Rural

COOPERA COOPERATIVES

USDA / Rural Development March/April 2005

Potato growers

looking to a new day

page 4
2 March/April 2005 / Rural Cooperatives

Editor’s note: Guest commentary for

this issue is by Lynn Jensen, state

director for USDA Rural Development in South Dakota. Jensen,

past president of the National Corn

Growers Assoc., continues to farm at

Lake Preston, S.D., population 600,

and is an investor in several farmerowned, value-added enterprises.

USDA Rural Development

isn’t crop subsidies. It isn’t conservation programs. It doesn’t

deal with mad cow disease. 

Rural Development is investment banking. It’s the investment

arm of USDA with a focus on economic opportunity and quality of

life.

In the first four years of the

Bush administration, Rural

Development has invested over

$50 billion in rural communities

for everything from new valueadded, producer-owned businesses

to broadband technology. Rural

Development brings you electricity and water and it helps build

your schools, hospitals and fire

stations. 

It’s the lead federal agency on

value-added agriculture and one of

the key players on biofuels. It also

provides technical assistance,

research and education (including

this publication) to help build

stronger rural cooperatives. 

As we continue to transition

beyond traditional commodity

agriculture, Rural Development

will be an increasingly important

partner across the board in rural

communities. 

Business development is a big

part of what Rural Development

does. The fastest growth rate in

rural areas has been in farmerowned, value-added businesses.

In rural communities, successful

producers and co-op members are

natural leaders. They have the

energy, the business experience,

the resources and the respect to

lead. If rural communities are

going to work, producers have to

get involved. This is about quality

of life. This is about your sons or

daughters coming back home. 

We also know there’s a cash

value to your farms and ranches in

having good schools, a grocery

store, hospital, implement dealer

or fire station within a reasonable

distance. None of those things will

be there if producers don’t get

involved. Our communities need

you on the school board, the hospital board, etc., but mostly on the

local economic development

board. 

While we work to build

stronger rural communities, we

also need to continue to transition

to more value-added agricultural

businesses. The National Corn

Growers Association just issued a

new report, “Taking Ownership of

Corn Belt Agriculture,” which

producers need to read. 

The report says: “As the business leaders and economic engines

of their communities, U.S. farmers

and ranchers play a vital role in

revitalizing America. They possess

the capital reserves needed to

invest in new value-added ventures, and the willingness to diversify outside of raw commodity

production.”

Bio-agriculture is one of a number of emerging technologies with

extraordinary potential. It is in its

infancy. I can’t tell you where it

will be in 20 years, but I do

believe in 20 years we will be

looking back in astonishment at

how far we’ve come.

Producers have some decisions

to make. Not everyone will make

the same choice. There are real

opportunities for producers to

participate in the ownership structure. 

Ethanol, for example, took off

when producers got involved in a

big way. Ethanol is becoming a

decentralized industry with strong

local ownership. We know that has

had tremendous benefits for rural

communities.

Producers need to be alert to

the opportunities that will arise

along the way to participate in

ownership. That’s where the

greatest gains will be realized. 

— Lynn Jensen, 

State Director

USDA Rural Development, 

South Dakota ■

COMMENTARY

Producers are natural leaders for rural communities 

If rural communities

are going to work,

producers have to get

involved. This is

about quality of life.
Rural Cooperatives / March/April 2005 3

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Mike Johanns, Secretary of Agriculture

Gilbert Gonzalez, Acting Under Secretary,

USDA Rural Development

Peter Thomas, Administrator, 

Rural Business-Cooperative Service

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USDA Rural Business-Cooperative Service

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Rural COOPERA COOPERATIVES

March/April 2005 Volume 72 Number 2

p. 4

p. 8

p. 14

p. 18

FEATURES & NEWS

4 Price crisis prompts potato 

growers to form national co-op

8 Low-carb, High Hopes 

Co-op’s tubers may beef-up Florida's potato industry 

11 Farmer co-op business volume nears $117 billion 

14 Unflappable 

Plant closure forces co-op launch onto fast-track 

18 A Perfect Storm 

Farmland trustee sues ex-officers, directors 

23 Court of Preference 

Minn. co-op helps manufactured home residents 

25 Upswing Continues 

Despite loss of Farmland, Agway, revenue 

& income climb for top 100 co-ops

30 Perils & Pleasures of Partnerships 

Key issue of co-ops in business partnerships: 

Who do you trust? 

DEPARTMENTS

2 COMMENTARY 

12 VALUE-ADDED CORNER 

24 LEGAL CORNER 

33 NEWSLINE 

43 INSIDE RURAL DEVELOPMENT 

On the Cover:

Potato growers in Idaho and other states are hoping they can establish

a fair price for their crop through a new co-op that will work to better

balance supply and demand. In Florida, another new co-op hopes to find

success with a low-carb potato variety. Articles on pages 4 & 8. Photo

courtesy United Fresh Potato Growers of America
4 March/April 2005 / Rural Cooperatives

By Stephen A.Thompson

Assistant Editor 

otatoes have been a staple of the American diet

for more than a century, and U.S. and Canadian growers together produce about 18.5

million tons of them a year. For many Americans, a meal just isn’t complete without potatoes, whether mashed, fried, boiled, or baked. However,

recent trends in consumption and increases in growers’ productivity are keeping potato prices down, putting farmers in

a bind. In response, a nation-wide cooperative is being

formed with the purpose of better managing supplies to help

growers earn a fair price. 

United Fresh Potato Growers of America was organized

March 3, in Washington D.C., during the annual meeting of

the National Potato Council. United of America hopes to

become an umbrella organization for a network of state coops that will monitor the potato market and encourage farmers to take voluntary action to limit potato production when

required to keep prices at, or above, a break-even level.

Until recently, the amount of potatoes people eat each

year was rising: the total weight of potatoes eaten in the

United States per person is about 30 percent higher now

than it was in 1980. But the popularity of the “low-carbohydrate” diet and other trends have put the squeeze on fresh

potato consumption: in 2002, annual U.S. per capita consumption dropped more than 10 percent from its peak in

Price crisis prompts 

potato growers to form 

national cooperative 

P
Rural Cooperatives / March/April 2005 5

1993, according to USDA’s Economic

Research Service. 

Part of the problem is the growing

proportion of people who live in oneor two-person households. People who

live in families with children are the

greatest consumers of potatoes.

Reduced demand for French fries in

fast-food restaurants is another factor.

But the most conspicuous cause is the

rise of the “Atkins Diet” and its imitators. Such diets require people to consume drastically reduced amounts of

carbohydrates. 

In its first phase, the Atkins Diet

requires consumption of only 20 grams

of “carbs” per day. Normal carbohydrate

intake in the United States, according to

the Institute of Medicine, is about 200

to 330 grams per day for men, and 180

to 230 grams for women. The average

potato contains about 26 grams.

Whatever the causes of the slump in

potato demand, the impact on prices

has been dramatic. Bulk prices for

fresh potatoes now hover around the

$2-per-hundredweight mark — $2.50

below the price producers say they

need to stay in business. 

Responding to a crisis

In response to the low-price crisis,

Florida farmers have come up with a

low-carb potato they hope will find its

own market (see related article, page

8). But northern potato producers will

be unable to grow the low-carb variety.

They need a different strategy, and

they need it soon.

Idaho is the largest potato-growing

state, producing a third of the country’s crop, and Albert Wada is the

largest potato farmer in the state. He

grows more than a billion spuds annually on 12,000 acres near Blackfoot,

the self-styled “Potato Capital of the

World.” Wada’s father began the operation after he moved to Idaho from

California to avoid the federal government’s internment of JapaneseAmericans during World War II.

Wada says that potato farmers are

losing money steadily, watching the

equity they have built up in their businesses over many years go down the

drain. He believes the problem isn’t

just lowered demand. “We’ve been

over-producing fairly consistently,” he

says. “If this keeps up, all the growers

are going to go broke.” Other Idaho

farmers point out that, while Idaho

potatoes used to be a recognized

“brand,” and commanded higher prices

than others, that advantage has now

lapsed, exacerbating the price problem

for Idaho farmers.

“We’ve operated on the assumption

that with free enterprise, hard work,

and good weather we’ll do okay,” says

Wada. “But the other side of that coin

is globalization of the market.” 

The advent of the North American

Free Trade Agreement (NAFTA),

which opened U.S. borders to the

import of farm products from Canada

and other countries, has put a heavy

downward pressure on the prices

American farmers can get for their

potatoes. “Historically, we would get

two years out of five that we made

decent money,” Doug Hanks, president of the Potato Growers of Idaho,

says. The two good years would get

the farmers comfortably through the

three bad years. But in the last

decade, under NAFTA, he says, “It’s

more like two out of ten.”

The problem of foreign competition hit home for Idaho farmers in

2003, when a large French-fry processing plant in Canada began production

– replacing one in Idaho – and the

United States became a net importer

of French fries. The announcement of

the Idaho plant’s closing had come

after the 2002 crop was already planted, resulting in a large surplus of potatoes in the state. 

In 2003, despite voluntary acreage

reductions, farmers realized an even

larger surplus. The resulting low prices

have affected potato prices across the

country.

Co-op role in supply management

Wada thinks the answer lies in

managing the supply of fresh potatoes. He founded United Fresh

Potato Growers of Idaho in late

2003, hoping it would form the

nucleus for a nationwide federated

cooperative with member co-ops in

each potato-producing state. The

idea, he says, is to unite potato growers and “rationalize the industry,” by

tailoring production to the market,

much the same way milk producers

have managed to do with dairy production. The plan is called United

We Stand (see sidebar).

Attorney Randon Wilson, legal

counsel for the co-op, stresses the need

for the effort to conform to the

Capper-Volstead Act so as not to be

subject to anti-trust laws. That means

that packers and other ineligible businesses can’t participate. “We’ve got to

be a pure farmer’s cooperative,” he

says.

With the formal organization of the

national federated cooperative this

March, the effort is underway.

Representatives of state and regional

potato-grower associations and cooperatives voted Albert Wada the interim

chairman, and pledged to help set up

the state and regional co-ops that will

form the foundation for United Fresh

Potato Growers of America. 

The effort will face a number of

challenges. The first is the necessity of

getting enough producers on board to

be effective. Not only must a high proportion of growers join, but the co-op

“We’ve been overproducing fairly 

consistently. If this

keeps up, all the

growers are going 

to go broke.”

—Albert Wada
6 March/April 2005 / Rural Cooperatives

must represent all the major potatogrowing states. “We need to get participation from all the significant growing

areas,” says Wilson. “If we don’t, it’s

curtains for this deal.”

Potato farmers tend to prize independence, and don’t have the same

kind of strong cooperative tradition

that helped the organizers of the

CWT program in the dairy industry

(See Newsline, page 33). But Wada

and David Beesley, the secretary of

United of Idaho, say that the beauty of

their program is that it preserves

farmer autonomy. 

Producers will still sell their crop to

whomever they wish, for terms agreed

between buyer and seller. And as long

as prices remain above the trigger point,

the program will take no action. Should

supply reduction be necessary, participation in buyouts of acreage or crops

would be entirely voluntary. A farmer

with formal or informal obligations to

sell his full output to buyers would still

be able to do so; others with comparatively more incentive to reduce production would bid to reduce their own.

“One thing we want to be careful

about is how we treat our customers,”

said one farmer at the organizational

meeting. “And this program will allow

us to treat them with respect and preserve our good relationships with

them.”

Two approaches to

Supply management

“There are two basic approaches to

dealing as an industry with oversupply,” says attorney Wilson. “One is to

seek a government program, such as

marketing orders or subsidies. The

other is for the industry to take the

initiative to unite and pursue programs

of mutual benefit.” Many farmers are

very reluctant to seek a government

marketing program or other assistance,

for fear it will compromise their independence, he says. “Often, federal programs mandate participation. But the

beauty of an industry program like this

is that it leaves growers free to make

their own decisions.” 

Some experts wonder if large buyers

such as Wal-Mart and the large supermarket chains will balk at attempts to

raise prices, and seek alternative

sources. But Beesley says that, for the

most part, the large customers would

Representatives of potato-growers associations vote to establish United Fresh Potato Growers of America during a March meeting in

Washington, D.C. Albert Wada, appointed interim chairman, is at center left in the white shirt. USDA photo by Steve Thompson
Rural Cooperatives / March/April 2005 7

like to see a stable price situation.

“They can’t plan ahead with prices

going up and down the way they do

now,” he says.

One possible stumbling block is the

cost of participation. Member farmers,

many already strapped for cash, will be

required to help fund cooperative

administrative programs. In addition,

co-op funds may be used to offer

incentives for switching acreage to

other crops, and, if necessary, to buy

out portions of a crop after harvest.

Under the dairy farmers’ CWT program, farmers pay into an indemnity

fund, through an assessment on projected output, for this purpose.

However, no decision had been made

at press time about implementation of

such a program.

The cost of such an indemnity

fund should be seen as a highly

attractive investment, says Carl

Taylor, chairman of United of Idaho’s

Future Crop Committee, who hammered out the basic United We Stand

plan. “If you pay in 40 cents a hundredweight, but in return you get a

price for your crop of $4.50 instead

of $2, you’ve just made a profit of

over 1,100 percent.” 

This strategy assumes that buying

out acreage and harvested potatoes will

be cost-effective. The co-op cites

research by the University of Idaho

indicating that a 1-percent decrease in

fresh potato supply can be leveraged

into a 7-percent rise in prices. The ultimate return will depend on the prices

farmers are willing to take for reducing

their crops and other market factors –

most especially how many farmers

decide to participate in the co-op. 

Will enough potato farmers sign up

to make the plan work? “We’ve tried

to get something like this going

before,” says Doug Hanks, “But we

couldn’t reach critical mass.” However,

he says, “Now the willingness to do

something is at ‘must’ level for growers

in Idaho and across the country,

because of continued low returns

they’re getting for fresh potatoes.”

Potato farmers at the National

Potato Council conference expressed

varying degrees of hope and skepticism. “I don’t know if it’ll work, but we

need to do something,” said one. Most,

however, seemed cautiously hopeful.

Wilson is enthusiastic about the coop’s chances. “I have high hopes the

farmers will deal with this problem as

an industry, that they will work together to bring the supply of potatoes into

line with the demand. That’s the name

of the game.” ■

United Fresh Potato Growers of America envisions

a two-pronged approach to influencing the market,

similar to the successful Cooperatives Working

Together (CWT) program that has helped shore up milk

prices by removing some excess milk capacity (see

page 33).

The first prong is the withdrawal of a calculated

amount of productive acreage. If acreage restrictions

fail to result in sufficient upward pressure on prices,

the second prong calls for restricting the number of

potatoes harvested . 

To limited planted acreage, a base acreage will be

defined using historical information verified by USDA’s

Farm Service Agency (FSA). Planting commitments by

farmers will be gathered every year by Feb. 28, and the

co-op will perform a comprehensive demand/supply

analysis, considering such factors as potential yields,

projected market demand, etc. 

If the market analysis indicates that the projected

crop will be too large, the cooperative will offer to pay

farmers for retiring potato-producing acreage. Farmers

will bid to plant alternative crops for a chosen price

per acre. Factors to be taken into consideration for

bids will be the location of the farm, its potential productivity, the varieties of potatoes grown and, of

course, the price the farmer agrees to accept. Co-op

officials pledge that all information provided by producers will be held in strictest confidence.

Farmers or their agents would take part in frequent

conference calls throughout the year discussing prices

and expected output in their respective areas. 

The June 1 potato planting report, issued by USDA’s

National Agricultural Statistics Service, will serve as a

possible warning bell for a potential surplus. Using the

latest information, the co-op will perform another

demand/supply analysis, and determine if growers

should be encouraged to voluntarily limit production by

minimizing inputs on selected acreage. 

Another analysis will be done Aug. 15. If projected

yields are not compatible with favorable prices in the

projected market, the co-op may ask farmers to

destroy a portion of the crop in the field. If low price

conditions arose after the harvest, measures would be

taken to limit shipments of potatoes until prices rise to

a reasonable level. Other potential supply-management tools include a “B market” strategy that would

divert potatoes to export and to non-conventional uses

such as animal feed.

To head off potentially disastrous prices in the coming year, the cooperative is also attempting to institute

a crash crop-acreage buydown for the 2005 potato

planting. ■

The United We Stand program
8 March/April 2005 / Rural Cooperatives

Low-carb, High Hopes

Co-op’s slimmed-down, SunLite tubers

may beef-up Florida’s potato industry

Checking on the first crop of low-carb

potatoes (from left) are: Edsel Reddon,

University of Florida extension agent; USDA

Rural Development State Director Charles

W. Clemons; and Wayne Smith, president of

Sun Fresh of Florida growers’ cooperative.

USDA photos by Ellen Boukari

By Ellen Boukari

USDA Rural Development/ Florida

Public Affairs Office

ursting with calcium,

niacin, iron and

Vitamin C, potatoes 

are one of the world’s

great foods. Even potato skins are a good source of fiber.

And they can be served in a seemingly inifinite number of ways. It’s not

surprising, then, that potatoes have

long been America’s most popular

vegetable, according to USDA’s

Economic Research Service, which

reports that the typical American

consumes more than 140 pounds 

of spuds each year. 

But for weight-conscious consumers, there is trouble lurking

beneath the skin: carbohydrates, and

plenty of them. If you subscribe to the

notion that fat is the dieter’s friend,

carbohydrates — as are found in bread

and potatoes — are viewed as dietary

offenders. As the low-carb diet trend

has taken root, millions of Americans

have adopted a low-carbohydrate regimen. That’s resulted in the sale of a lot

of meat, but fewer potatoes. 

Potato sales have been declining

precipitously in the Tri-County agricultural area (St. Johns, Putnam and

Flagler counties) of northeast Florida,

once known as the Potato Capital of

Florida. The number of potato growers here has dwindled from nearly 400

farmers in the early 1970s to fewer

than 40 today.

