Rural

COOPERA COOPERATIVES

USDA / Rural Development USDA / Rural Development January/February 2008

Strategic

Choices for

Renewable 

Energy

Industry

Page 4

Special Renewable

Energy Section

Strategic

Choices for

Renewable 

Energy

Industry
Editor’s note: This commentary was written by Thomas Dorr,

USDA Under Secretary for Rural Development.

The train is leaving the station. The rapid build-out of

renewable energy is a historic opportunity for rural America,

and the pace of development is accelerating. In this issue of

Rural Cooperatives, a team of USDA economists has ably

summarized recent research on the strategic choices arising

from this “renewables revolution” for farmers, investors, rural

utilities and government at all levels. 

The stakes are high:

• Since 2000, ethanol production in the United States has

tripled. The aggressive Renewable Fuels Standard enacted

in December — 36 billion gallons by 2022 — will keep this

rapid development on track for years to come.

• Installed wind capacity in the United States has more than

quadrupled in this decade. Germany still leads the world in

total capacity, but the United States led in new capacity in

2005 and 2006, and the projections suggest that we will have

done so again in 2007. 

• Shipments of photovoltaic units in the United States have

increased tenfold since 2000, and we lead the world in solar,

thermal, geothermal and waste-to-energy applications.

Renewable energy, in short, has become a noteworthy

American success story, and I fully expect this progress to

continue.

It is true that renewable energy is building out from a very

low base, currently between 6 and 7 percent of total U.S.

energy consumption. But it is also true that the growth rates

described above, if sustained, will rapidly expand renewables’

market share. 

For rural America — and for USDA Rural Development

— this is a challenge as well as an opportunity. Several new

industries, largely rural and/or ag-based, are developing

rapidly. There are opportunities at every point in the

production chain. This is probably the greatest new

opportunity for wealth creation in rural America in our

lifetimes, and capturing a fair share of that value for rural

America is an important objective. 

To help rural stakeholders and policymakers expand the

dialogue for winning strategies in this fast-moving and

increasingly competitive arena, USDA Rural Development

identified four areas

which are discussed

in this issue. The

choices we make

today will cast a

long shadow:

• Distributed wind and solar power must be integrated into

the grid. In addition, rural utilities will have to expand and

modernize the grid to move rural power in bulk to distant

urban markets — e.g., getting North Dakota wind energy to

Chicago.

• Biofuels face several logistical hurdles. The blend wall

barrier is a significant obstacle. It is important that we

increase the allowable blend level, increase the number of

flex-fuel vehicles and develop economically sustainable

solutions to incorporate more alternative fuels into our fuel

system. The barriers to pipeline transmission need to be

overcome. 

• Not all business and investment models are created equal.

From a rural development standpoint, it is desirable to

encourage local ownership and control. It is important that

we identify ways to facilitate the aggregation of local capital

and create opportunities for farmers and other rural

investors to engage.

These and many other issues are explored in these pages. I

urge you to tune in to the larger discussion as well. Renewable

energy and its impacts on farmers and rural development will

be a major focus of USDA’s annual Agricultural Outlook

Forum, which will be held this Feb. 21-22 just outside

Washington, D.C. Two weeks later, March 4-6, the world

will gather in Washington, D.C., again for the Washington

International Renewable Energy Conference, or WIREC

2008. More than 80 nations will participate in Ministeriallevel discussions, while hundreds of companies and several

thousand industry leaders will attend what will be 2008’s

leading renewable energy trade show and business conference. 

These events are an outstanding opportunity to explore the

potential of renewable energy, and to review best practices

from around the nation and the world. I cordially invite you

to attend. The renewables train is indeed leaving the station.

The opportunity is real. Now is a great time to consider whether

and how you should get involved. I hope to see you there. ■

COMMENTARY

Capturing Value for Rural America: Strategic

Choices for Renewable Energy Investment

2 January/February 2008 / Rural Cooperatives

“This is probably the

greatest new

opportunity for wealth

creation in rural

America in our

lifetimes...”

—Thomas Dorr
Rural Cooperatives / January/February 2008 3

Rural Cooperatives (1088-8845) is published

bimonthly by USDA Rural Development, 1400

Independence Ave. SW, Stop 0705, Washington, DC.

20250-0705.

The Secretary of Agriculture has determined that

publication of this periodical is necessary in the

transaction of public business required by law of 

the Department. Periodicals postage paid at

Washington, DC. and additional mailing offices.

Copies may be obtained from the Superintendent of

Documents, Government Printing Office, Washington,

DC, 20402, at $23 per year. Postmaster: send address

change to: Rural Cooperatives, USDA/RBS, Stop

3255, Wash., DC 20250-3255.

Mention in Rural Cooperatives of company and

brand names does not signify endorsement over

other companies’ products and services.

Unless otherwise stated, contents of this publication

are not copyrighted and may be reprinted freely. For

noncopyrighted articles, mention of source will be

appreciated but is not required.

The U.S. Department of Agriculture (USDA) prohibits

discrimination in all its programs and activities on

the basis of race, color, national origin, age, disability, and where applicable, sex, marital status, familial

status, parental status, religion, sexual orientation,

genetic information, political beliefs, reprisal, or

because all or part of an individual’s income is

derived from any public assistance program. (Not 

all prohibited bases apply to all programs.) Persons

with disabilities who require alternative means for

communication of program information (Braille,

large print, audiotape, etc.) should contact USDA’s

TARGET Center at (202) 720-2600 (voice and TDD). 

To file a complaint of discrimination, write to USDA,

Director, Office of Civil Rights, 1400 Independence

Avenue, S.W., Washington, D.C. 20250-9410, or call

(800) 795-3272 (voice), or (202) 720-6382 (TDD). USDA

is an equal opportunity provider and employer.

Chuck Conner, Acting Secretary of Agriculture

Thomas C. Dorr, Under Secretary,

USDA Rural Development

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?

Call (202) 720-6483, or

Fax (202) 720-4641

This publication was printed with vegetable oil-based ink.

Rural COOPERA COOPERATIVES

January/February 2008 Volume 75 Number 1

p. 4

p. 10

p. 16

p. 32

On the Cover:

Summaries of four studies that examine important strategic

choices facing the renewable energy industry are presented

in a special section of this issue. The studies were

commissioned by USDA Rural Development. 

FEATURES 

4 Investor’s Manual 

New investment models could help reverse decline of local ownership of biofuel plants

By David Chesnick

7 Tapping farm equity key to greater local ownership

By David Chesnick

10 Ownership Manual

Study assesses four primary ownership models for biofuels 

By Anthony Crooks

16 Getting Connected

Study sees USDA role in linking electricity from alternate energy sources to grid

By Alan Borst

18 Overcoming constraints to growth in biofuels industry 

By Donald Frederick

22 Using the ‘extra-value index’ to measure ag co-op performance

By Carolyn Liebrand

32 Bison co-op helping Native Americans develop production, marketing strategy

By Dan Schofer

34 Valuing Your Co-op

Meeting weighs value of co-ops in fast-changing business climate 

By Lynn Pitman

DEPARTMENTS

2 COMMENTARY

20 IN THE SPOTLIGHT

25 CO-OP DEVELOPMENT ACTION

27 VALUE-ADDED CORNER 

28 MANAGEMENT TIP

31 UTILITY CO-OP CONNECTION

38 NEWSLINE

47 PAGE FROM THE PAST

Special Renewable Energy Section
4 January/February 2008 / Rural Cooperatives

By David S. Chesnick

Agricultural Economist

USDA Rural Development

david.chesnick@wdc.usda.gov

Editor's note: This article presents findings

of Informa Economics, a consulting firm

headquartered in Memphis, Tenn. The

article does not reflect any official position of

the U.S. Department of Agriculture or of

any other government entity.

little more than onethird of ethanolindustry capacity was

owned by farmers and

other local investors in

early 2007, according to the Renewable

Fuels Association. However, only 15

percent of new or expanding biofuel

plant construction is owned by such

investors. A key reason for this shift is

that the larger plants being built today

require larger amounts of equity. 

Equity investment at this scale can

be difficult to obtain from farmers and

other rural investors living in close

proximity to a proposed facility. But if

local investment wanes, so does the flow

of returns from biofuel to the

communities where it is produced. 

Based on the analysis conducted by

Informa and interviews carried out

during the course of this project,

Informa formulated several investment

models that may be used to facilitate

investment by farmers and other rural

residents in the renewable energy

A

Investor’s

Manual

New investment

models could help

reverse decline

of local ownership of

biofuel plants

Investor’s

Manual

Bioenergy

New investment

models could help

reverse decline

of local ownership of

biofuel plants
Rural Cooperatives / January/February 2008 5

Bioenergy

USDA photo by Dan Campbell

sector. This article briefly describes

each of these models.

Closed-end renewable

energy fund

With a closed-end renewable energy

fund, investment is limited to farmers

and other rural residents seeking to

invest in energy projects. Such funds

would be managed by professionals or

institutions. These funds will need to be

large enough to invest across multiple

facilities. For example, a $300 million

capitalization fund could own almost all

the equity in three 100-million-gallonper-year ethanol facilities. 

While it is uncertain how much

money farmers and other rural investors

would be willing to invest in such a

fund, some parameters can be placed

around potential contributions.

Through interviews, Informa calculated

that the per-person investments by

farmers and other rural investors tend

to be small, in relative terms, generally

around $10,000 to $50,000. Given the

resources of farmers, Informa believes

farmers with gross sales of more than

$100,000, a mean net worth of at least

$1 million and a debt-coverage ratio of

at least $50,000 would be the most

likely candidates for participation in a

renewable energy fund.

“If local investment

wanes, so does the

flow of returns

from biofuel to the

communities where

it is produced.”
Nearly 300,000 farms fall into the

financial categories just described. If

each farmer were to invest at least

$10,000, the fund would attract $3

billion. New ethanol plants typically

cost $1.95 per gallon of capacity.

Typically, they are built using 40

percent equity and 60 percent debt.

This would be sufficient to provide

equity for more than 3.5 billion gallons

of ethanol. 

Debenture guarantees

The debenture guarantee model,

according to Informa’s analysis, would

be similar to the Rural Business

Investment Program (RBIP), created in

the 2002 Farm Bill and administered by

the Small Business Administration.

Under this program, Rural Business

Investment Companies (RBICs) are

established and allowed to issue

debenture guarantees. The debentures

issued by an RBIC are pooled with

other issues and sold to outside

investors. 

The debentures are backed by the

federal government and would carry

lower premiums. Informa proposes that

a similar program could be used for

biofuel investment projects. The modifications of the RBIP program to facilitate an RBIC program would be as follows:

• Because a relatively large amount of

total capital is required to finance

construction of a new ethanol plant

(around $185 million for a 100-

million-gallon facility) the maximum,

$6 million-net-worth restrictions of

the existing program would be relaxed.

• Debenture pre-payment requirements

for dividends may need to be relaxed

in order to generate more cash flow

to equity holders.

• Leverage fees for debentures would

have to be significantly lower to be

competitive against market interest

rates.

Despite the current drop in the

market price for ethanol, ethanol stake

holders enjoyed short debt-payback

periods for those that entered the

market early. Thus, the debt market did

not demand a high risk premium from

ethanol producers. Furthermore,

ethanol plants with a higher probability

of financial success are able to secure

adequate debt financing in the market,

Informa found.

New Markets Tax Credit

A third investment model is based on

the New Markets Tax Credit (NMTC).

The NMTC program is funded and

managed by the U.S. Treasury

Department’s Community

Development Financial Institutions

(CDFI) program. The Models for

Funneling Local Investment Capital

into Biofuel Production program

permits taxpayers to receive a credit

against federal income taxes for making

qualified equity investments in

designated Community Development

Entities (CDEs). 

These CDEs could invest in biofuel

facilities and could supplement the

farmers’ equity, thereby leveraging the

initial farmer investment. Some

modifications would be needed for the

biofuel sector, such as: 

• The CDE would pledge to invest in a

portfolio of qualified biofuel projects;

• Create a new tax credit model that

will mirror the investment mechanism

of the New Markets Tax Credit, but

target it specifically for biofuels and

renewable industry investment.

The New Markets Tax Credit could

become a model to help finance a few

farmer-owned biofuels facilities. The

federal tax credit provides a subsidy

that, if structured correctly, can provide

some economical incentives for

investors to finance farmer-owned

operations.

Tax credit for projects with

minimal rural involvement

Research by Informa indicated that

farmer groups and rural residents can

raise $5 million to $10 million from a

limited number of investors in a short

period of time. However, moving

beyond this has proven difficult for

many groups. To expand this group

would incur a high cost. Therefore,

another proposal would be to use tax

credits for outside investors to help

farmers finance biofuel facilities. 

This program would require an

outside investor to match the farmers’

investment in exchange for the project’s

tax credit. Informa says this is similar to

the Production Tax Credit for windgenerated electricity. In order for the

investors to gain the tax credit, they

would need to maintain a minimum of

perhaps 25 percent farmer ownership.

Using project tax credits for a minimum

share of farmer or rural involvement is

potentially a viable mechanism to

maintain or increase the farmer

participation in the biofuels sector.

No new investment models?

Informa noted that some

interviewees objected to any program

that the government would create for

investment in renewable energy. They

indicated that there already are

substantial amounts of equity flowing

into renewable fuel projects. They

stated that farmer-investors can buy

shares in any of the several publicly

traded ethanol companies. 

While farmers can use this approach

to invest in ethanol, this would not

accomplish the objective of stanching

the trend of rural investors owning a

receding share of renewable fuelproduction capacity. This also would

keep the returns from biofuels from

recirculating within the rural

community and thus stimulating further

economic growth within that rural

community. ■

6 January/February 2008 / Rural Cooperatives

The ribbon-cutting in 2002 for the Glacial Lakes

Energy ethanol plant in South Dakota. 
Rural Cooperatives / January/February 2008 7

Editor's note: This article presents

findings from Informa Economics Inc., a

consulting firm contracted by USDA

Rural Development to perform an initial

study on financial models used in biofuel

production. This article represents the

author’s effort to summarize the study

findings; it does not reflect official

positions of the U.S. Department of

Agriculture or any other government

entity.

The ability to tap local equity is

the key to greater local investment in

rural business opportunities, such as

renewable energy. One part of this

investment-model study includes an

examination of the amount of equity

available in rural communities that

could be available for rural

investment. 

Farm assets

According to Informa Economics

and the USDA Economic Research

Service, the value of U.S. farm

business assets in 2006 was $1.81

trillion, about 6.3 percent more than

in 2005. The value of farm real

estate, accounting for 85 percent of

farm sector assets, is expected to have

increased by 7.5 percent in 2006,

following a gain of 16.3 percent in

2005.

The value of farmland in the

United States generally follows farm

income and return to assets.

However, since 2004, net farm

income declined while rural real

estate value increased substantially.

This pattern followed the same

pattern of real estate values

throughout the rest of the country.

Total farm real estate value increased

from $1 trillion in 2001, to an

estimated value of $1.6 trillion in

2006, with most of the increase

occurring since 2004. 

Farm debt

While there is significant value in

land held by farmers, it is important

to determine the extent to which

these assets are already leveraged. It

is estimated that total farm business

debt climbed 1.2 percent in 2006, to

$218 billion. 

Real estate debt for farm

businesses has steadily increased over

the past 15 years, growing from $67.6

billion in 1990 to $114.3 billion in

2005. Real estate debt accounts for

more than half of total farm debt

outstanding. 

Bioenergy

Tapping farm equity key to greater

local ownership of renewable energy

continued on page 8

USDA photo by Dan Campbell
8 January/February 2008 / Rural Cooperatives

Farm equity

Farm business equity was

expected to continue rising in 2006

as the increase in farm asset values

exceeds the rise in farm debt. Farm

sector net worth was expected to be

about $1.7 trillion in 2006, up from

$1.59 trillion in 2005. The increase

in assets relative to debt has lifted

farmers’ net wealth over the past

few years. The value of debt-toequity fell from 17.4 percent in

2002 to an estimated 12.7 percent in

2006. 

This growing stock of equity

capital can be used to finance

investments in rural communities.

There are many opportunities for

investment in the rural communities

today, one of the biggest being the renewable fuel sector. 

Funds available

While U.S. farmers hold a significant amount of assets

and equity relative to debt, the ability to take on more

debt is largely dependent on the ability to generate

enough income to service their debt obligations. In other

words, you can’t mortgage the farm if you cannot cover

the additional debt payments.

One way to measure the amount of additional mortgage

funds available is to look at the unused debt-repayment

capacity. This value compares the difference between the

maximum amounts of debt farmers can afford to the

amount of debt they currently hold, given the income

level of the farm household. The difference is referred to

as the “un-used debt-repayment capacity.” 

The debt-repayment capacity is based on the maximum

debt service that operators would be able to pay given

total income and farm and non-farm expenses. Figure 1

illustrates these two values from 1970 to 2006. During this

time period, there was only one year when the debt level

was more than the repayment capacity. In 1981, the

aggregate debt payments exceeded the farmers’ ability to

repay these loans, which resulted in many farm

foreclosures. 

This tells us that farmers could boost their debt load by

nearly $1 trillion. However, a number of scenarios could

occur that could affect the income available for debt

coverage. These include falling commodity prices,

increases for input prices or crop failures. On the other

hand, the risk associated with commodity price

fluctuations for the farm operator may be partially offset

by their investment in a biofuel facility.

Demographics show that the farming community is

older. More than one out of every four farmers, and about

half of agricultural landlords, are 65 or older. This group

controls more than one-third of all farm assets. 

