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The co-op shuffle

How ag co-op realignments and huge growth will affect your buying.

Farmland's feed alliance with Land O' Lakes is a classic example of cooperative giganticizing. The agreement, signed at the beginning of September, is a full-fledged joint venture that combines the operation of approximately 70 production facilities as well as the sales forces of the two cooperatives. If that seems big, consider the larger trend of the last 10 years. As the number of farmers, nationwide, shrinks each year, farmer-owned agricultural cooperatives are merging, creating joint ventures and sometimes shutting down branches to economize. The result? Cooperatives are becoming more efficient, but your local co-op may be an hour's drive away.

Winners take all. A look at current co-op rankings shows that the remaining agricultural cooperatives consist of a handful of big regional organizations. According to the National Cooperative Bank "Co-op 100," an annual list of the nation's top 100 cooperatives based on sales, this year's top four were agricultural co-ops: Farmland Industries, Dairy Farmers of America, Cenex Harvest States and Land O'Lakes.

And where the mergers end, a melange of unifications and alliances begin, taking "cooperation" between organizations to yet another level. The Cenex Harvest States - Farmland "unification" of 1999 is the most evident example. Despite an overwhelming merger approval vote from Farmland members, the Cenex Harvest States membership vote turned up 2% shy of the two-thirds vote necessary to ratify a full-fledged merger. Questions about the financial standings of Farmland, as well as about proposed retirement packages for outgoing leaders at the regional level, raised enough concerns to sway the merger vote to "no." But, technically, a "unification" is not a merger, so the vote didn't stop the two organizations from partnering in an agronomy joint venture called Agriliance.

Who's who? Farmers look at these business dealings with a healthy dose of skepticism. Even if a co-op merger is proposed in the best interest of farmer members, the sheer size, volume and complexity of alliances can make the whole thing look like a giant shell game.

Tom Henry, a Westhope, ND, farmer and board member for Newberg Oil Cooperative, a Cenex-affiliate, says his biggest complaint about mergers is the confusion it can cause for customers. There's a slew of new names on the agribusiness scene - Country Energy, Agriliance and The VantagePoint Network - just to name a few. "The cooperatives and their products are changing so much it's tough to know who you're supposed to be dealing with and what you're actually getting from them," Henry observes.

Continuing to cultivate the trust and confidence of farmer members has been a challenge for regional cooperatives throughout the merger mania. And that could prove to be an Achilles heel, says Robert Cropp, director of the University of Wisconsin Center for Cooperatives. He says, in an effort to make some of these tough business decisions, regional cooperatives may appear to be moving too fast. "There may not always be the amount of member education necessary to instill confidence," Cropp notes. "The regional cooperatives can't forget what they're there for. They need to stay member-focused, and that becomes a real challenge the bigger they get."

Big savings. In the last four years alone, Midwest farmers have already seen several major mergers and more than a dozen joint ventures and partnering arrangements. Experts such as Mike Cook, agricultural economist at the University of Missouri, predict that more mergers and joint ventures will take place among these giants. He says the biggest factor driving today's co-op mergers is the quest for greater economies of scale. And, in theory, that should be good for farmer-owners. "Farmer-owners should benefit from those efficiencies, as well as the increased pressure on non-co-op supply businesses to be more competitive," Cook says.

In the recent agronomy and seed company joint ventures between Land O'Lakes, Cenex Harvest States and Farmland Industries, one of the biggest savings was in number of personnel. The organizations had similar field forces in many of the same states, notes Gregg Parvin, regional vice president of Farmland Industries. "Through the Agriliance joint venture, we were able to recognize significant savings by eliminating duplication in personnel," he explains.

There is also a significant savings in transportation costs on such major bulk commodities as fertilizers and fuels, adds Drue Sander, Farmland's vice president of administration. Referring to the "fuels" alliance Farmland formed with Cenex Harvest States just over two years ago, called Country Energy, he says combining marketing and distribution of petroleum products saved the two organizations a combined $9 million in the first full year.

Service call. Another reason that cooperatives are merging is to provide more sophisticated services. "Take the movement toward precision farming and GPS," Cropp says. "Not only does that kind of service require high-buck investments in equipment on the part of the local co-ops, but it also requires them to provide a high degree of technical expertise. And training and retaining those kinds of employees is an expensive and sometimes difficult proposition these days."

Reduced competition. With fewer cooperatives fighting for your input dollars, is pricing less competitive in certain areas? Some farmers, including Henry, fear so. He says co-ops in his area are feeling pressure to close less profitable local branches. "That's sure to cut down on competition. And it will be less convenient when it gets to the point where we've got 60 miles between co-ops."

But reduced competition doesn't necessarily mean higher prices, argues Tom Larson, with Cenex Harvest States member services. "Not only are co-ops becoming more efficient, we now also have price discovery [transparency] because the Internet keeps farmers informed about what prices should be, so they can easily see that prices are competitive."

Price is still one of the biggest considerations in buying inputs, and the remaining co-op systems should be able to deliver on that, Cook says. "If a farmer sees himself as a businessman, he will become part of the supply chain," he says.

"Whether you like it or not, agriculture is becoming increasingly more industrialized and systematized. And in the future, there will be fewer options on both the supply and marketing sides. Farmers will have to choose which chain or network they will identify with."

Cook says producers are already being encouraged to become part of a team and align themselves with one chain or another. He states, "They may have to give up some independence when they do that, but the gains should be there, too."

1997 Growmark and five other regional cooperatives for Pro-Pet, LLC, Growmark, Deere & Company, and Farmland jointly form The VantagePoint Network system.

Growmark and Countrymark Co-op consolidate operations of agronomy, energy and livestock businesses.

1998 Cenex Harvest States and United Grain Corporation form United Harvest, LLC, in joint venture.

Land O'Lakes and Growmark form joint ventures in feed and petroleum.

SF Services, Little Rock, AK, merges with Farmland Industries.

Cenex and Harvest States merge.

Land O'Lakes acquires major assets of Countrymark Co-op, Indianapolis, IN.

Land O'Lakes merges with Atlantic Dairy Cooperative, Carlisle, PA.

Land O'Lakes and Harvest States form joint venture in feeds in six states.

1999 Cenex Harvest States and Farmland form agronomy joint venture called Agriliance.

Cenex Harvest States forms Energy Alliance with EnPower electric co-ops.

2000 Land O'Lakes and Farmland finalize feed joint venture.

Cenex Harvest States buys Sparta Foods.

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