Fighting to regain crown 

Five Florida potato growers are

seeking to regain lost market share by

forming SunFresh of Florida Marketing Cooperative Inc. The members, all

sixth-generation Florida potato growers, think that a new variety of lowcarb potatoes they are growing can

even help the Tri-County area regain

its potato crown. The co-op has been

bolstered by technical assistance and a

$95,000 Rural Business Enterprise

Grant (RBEG) from USDA Rural

Development. Also playing a vital role

is Chad Hutchinson, an assistant professor of horticulture at the University

of Florida’s (UF) Institute of Food and

Agricultural Sciences.

Hutchinson has been growing and

testing the new potato variety for five

years at UF’s Plant Science Research

Unit in Hastings, Fla. In 2000, potato

farmers and UF scientists began working with Dutch seed company HZPC

to develop a better potato — better

B
Rural Cooperatives / March/April 2005 9

tasting, better looking and with an

increased shelf life. It has 30 percent

fewer carbs and higher protein than

russet potatoes (the biggest selling variety in the United States). This tuber

innovation is already impressing healthconscious consumers and is bringing

the potato back to the dinner tables of

more people on low-carb diets.

“Growers love this potato,” says

Hutchinson. “It is disease resistant, has

a shorter growing cycle and is better

able to deal with Florida’s extreme

weather.” 

Co-op growers are hopeful that the

new SunLite potato will revive the

potato market and turn a profit for

them. Joe Mueller, business and cooperative programs director for USDA

Rural Development in Florida, provided the co-op with critical help in

developing their marketing organization. The RBEG funds from USDA

assisted with the initial marketing rollout for the new potato. 

The SunFresh co-op has exclusive

rights to the potato. As an added benefit, SunLite low-carb potatoes are

grown in compliance with a pilot

USDA program that provides identity

preservation of the crop from the farm

to the consumer. Shoppers are thus

assured they are getting authentic

SunLiteTM low-carb potatoes.

Trouble in potato country

While growers are optimistic about

the new potato, they also are aware

that competition from northern growers will remain tough. The Tri-County

potato-growing region consists of

about 21,000 acres of unique farmland.

The moderate climate allows growers

to harvest potatoes early in the year,

usually in March and April, sometimes

even earlier. Over the years, Mother

Nature’s benevolence was a boon to

Florida growers, giving them the competitive advantage over cold-weather

spud growers.

However, due to new potato storage

technology and excess potato production in northern states, growers here

can no longer compete by relying solely on the early-to-market growing

cycle and the freshness of their product. The number of buyers has dwindled, also contributing to the decline

of the Florida potato industry. With

little member commitment, another

local co-op was not having much luck

increasing prices or finding new markets for its members, Mueller notes. 

By 2003, Florida’s potato industry

was ripe for a positive change. The

ground-breaking, low-carb potato was

the impetus needed to rally the farmers

into a unified group seeking a bigger

market presence. 

Prior to the formation of SunFresh,

there has been little crop differentiation in Florida potatoes had none had

a brand identity. Potato marketing has

historically been focused on bulk production, with most sales made to manufacturers of the potato chips or

French fries. Farmers knew that in

order for the low-carb potato to be a

success, they would need more than a

better potato.

The task was formidable. 

Instead of focusing solely on growing

and harvesting potatoes, the farmers

now were tasked with product management, from planting to harvesting, packing, shipping and marketing on a

national scale. Seeking advice about how

best to bring to fruition the many pieces

of the challenging puzzle, farmers and

scientists consulted with local agriculture extension agent Edsel Reddon, who

in turn called on Mueller at USDA

Rural Development for advice.

SunLite low-carb potatoes are sorted

at the co-op’s packing house. 
10 March/April 2005 / Rural Cooperatives

Co-op: perfect marketing vechicle

While Florida’s potatoes represent

only 5 percent of the nation’s crop,

they are important to the state, generating more than $120 million in sales

annually. 

Mueller was convinced that if farmers worked together and had a strategic plan for the future, they could capture more profits with the low-carb

potato. The co-op seemed to be the

perfect vehicle to take this new potato

to the market place. 

But given the lackluster performance history of some other cooperatives in the area, it was no easy task to

convince growers that a new co-op

was the best bet toward making the

low-carb potato profitable. Organizing

and operating a new co-op would be

the true test of commitment and dedication. 

Less than 12 months after it was

launched, Mueller says SunFresh of

Florida Marketing Cooperative “has

demonstrated a winning combination

of know-how, determination and management skills to handle the myriad of

details required, both internally as well

as externally. 

Marketing campaign

The cooperative is pushing fullsteam ahead with marketing strategies

that emphasize the potato’s health benefits. Sunfresh is promoting the SunLite

brand as a unique, gourmet potato sure

to please the palate and the waistline.

The growers also want to market the

potato as a fresh vegetable with a brand

name and logo, so that shoppers will ask

for it in their grocery store. 

Given that the potato is smooth

skinned, has small eyes and slightly

yellow flesh, it offers eye appeal and

tempts the tastebuds with its fresh

creamy texture. And butter and sour

cream are optional, due in part to the

potato’s high-moisture content, says

Hutchinson. 

USDA Rural Development’s RBEG

funding was provided to the Floridan

Resource Conservation and Development Council, which in turn used the

funds to assist the co-op in marshalling

marketing activities for the potato. A

marketing campaign targeting wholealers, retailers, the food service trade and

consumers is in full swing to market

SunLite as a premium table potato. 

The potatoes hit supermarket

shelves in February 2005 as “SunLite

All Natural-Low Carb Potatoes.”

Sunfresh began its marketing campaign by targeting grocery stores in

the southeast, including regional and

national chains. With marketing assistance from the Florida Depart-ment of

Agriculture and Consumer Services

(FDACS), each bag of SunLite lowcarb potatoes brandishes appealing

labeling and an eye-catching logo. The

marketing strategy is “to sell the sizzle

and not the steak,” says Sunfresh

Cooperative president and “SunLite”

potato farmer Wayne Smith.

Over the past eight months, the

low-carb potato has been featured in

numerous publications, including coverage on major newswires and network

television. Smith said that spending

time with reporters and photographers

has become somewhat commonplace

for him. 

Looking ahead

Currently, all grading, packing and

shipping is done in the co-op’s St.

Augustine facility. The first year’s production of the new variety will come

from an estimated 4,000 acres and will

triple in the second year, according to

Smith. As many as 30,000 acres are

projected to be in Sunlite production

in three years.

SunFresh cooperative growers also

have planted SunLites near Immokalee

in south Florida. Flexibility in harvesting and shipping is a distinct advantage

as the market moves from the south to

the north. And, with multiple growing

locations, co-op members believe they

are better protected against bad weather, which has besieged Florida growers in recent years.

Smith says that Sunfresh will add

additional producer members as

demand for the innovative tuber

exceeds current member’s capacity.

There will also be a need to add production during times when Florida

growers have no potatoes to sell. The

co-op’s five-year plan calls for spreading production to 10 states and developing six packing and distribution

facilities. 

If there is a downside to marketing

SunLite as a premium table potato, it

is the larger percentage of culls —

potatoes that don’t pass visual

appearance standards. Although

culls, or “No. 2s,” are identical in

nutritional value to their more visually appealing counterparts, even

small surface blemishes result in

downgrading. This has spurred the

co-op to look into additional markets,

such as the school lunch system. As

production increases, additional possibilities include a variety of frozen

packaged potato products.

The future of Florida’s potato farmers is looking brighter these days, and

as USDA Rural Development State

Director Charles W. Clemons Sr. said

at a press conference last summer:

“Not only will the low-carb potato

bring desirable options to the

American consumer, it will energize

Florida’s potato industry with

increased market share.” And that’s no

small potatoes for Florida’s $120 million industry. ■

SunLite potatoes are bagged at the co-op's

packing house. Three-pound bags were fetching

$4 in some stores in March.
Rural Cooperatives / March/April 2005 11

Editor’s note: Information for this article

was compiled by the Statistics Staff of

USDA’s Rural Business-Cooperative

Service, including Celestine C. Adams,

Katherine C. DeVille, Jacqueline E. Penn

and E. Eldon Eversull.

armer-owned cooperatives had gross sales of

nearly $117 billion in

2003, up 4.4 percent

from $112 billion in

2002. Increases in crop and livestock

production helped boost total sales,

more than offsetting the effect of the

bankruptcies of two large cooperatives. 

Total co-op farm marketing (which

includes the sale of all crops, livestock

and value-added goods) climbed 4 percent, farm supply sales increased 7.5

percent and receipts from farm services

were up marginally (table 1), according

to an annual survey conducted by the

Cooperative Services office of USDA

Rural Development. 

Income (before taxes) for all U.S.

farmer cooperatives was $1.4 billion in

2003, up from $1.2 billion in 2002.

Overall, cooperatives saw higher levels of equity capital on their balance

sheets, but it still remains low, averaging 42 percent of all assets. Cooperative

assets increased 1 percent, liabilities

remained about the same and equity

increased about 2 percent (figure 2). 

The bankruptcies of the federated

co-ops mentioned above resulted in

drastically lower patronage refund

income for local farmer cooperatives,

which fell by 78 percent. As a result,

many cooperatives experienced a

write-down in their equity accounts.

Overall, net income before taxes

increased by almost 18 percent, even

with lower patronage income.

Farmer cooperatives remain one of

the largest employers in many rural

communities, with overall employment

increasing by 1 percent, to 223,000 in

2003. Full-time employee numbers

declined by almost 2 percent, to

164,000, while part-time and seasonal

employees increased almost 10 percent, to 59,000.

Farmer co-op business 

volume nears $117 billion 

F

continued on page 39
By Erica Coble 

Editor’s note: Coble grew up on her family’s beef cattle and alfalfa hay farm in the

southwest Missouri town of Dadeville. She

is a senior majoring in ag journalism,

with a minor in ag economics, at the

University of Missouri-Columbia.

consumer walks into a

grocery store looking for

a meat product that’s easy

to prepare, stores conveniently and is safe for her

family. Walking down the canned food

aisle, the consumer spots a product

she’s never seen before. There on the

shelf, wrapped in a red label, is

Heartland Farm Foods’ fully cooked

ground and chunked beef. Curious, the

consumer picks up the can and turns it

around to look at the ingredients; only

one is listed: beef. In addition, the beef

is hormone-free, has no preservatives,

salt or other additives and can be traced

back to the farm where it was raised. 

Heartland Farm Foods LLC, a subsidiary of the Farm Foods

Cooperative, was formed in 2001 by

39 east-central Missouri farm families.

Headquartered in

Montgomery City,

Mo., the cooperative uses family

home-canning

recipes to produce

high-quality canned

ground and chunked

beef. The shelf-stable product is allnatural and contains only beef. 

Canning food is, of course, a traditional food-preservation technique

used by Americans for generations. It

remained popular longer in rural areas,

especially where electricity for refrigeration was slow in coming. Irene

Edwards of Montgomery City had

been canning beef for years and giving

it away in glass jars. People loved the

flavor and the convenience. The family

gradually realized there might be a

business opportunity in those jars. 

After a study showed market potential for the product, the Edwards family shared the plan with their neighbors

and decided to pursue a value-added

business venture. The goal: provide

consumers with a convenient, tasty,

high-quality beef product while creating a new business channel that would

help farm families realize more profits

from their cattle. 

Since the initial introduction of two

canned-beef products, the co-op and

its LLC subsidiary have been working

to build brand recognition and to get

their product on the shelf. Four years

after the launch, the cooperative has its

own canning facility that employs five

full-time employees and is set to introduce new products this spring. 

Shares prove popular 

Forming cooperatives can be an

attractive idea for producers, but the

farmers involved in Heartland Farm

Foods will tell you that it is not an easy

venture to undertake. Building a successful business takes hard work and

patience. The first organizational

meeting was held in December 2000, 

a steering committee was formed in

early 2001 and the business was organized as a new-generation cooperative

in December of 2001.

Once the steering committee was

formed, the group set out to create the

governing rules and elect a temporary

board. “The steering committee went

through a lot of challenging times,”

says Adam Blaue, a

Missouri beef producer

from Wellsville and

board chairman of the

Farm Foods Cooperative.

“It’s always an interesting

process when you get a

group of six to eight

farmers together who all

have different experiences and strong opinTrading on Tradition

Heartland Farm Foods uses country

tradition to market members’ beef

V ALUE-ADDED CORNER

A

12 March/April 2005 / Rural Cooperatives
Rural Cooperatives / March/April 2005 13

ions on how a business should work.” 

The group initially incorporated as

Farm Foods Inc. As they progressed

towards becoming a value-added

enterprise, they were advised by legal

counsel to form an LLC to address liability concerns. This resulted in the

creation of the co-op’s wholly owned

subsidiary, Heartland Farm Foods. 

In February 2002, the temporary

board started selling memberships on a

per cattle basis. The initial goal was to

secure 1,000 cattle per year, with members required to commit a minimum of

10 and a maximum of 50 head of cattle.

Each share sold for $200 and represented a commitment by the member

to deliver one head of cattle per year. 

It didn’t take long for the idea to

catch on. In just two weeks, 90 percent of the memberships were sold;

within a month all were sold.

Membership was extended to 39 farm

families in Montgomery, Audrain,

Pike, Lincoln and Warren counties. 

The goal of the first phase of the

plan was to get the business moving as

soon as possible, so a decision was

made to keep membership under 40. 

Key help from USDA, Extension

Assistance has come from a number

of sources. Jim Foster, vice president

of the board, says that Gary Hoette, a

local University of Missouri extension

agent, played a key role in helping

organize the cooperative. “Gary had

helped in getting an ethanol cooperative started, so he had been there and

knew how to advise us on things that

could have been potentially disastrous

for us,” Foster says. Hoette now serves

as the co-op’s at-large board member. 

The business received additional

help from Chris Cobb with the

University of Missouri Extension

office. She advises and assists the cooperative on a variety of issues. 

Business and financial support from

USDA Rural Development and the

Missouri Department of Agriculture

was instrumental in getting the

resources the group needed to get

their business started. Farm Foods Coop Inc. received a $200,000 ValueAdded Producer Grant (VAPG) from

USDA Rural Development in 2002. 

Funds were used for working capital

to support the start-up operations of

the hormone, steroid- and antibioticfree beef canning operation. These

funds were matched with the co-op’s

investment and $118,000 in grant

funds from the Missouri Department

of Agriculture for a feasibility study

and a business plan. 

“We were very excited that Family

Farms Co-op could benefit from the

VAPG program, which had to compete

with 712 applications requesting over

$121 million when only $33 million was

available in 2002,” says Nathan

Chitwood, business and community

specialist for USDA Rural Development in Missouri. “Their proposal was

well written and complied fully with the

intent of the VAPG program.”

Heartland Farm Foods was awarded

a second VAPG grant of $150,000 in

the fall of 2004. “Rural Development

believes that providing funds to help

farmers and ranchers launch valueadded businesses such as this project is

vital to the future of the nation’s agriculture economy,” says Greg Branum,

Missouri state director for USDA

Rural Development. 

Strong manager essential 

The membership drive netted

$200,000 to go toward building the

processing plant. An anonymous donation helped pay for the rest of the

$425,000 in construction costs. The

groundbreaking ceremony was held

March 21, 2003, where Farm Foods

Cooperative owns a 10-acre lot. 

From the beginning, the board set

three main goals for the cooperative:

(1) supply a high-quality product to

consumers; (2) be a positive influence

and support the community, and (3)

create a consistent, profitable market

for member cattle and create a future

for the next generation of beef farmers. 

Members knew that an experienced

general manager to move their ideas

and vision forward was vital to their

success. In October 2002, the board

hired Mark Uthlaut, who has an extensive agricultural background. He was a

farm manager at Iowa State University,

has marketed wool products for a

cooperative marketing group and

worked in retailing farm meats. 

“Mark has been a big factor in taking us where we need to go,” says

Blaue. “He went through a USDA

required processing school and through

Hazard Analysis Critical Control Point

(HACCP) certification in Nebraska.” 

Traceability reassures consumers 

From the beginning, members wanted consumers to know that the co-op’s

producers take good care of their animals, which helps ensure that they get

a safe, high-quality beef product. 

“The main selling point of our

product is that it is born, raised and

processed in the USA,” says Foster.

“With all of the concerns about food

continued on page 38

The co-op has three

main goals: (1) supply a high-quality

product; (2) be a

positive influence

and support the

community; (3) create a consistent,

profitable market

for member cattle

and create a future

for the next generation of beef farmers. 
By Paul Darby, Southern States 

Cooperative Development Foundation 

Editor’s note: Bill Brockhouse, a co-op development specialist with

USDA Rural Development in Washington, D.C., also contributed

to this article. 

etermination is “the act of deciding definitely

or firmly,” according to Webster’s Dictionary.

In the world of cooperative development,

determination can be defined as having “fire in

the belly.” The Shenandoah Valley-area poultry growers who formed the Virginia Poultry Growers

Cooperative (VPGC) possess plenty of each attribute; otherwise, they could never have launched their business under

such intense pressure and in such a time frame. 

In the Harrisonburg, Va.-area, if you mention the names

of Sonny Meyerhoeffer Jr., the co-op’s first president, Steve

Long, its vice chairman, or those of a half-dozen other

turkey growers who helped lead the co-op’s organizational

drive, people will tell you these individuals refused to buckle

in the face of unbelievable obstacles and challenges. They

stood tall when the heat was on. As a result of their determination, the co-op is now

processing and marketing

members’ birds at their own

business — one that embodies the

hope for the future of the Valley’s

poultry industry.

“I’ve rarely seen people so driven to succeed

in the face of adversity,” says Peter Thomas,

business and cooperative programs administrator

for USDA Rural Development. “I’m glad USDA

was able to lend its support to help keep this vital

industry alive in the Shenandoah Valley. This project shows how much can be achieved when you

have a total commitment by producers and their

communities.”

