Rural CoopJan 06 PostPrint - USDA Rural Development · 2019. 11. 20. · 6 January/February 2006 / Rural Cooperatives department of agriculture came through with that grant, and Schlegel

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Wine co-op takes rootWine co-op takes rootpage 9

USDA / Rural Development January/February 2006

Rural Cooperatives / January/February 2006 3

Rural COOPERATIVES (1088-8845) is publishedbimonthly by Rural Business–Cooperative Service,U.S. Department of Agriculture, 1400 IndependenceAve. SW, Stop 0705, Washington, DC. 20250-0705.The Secretary of Agriculture has determined thatpublication of this periodical is necessary in thetransaction of public business required by law of the Department. Periodicals postage paid atWashington, DC. and additional mailing offices.Copies may be obtained from the Superintendent ofDocuments, Government Printing Office, Washington,DC, 20402, at $23 per year. Postmaster: send addresschange to: Rural Cooperatives, USDA/RBS, Stop3255, Wash., DC 20250-3255.

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Mike Johanns, Secretary of Agriculture

Thomas C. Dorr, Under Secretary,USDA Rural Development,

Jack Gleason, Acting Administrator, Rural Business-Cooperative Programs

Roberta D. Purcell, Deputy Administrator,USDA Rural Business-Cooperative Programs

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?Call (202) 720-6483, orFax (202) 720-4641, Information Director,This publication was printed with vegetable oil-based ink.

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COOPERATIVESCOOPERATIVESJanuary/February 2006 Volume 73 Number 1

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F E A T U R E S

4 Making the GradeOff-grade potatoes have a home, thanks to Keystone plant By Dan Campbell

9 Fruits of Their LaborCo-op winegrowing takes root in North CarolinaBy Bruce Pleasant

14 Voice of experience: co-ops are resilientBy Scott Yates

16 Trade, Farm Bill challenges eyed at dairy conferenceBy Dan Campbell

20 Foreign AffairsCo-op leaders share strategies for pursuing global marketsBy Stephen Thompson

25 Largest 100 ag co-ops post strong margins in ‘04By David Chesnick

32 An Art & ScienceRevised co-op curriculum gets test drive in MadisonBy Jane Livingston

D E P A R T M E N T S

24 LEGAL CORNER 30 VALUE-ADDED CORNER35 MANAGEMENT TIP37 NEWSLINE47 INSIDE RURAL DEVELOPMENT

O n t h e C o v e r :

A vine laden with Chardonnay grapes awaits harvest. See page9 for a look at how wine grape growing is making a comeback inNorth Carolina. Photo contributed by Rodney Lough, a prize-win-ning photographer who specializes in outdoor photography. See more of his work at: www.theloughroad.com.

By Dan Campbell, Editor

tanding in a steady drizzle under asteel-gray October sky, CorySchlegel and several other men arepeering at the gauges on a control

panel, trying to find the kink that has inter-rupted the flow of gas under the road to thenew Keystone Potato Products plant. The hud-dle takes place on a giant landfill, the final rest-ing place for trash from all over the Northeast.Decomposing garbage is the sourcefor the methane gas that

provides fuel for the steam Keystone needs toprocess fresh spuds into 40-pound bags ofdehydrated potato flakes.

The culprit for the power interruption ulti-mately proves to be a defective switch that shutdown one of the blowers that drive methanegas into and through the underground pipelinethat leads to the plant, located near the town ofHegins in the Appalachian Mountains of east-ern Pennsylvania.

4 January/February 2006 / Rural Cooperatives

Making the Grade Off-grade potatoes now have a homethanks to Keystone dehydrator plant

S

When the methane gas system shutsdown, the plant’s back-up propaneburners kick on, so the potatoes keeprolling. “But we hate to have to use thepropane because of the higher cost,”explains Schlegel, the plant’s generalmanager. Indeed, it was the availabilityand economics of a low-cost, waste-to-energy power source that was thelynchpin for getting this $12 millionproject built.

There’s a lot riding on the outcomeof the effort. This plant could play amajor role in determining whetherPennsylvania’s fresh-market potatoindustry stabilizes and grows orcontinues to contract. TheKeystone plant — the only one ofits kind east of the MississippiRiver and outside Maine — wasbuilt so that growers here couldstop dumping their off-gradepotatoes or giving them away forcattle feed.

“For our industry to be viablein fresh markets, we need to havea market for our off-grade pota-toes as well,” says Keith Masser,president of PennsylvaniaCooperative Potato Growers Inc.,one of the nation’s oldest co-ops,and the largest of 42 stockholdersin the LLC that was formed tobuild and operate the plant.Masser is also president of theKeystone board and runs his fami-ly potato farm and a large packinghouse (Sterman-Masser) in nearbySacramento, Pa. Masser is the sec-ond biggest stockholder in theLLC.

In the early 1950s, about 100,000acres of potatoes were planted inPennsylvania. “Today we grow less than12,000 acres,” says Masser, whose fami-ly grows about 600 acres of spuds. “Ourdecline has gone out West.”

Competing with the NWProducers in the Pacific Northwest

dominate America’s potato industry, andgrowers there have long had the advan-tage of access to processing plantswhere they can sell their off-grade pota-toes. This has given them a consider-

able marketing advantage, Masser says.He’s long been convinced of the needfor a plant like Keystone in the East —ever since returning to the family farm-ing operation in the late 1970s afterseveral years working in the paperindustry for Proctor & Gamble.

Buyers in the East typically have topay about 12 cents per pound more forfresh potatoes than do their counter-parts in the West, he notes. To offsetthat differential, a cheap source of ener-gy was needed for a processing plant.Attention was first focused on one of

the half dozen or so small co-generationpower plants located in the region thatburn waste coal to produce electricity.

“The coal industry wasn’t as efficientin the past, so a lot of good coal wentout with the rock deposited in wastepiles that built up over the past century.There’s still a lot of energy in it,”Masser explains. These co-generationplants use steam turbines to generateelectricity, but just blow off the excesssteam as a useless byproduct.

The original idea was to build theplant next to one of these co-generationplants and use that waste steam for run-

ning the driers, peelers and blanchers.“We pursued that idea aggressively, butthe logistics just didn’t work out.”

Part of the problem was that tomaintain the steam pressure required,the potato processing plant would havehad to be located virtually next door tothe co-generation plant — not exactlyan appetizing prospect for a food facto-ry. Further, there was concern abouthow long the coal supply at any one ofthese plants would last.

With methane gas, the supply willlast as long as the landfill is in opera-

tion, and probably even longafterwards. So, the co-op found 83acres of land adjacent to a landfillwhere a methane-collection sys-tem was already in place, but thegas was just being flared off. Acontract was negotiated with theCES (Commonwealth Environ-mental Systems), the private com-pany that operates the landfill, andthe county agreed to sell the adja-cent land. Project backers thenwent to work to form the LLCand line up financing.

Stimulating a stagnant economy Local government agencies and

the state have backed the Keystoneproject both as a way of shoring-up the state’s potato industry andto create industrial jobs in a regionwhere the coal industry has longbeen fading and the garmentindustry has almost entirelymigrated overseas.

But it took several unsuccessfulattempts before a strong enough appli-cation and business plan were devel-oped to win a Value-Added ProducerGrant (VAPG) from USDA RuralDevelopment. The VAPG grant wasconsidered essential to making the proj-ect fly.

“The second time we failed to getthe USDA grant, our then-state agri-culture secretary asked me what kind ofhelp the state could supply to make ithappen,” Masser recalls. “I told him weneeded about $50,000 to hire someonewho could work for a year to develop areally strong application.” The state


Potatoes are steamed during the dehydration process atthe new Keystone Potato plant near Hegins, Pa., whichuses power from methane gas piped in from a nearbylandfill. USDA photo by Dan Campbell; Facing page: photo cour-tesy U.S. Potato Board


department of agriculture came throughwith that grant, and Schlegel — a man-ufacturing-process engineer and ahome-town boy — was hired away fromAlcoa Aluminum to go to work on theapplication package.

In 2001, the revised application —predicated on the use of methane gas topower the plant — was approved byUSDA, and Keystone was awarded a$450,000 VAPG. As a matching grant,Keystone members had to put up a likeamount of equity. The money was usedfor everything from attorney fees toincorporate the business to start-upcapital. Another huge boostcame in the form of a $1 mil-lion grant from Pennsylvaniafor an on-site wastewatertreatment plant (the grant wasactually awarded to an inter-mediary, which in turn isleasing the treatment plant toKeystone). A well was drilledfor an on-site water supply.

The state also kicked inwith $1.75 million in low-interest loans for machinery,land and the building. Key-stone borrowed $5 millionfrom a local bank, with the restof the money coming frommember equity investment.

Higher-value products eyedSchlegel says he hopes to produce 8

to 10 million pounds of dehydratedpotato flakes this year, and to doublethat amount within the next couple ofyears. Most of the plant’s initial salesare being made to buyers who repack-age Keystone’s product into smallerpackages and sell it under various pri-vate labels.

The extremely depressed potatoprices in recent years (although 2005saw some improvements) resulted in bigcarryover inventories of dehydratedpotatoes, which has put a damper onflake prices.