How does this affect the attitude of farmers with

respect to mortgaging the farm for investment purposes?

In addition to working longer past traditional retirement

age, farm-operator households tend to have several

income sources and different forms of wealth, compared

with the general population. While fewer farm operators

are covered by employer-sponsored pensions than are

non-farmers, a majority of farm operators save from

current income on a regular basis and have accumulated

diversified financial portfolios, including individual

retirement savings. 

Reduced tax rates on capital gains associated with the

appreciation in farmland values, along with the prospect of

avoiding capital gains taxes on any appreciation prior to

death, continues to encourage farm owners to hold land.

Recent changes in the federal estate tax policies that allow

larger amounts of property to be transferred at death free

of any estate tax further reinforce this incentive. 

These factors, along with not wanting to “mortgage the

farm” on risky ventures, will probably keep the equity

capital tied up in the farm business. In order to tap the

equity, there will need to be some incentive to entice the

farmer to transfer equity out of the farm and into

ownership of biofuel operations.

— David S. Chesnick ■
Rural Cooperatives / January/February 2008 9
10 January/February 2008 / Rural Cooperatives

By Anthony Crooks

Agricultural Economist

USDA Rural Development

anthony.crooks@wdc.usda.gov

Editor's note: This article presents findings

of Informa Economics, a consulting firm

headquartered in Memphis, Tenn. The

article does not reflect any official position of

the U.S. Department of Agriculture or of

any other government entity.

he U.S. Department of

Agriculture

commissioned Informa

Economics Inc. to study

the business models in

use in the renewable transportation

fuels industry. In addition to providing a

full description of the basic business

models used in biofuels production, the

objectives of the study were to:

• Articulate the advantages and

disadvantages of each model and the

conditions of the marketplace

products and raw materials, sources of

capital and regulatory and tax

environment that most favor use of

each particular model; 

• Assess public policy and USDA Rural

Development programs to align

particular models to conditions best

suited to promote energy

development.

Industry background, structure

The ethanol industry is by far the

largest component of the renewable

transportation fuels sector, with 3.9

billion gallons produced in 2005 and an

estimated 4.9 billion gallons in 2006.

This represents dramatic growth from

1990, when production was 900 million

gallons, and 2000, when production was

1.6 billion gallons.

During the current decade, ethanol

industry growth has been accelerated by

a rise in petroleum prices and the

banning of the competing oxygenate

methyl tertiary butyl ether (MTBE).

Farmer-owned facilities participated in

this growth to a greater extent than

ever. As of November 2006, farmers

and other rural investors owned 50 out

of the 107 operating ethanol facilities,

or 37 percent of production capacity,

and they participated significantly in the

T

Ownership

Manual

Ownership

Manual

Study assesses four

primary ownership

models for biofuels 

Bioenergy

Study assesses four

primary ownership

models for biofuels 
industry’s high profit margins.

About half of industry capacity is in

the hands of firms structured as either a

limited liability company or partnership

(LLC and LLP) or a cooperative. The

other half of the industry is controlled

by investor-owned corporations, such as

Archer Daniels Midland, which owns

20 percent of the industry’s production

capacity. Another 30 percent is owned

by privately held corporations, such as

Cargill and Abengoa Bioenergy. 

Business models for biofuels

While a number of diverse business

structures developed in the ethanol

industry in the past 15 years, looking at

a cross-section of the industry, with

respect to producer and capacity, reveals

these four main business model types:

■ Corporate Model

The producer here is a corporation

(typically a Class-C corporation) or a

subsidiary of a corporation. Internal

staff manages the plant(s) and the

functions of grain procurement,

biofuels marketing and co-product

marketing. The producer does not own

or manage farmland. If the corporation

produces biodiesel, it is very likely to

own integrated oilseed-crushing

operations. Some corporations also

provide third-party grain supply and

biofuel and co-product marketing

services to other producers. 

Archer Daniels Midland (ADM) is a

prime example of this model of

ownership. It is a vertically integrated

agribusiness conglomerate and is also

the largest biofuel producer in both the

United States and the world, with more

than 1 billion gallons of annual

production capacity (although a

pending deal may result in a company

that surpasses its production, see below).

The corporation owns an extensive

network of grain elevators and is one of

the world’s largest agricultural processors of soybeans, corn, wheat and cocoa. 

ADM is a Delaware corporation and

its stock is listed on the New York

Stock Exchange. With net sales and

other operating income of $36.6 billion

in fiscal 2006, ADM is the largest

example of the corporate business

model for biofuels. It operates seven

ethanol production facilities: Decatur

and Peoria, Ill.; Cedar Rapids and

Clinton, Iowa; Columbus, Neb.;

Marshall, Minn.; and Walhalla, N.D. It

is building two new 275-million-gallon

plants at its Cedar Rapids and

Columbus sites. 

ADM has an experienced internal

sales force to market its ethanol. It

began offering ethanol-marketing

services to independent ethanol

producers last year. The corporation

controls substantial transportation

assets, including 20,000 railcars, 2,000

barges and 1,500 tractor trailers. It has

co-product merchandising capability via

its ADM Alliance Nutrition subsidiary. 

“ADM is uniquely positioned at the

intersection of the world’s increasing

demands for both food and fuel,” says

ADM Chief Executive Officer Patricia

Woertz.

■ The Farmer-Owned Model

These businesses are generally

structured legally as either a cooperative

or an LLC or similar organization.

Farmers have a majority ownership in

the facility. In a co-op, or a co-op

within an LLC or which owns an LLC,

Rural Cooperatives / January/February 2008 11

Bioenergy

USDA photo illustration by Stephen Thompson
members have delivery obligations

(grain and/or oilseeds) to the facility.

They have access to storage, including

on-farm bins and limited storage at the

facility. Especially if the ownership is

through a cooperative, the business will

also have separate grain-elevator

operations.

The Chippewa Valley Agrafuels

Cooperative (CVAC) is an example of

the farmer-owned business model. It

was formed in the early 1990s with the

intent of establishing an ethanol facility

in Benson, Minn. CVAC was formed

with more than 650 shareholders, which

included producers, elevators and local

investors. Planning for the ethanol

plant began in 1993. CVAC teamed up

(with) the design/builder Delta-T

Corporation to form Chippewa Valley

Ethanol Co. LLC (CVEC). Delta-T

chose to become an equity investor

when local producers faced a significant

shortfall in their original equity drive. 

CVEC’s original capacity was 15

million gallons, and was later expanded

to 20 million gallons. As the size of new

ethanol plants increased, CVEC

expanded again, to 45 million gallons in

2003, in order to stay competitive. In

late 2006, CVEC signed a letter of

intent with Fagen Inc. to build a new

40-million-gallon facility next to the

existing facility. 

To improve its market position and

diversify its revenue stream, CVEC and

a group of other ethanol producers

founded Renewable Products

Marketing Group. RPMG was

established to collectively and costeffectively market ethanol by

aggregating sales in volumes demanded

by buyers. RPMG members also used

their combined buying power to reduce

costs of enzymes and other raw materials.

CVEC teamed up with Pete’s

Wicked Ale in 2003 to produce Shakers

Original American Vodka, a premium

brand. CVEC has proven that the

farmer-owned business model can be

adaptive and progressive and that it can

offer business strengths that go well

beyond an assured grain supply.

■ Engineer/Builder-Owned Model

These firms either own facilities

outright or maintain a significant

ownership interest, along with other

investors, in individual plants. In either

case, the design/build firms maintain a

controlling interest in management.

Because of their ownership in multiple

facilities, these firms have the scale to

support an internal staff that conducts

grain procurement and biofuels/coproduct marketing. They may also

provide services to unaffiliated plants. 

From the Broin family’s small-scale

entry into the ethanol industry in the

1980s, it would have been difficult to

predict the extensive role that the Broin

Companies now play across the

ethanol-supply chain today. The family

built a small plant on its farm in

Kenyon, Minn., in 1983. The Broins

then purchased and refurbished a

foreclosed ethanol plant in Scotland,

S.D., in 1987. 

From such small beginnings, Broin

& Associates began providing ethanol

facility engineering and construction

services for other organizations. By the

end of the 1990s, Broin Companies

provided a range of services to ethanol

producers and became the prototype

engineer-owned business model.

Renamed POET in May 2007, this

group of companies provides a

comprehensive array of services for

12 January/February 2008 / Rural Cooperatives

The Washington International Renewable Energy Conference (WIREC 2008)

will bring together government, civil society and private business leaders to

address the opportunities and challenges of a major and rapid scale-up in the

global deployment of renewable energy technology. The conference will be held

March 4-6 at the Washington, D.C., Convention Center. 

“Renewable energy can quite literally change the centers of power from

urban cities to rural communities,” Thomas C. Dorr, USDA Under Secretary for

Rural Development, recently said. “It is not often that you have the chance to get

in on the ground floor of this kind of development, but that is the opportunity we

are being presented with today. WIREC 2008 will bring together government,

business and community leaders from around the world to discuss issues, share

successes and identify best practices.” 

WIREC participants can expect to: 

• Acquire a better understanding of the benefits of renewable energy deployment

on energy security, climate change, air quality and economic growth.

• Gain an appreciation for the multiple policy options and best practices that

encourage and enable accelerated renewable energy up-take. 

• Develop networks and find partners with whom to explore and initiate

renewable energy projects. 

These three objectives will be woven into WIREC’s four cross-cutting and

policy driven themes: Agriculture and Rural Development; Technology/Research

and Development; Finance; and Market Adoption/Deployment. 

For more information and to register: www.wirec2008.gov, or (805) 290-1338.

Renewable energy issues focus of WIREC 2008

“With the advent of

cellulosic ethanol...

the issues of cost,

legal structure and

management are

expected to become

even more acute.”
ethanol producers. In 1991, it began

operating a center for plant design,

engineering, construction and research.

A management company was formed in

1994 to provide management services

for Broin-designed plants. Dakota Gold

Marketing was established in 1995 to

market Dakota Gold Enhanced

Nutrition Distillers Products. In 1999,

Ethanol Products was formed to market

ethanol and carbon dioxide. 

Twenty-three operating ethanol

plants with a combined production

capacity of over 1.1 billion gallons have

been designed and built by POET. An

additional five plants totaling 375

million gallons were under construction

or development in December 2007. 

POET retains an equity interest of

20-25 percent in its partners’ plants.

With its engineering and construction

capabilities, ownership and management of partner plants, as well as its

ethanol and distillers grains marketing

services, POET has pioneered the

“engineer/builder-owned” business

model. 

■ The “Franchise” Model

This is not a vertically integrated

model, but rather is characterized by a

dependence on third-party service

providers to link the firm to its supply

chain. The plant is a “cookie-cutter”

facility designed and built by one of the

major engineering firms (consortiums),

and its production process is monitored

remotely by the builder. 

Third-party service providers are

depended upon to procure feedstock

(grain or oil) and to market biofuels and

co-products. New operations under this

model are generally required by their

financial institution(s) to enter into

long-term agreements with these

service providers. In turn, the service

providers might invest a modest amount

of capital in the facility. 

ASAlliances Biofuels LLC (ASA) was

formed in 2004 by Americas Strategic

Alliances LLC, a firm specializing in

merchant banking and investments.

ASA’s business plan combines top-tier

service providers with sophisticated

financial partners. Each facility is to be

built by Fagen Inc. and located adjacent

to an existing Cargill Inc. grain elevator.

ASA began construction on two

planned ethanol facilities in 2006, each

with a capacity of 110 million gallons

annually, in Albion, Neb., and

Bloomingburg, Ohio. Construction

began on a third facility in Linden,

Indiana in 2007. 

Cargill Inc. is contracted to provide

corn and natural gas procurement

services and ethanol and distillers grains

marketing and transportation services.

United Bio Energy Management LLC

will provide operational and

maintenance support.

In addition to negotiating contracts

with the construction, grain supply,

product off-take and facilities

management firms, ASA put together

the group of equity backers for the

three facilities and obtained the

required debt financing. A group of

private equity firms comprised of

American Capital Strategies Ltd.,

Laminar Direct Capital, L.P. (a member

of the D.E. Shaw group), U.S.

Renewables Group LLC and Midwest

First Financial Inc., provided a

significant portion of the equity and all

Rural Cooperatives / January/February 2008 13

Elements of a Business Model

4 Pillars 9 Building blocks Answer these important questions.

Products Value proposition What products are made? What services are performed?

Customers Target customer What customer or segment is offered value?

Distribution channel By what means is value (products/services) offered?

Customer relationships What links the company with its customers?

Operational Value configuration How are activities and resources arranged?

Architecture Core competencies What competencies are involved in executing the business?

Commercial partnerships What arrangements with other businesses are necessary?

Finances Cost structure What are the monetary ways and means?

Revenue streams How does the company make money?

Adapted from Ostenwalder, A. Pigneur and C. Tucci, “Clarifying Business Models: Origins, Present, and Future

of the Concept,” Communications of the Association for Information Systems, vol. 15, May 2005.

Bioenergy
14 January/February 2008 / Rural Cooperatives

of the subordinated debt to ASAlliances

Biofuels. Challenger Capital Group

Ltd., a Dallas-based, full-service

investment bank, secured $148

million in equity and subordinate debt. 

In September 2007, VeraSun Energy

Corp. announced plans to acquire the

three ethanol plants from ASAlliances

Biofuels LLC for $725 million. The

acquisition is expected to increase

VeraSun's total production capacity to

approximately 1 billion gallons by the

end of 2008. 

In a sense, the “farmer-owned” and

“engineer/builder-owned” business

models can be viewed as variations of

the “franchise” model. However, they

also have elements of vertical

integration that differentiate them from

the pure “franchise” model. Farmerowned operations are linked to the

farmer segment of the supply chain, and

in some cases there is integration with a

grain elevator. This arrangement can

reduce, but not eliminate, the need for

a feedstock supply agreement for

ethanol operations. 

Third-party marketing

organizations

The advent of third-party marketing

organizations is an important

development in the industry and a key

component of certain business models,

especially the “franchise” model. As of

December 2007, there were 120

companies owning 134 ethanol facilities

in operation, with 66 facilities under

construction. 

Besides being costly for each of these

facilities to have internal sales staff for

ethanol and distillers grains (the main

co-product of dry-mill ethanol

production), it would be particularly

inefficient for fuel blenders to have to

purchase ethanol from 100 or so

different firms. Moreover, rail carriers

favor unit train shipments of about 100

cars and a limited number of origin and

destination points (preferably one of

each). These preferences are reflected

in their rate structures.

Until recently, it was necessary for a

company to have a minimum of 100

million gallons of annual production to

justify having an internal sales staff.

However, given the proliferation of

individual plants of that size, the

minimum size has increased. Although

there is no set rule, operations

producing an aggregated 300 million

gallons annually are more likely to use

an internal sales staff. However,

virtually all new entrants into the

industry are encouraged by their

lenders and debt holders to use a thirdparty marketing company, at least until

they’ve gained sufficient industry

experience. 

VeraSun Energy Corp. owns eight

plants with 560 million gallons of

annual production, and has an

additional 330 million gallons of

capacity under construction. 

At press deadline for this article (in

early December), VeraSun had recently

announced a proposed purchase of U.S.

BioEnergy Corp. of Inver Heights,

Minn., which would combine the

nation’s No. 3 and No. 4 ethanol

producers into one company. The new

VeraSun would have about 1.6 billion

gallons of annual production at nine

existing plants, with seven more under

construction.

The deal was expected to be

completed by March of 2008. If

completed, the combined VeraSun-U.S.

BioEnergy would surpass both ADM

and POET in production. VeraSun

recently transitioned to market its own

ethanol, a service which had been done

by Aventine Renewable Energy. 

CHS Inc., the nation's leading

farmer-owned energy and grain-based

foods company, had owned about 20

percent of U.S. BioEnergy. If the

merger is approved, it will own about 8

percent of VeraSun.

The CHS board of directors voted in

favor of the VeraSun merger. CHS has

marketed ethanol-blended fuels for

more than 25 years and currently is one

of the nation's largest suppliers of

blended fuel products, which it

distributes through 64 terminals.

Cellulosic ethanol applications

With the advent of cellulosic ethanol

in the coming years, the issues of cost,

legal structures and management are

expected to become even more acute.

Capital expenditures per gallon of

capacity for cellulosic plants are

estimated to be at least three times

those for a corn-based plant. Between

the total cost of a facility and obtaining

the rights to use cellulosic ethanol

technology, it is possible that only large

corporations and private equity funds

have the financial resources to provide

the equity for such ventures, especially

given the associated risk. 

Given the importance of intellectual

property in cellulosic ethanol and the

fact that some of the main engineering

companies serving the corn-based

ethanol industry are also devoting

resources to cellulosic ethanol, the

engineer/builder-owned business model

are likely to rise in prominence.

Collection and storage systems have

yet to be established for crop-based

feedstocks, although central milling

locations exist for some forest and paper

products. Given the scale of the

investments and the role of intellectual

property in cellulosic ethanol, it is

possible that the farmer-owned business

model will struggle to be relevant in the

new industry. However, farmers will

still be the main source of cellulosic

feedstock. A hybrid business model

could be developed to bring feedstock

producers into the ownership structure. 

The Broin/POET system of

partnering with farmers and other rural

investors seems to be adaptable for this

purpose of tying together capital,

intellectual property and feedstock. But

the feedstock supply linkage will need

to be enhanced. Given the legal and

management issues discussed above, it

seems imperative to ensure that any

necessary modifications to legal

structures and management systems be

put in place during the next few years if

farmers and other rural investors are to

continued on page 44
Rural Cooperatives / January/February 2008 15
16 January/February 2008 / Rural Cooperatives

By Alan Borst

Agricultural Economist

USDA Rural Development

alan.borst@usda.gov

Editor's note: This article presents findings

of Booz Allen Hamilton, a consulting firm

headquartered in McLean, Va. The article

does not reflect official positions of the U.S.

