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Links in the food chain

It's been a rough year for some of the nation's largest farm cooperatives. In 2002, Farmland Industries and Agway Inc. both filed for bankruptcy, affecting more than half a million farmer-owners.

Several smaller, new-generation value-added ag co-ops have experienced failures, too. This past summer, Spring Wheat Bakers shut down its frozen dough and par-baked bread plant in Georgia after three years of production. “We underestimated the time and money it would take to get the plant running efficiently, and we overestimated the debt capital we could get,” says Mike Warner, chairman. In 1997, 2,800 wheat farmer-members invested $23 million in this value-added venture. Now they're waiting to see how much they can sell the bakery and its assets for. Warner is hopeful. “It's the right plant with the right products for the right market,” he says. “With the market expanding 10 to 14% a year, we believe the facility will be of value to someone.”

The Prairie Farmers Cooperative built a pork processing plant in Dawson, MN, which operated less than a year before the 82 pork producer-owners of the plant decided to shut it down last November. They hope to resume operations sometime this year.

Some ventures have sought partners to stay viable. In its first four years of existence, Golden Growers Cooperative suffered losses of more than $19 million from its 49% stake in a new corn wet-milling plant. The ProGold plant was operational in the third and fourth year and lost more than $39 million. Golden Growers opted to lease the ProGold plant to Cargill for 10 years, until 2008, allowing ProGold to retain ownership and stop losing money.

Other established ventures have opted to cash out. After 22 years in the ethanol and fructose markets, Minnesota Corn Processors and its 5,000 members decided to sell its business to ADM for $2.90 a unit share. Some of the early farmer-investors turned a nice profit, others broke even, but about 1,800 members who invested when the stock was $4.50/share came up losers.

Farmers still investing

Despite news like this, farmers throughout the country are still seeking ways to cooperatively add value to the products they produce. Through its Value-Added Agriculture Product Market Development Grant program, USDA awarded more than $37 million in matching grants to 231 value-added ag projects throughout the U.S. in 2002. Some of the money was used for feasibility studies, and some was used for working capital.

Why are farmers still investing? Some recognize that there have been successes as well as failures. They note that Dakota Growers Pasta, U.S. Premium Beef, Golden Oval Eggs and Crystal Sugar have paid off handsomely for shareholders. Others say little or no profits still look better than the losses they've taken recently in the stock market. Many don't see any other choice given farmers' collective economic situation.

“The long-term picture for agriculture demands that farmers figure out how to move up the marketing chain,” contends Zach Fore, University of Minnesota Extension educator and director of FarmConnect, an alliance of 750 farmers primarily in Minnesota, Iowa and the Dakotas. He cites the growing disparity between the farm value and the retail value of what farmers produce. “The retail value has increased steeply over the past 20 years, while the farm value hasn't even kept up with inflation,” Fore says. “Somebody is adding significant value to the products farmers produce. Why shouldn't it be farmers?”

New ventures

SoyLink of Oskaloosa, IA, is one of FarmConnect's efforts to move up the value chain. SoyLink produces a fine soy powder for the food and beverage industry. About 200 FarmConnect members raised $5.8 million to purchase 55% of SoyLink. FarmConnect thought it was a good investment for several reasons. “The soy market is rapidly growing, it's a worldwide market, and we had the opportunity to buy an existing plant with state-of-the-art processing capabilities and proprietary technology,” explains Brent Sorensen CEO of FarmConnect. SoyLink received a $500,000 Value-Added Agriculture Product Market Development Grant for working capital in 2002. The company began production in July and has made some initial sales in the U.S. and Asia. However, it projects that it won't be profitable for 18 months.

The Producers Alliance in Bloomington, IL, is another effort by farmers to move up the value chain. It was formed in 1999 with about 350 farmer-members to investigate value-added opportunities. Since then, Producers Alliance members have invested in an ethanol plant in Lakota, IA, and a soybean processing plant in Brewster, MN. Members are participating in an equity drive for another ethanol plant in Illinois. “I used to think it was good enough to build a plant and make some flour,” says board member Stan Blunier. “But now I realize that's not good enough. You're still on the bottom rungs of the value-added ladder. We need to try to take it from the field all the way to the store shelf.”

That takes money. Lots of money. That's why the Producers Alliance recently joined with 21st Century Alliance of Kansas and 21st Century Alliance of Michigan to become 21st Century Producers. “We found we each were struggling to get enough members to pay for the things we were trying to do. And many of us were already working on projects with neighboring states, so why not join forces?” Blunier says. Members of 21st Century Producers held their first annual meeting on February 21 in Kansas City and hope other groups will join their multistate effort.

Good opportunities

Although investing in value-added ventures has been a mixed bag for many farmers, Mike Warner, chairman of Spring Wheat Bakers, believes it's worth the risk. He has invested in five different value-added ventures over his 33-year farming career. “Of those five, I have had two winners, one loser, one disappointment, and one unknown. The successful ones, American Crystal and Dakota Grower Pasta, have been very successful. The returns I get from my sugar beet and pasta investments dwarf my losses and disappointment in the others,” he says.