Keystone is targeting the food-ingre-dients industry, where dehydrated pota-toes can be used for just about anything,from breads and rolls to ice cream. Theultimate goal is to expand production

into higher-profit-margin foods, such asfresh-cut French fries. Masser says itdoesn’t take an economic genius to seewhy: it takes six pounds of raw potatoesto make one pound of dehydrated flakesthat sell for 40 cents a pound, whereasone pound of fresh potatoes can nearlyyield one pound of French fries that sellfor 50 cents a pound.

Keystone is working with theNational Agri-Marketing Association atPenn State University to identify themost promising value-added productsto pursue. About 10,000 square feet inthe plant has been allocated for produc-

ing such products.The plant’s business plan calls for

pulling raw product from a 600-mileradius, although sky-high fuel andtrucking costs have currently shrunkthat radius, says Schlegel. The rise infuel prices actually costs Keystone’scompetitors in the West far more. “Afuel increase that costs us an extra 1-2cents per pound will cost them 7-8cents per pound,” Schlegel says.

In addition to off-grade fresh-marketpotatoes (usually kept off the fresh mar-ket due to small size or superficial blem-ishes), another source of raw supply isPennsylvania’s large potato chip indus-try. The state is home to about a dozenmajor and minor chip fryers, and thoseplants frequently reject loads that arrivewith a flesh color that will not fry to the

food-maker’s specifications. As with theother off-grade potatoes, these are per-fectly good spuds, just not quite whatthe potato chip makers require. ButSchlegel says they work fine for him.

Shake-down cruiseLike most new plant start-ups, there

have been a number of bumps in theroad and a learning curve to masterduring the plant’s start-up cruise,Schlegel says. The plant began operat-ing in mid-May, but it took most of thesummer to prefect the process to pro-duce a superior product.

“This is a unique opera-tion for this part of thecountry,” Schlegel says. “Wecouldn’t just run around thecorner for answers everytime we ran into a problem.”The equipment supplier,Idaho Steel Products, hasbeen a big help, as has beenthe ability to consult withothers who had experiencein potato processing, saysSchlegel.

“I thought the learningcurve would be shorter thanit was,” Masser says. “Butby mid-September, we hadpretty well learned how todehydrate our type of pota-toes. Out West, they are

doing mostly Russet Burbanks, withhigh solids content.” But that’s not avariety Keystone handles very often.“We struggled with the process afterthe blanching and cooling. But we keptat it, and developed a formula thatreconstitutes and tastes better than theproduct of our competitors.”

“It’s not as simple as cooking a potato,peeling it and drying it,” Schlegel adds.“There are many little things to watch toget the right time, temperature and con-sistency. But we’ve made huge progress.”

The landfill-gas component has beenthe most complex and challenging partof the start-up project, Schlegel says.“It’s a custom, hybrid system — not offthe shelf. Everything had to be designedand engineered from scratch. So we’vehad bugs to work out.”

Eye to eye: Cory Schlegel samples a delivery of new spuds. Perfectlygood, but off-grade, potatoes that were once used for livestock feedin eastern Pennsylvania can now be processed into value-addedfoods. USDA photos by Dan Campbell

Coal mining (such as this operation near Hegins) and tex-tiles once dominated the region’s economy, but have beenon a decline, making it crucial to preserve the area’s agri-cultural base, co-op members say. Inset (above): a countrychurch is neighbor to the Sterman-Masser potato packingplant. Inset (below): the main street in Hegins.

For the first year, the plant is operat-ing every other week, running 24 hoursa day with two 12-hour shifts. Thatmeans that the work is half-time for the20 hourly workers (there are also fivefull-time managers). That has made itdifficult to retain workers.

A major warehouse distribution cen-ter has been developed about 10 milesnorth of the plant, which is proving tobe a major source of competition for

hourly workers. When the plant con-verts to a full-time schedule, it shouldgreatly help with the labor issues,Schlegel notes.

He works closely with the co-op toorder supplies needed to keep theplant running at optimum level. Tohelp the plant succeed, co-op membershave been willing to sell product to theplant for less than they can get else-where.

High fuel/shipping costs is a majorreason for a regional supply close to themajor markets of the Northeast, Massersays. He notes that it costs about $9.50per hundredweight to ship potatoesfrom the Northwest to the East Coast.“But we can grow them here for $8 perhundredweight — less than the cost ofthe freight. It wouldn’t make sense to lose production here.” ■


The potato may be America’s favorite vegetable, but ithas had to scrap a bit more in recent years to maintain thatstatus, due in part to the popularity of the Atkins and SouthBeach diets, which make scant use of the tuber.

Keith Masser, president of the Pennsylvania Coopera-tive Potato Growers, says he believes the impact ofthose diet crazes on the market has already large-ly passed. But he sees a much bigger challengefor the industry in the ever-increasing trendtoward consumption of convenience foodsthat can be prepared in a hurry — never thestrong point of the potato, although consider-able product development is taking place toaddress that demand.

Helping the industry spread messagesabout the nutrition of the potato is the UnitedStates Potato Board (USPB), established in 1971by a group of potato growers to promote the ben-efits of eating potatoes. Today, this cooperativeindustry effort represents 6,000 potato growers andhandlers across the nation. Recognized as an innovator inthe produce marketing industry, the Denver-based USPBwas one of the first commodity groups to promote its prod-uct generically and to develop a nutrition label approved bythe USDA and FDA.

USPB is funded through a small assessment on growerproduction, which generates around $9 million annually.

USPB recently acquired the services of a celebrityspokesman — or spokespud — who is playing an important

role in helping to educate children about potatoes: Mr.Potato Head. Yes, the venerable, ever-flexible, face-chang-ing toy that has entertained children for more than half acentury is helping kids learn that potatoes are an important

part of a healthy, balanced diet. Through nutritional education programs suchas this, consumer public relations and retail

programs, foodservice marketing and exportprograms, USPB strives to educate con-sumers, retailers and culinary profession-als about the convenience, good nutritionand versatility of potatoes.

“The potato is a nutritional power-house, loaded with fiber and essentialvitamins and minerals,” says USPB Chair-

man Ray Meiggs of Camden, N.C. He notesthat a 5.3 ounce potato is a great source of

vitamin C; is an excellent source of potassiumwhen eaten with the skin; contains only 100

calories; has less than 10 percent of the daily valueof carbohydrates and is a good source of fiber when eatenwith the skin.

As evidence that the industry’s Healthy Potato Campaignis having an impact, USPB cites a recent survey showingthat 4 percent more consumers in 2005 agreed that “pota-toes are a good food for the health of consumers” than in2004. There was a like increase from 2004 to 2005 in thenumber of consumers who reported serving potatoes athome the previous week. ■

USPB promotion effort enlists celebrity spokespud

By Bruce Pleasant Business Programs SpecialistUSDA Rural Development/NorthCarolina

efore Prohibition in the1920s, North Carolinawas the nation’s leadingwine-producing state,with Muscadine and

Scuppernong wines dominating itsindustry. But that all changed withProhibition, which lasted longer in theSouth than in most other parts of thenation. Combined with low prices fortable grapes, most vines were ripped outor left to die, says Margo Knight, exec-utive director of the North CarolinaWine and Grape Council.

While California’s wine crown is inno danger of being lost, winegrowing issteadily making a comeback in NorthCarolina, which currently ranks 12thamong the states for wine production.Interest in wine grapes has been fueledin part by declines in the state’s textile,tobacco and furniture industries, whichonce dominated the region’s economy.

Data compiled in 2003 indicates that1,000 jobs and $84 million are directlyrelated to wine production in NorthCarolina. While the ultimate economicimpact wine has on the state’s economyhas not been determined, Knightbelieves that it is significantly higherthan the $84 million estimate. A newstudy has been commissioned to meas-ure the economic impact with certainty,which should be completed this April.

OldNorthStateWinegrowersCooperativeAssociation(ONSW) in Mt. Airy,N.C., was incorporated in 2001, and iscurrently the only co-op among thestate’s 52 wineries. When ONSW start-ed, there were only 22 wineries, whichprovides some idea of the burgeoningwine industry in North Carolina.

Cooperative members have pooledresources to take advantage ofeconomies of scale and marketingopportunities not available to smallindependent growers. ONSW hasmembers from nine counties, so the

Fru i ts o f The i r LaborCo-op winegrowing takes root in North Carolina

B


Wine ages in the barrel room ofthe Old North State WinegrowersCooperative Association (ONSW)in Mt. Airy, N.C. Wine productionis steadily making a comeback inthe state, contributing $84 millionto its economy in 2003. USDAphoto by Bruce Pleasant; grape photocourtesy Shelton Vinyards

impact of the winery reaches at least asfar as their member vineyards.

Look for the co-op labelWhen ONSW bottled its first wine,

the label chosen by the co-op was“Carolina Harvest,” reflecting the pridethe members had in North Carolina-grown wine. After a year of marketingthe brand, the co-op made a bold moveby changing its brand to “38 Vines” forits 38 charter members.

The label change was suggested by ateam of MBA students at Wake ForestBabcock School of Management tomake the wine appealing to out-of-statemarkets. Each bottle now tells the storyof the cooperative and explains the sig-nificance of the brand name.

The Wake Forest MBA studentswere the winning team responsible fordeveloping a new marketing plan forthe cooperative winery.