Department of Agriculture or any other

government entity.

SDA Rural

Development

commissioned Booz

Allen Hamilton (BAH)

to: examine current

renewable energy markets for electricity

generation; identify various barriers that

inhibit further development of these

resources by rural residents; analyze

business model options that can be

applied to better enable the profitable

sale of on-farm generated power to the

electric grid; and recommend programs

or policies that USDA could undertake

to promote greater capture of renewable

energy benefits by rural communities.

Affordable and accessible electric

transmission remains the greatest

obstacle to the development of rural

renewable energy projects overall. BAH

concluded that USDA, as the largest

lender to rural electric cooperatives for

transmission upgrade projects, has an

important role to play in working with

a variety of stakeholders and regulators

to develop comprehensive, equitable

and transparent transmission access

rules that provide the opportunity to

participate fully in the growing

renewables market.

Despite the lack of comprehensive,

nationally applicable transmission

policies, there are emerging policy

solutions at the state and federal level.

These include provisions of the Energy

Policy Act of 2005, which call on the

federal government to create new

transmission corridors in renewableresource-rich areas. Regulatory

developments at the state-government

level will likely make transmission

access more transparent and affordable

for renewable energy projects. BAH

found that USDA could play a

significant role in helping analyze and

publicize these developments to ensure

that rural communities are able to

capitalize on them to the greatest

degree possible.

Supporting rural renaissance

Rural energy production holds much

promise as a means of supporting our

national energy needs and contributing

to the rural renaissance in America. A

high percentage of the estimated U.S.

wind and solar capacity and virtually all

of the biomass-derived electricity

generation capacity is located in rural

areas. BAH found that wind energy

currently offers the highest potential for

profitable development, followed by

biomass and solar opportunities.

Unlocking the economic potential for

these renewables requires analysis of the

various value chains to identify the

functions with the greatest potential for

capture by rural residents. Realizing

Study sees USDA role in linking

electricity from alternative energy

sources to grid 

Getting

Connected U Getting

Connected
Rural Cooperatives / January/February 2008 17

this value will require larger scale

projects, which in turn will inform the

choice of best business models.

The primary business model involves

large-scale (primarily wind) projects by

large and remote corporate developers,

including investor-owned utilities and

private energy companies. These

projects bring some limited economic

benefits to the local community but

return the majority of the earnings to

outside investors. Capturing the value

inherent in renewable energy

production requires major shifts in the

way rural residents think about and act

upon these opportunities.

Rural entrepreneurs

key to effort

The first step in promoting these

shifts is the dissemination of technical,

business and policy information in a

manner that America’s rural

entrepreneurs will understand. This

information must be timely to ensure a

market-based solution to both energy

and rural development needs.

The greatest opportunities for

capturing renewable energy value will

be realized if rural communities

aggregate their resources, either in the

form of land-lease rights or capital

formation, to develop new projects at

the local level. However, such

aggregation will only work if rural

investors are able to secure access to

expertise on various technical and

contracting mechanisms that govern

power production, including site

selection, project operation and power

purchase agreement negotiation.

There is no current means for

distinguishing renewable energy

generated and owned by rural

communities. An examination of

marketing and outreach mechanisms

that could stimulate greater demand for

community-owned renewable energy

should be undertaken.

Facilitating best practices

Given the pace of change in the

renewable marketplace, new policies

and business models are emerging on

an almost daily basis that fundamentally

alter the feasibility of rural- owned and

-operated rural energy. By providing

rural Americans with easy access to such

information, USDA would facilitate a

more rapid transition to creative new

best practices and help rural Americans

increase their profitability by adopting

cutting-edge policies and business models.

Providing access to

technical expertise

On-farm energy generation will

entail a number of technical decisions,

ranging from identifying appropriate

energy source, technology and size, to

project-related decisions involving site

selection and connecting to the grid.

Business challenges include the

aggregation of financing and finding

and negotiating a power purchase

agreement. 

In most cases, tackling all of these

issues requires outside expertise or

counsel, which is often time consuming

and expensive. BAH suggests that

USDA help rural constituents overcome

this barrier by establishing a program

through which it would provide rural

investors access to experts on the

various aspects of renewable energy.

These experts would be pre-screened by

USDA to determine their level of

expertise and experience.

Promoting ‘green branding’

To assist in developing a local market

for on-farm energy products, tools

could be developed to create additional

demand for rurally owned renewable

power. The government has used

similar branding campaigns to build

consumer awareness and markets for

environmentally friendly products to

great success, most notably with the

ENERGY STAR Program. The federal

government could assist rural

developers in creating “green-market”

branding campaigns to help the public

connect the benefits of rural-based

renewable energy generation to those

regions and to their own lives.

Increasing use of

financial incentives

The federal Production Tax Credit

(PTC), with its relatively short

authorization periods and lapses

resulting from delays in reauthorization,

has had the effect of creating boom and

bust periods in the industry. To avoid

such cycles in the future, BAH suggests

the federal government should develop

guidelines for a consistent, integrated

set of financial incentives targeted

specifically at renewables and on-farm

generation, including making the PTC,

Clean Renewable Energy Bonds, and

Renewable Energy Production

Incentive long-standing and consistent. 

Reforming the PTC to allow it to be

applied against ordinary income, instead

of passive income, would significantly

increase rural ownership opportunities.

In summary, USDA can play a

significant role in helping rural

communities to profitably invest in

renewable energy projects. Renewableresource-rich rural areas can, and will,

lead the way in helping America to

reach its energy independence and

environmental goals while also

furthering their own economic

development. ■

“The greatest Bioenergy opportunities for

capturing renewable

energy value will be

realized if rural

communities aggregate

their resources...to

develop new projects at

the local level.”
18 January/February 2008 / Rural Cooperatives

By Donald A. Frederick

Program Leader for Law,

Policy & Governance;

USDA Rural Development

Editor's note: This article presents findings

of Booze Allen Hamilton, a consulting firm

headquartered in McLean, VA. The article

does not reflect official positions of the U.S.

Department of Agriculture or any other

government entity. The author of this

article recently retired from USDA. 

he U.S. Department of

Agriculture asked Booz

Allen Hamilton (BAH)

to identify the obstacles

to rapid expansion of

the biofuels industry and actions to

overcome those barriers. The target is

U.S. production and use of 60 billion

gallons per year (BGY) of biofuels by

2025. This would meet 17 percent of

the projected 250 BGY United States

transportation fuel demand for 2025.

Expanded domestic biofuels

production and use will have several

important benefits, including: 1) lessen

our dependence on foreign oil; 2)

improve the environment; 3) reduce

U.S. foreign trade deficits; 4) enhance

the economic well-being and quality of

life for rural Americans.

The 60 BGY target represents what

policymakers believe to be the most

aggressive, yet achievable, goal for

biofuel production (i.e., ethanol and, to

a much lesser extent, biodiesel) in the

United States. BAH concludes that the

goal is attainable, but will require

significant technological, logistical and

socio-economic changes to the current

system of producing, transporting and

using transportation fuels.

Initial findings

Most biofuels production today is

corn-based ethanol, most of which is

used as an additive to petroleum-based

gasoline, producing a blend of 90 percent gasoline and 10 percent ethanol.

As early as 2012, BAH says ethanol

production from corn will reach 15

BGY. This will saturate the current

blend market and the use of corn for

ethanol production will begin to

adversely impact other uses of corn,

notably as livestock feed.

Further growth of the biofuels

industry will require a new set of

government policies that will facilitate

the development of new, dedicated

energy crops, commonly referred to as

cellulosic feedstocks. Additional policy

initiatives will be needed to encourage

investment in infrastructure and

distribution capacity that will make

high-blend fuels – such as an 85 percent

ethanol fuel (E85) – readily available

and cost competitive with fuels entirely

or primarily produced from oil. Finally,

drivers will have to want to purchase

and have easy access to affordable

vehicles that operate efficiently on

biofuels.

BAH found that as annual biofuels

industry production progresses towards

60 BGY, constraints will arise in all four

major components of the biofuels value

chain (feedstock, conversion, transport

and end use). The BAH report

identifies those constraints and

recommends actions that USDA and

other government institutions can take

to address them. Forward thinking is

essential to coordinate the simultaneous

expansion throughout the biofuels value

chain that is necessary to avert

constraints which could cripple the

industry.

Feedstock

Feedstock production involves the

growth and harvesting of traditional

crops such as corn and soy, future

dedicated energy crops and biomass

available from forest and agricultural

resources.

BAH found that significant feedstock

constraints are:

• Land and water use requirements for

feedstock production sufficient to

supply a 60 BGY biofuels market are

not well understood; 

• Severe drought and low crop yields

could significantly impact the

feedstock availability for conversion

to biofuels; 

• Current re-enrollment of CRP land is

high and there is no incentive for land

reintroduction for growing dedicated

energy crops.

T

Overcoming constraints to 

growth in biofuels industry

“Further growth of the

biofuels industry will

require a new set of

government policies that

will facilitate the

development of new,

dedicated energy crops.”
The recommended action to address

feedstock constraints is to create a

mechanism to determine what agricultural practices must be present in

2025 to support a 60 BGY biofuels

market and still meet food and feed

requirements. This study should examine:

• The balance between existing

agriculture and introduction of new

energy crops;

• The pace of land introduction and/or

conversion needed to meet future

biofuels feedstock production

requirements;

• The potential of introducing droughtand pest-tolerant and high-yield seed

hybrids;

• The benefits of creating a "strategic

crop reserve" as a hedge against low

crop yields;

• How subsidies could impact the

production of new

feedstocks/dedicated energy crops; 

• How improved feedstock

densification processes can lower

costs and risks of biofuels facilities.

Conversion

Ethanol and biodiesel plants each

have their own unique processes for

converting renewable feedstocks into

biofuels. A sustainable American

biofuels industry capable of replacing a

significant amount of imported oil will

require new technologies which can

convert different and more plentiful

renewable resources into biofuels.

The significant conversion

constraints are:

• Environmental challenges of

conversion technologies affect

potential plant siting;

• Economics of new bioconversion

technologies are highly dependent on

volatile feedstock and biofuels prices. 

• Biodiesel production is well below

existing refinery capacity.

The recommended actions to address

these conversion constraints are:

• Work with states to determine how

emerging carbon trading programs,

water rights issues and air permitting

requirements will impact biofuels

industry development;

• Create a biofuels security subsidy with

a price floor on oil and a price ceiling

for feedstock outside of which

government support would be

triggered to maintain positive economics within the biofuels industry; 

• Create additional Renewable Fuels

Standards specifically for E85 and

biodiesel to increase both nationwide

availability and demand of E85 and

biodiesel.

Transport

Current biorefining finished product

volumes are small enough that barge,

rail and truck shipments are economical

and efficient. But moving a greatly

enlarged amount of product from

dispersed biorefineries to local fuel

terminals will require expanded and

innovative transportation systems.

The significant transport constraints

are:

• The existing biofuels transport

infrastructure is incapable of

supporting 60 BGY of biofuels;

• Rail tank-car construction is backlogged 18 months and rail spur lines

are becoming overburdened with

current shipments of freight and fuel; 

• No determination has been made as

to the feasibility of converting existing

petroleum pipelines to accommodate

biofuels; 

• There is a long permitting process

Rural Cooperatives / January/February 2008 19

Moving increased volumes of ethanol will require expanded and innovative transportation systems. Rail tanker-car

construction is backlogged 18 months, and some rail spurs are already overburdened. USDA photo by Dan Campbell 

Bioenergy

continued on page 43
By Lindsay Atwood 

USDA Rural Development

rue Value hardware.

Ocean Spray

cranberries. Blue

Diamond almonds.

Land O’ Lakes butter.

Dunkin Donuts. Best Western hotels.

Sunkist oranges. These are all common

brand names known by most

Americans. The fact that they are all

cooperative brands separates these

businesses and their products from

others. 

Almost half of Americans are

members of cooperatives, although

many are unaware of it, and almost

everyone in America regularly

purchases products produced by

cooperatives. Co-ops are part of the

basic fabric of our daily lives, but too

many Americans are unaware of this, or

of the major role cooperatives play in

the marketplace.

That is all going to change if

Roberta MacDonald has her way.

MacDonald, senior vice president of

marketing for Cabot Creamery

Cooperative in Vermont (part of the

Agri-Mark dairy co-op), was

instrumental in creating the new

Marketing Committee of the National

Cooperative Business Association

(NCBA). As chair of the committee, her

goal is to combat public ignorance of

co-ops. Helping the public to

understand what co-ops are can give coops a better edge in the marketplace

and spread this member- and

community-oriented business structure.

Spreading the word

Although she makes her living

promoting farmer-owned Cabot

Cheese, MacDonald is a city kid who

did not have a farming or cooperative

background.

“I come from consumer products,

glitzy D.C., New York and San

Francisco,” says MacDonald. “I was

actually somebody that didn’t even

know where milk came from.”

In the almost 20 years since

MacDonald started working for Cabot,

a few things have changed. She credits

her teammates with helping Cabot

grow from a cooperative with $30

million in annual sales to one with $350

million in sales. During that time, she

has come to truly appreciate and

support the cooperative business model.

“Long before I was a zealot about

co-ops, I was a zealot about farmer

ownership,” she says. “I then came to

appreciate what the cooperative

structure meant.”

Understanding and appreciating the

co-op business structure makes her

position with Cabot more than simply a

job. It may be her job to market Cabot,

but her mission is to advocate Cabot’s

cooperative advantage — and the

advantages of cooperatives in general

— to the nation.

“People don’t get that it’s an

alternative to other business structures,

and it can be just as profitable, just as

20 January/February 2008 / Rural Cooperatives

IN THE SPOTLIGHT

Mission to Market Co-ops

MacDonald, NCBA Marketing Committee work

to expand public understanding of cooperatives

T

“Long before I was a zealot about co-ops,

I was a zealot about farmer ownership,”

says Roberta MacDonald. Above right:

the new Girl Scouts’ Co-ops for

Community merit badge. Opposite page: a

new co-op education Web site

homepage. 
effective, but certainly...more

transparent,” she says.

From this dedication, both to Cabot

and to the entire cooperative sector,

MacDonald has poured her efforts into

promoting cooperatives. She is well

aware that what is true for Cabot is true

for other co-ops: that on their own, coops simply do not have enough money

to do serious consumer marketing.

Joining forces is mutually beneficial to

each and every one of them.

“We represent the largest potential

voting bloc of any group in the United

States,” she says. “We are a political

force to be reckoned with if we ever got

together.”

MacDonald was nominated to the

NCBA board about four years ago,

making her goal of promoting co-op

advantages and forging cross-sector coop alliances more attainable. She used

her position on the board to advocate

the creation of an NCBA Marketing

Committee open to board members and

any cooperative members’ marketing

team leaders. 

“The committee was really her idea,”

NCBA President Paul Hazen says.

“She’s a marketing genius.” 

“I thought the marketing committee

was the perfect place for the outgoing

chair [of NCBA] to serve as chair,”

MacDonald says. “Instead, what they

did was to make me chair.”

Marketing the co-op advantage

Since its creation, the NCBA

Marketing Committee has developed

some powerful tools for reaching out to

people and educating them about

cooperatives. These tools, including a

new co-op Web site (www.go.coop), a

new introduction to cooperatives video

and a new Girl Scout “Co-ops for

Community” patch, all tout cooperative

advantages. MacDonald played a part in

each of the projects but credits

teamwork for making them all happen.

“No one person accomplishes anything,

if you ask me,” she says. “It’s always a

team.”

Every member of the NCBA

Marketing Committee, which includes

representatives from several cooperative

associations — including the Credit

Union National Association, the

National Rural Electrical Cooperative

Association and the National Council of

Farmer Cooperatives — was crucial to

the effort, she stresses. Staff from

NCBA, dotCooperation LLC (which

oversees the .coop Web URL domain)

and NCB (formerly National

Cooperative Bank) were especially

helpful to the effort, as was the

National Cooperative Grocers

Association. The grocers association

also played a key part in creation of the

.coop URL. Having researched what

consumers thought of cooperatives with

their members, they landed on the Go

Co-op phrase, which was turned into

the committee’s Web site for the

marketing program. 

Many cooperatives are already taking

advantage of the .coop URL, but the

committee appreciates that there has to

be serious marketing on an ongoing

basis to increase public awareness. “Too

few people even realize there’s a .coop

URL,” MacDonald says. 

As part of National Co-op Month in

October, the NCBA Marketing

Committee launched a month of

sponsorship announcements on

National Public Radio, promoting the

new co-op Web site. “Two weeks into

the campaign, we had thousands of hits

on our Web site and many stayed to

look through all we had to offer,”

MacDonald says.

The Web site is also home to the

video created to educate people about

what co-ops are, what they do and how

they benefit people. The video

highlights housing, electric, grocery,

healthcare, farm and financial co-ops

across the nation. Cabot, along with

NCBA, also spearheaded the effort to

create the Girl Scouts “Co-ops for

Community” patch program as a part of

the overall co-op awareness campaign. 

“Roberta has always wished to do

something to spread

the word on what coops are,” says Deb

Lowery, the National

Girl Scouts project

coordinator for Cabot

Creamery. This is one

way she has been able

to directly involve coops in teaching the

next generation about

how they can

personally become

involved.