Plant closure stuns Valley

This story begins when Pilgrim’s Pride — one of the

nation’s major poultry companies — announced that it was

exiting the Shenandoah Valley turkey industry and would be

closing its processing plant near Harrisonburg by Sept. 1,

2004. That news sent a shock wave throughout the Valley

and into neighboring West Virginia. The region was looking

D

The Virginia Poultry Growers Co-op plant (foreground) is nestled in the rich farm country of the Shenandoah Valley. The

plant was slated for closure, but a combined effort by poultry

producers and supporting agencies will keep it open under

farmer ownership. Photo by Nathan Holleman

Unflappable

Plant closure forces Virginia poultry

cooperative launch onto fast-track

14 March/April 2005 / Rural Cooperatives
Rural Cooperatives / March/April 2005 15

at the loss of $200 million to the local

economy, the loss of 900 plant-related

jobs and more than 130 farmers would

not have a contract to grow turkeys.

These growers quickly came to grips

with the fact that they were likely to

lose their farms if they didn’t act

quickly. 

Turkey producers (grow-out, breeders and egg producers) almost immediately hit on the idea of forming a

grower co-op that could take over the

processing plant operation in Hinton,

Va., as occurred in recent years in Iowa

and Michigan. They had an unwavering faith (personal and professional)

that they could develop a successful

business, even though circumstances

made it impossible for them to follow

the standard cooperative development

format. What they didn’t have was

time, and they knew that a business

plan rushed has been the doom of

many an otherwise sound business. 

But the producers believed from

Day One that they could, and would,

succeed in spite of the conventional

wisdom that says it takes 12-18 months

to plan, determine the feasibility and

develop a business plan for a new

value-added processing business. Due

to the short window of opportunity,

poultry growers had to move toward

implementation before completing

these steps. 

The perennial problem of capitalization of a value-added venture was

solved through a package of resources

that included producer capital, commercial financing from the Farm

Credit System, funding from USDA

Rural Development and funding from

both Virginia and West Virginia state

governments. 

All of this happened after the April

26, 2004, announcement by Pilgrim’s

Pride that it was closing its turkey-processing plant at Hinton, Va., and canceling grower contracts. Pilgrim’s

Pride said the closure was brought on

by major changes in the turkey industry and by its desire to focus operations on other plants that produced

value-added turkey products (such as

sliced deli meats), as opposed to the

bird parts produced in the Hinton

plant. 

Not just Pilgrim’s Pride, but the

entire turkey industry is undergoing

major changes. Many major players are

changing their marketing strategies

and focus. While on-farm and wholesale turkey prices have been above

average in the past six months, the

five-year average is far lower. Outbreaks of avian influenza in early 2004

in the Valley and in the adjacent states

of Delaware, Maryland, New Jersey

and Pennsylvania, as well as in Texas,

hit the industry hard. But these facts

did not deter the producers. 

The likely impact of all those lost

jobs, farms and related revenue soon

attracted the attention of local, state,

and federal government officials, who

began offering technical and financial

help. 

How they did it

So how did the turkey producers

manage to make the transition from

contract growers to owners and operators of a major turkey processing business and feed mill in just 181 days?

Here are the major steps: 

(All dates in 2004)

• May 21 — growers met and voiced

support to determine whether they

could buy the Pilgrim’s Pride plant

in Hinton.

• May 26 — growers file articles of

incorporation for the Virginia

Poultry Growers Cooperative; charter issued.

• May 31 – co-op steering committee/board sends letter to turkey

growers requesting growers contribute 15 cents per-square-foot of

housing. Within two weeks, more

than 90 growers had contributed

$994,000 for the feasibility effort. 

• June — Pilgrim’s Pride stops placing

poults (young turkeys) with members. 

• June — Southern States Cooperative

Foundation becomes involved in

helping the new cooperative on legal

and feasibility issues, agreeing to

Co-op President Sonny Meyerhoffer addresses growers during the membership drive for

the new co-op. The plant, operating under the co-op since November, is exceeding projected operating goals. Photo by Michael Reilly, Courtesy Harrisonburg, Va., Daily News-Record 

These individuals

refused to buckle in

the face of unbelievable obstacles and

challenges.
16 March/April 2005 / Rural Cooperatives

develop an integrated financial

model to capture and test assumptions.

• June — board begins purchasing

eggs to place poults in growers’

poultry houses. 

• June - Pilgrim’s Pride announces

plans to sell its hatchery, but not to

the co-op. This creates additional

issues, because 20 percent of the

growers are breeder-producers, who

would have to switch to grow-out

operations. 

• June 26 — co-op holds second grower meeting. 

• July 12 — co-op converts to a stock

corporation, enabling it to raise capital through the issuance of preferred

and common stock. 

• July 14 — co-op holds third grower

meeting and announces that it has

signed a non-binding letter of intent

with Pilgrim’s to purchase the

Hinton plant, the Broadway, Va.,

feed mill and inventory of supplies

and birds on or before Aug. 31,

2004. 

• July 16 — co-op files an application

with the Internal Revenue Service

(IRS) for recognition as a tax-exempt

cooperative under Section 521 of the

Internal Revenue Code. 

• July 22 — IRS approves the 521

application, meaning that the co-op

can have members in both Virginia

and West Virginia, without the

expensive and time-consuming

process of SEC registration. 

• July — co-op finalizes agreement

with a national premium deli meat

processing company on products to

be produced; the company also

agrees to invest in the plant. 

• July — co-op meets with CoBank

and other Farm Credit System

lenders to secure financing. 

• August — negotiations with Pilgrim’s

Pride continue.

• September 15 — co-op signs purchase agreement with Pilgrim’s Pride. 

• September-October — co-op begins

to hire management staff and

announces plans to begin processing

of turkeys after Thanksgiving.

• October — co-op begins interviewing and taking applications for processing staff.

• October 13 — co-op receives $8 million loan under USDA Rural

Development’s Rural Economic

Development Grant (REDLG) program (through Shenandoah Valley

Electric Co-op).

• November 28 — co-op begins processing members’ turkeys. 

Thus, in just six months, did VPGC

go from having an idea to implementing that idea. 

Today, the co-op has 136 members

in a 10-county area of Virginia and

West Virginia. It owns a multi-milliondollar turkey processing plant, a feed

mill and associated equipment to pick

up turkeys from members’ farms. Its

members currently have plans to grow

more than 6 million turkeys annually.

It has significant, sustainable contracts

with customers throughout the eastern

United States. 

Factors for successful

co-op development

But the question remains, why has

this group of producers been able to

advance its co-op far more rapidly than

so many others? 

When the Southern States

Cooperative Foundation conducts an

initial evaluation with a new group of

producers — as it did with these poultry growers — it shares with them the

keys to success that any business project must have. These include:

1) a good idea;

2) a clear vision;

3) committed leadership;

4) producer support (putting their dollars at risk);

5) government support (local, state,

federal);

6) access to commercial credit; 

7) focused planning and analysis;

8) good communication with members;

9) perseverance.
Rural Cooperatives / March/April 2005 17

Here’s the Foundation’s perspective

on how well Virginia Poultry Growers

Cooperative met these criteria: 

• VPGC had a good idea — though

execution was a challenge, especially

due to the time constraints; 

• Members absolutely had a clear

vision and could articulate it with

passion; 

• Leadership was absolutely committed to the co-op, even to the extent

that their farms and families took a

back seat for at least six days a week

for virtually the entire six months. 

• Producers stepped up with dollars —

almost $1 million in the first 30 days

and a significant amount thereafter

as the purchase neared. However,

they fell short of what was needed to

secure sufficient commercial financing to fully capitalize the cooperative. 

• Poultry growers had vitally important government support at all levels.

Locally, the county is providing

incentives to the cooperative. At the

state level, the Virginia Dept. of

Commerce made a $500,000 grant to

the cooperative; the West Virginia

Department of Agriculture provided

$250,000 to growers on its side of

the state border to invest in the

cooperative. Support from the

USDA Rural Development was critical to the project’s success. It provided assistance on two levels. First, it

provided significant financial assistance in the form of the $8 million

REDLG and a still-pending $5 million Business & Industry loan guarantee. The other level of help was in

technical assistance from Rural

Development’s Cooperative Services

office, which helped with organizational guidance and support. Rep.

Robert Goodlatte of Virginia, chairman of the House Agriculture

Committee, and his staff also provided critical support. 

• The co-op has had access to commercial credit, which was essential to

the cooperative’s purchase of the

processing plant and feed mill. That

credit came through Farm Credit

System’s institutions: Farm Credit of

the Virginias and CoBank.

• The cooperative made a clear,

unequivocal commitment to planning and analysis. The Southern

States Foundation was given outstanding cooperation in the development of the financial feasibility

analysis and modeling. SSCF’s legal

counsel worked closely with the coop’s local counsel. 

• At every step of the process, good

communication with growers and

perseverance of the steering committee and the board kept this cooperative focused and on-plan.

Grower contracts

reflect member input 

Another element leading to the

cooperative’s success was the foresight

of the steering committee to involve

growers in the design of grower contracts. This created trust and cooperation, and removed any hint of “us vs.

them,” which so often occurs in the

poultry industry between integrators

and contract growers. 

The board also made a commitment

to hire quality, professional management to oversee operations. Early on,

the board identified a well-qualified

manager for the cooperative, a seasoned veteran in the processing industry, skilled marketers, and food safety

staff to train processing staff and monitor and test product quality.

Is the future success of the cooperative assured? Of course not, but it

has a strong game plan for success.

Are there bumps in the road ahead?

Absolutely. No business has ever gone

through start-up without encountering the “hidden bummer factor.”

That this development project succeeded in a co-op launch can clearly

be attributed to a number of important factors, mainly: unwavering dedication and the hard work of the coop leaders and members; the cooperation and coordination of many producers and professionals and a dose

of luck. 

VPGC can stand as a model for

producers on how to create “co-op

development fever,” and for professional development practitioners, private businesses and government economic-development staff on how to

coordinate and work together to make

a cooperative vision a reality. ■

Sonny Meyerhoffer, third from left, and other co-op officers receive a ceremonial check for

$8 million from USDA Rural Development outside the plant’s headquarters at Hinton, Va. 
18 March/April 2005 / Rural Cooperatives

By Dan Campbell, Editor

n its final years, Farmland

Industries was trapped in

a “death spiral of debt,”

made worse by a series of

business blunders that

evidence reckless and negligent behavior by the co-op’s managers and board,

according to a lawsuit filed in February

by the estate trustee for Farmland. 

The lawsuit accuses the co-op’s former managers and directors of “gross

negligence and acts of corporate

waste” in carrying out their duties,

resulting in the largest co-op bankruptcy in the nation’s history. The

board was little more than “a rubber

stamp” for management’s high-risk

ventures, the lawsuit says, and directors repeatedly failed to demand that

other obvious alternatives be explored.

The 34-page lawsuit reads a bit like

a “how-not-to-run-a-cooperative”

primer, complete with lessons in

“throwing good money after bad.”

That impression could, of course,

change markedly when the defendants

file their response (which was due in

March, after the copy deadline for this

magazine). The pre-trial hearing has

been slated for May 10. 

The lawsuit, filed in U.S.

Bankruptcy Court in Kansas City by

J.P. Morgan Trust Co., does not paint

a pretty picture of how the ship of

state was being guided in the final

years of Farmland. It provides a

detailed look into how Farmland tried

to grow its way out of debt by taking

on even more debt as it constructed

major new facilities and acquired

another failing farm supply business. In the end,

Farmland succeeded only in

swamping itself in an everdeepening sea of red ink, which

led to its bonds being downgraded

to “junk” status. 

That resulted in the co-op having to

pay higher interest rates. A “run on the

bank” by panicked bondholders ensued

when press reports picked up on the

co-op’s intensifying financial troubles.

Farmland filed for Chapter 11 (reorganization) bankruptcy in 2002. Since

then, the assets of the one-time

Fortune 500 company — with $11.8

billion in annual sales and 600,000

members — have been sold off.

The suit builds its case on a series

of seemingly self-destructive actions

the co-op took, or didn’t take, primarily during the tenure of CEO Harry

Cleberg from 1992 until 2000. The

suit also names his successor, Robert

Honse, along with 27 former board

members. 

Ben Mann, a Kansas City attorney

representing Cleberg and former

Chairman Al Shively, says the lawsuit

“is nothing but second guessing” by

the trustee, and that none of the claims

have merit. He declined further comment pending his clients’ formal

response to the lawsuit. 

Fertilizer plant: 

a co-op killer? 

Perhaps the handwriting on the wall

for Farmland Industries appeared in

1999, when CHS members voted down

a proposed merger with Farmland. In

turning it down, CHS members cited

their concern

over the massive

debt levels Farmland had assumed and

displeasure with the big pay checks

management of the two co-ops would

have collected as part of the deal. 

The biggest nail in Farmland’s coffin, according to the lawsuit, was the

decision to build a $300-million nitrogen fertilizer plant close by its petroleum refinery in Coffeyville, Kan. The

new fertilizer plant was to use a commercially unproven technology from

Texaco that used petroleum coke (produced as a byproduct of refining petroleum) instead of natural gas as a fuel

source for anhydrous ammonia-based

fertilizer. This technology was not

being used commercially anywhere in

the United States at the time and in

very few places globally. 

Farmland relied on fertilizer sales

for up to 70 percent of its income in

the 1990s, the lawsuit says. However,

in the early ‘90s, management had recommended that Farmland exit the

highly volatile fertilizer business.

Fluctuating demand caused by changes

in cropping patterns and government

farm programs, weather conditions and

competition from imports were making the fertilizer trade seem like an

endless rollercoaster ride. Natural gas

prices also fluctuate widely, but

Farmland believed the long-term outA Perfect Storm 

Farmland trustee sues ex-officers, directors

for ‘gross negligence’ in co-op’s collapse

I

Etchings: Gustav Doré
Rural Cooperatives / March/April 2005 19

look was for steadily rising gas prices,

hence its decision to seek an alternative energy source for the manufacture

of anhydrous ammonia. 

The lawsuit says the board approved

the fertilizer plant “after woefully

inadequate due diligence,” relying primarily on “self-serving data provided

by Texaco.” Further, this investment

was made at a time when the co-op

was already carrying close to $1 billion

in debt, when demand for fertilizer was

dropping and imported fertilizer was

grabbing more of the domestic market. 

Farmland calculated the payback on

the new plant would have been $28

million per year, or nine years to

recoup the construction expenses.

Inadequate research alleged

“Farmland never hired any third

party or outside consultant to advise

[it] on the completeness and accuracy

of Texaco’s representation,” the suit

says. The co-op’s main research consisted of a single trip by Honse and

one other co-op employee (a former

Texaco employee) to a small plant in

Japan that was using the technology.

No board members made the trip, and

no contacts were made with customers

of the plant, which had experienced

start-up problems. 

Gasification technologies other than

Texaco’s were available in the United

States at that time, and the Tennessee

Valley Authority had built a gasifier

that used petroleum coke to produce

ammonia. None of these options were

investigated by Farmland, the suit says.

Another promising alternative

would have been to expand the co-op’s

joint venture with Mississippi

Chemical on the Caribbean island of

Trinidad, where Farmland was then

securing natural gas for only 40 percent of the cost of domestic natural

gas. But that option was given “only a

cursory consideration,” the lawsuit

says. Other off-shore suppliers also

could have been tapped as low-cost gas

suppliers, but again, such options were

not explored. 

Ultimately, the co-op spent less

than $2 million investigating the merits of the Coffeyville fertilizer plant,

and allotted only 25 minutes of its

agenda to the topic before approving it

in April of 1997, the suit says. The

entire Coffeyville complex — fertilizer

plant and refinery — were eventually

sold for just $11 million, leaving it

with a $300 million loss on the fertilizer plant alone. 

Farmland’s decision to enter some

major joint ventures — with ADM for

grain marketing and with other co-ops

in Agriliance for fertilizer — caused it

to lose control over the ability to set

prices for those commodities, the lawsuit says. 

SF Services acquisition

J.P. Morgan Trust contends that

Farmland’s leaders failed to perform

due diligence when it decided in April

1998 to acquire SF Services, a faltering, federated farm-supply co-op with

$100 million in debt. SF Services was

not only losing money and burdened

with debt, it had “a significant problem

with its pension plan” and was locked

in a dispute with the IRS. Farmland

“hired no outside consultant to advise

it regarding the merger,” the lawsuit

says. 

SF Services — which did business in

Arkansas, Louisiana and Mississippi —

never made money for Farmland. “All

the money was lost. These losses were

foreseeable and completely avoidable,”

the lawsuit alleges. 

These types of actions, it continues,

reflected Cleberg’s philosophy that

“Farmland needed to grow ever bigger.

During his tenure as CEO, the focus

was on growing sales volume and

diversifying operations, not on the bottom line — profitability. From 1996 to

2000, the co-op took on an additional

$400 million in debt, boosting total

indebtedness to $1.3 billion.” 

The lawsuit alleges that accounting

tricks were used to mask its true financial condition. “Gross revenues

increased significantly until 2002, giving the appearance that Farmland was

a growing company, when its profitability was in truth steadily declining.” Expansion, including the

Coffeyville fertilizer plant, “was funded

through the use of off-balance sheet

financing.” Furthermore, Farmland

“changed certain accounting practices

that added billions of dollars in revenue to the company,” masking how

leveraged it was, the suit alleges. 

Rubbing salt in the wound was a

$700,000 “sweetheart bonus” Cleberg

received in 1999, during a year in

which his primary focus was on securing approval for the merger with CHS.

Having failed to accomplish this goal,

the suit questions why he was given a

bonus equal to more than his annual

base salary. Cleberg and Honse

reached a settlement with the creditors

last September which allowed them to

collect $7.4 million and $3.6 million

(respectively) in deferred compensation

and retirement benefits.
20 March/April 2005 / Rural Cooperatives

A perfect storm 

While the defense attorneys aren’t

saying much at this point, some others

who have followed the case say a number of negative factors converged to

bring down Farmland. The Coffeyville

plant was “located in just about the

worst place it could be,” says David

Barton, director of the Arthur Capper

Cooperative Center at Kansas State

University. “It was located in an ‘oversupplied’ market with limited marketing flexibility resulting in relatively low

prices and needed major environmental updating.”