“It was the best thing that happened,and it was the worst thing that hap-pened to us,” says Gray Draughn, presi-dent and general manager of the coop-erative. After a year of marketing, theyhad to start from scratch to gain brandrecognition. However, as they haveexpanded, the co-op’s new brand hasgained recognition. This year, the co-op’s Chardonnay took a double goldmedal in the state fair wine competition.

Capitalization and growing painsManaging growth can be a welcome

problem to have, but it has also causedsome pitfalls for the ONSW coopera-tive. One of the biggest challenges thecooperative has faced has been raisingcapital.

Most members are small producerswho must make substantial up-frontinvestment in their vineyards, with a 2-to 3-year waiting period before generat-ing any income from a harvest, saysDoug Thomas, treasurer of theWinegrowers Association. “As a result,the membership is limited as to howmuch additional capital it has to investinto the cooperative.”

The cooperative structure has beenboth an impediment and an avenue forfinancing their facility and operations.Cooperative members have one voteregardless of vineyard size. To meet theneed for more capital, the membersvoted to assess themselves each $7,500.In addition, each member pays a fee of$1 per vine, with a 250-vine minimum.The vineyards range in size from 250 to6,500 vines, which represents fromabout 1/3 to 10 acres. There are about54,000 vines planted by cooperativemembers.

The cooperative did not have a salesstaff that could service a wide geograph-ic area, so it contracted with a wine dis-

tributor to expand its market. Expand-ing the markets and distribution of the“38 Vines” brand into new geographicmarkets is essential, given the numberof wineries in the Yadkin Valley region,according to Thomas.

However, their first attempt toobtain a distributor failed after onebacked out on a deal. At this point, theco-op was left with excess product thatcould not be moved quickly enough tofree capacity. This past year, the coop-erative dedicated more capacity to cus-tom crushing for other wineries and forits members who wanted to bottle wineunder their own labels.

Growth has outstripped the capacityto process wine. The inability to takeequity when they leave the cooperativehas hindered member investment. Thishas prompted the board to considerconverting from a cooperative status toa stockholder corporation that wouldallow producers to recover their equityin the entity. However, the boardtabled any proposed entity change, butwill revisit it again in 2006.

Key help from USDA, N.C. The cooperative has benefited from

a number of grants. It has used busi-ness/cooperative programs of USDARural Development and has obtainedfunding from other state and private

Location, location, locationThe ONSW winery is located in the heart of downtown Mt. Airy — a

town of about 8,500 in the foothills just south of the Virginia border. It isnot unusual to see tour buses dropping off passengers to visit any number ofplaces of interest in this tourist-friendly town.

Mt. Airy is the boyhood home of actor Andy Griffith, and is believed tobe the basis for the fictional town of “Mayberry” from the Andy Griffith TVshow. The “Mayberry” theme and nostalgia are evident all over town.

Mt. Airy holds two festivals annually: Mayberry Days and AutumnLeaves. These are two big weekends for the cooperative, as the festivalsdraw nearly a quarter of a million visitors to the area. This is in addition tothe 78,000 visitors who signed the guest register at the town’s visitor centerin 2004.

Located in a three-story, 26,000-square-foot mercantile building con-structed in the 1890s, the winery has a “vintage” (no pun intended) look,with oak floors and decorative tin ceilings. The winery is complete with atasting room, gift shop and restaurant. The building is owned by the OldNorth State Winegrowers Foundation, a nonprofit organization that leasesthe facility to the cooperative.

Don Knotts and Andy Griffith confront towndrunk Otis Campbell. The co-op’s winery islocated in Mt. Airy, the boyhood home ofGriffith and the inspiration for the fictionaltown of Mayberry. Photo courtesy TAGSRWCArchives


foundations as well. To assist with therenovation of the building, the OldNorth State Winegrowers Foundationreceived a $200,000 grant from theAppalachian Regional Commission, afederal-state partnership.

In 2002, the town of Mt. Airyreceived two $99,000 Rural BusinessEnterprise Grants to purchase bottlingequipment and renovate the buildings,that would in turn be leased to thecooperative. In 2003, the WinegrowersFoundation obtained the building withan $829,000 loan guarantee fromUSDA Rural Development through theNorth Carolina Agricultural FinanceAuthority. NCAFA also provided thecooperative a $525,000 loan for work-ing capital, which was also guaranteedby USDA Rural Development.

In 2004, the co-op’s application for azero percent Rural EconomicDevelopment Loan of $210,000 wasselected for funding. However, becauseof the liens placed in connection withthe Business and Industry LoanGuarantees from USDA, the co-op wasunable to use the zero percent interestloan for start-up expenses, but themajority of the co-op’s working capitalneeds had already been met by theNCAFA loan. This past September, the

cooperative was awarded a Value-AddedProducer Grant of $150,000 for workingcapital to market its wine. This grantwill be used to purchase inventory andsupplies as well as to cover marketingexpenses associated with sales staff salary.

Member assetsAs with most cooperatives, every

member brings something to the table.Renovating an old building to make itsuitable for a winery and restaurantrequired many resources. One memberwho is an iron worker furnished thewrought iron railing and gate for thetasting room. The decorative railing isfunctional as well since alcohol lawsrequire separation between the tastingroom and other parts of the winery.

The sprinkler system for the build-ing was provided by a member who hasa fire protection business. Anothermember who is a restaurant ownerhelped the cooperative purchase “gentlyused” restaurant equipment at auctionfor about 10 percent of the cost of newequipment.

One cooperative member is a musi-cian who has lined up bands for festivalsand events for the winery. Other mem-bers volunteer time in the bottlingroom or assist with wine tastings in the

tasting room or at festivals. While the Old North State

Winegrowers Cooperative winery gotoff the ground with help from USDA, it has been the members who have vol-unteered their time and money that willmake this cooperative venture success-ful. Though the cooperative faces manyof the same, and some unique, chal-lenges as most cooperatives, the cooper-ative members will continue to pooltheir financial and strategic resources toexploit their strengths in an industrythat has been reborn in North Carolina.■

Roses planted at the end of each row of vinesaren’t just for looks; they attract the samepests that attack grapes, and thus serve as anatural bell-weather. Photo courtesy SheltonVineyards

Expanding the mar-kets and distributionof the co-op’s “38Vines” brand intonew geographicmarkets is essential.



By Bruce Pleasant

Editor’s note: Pleasant is a business programs specialistfor USDA Rural Development in North Carolina.

As with many wineries, the members of the YadkinValley Winegrowers Association (YVWA) in North Carolinaare constantly looking for new ways to add value to theirgrapes. The processing of grapes into wine will yield 10times more than grapes sold in bulk. While that compari-son is somewhat misleading (since there is much expenseassociated with operating a winery), production of winenonetheless results in greater returns to grape growers.

In 2004, the YVWA received a Value-Added ProducerGrant from USDA Rural Development for working capital tomarket wines of member wineries through a retail winestore at the Charlotte-Douglas International Airport. BuddyNorwood, YVWA vice president and manager of the YadkinValley Wine Bar, says the store would not have openedwithout the $250,000 working capital grant received fromUSDA in 2004. The store was only one of two such airportstores in the country when it opened in March, 2005.

But the idea is apparently catching on. A wine-tastingbar has since opened at Virginia’s Dulles Airport in subur-ban Washington, D.C., and other airports have plans to addwine-tasting bars. The Wall Street Journal (WSJ) recentlyincluded an article on airport wine sales, which featuredthe North Carolina wine bar. “With people spending more

time at airports — Americans took 633 million domestictrips last year, according to the Bureau of TransportationStatistics — this gives weary travelers something to do.It’s a great way to promote local wines,” the WSJ wrote.“Isn’t everybody always looking for a last-minute presentat the airport? What could be a better and more interest-ing present than a bottle of local wine?”

The revenues generated at the North Carolina airport

wine bar help support the nine member wineries, includinga cooperatively owned winery with 38 charter members insome of the most rural counties in the state. The store isan extension of the tasting rooms of the member wineries,reaching a customer base that they would never otherwisetap.

Supreme Court ruling impacts local wineriesThe Yadkin Valley Wine Bar has enjoyed remarkable

success since opening in March of 2005. Visitors fromother states and abroad can taste and purchase Yadkin

Valley Wines and take themhome or send them as gifts.

In March, the SupremeCourt ruled that it is uncon-stitutional to prohibit inter-state wine shipment tostates that allow wine to beshipped within their borders.Since the Supreme Court rul-ing, the Yadkin Valley WineBar has noticed briskincreases in out-of-stateshipments. Most go toFlorida or New York becauseof their popularity as traveldestinations from theCharlotte airport.

However, the ruling didnot necessarily mean thatwine can now be shipped toall parts of the country. Onestate, Louisiana, responded

Yadkin Valley Wine Bar “takes off” at Charlotte airport

The association’s wine bar opened at Charlotte-Douglas International Airport with the help of aVAPG from USDA Rural Development. USDA photos by Bruce Pleasant


to the court ruling by enacting legislation to prohibitintrastate shipping previously permitted, effectively block-ing the shipment of wine into the state. Of the remainingstates, only nine do not allow interstate wine shipments,primarily because they do not permit any wine shipping atall.

Ultimately, the Supreme Court decision should opennew markets for North Carolina wineries.