“I probably

have about 200 orders

[for information

packets on the co-op

merit badge program]

that have come in

from cooperatives,” Lowery says.

“There’s a tremendous amount of

interest. The orders for the booklets are

just coming in hand over foot.”

Although the booklets were created

for Girl Scouts, MacDonald emphasizes

that any children and youth

organizations can use the materials. 

“I think once 4-H gets hold of it, it’ll

go a lot of places,” she says. “It’s not

just for Girl Scouts.”

The benefits of this Girl Scouts

patch program are in keeping with

MacDonald’s long-term goals for the

future of cooperatives. She wants to get

young people interested in co-ops,

understanding co-ops and involved in

co-ops.

“When you get kids involved from

an early age in anything, it becomes

Rural Cooperatives / January/February 2008 21

continued on page 46
22 January/February 2008 / Rural Cooperatives

By Carolyn Liebrand, Ag Economist 

USDA Rural Development, Cooperative Programs 

Editor’s Note: The extra value index was developed by USDA

Cooperative Programs previously to evaluate dairy cooperative

performance. Results for dairy cooperatives can be found in

Research Reports 166 and 212, and also in “Rural Cooperatives”

magazine (Nov./Dec. 1996 and Sept 1998 issues). This article

summarizes the results of “Measuring the Performance of

Agricultural Cooperatives,” a new USDA report that extends the

analysis to all types of agricultural cooperatives. To order a copy of

the full report, see ad on page 15.

Using the ‘extra-value index’ to measure

agricultural cooperative performance

Photo illustration from photo by Bruce Campbell
Rural Cooperatives / January/February 2008 23

he task of measuring the financial

performance of cooperatives is problematic

because of the attributes of the cooperative

form of business. One such feature is the use

of member equity to finance cooperatives.

The cost of member equity is often overlooked. 

Most of the commonly used financial measures — return

on equity, return on assets, return on operating capital, net

margins on sales, net margins per unit and so forth — do not

yield unequivocal conclusions about a cooperative’s

performance, in large part due to the treatment of equity.

Another complicating factor is a cooperative’s lack of publicly

traded stock. For public companies, the stock price may serve

as a proxy for a company’s performance and market value. 

For these reasons, it is difficult for members to judge their

cooperative’s performance. However, members need to be

able to fully evaluate their cooperative’s performance. The

more complete the measure of cooperative performance, the

better equipped the board is to guide the cooperative and to

evaluate and appropriately reward cooperative managers.

What is extra value?

In previous reports, USDA Cooperative Programs took an

innovative business-school tool for measuring the

performance of a business and modified it for use with

cooperatives. This method is fairly simple. It calculates the

“extra value” a cooperative generates through its operations

by subtracting an interest charge on equity capital from net

savings:

Extra value = Net savings - Interest on equity

Interest on equity = member equity x interest rate for equity

Performance was measured using three different interest

rates for the charge on equity to reflect a range of risk

premiums. The December average of the British Bankers

Association’s London Inter-Bank Offered Rate (Libor) plus

200 basis points provides the basic reference rate. This Libor

+ 2 “basic” rate reflects the commonly held opinion that

banks in the United States will generally extend loans to a

firm with a better-than-average credit rating, at an interest

rate of about 200 basis points above the Libor. 

The extra-value approach enables a cooperative’s use of

member-supplied funds to be fully measured — whether

member capital is earning more, or less, than it could in

alternative investments. The value a cooperative generates

over and above its expenses, including an opportunity cost for

its equity capital, is termed “extra value.” A positive extra

value indicates that a cooperative has created value by its

operations, while a negative extra value means that a

cooperative has actually diminished the value of members’

investment. 

Extra value was also calculated at two higher rates – the

basic rate plus 5 percentage points and the basic rate plus 10

percentage points – to account for the fact that equity

investments are riskier than debt and require higher rewards.

For comparisons over time and among different types of

cooperatives, extra value is expressed as a percentage of

operating capital. This common-sized index is thus scaleand operating mode-neutral. 

Extra-Value Index = Extra Value / Operating Capital x 100

Operating capital = fixed assets + net working capital

Fixed assets = non-current assets

Net working capital = current assets minus current liabilities

Selection criteria for cooperatives

Agricultural cooperatives that were on the “Top 100” list

(compiled by USDA Cooperative Programs, based on a coop’s revenue) for at least four years in both of the five-year

time periods 1992–96 and 2000–04 were included in this

T
24 January/February 2008 / Rural Cooperatives

study. Multiple years were averaged to help minimize the

impact of extraordinary factors on results. Use of this criteria

resulted in the selection of 65 agricultural cooperatives. 

Based on their main source of revenue, the cooperatives

were grouped into seven general types: cotton, dairy, farm

supply, fruit and vegetable, grain, sugar and “other.” The few

diversified (where marketing and supply operations both

generate significant revenue), rice, poultry and livestock

cooperatives were combined in the “other” category. 

Ag co-op performance

Performance was assigned to one of five categories,

according to the cooperatives’ return on equity and extra

value generated at three different interest rates: 

Category I — Negative returns. Cooperatives in this

category had a negative average return on equity for the fiveyear period. 

Category II — Positive return on equity, but no extra

value generated. These cooperatives averaged positive

return on equity for the five-year period, but showed a

negative extra value when the basic rate was charged for

equity capital.

Category III — Extra value generated at a basic interest

charge for equity. These cooperatives were adding sufficient

value through their operations to cover the opportunity cost

of member-supplied capital at a rate similar to what they

would have had to pay for debt capital.

Category IV —Extra value generated with a moderate

risk premium on equity capital. Cooperatives in this group

showed positive average extra value when interest on equity

was charged at a 5 percent premium over the basic rate. 

Category V — Extra value generated with a higher risk

premium charge for equity. Cooperatives in this category

were able to average positive extra value for the five-year

period when applying a 10 percent risk premium (over the

basic rate) to reflect the historical risk premium for equity

investment.

Table 1 shows the numbers of cooperatives, according to

type, that performed in each category for each time period.

More cooperatives showed positive extra value (category III,

IV or V) in the second time period (46 cooperatives) than in

the first (39 cooperatives). The different types of

cooperatives followed suit, with the exception of the farm

supply cooperatives, where there were two fewer cooperatives

with positive extra value — at any interest charge for equity

— in the second time period. 

For 2000-04, all of the cotton cooperatives showed

positive extra value and more than 80 percent of the grain

and dairy cooperatives generated extra value. A majority of

continued on page 44

I X 1992-96 0 1 0 0 0 1 2 4

2000-04 0 1 1 2 1 0 0 5

II X 1992-96 1 4 2 9 4 2 0 22

2000-04 0 2 3 5 1 2 1 14

III X X 1992-96 0 4 4 3 5 2 1 19

2000-04 1 5 5 5 8 3 1 28

IV X X X 1992-96 0 3 2 1 2 0 0 8

2000-04 0 3 0 1 2 0 1 7

V XXX X 1992-96 2 4 1 2 2 1 0 12

2000-04 2 5 0 2 1 1 0 11

Table 1—Performance of agricultural cooperatives in the two five-year periods 1992-96 and 2000-04, by category

Group

Negative

ROE

Positive

ROE

Positive

EVI

@Basic

Rate

Positive

EVI @

Basic

+5%

Positive

EVI @

Basic

+10% Period Cotton Dairy

Farm

Supply

Fruit &

Veg Grain Other Sugar Total

Criteria met Number of cooperatives meeting criteria
Rural Cooperatives / January/February 2008 25

By Melanie Bowden

Editor’s note: Bowden is a freelance writer, writing

teacher and writing coach. She has written for more

than 100 publications.

’ve lived here for more than 15

years,” says Lina Hernandez, a

mother of three. “Before the

Knights Landing Children’s

Center,

there was no reliable

child care. My husband

worked days and I had

to work the swing shift.” 

Now, Lina has a day

job as a case manager

for the Yolo Family

Resource Center. She’s

much happier not

having to look for swing

shift agricultural or

retail work. And her

four-year-old daughter,

Esmeralda, is happier

too.

Staff from the new

California Center for

Cooperative Development (CCCD), along with a parent

organizing committee, spent a year planning for the parentrun cooperative’s opening in January 2004. In 2007, the

CCCD helped the co-op upgrade its financial accounting

system. CCDC helped educate the members and the board

of directors, which is comprised of parents. It also assisted

with other structural supports that have helped strengthen

the co-op, which offers families in the rural community of

Knights Landing, Calif., a place for children age 2-6.

The co-op meets the unique needs of parents in a rural

agricultural community. Many of them work in a nearby

cannery or in the fields. Since the center is open year-round

from seven a.m. in the morning to five p.m., parents have

time to drive back and

forth to their jobs and still

put in an eight-hour shift,

something that was

impossible when the sole

preschool in town offered

only a three-hour

program.

USDA Rural

Development recently

provided a $224,000 grant

to the Yolo Mutual

Housing Association

(YMHA), which is the new

Center for Cooperatives in

California. YMHA works

with cooperatives on

various projects

throughout the state,

including providing

technical assistance and

support to Knights

Landing Cooperative

Children’s Center. 

Parents make the

difference

The operation of

Knights Landing Children's Center (KLCC) is designed to

meet the needs of its members--and to adjust when those

needs change. Parents make decisions and solve problems on

such issues as tuition, staff hiring, hours of operation and

budget. The parent-elected board of directors meets

monthly, and membership meetings are also held regularly.

“It’s the parents working together who have kept the

center open,” says Clare Purtill, a board member and a

teacher at KLCC. “Without the parents’ help, we wouldn’t

be able to offer three different programs: four-hour, six-hour

and full day." 

A sliding-scale fee has also been established, with the help

of a combination of grants, donations and volunteer parents

School’s In!

CO-OP DEVELOPMENT ACTION

California parents create childcare co-op

“I

Director-teacher Clare

Purtill greets an

arriving student at the

Knight Landing

Cooperative Children’s

Center. Above: the coop’s playground. Each

member-family must

perform five hours of

work at the Center

each month. Photos

by Melanie Bowden
26 January/February 2008 / Rural Cooperatives

doing jobs that would otherwise require paid help. Since

the highest fee is less than the lowest fee typically

charged by local child care providers, KLCC is able to

serve more families living on low incomes.

For their part, each member family is required to

participate five hours a month, either helping in the

classroom or performing functions such as bookkeeping

or purchasing supplies. Parents are expected to attend

the annual membership meeting and to participate in a

minimum of six education classes that focus on parenting

issues.

“It is humbling to work with the parents and staff of

Knights Landing Children’s Center,” says Kim Coontz, a

nationally known co-op development specialist who now

serves as executive director of the new California Center

for Cooperative Development. “The parents and the

dedicated staff of KLCC put a high value on their

cooperative and have been true partners in identifying

the education and training needs that would best help it

succeed. They have worked hard to implement the

changes needed to make their cooperative strong.” 

Facing the future, together

This solid base of support will be tested in the coming

months. Grafton Elementary School has notified the coop that next fall, it will need the classroom currently used

by KLCC. The school has offered the cooperative

another temporary classroom until the following fall, but

then the co-op will need to have a more permanent

location. Some of the help provided by the cooperative

development center has included identifying potential

funding sources for this move and developing a brochure

and templates for other types of information, which are

useful for fundraising.

Gricelda Cardenas, a board member and the co-op’s

treasurer, appreciates all that KLCC has to offer. “I

receive parenting and educational support from the staff

and the other parents. Parents are encouraged to

participate in their children’s education, both at the

center and at home, and are given the necessary tools to

help their children learn.” 

Esmeralda Hernandez, Lina’s four-year-old daughter,

likes getting to play with all her friends at school.

“Teacher Clare takes us to the library every week,” she

says. “One time we went to the clinic and learned how

to listen to a heartbeat from the doctor.” 

Asked what she likes best about her school, she says, "I

like everything.” And she likes having both of her parents

at home at the end of the school day, too.

For more information on the California Center for

Cooperative Development, visit: www.cccd.coop. ■

“The Art and Science of Cooperative Business Development,”

now in its fifth year, is the only training program available in the

United States that addresses the unique attributes of developing

and expanding cooperatively based enterprises. 

Twice each year for five days of intensive training,

participants are immersed in learning the practical applications of

cooperative business development skills. The training uses a

multi-faceted format that includes lectures, interactive sessions,

case study analyses, panel discussions, study tours to local

cooperative, and plenty of opportunities to network with faculty

and students. 

The program is produced by CooperationWorks!, a national

service cooperative for co-op development centers. It takes place

at the University of Wisconsin and Madison, a national nexus for

cooperatives and credit unions.

Energy independence director speaks

A special highlight of the September 2007 session was a

reception for the Madison co-op community, featuring guest

speaker Judy Ziewacz. Currently the director of Wisconsin's new

Office of Energy Independence, she was previously deputy

director of the Wisconsin State Department of Agriculture, Trade

and Consumer Protection. Before that she was a national leader in

cooperative development and one of the founders of

CooperationWorks! 

Ziewacz spoke about the role co-ops can and are playing in

the move toward energy independence. Wisconsin's governor has

challenged the legislature to mandate that 25 percent of electricity

and 25 percent of transportation fuel come from renewable fuels

by 2025. The state’s dairy co-ops (part of a $20.6 billion industry)

seem to be in a good position to benefit from such initiatives. 

Ziewacz told the Madison crowd that people who look to

generating renewable energy from the rural landscape but are

intimidated by big projects should not be concerned. That’s

because the co-op model offers a way to make this happen by

becoming more, not less, independent.

Business model that works

“When we first started the [co-op development] centers,” she

said in a recent interview, “we positioned cooperatives as a rural

development tool that aggregates individual producers’

enterprises in both vertical and horizontal linkages to the market.

As the renewable energy field develops, we don't have to reinvent

the wheel,” she emphasized. “We already know a model that

works.”

The 2008 “Art & Science of Cooperative Business

Development” program will begin this spring. For more

information, contact Audrey Malan at 307-655-9162 or

cw@vcn.com.

—By Jane Livingston

Art & science of energy independence
Rural Cooperatives / January/February 2008 27

Ohio co-op’s soy-crushing plant produces

for expanding trans-fat-free oil market

V ALUE-ADDED CORNER

By Michael Jones

Public Affairs Director

USDA Rural Development, Ohio 

eveloping new markets

and responding swiftly —

and correctly — to

market changes are

qualities all successful

businesses share. Mercer Landmark Inc.,

a northwest Ohio cooperative, exhibited

those business skills in positioning itself

to become a significant regional supplier

of soybean-based products.

Mercer, a 74-year-old, locally owned

farm cooperative, has more than 2,000

producer-members and operates 15

facilities in Mercer, Darke, Van Wert and

Paulding counties. Although Mercer focuses on delivering a

variety of agronomy, livestock, grain-marketing and related

services to its members, it constantly evaluates new

opportunities that could increase the cooperative’s overall

profitability. 

The motivation to financially reward its producer

members prompted Mercer to investigate the potential

market for soybean oil. To do so, Mercer sought USDA

Rural Development’s help, securing a $30,000 Value Added

Producer Grant to evaluate the soy-oil market. The grant

provided half of the funding needed to conduct a feasibility

study and complete a business plan. The study, completed in

2006, confirmed that Mercer’s management was right on

target in seeking to enter the soy-oil market.

“When we look at growth opportunities, our main

concern is making sure whatever decisions we make produce

positive financial returns for our members,” says Mike Fry,

president and CEO of Mercer Landmark. Fry has been with

Mercer since 1995 and is responsible for directing and

leading the business operations. 

“This venture is an opportunity for us to position Mercer

to benefit from current trends, as well as to anticipate and

incorporate any future industry developments,” adds Fry.

Study leads to crushing plant 

As a result of the feasibility study, Mercer constructed a

small soybean-crushing plant where it processes a special

low-linolenic soybean, grown under contract by 200 Mercer

producer-members. The co-op then sought, and received, a

second Value Added Producer Grant: $300,000 in working

capital for the soybean-crushing venture.

Producer members will earn a premium of 60 cents per

bushel when delivering this product to the plant at harvest, or

70 cents per bushel if the soybeans are stored on their farms

until the plant calls for their crop. Mercer’s producermembers will also share in profits from operations at the

soybean-processing plant.

Using a mechanical extrusion technique, the process

separates soybeans into food-grade soy oil and soybean meal.

The extrusion process, which doesn’t use chemicals, produces

a premium-quality trans-fat-free oil and high-protein soybean

meal that can be used in feeds. 

“We’ve been very deliberate in our approach to launching

this venture and have specific marketing goals in mind,” says

Scott Boulis, facility manager for Mercer Landmark.

“Developments within our industry occur very rapidly and we

D

Denise Myers determines the linolenic acid concentration of a new soybean shipment.

Mercer Landmark CEO Mike Fry (left) and Manager Scott Boulis display raw soybeans,

high-protein soybean meal and soy oil. USDA photos by Michael Jones

continued on page 43
28 January/February 2008 / Rural Cooperatives

By Bruce J. Reynolds, Ag Economist 

USDA Rural Development/Co-op Programs

bruce.reynolds@usda.gov 

t is puzzling that many businesses and

individuals forgo opportunities to join or

organize cooperatives when such actions

would benefit them. One reason for such

missed opportunities is that “go-it-alone”

decisions sometimes offer more immediate payoffs, or more

certainty of outcome, than do efforts that involve sharing

resources or participating in orderly marketing efforts. 