And while he agrees that it was a

major negative for the co-op, Barton

cites three primary reasons for

Farmland’s failure: 

• it pursued a high-risk business strategy based on highly leveraged growth; 

• it failed to execute properly when

confronted with major problems; 

• it was hit by a “perfect storm” of

negative conditions that converged on it in the final years of

its operation, the biggest of which

was probably high natural gas

prices that “totally changed the

economics of manufacturing fertilizer. Farmland just couldn’t reposition itself fast enough to

switch over to off-shore supplies,”

Barton says. 

There was also “a sea change”

occurring in the grain business

which worked against Farmland.

Less grain volume was being

shipped to its traditional inland

grain terminals and instead was

moving to smaller, high-speed train

load-out facilities dispersed

throughout the grain belt.

“Recklessness” hard to prove 

Farmland had shown strong

intentions of wanting to transition

from being a farm supply and grain

business to being a producer of

processed meats. It had been moving

in that direction and was operating

successful pork and beef operations

when the roof began to fall in. 

Had Farmland started sooner in

making the transition to a food coop, perhaps today we would be hailing

it as a model of a co-op that successfully reinvented itself for the 21st century,

rather than as the biggest co-op failure

in history. 

But the good performance of the

meat processing businesses was not

directly serving the needs of its primary owners and patrons, the Farmland

local co-op members, who wanted the

co-op to perform better as a source of

farm supplies and as a grain marketer,

says Barton. 

There also may have been a method

to what the lawsuit paints as madness

regarding the money spent on the

Coffeyville fertilizer plant. Farmland

had been trying for years to sell the

Coffeyville petroleum refinery, but

without success. Had the fertilizer

plant been successful in using byproducts from the refinery to produce fertilizer, it might have made that entire

operation marketable.

According to a March 11 report in

Kansas City Star, the Coffeyville complex, which some called an albatross, is

now paying off for Pegasus Capital,

which paid only $22 million in cash

(plus some other considerations) for

the refinery and fertilizer facilities. In

its first year running the plant, Pegasus

says it will earn $100 million in operating income, making it what the owners

call "the lowest-price producer of fertilizer in the world." So perhaps the

technology was not flawed, but only in

need of fine-tuning. 

The business, now operating under

the name Coffeyville Resources, has

announced that it is going public and

hopes to raise $300 million.

It is the job of the trustee to get as

much as he can for the debtors in a

bankruptcy, but proving recklessness

may be an uphill battle in this case,

according to some legal experts. It is

important to note that this lawsuit

does not allege fraud, nor that

actions were taken for the personal

enrichment of the defendants. And

while the suit certainly alleges that

some very poor business decisions

were made by management and the

board, the court may not agree that

this constitutes negligence or failure to perform due diligence. That

is a heavy burden to prove. If it

does, most companies and co-ops

carry liability insurance to protect

the directors from any personal liability. 

In essence, the lawsuit poses the

question: at what point do (alleged)

bad business decisions cross the border into the realm of failure to perform due diligence? 

The closest the lawsuit comes to

alleging fraud is when it makes allegations of “off-balance-sheet financing” and “changing accounting

practices” to mask indebtedness. 

In this environment, management

and directors more than ever need

to do their homework, properly

research major business moves and

make sure all accounting and financial statements are above board and

accurate. ■
Rural Cooperatives / March/April 2005 21

Heads have been turned and eyebrows raised in coop circles by reports of the unusually high payouts creditors are receiving from the estate of bankrupt Farmland

Industries. Secured creditors (essentially the co-op’s

lenders) have been paid in full, about $500 million. The

60,000 unsecured creditors (including about 20,000

bondholders) have been paid 95 cents on the dollar, or

more than $800 million, with prospects for getting even

more. 

Those are remarkable payback figures, considering

that the average in bankruptcy cases is closer to 10

cents on the dollar for unsecured creditors and 80 cents

on the dollar for secured creditors. 

Holders of $100 million in Farmland preferred stock

have not fared as well, with an estimated payback of

only about $4 million at this time. Local co-ops lost all of

their equity investment (or common stock) in Farmland. 

So why wasn’t Farmland reorganized, as are so many

other companies that file for Chapter 11 Bankruptcy?

The case seems to have been handled as a Chapter 7

liquidation almost from the start — and it seems there

was never any real intent to save the business, some

former co-op members have complained. Some have

also questioned whether Smithfield Foods was able to

exert pressure to steer the case toward liquidation

because it wanted to gain control of Farmland’s highly

coveted pork operations.

Larry Frazen of the Kansas City law firm of Bryan

Cave, Farmland’s attorney, says he understands why

former members and others are doing a double take

when they read reports of how well creditors have

fared, but he does not share the belief that this is an

indication that Farmland should have, or could have,

been successfully reorganized. 

“Sometimes the assets of a co-op may be worth far

more when it is broken up than when whole, as in this

case,” Frazen says. In the case of Farmland, it operated

numerous divisions and joint ventures — fertilizer,

petroleum, grain, pork, beef, feed, transportation —

which did not necessarily complement each other well,

he notes. Furthermore, no one anticipated the very big

sale prices many of the co-op’s best assets fetched. 

The management team did make an offer to reorganize the co-op, Frazen says, but the two unsecured creditors’ committees (one for bondholders and one for trade

creditors) wanted to liquidate. “They wanted cash.” 

While Smithfield did indeed buy up some creditors’

claims against Farmland, Frazen said it was never to the

extent that the Virginia-based pork company could have

blocked a reorganization had the creditors’ committees

decided to go that route. But Smithfield did gain standing on the creditors’ committees, he noted.

The creditors included banks that were adamant

about being repaid, and many bondholders who were

equally eager to get their cash out. It was many of these

same small bondholders who were spooked by press

reports of Farmland’s growing debts that sparked a “run

on the bank” in 2002. 

The resulting “cash crunch” was the culmination of

what Frazen also calls “a perfect storm” of events that

doomed the co-op. Farmland had been greatly weakened by three successive years of poor planting conditions, causing fertilizer sales to plunge just when the coop could least afford it.

David Barton, director of the Arthur Capper Cooperative Center at Kansas State University (KSU), cites two

main reasons for Farmland’s inability to reorganize under

bankruptcy: 1) bondholders would have had to agree to

convert their bonds into preferred stock in the co-op,

and few had any interest in doing so; and 2) members

would have had to invest more money in the co-op, and

few showed a willingness and interest to do so. 

“Local co-op members had other options where they

could take their business, rather than investing more in

Farmland,” says Barton, who has been tracking Farmland’s fate both as an academic whose work focuses on

co-ops, and as an unsecured creditor himself (he was

owed for some consulting he did for the co-op). The

KSU Co-op Center was also an unsecured creditor. 

Because so many of the co-op’s bondholders were

relatively small investors living in rural areas and associated with local co-ops, some of whom had invested

the majority of their retirement funds in the bonds, there

was a strong sentiment at Farmland to strive to repay as

much of the bond debt as possible, Barton says.

Once the co-op’s assets went on the block, some

spirited bidding wars broke out, none keener than for

Farmland’s pork operations, where Smithfield vs. Cargill

bidding ran up the price to $481 million. Smithfield even

picked up the obligation for Farmland employee pensions, a real stroke of good fortune for workers caught

up in a bankruptcy, Frazen says. 

“It is kind of funny that you can get criticized for

doing your job almost too well — for getting as much as

you can for the creditors — in a case like this,” Frazen

says. “Farmland’s management worked very hard to

make sure as few as possible were hurt by the co-op’s

bankruptcy.” ■ — Dan Campbell, editor

Why wasn’t Farmland reorganized? 
22 March/April 2005 / Rural Cooperatives

Thomas W. Gray, Ph.D

Rural Sociologist 

USDA Rural Development

Agricultural cooperatives are at once democratic associations of member-producers as well as businesses. This

dual function of democracy and business results in various

trade-offs and tensions that become a basic part of cooperative structure. Embedded are values of equality, equity,

participation and self-governance (the democracy function,) but also values of efficiency, performance and economic return (the business function.) In their operations,

cooperatives struggle to meet both sets of needs, sometimes successfully dancing between them, sometimes

falling to one side or the other.

Many cooperatives were formed to help empower farmers to compete with much larger business organizations.

Farmland Industries, from its

inception as Union

Oil in 1929, was

formed to oppose

the market power

of such giants as

Standard Oil and

Sunoco. Farmland

sought to empower farmers by

competing with

Big Oil. This led

the cooperative

down a path (with

much of the rest of U.S. agriculture) of energy-intensive,

agricultural industrialization, and into big business operations.

Conglomeration has been the predominant organizational strategy of big business, commencing with the Depression and World War II. Spreading investments across several different activities, subsidiary firms and locations

(conglomeration) can diversify organizational vulnerability

and risk. In an era that has come to be dominated with multi-nationalized firms, Farmland Industries grew to operate in

all 50 states and 60 counties, with 600,000 members and

1,700 local cooperative owners. 

Cooperatives are organized with the member in mind.

Members are to be the prime beneficiaries. However, in a

multi-national cooperative such as Farmland, complexity

rules. It can become unclear who the prime beneficiaries

and critical decision makers are. 

Do the primary benefits of cooperatives get lost in shifts

between business management prerogatives vs. the democratic rights of the members? Do membership interests get

lost to the investment interests of “outsiders” in joint ventures? What group of interests is making crucial decisions

of the organization that shape future directions? Complexity

“confuses” any easy answer to these questions. 

Had Farmland taken a different, less extensive path of

development, member participation in the organization may

have been higher. Complexity always leads to losses of

member involvement and, generally, to increases in centralized decision making. To the extent that centralization

occurs, the cooperative is less member-oriented because

members are less involved. 

More member involvement allows for more input and

can produce greater flexibility and creativity. We might

wonder if a more active democracy (one closer to the members) could have

led to different

structures and

operations (if

more modest) and

to better survival

rates of farmers

and, ultimately, of

the organization. 

However, the

tension from the

business side of

the organization

may claim that

while democracy

is central to cooperative organization, to act without recognition of market imperatives (e.g., the need for earnings,

market innovation, and countervailing power in the market

place) can very easily eliminate the cooperative all together.

Ultimately, the members of a cooperative can demand

that: 1) those who own and finance the cooperative are

those who use the cooperative; 2) those who control the

cooperative are those who use the cooperative; and that 3)

the cooperative’s sole purpose ultimately is to provide and

distribute benefits to its users on the basis of their use of

the organization (Dunn). 

However, the ease with which these principles can be

stated belies the complexity of responding to member

needs and rights of use, in an environment of globalization,

industrialization, multi-national competitors, and such everpresent needs as capitalization. ■

Farmland faced classic co-op dilemma
Rural Cooperatives / March/April 2005 23

By Angela Dawson,

Communications Director

Northcountry Cooperative

Development Fund

Center for Cooperative

Enterprise and Innovation

n manufactured

home park communities in rural

Minnesota, it’s common for residents to

own their homes but to rent the

lot on which their home is located.

The park owners usually don’t live

in the park, but still make the rules

for people who live there. 

Eventually, an eager commercial

real estate developer approaches

the land owner with an attractive

bid to buy the park. Too often, the

story plays out with the eviction of

families from the homes they’ve lived

in for years, and a permanent loss of

affordable rural housing. 

In the case of Sunrise Villa

Manufactured Home Park in Cannon

Falls, Minn., Rick and Becky Ruddy

had come to know Sunrise Villa as

home for 15 years. Then the

owner decided to sell the park.

Instead of packing up and

looking for another home, the

residents of Sunrise Villa —

with the help of Northcountry

Cooperative Development

Fund (NCDF) — got organized and became Minnesota’s

first manufactured home park

cooperative.

The creation of Sunrise Villa

Cooperative goes against an

unfortunate trend of mobile

home park closings across the

state, a trend that NCDF

Court of Preference

Minnesota co-op helps manufactured home residents

avoid closures, evictions that plague other courts 

I

NCDF recently launched www.coopliving.coop, an online housing co-op listing service that adds value to the

co-op housing market. Until now, co-op housing residents were forced to use conventional methods to list

and sell shares in their units, including listings in local

papers or multiple listing services. 

Unfortunately, the listings compete with thousands of

conventional real estate listings, and sellers couldn’t target the market of interested cooperative buyers. Not any

more! In an effort to make it easier to buy and sell a coop housing share, the co-op listing service provides a

centralized location in which buyers and sellers of co-op

housing can connect. 

NCDF has also published the Cooperative Housing

Toolbox: A Practical Guide for Cooperative Success.

This toolbox is a “best

practices” guide for housing cooperative boards of

directors, committees and

members. For information

on ordering, contact: 

(612) 331-9103, or

info@ncdf.coop.

NCDF is a cooperatively owned and operated financial

intermediary which acts as a catalyst for the development and growth of cooperatives. NCDF embodies the

sixth Rochdale principle of “cooperation among cooperatives,” offering co-ops and socially motivated institutions

and individuals a means to pool surplus funds and then

reinvest those funds in the community. ■

Co-op Living Web site brings 

value to co-op housing market

Resident-members of Sunrise Villa have formed Minnesota’s

first manufactured housing cooperative. Photo courtesy

Northcountry Cooperative Development Fund 

continued on page 39
24 March/April 2005 / Rural Cooperatives

By Marlis Carson

Vice President, Legal, 

Tax and Accounting

National Council of Farmer

Cooperatives

Donald Frederick

Program Leader for Law, 

Policy & Governance

USDA Rural Development

wo recent developments

should remind agricultural cooperative leaders

that they can not take for

granted the limited

antitrust protections accorded associations of producers. 

The first is the decision by the new

Antitrust Modernization Commission

to study all antitrust exemptions,

including those enacted to promote

cooperative marketing of agricultural

and aquacultural products. The second

is the settlement of an antitrust suit

against a mushroom marketing cooperative that resulted in the association

agreeing to cease activities the Department of Justice felt were outside the

scope of applicable antitrust shields.

Antitrust Modernization Commission

In 2002, Congress created the

Antitrust Modernization Commission

(AMC) to examine whether the antitrust laws should be “modernized” and

to submit its findings to Congress and

the President. The AMC is a 12-

member, bipartisan commission consisting primarily of antitrust lawyers

with large law firms and major corporations. The commissioners plan to

complete a draft report by the summer

of 2006 and to submit a final report in

the spring of 2007.

Once appointed, the AMC established eight working groups to develop

recommendations for issues the commissioners should study. The AMC

met on Jan. 13 in Washington, D.C.,

to discuss those recommendations.

At their January 2005 meeting, the

commissioners unanimously agreed to

accept the Immunities and Exemptions

Working Group’s recommendation

that the AMC study all antitrust

immunities and exemptions (both

statutory and those based on case law)

to determine whether they should be

eliminated if not justified by the benefits they provide, or if they should otherwise be time-limited. The list of

exemptions to be considered includes:

• Section 6 of the Clayton Act (authorizes the formation of non-stock

agricultural co-ops);

• The Capper-Volstead Act (permits

cooperative marketing by associations of agricultural producers), and

• Fishermen’s Collective Marketing

Act (similar to Capper-Volstead, but

protects associations of aquacultural

producers).

In a letter to the AMC, the Department of Justice did not mention any of

the producer-oriented exemptions but

did call attention to exemptions that

can “...undermine our global leadership in advocating market-based

approaches in other jurisdictions.

Among the immunities and exemptions that deserve to be studied are the

Shipping Act, 46 U.S.C. § 813, the

Export Trading Company Act, 15

U.S.C. §§ 4011-21, and the WebbPomerene Act, 15 U.S.C. §§ 61-66.”

At the conclusion of the January

meeting, the working groups were

instructed to prepare written proposals

detailing how their recommendations

should be carried out. The commissioners anticipate they will eventually

hold hearings and receive testimony

from industry representatives.

Information about the AMC, its

commissioners and the initial reports

of all Working Groups are available at:

http://www.amc.gov. Producer-owned

marketing cooperatives will want to

keep abreast of commission actions

and be ready to defend their antitrust

protections if necessary.

Mushroom growers case settled

In December 2004, the Department

of Justice simultaneously filed an

antitrust lawsuit against the Eastern

Mushroom Marketing Cooperative

(EMMC) of Kennett Square, Pa.,

while also entering into a consent

decree settling the case. EMMC, in an

attempt to limit mushroom production

by non-members of the cooperative,

LEGAL CORNER

Antitrust developments; 

case against mushroom 

growers’ co-op settled

T

continued on page 41
Rural Cooperatives / March/April 2005 25

By David Chesnick, Ag Economist

USDA Rural Development 

here was a dramatic

change in the landscape

of the nation’s 100

largest agriculture cooperatives in 2003. No

longer were Farmland and Agway

included in the top 100 co-op list, as

both closed their doors. However, this

does not mean the agriculture cooperative sector, as a whole, is on a downswing. Indeed, quite the contrary is

true. In preliminary findings, the

largest agriculture cooperatives had a

jump of 7.8 percent in total operating

revenue while net margins and patronage to members each soared 39 percent in 2003 (table 1). 

Based on USDA’s annual survey of

cooperatives, the top 100 co-ops had

operating revenue of $58.3 billion, up

from $54.1 billion in 2002. That’s

about half of total revenue for the

nation’s 3,000 farmer-owned co-ops.

Marketing activity contributed 72 percent, farm supply sales 26 percent and

“other revenues” 2 percent of total

revenue for the top 100 co-ops. 

Leading the increase were the “diversified” category of cooperatives, with a

jump of $2.1 billion in total revenue.

Farm supply sales for diversified cooperatives — those that primarily market

members’ grain and sell them farm supplies — were up 38 percent, to $8.1 billion. This marks the first time farm supply sales were greater than marketing

revenue for diversified cooperatives.

Grain and farm supply cooperatives

also showed substantial gains in revenue, with each group adding more

than $1 billion to total revenue. Fruit

and vegetable cooperatives had a $1

billion decline in total revenue.

However, most of the decline was due

to a restructuring activity that will

help a co-op improve its bottom line. 