More incremental returns for producersWine bar traffic is directly proportional to the traffic in

the airport, Norwood says, with afternoons on Wednesdaythrough Friday being the busiest time. The store also doesgood business with vacation travelers on Saturdays.

The wine bar is on track to sell over 13,000 bottles thisyear. Norwood says, “it’s remarkable how close we havecome to our sales projections.” The average price per bottleis actually $3 higher than projected, due to the number oftastings sold and the amountof wine sold by the glass. Theaverage bottle of wine sellsfor around $15. Tastings gen-erate $18 per bottle whilewine sold by the glass gener-ates $23 per bottle.

The requirements of thestore are minimal. At 600square feet of retail space,the $400 per-square-footannualized sales comparefavorably with the $300-$400average for most retailers atthe airport. Typically, mosttravelers expect to pay morefor food and other items with-in an airport.

However, the prices ofmembers’ wine are the sameas they are in a grocery storeor at the winery. Visitors to the Yadkin Valley Wine Bar maybe greeted by a winemaker or owner of any one of the ninemember wineries, each of whom work about 2 days permonth at the airport store. These representatives providean enormous amount of goodwill in addition to staffing forthe store, Norwood says. Their presence at the wine barusually results in a spike of their own label. “If a customerasks for a recommendation of a good Chardonnay, they areexpected to push their own,” Norwood notes.

Yadkin Valley wine designation California has its Napa Valley, but North Carolina has its

Yadkin Valley, thanks to a new designation that recognizes

the unique climate and soils of the valley that are benefi-cial to growing wine grapes. This designation was grantedin February 2003 by the Treasury Department’s Alcohol andTobacco Tax and Trade Bureau, a process that took 2years.

With the designation, all wines marketed as YadkinValley wines must contain 85 percent grapes grown in theYadkin Valley region. This designation is important to areawineries because it creates interest and helps establishthe region as a wine destination.

Margo Knight, executive director North Carolina Wineand Grape Council, says having that designation is a keypoint in the growth of the state’s wine industry because ithelps develop a “sense of place” for wines of the region.Unlike wineries scattered across a wide area, a number ofwineries in an area encourages tourism.

“Then it becomes a critical mass,” according to Knight.Many will make a day trip to visit several wineries but

would not travel to visit justone. While applications forother designations are inprocess, Yadkin Valley iscurrently the only designat-ed appellation in the state.

In addition to becomingacquainted to Yadkin Valleywines, visitors to the“Yadkin Valley Wine Bar”can receive complimentarypasses for tours and tast-ings at member wineries.Visitors can also obtainmaps and brochures thatwill direct them to each ofthe wineries in the YadkinValley.

Value of VAPGs While the airport store

still is a relatively fresh concept, it appears to have beenvery successful for the YVWA. The airport wine bar is agood example of how, through the assistance of a USDAValue-Added Producer Grant, agricultural producers wereable to start a new venture that would not have been pos-sible otherwise.

“The Value-Added Grant Program helps North Carolinafarmers transition from tobacco and other crops to grapeswhich yield a greater return per acre,” says John Cooper,state director for USDA Rural Development in NorthCarolina. “I look for this venture to be the start of a trendwhich will “take off” at airports across the country.” ■

The airport wine bar sold about 13,000 bottles of wine last year.The average price per bottle was $3 higher than projected,reflecting the higher price paid for wine ordered by the glassor for tasting.

By Scott A.Yates

Editor’s note: this article is reprinted courtesy the Capital Press,which covers agriculture in California and the Northwest UnitedStates. Yates is that publication’s Washington state staff writer. Hecan be contacted at: [email protected].

he question itself was revealing, but according toDennis Bolling, the answer is: “Yes, cooperativesdo have a future.”

Speaking at the Joint Northwest Co-opCouncil’s annual meeting in Post Falls, Idaho,

the president and chief executive officer of United Producerswith headquarters in Columbus, Ohio, said anybody wantingto investigate the future of cooperatives should think aboutshutting down. That’s what happened to his company.

“If your co-op closed tomorrow, would your members startit up again?” he asked the roomful of cooperative directors andmanagers.

He related the saga of the Midwest livestock cooperativethat got caught in a ponzi (pyramid) scheme, which resulted in$140 million worth of damages. The house of cards involvedindividuals showing banks duplicate cattle inventory as part ofreceiving financing.

Two banks lost over $50 million. The cooperative lost $12million. And that doesn’t count the “boatload” spent on attor-neys during litigation.

“We were rocking and rolling with litigation,” Bolling said.“I was a little overwhelmed when I came on the board. Howdo you think directors of ours felt? ‘And, oh, by the way, here’sthe 50 pounds of legal stuff I have to go through with you.’”

That “legal stuff” will increasingly be part of the future ofcooperatives. That means directors will increasingly beresponsible for ensuring due diligence was performed “when ithits the fan.”

And don’t think it can’t happen to you, Bolling told thegroup. It’s a myth to think that what happened to UnitedProducers couldn’t happen to any cooperative out there. “Weare a litigious society... [but] it is not just a matter of beingsued. It is a matter of positioning for the future,” he said.

Bolling has taken a business lemon and turned it intolemonade by helping the directors understand what is neces-sary to survive. The future, Bolling said, is a fast-paced one

that has agricultural commodities dealing with the leadingedge of science over problems like BSE, bird flu and otherphytosanitary issues.

And that doesn’t even address the question of getting big-ger, which he said shouldn’t be confused with needing to grow.

“We simply had to handle more widgets. We couldn’t staycompetitive if we didn’t grow,” he said.

But for the farmers his cooperative serves, the real value tothe operation, as revealed in a survey, was the company’s pres-ence in the marketplace.

“Which is a good thing, because the equity is gone,” hesaid, referring to the bankruptcy loss.

“Co-ops can’t be hobbies, habits or the Church inWildwood,” Bolling wrote on one of his power point displays.


Editor’s note: this backgrounder supplied courtesy Unit-ed Producers.

United Producers Inc. (UPI), originally formed in the1930s, is a multi-state livestock marketing, lending andrelated services cooperative headquartered in Columbus,Ohio, governed by a 17-member board. UPI currently servesover 70,000 patrons in about a dozen Midwest states.

In 2001, UPI was victimized, along with several banks,cattle producers and agri-businesses, by a third-party cat-tle-fraud situation. The perpetrators are serving time in fed-eral prison. UPI suffered significant losses coupled withlegal expenses from related litigation.

UPI filed for Chapter 11 on April 1, 2005, to reorganize itsbusiness and have a forum to ultimately deal with the litiga-tion. Subsequently, in early October of 2005, UPI’s Plan ofReorganization was confirmed by the Court. CoBank contin-ues to provide financing for the cooperative’s operations.

UPI’s core business continued intact during this time-frame. UPI markets nearly 4 million head of livestock andhas a loan portfolio of over $50 million. Sales volumeapproaches $1 billion. Additionally, risk management andproduction coordination, including a Managed BeefAlliance, are provided to the cooperative’s membership.

Co-op progressing under Chapter 11

Vo ice o f exper ience:co-ops a re res i l ient

T

A model created in the 1930s, itlargely went on the same way for 65years. Only recently have co-opsbeen forced to adapt for the 21st cen-tury.

Bolling said it would be a mistaketo think the cooperative structureisn’t alive and well. Farmers areforming co-ops right and left, whichsuggests the model is healthy. InOhio, four new livestock cooperativeswere formed recently.

“We are feeling pretty happybecause we are the big fish, butfarmers have formed these relatedco-ops because they are dealing withissues or needs we weren’t address-ing,” he reminded co-op managersand directors.

In addition to dealing with theproducer, the input provider, theslaughterhouse, the wholesaler andthe retailer, today’s cooperative has toaddress the consumer, who is king.

“The challenge for us is how dowe connect the farmer further up thefood chain,” Bolling said.

Although farmers can accomplish alot on their own, he said, a coopera-tive can effect more change. But co-ops of the future will need marketposition, financial capital and leader-ship to compete. “We are going tohave to address economic perform-ance, structural alternatives and inten-tional leadership,” he said.

In the process, it’s likely co-opswill have to change entrenched poli-cies. For instance, 5 years ago, theUnited Producers board would havereacted in horror to the idea of enter-ing into a formal supply agreementwith a packer. Now it has one.

“We’re competing on a much dif-ferent plane. Our competition is notother co-ops like us,” Bolling said.“In reality, our competition is ourcustomer, the packing companies.” ■


Sam Roberts, beef technologies coordinator forUnited Producers Inc., applies a new electronicidentification ear tag designed to track cattleback to their place of origin. Photo courtesy UnitedProducers

Leaders evaluate risks of servingListening to speakers at the Joint Co-op Council Annual

Meeting and Educational Seminar talk about the obligationsfaced by directors of modern farming cooperatives raisesquestions about why they serve.

Talk to a few directors from various boards and one ofthe first things they mention is the obligation to give back tothe community. For many, it is a responsibility that has beenpassed from parent to child.

But to paraphrase an automobile ad of the 1990s, thisisn’t your father’s cooperative. Once a quiet backwater ofAmerican business, co-ops are finding themselves on thecutting edge of finance, science and society. More isexpected of directors, and more risk is involved.