Game Theory analysis helps identify situations that may

lead to coordinated decisions among various “players,”

depending on the way incentives are structured. An incentive

structure can be conveniently displayed in a 2 x 2 pay-off

matrix. These matrices provide a way to distinguish between

“dominated” and “contingent” choices, which is a key to

understanding the prospects for coordinated decisions. This

analysis will be applied in this article to hypothetical rafting

businesses that share a thin strip of white water on the North

Fork Canyon Run. 

Game Theory is applied to studying situations where payoffs to each participant are interdependent, i.e., determined

not only by the decision of an individual but also by the

decisions of others. For the sake of simplicity, this will be

examined as a two-person game. 

Although the pay-offs are interdependent — mutually

affected by how many rafts in total are operated — the

decisions about how many rafts to operate are often

independent of what the other participant does. In these

cases, the incentive structure is based on dominated choices

— that is, the decisions of one participant do not influence

the other operator’s decision and vice versa. 

Two-person game

The North Fork Canyon Run is a narrow branch of a river

that runs through a large and mountainous park. Several

I

MANAGEMENT TIP

Sharing the North Fork Canyon Run

Insights from Game Theory for Cooperatives

Photo courtesy Chattanooga Area Chamber of Commerce
Rural Cooperatives / January/February 2008 29

small rafting companies provide tourists with white water

rafting recreation during the non-winter months. These trips

primarily are made on a couple of the larger rivers in the

park and, to a limited extent, at the North Fork Canyon Run.

This run is navigable only during a couple months in the

spring. Due to its narrow channels and frequent spots where

rafts get briefly hung-up, the park authority established a

one-raft-at-a-time rule. The park provides a dedicated phone

line between the entry and exit points so the rafters know

when to start the next raft trip. Rafting companies must have

a permit to operate in the park.

Near the entry point for the North Fork Canyon Run is

an access road along which visitors can park, as well as a

small parking lot. Visitors come for a popular scenic outlook,

hiking trails and to get on the waiting-list for raft rides when

offered during the spring. The park authority believes that

there is only adequate space for two rafting companies to set

up and operate on any given day. 

The first two permit-holding raft companies to arrive in

the morning get exclusive rights to operate for that day.

Different rafters operate on different days, depending upon

their customer bookings and business on larger rivers in the

park. 

Daily revenue is determined by the number of rides per

day, which in turn is affected by river conditions. Differences

in water level occur from changes in the volume of snow melt

in the mountains. When the water level is low, the rafts get

stuck or hung-up more often on rocks, reducing the number

of rides. Based on water levels, the two raft operators can

estimate how many trips they’ll make in the day, which is also

affected by their respective decisions to operate one or two

rafts. Four rafts usually operate, two per company, on the

North Fork Canyon run. However, the optimum is usually

three rafts, sometimes two — but hardly ever four rafts in

total. 

Let’s take a look at three recurring payoff situations for

rafting businesses sharing the North Fork Canyon Run.

Dominant choices

The outcome for two rafting companies in making a

decision to operate one or two rafts is displayed in the payoff

matrix for the relatively high water level that usually prevails

on the North Fork Canyon run during the spring (Figure 1). 

Table 1 shows the number of rides per raft and the effect of

the number of rafts operated on the total payoff for each cell

in the matrix. Although there is a cost in operating an

additional raft, the business owners want to keep their raft

guides or navigators busy. When the first two operators

arrive to establish their claim to operate for the day, each

plans on using two rafts.

The incentive structure of the payoff matrix in Figure 1

creates a dominant choice of two rafts each regardless of what

the other does. Column Rafting Co. has payoffs in the upper

right corner of each cell. The second column has a payoff of

either 20 or 14, which are larger than column one payoffs of

12 and 10 when operating one raft. A column is “dominant”

when the payoff of at least one of its cells is higher and all its

other cells are not lower than the adjacent cells of all other

columns in the matrix. Likewise, for Row Rafting Co., the

payoffs of both cells for operating two rafts dominate the

pay-offs for one raft (lower left corner of each cell). 

Combined revenue would be maximized with three rafts in

total. The dominant choices would not have to be made if

the two companies shared the day’s proceeds from operating

three rafts. Such coordination is difficult because there is

usually a different combination of two companies operating

on the North Fork Canyon Run from one day to the next.

When overnight temperatures are lower than normal,

refreezing occurs in the mountains and water levels can drop

enough to reduce the number of raft rides, whether operating

2, 3 or 4 rafts. Figure 2 and Table 2 report the impact of a

lower water level on the number of rides. When more than

two rafts are operated in these conditions, back-ups at the

entry point may cause some customers to leave or other

delays, in contrast to the immediate turnaround when using

two rafts. The incentive structure of pay-offs again produces

dominant choices in the 2nd column and the 2nd row.

However, in this case maximum revenue is the northwest cell,

where each operates one raft. This payoff structure is known

Figure 1 — Normal water level rafting and dominated choices

COLUMN RAFTING CO.

ROW

RAFTING

CO.

1 raft 2 rafts

1 raft

2 rafts

12

12

10

20

14

14

10

20

Table 1: Rides per raft

Rafts Rides Total

2 12 24

3 10 30

4 7 28

Figure 2 – Low water level rafting and the Prisoner’s Dilemma

COLUMN RAFTING CO.

ROW

RAFTING

CO.

1 raft 2 rafts

1 raft

2 rafts

11

11

7

14

8

8

7

14

Table 2: Rides per raft

Rafts Rides Total

2 11 22

3 7 21

4 4 16
30 January/February 2008 / Rural Cooperatives

as “the prisoners’ dilemma.” 

Volumes have been written about the prisoners’ dilemma

because it focuses on what is lost when participants cannot

communicate. In the original story, two prisoners are in

isolation and both choose to confess, hoping to get a better

outcome. Unfortunately, since they both confess, they each

get the worst payoff. The two prisoners lack the trust in each

other to stick to their “not-guilty” story and mutually get the

better results of the northwest quadrant. 

Many studies use the prisoners’ dilemma to discuss the

importance of improving upon worst outcomes through trust

and understanding. But on the North Fork Canyon Run, the

participants in the two-person game differ from day to day,

which can be enough to thwart communication and the

building of trust. As pointed out by Thomas Schelling, it’s

not really a “dilemma” at all but a game of dominated choices

(Thomas Schelling, Strategies of Commitment, 2006, viii). 

Contingent choices

Weekends in the park are crowded with sightseers, hikers

and tourists wanting raft rides. The difficulty of finding

convenient parking for the vans and raft trailers increases the

turnaround time when more than two rafts are operated. A

third raft encounters occasional delays but still results in

more rides than if two rafts were operated. A fourth raft

results in a series of delays on crowded weekends. The

decision for each operator about one or two rafts is

contingent upon what the other operator does. 

Figure 3 and Table 3 report the payoffs of an incentive

structure that involves contingent choices. Without a

dominant choice, each participant will consider the benefits

of coordinating their decisions to be able to operate three

rafts – one company operates two, the other company

operates one raft, and they split their combined revenue. 

The contingent choices of Figure 3 may not always result

in coordinated decisions. The first rafting company to set up

on the North Fork Canyon Run on a weekend day could

choose to operate two rafts on the expectation that the

second company to arrive will prefer to use one raft with a

payoff of 9, as compared to 6 if a fourth raft were added.

This game has a “first-mover” advantage. 

The potential success of a first-mover in operating a

second raft depends on the other rafting company’s sensitivity

about fairness. The second raft company could be indignant

about the lack of revenue sharing and decide to operate two

rafts. The first-mover advantage is defeated if raft operators

always react indignantly and chose to operate a second raft.

In that case, the “first-to-arrive” rafting company may choose

to use just one raft so as to secure the pay-off of 12 trips

rather than risk getting only 6. 

Clearly, weekends on the North Fork Canyon Run involve

contingent choices that do not come up during the weekdays

when operating two rafts each is the dominant choice for any

two companies.

Challenges in coordinating decisions

Game Theory analysis may appear to be an

oversimplification of actual business decisions, but its purpose

is to highlight cooperation opportunities and their prospects

for success. In each of the three scenarios on the North Fork

Canyon Run there are opportunities to jointly maximize

earnings with coordinated decisions. Although only two

parties have to reach an agreement, the fact that the

companies operating raft trips frequently vary from day to

day diminishes the patience and trust necessary for

negotiating a plan for either three or two rafts. 

A payoff matrix reveals the decision cell with the highest

total earnings, but participants estimate their payoffs either

along columns or rows. In other words, each player estimates

its payoffs from a go-it-alone perspective. They don't

compare the total value of each cell or quadrant in a payoff

matrix. This orientation is natural and practical when

thinking in terms of operating alone. 

Finally, a Game Theory analysis also demonstrates why

the prospects for coordinating decisions are much improved

if participants are dealing with contingent, rather than

dominant, choices. Participants understand that to choose

for the highest pay-off, they risk getting the lowest pay-off,

while their other choice offers pay-offs between the highest

and lowest. This uncertainty, in contrast to dominant choices,

encourages the parties to seek an agreement on three rafts

with revenue sharing. 

The benefits and challenges of coordination in a one-day

encounter may be extended to the longer term of formally

organized cooperatives when the earnings from individual

decisions are interdependent. Market participants are more

likely to become members of a cooperative when their

decisions are contingent upon what other market participants

do than if their choices are dominated. 

The lesson from Game Theory is that while businesses

and individuals are committed to their "bottom line," their

goals can be self-defeating if they allow this singular commitment to create tunnel vision. An eye for opportunities to

cooperate is a useful skill in the pursuit of individual gain. ■

Figure 3 – Normal water level rafting and contingent choices

COLUMN RAFTING CO.

ROW

RAFTING

CO.

1 raft 2 rafts

1 raft

2 rafts

12

12

9

18

6

6

9

18

Table 3: Rides per raft

Rafts Rides Total

2 12 24

3 9 27

4 3 12
Rural Cooperatives / January/February 2008 31

By Anne Mayberry 

USDA Rural Development

Rural Utilities Programs 

entral Electric Power Cooperative in South

Carolina is not an average utility, and neither

are its members average electricity

consumers. The co-op recently saluted its

members for their efforts to embrace

conservation, use renewable fuels and fund research into

clean-air technology. The co-op and its members have

committed up to $10 million per year to fund projects that

will help improve the environment and meet future energy

needs. 

“Our members deserve credit for what they’ve done, ” says

Ron Calcaterra, the co-op’s president and CEO. Because of

their support, the co-op is “committed to investing in

renewable energy and energy efficiency.” 

Studies prompt action

Recent actions by the co-op are the result of two new

studies commissioned by Central Electric to address its

growing energy needs. Calcaterra explains that the rapid

growth in the state — combined with the fact that most of its

energy is purchased — triggered the need to base the co-op’s

future direction on factual information rather than

speculation. 

“There were lots of comments about how we should meet

our energy needs. We wanted to know what was possible, not

just technically achievable,” Calcaterra says. Rural electric

cooperatives are searching for safe, reliable and affordable

electric power, but worry that they won’t find it before

demand surpasses capacity. They’re not alone in having that

concern.

Measures to increase use of renewable fuels and decrease

carbon emissions will remain before Congress for the

foreseeable future. Investors are looking for a silver bullet to

generate returns on renewable fuels and carbon-capture

technologies. While the decision to move toward a

renewable-fuel portfolio can win accolades, it requires careful

evaluation. 

“There has been a lot of speculation about the best way to

address climate change,” says Van O’Cain, spokesperson for

the Electric Cooperatives of South Carolina. “Unfortunately,

there isn’t always a lot of information that tells you the best

way to proceed.” 

The challenge to meet future needs while providing

reliable, affordable and environmentally responsible power

led to the two independent, third-party studies. One study

reviewed energy-efficiency programs while the other

explored the value of renewable energy investments. Results

of the studies are guiding South Carolina rural electric

cooperatives as they determine which programs will deliver

the greatest return on investment in addressing climate

change issues.

Reliability

The energy studies focused on several sources of power.

Currently, wind is not a viable alternative for providing the

amount of power that electric cooperative utilities will need

to meet demands growing at twice the nationwide average,

Calcaterra says. “Setting up wind turbines off shore might

provide more electric power, but there’s a whole gamut of

problems with getting that power back on shore.” 

Use of solar power would cost five-to-ten times the cost of

coal, and “the sun doesn’t always shine when you need it,”

Calcaterra notes. Baseload power must be available 24 hours

each day, seven days a week.

C

UTILITY CO-OP CONNECTION

Ron Calcaterra, CEO of Central Electric Power Cooperative

(CEPC), tells co-op members about how compact fluorescent light

bulbs can save electricity. Photo courtesy CEPC

South Carolina co-op pursuing

three-pronged energy strategy

continued on page 46
32 January/February 2008 / Rural Cooperatives

By Dan Schofer 

dan.schofer@wdc.usda.gov 

Editor’s note: Schofer was a co-op

development specialist with USDA Rural

Development, but recently became deputy

director for outreach with USDA’s Farm

Service Agency. 

he Intertribal Bison

Cooperative (ITBC) is

a nonprofit tribal

organization with 57

tribal members across

19 states committed to restoring buffalo

herds to Indian Nations. This is being

done in a manner that is compatible

with the spiritual beliefs and cultural

practices of these tribes. ITBC

customers include the restaurant at the

Smithsonian National Museum of the

American Indian in Washington, D.C.

It also provides buffalo robes and skulls

for museum displays.

Helping ITBC in this effort is the

funding it has received under the Small

and Minority Producer Grant (SMPG)

program of USDA Rural Development.

This program provides funds and

technical assistance to cooperatives or

associations of cooperatives of smallscale, minority agricultural producers.

The co-op or association must have a

governing board and/or membership

comprised of at least 75 percent

minorities. 

The role of ITBC, as established by

it members, is coordinating the

movement of surplus buffalo from

national parks to tribal lands and

developing marketing strategies. It also

acts as a facilitator for educational and

training programs. 

ITBC provides technical assistance

to members to help them develop

management plans that will enable

tribal herds to become self-sustaining.

To do this, tribes need to acquire

business tools to develop and

implement long-term business and

marketing plans for their individual

herds.

T

Bison co-op

helping Native Americans

develop production,

marketing strategy

Bison (below and opposite page) are rounded up and herded through chutes at

Badlands National Park. The Intertribal Bison Cooperative (ITBC) is helping its members

manage their herds as sustainable businesses while also preserving the tribes’ heritage.

Photos courtesy ITBC

Bison co-op

helping Native Americans

develop production,

marketing strategy
Rural Cooperatives / January/February 2008 33

Combining heritage and

economics

Many Native American communities

and tribal governments manage their

herds solely for heritage and spiritual

purposes. The challenge facing them is

to also manage their herds as

economically self-supporting businesses. 

Some tribes regularly take children

enrolled in tribal Head Start programs

on tours of the buffalo herds to teach

them about nature and the heritage of

their tribes. Tribes also slaughter a

select few animals for special events,

sun dances and for consumption by the

elders of the tribe. 

“All of our member-tribes know it

takes money to manage a herd

properly,” explains Greg Wrangel,

marketing director for ITBC. “People

have been waiting for a comprehensive

approach to make the tribal herds

economically viable, as well as

embodying our heritage and

spiritually.”

In its effort to use buffalo as an

economic resource, USDA awarded

ITBC funds from the Small and

Minority Producer Grants program to

provide tribal members with:

• An assessment of current

management and business practices;

• Business and marketing software;

• Regional training on using new

software for each tribe’s buffalo

program;

• The newest available production and

herd-management techniques; 

• A national conference, including

training and the delivery of

preliminary project evaluations.

The first phase of the project

involved evaluating current

management and business practices for

individual tribal herds. Most members

did not previously have any written

business or marketing plans, working

only on verbal directives from tribal

councils or leaders. These directives are

often subject to sudden change because

of tribal elections.

A software package — designed to

help them develop their own feasibility

analysis, business plans and marketing

plans — was purchased and distributed

to tribal members. ITBC then held five

regional meetings in New Mexico,

Wisconsin, Oklahoma, North Dakota

and Oregon to familiarize tribal

members with the software and related

business concepts. Training sessions

have been conducted for 42 tribes so far.

“We had members bring their

laptops, loaded with the software,”

Wrangel says. “Then we walked them

through the business plan process. Each

member was able to create a unique,

basic business plan for his her tribe’s

buffalo herd during the training session.”

Binders were distributed containing

the most up-to-date information on

herd management, organic- and

natural-production guidelines, new

veterinarian techniques, feed

instructions, pasture management,

noxious-weed management and

university/extension bulletins on

marketing. A second binder was

distributed highlighting relevant

government services and contacts that

may be beneficial to herd management

and marketing. 

Hide tannery studied 

Additionally, ITBC is looking into

the economic feasibility of operating a

jointly owned and operated tannery.

The Ponca Tribe of Nebraska operates

a small tannery, which currently

processes hides from ITBC and other

tribes. The Santee Sioux Tribe, also

located in Nebraska, is looking to

develop its own tannery business for its

tribal members, as well as for ITBC. 

A business partnership between ITBC

members and tribal tanneries, combined

with a solid marketing plan, could

create an alternative and profitable

revenue stream for tribal buffalo

programs. 

The culmination of the SMPG

project was a national meeting of ITBC

in Rapid City, S.D., Aug. 6-10,

coinciding with the 2007 International

Bison Conference. This provided an

excellent opportunity to finish training

tribal members on the use of their new

software and provided follow-up

assistance for fine-tuning business and

marketing plans. 

The concurrent conferences

provided an opportunity for ITBC and

its members to learn from other, nonNative ranchers and the buffalo

industry as a whole. It also helped

tribal members establish industry

contacts and build professional

relationships. ITBC provided entertainment for the international

conference, which included tribal dancers,

re-enactors and a traditional village.