Margins soar 

Net operating margins (gross margins less operating expenses) were up

10.4 percent, to $980 million. Most of

the increase came from diversified

cooperatives, where net operating margins jumped $125 million, to $268 milUpswing Continues

Despite loss of Farmland & Agway,

revenue, income climb for top 100

T

Table 1—Combined Operating Statement-Top 100, 2002-03

2003 2002 Difference Percent 

$ thousand Change

Revenues

Marketing 42,224,706 41,473,012 751,694 1.81%

Farm Supply 15,088,921 11,700,590 3,388,331 28.96%

Total Sales 57,313,627 53,173,602 4,140,025 7.79%

Other Operating Revenues 1,025,113 931,834 93,279 10.01%

Total Operating Revenues 58,338,740 54,105,436 4,233,304 7.82%

Cost of Goods Sold 53,169,267 49,038,973 4,130,294 8.42%

Gross Margin 5,169,473 5,066,463 103,010 2.03%

Expenses

Operating Expenses 4,189,713 4,178,604 11,109 0.27%

Net Operating Margins 979,760 887,859 91,901 10.35%

Other Revenues (Expenses)

Interest Expense (422,183) (479,844) 57,661 -12.02%

Interest Revenue 27,291 36,331 (9,040) -24.88%

Other Income 334,954 358,402 (23,448) -6.54%

Other Expenses (113,360) (73,455) (39,905) 54.33%

Patronage Revenue 99,167 64,201 34,966 54.46%

Net Margins from Operations 905,629 793,494 112,135 14.13%

Non-Operating Rev. (Exp.) (34,993) (170,694) 135,701 -79.50%

Net Margins 870,636 622,800 247,836 39.79%

Distribution of Net Margins

Cash Patronage Dividends 264,589 191,048 73,541 38.49%

Retain Patronage Dividends 453,028 397,276 55,752 14.03%

Nonqualified Noncash Patronage 7,097 4,249 2,848 67.03%

Dividends 9,728 9,858 (130) -1.32%

Unallocated Equity 87,343 3,879 83,464 2151.70%

Income Tax 48,851 16,490 32,361 196.24%

Total Distribution 870,636 622,800 247,836 39.79%
lion. Poultry/livestock cooperatives

showed the largest decline in operating

margins, which fell $106 million, leaving them with a net operating loss of

$41 million.

Overall net margins from operations

(which exclude all non-operating revenues and expenses) hit $906 million in

2003, an increase of 14.1 percent for

the top 100. Much of the gain was due

to fruit/vegetable cooperatives, which

saw net margins from operations climb

by $105 million, to $261 million. Nonoperating revenues and expenses generally include gains or losses from disposing capital assets, accounting changes

or other one-time revenue or expenses

not related directly to operations.

Net margins — the bottom line for

cooperatives — increased 39.8 percent,

to $870 million for the top 100 co-ops

in 2003. With the exception of diversified, grain and poultry/livestock cooperatives, all commodity groups showed

substantial gains in net margins.

Poultry/livestock cooperatives were the

only commodity group to have a net

loss ($64 million).

More patronage goes to members

The top 100 cooperatives allocated

82 percent, or $718 million, of net

margins back to their members as

patronage in 2003. Of that amount,

$265 million was in cash payments to

members while the remaining $453

million was retained by the co-ops.

Dairy cooperatives led the way, allocating 94 percent of net margins back to

members. 

Non-qualified, non-cash patronage

refunds were up 67 percent, to $7 million. Dividends remained fairly constant, at $10 million. Unallocated equity, which was used to absorb net losses

in prior years, absorbed $87 million of

the net margins, up $83 million from

2002. Fruit/vegetable cooperatives was

the primary co-op group still using

unallocated equity and tax benefits to

absorb net losses.

Patronage refunds received by the

top 100 co-ops reached $99 million in

2003, up 54.5 percent. Much of this

increase was reaped by diversified

cooperatives, which saw patronage

increase 125.2 percent, to $61 million. 

Goods, labor costs rise

Cost of goods sold by the top 100

co-ops was up 8.4 percent, with most

of the increase occurring among diversified, grain and farm supply cooperatives. These three commodity groups

also accounted for the largest increase

in total operating revenue. 

Operating expenses were up a slight

.3 percent, to $4.2 billion, due in part

to higher labor costs. Cooperatives

that reported labor expenses indicated

costs were up 5 percent from 2002.

Labor as a percent of total expenses

rose from an average of 65 percent of

total expenses to 68 percent in 2003. 

The largest increase in operating

expenses occurred in the grain sector,

up 12.2 percent, to $541 million.

Dairy cooperatives’ operating expenses

jumped up $42 million, to $807 million. Fruit/vegetable cooperatives saw

the biggest decline in operating

expense, dropping 12.7 percent, to

$855 million, despite a 5-percent

increase in reported labor costs.

26 March/April 2005 / Rural Cooperatives

Table 2—Combined Balance Sheet-Top 100, 2002-03

2003 2002 Difference Percent 

Assets $ thousand Change

Current Assets

Cash 980,404 666,959 313,445 47.0%

Accounts Receivable 4,644,641 4,547,146 97,494 2.1%

Inventory 5,127,491 4,957,569 169,922 3.4%

Other Current Assets 1,195,117 965,117 230,000 23.8%

Total Current Assets 11,947,652 11,136,791 810,862 7.3%

Investments

Cooperative Banks 256,593 269,062 (12,469) -4.6%

Other Cooperatives 1,497,540 1,469,814 27,726 1.9%

Other Investments 1,799,779 1,821,580 (21,801) -1.2%

Total Investments 3,553,912 3,560,456 (6,544) -0.2%

Net PP&E 6,987,926 7,123,988 (136,062) -1.9%

Other Assets 2,271,118 2,195,705 75,413 3.4%

Total Assets 24,760,608 24,016,940 743,668 3.1%

Liabilities

Current Liabilities

Total Short-term Debt 2,132,679 2,380,554 (247,875) -10.4%

Accounts Payable 3,133,000 2,839,547 293,453 10.3%

Member Payables 501,278 528,358 (27,080) -5.1%

Patron and Pool Liabilities 1,532,544 1,341,910 190,634 14.2%

Other Current Liabilities 1,417,321 1,334,457 82,865 6.2%

Total Current Liabilities 8,716,821 8,424,825 291,996 3.5%

Long-Term Debt

Less Current Portion 4,949,874 5,084,611 (134,737) -2.6%

Other Liabilities and Deferred Credits 1,130,702 1,045,426 85,276 8.2%

Total Noncurrent Liabilities 6,080,576 6,130,037 (49,461) -0.8%

Total Liabilities 14,797,397 14,554,862 242,535 1.7%

Minority Interest 924,098 769,413 154,685 20.1%

Member Equity

Preferred Stock 1,631,929 1,531,343 100,586 6.6%

Common Stock 178,859 164,428 14,431 8.8%

Equity Certificates and Credits 6,108,943 5,976,173 132,770 2.2%

Unallocated Capital 1,119,382 1,020,721 98,661 9.7%

Total Equity 9,039,113 8,692,665 346,448 4.0%

Total Liabilities and Equity 24,760,608 24,016,940 743,668 3.1%
Rural Cooperatives / March/April 2005 27

Low interest rates, coupled with

falling debt, pushed interest expense

for the top 100 co-ops to its lowest

level since 1994. Interest expense fell

12 percent, to $442 million. However,

most of this decline can be traced to

one cooperative which underwent

major restructuring. Without that

cooperative, overall debt levels would

be higher. There was also a slight

increase in interest expense of $1 million.

Lower interest rates caused interest

income to fall 24.9 percent, to $27

million. Nearly all commodity sectors

experienced falling interest revenue.

Other income, indirectly related to

operations, was also down 6.5 percent,

to $335 million. However, interest and

other income generally accounts for

less than 1 percent of total revenue for

all top 100 cooperative.

Other expenses not directly related

to operations were up 54.3 percent in

2003, to $113 million. This is the

largest amount of indirect expenses for

the top 100 co-ops in the past 10 years. 

Income taxes paid jumped nearly

200 percent, to $49 million.

Non-operating expenses were down

79.5 percent, to $35 million. These

expenses are caused by accounting

changes, extraordinary gains and losses, as well as income and expenses

from other marginal interests. These

expenses and revenues are generally

non-reoccurring. 

Co-ops build asset value

Total assets for the 100 largest agriculture cooperatives were up 3.1 percent, to $24.7 billion (table 2) in 2003.

Leading the increase were current

assets, which jumped 7.3 percent, to

$11.9 billion. Investments dropped

slightly, falling .2 percent, to $3.6 billion. Fixed assets also slipped marginally, from $7.1 billion to $7 billion. 

The largest increase in current

assets was in cash balances. Cash

jumped 47 percent, to $980 million.

Higher net margins from operations

helped fuel the increase in cash balances, with almost all commodity

groups having higher cash balances at

the end of 2003. The exception was

rice cooperatives, which used the higher cash flow generated by operations to

pay off debt.

Investments in other cooperatives,

excluding cooperative banks, was up

1.9 percent, to $1.5 billion. Most of

the investments in other cooperatives

reside with diversified, farm supply,

grain and poultry/livestock cooperatives. Investment in cooperative banks

was down 4.6 percent, to $57 million.

Cooperatives carried less debt in

2003, especially from cooperative

banks. Non-cooperative business

investment was down 1.2 percent, to

$1.8 billion. Most of these investments (63.7 percent) were held by

dairy cooperatives.

The value of fixed assets fell 1.9

percent, to $7 billion, continuing a

trend that started in 2001. However,

much of the decline in 2003 can be

attributed to one cooperative which

sold off substantial amounts of its

fixed-asset base. The average value of

fixed assets purchased was up $253,000

from 2002, to $8.5 million. 

Despite overall lower debt levels,

total liabilities were up 1.7 percent, to

$14.8 billion. The increase in liabilities was due mostly to higher current

liabilities, which jumped 3.5 percent,

to $8.7 billion. An increase in accounts

payable and liabilities owed to members fed the increase in current liabilities. Accounts payable jumped $293

million, to $3.1 billion, and funds

owed to patrons were up $164 million,

to $2 billion. Total funds owed to

members included member payables

and other liabilities owed to patrons.

Working capital loans were down

10.4 percent, to $2.1 billion, the lowest

level in more than 10 years. Diversified

cooperatives accounted for the majority of the decline, with loan value

falling $333 million.

More cash flow from operations 

Cooperatives were able to generate

higher levels of cash flow from operations, allowing them to rely less on

working capital loans. The increase in

accounts payable and funds owed to

members are more likely in response

to higher sales. The ratio of these liabilities to cost of goods sold remained

steady, at around 9.7 percent.

Non-current liabilities fell .8 percent, to $6.1 billion. Again, lower debt

levels were the driving force. Total

long-term debt, less current portion

owed, was down 2.6 percent, to $4.9

billion. Generally, this decline can be

traced to lower investments in fixed

assets. However, higher margins, along

with higher cash balances, gave many

cooperatives flexibility to pay down

outstanding balances without acquiring

new loans.

Eighteen top 100 cooperatives held

majority holdings in subsidiaries in

2003. The top 100’s minority interest

in subsidiaries was up 20.1 percent, to

$924 million. Most of the minority

interest is concentrated in the dairy

sector, with dairy cooperatives holding

more than 51 percent of the total.

Diversified and sugar cooperatives

hold 45 percent of the other minority

interest. Each of those sectors

increased the amount of minority

interest.

Stronger equity position

Cooperatives’ improved their equity

position in 2003, continuing the trend

of the past few years. Total equity grew

4 percent, to $9 billion. Total equity

allocated to members grew $248 million, to $7.9 billion. 

Unallocated equity increased 9.7

percent, to $1.1 billion. The increase

in unallocated equity reversed a declining trend of the past five years. 

Diversified co-ops led the increase

in equity. Their equity balance climbed

$175 million, to $2.4 billion. Dairy and

grain cooperatives among the top 100

also increased their equity balance by

$76 million each. 

The dairy sector placed most of its

increase in unallocated equity

accounts, while grain cooperatives allocated a majority of income back to

members in the form of equity credits.

Poultry/livestock cooperatives were the

only commodity group to suffer a

decline in total equity. ■
28 March/April 2005 / Rural Cooperatives

By David Chesnick

USDA Rural Development

e can take a closer look

at what the numbers in

the preceding article

(page 25) reveal about

the financial performance of the nation's 100 largest agricultural cooperatives by using table 1

(page 29). In this analysis, average performance measurements are used.

This “averaging” will, in effect, lower

the influence of the largest cooperatives of the top 100 and reflect less

“swing” between commodity groups.

The average ratio generated gives

equal weight to all cooperatives and

provides an additional perspective on

the performance of the nation’s largest

farmer cooperatives.

Average liquidity rose in 2003 for

the largest cooperatives. While the

average current ratio for all the top 100

edged up from 1.37 in 2002 to 1.38 in

2003, the average quick ratio jumped

from .74 to .78. This indicates better

inventory control by cooperatives. An

increase in cash balances helped reduce

the amount of debt and reliance on

outside sources for working capital. 

However, not all commodity groups

were able to generate higher liquidity.

The better performers were concentrated among diversified and poultry/

livestock cooperatives, which showed a

tremendous increase in both their

average current and quick ratios. Both

commodity groups showed a broad

decrease in debt and an increase in

cash balances. 

On the other hand, cotton cooperatives had a build-up of inventory. This

inventory appears to be financed mostly by working capital loans, since there

was a net outflow of cash from operations. Thus, the average liquidity ratios

for cotton cooperatives were down.

Leverage ratios examine the use of

debt. One of the most important is the

debt-to-assets ratio, which illustrates

outside ownership in a business’ assets.

The average debt-to-asset ratio for the

top 100 co-ops remained fairly stagnant in 2003, at 61.4 percent. 

The highest leveraged commodity

groups were sugar, poultry/livestock

and diversified, with ratios of more

than 65 percent. The least leveraged

commodity groups were cotton and

rice cooperatives. Rice cooperatives

had a debt-to-asset ratio of 47.5 percent, the only group to have a debt-toasset ratio of less than 50 percent.

Long-term debt-to-equity

falls, but still too high

Long-term debt-to-equity examines the long-term stability of a business. The average long-term debt-toequity ratio fell from .87 to .78 in

2003. This signals less reliance on

debt and more equity for long-term

financing. 

However, a long-term debt-to-equity

ratio of .78 is still relatively high compared to the ratio between .5 and .6

recorded from 1999 to 2001. Cotton

and rice cooperatives do not use much

long-term debt in their capital structure. 

Due to a reorganization of one cooperative, the fruit/vegetable group saw its

average long-term debt-to-equity ratio

decline from 2.74 to .65. Excluding that

one cooperative, the average ratio still

improved, from .75 to .69. 

Poultry/livestock had a tremendous

jump, from 3.12 to 7.20 in average longterm debt-to-equity. Much of this jump

resulted from a transfer of short-term to

long-term debt. Sugar cooperatives are

also highly leveraged, with an average

long-term debt-to-equity ratio of 1.18.

Being leveraged, in and of itself, isn’t

a problem. It becomes a problem when

the operations do not generate enough

margins to cover interest expense,

resulting in default on the loans. 

Times-interest-earned is a ratio that

looks at how many times margins can

cover interest expense. In 2003, the

largest agriculture cooperatives had an

average times-interest-earned ratio of

12.45, down from 14.32 in 2002. Much

of this decline can be attributed to the

dairy sector. However, the dairy cooperatives fall from an average of 68.06

to 56.27 in 2003 should not be a cause

for concern.

What may be a cause of concern for

some sugar and poultry/livestock coops is having both low times-interestearned values and high long-term

debt-to-equity values. Poultry/livestock cooperatives had an average ratio

of .72 while sugar co-ops had a ratio of

2.14. On a positive note, sugar cooperatives have shown improvement on

this score in each of the past five years. 

Efficiency ratios examine how a

business uses its assets to generate sales.

The average local asset turnover for the

top 100 increased from 3.10 to 3.14

times in 2003. Most of the commodity

groups had a ratio of between 2 and 3.

Cotton, dairy and sugar co-ops were

the exception. Both cotton and dairy

cooperatives had a declining localasset-turnover ratio. However, both

Measuring top 100 

co-op performance

W
Rural Cooperatives / March/April 2005 29

were above the average. 

Cotton cooperatives fell from 4.69

to 3.91 and dairy cooperatives fell from

6.01 to 5.49. Sugar cooperatives operate in a heavily capitalized industry, so

their turnover ratios reflect this with

average lower values. This will be more

evident in their fixed-asset-turnover

ratio. The average total-asset-turnover

for sugar cooperatives was .96 in 2003.

The average fixed-asset turnover for

all of the top 100 was up slightly from

2002, from 14.57 to 14.66. Most commodity groups had a turnover rate that

ranged from 10 to 15 times. The more

processing a cooperative performed,

generally the lower the turnover rate. 

As mentioned earlier, sugar cooperatives are highly capitalized and their

average fixed-asset turnover was 1.92

in 2003. Despite the low value, they

showed a strong improvement from

2002, when the ratio was 1.75. Other

commodity groups which do less processing — such as poultry/livestock

cooperatives — have higher fixed asset

turnover ratios. In 2003, poultry/livestock co-op turnover ratio was 31.43,

up from 30.30 in 2002. 

Dairy cooperatives also had a high

turnover value of 29.21 in 2003.

However, there was a high variation

level between dairy cooperatives,

which ranged from a high of 175.28

times to a low of 4.83 times. 

Gross margins reflect 

pricing strategy

While most cooperatives do not have

profit as their primary objective, they

still must generate margins in order to

continue operations. Profitability ratio

trends indicate whether a cooperative is

headed for failure. 

Gross margin percent generally

measures pricing strategy of the cooperative. In other words, it looks at margins generated after the cost of goods

sold is subtracted from total operating

revenues. If a marketing cooperative is

paying too much to its members up

front for their commodities, the gross

margins left may not be enough to

cover expenses. So, looking at changes

in gross margins as a percent of total

revenue can help determine a co-op’s

pricing strategy.