Hence the need for educational meetings where direc-tors learn that litigation is only a lawsuit away. Mark Han-son, a lawyer for Lindquist & Vennum in Minneapolis, whichworks with cooperatives, agreed agriculture is more liti-gious nowadays, but still much less than any other sector ofthe economy.

“I think, unfortunately, the rural lawyers have changed.They are more willing to sue,” Hanson said.

So is serving on a board worth taking the risk? WadeMcClean of Co-op Supply Inc. in Northern Idaho said youowe it to the community to help out.

Donald Heikkila, on the Co-op Supply Board in NorthernIdaho, said it’s all about being able to sleep at night.

“I’m not so much concerned about personal liability. Allthe decisions we make are based on good, sound judgment,and I think we all have a clear conscience that our vote isnot only in the best interests of the cooperative, but of itsmembers,” said the 25-year veteran.

Tim Butler, on the Wilco Board in the Willamette Valley,said as owners of the company, it’s important to be involvedin the company. Sure, litigation is possible, he said, but“Board members have made those decisions before me,and now it’s my turn to make those decisions, and in 5 or 10years, it will be somebody else making the decisions. It hasto be done.”

Besides, said Bud Dyk, on the board of Midstate Coop-erative in Ellensburg, Wash., it’s important to know how acooperative actually operates. He said he was prettynaive when he first became a director and called his 9years on the board a good challenge. Some risks areworth taking.

“I always wanted to give back, and this is one way to doit. Yes, there is a risk, but you have to weigh it with whatyou’re doing,” he said. ■— Scott A. Yates, Capital Press


ow important are theWorld TradeOrganization talks forU.S. dairy cooperativesand their members?

“Either we have a place at the table, orwe’ll be on the menu,” is how JerryKozak, CEO of the National MilkProducers Federation (NMPF), put itin his address to the joint annual meet-ing of NMPF, the United DairyIndustry Association and NationalDairy Promotion and Research Boardin December.

NMPF lobbying efforts have beenbased on the stance that there can be nodairy trade deal if the European Unionmakes only incremental cuts in its sub-sidies and import tariffs, which aremuch higher than those in the UnitedStates, he stressed. Still, the industry’svery willingness to even discuss possiblereductions in a 50-year-old supportprogram — under which the U.S. gov-ernment pays more than $4 billionannually to support the dairy industry— represents something of a shifttoward greater flexibility on free trade.

And how much is at stake for pro-ducers as the 2007 Farm Bill takesshape? “Either we get our ducks in arow, or we’ll be sitting ducks,” Kozakwarned, noting that agriculture is brac-ing for farm program reductions andthat the dairy industry needs to be unit-ed and proactive to keep the budget axfrom swinging its way.

Environmental issues — includingpotentially stricter air and water qualitycontrols — will play a part in the FarmBill debate, Kozak said. Food securityand the war on terrorism, animal wel-

fare and product standards and labelingwill also be in the mix more so than inpast Farm Bills.

Another fundamental challenge fac-ing producers comes from “people out-side the industry who would like to dis-mantle the cooperative business struc-ture,” he said. This would have“extremely serious consequences forfarmers and the industry,” Kozak con-tinued. “Now is the time to rallyaround the cooperative structure andtake advantage of the magic of coopera-tives and the Capper-Volstead Act. Weneed to take advantage of cooperativeunity for the benefit of all producers.”

CWT & market gainsAs sobering as those thoughts were

for the 1,100 or so producers and guestsgathered at the meeting in SanFrancisco, there were also manyachievements in 2005 to look back on

and cheer. After three successful bid-ding rounds of the CWT (CooperativesWorking Together) program, 74 per-cent of the nation’s milk production isenrolled in this industry self-help effortto stabilize on-farm milk prices by bet-ter balancing supply and demand. In2006, the CWT focus will likely shiftfrom voluntary herd reductions toboosting the export-enhancement com-ponent of the program, Kozak noted.

NMPF Board Chairman CharlesBeckendorf said the 5 cents per hun-dredweight producers contribute (on avoluntary basis) toward the CWT pro-gram is “the best nickel you could everspend.” Last year, CWT removed 900million pounds of excess milk from themarket, he noted.

Dairy Management Inc. CEOThomas Gallagher recounted gains indairy research and promotion, many ofwhich were achieved through invest-


H

Jerry Kozak, left, and the senior staff of the National Milk Producers Federation (NMPF), hosteda lively “town hall” meeting, during which producers could quiz them about any NMPF pro-gram. USDA photos by Dan Campbell

Trade, Farm Bi l l , co-op s t ruc tu recha l lenges eyed at da i ry conference

ment of producers’ Dairy Checkoff dol-lars. Topping the good news on thenutrition front was the revised U.S.Dietary Guidelines, which keep dairy asits own food group and boosts the rec-ommendation from twice-daily tothrice-daily consumption of dairy foodsfor adults and children.

Yogurt was the retail star for theindustry in 2005, with sales thatclimbed 6 percent, to 2.87 millionpounds, and is becoming “a ‘growthengine’ for the industry,” Gallaghersaid.

The big news for fluid milk consump-tion continues to be sales gains inschools and fast food outlets, achievedprimarily by replacing cardboard milkcartons with flavored milk in single-serve, plastic bottles. Indeed, severaltimes during the meeting, the image ofthe single-serve, cardboard milk cartonwas flashed onto video screens as a sym-bol of an industry that in the past wassometimes too slow to adapt to modern


When Jason VanderKooy left his dairy farm near Mount Vernon, Wash., in lateNovember and headed to San Francisco for the joint annual meeting of threemajor dairy organizations, he went expecting to learn more about the state of theindustry and what is being done to strengthen it. But one thing VanderKooy neverexpected was to wind up in the hammerlock of Olympic gold medal Greco-Romanwrestling champion Rulon Gardner.

Yet there he was, up on stage in front of 1,100 producer delegates, nose-to-nose with Gardner as the champ demonstrated the techniques he used to defeatRussia’s supposedly invincible Aleksandr Karelin. It’s been called “the miracle onthe mat,” and some sportswriters consider Gardner’s victory the greatest upset inOlympic history.

Karelin had easily defeated Gardner in a prior match in 1997, throwing Gardnerto the mat three times — including a head-first landing which caused a spinalcrack (diagnosed years later). Gardner said it seemed everyone in Sydney, Aus-tralia, wanted to see the legendary Russian win again — the crowd, the sponsorsand even the officials. But as he has on so many other occasions in life, Gardnerfooled the odds makers, who had made him as much as a 2,000-1 underdog. Hedid so by drawing on the qualitiesthat got him into the Olympics: per-severance, dedication, determina-tion and heart. Gardner said he alsoused some of the techniques dairyfarmers must master “to make cowsdo what you want them to do, notwhat they want to do.”

So was VanderKooy scared upthere in the vice-like grip of thechamp?

“Nah, Rulon is really just a bigteddy bear,” said VanderKooy, safelyback home on the 1,000-cow dairyfarm he operates with his brotherand father. After all, when you make your living herding 1,200-pound Holsteinsaround your farm, doing mock battle with a 265-pound wrestling champ seemsalmost tame!

VanderKooy, 30 and a member of the Northwest Dairy Association cooperative,says his wife, Shelby, volunteered him for the “match” by grabbing his arm andhoisting it in the air when Gardner asked for someone to help him demonstratehow he achieved his impossible dream. VanderKooy says Gardner’s message —about never giving up even when the odds are stacked against you — resonateswith producers who know that feeling all too well.

“We’re facing more pressure all the time on our farm from environmental regu-lations, urban growth and rising energy prices and costs in general that just keepgoing up,” says VanderKooy, who farms 1,000 acres of corn, alfalfa and grass inaddition to milking his herd three times daily. “We just have to keep looking forways to get better.”


A Grip on SuccessGardner recalls odyssey from ‘failure’ to gold medal victor

continued on page 18

Washington state dairyman JasonVanderKooy, left, was “volunteered” toserve as Olympic champion RulonGardner’s wrestling foe.

consumer food preferences, nearly cost-ing the industry a generation of milkdrinkers.

Halting slide of fluid sales Gallagher said fluid milk sales have

been in a 21-year downward slide.Why? “Decades of offering milk incardboard boxes that kids needed a forkto open.” He disagreed strongly with

those who say the best the industry canhope for is to halt or slow the slide, andhe predicted that with the right prod-ucts, fluid milk can once again becomea “shining star” of market growth fordairy producers.

Need evidence? Dairy producerinvestments in foodservice and schoolpartnerships have led to the introduc-tion of milk in plastic bottles at

McDonald’s and Wendy’s restaurantsacross the country, and milk in plasticbottles in 3,500 schools today, com-pared to just 400 schools during the2003-04 school year. Based on incre-mental sales increases, if milk in plasticbottles were offered in all schools andmajor fast food chains nationwide, salescould increase by an additional 1 billionpounds — a 1-percent increase in per

“One of us”Many farm conferences include an inspirational speaker

on their agenda, and Gardner filled that role at the jointmeeting of the National Milk Producers Federation, UnitedDairy Industry Association and the National Dairy Promotionand Research Board. As a farm boy who grew up on aWyoming dairy, Gardner knows well the daily battles farm-ers face, and the strength they draw from rural values andwork ethic.