For more information on the SMPG

program, visit: www.rurdev.usda.gov. ■

USDA funds are helping the ITBC educate member tribes about new herd management

techniques and to adopt modern business and marketing software.
By Lynn Pitman,

University of Wisconsin Center for Cooperatives 

nderstanding the true value of a cooperative

is crucial to meeting the many strategic

dilemmas facing cooperatives as they adapt to

a changing business landscape. To explore

this critical issue, more than 180 U.S. and

Canadian co-op leaders (a record attendance) gathered in St.

Paul, Minn., in early November for the 10th annual Farmer

Cooperatives Conference. The University of Wisconsin

Center for Cooperatives (UWCC) presents the annual

conference, funded by the Farm Foundation and other

organizations, to provide co-op directors and managers,

professional organizations, government representatives and

academics with information on major trends and issues

affecting agricultural cooperatives. 

Do co-ops create or destroy value?

Chris Peterson, professor at Michigan State University,

provided a solid framework for the conference with his

presentation: “Do Cooperatives Create or Destroy Value?”

Each cooperative is built around a value proposition, said

Peterson. Whether value is gained or lost is determined by

how well the cooperative fulfills that proposed business

arrangement.

The traditional value proposition — in which a

cooperative business is organized and run for the mutual

benefit of its members — provides market access for

members and deals with them fairly. Public policy provides

these co-ops with some preferences (as in areas of anti-trust

exemptions and tax treatment). Problems with this model

occur when capital needs for either business investment or

member equity redemptions exceed equity generated from

members. As market conditions evolve, the co-op may not be

the only avenue for “fair dealing.”

Another type of value proposition is based on the

economic value created by the cooperative enterprise. Here

the annual return of investment, adjusted for a given risk

level, is the key metric for assessment. It was on this basis

that the 2002 McKinsey report concluded that agricultural

co-ops had destroyed more than $1 billion of value in 1999.

Under this scenario, there is no value added by the use of the

cooperative business structure, because financial measures do

not reflect or encompass the mutual benefit provided to

members.

A third type of value proposition recognizes that a

cooperative can create value both at the member-farm level

(which was not considered in the McKinsey study), as well as

at the co-op business level. While returns at the co-op

business level can be measured by the net income used for

patronage refunds and dividends on capital, the returns at the

member-farm level are more difficult to quantify.

There are other variations of the cooperative structure

that are being used to create and capture value, but these

structures use trade-offs in member control to gain broader

market access, alternative sources of equity or other

opportunities. Peterson concluded that co-ops can create

34 January/February 2008 / Rural Cooperatives

Valuing Your Co-op

Meeting weighs value of co-ops in fast-changing business climate 

U
value when the value proposition both fits member needs and

performs well as a business. Some cooperatives are

successfully accomplishing both, but this continues to be a

challenge.

Doug Sims, retired CEO of CoBank, focused on economic

valuation. He stressed that a cooperative must first function

successfully as a business before it can deliver the other

benefits that are also associated with the cooperative business

model. Sims said he believes that cooperatives historically

have coasted on the value of member refunds without

addressing inefficiencies within the business. 

A co-op’s value proposition must be able to generate a

return on investment that meets or exceeds the cost of

capital, Sims said. Given that ability, however, a memberowned and controlled co-op can be an exceptionally strong

model for a customer-oriented business. 

Valuing assets during changing times

The co-op business structure can meet both economicand member-benefit criteria. A change in market conditions

was compelling enough for a group of Michigan Sugar Co.

(MSC) producers to buy the company and create a producerowned enterprise. When the parent company went into

bankruptcy and put MSC up for sale, sugarbeet growers were

faced with the possibility of losing demand for their crop,

which produce a higher net return per acre than other crops.

Mark Flegenheimer, CEO of MSC, described how producers

bought shares based on acreage and raised $24 million in

equity to start this new-generation co-op.

United Producers Inc. — a livestock marketing co-op that

also offers risk-management and production management

services – decided to maintain its core cooperative structure

after a lawsuit wiped out the co-op’s equity, forcing it to

reorganize. CEO Dennis Bolling pointed out that the

cooperative previously had been structured so that the risk to

farmers was limited to their retained earnings. But the future

of the business depended on greater equity participation by

members. 

Because they recognized the value the co-op brought to

their individual operations, farmers were willing to continue

to patronize the co-op and provide equity for refinancing its

operations. UPI is implementing cooperative-based solutions

to meet its capital requirements through new capital retains

and preferred membership programs. It has also created a

community markets program to organize new cooperatives

around its local facilities. While these efforts are not

sufficient to meet all of the co-op’s capital needs, they have

provided significant member value while addressing financial

requirements. 

In other cases, the evaluation of the cooperative’s value has

led to the conversion to other business structures. FCStone

CEO Pete Anderson described the rationale and the process

of converting from a cooperative to a public corporation.

FCStone was created in 2000 when the Farmers

Commodities Corp. and Saul Stone and Co. merged to form

one of the nation’s largest volume commercial grain

brokerage firms. The business needed increased capital to

finance expansion while maintaining member service levels.

However, annual payments to members limited the

company’s ability to raise and retain equity. 

The cooperative structure also did not provide liquidity or

a means for members and employees to benefit from the

company’s growth, in both market value and income

generation. After a comprehensive strategic assessment, the

cooperative converted to a stock company controlled by

existing members. The new company included an employee

stock ownership plan (ESOP) and increased investment

opportunities for members. Two years later, the company

converted from a private to a public corporation, with an

Rural Cooperatives / January/February 2008 35

Clockwise from center: Amy Gales of CoBank discusses

financial perspective on co-op valuation; Swiss Valley Farms

found advantages re-incorporating as a stock co-op under

Iowa’s new cooperative law; South Dakota Soybean

Processors (seen here is a night photo of its plant in Volga,

S.D.) transitioned from a new-generation co-op to a

producer-owned limited liability corporation (LLC). 
initial public offering (IPO) of common

stock. 

Case study measures benefits

Kansas State University Professors David

Barton and Michael Boland, in their

accompanying case study of FCStone,

evaluated member benefits, before and after

the conversion. Access to risk management

services was similar, and for the next few

years, at least, the original local co-ops will

maintain control of the board. However,

FCStones’s IPO generated unparalleled

multiples of book value, with the possibility

of large equity payouts to co-op and

producer owners, a scenario that was unique

to this conversion and its business position. 

Rodney Christianson, CEO of South

Dakota Soybean Processors (SDSP),

described how SDSP converted from a

closed new-generation cooperative to an

LLC in order to expand into the

burgeoning field of vegetable oil

technologies. Projected growth would

threaten the cooperative’s single taxation

treatment, required more equity for

expansion and a larger pool of producers. 

In Barton and Boland’s case study,

expectations that drove the conversion were

compared to the results. The growth in

non-patronage-sourced business has not

been as strong as expected, although

business growth has been sufficient to

increase the demand and the price for

soybeans in the area. While producers and

the plant are now both free to pursue the

best respective buy/sell relationships, the

actual transactions continue to follow the

pre-existing pattern. 

Equity liquidity has increased, as has

access to new equity capital. Stock prices

have fluctuated, but have remained above the

original equity drive purchase price. Whether

these changes would have occurred under the

co-op structure is unclear.

Gold Kist conversion

The Gold Kist transformation from cooperative to public

company to takeover target was described by Dan Smalley,

past board chair of the cooperative. Gold Kist had evolved

into a major poultry production and marketing enterprise

with a homogeneous board and membership. Its financial

success raised member expectations for payouts at the same

time that the cooperative began to lose market share, faced

large equity redemption obligations and needed access to

capital. 

Serious conflict ensued among board members, and the

board eventually recommended converting to a public

company with an IPO. The conversion was intended to

provide flexibility, liquidity for equity holders and an

independent board with expertise and perspective (which

Smalley believed was particularly needed by the cooperative).

The membership approved the conversion, Gold Kist went

public and a new board (with a majority of independent

directors) was formed. 

But the now-public company was soon sold to Pilgrim’s

36 January/February 2008 / Rural Cooperatives

The definition of a co-op’s value to members can change over

the course of a single cooperative’s life cycle, said Michael Cook,

professor at the University of Missouri. He noted the many

different member-value propositions that were described during

the Farmer Cooperative Conference.

The range of member-value propositions reflect the

complexity of the cooperative structure, while value created by an

investor-owned firm is assessed by just a few measures. Cook

pointed out that co-op value propositions can treat members as

patrons or as investors, and the cooperative should understand

where along the patron-investor spectrum its membership wishes

to be. 

Traditionally, farmer cooperatives have been formed to secure

producers a larger portion of the proceeds from the sale of their

product, or “a larger piece of the pie,” and the co-op supported

their efforts as individual entrepreneurs. The current shift in

cooperative business strategy is to “create more pie” by enlarging

markets through value-added efforts. Members look to the

cooperative to serve a more “collective entrepreneur” function,

and capital formation becomes a larger issue, Cook noted.

Because there are many ways to create value, cooperative

members need to share a common interest. Cooperative life

cycles can be seen as a process in which divergent interests

develop within the membership as the result of growth, and the

subsequent actions the co-op takes is a process for realigning the

members’ common interests. From this perspective, Cook said, a

cooperative can have multiple life cycles. ■

Value definition can evolve

during co-op’s life cycle
Rural Cooperatives / January/February 2008 37

Pride, a privately held enterprise. Smalley felt that the

outcome ultimately benefited cooperative members,

allowing them to capture the full market value of their

company. But former members, who continue to be contract

producers for Pilgrim’s Pride, have no investment in, or

control over, the company.

The issues that commonly lead to conversion can be

strategically addressed, said John Schmitz, CHS executive

vice president and chief financial officer. He described the

advantages of CHS’ cooperative structure as four-fold: a

single level of income taxation, an orientation toward longterm planning, potentially closer customer ties and earnings

that ultimately benefit the member. CHS equity and

enterprise valuations are similar to an average of publicly

held agribusiness corporations; earnings are the most

important source of capital for creating value for the

shareholder and for the business.

Valuing assets and measuring performance

Performance measures and asset valuation are also key to

assessing a cooperative’s value. David Holm, executive

director for the Iowa Institute for Cooperatives, described a

new cooperative benchmarking project, which will provide a

powerful tool for assessing results of management decisions. 

Harry Fehrenbacher, president of Effingham Equity,

described the co-op’s decision-making process for capital

assets, which analyzes how well an investment will profitably

support core business strategies and systematically evaluates

the return on assets by facility and department. Amy Gales,

regional manager of CoBank, reviewed financial perspectives

on valuation, which establishes a present value for the coop’s relevance and viability both now and in the future. 

Member-value proposition

The value proposition for members was part of Swiss

Valley Farms’ structural reassessment, undertaken when a

50-year sunset clause in the bylaws kicked in. Gordon

Toyne, co-CEO, and Don Peterson, a director, provided

perspectives on the process of reincorporating under the

new Iowa cooperative law as a stock cooperative, rather than

a membership co-op. 

The board compared the limits of traditional bank

lending practices to the impact of new sources of equity

needed for maintenance and growth. The new law also

allowed co-op boards to add outside (non-member) directors

who could provide needed expertise in areas such as finance,

mergers and acquisitions. The governance committee and

the attorney worked to define and codify in the bylaws the

different interests allowed under the new law and provided

for member voting rights and a producer-member board

majority. 

The new structure gives the co-op the ability to issue

preferred stock, which provides equity flexibility and a way

for both employees and co-op members to invest in the coop. The co-op’s mission statement has been broadened to

recognize its commitment to its workforce and customers, as

well as to its owners and members. 

Because the change was so significant, extensive

membership communications on this issue began five

months before the vote, allowing time for members to ask

questions. Peterson felt that this step was critical to member

engagement and the eventual success of the reincorporation

effort.

Kevin Sexton, manager of River Country Cooperative,

explained how the co-op redefined its member-value

proposition in response to changing demographics. The coop repositioned itself to serve both consumer and farmer

needs. Almost half of its earnings are now from petroleum,

with the remaining earnings from farm supply activities.

The co-op is attempting to maintain its program of cash

refunds to members while building its unallocated reserve to

support its growth.

Branding and corporate responsibility

A broader perspective on the cooperative value

proposition was provided by Jean-Marie Peltier, president

and CEO of the National Council of Farmer Cooperatives

(NCFC). Peltier pointed out that traditional cooperative

values — farmer ownership and control, economic viability

of farm businesses, stewardship of natural resources and

rural community — fit in well with the current emphasis of

sustainability and social responsibility in the corporate

realm. 

NCFC is developing a cooperative stewardship initiative

by working with Wal-Mart on a producer score-card

program, and by exploring other tools for self-regulation,

rather than using a third-party certification process for

sustainability compliance. 

To market this initiative, NCFC is developing a

communications program that will capitalize on the desire

by consumers to buy products that are values based. Peltier

urged farmer cooperatives to create a vision of sustainability

that is aligned with grower needs, saying that “you can’t go

wrong by doing good!”

Value creation critical

to future co-op viability

It is clear that the ability of a cooperative to create

economic value, as measured by standard financial metrics,

is critical to the ongoing viability of the business. But the

value proposition for members can encompass a wide range

of benefits that may be difficult to accurately assess. Benefits

may have a patron- or investor-orientation, which may

change over the life cycle of the cooperative. This can be

further complicated by market valuation increases that can

be difficult for members to capture. 

Cooperatives continue to explore structural alternatives

that can support the value proposition for members and

meet capital formation challenges, while weighing the

potential impacts of the trade-offs in member control. ■
38 January/February 2008 / Rural Cooperatives

Income, revenue climb at

Riceland Foods

Riceland Foods Inc., Stuttgart, Ark.,

had $947 million in revenue for 2007

(its fiscal year ended July 31), an

increase of $10 million from 2006.

Income before distributions was $549

million, up $60 million from the

previous year. The co-op reports that

more than 98 percent of the earnings

were returned to farmer-members as

seasonal pool settlements or cash

payments for grain.

Speaking at Riceland’s 87th annual

meeting in Jonesboro, Ark., President

and CEO Danny Kennedy said the

farmer-owned cooperative had met its

three performance targets of providing

competitive crop returns, protecting

farmer-members’ investments in assets

and providing a high level of service.

Riceland’s 2006-07 marketing pools

returned $4.38 per bushel for longgrain rice and $5.28 per bushel for

medium-grain rice, both of which

compared favorably with other

marketing opportunities. 

The return for Riceland’s soybean

marketing pool was $6.85 per bushel,

compared to the harvest price of $6.11.

The wheat marketing pool returned

$3.74 per bushel, compared to a harvest

price of $3.45.

Kennedy said that the cooperative’s

balance sheet continues to reflect solid

performance. Total assets stood at $525

million, while permanent assets were

$262 million. Members’ equity,

including base capital and retained

earnings, was $205 million, he said.

Long-term debt was $57.5 million and

working capital was $59 million.

“We understand that our members

evaluate us at the end of the year on

how our final settlements come out, but

NEWSLINE

Send items to: dan.campbell@wdc.USDA.gov

Crucial farm and rural development topics, including forces influencing

renewable energy development, will be in the spotlight when USDA hosts the 84th

annual Ag Outlook Forum, Feb. 21-22 at the Crystal Gateway Marriott Hotel in

Arlington, Va., just outside Washington D.C. The forum attracts about 1,500 people

annually, and is widely considered the nation’s foremost conference for those

with an interest in farm and rural issues. 

The title for this year’s conference is “Energizing Rural America in the Global

Marketplace.” Speakers include a wide array of national leaders from private

industry and government. “Getting it Right: Responding to Market Forces” is the

title of a panel talk that will follow the secretary of agriculture’s address. JeanMari Peltier, president and CEO of the National Council of Farmer Cooperatives,

will moderate the panel, with members that include: C. Larry Pope, president and

CEO of Smithfield Foods; Thomas E. Stenzel, president and CEO of United Fresh

Produce Assoc.; and Paul Schickler, vice president and general manager of

DuPont and president of Pioneer Hi-Bred. 

There will be 25 other panel talks in the following six topic tracks: Rural

America, Energy and Technology, Policy and Trade, Food Risk and Security,

Conservation, and Commodities. There will also be additional luncheon and dinner

speakers.

Rural Development track panel topics include: “Innovative Business Models

for Rural America” and “Innovative Financing for Rural America,” among others.

Energy and Technology track sessions include: “Ethanol: Is it a Sustainable

Alternative?” “New Sources for Biofuels: What Are They?” and “Solar and Wind

Technologies Coming of Age,” among others. 

For a program preview, roster of session topics and speakers, and to register,

please visit: www.usda.gov/oce/forum. Registration is $300 for those who register

by Jan. 11, and $350 after that. For updates on the meeting, send your e-mail and

postal address to agforum@oce.usda.gov, or write to: 2007 Outlook Forum, Room

4426 South Building, USDA, Washington, D.C. 20250-3812. ■

‘Energizing Rural America’ theme 

of USDA Ag Outlook Conference
Rural Cooperatives / January/February 2008 39

that must be in balance with service,

which comes at a cost,” Kennedy said. 

Scott Gower, vice president for

commodity operations, said Riceland

received 116 million bushels of grain

during the 2006 fiscal year, and expects

to receive approximately 119 million

bushels from the 2007 crop.

Carl Brothers, senior vice president

for international rice, said that U.S. rice

exports from the 2007 crop are

expected to increase 14 percent

compared to the previous year. Rice

carryout at the end of the 2007-08

marketing year is expected to be 30

million bushels, down 52 percent from

the previous year. “The low carryout,

along with rice competing for acreage

with other grain prices, has created a

friendly, if not bullish, marketing

situation for U.S. long grain rice this

season,” Brothers said. 