The average gross margin percent

for the largest agriculture cooperatives

in 2003 was 14.29. This value has been

declining steadily from a high in 1999

of 16.48. Most of the commodity

groups tend to have a ratio between 10

and 20. However, co-ops that perform

more processing tend to generate higher expenses and will require higher

gross margins to cover those expenses. 

Changes in gross margin percent

are only half the story. If cooperatives

are becoming more efficient in their

operations by lowering operating

expenses, they will not need higher

gross margins. Therefore, members

can benefit directly on the front end by

receiving higher prices for their commodities they market through the

cooperative or pay lower prices for

continued on page 40

Table 1—Average selected ratios by commodity group, Top 100 Cooperatives, 2002-03

Top 100 2002 1.37 0.74 61.27% 0.87 14.23 3.10 14.57 70.90 16.41 14.65% 1.36% 5.62% 5.28%

2003 1.38 0.78 61.35% 0.78 12.45 3.14 14.66 46.31 17.41 14.29% 1.68% 5.98% 13.09%

Cotton 2002 1.50 0.71 47.92% 0.28 6.35 4.69 16.81 15.01 23.64 17.72% 4.02% 10.76% 18.33%

2003 1.44 0.55 51.84% 0.27 6.47 3.91 15.36 9.87 24.96 17.83% 4.73% 10.90% 20.53%

Dairy 2002 1.32 0.95 59.78% 0.44 68.06 6.01 32.85 273.82 24.53 9.43% 1.26% 5.94% 15.40%

2003 1.32 0.94 60.82% 0.41 56.27 5.49 29.21 134.43 22.82 9.55% 1.17% 4.75% 10.27%

Diversified 2002 1.19 0.81 68.92% 0.75 2.83 2.02 8.97 11.66 7.40 12.09% 1.61% 5.73% 10.74%

2003 1.38 0.93 68.00% 0.94 2.66 2.22 9.02 12.42 9.48 12.92% 1.43% 6.38% 11.54%

Fruit/Vegetable 2002 1.60 0.72 68.50% 2.47 2.69 2.32 10.37 46.72 11.94 20.00% 1.52% 7.91% -11.43%

2003 1.59 0.76 61.72% 0.65 4.64 2.42 11.64 31.96 12.57 21.17% 3.99% 13.38% 38.84%

Farm Supply 2002 1.32 0.71 56.51% 0.44 2.64 2.35 10.40 9.47 10.56 15.99% 1.21% 4.64% 6.22%

2003 1.31 0.77 58.15% 0.47 3.61 2.48 10.94 10.55 11.04 15.19% 1.63% 5.61% 10.10%

Grain 2002 1.26 0.58 61.24% 0.40 3.89 2.58 9.38 8.95 18.35 12.71% 0.87% 4.53% 8.19%

2003 1.26 0.63 62.58% 0.45 2.49 2.87 10.58 12.37 21.28 11.42% 0.54% 3.30% 5.63%

Poultry/Livestock 2002 1.77 1.34 65.78% 3.12 1.08 2.78 30.30 217.50 13.85 7.99% 2.23% 4.95% -25.44%

2003 2.14 1.70 68.28% 7.20 0.72 2.92 31.43 251.70 13.31 7.58% 0.56% 2.69% 1.58%

Rice 2002 1.67 1.03 50.42% 0.38 7.87 2.26 4.92 11.37 10.31 34.00% 2.86% 7.62% 14.30%

2003 1.69 0.76 47.46% 0.38 9.34 2.44 5.34 9.28 12.39 36.11% 4.19% 10.89% 23.39%

Sugar 2002 1.35 0.60 65.33% 1.17 1.55 0.94 1.75 5.79 10.05 26.18% 2.28% 4.83% 5.39%

2003 1.35 0.59 66.62% 1.18 2.14 0.96 1.92 5.74 9.83 25.41% 3.19% 5.62% 8.42% Current Ratio Quick Ratio Debt to Assets Long-Term Debt to Equity

Times Interest EarnedLocal Assets TurnoverFixed Assets TurnoverInventory TurnoverA/R TurnoverGross Profit MarginNet Operating MarginReturn on Total AssetsReturn on Members Equity
30 March/April 2005 / Rural Cooperatives

By Kimberly Zeuli,

Assistant Professor 

& Judy Turpin, student researcher

University of Wisconsin-Madison 

Editor’s note: This is the second of three

articles with highlights from the seventh

annual Farmer Cooperatives Conference,

Cooperative Innovation, held last fall 

in Kansas City. Part I appeared in the

Jan–Feb. 2005 issue. Part III will appear

in the May–June issue. 

artnerships are businesses

formed when two or more

companies or people join

forces to accomplish more

collectively than they can

individually. According to Roger

Ginder, a professor at Iowa State

University, there are three general types

of partnerships: 

(1) Horizontal partnerships (both firms

are at the same level in the value

chain); Example: Agriliance, an

agronomy partnership between two

regional cooperatives, Land O’Lakes

Inc. and CHS Inc. 

(2) Vertical partnerships (firms that are

at different levels in the value chain);

Example: Land O’Lakes partnering

with local co-ops to build jointly

owned feed mills.

(3) Complementary joint venture with a

firm outside the value chain; Example:

West Central Co-op’s joint venture

with Todd & Sargent, a corporate

construction firm, to form the

Renewable Energy Group (REG),

which builds turn-key biodiesel

plants and provides start-up assistance and ongoing plant management for clients.

Ginder says that horizontal partnerships between cooperatives and

investor-owned firms (IOFs) are one of

the most challenging partnerships to

establish and maintain. Two different

examples — with two very different outcomes — of local cooperatives entering

into a partnership with Cargill were

presented at the Cooperative Innovation

conference. 

Ag Partners LLC

Troy Upah, CEO of Ag Partners

LLC, described the creation and success

of his firm, a partnership equally owned

by Albert City Elevator, an Iowa farm

supply and grain co-op established in

1905, and Cargill. The two partners felt

that a joint venture would improve their

value to local farmers, improve efficiencies and allow them to update facilities

they operated in an overlapping trade

area. 

Albert City brought nine grain,

agronomy and feed facilities and 900

farmer-members to the partnership;

Cargill brought four similar facilities to

the partnership. In 1997, the two businesses agreed to a five-year partnership.

Instead of updating some of the current

dry fertilizer facilities, the two compaPerils & Pleasures 

of Partnerships

Key issue for co-ops in business

partnerships: who do you trust? 

P

Global Berry Farms is a marketing partnership that provides services to co-ops producing

blueberries, strawberries, blackberries and raspberries. Photos courtesy Global Berry Farms 
Rural Cooperatives / March/April 2005 31

nies built a new, 15,000 ton dry plant

to take the place of five smaller plants.

This saved $1 million that would have

been needed to upgrade the older and

smaller facilities.

The two partners operate

autonomously, with Ag Partners LLC

having decision-making power and

exerting influence on budget and

strategic planning. Upah cautioned

that the decision-making process for

the partnership, however, has to be

both business-centered and sensitive to

local concerns. Challenges to the partnership have included initial customer

concerns regarding either partner having a controlling influence, market

perceptions about Ag Partners operating as a truly independent organization, and supplier misconceptions

about the structure of Ag Partners

(which is often misconstrued as being

more of a Cargill entity instead of a

separate business).

These challenges were overcome,

and Ag Partners has been successful,

with improved efficiency and positive

financial results for both partners,

Upah said. Overall, “The value of an

investor-owned partnership lies in

greater access to resources — including

capital, risk management and marketing — than each owner would have on

their own in Northwest Iowa. We also

gain a very strong board of directors

with industry knowledge and solid outside perspectives,” he noted. 

Agri Grain Marketing 

Another Iowa partnership between a

co-op and Cargill that did not work

out as well is Agri Grain Marketing

(AGM). Created in 1986 by AGRI

Industries, a farmer-owned cooperative, and Cargill, AGM was formed to

provide both partners with grain marketing and other services. The partnership went well until 2002, when problems between the partners surfaced. By

2004, the partnership dissolved. 

Sue Tronchetti, a board member of

AGRI Industries, described the partnership failure as the result of a shift in

the business goals of both companies.

“Agriculture has witnessed many

changes from 1986 through the 1990s

that brought about changes in each

partner’s goals,” Tronchetti said.

The major difficulty AGRI

Industries faced in ending the AGM

partnership was the lack of a clear exit

plan. The co-op had to decide how and

when to end the partnership — which

were both contentious issues. There

were also considerable costs for ending

the partnership.

In the end, the partnership experience with Cargill was not bad enough

to prevent AGRI Industries from

searching for a new partner, even

another IOF. The co-op started the

search by first assessing what it needed

from another firm and how to create a

partnership that would allow for easier

exit than the Cargill partnership had. 

After consulting with industry leaders and its members, AGRI Industries

decided to form a partnership with

Bunge North America, the North

American operating arm of Bunge Ltd.,

a successful global grain and oilseed

company. Bunge has worked extensively

with cooperatives in the past. 

This time, the partnership agreement

included a commitment to the idea of an

evolving partnership and a detailed exit

strategy. As Tronchetti noted, “Always

trust your partner, but prepare for the

probability that the partnership may not

ultimately work out.”

How do you create successful corporate partnerships? Since cooperatives

will continue to rely on partnerships

with other firms for a variety of strategic

advantages, what should they do to

ensure success? Two successful cases discussed at the conference are summarized

below. Perhaps not surprisingly, the element of trust is a key issue in each.
Global Berry Farms 

Global Berry Farms LLC (GBF)

has an ambitious mission for a company created just four years ago: to be

the premier fresh berry supplier to

North America. John Shelford, president, described how GBF has structured its relationship with three strategic partners to ensure they achieve

their goal.

Michigan Blueberry Growers

Association (MBGA), a 400-member

marketing cooperative representing

25-30 percent of North America’s cultivated blueberries, had a marketing

contract with Hortifrut SA, dating

back to 1991. Hortifrut is a closely

held family corporation representing

30-35 percent of all berry production

in Chile (raspberries, blueberries and

blackberries) and 40 percent of

Mexico’s fresh blackberry production.

In 2002, Naturipe Berry Growers, a

California marketing cooperative

founded in 1917 that represents 8-10

percent of California’s fresh strawberry

sales, became an equal partner.

The three organizations formed a

partnership called Global Berry Farms

LLC, with MBGA, Hortifrut and

Naturipe each holding an equal, 33.3

percent interest.

GBF sales have increased from $72

million in 2001 to a forecasted $214

million in 2005. Although it does some

non-partner business, it tries to keep

partner-sourced sales around 90 percent

of its volume. The partnership can provide year-round fruit supplies to customers who are no longer satisfied with

having to source fruit from multiple,

seasonal suppliers. In addition, its fruit

volume is sufficient to mount a serious

marketing campaign.

The partnership has not been without its challenges. MBGA and Hortifrut

enjoyed a nine-year relationship;

however, neither had any prior relationship with Naturipe. Therefore, trust

and confidence had to be built in the

years following Naturipe becoming a

partner. Since fruit prices are calculated

daily, trust is essential.

Perhaps more importantly, each of

the partners had pride in, and an emotional connection to, the success of

their own operations. This pride was

difficult to put aside when they eventually agreed to adopt the Naturipe

brand. As Shelford put it, “the

Naturipe brand was almost a deal

breaker.”

How did they overcome these challenges? Two of the partners had a track

record which, Shelford acknowledged,

had a “huge impact on working

together.” Shelford had also worked 18

years at MBGA.

To build trust among the partners,

MBGA established an intensive agenda

of membership meetings and sent its

board to Chile to learn more about

Hortifrut. Board members also traveled to California to learn more about

Naturipe. Employees were integrated

into a new team at GBF, which experienced very little turnover.

Each partner has two representatives (their CEO and their board’s designated representative) on the GBF

board. All decisions must be unanimous. Shelford admits that he was

skeptical of this policy at first, but now

endorses it wholeheartedly. He feels

that creating a united front is key to

their partnership.

Expenses are allocated based on a

fixed and variable basis to ensure equitability. The partners work together to

develop their supplies.

Shelford offered this advice for successful partnerships: (1) the strategic

considerations for a partnership must

be compelling; (2) the partners must

be willing to invest an inordinate

amount of effort into relationship

building; (3) they should communicate

the partnership’s vision often; and (4)

always deliver on promises.

Dairy Marketing Services

Rick Smith, CEO of Dairylea

Cooperative Inc. and chief operating

officer of Dairy Farmers of America

(DFA) came to the dairy industry after

briefly working as a teacher and then

as a lawyer — both careers providing a

unique perspective which he believes

has served his organization well.

In 1999, after years of intense competition among dairy co-ops in the

Northeast, Dairylea and the thennewly formed Dairy Farmers of

America (DFA) — decided to pool

resources to create Dairy Marketing

Services (DMS) as a larger, more effective marketing organization for the

Northeast.

Today, DMS is a partnership among

three major co-ops (DFA, Dairylea,

and St. Albans Cooperative Creamery),

and has relationships with Land O’

Lakes, many small co-ops and 2,000

independent dairy producers. Smith

said this diversity of owners is the

strength of the operation.

32 March/April 2005 / Rural Cooperatives

Keys to successful

partnerships: (1)

strategic considerations for partnerships must be compelling; (2) partners

must be willing to

invest an inordinate

amount of effort into

relationship building; (3) communicate the partnership’s vision often;

and (4) always

deliver on promises.

continued on page 37
Rural Cooperatives / March/April 2005 33

CWT Round II removing 

nearly 1-billion pounds of milk 

Cooperatives Working Together

(CWT) — a dairy industry funded and

administered program to help better

balance milk supply and demand —

has accepted bids from 363 farms to

retire their dairy herds. These bids

represent 50,478 dairy cows, all of

which will be sold by the participating

farmers for beef. The cows being

retired produced 908 million pounds

of milk annually, or a little more than

0.5 percent of the 170 billion pounds

of U.S. milk produced in 2004. 

“Our field auditors visited each of

the 378 farms we initially accepted into

the program,” says Jerry Kozak, president and CEO of National Milk

Producers Federation, which manages

CWT. “We had excellent cooperation

from all the farmers, which allowed us

to complete our auditing process ahead

of schedule. That process screened out

a small number of bids that, it turned

out, didn’t meet our program’s criteria.” 

The average bid accepted

in the second herd retirement program was

$5.24/cwt, with no bid

accepted above $7.63. The

363 accepted bids were

selected from 736 submitted. The 908 million

pounds of milk removed is

4 percent higher than

CWT’s initial goal of 870

million pounds. In the first

herd retirement program in

the fall of 2003, CWT

accepted bids from 299

farms that retired 33,000

cows representing 608 million pounds of milk. 

“This program is a winwin for all of America’s dairy producers,” Kozak says. “Producers who

wished to retire their herds are able to

do so through a bidding process that

assures they receive fair market value

for their milk production capacity,

while those dairy farmers who remain

in business will benefit because of a

better balance between supply and

demand.” Under CWT, farmers bid to

be paid for the volume of milk that

their herds produced, and also recover

the market price for those herds when

sold for beef.

Southern States Co-op acquires

Agway’s share of Co-op Milling 

Southern States Cooperative Inc.

(SSC) is now the sole owner of

Cooperative Milling in Gettysburg,

Pa., following its acquisition of the 50-

percent interest Agway had held in the

business. The milling business produces premium horse feeds under the

Triple Crown and Legends brands, as

well as other livestock feeds. SSC plans

to expand distribution of the mill’s feed

into New York and Connecticut. 

Agway is now defunct, having

declared bankruptcy in 2002, while

SSC has been making marked progress

in restoring its operations back to fiscal

health after several years of losses.

Southern States has 300,000 members

and serves nearly 1,200 retail outlets in

19 states with agricultural inputs and

farm and home products. 

Bio-energy priority for 

USDA value-added grants 

Agriculture Secretary Mike Johanns

has announced the availability of $14.3

million in grants that will support the

development of value-added agriculture

business ventures and support

President Bush’s energy plan to develop

alternative sources of renewable energy.

“The Bush Administration is committed to working with rural farmers,

ranchers and entrepreneurs to increase

their economic opportunities, and to

create jobs that boost local economies,”

says Johanns. “These grants provide

America’s farmers and ranchers with

the investment funds needed to expand

their role in developing and marketing

value-added products.”

Priority consideration will be given

to those grant applications that have at

least 51 percent of project costs dedicated to activities for a bio-energy project. The renewable energy projects

involve biodiesel, ethanol or wind

energy production or the use of biomass to generate energy. The funds are

provided through the Value-Added

Producer Grant program, administered

by USDA Rural Development. Grants

are available to independent producers,

agricultural producer groups, farmer

or rancher cooperatives and majorityNEWSLINE

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

More than 50,400 dairy cows will be taken out of production under the second round of the Cooperatives

Working Together program. USDA photo
34 March/April 2005 / Rural Cooperatives

controlled producer-based business

ventures. They may be used to: (1)

fund planning activities needed to

establish a viable value-added marketing opportunity for an agricultural

product (e.g. conduct a feasibility

study, develop a business plan, develop

a marketing plan), or (2) acquire working capital to operate a value-added

business venture that will allow producers to better compete in domestic

and international markets. 

Awards will be made on a competitive basis. Applications must be

received no later than May 6, 2005.

For more details about application and

program requirements, visit:

http://www.rurdev.usda.gov/rbs/coops/

vadg.htm, or call (202) 690-2426.

DFA acquires Keller’s Creamery 

The producer-owners of Dairy

Farmers of America Inc. (DFA) have

acquired all of the ownership interests

in Keller’s Creamery LP, the nation’s

second largest manufacturer of butter

for retail, food service and industrial

uses. Terms of the deal were not

announced. Keller’s was formed in

May of 2000 as a joint venture

between DFA and Frank Otis and

Glenn Millar, the former management

team of Sodiaal North America

Corporation (although dairy products

have been produced under the Keller’s

brand for more than a century). With

this transaction, DFA becomes the

majority owner of the partnership in

the butter business and will oversee the

management of Keller’s warehouse and

office operations in Harleysville, Pa.,

and the butter processing plant in

Winnsboro, Texas. 