Building hay stacks and shoveling manure taught himhard work and discipline, he said, recalling how he workeduntil midnight during sweltering summers and milked cows infrigid winter temperatures after the family’s barn burneddown. His upbringing also taught him the value of family andneighborliness, such as when his family’s neighbors allpitched in to harvest the Gardners’ barley crop so that theycould watch him wrestle in the Olympics.

“He’s one of us,” one delegate was heard to remark.Despite being somewhat hoarse from shouting a day

before at a wrestling event where he had coached, Gardnerrecounted what it was like growing up with learning disabili-ties that put him in special education courses where it some-times seemed as if he was expected to fail. “I’d get pulled outof class every day and fall further behind. My family helpedme deal with the frustration — they showed me that I couldbe successful if I gave 100 percent.” When school coun-selors said he could never go to college, his mother respond-ed: “how dare you limit my son’s potential” and refused totake their advice, he recalled.

Other kids would make fun of Gardner for being a poorreader and slow to learn in other subjects. After he won thegold medal, many of them who had treated him so cruellysaid they were sorry. “Why did you do it? You could havedestroyed me,” Gardner said. But he instead used thosejeers to motivate himself to success.

Gardner says his wrestling skills were developed with alarge measure of help from the Sunkist Kids Wrestling Club,founded by Arizona citrus grower Art Mortori, who namedthe club after the Sunkist Growers citrus co-op, of which heis a member. Sunkist Growers has been a regular contributorto the youth program, which has produced more than 150

wrestlers who have earned spots on U.S. World and Olympicwrestling teams since 1976.

Against all oddsGardner made it to a small college, majoring in dairy man-

agement, and later transferred to the University of Nebraska,where he earned a teaching degree in physical education. Hehad been told he didn’t have the stuff needed to get an educa-tion degree from a major university, especially one like U.N.where the academic requirements for teaching majors are rig-orous. But he worked with tutors daily and continued to wres-tle, winning his biggest match of all: for his college degree.

He was also told he’d never land a spot on the Olympicteam, and would certainly never earn a medal. But thenaysayers learned just how wrong they were when the bigfarm kid so few had believed in was standing up on the block,the gold medal gleaming around his neck as the Star Span-gled Banner boomed across the public address system.

Gardner’s time to bask in the glory was almost cut tragi-cally short, when he was lost and nearly died in a blizzardwhile back home on the farm. He followed a frozen river andsheltered between two boulders, where he survived 18 hoursat 25 degrees below zero. His body temperature dropped solow that the emergency medical technicians who treated himsaid there was no way he should have lived through theordeal. Gardner lost the middle toe of his right foot to frost-bite, but managed to come back again to compete in the 2004Olympics in Athens, where he took home the bronze medal.

Gardner offered these tips for success from his own lifeexperience that he believes canhelp most people, regardless oftheir specific circumstances:• get back to the basics;• turn negatives into positives;• enlist the help of others;• train hard every day;• always take care of business;• aim even higher after a crisis;• don’t rest on your laurels.■


A Grip on Success continued from page 17

capita fluid milk consumption. That trend could pick up steam as the nation’s two soft-

drink giants — Coke and Pepsi — edge more into the dairysector, with products such as Bravo Milk Slammer. To con-sider the potential impact on sales, Gallagher noted thatCoke has a fleet of trucks second in number only to UnitedParcel Service that deliver products daily nationwide. Theyalso maintain more than 2 million vending machines that cansell milk. The industry’s hope, of course, is that those types ofproducts take market share from soft dinks, not from tradi-tional milk products.

Dairy producers need to keep pursuing strategic partner-ships with suppliers, manufacturers and the food serviceindustry, Gallagher said. Retail cheese sales, which for manyyears have driven dairy industry marketgains, were flat last year. This could be aprime area where producer/processorpartnerships could help spread the riskfor developing new products, such assnack cheeses and cheeses for theHispanic market, he noted.

Looking at the dairy ingredients mar-ket, there is no bigger need than for aworldwide research and promotion effortto develop nutritional information fordairy whey that will help marketers bet-ter compete with soy-based food addi-tives, he said.

Sending large volumes of milk to bal-ancing plants to “turn into powder forthe government to buy, then dump onthe market is not growing the business,”Gallagher said.

Innovation and passion critical for cheese gains

Lou Gentine, CEO and chairman ofthe family-owned Sargento Foods inWisconsin, told how the small companyhis father started in 1953 to fill a market void for consumer-size packages of Italian cheeses grew into a company thattoday annually sells 3 billion pounds of cheese worth $550million — 3 percent of the U.S. retail cheese market. To putit in farmer-friendly terms: it takes the milk from 160,000cows each year to supply the raw product for Sargentocheeses, he said.

Sargento cheeses are produced at four plants in Wisconsinthat employ 1,200 workers. One reason for the firm’s rapidgrowth was good timing: Sargento went into business just asthe market for pizza and some other Italian foods began tosoar. But its success is also due to the innovation and passionhis family and its employees have for producing cheese,Gentine said. Among the elements of the company’s state-ment of values is to: “Hire good people and treat them likefamily.”

U.S. cheese sales have grown 300 percent since 1953, farout-shining stagnant or falling fluid milk sales during most ofthose years, he said. However, since is takes 10 pounds ofmilk to make one pound of cheese, that has not necessarilybeen a bad trend for dairy producers, Gentine said.

He sees cheese and yogurt as providing the biggest oppor-tunities for dairy sales growth, and urged producers to “ridethe winner,” saying their research dollars should be investedin developing new cheese products.

But innovation is not cheap, Gentine stressed. Hedescribed a process that involves consumer surveys, conceptdevelopment and testing, product development and furthertesting, building or adapting plants and equipment and costlyproduct launches (including advertising, promotion and slot-

ting fees). Total costs can run from $10 million to $40 millionto launch a new food product, “and there is no guarantee ofsuccess.”

Gentine said he thinks branded advertising does more forthe industry than generic advertising, saying generic ads arebased on convincing consumers that all cheddar cheese (forexample) is the same, which means they compete only onprice, and that tends to drive the market down.

He urged producers “to support innovation” and to con-sider increasing fees for the Dairy Checkoff program (nosuch proposal is currently being pursued by the industry).Asked if he would also support a Cheese Checkoff for proces-sors to pay, Gentine said his company already spends 20 to 25percent of its income on innovation and promotion. “Whenwe build our own brand, we also build the dairy industry.”


With a reduced-scale Golden Gate Bridge as a backdrop, NMPF staff fielded questionsranging from the workings of the CWT program to the outlook for the 2007 Farm Bill.


By Stephen Thompson, Assistant Editor

ike other markets, agricultural trade isbecoming increasingly international.Hence, dealing with the globalizationof agricultural commerce was thetheme of the 2005 Annual Farmer

Cooperatives Conference, held Nov. 7 and 8 inMinneapolis.

As barriers to international trade, capital flow andcommunication come down, U.S. cooperatives todayare facing up to the necessity of building businessrelationships outside of our borders to remain com-petitive. Presenters at the conference, sponsored bythe University of Wisconsin Center forCooperatives, offered hope and useful suggestionsfor participating in the international business arena.But none of them said that doing so will be easy.

Participants may have felt that they left the gath-ering with more questions than answers; the picturethey were presented was one of increasing change —offering new opportunities, but also greater risk anduncertainty.

Now what?Terry N. Barr, chief economist with the National

Council of Farmer Cooperatives, presented co-opleaders with this question: “The market in whichyou had prepared to compete no longer exists! Nowwhat?”

Barr argued that world markets are changingquickly and drastically, that “the rise of China andIndia is the most important economic force in theworld,” and that the continued growth of thosecountries will result in massive changes to the worldeconomy. He said that customers are taking advan-tage of increasing competition to demand moreservices and better quality. Lower transportationcosts and increasingly efficient communications arebreaking down barriers not only to the flow ofgoods and services, but to capital and knowledge aswell. In fact, capital moves more quickly than physi-cal goods.


Fore ign Af fa i rsCo-op leaders share strategiesfor pursuing global markets

L

As a result, said Barr, U.S. ag cooperativeswill have to participate in riskier overseasmarkets, make new partnerships with foreignfirms, and even invest in overseas ventures toproperly serve their members.

Unfortunately, thehuge reductions intransportation andcommunicationscosts that haveencouraged moreAsian imports intothe U.S. markethave not stimulatedas rapid a growth inU.S. exports.

While large vol-umes of importedgoods from Asiasend many dollarsoverseas, those dol-lars often don’treturn as paymentsfor U.S. exports. Acombination of fac-tors has created this

situation. The government of China has pro-vided significant stimulus to investment overconsumption and uses high tariffs on import-ed goods to protect domestic industries, suchas agriculture. At the same time, the incomeand purchasing power of the Chinese con-sumers is low and their savings rates are veryhigh.

As a result, the money American con-sumers spend on foreign goods is used topurchase U.S. financial assets, such asTreasury bonds and other securities. Barrpointed out that this is part of a consciousgrowth strategy on the part of many Asiangovernments to promote demand for theirexportable goods in the United States andother regions, rather than rely on internal-demand growth.