USDA currently projects the 2007

rice crop average price for all types

(long, medium and short) in the midrange of $4.73 per bushel, 35 cents

higher than USDA’s current projection

for the 2006 rice crop, he said.

Riceland introduced two new valueadded products: a quick-cook wholegrain parboiled brown rice that cooks in

half the time of regular brown rice and

a yellow rice mix which foodservice

chefs can use to create a variety of

ethnic dishes.

Brian Furnish to lead

Burley Tobacco Co-op 

The Burley Growers Cooperative

Association has chosen Kentucky native

and farmer Brian Furnish as its new

general manager. Furnish, who has a

1,000-acre tobacco and beef cattle

operation, says tobacco has a strong

future ahead. 

“As a young tobacco farmer myself, I

believe there are a lot of opportunities

for our members,” he says. “We all

need to work together to communicate

and figure out ways to make money for

the co-op and our farmers.”

Furnish has served as marketing

director at the Kentucky Department of

Agriculture and then as deputy director

of the Governor's Office of Agricultural

Policy. He also worked previously in

government relations for the Burley

Tobacco Cooperative. 

“Brian brought to the board ideas

and enthusiasm to help move the

organization forward,” said Roger

Quarles, president of the Burley

Tobacco Cooperative Board. “He is a

proven winner and we think he is a

perfect fit for us at this time.” 

GROWMARK, FS Seed 

Support Ag in the Classroom 

The FS Seed Division of

GROWMARK has renewed its

commitment to Illinois Ag in the

Classroom programs with a

check for more than

$50,000. This year’s

contribution brings the coop’s four-year total

contribution to the

program to nearly

$235,000.

“Many children have

lost the connection to the

farm and aren’t aware that

real people grow the food

that ends up on their plates

at the dinner table, and

that real people raise the

corn and soybeans and

other products that are

turned into the renewable

fuels that run their parents’

cars and other vehicles,”

says Bill Davisson, CEO of

GROWMARK, the

regional agricultural supply

and grain marketing

cooperative comprised of

FS member cooperatives.

“Through the Illinois Ag in

the Classroom program, we’re working

to make sure they know where their

food and related products come from.” 

Florida’s Natural squeezes out

record revenue

Florida’s Natural, the nation’s third

largest seller of orange juice, had record

revenue of $401.5 million for the 2006-

07 season, despite a 7-percent drop in

juice volume. The co-op reported that

returns to its growers were 5 percent

higher than the citrus industry average

David Feilke, a Riceland Foods member and director, checks on his crop near Stuttgart, Ark.

Riceland handled about 119 million bushels of 2007 crop, and had revenue of $947 million.

Photo courtesy Riceland
40 January/February 2008 / Rural Cooperatives

for the 2006-07 season. It was the coop’s highest grower return since 1984,

following a major freeze, according to

The Ledger.

The improved returns came after a

two-year program of cost-cutting that

included selling a processing plant in

Bartow and a packaging plant in

Fullerton, Calif. Florida's Natural also

trimmed the number of different

products it offered by about 30 percent

to concentrate on the most profitable

lines, The Ledger reported. 

Record earnings for CHS

CHS Inc., an energy and grain-based

foods cooperative, had record net

income of $750.3 million for fiscal 2007

(which ended Aug. 31), up from $490.3

million for fiscal 2006. Revenue for

fiscal 2007 was $17.2 billion, also a

record, and was up 20 percent over

$14.4 billion for fiscal 2006. The 2007

results mark the fourth consecutive year

of record earnings for the producerowned cooperative and reflected strong

performance by every CHS operating

unit. The company issued a record $253

million in cash patronage, equity

redemptions, preferred stock and

dividends. Another record cash return is

expected during 2008, based on fiscal

2007 results.

Once again, refined fuels earnings

led overall results, largely due to strong

margins generated by the two CHS

refineries. CHS is the nation’s largest

cooperatively owned refiner. Record

revenues were attributed to increased

renewable fuels volumes, and higher

values and volume in grain.

While earnings were led by the

performance of the company’s Energy

segment, CHS also achieved strong

results in its Ag Business and Processing

segments and corporate business

solutions operations. Ag Business

earnings — which include agronomy,

grain marketing and retail operations —

were led by both strong domestic grain

markets driven by increased renewable

fuels demand and continued growth in

export markets, along with increased

energy sales and grain movement at the

retail level. Agronomy earnings were

boosted by a shift to corn acreage which

drove demand for crop nutrients and

increased margins.

Processing performance improved

significantly over fiscal 2006 for oilseed

crushing earnings. CHS also reported

improved earnings from its share of the

Horizon Milling LLC wheat milling

venture and strong performance from

its share of Ventura Foods LLC, a

vegetable oil-based food manufacturing

and packaging business. CHS also saw

record performance in its corporate

business solutions operations, which

include its insurance, risk management

and financial services businesses.

Pappajohn drops plan

to acquire ethanol plants 

Iowa businessman John Pappajohn

has shelved his plan to buy a controlling

interest in as many as 10 farmer-owned

ethanol plants, which he planned to

operate as a single, publicly owned

company. He had hoped to raise about

$800 million from investors to buy

control of the plants, according to the

Des Moines Register. The sharp drop in

ethanol prices in recent months dried

up investor interest, making his plan

unfeasible. “At some point you need to

acknowledge the market isn't there,” he

told the newspaper. 

NCBA awarded $8 million grant

to help Mozambique farmers

The National Cooperative Business

Association (NCBA), through its

CLUSA international development

program, is the recipient of an $8

million grant from the Bill and Melinda

Gates Foundation to improve the

livelihoods of 60,000 small-scale cotton

farmers in Mozambique. The grant will

fund The Cotton Value Chain

Improvement Project, a five-year project

aimed at increasing Mozambican

farmers’ cotton yields and profits

through improved efficiency. 

The project brings together the

CLUSA International Program with

business partners Dunavant

Mozambique, an international cotton

trading company wholly owned by

Dunavant Enterprises Inc. of Memphis,

Tenn., and GAPI, Sarl, a Mozambican

financial services company that

promotes investment in small- and

medium-sized businesses. GAPI will be

providing much-needed credit and

financial management service to the

project’s farmers.

“We believe that the combination of

NCBA’s long experience in organizing

CHS Inc.’s refinery operations helped the co-op enjoy record income of $750

million and record revenue of $17.2 billion in 2007. Photo courtesy CHS Inc.
Rural Cooperatives / January/February 2008 41

farmers, plus Dunavant’s progressive

management approach, production

expertise and long-term commitment to

the African farmer and GAPI’s unique

approach to value chain lending in rural

areas, will create a successful model that

can be replicated in other regions or

countries,” said NCBA President and

CEO Paul Hazen.

Blue Diamond sales

hit $658 million

Blue Diamond Growers,

Sacramento, Calif., had $658 million in

sales for the 2006-07 marketing year,

the second highest in the co-op’s history

and just $16 million less than the 2005

crop year. Speaking at the co-op’s 97th

annual meeting, Board Chairman

Clinton Shick attributed much of the

co-op’s success to its ability to develop

new markets, offer innovative product

solutions for health-conscious

consumers and partner with leading

almond users.

Shick reminded growers that the

most powerful tool for producing a

“top-quality, safe and nutritional food is

the power that we, as growers, wield

when we pull together in a cooperative

relationship to deliver to the biggest

and most versatile marketer." He called

Blue Diamond’s co-op business model a

dynamic one that identifies “leadingedge technology systems and processes

that provide the best quality almonds to

consumers worldwide. 

“As owners, we provided our

cooperative with almost 90 percent of

its short-term borrowing needs through

the investment certificate and deferred

payment programs,” said Shick, who is

beginning another three-year term as

chairman. “This is not only a powerful

indicator of grower confidence in Blue

Diamond, it also lowers our cost of

operating capital.”

Blue Diamond had earnings of $3.4

million from non-patronage business

other than from almond sales. This

reduces the need for retained earnings

traditionally used to offset costs and

provides for additional capital

investment in the business, Shick said,

adding that almond demand has

increased 5.4 percent compounded

annually for the last 25 years.

With 150,000 new almond acres set

to bear record crops over the next three

years, Shick cautioned growers to

protect their investment with a handler

who plans and invests long-term in

markets and innovative product mixes

that increase customer demand.

Frederick named 

‘Honored Cooperator’ 

The National Cooperative Business

Association has presented Donald

Frederick the Honored Cooperator

Award for his long career working with

cooperatives while at the U.S.

Department of Agriculture (USDA),

including his efforts to make the

Internal Revenue Code and regulations

relating to cooperatives more accessible

and comprehensible.

“His knowledge and efforts regarding law, tax policy and governance have

benefited cooperatives and cooperative

advisors and will have a long-lasting

effect on cooperatives,” said NCBA

President and CEO Paul Hazen.

In addition to his co-op tax reference

books, Frederick is the author of some

of the mostly widely read co-op primers

in the world, including “Co-ops 101”

and “Do Yourself a Favor, Join a Coop” (both of which are available from

USDA Rural Development). He also

wrote the popular “Legal Corner”

column in USDA’s cooperative

magazine, Rural Cooperatives. 

The Honored Cooperator Award

gives national recognition to

outstanding individuals, including

public figures, co-op employees and

volunteers, who have worked to

develop, advance and protect

cooperatives. Frederick recently retired

from USDA and now works part time

with the National Society of

Accountants for Cooperatives.

South Central Grain 

to merge with CHS 

South Central Grain in North

Dakota has voted to merge with CHS

Inc. The co-op includes elevators in

Napoleon, Kintyre, Wishek and

Hazelton. The vote was 154 for the

merger and 25 against it, according to a

report in the Bismarck Tribune. South

Central Grain and CHS already jointly

operate a shuttle grain-loading facility

at Sterling. 

CHS has been leasing the four

elevators based on a depreciation

schedule. The elevator leases with CHS

were set to expire at the end of 2008.

The expiration will be accelerated and

the merger formalized by the end of

2007, the Tribune reported. 

Florida sugar co-op and partner

purchase Veracruz sugar plant

American Sugar Refining Inc. —

owned by the Sugar Cane Growers

Cooperative of Florida in Belle Glade

and by Florida Crystals Corp. of West

Palm Beach — purchased a sugar mill

and refinery in Veracruz, Mexico, less

than a month before the final phase-in

of the North American Free Trade

Agreement. The purchase of Ingenio

San Nicolas S.A. de C.V. gives the U.S.

company a refinery that produces

75,000 tons of refined sugar annually,

according to a report in the Palm Beach

Post. 

Blue Diamond Chairman Clinton

Shick and his fellow growers

produced another huge crop last

year, which their co-op processed

and marketed for $658 million –

second best in co-op history. Photo

by Catherine Merlo
42 January/February 2008 / Rural Cooperatives

On Jan. 1, all sweetener trade

restrictions with Mexico were set

to disappear, and trade among the

U.S., Canada and Mexico will be

open. The Post article notes that

some in the sugar industry are

worried that a glut of sugar could

be coming into the United States

from Mexico, while others say the

open borders present an

opportunity. “It is a two-way

street,” sugarcane farmer Fritz

Stein Jr., a member of the Sugar

Cane Growers Cooperative, told

the newspaper. “Come Jan. 1, we

can go south and they can come

north. I don't think they are

going to destroy our market up

here.” 

Sunkist to consolidate 

citrus juice and oil units

Sunkist Growers is

consolidating its citrus juice and

oil operations, which process

citrus fruit into juice and other

byproducts. The lemon

processing operations currently housed

in Ontario, Calif., will move to Sunkist’s

state-of-the-art processing facility in

Tipton, Calif., which currently focuses

on processing oranges and tangerines. 

“By consolidating the two operations

in the heart of the San Joaquin Valley

citrus-growing area, we achieve greater

economies of scale and increased

efficiencies,” said Ted Leaman, vice

president of Sunkist’s juice and oil

business. “The Tipton facility is a

newer, more modern facility.” 

The shortage of lemons caused by

the freeze last January makes this the

optimum time for Sunkist to

accomplish this consolidation, Leaman

notes. The bulk of the current season’s

lemon crop will be sold into the fresh

market, leaving very little fruit for

byproducts. Sunkist will contract for

what processing capacity is needed until

March 2008 when the new lemon lines

are expected to be up and running at

Tipton. Post-processing functions are

expected to continue at the Ontario

plant for about a year, until the move is

complete.

The Sunkist plant has been a fixture

for many years, anchoring a large

portion of Sunkist Street in east

Ontario. Built in 1926, the complex is

home to the plant that processes citrus

juices, oils and aromas, and — until

recently — Sunkist’s research facilities,

where many of the innovations found in

today’s citrus packinghouses were

invented. The Tipton facility was built

in 1981, and its operations have been

continually upgraded.

Sunkist Citrus Juice & Oil is a

leading supplier of value-added citrus

products and has staked out a successful

niche in its line of citrus byproducts.

“Not-from-concentrate (NFC) orange

juice is a key market,” said Leaman,

“and Sunkist supplies fresh quality juice

to the major brands — with a West

Coast shipping advantage.” 

Walton EMC returns

$3 million to members

Customer-owners of Walton Electric

Membership Corporation (EMC),

Monroe, Ga., received a capital credit

on their December bills totaling $3

million for all members. That

brings the co-op’s 20-year total for

capital credits issued to members

to more than $31 million.

Capital credits are the

customer-owners’ portion of

money left over once all expenses

are paid. Walton EMC holds

margins as a reserve to retire debt,

build equity and to prepare for

emergencies. Once sufficient

reserves are accrued, additional

money is returned to the

customer-owners as capital credits. 

The amount each customerowner gets is determined by the

amount of electricity he/she

bought during 1983, 1984 and

2006. Walton EMC serves 116,000

accounts over its ten-county

service area between Atlanta and

Athens.

Minn-Dak revenue tops

$278 million 

Minn-Dak Farmers

Cooperative, Fargo, N.D.,

reported revenue of nearly $278.6

million in 2007, up from about $177

million in 2006. The co-op made

payments to members (net of unit

retains) of $140.6 million, up from

$71.6 million in 2006. Patronage of

$7.8 million was credited to member

accounts.

The co-op’s growers harvested 2.2

million tons of sugarbeets from more

than 107,000 acres. Average sugar yield

was 20 tons per acre. 

Speaking to members at the co-op’s

35th annual meeting in Fargo,

Minn–Dak President/CEO Dave Roche

said the 2006 crop was the largest in the

co-op’s history. Despite increases in the

prices of other crops, Roche urged

growers to keep their acreage planted in

sugarbeets. 

Doug Etten, Foxhome, Minn., was

elected chairman, succeeding Mike

Hasbargen, Breckenridge, Minn., who

stepped down from the post but

remains on the board. Brent Davison,

Tintah., Minn., was elected vicechairman. ■

More than $1 million was raised last summer

for March of Dimes charities through

Sunkist’s “Take a Stand” program. About

11,000 children age 7-12, including these

Portland, Ore., citrus-drink moguls, received

free lemonade stands and juicer kits from the

co-op to raise money to help fight birth

defects. Photo courtesy Sunkist
Rural Cooperatives / January/February 2008 43

required for construction of new pipelines.

The recommended actions to address these transport constraints include:

• Determine the government’s role to ensure adequate biofuels transportation

capacity;

• Determine when the current biofuels transport infrastructure will be pushed

beyond its capacity to accommodate additional volume; 

• Examine opportunities to modify existing pipelines or use existing rights of way to

transport biofuels; 

• Fund research on reducing siting and construction constraints to enable

infrastructure development necessary to support rapid industry expansion;

• Conduct analysis on the “least-cost” strategy for handling the transition to a 60

BGY future.

End use

Biofuels will reach their potential only if energy companies, vehicle

manufacturers, retail service stations and consumers all have sufficient incentives to

change their operations and habits to embrace renewable fuels. Like the change

from leaded to unleaded gasoline, this will require a clear and sustained campaign to

match supply and demand on an evolving basis.

The significant end-use constraints are:

• As ethanol production moves beyond 15 BGY, a significant increase in consumer

demand for E85 will be required to support increased ethanol production;

• Current E85 and biodiesel retail availability is limited;

• Current production and sale of flexible fuel vehicles (FFVs), capable of running

smoothly on either gasoline or biofuels, is limited;

• Additional outlets for ethanol are not established to accommodate an imbalance

where supply exceeds national fuel demand.

The recommended actions to address these end-use constraints include:

• Sponsor public education programs to increase consumer demand for biofuels and

FFVs;

• Create a national corridor of biofuels refueling stations to increase availability and

encourage purchase of both E85 and biodiesel;

• Work closely with auto manufacturers to establish incentives to increase

production of FFVs; 

• Develop an export market for U.S. ethanol to support continued ethanol industry

expansion through a possible slow transition to E85.

Failing to address the critical issues facing the biofuels industry will lead to

bottlenecks which constrain continued rapid industry expansion and limit its

capacity to lessen America’s dependence on foreign oil. It will also hamper efforts to

improve the environment, reduce trade deficits and enhance the economic wellbeing of rural America.

Eliminating these constraints will require considerable discussion and

coordination with states and industry to determine the benefits and risks of various

government interventions. While the range of issues and stakeholders is large, the

timeframe for ethanol’s transition beyond 15 BGY provides an opportunity for

robust debate and for developing reasoned responses. The time to begin is now. ■

Overcoming constraints to growth in biofuels industry

continued from page 19

have to strategically respond to them

if we want to remain competitive.”