“For the past four years, our dairy

farm families have helped to supply

milk and cream that goes into Keller’s

butter churns,” says Gary Hanman,

DFA’s president and CEO. “This

transaction doesn’t really change the

operations, except it creates an even

stronger relationship between our

farmers and the butter brands. It also

provides opportunities for future efficiencies and market synergies among

our processing units.”

In 2003, the Winnsboro, Texas,

plant churned cream into more than

100 million pounds of dairy products,

including premium and bulk butter,

butter oil, non-fat dry milk powder

and other dairy ingredients. Mark

Korsmeyer, president of DFA’s

American Dairy Brands (ADB) division, will assume managerial responsibilities for Keller’s marketing, sales and

manufacturing functions. ADB is the

retail brand division of DFA’s manufacturing group, which markets processed

and natural cheese, as well as formulated, dairy-based beverages under DFA’s

regional and national product brands

including: Borden cheese, Cache

Valley cheese, Sport Shake, Sport

Shake Max and VitalCal.

Health care co-ops get 

boost in Wis., Minn. 

President George Bush in

December made official the $2.25 million earmarked for Co-op Care, the

project developed by Wisconsin

Federation of Cooperatives (WFC)

and Minnesota Association of Cooperatives (MAC) to increase access to

affordable health benefit plans. The

funds will be used for establishment

and administration of a “stop loss

fund” that will help diminish the highrisk label that insurers have attached

to many farmers and small business

owners. 

“We are very pleased Co-op Care

was among the projects funded,” said

Bill Oemichen, WFC President and

CEO. “The funds will help pay for

some of the higher-cost claims

incurred by cooperative members,

which will in turn help stabilize premium rates over a number of years, a priority of the Co-op Care project.” 

In related news, WFC and MAC

members gave their overwhelming

approval to unification of the two

organizations. The action was taken at

the joint annual meeting of the organizations held in November. 

LO’L sales top $7.7 billion;

CEO Jack Gherty to retire 

Land O’ Lakes reported $7.7 billion

in sales for 2004, up sharply from $6.3

billion in 2003. But net earnings of

$21 million were down from $82 million in 2003. The co-op returned $35

million in cash to members in 2004, up

from $24 million in 2003, boosting the

co-op’s five-year cash payout to members to $198 million.

Land O’Lakes is poised to transform itself into a farmer-owned organization that is more focused, financially stronger and positioned to deliver on the strategic and financial potential of its recent growth initiatives,

President and CEO Jack Gherty told

2,000 delegates and visitors at LOL’s

84th annual meeting in Minneapolis.

He said LOL will focus on three key

strategies in driving this transformation: building on a foundation of excellent people; accomplishing key portfolio initiatives and delivering industrycompetitive results in core businesses. 

“Organizations don’t transform people,” Gherty said. “People — the right

people — transform organizations.”

Gherty, who has led the co-op since

1989 and been on the staff for more

than 34 years, has announced that he

will retire at the end of this year. The

board is now in the process of selecting

his successor. 

Chief Financial Officer Dan

Knutson said the decline in net earnings was due to a $36.5 million charge

related to the company’s $249.5 million investment in CF Industries (its

joint venture fertilizer manufacturing

unit) and a $23.1 million non-cash

adjustment related to hedging losses.

Proceeds from litigation settlements

were also $17.4 million less in 2004

than in 2003.

“If you factor out these three items,

and their tax impact, you would see net

earnings of $66.5 million from our

base business in 2004, a $13 million
Rural Cooperatives / March/April 2005 35

increase from comparable base business performance in 2003,” said

Knutson.

Land O’Lakes also continued to

make progress in paying down debt

and strengthening the balance sheet in

2004, Knutson said. Since the company’s acquisition of Purina Mills in

2001, total balance sheet debt is down

more than $200 million. In total, the

co-op has achieved $416 million in

debt reduction over that period. He

also indicated that the expected proceeds from the recently announced sale

of the company’s swine business would

enable further debt reduction. 

The co-op saw improved earnings

in the Dairy Foods, Seed, and

Agronomy businesses, as well as strong

performance in Layers/Eggs. Although

CF Industries’ 2004 performance was

strong, domestic nitrogen manufacturers remain at a considerable competitive disadvantage in today’s global market, Gherty noted. “The doubling of

natural gas costs over the past few

years has created considerable stress on

U.S. nitrogen manufacturers,” he said.

“We are engaged with the other CF

owners to aggressively evaluate the

strategic options to improve performance and returns.”

Preserving rural heritage, culture

goal of White House/USDA effort 

Agriculture Secretary Mike Johanns

marked the second anniversary of the

Preserve America initiative by announcing that Preserve America communities

will be given priority consideration for

community facility funding projects

that support efforts to preserve and

encourage enjoyment of America’s

priceless cultural and natural heritage. 

“There are significant economic,

educational and cultural benefits that

historic preservation provides, especially to rural communities,” said

Johanns. “Sustainable preservation is

not a cost for maintaining the past, it is

an investment in the future. Rural

communities that are dedicated to historic preservation will be rewarded for

their vision for the future, as their

efforts help revitalize their local economy and sense of community pride.”

The Preserve America initiative,

announced by First Lady Laura Bush

in March 2003, is a White House

effort to encourage and support community efforts to preserve America’s

priceless cultural and natural heritage.

The goals of the initiative include: a

greater shared knowledge about the

nation’s past; strengthened regional

identities and local pride; increased

local participation in preserving the

country’s cultural and natural heritage

assets and support for the economic

vitality of communities. To date, more

than 220 communities in 37 states have

received the designation as Preserve

America communities and will be considered for priority funding under the

Rural Development Community

Facilities program.

“We want to provide incentives to

communities to look for projects that

will help rejuvenate their local

economies, as well as preserve and promote our national heritage,” said Gil

Gonzalez, USDA Acting Under

Secretary for Rural Development. The

Community Facilities Loan and Grant

program provides communities with

financial tools and facilitates essential

community facilities such as health

care clinics, police and fire stations,

schools and child care centers. The

program’s flexibility also allows funding for projects that revitalize rural

economies, such as interpretative centers, museums or restored historical

buildings. Further information on eligibility for priority funding can be

obtained by contacting any local

USDA Rural Development office or by

visiting www.rurdev.usda.gov.

Communities designated through

Preserve America receive national

recognition for their efforts. Benefits

include use of the Preserve America

logo, listing in a government Webbased directory to showcase preservation and heritage tourism efforts, and

eligibility for special existing and proposed Preserve America grants and

funding through various government

agencies. The next quarterly deadline

This farmer’s market in downtown Ritzville, Wash., was designated a Preserve America

Community in summer 2004. Located in the state’s eastern wheat belt, Ritzville (population

1,736) was settled in the late 1870s, largely by German and Russian immigrants. The turreted

building is currently partly occupied by a senior center. Photo courtesy R. Bruce Eckley

Photography.
36 March/April 2005 / Rural Cooperatives

for Preserve America Community applications is June 1, 2005. For more

information, application forms, and

procedures, visit:

www.PreserveAmerica.gov. 

CoBank pays record patronage; 

smaller board approved in vote 

CoBank’s 2004 earnings of $275

million climbed 5 percent from $261

million in 2003. The increase was driven largely by a lower provision for

credit losses — reflecting improved

credit quality — and by lower financial

assistance expenses for the Farm

Credit System. The strong showing

will allow the co-op bank to return

$160 million in patronage and stock

retirements to customer-owners for

2004. The cash distributions represent

a record 13.3-percent return on average invested capital for customer-owners. For the past five years, CoBank

customer-owners have received an

average of $121 million per year in

cash as a result of their investment in

the bank. 

Total loans and leases outstanding

to U.S. and international customers

declined slightly, to $24 billion, down

from $24.8 billion in 2003. Most of the

reduction can be attributed to changing market conditions and refocusing

portfolio strategy with core rural customers.

“For customers, patronage remains

one of the most tangible measures of

our success,” Douglas D. Sims,

CoBank CEO said. “In 2004, we continued to build on our history of consistent financial performance. Even

though loans and leases declined

slightly for 2004, capital grew, our 

risk profile improved and earnings

increased.” 

CoBank — part of the $125 billion

U.S. Farm Credit System — has

enhanced its capital plan for 2004 by

increasing the overall rate at which

patronage is calculated and by increasing the level of cash patronage paid to

stockholders. With $30.9 billion in

assets, CoBank specializes in financing

for agribusinesses and Farm Credit

associations, as well as rural communications, energy and water systems.

In other developments, 96 percent

of the bank’s stockholders recently cast

votes approving bylaw changes which

will reduce the size of the current 26-

member board to 15 to 17 members.

Existing representational districts will

be combined into three regions (East,

Central and West), each of which will

elect four directors. The board will

also include a maximum of three outside directors (who can have no customer affiliation with the bank) and

two appointed directors (who may

have a customer affiliation). Director

terms are being expanded from three

to four years.

Isom, Toelle NCFC’s

directors of the year 

The National Council of Farmer

Cooperatives (NCFC) has awarded

Howard Isom, a farmer from Chico,

Calif., and board chairman of Blue

Diamond Growers, the Farmer

Cooperative Director of the Year award

for directors with 12 or more years

tenure. Mike Toelle, a farmer from

Browns Valley, Minn., and chairman of

CHS Inc., won the award for the director with less than 12 years tenure on

the board. Isom and Toelle were saluted for leading their cooperatives to

meet the needs of farmer-members

while positioning their co-op’s to compete in a rapidly changing global marketplace.

Isom, a Blue Diamond member

since 1969 and a director for 16 years,

farms 1,200 acres of almonds, walnuts

and grapes. He is also president of

Matson and Isom, an accounting firm

in Chico. Toelle, a co-op member his

entire adult life, works a 3,200-acre

grain, hog and cattle operation with

his family near Browns Valley. “Both

Harold and Mike are dedicated to the

principles of farmer-ownership and

their leadership of their respective

boards makes them worthy recipients

of the Director of the Year award,”

says Jean-Mari Peltier, president and

CEO of NCFC. The awards were presented Jan. 23 at NCFC’s 76th annual

meeting in Carlsbad, Calif. The award

was established to recognize the outstanding achievements of farmer cooperative directors who take the lead to

help their boards make decisions vital

to their cooperative. 

FCS America board election

reflects anti-sale sentiment 

Results of a board election in

January for Omaha-based Farm Credit

Services of America give further evidence of members dissatisfaction with

a plan that would have sold the co-op

lender to Rabobank had it not been

scuttled by member opposition and the

concern of Congress. Five directors

elected to the co-op’s 17-member

board were all endorsed by Farmers

for Farm Credit, the grassroots group

that led opposition to the sale. 

Myron Edelman of Watertown,

S.D., chairman of Farmers for Farm

Credit, which opposed the sale, said

the election indicates that the cooperative’s members want to stay within the

national Farm Credit System, according to a report in the Omaha World

Herald. “A strong majority of the

stockholders seem to agree with our

position,” Edelman said.

“Sometimes we forget, particularly

in large business entities, that they still

work for the owners,” Neil Harl, an

Iowa State University professor, told

the World Herald. “Sometimes the

shareholders are goaded into taking

matters into their hands. I think this is

one of those examples.”

Incumbent board members Alan J.

Steffens and James K. Geyer were

defeated by Darrell Cain of Elwood,

Iowa, and Larry Paulsen of Coleridge,

Neb. Cain and Paulsen were nominatHoward Isom Mike Toelle
Rural Cooperatives / March/April 2005 37

ed from the floor at the co-op’s annual

meeting. Incumbents Dean Chapman

of Russell, Iowa, Gene Hammen of

Wellman, Iowa, and Lyndon Limberg

of Gary, S.D., were re-elected. 

“Payback” new CHS feed brand

Payback is the new ‘umbrella’ brand

for all animal feed formulations from

CHS, available through some 500 local

co-ops and independent dealers in nine

northern states. “With the CHS corporate name change in 2003, it was

time to establish a product brand identity for animal feeds that was separate

from the company name,” says John

Steffen, vice president for nutrition.

“Our biggest challenge is reassuring

dealers and producers that the formulas have not changed.” 

Payback products include a complete feed line for livestock, horse,

swine and poultry, as well as specialty

blends that were manufactured for

decades by Harvest States Feeds, one

of CHS’ predecessor co-ops. 

The process of establishing a new

brand name included developing a

Web-based survey sent to beef producers in six states across CHS’ core trade

territory. Overall, the single most

important attribute respondents said

they wanted from their feed company

was the commitment to help them be

more profitable. The proposed

Payback name ranked highest as

appealing, memorable and relevant.

In other news, the CHS Foundation

has announced that it will contribute

$172,840 to CARE for Asian tsunami

relief efforts. In early January, the

CHS Foundation pledged an initial

$100,000 contribution and implemented a match program for CHS Inc.

member cooperative locations and

employees of CHS and Agriliance

LLC, a CHS joint venture company. 

Michigan cattle producers unite 

to pursue market opportunities 

Frustrated with the obstacles facing

the beef industry and the challenges

posed by bovine tuberculosis, a group

of northeastern Michigan cattle producers have banded together to form

North Country Beef Producers

Cooperative. The group was formed to

explore new marketing opportunities,

increase profitability and provide educational opportunities for members.

In addition to working to strengthen their business skills, the 40 members also are educating themselves

about vaccination, animal health and

nutrition, genetics and management

practices for cow/calf producers as well

as backgrounders and feeders. As part

of this effort, they approached

Michigan State University (MSU)

Extension, the MSU Product Center

for Agriculture and Natural Resources,

and the Michigan Department of

Agriculture (MDA) to explore new

marketing opportunities to increase

profitability.

“The biggest challenge is finding

new ways to market beef,” says Dave

Glenn, Presque Isle County MSU

Extension director. “We are looking

into value-added options to increase

the profitability of beef producers in

northeast Michigan. “Glenn is an

innovation counselor with the MSU

Product Center. He is working with a

core group of seven of the cooperative’s members to create a business

The business structure of DMS

allows different groups of farmers to

participate in a single marketing unit.

“Every member can wear whatever coop’s hat they want, but they go to the

market together, as one,” Smith said.

Individual identities are maintained, but

by combining the milk supplies of independent and cooperative farms in the

national marketplace for the purposes of

creating efficiencies and the reduction of

cost on milk assembly, field services and

transportation, all dairy producers can

effectively and efficiently market milk in

the most profitable manner.

DMS also emphasizes transparency

and candor in its business operations,

which Smith considers essential for

building trust among partners. The

cooperatives have worked hard to

appeal to their consumers, most of

whom have some history of farming

and appreciate the dairy producers in

the organization.

This “team approach” to jointly

marketing milk has removed redundancy and reduced the cost on milk

assembly, transportation and field services. Together, this has generated

more revenues for sharing with all

dairy producers involved. Risk management has also improved since the

joint venture was created. Smith

remarked, that “Any one of our cooperatives could have been the best in the

market, but by working together, the

prices have been elevated and the

whole market is better off.”

DMS has been very successful, earning praise from processors, producers

and the agribusiness community as a

model that has, indeed, created efficiencies in all areas as well as high premiums

for producers. The co-ops are committed to keeping the Northeast dairy

industry competitive through cooperation, said Smith.

There are still 63 dairy cooperatives

in New York, and a fairly high percentage of farmers who do not belong

to any co-op. 

Smith believes that the key to successful partnerships is commitment.

With the same level of commitment

from all partners, he says the governance structure and other challenges

will work themselves out. ■

Perils & pleasures of partnerships continued from page 32
38 March/April 2005 / Rural Cooperatives

plan and determine the best way to

market beef using options that are feasible for the group. One option being

considered is retained ownership —

finishing the cattle rather than selling

young stock — which will result in

increased profitability.

“By feeding out our cattle, we don’t

have to worry about as many obstacles

relating to TB — this removes one

obstacle facing farmers in our area,”

says Marty Galbraith, a member of

the North Country Beef Producers

Cooperative. “One of the problems

many of the producers face is that as

individuals, they don’t have sufficient

cattle to attract buyers,” says veterinarian John Molesworth, the co-op’s

executive director. “Forming a cooperative is one way of putting together

larger groups of like kind cattle to

attract buyers.” For more information

about the co-op, contact Marty

Galbraith at (989) 826-3793. 

Georgia Co-op Center gets 

boost from USDA grant

A $266,000 grant from USDA

Rural Development to the Georgia

Center for Agribusiness and

Economic Development will give

Georgia its first statewide farm coop development center. The new

Georgia Cooperative Development

Center (GCDC) will be one of 20

such centers in the United States.

The GCDC will support fledgling

safety, our consumers know exactly

where their product comes from.”

The cooperative has taken product

accountability to a high level.

Numbers printed on the bottom of

each can may be traced back to the

farm of origin. 

“We are planning to have a Web

site so that consumers can see firsthand where their meat comes from,”

says Uthlaut. “Consumers will be able

to enter the number on the bottom of

the can into the Web site and pull up

information about the exact family and

where the animal was raised.”

Heartland Farm Food’s philosophy

is based on promising the consumer

that they are getting the highest quality

and safest product possible. Cattle used

for the product are produced under a

grower agreement that requires that all

cattle are hormone-free and must meet

a number of other quality standards. 

“We always told them [members]

not to get involved unless they could

be proud of the cattle they send,”

Blaue says. 

Cattle are needed throughout the

year. Producers typically let Uthlaut

know when they have cattle ready to

be processed, and he solicits for cattle

when it’s time to go into production. 

Cattle are slaughtered at two nearby locations, and then brought to the

Montgomery City facility to be

processed. The ground and chunked

beef products are fully cooked, creating a broth and separating the fat from

the beef. No additives, salts or preservatives are added to the product, making it 100 percent pure beef. 