With export income being channeled intopurchases of U.S. securities and assets, Asiancountries help keep U.S. interest rates low.Access to debt at lower rates further encour-ages American consumers to buy more con-sumer products, including imported goods.But it also means that the consumption pat-terns of Asian consumers don’t reflect thesame benefits: deprived of much of theexport income, they are discouraged by hightariffs from raising their standard of living by

purchasing imported goods, such as agricul-tural and other products from the UnitedStates. Thus, both Asian consumers andAmerican farmers are missing out on muchof the potential benefit of globalization.

Net ag-exporter status ending As a result of this changing world market,

the United States’ status as a net agriculturalexporter is coming to an end, Barr said. Theproblem, he continued, is not in the com-modities sector — although bulk exportshave fallen. Rather, high-value products aretipping the scales.

U.S. exports of high-value agriculturalproducts are actually rising, but, said Barr,they are not rising fast enough to offset therising imports of such items as horticulturalproducts and other high value agriculturalgoods. Meanwhile, commodity exports fromBrazil and other sources are continuing toincrease, and agricultural production contin-ues to consolidate.

Barr believes that the result will be agrowing trend on the part of producers toattempt to break out of commodity marketsthrough product differentiation — whetherby product attribute, delivery capability, orsome other distinct value added to the prod-uct. The use of new life-science technologieswill offer one route, resulting in new foodand energy products, as well as new pharma-ceuticals and other health products.

Serving consumer markets offers anotherroute, but it is an avenue fraught with com-plications. Barr pointed out that trends in theconsumer sector are toward goods that arecustomized to individual markets — nolonger can a firm expect simply to introduceproducts into one market that have beendesigned for another.

In addition, retail outlets are consolidatingrapidly — the Wal-Mart phenomenon —and food processing companies are consoli-dating in response, while at the same timediversifying their product lines, using brandnames and private labels to meet thedemands of various markets.

The implications of Barr’s presentationwere clear: farmer cooperatives must bewilling to forge ties with foreign firms tocompete in the markets of today and tomor-row. Such relationships may take manyforms, from straight client agreements tojoint ventures.


“Farmer coopera-tives must be willingto forge ties withforeign firms tocompete in the markets of todayand tomorrow.” – Terry Barr

USDA graphic by Stephen Thompson; Ship imagecourtesy Hong Kong Tourism Board

The most important internationalmarkets for agricultural products arealso among the most difficult to dealwith: China and India, together having38 percent of the world’s population.The economies of both countries aredeveloping rapidly, and growing middleclasses are demanding more and moreprocessed foods. Joint ventures are themost obvious avenue for market partici-pation in these countries.

China and India erect high tariff bar-riers to agricultural imports,and have laws that preventforeign firms from partici-pating by themselves in theirdomestic markets. Thismeans that American coop-eratives seeking to breakinto those markets will haveto develop joint ventureswith Chinese and Indianfirms.

How co-ops can competeBarr listed the implica-

tions of these trends forfarmer cooperatives. Tocompete, he said a co-opmust understand what itdoes better than anyone else— that is the value that itoffers in any business rela-tionship. It must know themarket value of what it“brings to the table” in anypotential agreement — andwhat it would cost its poten-tial partner to duplicate it.

And it must approach theinternational market from a position ofstrength domestically: “Deployingscarce capital resources and capital inthe world market should not take prece-dence over domestic strategies,” he said.“You need to have an integrated strate-gy.”

Cooperative management boards ofdirectors must develop ways of continu-ally finding and evaluating potentialjoint partnerships, Barr emphasized.This must include communicating withcustomers and suppliers about theirown global strategies to identify emerg-ing opportunities and risks.

Further, they must be aware of howchanges in domestic farm and interna-tional trade policy will affect their posi-tion in the marketplace, and be ready torespond.

Behind the curveElizabeth Hund of Rabobank told

the gathering that the U.S. agriculturaleconomy is “behind the curve” in com-parison to that of Europe. She pointedout that the Netherlands, with only a

small fraction of the farm acreage of theUnited States, holds the second-largestshare of the world ag export market,with 10.6 percent compared to theUnited States’ 15.5 percent share.

Hund said that the U.S. share of themarket is falling, while European coun-tries gain, because the European pro-ducers are exporting high-value, value-added goods. She agreed with Barr thatinternational joint ventures, whileinvolving difficulty and risk, offerimportant opportunities to U.S. cooper-atives: “If you can’t beat ‘em, join ‘em!”

Other presenters gave the audience

some examples of successful interna-tional collaboration. John Johnson,CEO of CHS Inc., told the gatheringabout that co-op’s experiences withinternational joint ventures. CHS has awell-established, highly profitable rela-tionship with the Japanese corporationMitsui — one of the largest publiclytraded corporations in the world.Johnson said that the impetus for thepartnership came about by accident: asubsidiary of Mitsui, Wilsey Foods, was

considering acquiring someof the same smaller compa-nies at which CHS subsidiaryHolsum Foods was looking.

In addition, it was a largecustomer of CHS products.Both companies decided thata partnership would avoidduplication and provide newopportunities.

The partnership agreementbetween CHS and Mitsui wassigned in August 1996, atwhich time CHS had $350million in annual sales, with$8.5 million in profits. Nineyears later, says Johnson, thepartnership has paid off bigfor the cooperative. VenturaFoods now has $1.2 billion inannual sales. Profits haveincreased more than 800 per-cent, to between $60 and $70million in profits, making fora 25-30 percent return onmembers’ equity.

Johnson presented a jointgrain-marketing effort in the

Pacific Northwest, called UnitedHarvest, as an example of the synergiesachieved by the partnership. Mitsui hada global portfolio of customers forAmerican grain, while CHS had accessto the grain at the source. Both firmseach had an export facility inWashington State — Mitsui atVancouver and CHS at Kalama — bothon the Columbia River. Both firmsneeded to build new terminals for large,single-cargo shuttle trains to feed thosefacilities — an innovation at the time.

Mitsui at first planned to build shut-tle terminals, but turned the task over


Doug Wilson, CEO of Cooperative Resources International, a livestockbreeding co-op, makes a point during the Farmer CooperativeConference in Minneapolis. He is flanked by DFA’s Don Schriver andco-op attorney Mark Hanson of Lindquist & Vennum. USDA photo byStephen Thompson

to CHS with its superior expertise inthat field. The result, said Johnson, wasa venture that paid off for both parties.

Making it workAccording to Johnson, the secret to

making an international partnershipwork is a good working relationshipbetween top leadership officials. Henoted that differences betweenJapanese and American cultures makefor different management styles,which must be taken into account andadapted to.

“Here in the U.S., we’re used todoing things by Robert’s Rules ofOrder, with an up-and-down vote,” hesaid. “In Japan, everybody discussesthe issue until a consensus is reached.”He said that this resulted in misun-derstandings, in which the Japanesebelieved a decision had been madewhile the Americans still anticipated aformal resolution.

Other problems, said Johnson,included ambivalence by older CHSmembers who remembered being atwar with Japan during World War II.However, a trip by the cooperativeboard of directors to Mitsui Head-quarters in Japan helped cement cor-dial relations. Johnson emphasizedthat personal relationships between topmanagement must be cultivated, andthat he, as CEO of CHS, regarded hisability to call and discuss issues directlywith the president of Mitsui as essential.

The CEO of Growmark, Bill Davis-son, presented his perspective on anoth-er kind of international partnership:having co-op members in other coun-tries. Davisson discussed Growmark’sacquisition of bankrupt United Coop-eratives of Ontario (UCO) assets in1995, saying that the similaritiesbetween UCO and Growmark in struc-ture and core business were a good fit,and gave Growmark the opportunity toexpand into an area more or less con-tiguous with its area of operations inthe United States.

Problems with the merger includeddealing with UCO’s bankruptcy, anti-trust regulation in both the UnitedStates and Canada, and issues result-

ing from differeing business regula-tions and statutes, including UCO’scommercial dealings with Cuba, whichare forbidden to U.S. firms. Culturalissues, including dealing with French-speaking members and Canadian atti-tudes toward the acquisition of aCanadian business by a U.S. firm, alsoposed obstacles to success.

Personal relationships helpLike Johnson, Davisson emphasized

the importance of establishing personalrelationships — which in this caseinvolved getting Canadian and U.S.leaders and employees together andallowing them to discover how muchthey had in common.

Another Growmark acquisitioninvolved gaining a 44-percent interestin MaltaCleyton, Mexico’s second-largest feed company. In theMaltaCleyton case, Growmark boughtinto an investor-owned, non-coopera-tive firm. The purchase gave Growmarkan entry into a growing market forgrain south of the border through afinancially sound investment.

Risks and challenges included a verydifferent political and cultural situationfrom those of Canada and the UnitedStates, which might have complicated a

relationship with a Mexican cooperative.Davisson concluded that, when con-

templating international partnerships,cooperatives must be true to their basicprinciples and assiduous in calculatingrisks and benefits. If they choose toestablish a relationship, they must care-fully monitor the results.

Relationships must be carefully nur-tured, he said, and local attitudes andissues must be continually taken intoaccount.

Gaining access to technologyDairy Farmers of America used a

joint venture with international part-ners to gain access to new technologyand develop new markets at home, DonSchriver, DFA executive vice president,told the conference. DFA, one of thelargest milk marketers in the world,represents nearly one third of U.S.milk production, but had not developednew fractionated products, leaving itwith limited outlets for its members’production.