For instance, he says, recent

consumer focus on healthier eating

has created more incentives for

companies to expand their product

offerings. “That’s what we’re doing

with production of the soybean oil,”

Boulis says. “We’re also responding to

the agriculture industry’s demand by

providing our high-end soy meal for

use in their feeding practices. I think

adaptability is the key to our business

success.” 

Reducing transportation costs

As Mercer consolidates its

operations and brings its soybean

processing plant to full capacity, it

eliminates the roundtrip costs of

transporting soybeans to regional

processors. Since Mercer currently

buys soy meal from these same

regional processors and has it shipped

back to Ohio, bringing the plant into

production will reduce product

transportation costs by more than 50

percent.

Additionally, health benefits from

using trans-fat-free oils are triggering

an increase in consumer demand.

Major fast food chains and food

manufacturers either have changed, or

are considering changing to trans-fatfree oils in their food preparations.

These developments have helped to

validate Mercer’s market projections

and its decision to initiate this new

venture.

Cooperatives exist for the single

purpose of improving the business

profitability of their members. The

commitment of Mercer’s management

and its ability to reach beyond current

operations and find new venues to

generate positive financial returns

reflect the spirit and mission of all

cooperatives. ■

Value-Added Corner

continued from page 27
44 January/February 2008 / Rural Cooperatives

the other types of cooperatives generated positive extra value

in the second time period.

Five cooperatives showed consistent, strong performance

— generating extra value with a 10 percent risk premium

added to the basic charge for equity capital in both time

periods (category V). Three of these high-performers were

dairy cooperatives.

Furthermore, except for farm supply cooperatives,

cooperatives of each type were found in the highest

performance categories, IV and V, in 2000-04. This indicates

that a range of agricultural cooperatives are capable of

performing admirably, regardless of the product they may

handle.

On the other hand, with the exception of cotton

cooperatives, at least one cooperative of each type failed to

generate sufficient value to cover a basic charge for the use of

their members’ equity. However, fewer cooperatives of each

type (except for farm supply cooperatives) lost value in the

second time period than in the first. In fact, farm supply

cooperatives were the only type where a majority dropped in

performance category between 1992-96 and 2000-04.

Group average extra value index

The simple average of the individual cooperatives’

performances is shown in Table 2. The 65 cooperatives in

the study averaged positive extra value in both time periods at

the basic plus 5 percent rate, a category IV performance. For

2000-04, this group of agricultural cooperatives created 2.3

cents in extra value for every dollar of operating capital

expended, on average, when a charge for equity capital with a

5-percent risk premium over the basic interest rate was

applied. 

However, if members’ risk premium was 10 percent, the

65 cooperatives, on average, fell short of being able to pay

member-producers this premium by 1 cent for each dollar of

operating capital used. 

Grouping cooperatives according to their main product

showed a range of performance. Cotton cooperatives, on

average, outperformed the other types. They generated

positive extra value, with a 10-point risk premium charged

for equity (performance category V) in both time periods. As

a group, dairy cooperatives performed almost as well, but

they dropped to performance category IV for 2000-04,

missing members’ expectations by an average of just 0.8 cent

per dollar of operating capital when equity was charged a 10

percent risk premium over the basic rate. 

The other five types of cooperatives all performed at

category III for 2000-04, averaging positive extra value when

charged a basic rate for their use of equity capital. 

The averages obscure the fact that performances of

individual cooperatives of the same type often varied widely.

For example, at the basic plus 10 percent rate, four of the 16

dairy cooperatives ranked in the top 10 of the 65 cooperatives

in 2000-04. 

At the same time, a dairy cooperative showed the largest

drop in rank between the two time periods among the 65

cooperatives. Another dairy cooperative was among the

bottom 10 in rank for 2000-04. Similarly, of the three cotton

cooperatives represented in the sample, two were in the top

10 in 2000-04 while the third cotton cooperative showed the

second largest drop in rank of all 65 cooperatives. 

The highest and lowest ranking cooperatives were both

fruit and vegetable co-ops. Likewise, there was one grain

cooperative in the top 10 for 2000-04, with two grain

cooperatives ranking in the bottom 10. 

Conclusions

The results of this extra-value analysis show that while all

the cooperatives operated in the same general economic

conditions of each time period, some saw their performance

improve, while other cooperatives’ performances worsened

between the two periods. However, at least one of each type

of cooperative (with the exception of sugar cooperatives) in at

least one of the two five-year time periods considered, was

Using the ‘extra-value index’ to measure

agricultural cooperative performance

continued from page 24

participate fully in the cellulosic ethanol

industry of the future.

Business models are likely to become

even more complex with the advent of

cellulosic ethanol. For while corn is the

predominant feedstock for the ethanol

industry of today, a variety of feedstocks

— corn, agricultural wastes, dedicated

energy crops such as switchgrass and

miscanthus, forestry products and

others — are expected to be used by the

cellulosic ethanol industry of tomorrow.

The feedstock producers of tomorrow

are, therefore, likely to be much more

than row crop farmers. The “farmerowned” business model will have to expand to embrace these new producers. 

With the advent of biorefineries, the

number and specialization of coproducts should multiply and require a

more diverse and complicated mix of

third party marketing firms. In the case

of some products with highly technical

applications, the use of specialized

marketing firms or long-term off-take

agreements will be necessary because of

the extraordinary expense of a facility

having internal staff to perform such a

highly specialized and technical sales

function. 

It’s quite likely that more business

models will be created by the advent of

cellulosic ethanol. And we can expect

them to be even more complex than

today’s business models. ■

Owner’s Manual

continued from page 14
Table 2—Performance of study cooperatives, simple averages by type of cooperative, 1992-96 and 2000-04

Rural Cooperatives / January/February 2008 45

1992-1996 Averages 

All (65 cooperatives) 11.9% 4.0 0.3 (3.4) IV 74.5%

Cotton (3 cooperatives) 18.3% 10.1 5.7 1.3 V 1 88.0%

Dairy (16 cooperatives) 17.0% 8.9 5.1 1.2 V 2 76.6%

Farm Supply (9 coops) 10.5% 2.4 (1.2) (4.9) III 4 73.2%

Fruit & Veg. (14 coops) 6.2% (1.1) (4.6) (8.1) II 6 69.7%

Grain (13 cooperatives) 10.7% 2.4 (1.6) (5.6) III 5 79.5%

Other (6 coops) 8.3% 0.6 (3.0) (6.5) III 3 70.4%

Sugar (3 cooperatives) 1.9% (2.8) (5.7) (8.6) II 7 58.5%

2000-2004 Averages 

All (65 cooperatives) 12.2% 5.6 2.3 (1.0) IV 66.7%

Cotton (3 cooperatives) 22.9% 15.5 11.3 7.1 V 1 83.2%

Dairy (16 cooperatives) 12.5% 6.6 2.9 (0.8) IV 2 73.7%

Farm Supply (9 coops) 5.1% 0.1 (3.3) (6.7) III 7 67.9%

Fruit & Veg. (14 coops) 5.6% 0.5 (2.4) (5.3) III 6 58.7%

Grain (13 cooperatives) 8.1% 2.0 (1.5) (5.0) III 5 69.2%

Other (6 cooperatives) 9.3% 2.4 (0.4) (3.2) III 3 56.1%

Sugar (3 cooperatives) 6.2% 0.5 (2.0) (4.6) III 4 50.7%

Change 

All (65 cooperatives) 0.3 1.6 2.0 2.4 = (7.8)

Cotton (3 cooperatives) 4.6 5.4 5.6 5.8 = 0 (4.8)

Dairy (16 cooperatives) (4.5) (2.3) (2.2) (2.0) dn 1 0 (2.9)

Farm Supply (9 coops) (5.4) (2.3) (2.1) (1.8) = (3) (5.3)

Fruit & Veg. (14 coops) (0.6) 1.6 2.2 2.8 up 1 0 (11.0)

Grain (13 cooperatives) (2.6) (0.4) 0.1 0.6 = 0 (10.3)

Other (6 coops) (1.0) 1.8 2.6 3.3 = 0 (14.3)

Sugar (3 cooperatives) 4.3 3.3 3.7 4.0 up 1 3 (7.8)

ROE BASIC

RATE

(LIBOR +2)

BASIC

RATE

+5

BASIC

RATE

+10

Performance

Category

Rank Equity

share of

operating

capital

EXTRA VALUE INDEX

able to add value sufficient to reward members for the use of

their capital at a rate representing a 10-point risk premium

above the basic rate. 

Thus, this exercise of measuring cooperative performance

by the extra value method tells us that cooperatives of all

types can be very able performers. 

Some factors such as a cooperative’s pricing policies are

not captured by the financial statements and thus are not

reflected in the various financial performance measures,

including the extra value measure. The value of intangible

cooperative benefits is also elusive and hard to quantify. 

However, these benefits are very real for members. For

some cooperatives that did not appear to be fully rewarding

members for the use of their equity, it may very well be that

compensation came through avenues not captured by the

extra-value measure. 

For references used in this article, please contact the

author at Carolyn.liebrand@wdc.usda.gov. ■
46 January/February 2008 / Rural Cooperatives

Gary Stooksbury, CEO of Aiken Electric Cooperative in South

Carolina, echoes Calcaterra’s comments. “I think we were somewhat

surprised that there was not more renewable power available in South

Carolina.” But, he adds, these studies will help people understand that it

will be difficult to rely on renewable energy for 15 percent of the nation’s

energy portfolio in the near future. 

The biggest surprise contained in the study concerned biomass. “There

are as many as a half-dozen sites across the state with wood waste that

could be converted to electric power,” says Calcaterra. “Part of the cost of

biomass is a function of how far you have to transport the wood. But it is a

renewable resource.” 

The energy-efficiency study put into perspective what would have the

greatest impact, with the additional advantage of being among the easiest

programs to implement. Stooksbury explains that the study showed that

conservation and wise use of energy offer “the most advantageous and

quickest payback.” 

For this reason, the decision was made to immediately tackle one of the

studies’ recommendations. “We’re launching a massive plan to distribute 7

million compact fluorescent lights (CFLs) to our members, beginning this

spring,” says Calcaterra. “Because CFLs use one-third of the energy and

last up to 10 times longer than standard bulbs, their total energy savings

represents electric power used by about 35,000 homes.” 

Affordability

Affordability is a key consideration for South Carolina cooperatives and

an additional reason to expand energy conservation and efficiency

programs. Conservation efforts that would cost $500 annually per

household are not realistic for many South Carolina rural electric

cooperative residents, Calcaterra explains. He notes that more than 20

percent of the co-op’s consumers live in manufactured homes. 

Programs that increase heating and cooling efficiency result in savings

that the study characterizes as having not just “technical potential,” but

also significant “achievable potential.” 

Environmentally responsible

Renewable energy, conservation and energy-efficiency programs

individually may not achieve significant energy savings. But together, they

can, Calcaterra says. “There is no silver bullet, but there may be silver

birdshot.” 

That’s why net metering — which pays consumers who install their

own renewable-energy generation equipment (such as solar panels) in

their homes — is part of the South Carolina strategy. “We want those

entrepreneurs. We believe in our members. We want to set up a system

that gives incentives for helping find solutions,” Calcaterra says.

South Carolina cooperatives expect to be part of the solution. They

have invested $2.5 million to fund research at the University of South

Carolina to look for ways to burn coal cleaner. 

Calcaterra explains: “We have become very efficient at burning coal.

The new plants are far more efficient and cleaner than those built 20 years

ago. And those plants were much better than those built 50 years ago. But

it has taken us anywhere from 20 to 50 years to accomplish that. We will

take care of the problem, but it cannot happen overnight.” ■

Utility Co-op Connection

continued from page 31

second-nature to them,” Lowery says. “The

value is in the education process and

teaching kids these things from the very

beginning. It becomes more natural to

them.”

Just as technology and computers have

become second-nature to America’s

younger generations, they hope that

cooperatives will do the same.

Long-term vision

All of these efforts and accomplishments

by the NCBA Marketing Committee

support MacDonald’s vision for co-ops.

She foresees “wild success” for co-ops in

the future, but says advancing the

cooperative business model must itself be

an exercise in cooperation.

“We did it the first time,” she says of the

committee’s work, “but other people have

to pick up the gauntlet.”

She is convinced that co-ops’ biggest

priority has to be educating the next

generation about co-ops and the power of

what she considers the most democratic

form of business. Perhaps it will give them

a reason to believe that they don’t have to

mistrust business.

All the responsibility should not be laid

on co-ops, though, MacDonald says. Her

greatest hope is that business schools will

start teaching more about cooperatives. 

“Cooperatives are the better business

model,” she says. “I see cooperatives as

healing the world, bringing peace,

educating.” Co-ops are typically much

more community oriented than other types

of businesses, some of which are now trying

to emulate the co-op philosophy of “giving

back to the community.” 

It is this cooperative difference that

keeps MacDonald going — day after day,

week after week, year after year. “I

absolutely love the people I work with, so I

have this great sense of contribution and

accomplishment,” she says. “It’s very

satisfying to my soul.”

For MacDonald, serving cooperatives is

not about the money; it’s not about the

recognition; it’s not about the status. It is all

about devoting her life to a worthy cause.

It’s a mission you can’t put a price on. ■

Mission to Market Co-ops

continued from page 21
50 Years Ago...

From the January 1958 issue of News for Farmer Cooperatives

Cooperatives: tools for self-help

Many agriculture problems today are too big to be handled

singly by the individual farmer, notes USDA Farmer

Cooperative Service Administrator Joseph G. Knapp in the

lead article of a special issue on co-op and self-help efforts

nationwide. Knapp asks: Can an individual farmer provide

himself with the quality of feed, fertilizer, seed or other

supplies that he requires? Can an individual farmer find

satisfactory markets for his products, or have any influence in

the market in which he operates? The answer to these questions is, of course, “no.” However, through organization, an

individual can obtain these and many other benefits for

himself.

The form of organization that is peculiarly adapted to the

needs of farmers is the farmer cooperative. Through a co-op,

an individual farmer can maintain his independence of action

as a farmer and still obtain the benefits of large organization.

The farmer-owned cooperative not only helps farmers

increase their efficiency, and thus their farm income, but its

use gives strength and character to the user as well as to the

whole rural community and nation.

30 Years Ago...

From the January 1978 issue of Farmer Cooperatives

Co-op’s olive pits yield energy

Cooperatives in California are drawing attention for

projects that save energy. For example, Lindsay Olive

Growers, Lindsay, Calif., is charting a new course through

converting its olive pits into a source of fuel.

At Lindsay’s headquarters, management struggles over

what to do with 27 tons of olive pits every working day.

Through the years, Lindsay has tested the pits as livestock

feed, fireplace logs, ground cover, soil conditioner, an

ingredient in blasting powder, a plastics filler, a bug-bait

carrier, olive oil and as a source for making methane gas.

However, none of the uses has been competitive with

materials already on the market.

On recommendation of Lindsay president Earl Fox, the

cooperative’s board of directors authorized proceeding with a

plan to use the pits as boiler fuel for the plant’s steam

generation.

J. R. Webster, Lindsay’s research director, recently

reported: “Last week we burned about 125 tons of olive pits.

And we only had 30 gallons of ashes to take to the county

disposal site.” Explains Fox: “As fuel becomes more expensive,

the savings from the pits will become more valuable.”

Lindsay adapted a unit capable of burning wood chips with

60 percent moisture so that the pits can be fed into the boiler

fuel unit in a moist condition. They can be converted into a

yield of nearly 4,000 Btu’s of heat per wet pound.

10 Years Ago...

From the January/February 1998 issue of Rural Cooperatives

How co-ops give power to the people 

Electric co-ops are working to help members feel and act

like utility owners.

How is an electric or telecommunications cooperative

different from any other business that provides the same

service? Electric, telephone and most other types of

cooperatives were born out of necessity. There was a need.

The neighbors of that community did not have electricity.

There was no phone service. These services were long

available in larger cities, but not in the small towns and not on

the farm. No one was interested in serving these high-cost

rural areas.

The emotional reaction that came with electric power was

overwhelming. A farmer giving witness in a Tennessee church

in the early 1940s said, “Brothers and sisters, I want to tell

you this: The greatest thing on earth is to have the love of

God in your heart, and the next greatest thing is to have

electricity in your house.” Connection of the first telephone

lines erased loneliness and provided a connection to friends

and neighbors across the countryside.

Neighbors worked together to organize cooperatives and

sign up members. They held endless meetings to determine

where power lines would go. They worked with employees of

the Rural Electrification Administration (one of the

predecessor agencies of USDA Rural Development) to make

sure the project was feasible and could get the needed

financing.

Today, that same cooperative spirit continues. Nationwide,

there are 1,000 rural electric co-ops and 1,000 rural telephone

co-ops providing the same types of help, services and

leadership to rural communities. Members today are working

together to ensure that their communities have access to

quality education, healthcare, housing and business development. The “co-op way” brings out the best in all of us. ■

P A GE FROM THE PAST

From the archives of Rural Cooperatives and its predecessor magazines

Rural Cooperatives / January/February 2008 47
48 January/February 2008 / Rural Cooperatives

United States

Department of Agriculture

Washington, DC 20250

OFFICIAL BUSINESS

Penalty for private use, $300

NOTICE:

❏ Check here to stop receiving this publication,

and mail this sheet to the address below.

❏ NEW ADDRESS. Send mailing label

on this page and changes to:

USDA/Rural Business–Cooperative Service

Stop 0705

Washington, D. C. 20250-3255

Periodicals Postage Paid

U.S. Department of Agriculture