In addition to helping with inhouse processing, the five employees

focus on opening up new market outlets, developing recipes and general

marketing strategies. A big target market is outdoor and recreational consumers. The shelf life and convenience

of the product make it attractive for

camping and other outdoor use. 

“We want to get our product into

some of the major outdoor shops, but

we have to make some changes before

that is possible,” says Uthlaut. “It’s definitely a high-priority market for us.” 

Heartland Farm Foods ground and

chunked beef products can currently be

found in super markets and specialty

food stores in St. Louis and throughout

east central and central Missouri. 

Expanding product line

Bill Diechman, board treasurer, says

that members have been pleased with

the progress thus far, but he adds that

this is just the beginning for Heartland

Farm Foods.

“The members have continually

expressed their support of the plans and

facilities,” says Diechman. “We keep in

touch with the members through

newsletters and annual meetings. We’re

such a small group that if a member

has a question, they’ll come talk to us

in town, or just come up to the facility

and find out what’s going on.” 

“Our members have been so patient

with us, and that has been key,” says

Blaue. 

The group is set to release six new

canned beef products this spring. The

products include beef and nacho cheese

dip, beef ‘n’ bean dip, taco beef, chili,

chili cheese dip, and new ground beef. 

“If we want to get into more markets, we’re going to have to have more

products,” says Uthlaut.

The co-op is also selling steaks to

local restaurants and markets packaged

under the Heartland Farm Foods label. 

For more information, contact Uthlaut

by e-mail: muthlaut@heartlandfarmfoods.com, phone (573) 564-1600, or

visit the Web site: www.heartlandfarmfoods.com. ■

Trading on Tradition continued from page 13

“With all of the 

concerns about food

safety, our consumers

know exactly where

their product comes

from.”

—Jim Foster
Rural Cooperatives / March/April 2005 39

co-ops and help farmers who want

to form others, says CAED coordinator John McKissick. Before the

grant, he said, there weren’t enough

resources to meet all of the needs.

The CAED is part of the University

of Georgia College of Agricultural

and Environmental Sciences.

“The grant will focus on cooperative development and providing more

services to those in agriculture who

think they have a future to develop as a

co-op,” McKissick said. It will fund

two business development specialists

and other resources. The CAED has

played a key role in successful co-ops

such as Sunbelt Goat Producers in

Washington County and Farm Fresh

Tattnall, a co-op of roadside markets

and pick-your-own farms in Tattnall

County.

The new center’s steering committee has already approved new feasibility studies, board training, market analyses, business plans or other support

for four co-ops: an ethanol production

co-op of Georgia corn growers; the

Sunbelt Organic Gold co-op of south

Georgia poultry growers who want to

make and market organic fertilizer

from chicken litter; a community food

network that would match organic

produce growers with markets in suburban Atlanta, and a co-op that would

match organic markets with grass-finished beef.

hopes to change for good. “The residents were enthusiastic from

the start,” says Warren Kramer, NCDF’s director of housing development. “They demonstrated interest in exploring the co-op model

as a way to secure the future of their housing in the park.”

Now that residents own the park, they can begin to act on their

list of repairs, something over which they had no control last year.

Florence Pirrung, 66, who lives next to her three great-grandchildren, is looking forward to the benefits of owning the park with her

neighbors.

“We need changes; we need speed bumps and the roads need to

be resurfaced,” she says. The resident board is also working on plans

to cap a well, overhaul the playground and replace the old rusty

mailboxes.

NCDF embraced the idea of helping mobile home park residents

become cooperative park owners after witnessing the success of similar programs in California and New Hampshire. “In light of the

impact that a park closing has on residents, we definitely saw the

need,” explains NCDF Executive Director Margaret Lund. “The

cooperative ownership model has many applications in rural communities, beyond its traditional uses in agriculture, and the benefits

— both financial and social — that the model brings to communities

are really compelling.”

City officials supported residents’ efforts to purchase the park.

Ultimately, the project delivers affordable homeownership to 47

households, with no public subsidy. 

Cannon Falls Mayor Glen Weibel supported the project from the

very beginning. He attended some of the organizing meetings to

voice his support to the residents.

“I think it’s fantastic,” Weibel says, designating Sunrise Villa as

the town’s “Court of Preference.” 

Manufactured home park cooperative conversions are one dimension of NCDF’s housing development agenda. NCDF is also actively pursuing the conversion of expiring Low Income Housing Tax

Credit projects and USDA Section 515 properties into residentowned cooperatives and is actively involved in the adaptive reuse of

buildings as residential homeownership cooperatives in rural areas.

Find more information on other cooperative innovations at:

www.ncdf.coop ■

Court of Preference continued from page 23

Table 1—U.S. farmer cooperatives,

comparison of 2003 and 2002

Item 2003 2002 Change

Billion $ Percent

Sales

Marketing 79.6 76.6 3.90

Farm supplies 33.9 31.5 7.54

Service 3.4 3.4 0.84

Total 116.9 111.6 4.84

Balance sheet

Assets 47.8 47.5 0.68

Liabilities 27.8 27.9 -0.29

Equity 20.0 19.6 2.04

Liabilities and net worth 47.8 47.5 0.68

Income Statement

Sales 116.9 111.6 4.84

Patronage income 0.1 0.4 -78.15

Net income before taxes 1.4 1.2 17.60

Thousand 

Employees

Full-time 163.5 166.1 -1.55

Part-time, seasonal 59.3 54.3 9.26

Total 222.8 220.4 1.11

Million

Membership 2.7 2.8 -2.02

Number 

Cooperatives 2,982 3,140 -5.03 

Farm numbers continue to decline, as do co-op

memberships and the number of farmer cooperatives. Cooperative memberships stand at 2.7 million, down about 2 percent from 2002. Many

farmers are members of more than one cooperative, hence cooperative memberships exceed U.S.

farm numbers. There are now 2,982 farmer cooperatives, down from 3,140 in 2002. ■

Farmer co-op business volume 

continued from page 11
40 March/April 2005 / Rural Cooperatives

GROWMARK forms alliance

to offer grain-risk services 

GROWMARK has formed an

alliance with Decision Commodities to

deliver and develop grain-risk management products and services. GROWMARK is a regional, federated cooperative system made up of local grain and

farm supply cooperatives across the

Midwest. Decision Commodities provides innovative forward contracts to

grain producers. The company’s market-based pricing tool, Decision

Contracts, provides farmers a means of

protecting themselves from adverse

price movements. 

According to Davis Anderson,

GROWMARK vice president/grain,

GROWMARK member cooperatives

were looking to find innovative

grain/risk management products and

services to help improve the profitability of their farmer-customers. “Decision Commodities has demonstrated

the success of its business model working with local cooperative elevators.

The partnership will accelerate the use

of the company’s contracts and provide

a foundation for competitive success

among our member cooperatives in the

area of producer risk management services,” Anderson says. 

As part of the partnership, new services and products will be developed

through shared work and resources of

GROWMARK and Decision Commodities. GROWMARK will be making an investment in Decision Commodities and will have a seat on the

board of directors. 

Soybean association joins

crop insurance co-op 

The Minnesota Soybean Growers

Association (MSGA) is joining with 17

farm associations to sponsor Growers

National Cooperative Insurance Agency

Inc. GNC provides an alternative way

for MSGA members to purchase federal

crop insurance. Through GNC, sponsoring associations will have a voice in

providing insurance tailored to the specific needs of members. “This win-win

program will lead to increased membership in MSGA and will provide an

innovative way to purchase federal crop

risk management tools,’’ said Ron

Jacobsen, MSGA president. 

Co-ops have $6-billion

impact on North Dakota

Cooperatives provide full-time

employment for more than 11,000

people in North Dakota and contribute more than $6 billion to the

state’s economy, a North Dakota State

University official says. Researcher and

professor Larry Leistritz said the study

is the most comprehensive yet of

North Dakota co-ops, according to a

report in the Bismark Tribune. It

looked at the economic activity of all

types of co-ops, taking into account

factors such as retail trade, personal

income, total business activity, employment and tax revenue. North Dakota

has 405 co-op businesses, most of

them relating to agriculture.

Iowa, Illinois get

new winery co-ops

Iowa and Illinois are not usually

thought of as wine-producing states,

but each has a growing number of

small vineyards and new cooperatives

are forming to serve the growers. Two

Rivers Grape and Wine Cooperative is

the first farmer-owned cooperative

inputs. The gain in efficiencies will

manifest itself in net margins. This is

where net margin percent will show

the other half of the picture. 

The average net margin percent for

the largest agriculture cooperatives was

up from 1.36 in 2002 to 1.68 in 2003.

Leading the increase were cotton,

fruit/vegetable, rice and sugar cooperatives. Fruit/vegetable cooperatives

enjoyed the largest jump in their average net margin percent, which

increased from 1.52 to 3.99 in 2003.

Poultry/livestock cooperatives, on

average, had the largest decline, falling

from 2.23 to .56 in 2003.

Return on assets

The return on assets (ROA) looks at

net margins before interest and taxes

are deducted. This attempts to look at

all returns for interested parties. In

2003, ROA increased from 5.62 to

5.98 for the top 100. 

Due to a major co-op reorganization, fruit/vegetable cooperatives

showed a surprising jump in their

ROA, increasing from 7.91 to 13.38.

Cotton and rice cooperatives also

had ROA of over 10 percent in 2003.

All other commodity groups had

ROA between 5 and 6 percent.

Poultry/livestock cooperatives were

an exception, with ROA falling from

4.95 percent in 2002 to 2.69 percent

in 2003.

Return on member equity (ROME)

measures returns attributed only to

equity investment. This excludes

interest and taxes from net margins.

The difference between ROA and

ROME illustrates the benefit or curse

of leverage. ROME for the top 100 

co-ops jumped from 5.28 percent, to

13.09 percent.

With the exception of dairy and

grain cooperatives, all other commodity groups shared in the higher

returns to their members in 2003.

The largest increase in ROME

occurred in the fruit/vegetable and

poultry/livestock cooperatives. In

2002, both of these commodity

groups had a negative ROME while

both had positive ROME in 2003.

Fruit/vegetable cooperatives had the

most dramatic increase, jumping from

-11.43 percent to 38.84 percent in

2003. Declining values were felt in

both the dairy and grain commodity

groups in 2003. ■

— By Dave Chesnick, 

USDA Rural Development 

Measuring top 100 co-op performance continued from page 29
Rural Cooperatives / March/April 2005 41

making wine and growing grapes in

Iowa, according to the Des Moines

Register. The new winery is one of

about a dozen planning to open soon

in Iowa. It is more evidence, say Iowa

wine boosters, that the state is undergoing a rebirth of an industry that was

all but wiped out by Prohibition and

other factors. 

“The wine industry is growing so

fast, I’m having trouble keeping up,”

White, of the Iowa State University

Extension, told the Register. “It is going

to happen in Iowa.” Iowa now has

about 30 wineries that sold about

76,000 gallons of wine in 2003. More

than half of Iowa-produced wines are

made in the Amana Colonies.

Meanwhile, a new winery co-op has

also been formed in Illinois, with 11

small vineyards as members. Shawnee

Winery Co-op is producing eight

wines for its members, whose vineyards range in size from half an acre to

eight acres. About $300,000

in state and federal grants

helped to launch the co-op.

It has a 4,000-square-foot

building that includes a

production area and a wine

tasting and retail area. 

A 2003 study of

Missouri’s wine industry

shows that the state’s 47

wineries have a significant

effect in stimulating rural

economies. 

Preliminary settlement

reached in MCP lawsuit

A preliminary settlement

has been reached in a classaction lawsuit filed against

five former executives of the

Minnesota Corn Processors

(MCP) for their role in

convincing farmers to sell

their ethanol and sweetener

business to Archer Daniels

Midland for $400 million in 2002.

That amount was only a fraction of the

true value of the business, according to

farmers of the former co-op. 

Although growers voted to approve

the sale of MCP, which had converted

into a producer-owned limited liability

company by the time of the sale, many

now feel they were misled by their

own officers, who they allege were

looking out primarily for themselves

(see July/August 2004 issue of Rural

Cooperatives, page 22, for detailed background on the MCP sale; past issues

are on-line at www.rurdev.usda.gov/

rbs/pub/openmag.htm). 

The lawsuit alleges that MCP CEO

Dan Thompson and four other officers

conspired in self-dealing to sell MCP

for personal gain. A sixth individual is

charged in the suit with alleged conspiracy and breach of financial duties.

Under the settlement, the five executives would pay $5.75 million to the

farmers.

The MCP executives’ defense was

weakened by a note that Thompson

wrote to ADM officer Marty Andreas,

in which Thompson says: “my

thoughts are that I am the only person

who could get them to accept a lower

number.” When read in context, it is

clear that Thompson meant he would

work to convince farmers to take a

lower price than the true value of

MCP, the plaintiffs say. An editorial in

the Marshall (Minn.) Independent called

The Shawnee Winery Co-op in Illinois benefited from

Rural Business Enterprise Grants from USDA Rural

Development. Photo courtesy Shawnee Winery Co-op.

purchased and leased land capable of

producing mushrooms and placed deed

restrictions on the titles to the land.

The deed restrictions barred mushroom farming on the land, usually forever.

Justice did not challenge the

Capper-Volstead status of EMMC.

Rather, the department asserted in its

complaint that the Capper-Volstead

Act does not protect members of a

cooperative who conspire to prevent

independent, non-member farms from

competing with the cooperative or its

members.

Under the terms of the consent

decree, EMMC agreed to remove all

restrictions on producing mushrooms

from the deeds and to restrain from

similar activity in the future. No fine

or other additional punishment was

levied against the association or its

producer-members. Thus, EMMC

members may continue to agree on

prices and otherwise market their

mushrooms through their cooperative.

A consent decree does not set a

judicial precedent in the same way a

court decision can. However, this

case should put marketing associations on notice that the Justice

Department may intervene when it

believes a cooperative’s actions artificially reduce the acreage and facilities

available to non-members to grow

and market the same product as the

cooperative’s members, thereby

depriving consumers of the benefits

of competition. ■

Legal Corner continued from page 24
42 March/April 2005 / Rural Cooperatives

that hand-written note a “smoking

gun” of culpability. 

“We are pleased this hard fought

litigation has come to an end,” the

class action committee says on its Web

site. “We are particularly pleased that

the facts behind this merger have been

fully debated. A trial and appeal of this

matter presented risks and costs to

both sides. The parties were well

served by a conscientious and hardworking judiciary which identified the

respective strengths and weaknesses in

the parties’ positions prior to trial.

Based upon this meaningful settlement, it now seems time for the issues

surrounding the ADM/MCP merger

to come to an end.” 

Notice of the settlement was sent

out to about 5,000 shareholders in late

February. A final hearing has been

scheduled for April 12, at which time

the court will approve or deny the settlement, according to attorney Robert

Moilanen, of Zimmerman-Reed PLLP

in Minneapolis, legal counsel for the

growers. Some farmers elected last

year to opt out of the class action, and

will not share in any disbursement

arising from the settlement. They

could, however, still pursue litigation

on their own. Otherwise, if approved,

members would share in the settlement

based on the number of shares they

owned in MCP (after attorney fees and

expenses are deducted). ■
Rural Cooperatives / March/April 2005 43

By Peter J.Thomas, Administrator

Business and Co-op Programs

USDA Rural Development 

he Value-Added Producer

Grants (VAPG) program

is a great example of the

commitment USDA

Rural Development has

made to carrying out President Bush’s

agenda for building a stronger rural

America. You can read about an

example of a project funded by this

program on page 12 and learn about

funding priorities and the next application deadline on page 33 of this

issue of Rural Cooperatives.

The VAPG program is helping to

accelerate the pace of the transformation of the nation’s agricultural

economy to one focused on producer-owned, value-added businesses.

With global competition increasing

for production of crops, many producers realize that their best bet for

success in the years ahead will be to

move higher on the value-added

chain that starts with their crops and

livestock. 

Since 2001, USDA Rural

Development has awarded $100 million

for 584 VAPG projects. Not only does

VAPG help producers generate more

profits from their operations and keep

that income turning over in rural communities, it also helps create jobs. 

For example, Value-Added Partners Inc.

(VAP) received a VAPG in 2001 for

$500,000 to help market dough and

bread products made from hard red

winter wheat. The co-op was originally

formed by a group of producers looking

for value-added processing alternatives

for their hard red winter wheat. This

variety is the region’s major crop, preferred by producers as a consistent

source of clean, high-quality wheat that

has above-average test weights and protein levels. 

In 1999, VAP began its equity drive

to purchase a site for a frozen-dough

processing plant. The producer

response was strong. VAP also obtained

a Business and Industry Guaranteed

Loan from USDA for $7.5 million,

allowing the cooperative to purchase a

site in Alva, Okla. 

The processing plant now produces

several types of dough and bread

products, including its latest addition:

a frozen cinnamon roll that can be

microwaved. The plant’s main line

produces pizza crust and can process

10,000 pounds of dough per hour.

VAP has 80 full-time employees and

recently launched its own trucking

company to handle the shipping of

its products. 

Recently, we have revised the

VAPG program so that it can be

maximized so that more people can

benefit. Because of this action, more

grants will be awarded, creating

more jobs and strengthening the

economies of more rural communities. To echo Agriculture Secretary

Mike Johanns, “the Bush Administration is committed to working

with farmers, ranchers and rural

entrepreneurs to increase their economic opportunities and to create

jobs that boost local economies.

These grants provide America’s

farmers and ranchers with the

investment funds needed to expand

their role in developing and marketing value-added products.”

Rural Development is committed to

providing determined leadership to

increase economic opportunities and

improve the quality of life for citizens

living in America’s rural communities.

With 47 state offices and 800 field

offices, we look forward to working

with you to bring opportunities to you

and your communities. ■

VAPG program creates rural

jobs, boosts local economies

INSIDE RURAL DEVELOPMENT

USDA Rural Development’s Peter Thomas (far right)

delivers a check with financial assistance to a new

turkey producers’ cooperative in Hinton, Va. (see

page 14). 

T
44 March/April 2005 / Rural Cooperatives

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