“Basically,” said Schriver, “we hadconventional dairy products, dried milkpowder and the government.”

DFA attacked the problem by start-ing a joint venture in 2000 withFonterra, a multinational dairy compa-ny owned by 13,000 New Zealand dairyfarmers that is the largest exporter ofdairy products in the world. The ven-ture, called DairiConcepts, combinesDFA’s U.S. production capabilities withadvanced technology developed byFonterra, to produce dairy and cheeseingredients for processed food manufac-turers.

Items produced by DairiConceptsinclude various proteins, fats, dairy-derived artificial flavors, milk- andcheese-based modified powders, pow-ders for infant formula and adult nutri-tional beverages and preparations, andhard Italian cheeses. Many of its prod-ucts are used in the manufacture ofconvenience foods such as snacks,ready-to-eat meals, sauces, soups andbaked goods.

The partners initially each con-tributed about $25 million to the ven-


Paperwork on anorder must be flaw-less with foreign cus-tomers, or they maythink the exporter is‘trying to pull a fastone on them.’ – David Fuhrman



L E G A L C O R N E R

Bye-Bye Bus iness Judgment Ru le?By Donald A. FrederickProgram Leader for Law,Policy & Governance;USDA Rural Development/Cooperative [email protected]

ooperative directors owe afiduciary duty to themembership to exercisetheir authority in the bestinterests of the association

and all of its members. In lawsuitsclaiming directors violated their duty,courts have routinely applied the “busi-ness judgment rule.”

In its simplest terms, the businessjudgment rule provides that a boardaction is protected from challenge ifthere is a good business justification forthe decision and it isn’t fraudulent or anabuse of discretion. When the businessjudgment rule is applied, the burden ofproof to establish the impropriety of thedecision is on those challenging it.

But in today’s environment ofheightened concern over the diligenceof directors, courts may begin lookingfor another standard for measuringdirector conduct. In a recent decisioninvolving a suit against a housing coop-erative and most of its directors, theappellate court said the trial courtshould have applied a “reasonableness”test, and the burden of proof should beon the directors to prove their actionswere indeed “reasonable.”

Case factsIn 1974, an apartment building on

Wisconsin Avenue in the District ofColumbia was converted to a housingcooperative. The cooperative associa-tion financed the purchase with money

borrowed from the developer who hadowned the building, and signed a 30-year mortgage repayment agreementwith the developer. A pro-rata share ofthe mortgage obligation was assigned toeach housing unit in the building, basedon the relative value of the units at thetime. Contracts between the coopera-tive and its members required the mem-bers to make monthly payments ontheir share of the mortgage, which thecooperative used to pay its monthlyobligation to the lender.

The contracts between the coopera-tive and its members permitted themembers — at their option — to pre-pay their mortgage obligation. Over thefirst 20 years of the mortgage, a smallminority of the members prepaid theirobligation.

By the mid-1990s, the developer wasbankrupt and his assets were controlledby a bankruptcy trustee. The coopera-tive had several unresolved claimsagainst the developer. The cooperativehad a cash reserve comprised in largepart of payments from members. Itstruck a deal with the bankruptcytrustee to pay off the remaining balancedue on the mortgage, less a negotiatedamount for its claims against the devel-oper.

After this deal was completed, thedirectors made two decisions which ledto a lawsuit. First — since the mort-gage that was the basis for the contractsrequiring special monthly paymentsfrom the members no longer existed —the board voted to forgive the amountsremaining on those notes. Second —since there were no notes to forgive inthe case of the members who prepaidtheir obligation — the board deliberat-ed at length over whether the coopera-

tive should pay a rebate to those mem-bers on the theory that they had over-paid. After consulting with legal coun-sel, the board determined it had noequitable basis to justify the rebates andso voted not to use cooperative funds topay the proposed rebates.

Two members who had prepaid theirobligation, including one person whowas a director at the time and hadargued and voted for rebate payments,sued the cooperative and the otherdirectors for breach of contract andbreach of fiduciary duty. They asked formonetary damages equal to the amountthey alleged they would have saved hadthey not prepaid their obligation andbeen treated the same as the othermembers, including the other directors.

Trial court appliesbusiness judgment rule

Both sides of the case moved forsummary judgment, a decision by thecourt that they will prevail even if thefacts are interpreted favorably for theother side. The trial court denied themotion of the unhappy members andgranted the motion of the cooperative.First, the court said the unhappy mem-bers hadn’t shown it any provision oftheir contract with the cooperative thatcould have been violated by the cancel-lation of the notes covering the mort-gage.

As to breach of fiduciary duty, thetrial court referred to the business judg-ment rule and concluded there was noevidence that the board acted hastily orirresponsibly. Thus, a jury could notrationally conclude the board engagedin any misconduct subjecting the coop-erative to liability.


C


Largest 100 agriculture co-ops post strong margins in 2004

Table 1—Consolidated Statement of Operations, 2003-04, Top 100 Cooperatives; values in $1,0002004 2003

Difference % ChangeRevenues

Marketing 53,529,034 43,833,692 9,695,342 22.1%Farm Supply 15,957,236 14,504,208 1,453,028 10.0%

Total Sales 69,486,270 58,337,900 11,148,370 19.1%Other Operating Revenues 733,875 653,915 79,960 12.2%

Total Operating Revenues 70,220,145 58,991,815 11,228,330 19.0%Cost of Goods Sold 63,344,425 53,638,947 9,705,478 18.1%

Gross Margin 6,875,720 5,352,868 1,522,852 28.4%

ExpensesOperating Expenses 5,450,743 4,388,502 1,062,241 24.2%

Net Operating Margins 1,424,977 964,366 460,611 47.8%Other Revenues (Expenses)

Interest Expense (424,624) (398,052) (26,572) 6.7%Interest Revenue 18,722 25,582 (6,860) -26.8%Other Income 212,961 345,594 (132,633) -38.4%Other Expenses (194,017) (119,278) (74,739) 62.7%Patronage Revenue 164,601 96,985 67,616 69.7%

Net Margins from Operations 1,202,620 915,197 287,423 31.4%Non-Operating Rev. (Exp.) (47,716) (44,709) (3,007) 6.7%

Net Margins 1,154,904 870,488 284,416 32.7%

Distribution of Net MarginsCash Patronage Dividends 291,403 285,044 6,359 2.2%Retain Patronage Dividends 502,570 383,756 118,814 31.0%Nonqualified Noncash Patronage 30,055 7,296 22,759 311.9%Dividends 19,172 18,937 235 1.2%Unallocated Equity 194,009 114,182 79,827 69.9%Income Tax 117,695 61,274 56,421 92.1%

Total Distribution 1,154,904 870,488 284,416 32.7%

✔Top 100

By David Chesnick, Ag EconomistUSDA Rural Development

The rapid rate of change impactingthe nation’s 100 largest agriculturalcooperatives slowed considerably in2004 from the previous several years. Itwas not only a year of stabilization, butof strong performance, as the top 100ag co-ops posted record gains in salesand margins (table 1), based on USDA’spreliminary survey results. Total operat-ing revenue for the top 100 jumped 19

percent, to $70 billion. All co-op com-modity groups reported increased rev-enue. Dairy and diversified cooperativesled the way, accounting for two-thirdsof the total revenue increase.

Gross margins were up 28.4 percent,reaching $6.9 billion. The largestincrease was in the dairy sector, whichaccounted for 61.5 percent of the totaljump in gross margins for the top 100co-ops. Fruit/vegetable and rice werethe only sectors to record a decline ingross margins. Despite higher sales for

these two sectors, fruit/vegetable andrice cooperatives paid a higher cost ofgoods sold. Thus, it appears likely thatthese cooperatives returned more totheir members up front, rather than aspatronage later on.

Operating expenses also jumped 24.2percent, to $5.4 billion. Dairy co-opsagain had the biggest jump in operatingexpenses, which increased $859 million.That jump accounted for nearly three-fourths of the top 100 co-ops’ totalincrease in operating expenses.


Operating margins soar $1.4 billionOperating margins for the top 100

shot up a whopping 47.8 percent, to $1.4 billion. Leading the increase werepoultry/livestock cooperatives, a rever-sal of fortune from 2003, when poul-try/livestock cooperatives were the onlycommodity group to post operatinglosses. In 2004, top 100 cooperatives inthis sector had operating margins of$238 million, a 634-percent jump fromthe year before.

Fruit/vegetable and rice cooperativessaw operating margins decline from2003 to 2004, mostly due to lowergross margins. However, fruit/veg-etable cooperatives still posted solidoperating margins of $204 million.Rice cooperatives continue to operatewith tight margins.

Despite lower total debt levels, inter-est expense for the largest 100 agricul-ture cooperatives increased 6.7 percent,to $425 million. The dairy sector sawinterest expense climb 32.8 percent, to$71 million. Poultry/livestock coopera-tives also saw interest expense rise from$9 million in 2003 to $37 million in2004.

“Other revenue,” including interestincome and revenue from operatingsources not directly related to opera-tions, was down 37.6 percent, to $232million. Nearly all co-op commoditygroups except for cotton, diversifiedand grain saw other revenue decline. “Other expenses” were up 62.7 percent,to $194 million. The largest increase inother expenses occurred in the diversi-fied and poultry/livestock cooperatives.

Patronage refun