Additionally, he contends that his ProGold investment is a winner despite the fact it hasn't returned much in the way of company profits. “Having the ProGold wet-milling plant operating in the area increases the value of our corn crop, and that provides me with a much greater return than if the company earned a 15% return,” he contends. Warner says the plant has increased the corn basis by $0.20/bu. and that a grower with 450 acres of corn yielding 125 bu./acre would gain $11,250 annually from the increased basis. By comparison, a 15% return on a $12,000 investment is only $1,800.

Tim Dufault, a FarmConnect member from Crookston, MN, says he won't be deterred from investing in good opportunities. “There have been some casualties, but we can't run away. Every field doesn't have a bumper crop, but that doesn't stop us from planting crops,” he says. “My approach is to invest a minimum amount in several of these ventures and to look critically at each project. Has the group done its due diligence? Does the project make economic sense? Is the plant being built in a strategic location or in a board member's backyard?”

Keys to success

Many issues will affect the profitability of a value-added agribusiness, but these six actions are key to success.

  1. Hire competent consultants. The project developers must take care to hire competent advisors and to understand how compensation relates to project advice.

  2. Understand the business plan from the outset. The project developers should have a good understanding of the business plan from the beginning to assess new information as it is developed throughout the project. An excellent business plan, including the proper assessment of construction or acquisition costs, the costs of operation, and the availability and pricing of markets, is essential.

  3. Develop the appropriate structure for the business; don't pull the business plan through the preselected business structure. Many projects start by saying they are a cooperative or LLC. It is important to develop and understand the business plan, determine whether the project will be based on an income or growth business model, and assess who will provide the equity investment, before developing a business structure.

  4. Assess the project risks at the beginning of the project. The project risks that will be disclosed to investors should be assessed and understood at the beginning of the project.

  5. Understand the project restrictions to be required by the financing structure. Different types of financing will place different restrictions on project structure and distributions. An early assessment of debt-to-equity ratios and the amount of producer and/or investor equity will assist in the development of the project.

  6. Determine the employment and compensation structure for the CEO. Understanding the compensation goals will be an important factor in attracting and retaining a top-quality CEO.

Taken from presentations by Mark J. Hanson, Lindquist & Vennum

Cooperatives look at LLC structure

Increasingly, new-generation value-added co-ops are restructuring to become limited liability companies (LLCs) so they can seek outside capital. Dakota Growers Pasta and Minnesota Corn Processors are examples of co-ops that restructured to LLCs or corporations. Other new ventures such as SoyLink have started out as LLCs.

“Successful new-generation co-ops can quickly run into roadblocks that force them to convert to a limited liability company or other corporate structure,” says Mark Hanson, an attorney with Lindquist & Vennum who works with agribusinesses and cooperatives. “Basically, they need more capital than farmer-members can provide. The LLC structure allows investors other than farmers to buy stock in the company, and it provides more liquidity for shareholders who want to sell their stock.”

Mike Warner, chairman of Spring Wheat Bakers and a shareholder in Dakota Growers Pasta, puts it this way: “When you're all grown up and not just the little engine that could, you're going nose to nose with the big dogs and you have to grow.”

Hanson notes that the cooperative business structure has not changed much in more than 70 years but the roles and services provided by farm co-ops have changed significantly. In particular, there's been significant growth in value-added cooperatives that process ag commodities and market them in new ways. “These cooperatives could change further — and more profitably — if they were allowed access to outside capital,” Hanson contends. “Some of the short-term benefits to farmers of a cooperative business structure must be weighed against the long-term needs of the business and its members.”

Hanson notes that the Minnesota and Wisconsin legislatures will be considering a new statute that allows a cooperative to have outside investment and is more similar to an LLC. “We need a cooperative model that fits today's ventures,” he states.

He says that the traditional co-op structure doesn't provide retiring farmers with an easy means to sell their stock. “Liquidity of equity is a big issue,” he says. “We're losing producers each day. If you have 100 farmers that you could sell your shares to today, in 10 years there might only be 10 to whom you could sell your shares. A business structure that combines patron and outside investors allows more liquidity and gives retired farmers the opportunity to participate on the investor side.”

In recent years, Hanson has seen more value-added ventures go the LLC route. He's quick to caution that no business structure can cure $8 hogs or a business plan that's not properly prepared and executed.

Hanson's outlook for value-added ventures is positive. “Over the last eight years we've helped form 60 value-added ventures, and only a handful of them have not gone forward,” he says. “The success rate of these ventures is much higher than that of other new businesses, of which only 25% succeed.”

He credits farmers' problem-solving skills in part for their success. “Farmers are used to solving problems,” Hanson says. “It's hard to match their enthusiasm, drive and problem-solving abilities. There's not a better group of people to work with on a project.”

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