RuralCoop Jan08 Final3 - USDA Rural Development · Nearly 300,000 farms fall into the financial...

Ru

ral

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

St ra teg icChoices fo rRenewable EnergyIndust ryPage 4

Spec ia l RenewableEnergy Sect ion

S t ra teg icChoices fo rRenewable EnergyIndust ry

Editor’s note: This commentary was written by Thomas Dorr,USDA Under Secretary for Rural Development.

The train is leaving the station. The rapid build-out ofrenewable energy is a historic opportunity for rural America,and the pace of development is accelerating. In this issue ofRural Cooperatives, a team of USDA economists has ablysummarized recent research on the strategic choices arisingfrom this “renewables revolution” for farmers, investors, ruralutilities and government at all levels.

The stakes are high:• Since 2000, ethanol production in the United States has

tripled. The aggressive Renewable Fuels Standard enactedin December — 36 billion gallons by 2022 — will keep thisrapid development on track for years to come.

• Installed wind capacity in the United States has more thanquadrupled in this decade. Germany still leads the world intotal capacity, but the United States led in new capacity in2005 and 2006, and the projections suggest that we will havedone so again in 2007.

• Shipments of photovoltaic units in the United States haveincreased tenfold since 2000, and we lead the world in solar,thermal, geothermal and waste-to-energy applications.Renewable energy, in short, has become a noteworthyAmerican success story, and I fully expect this progress tocontinue.

It is true that renewable energy is building out from a verylow base, currently between 6 and 7 percent of total U.S.energy consumption. But it is also true that the growth ratesdescribed above, if sustained, will rapidly expand renewables’market share.

For rural America — and for USDA Rural Development— this is a challenge as well as an opportunity. Several newindustries, largely rural and/or ag-based, are developingrapidly. There are opportunities at every point in theproduction chain. This is probably the greatest newopportunity for wealth creation in rural America in ourlifetimes, and capturing a fair share of that value for ruralAmerica is an important objective.

To help rural stakeholders and policymakers expand thedialogue for winning strategies in this fast-moving andincreasingly competitive arena, USDA Rural Development

identified four areaswhich are discussedin this issue. Thechoices we maketoday will cast along shadow:• Distributed wind and solar power must be integrated into

the grid. In addition, rural utilities will have to expand andmodernize the grid to move rural power in bulk to distanturban markets — e.g., getting North Dakota wind energy toChicago.

• Biofuels face several logistical hurdles. The blend wallbarrier is a significant obstacle. It is important that weincrease the allowable blend level, increase the number offlex-fuel vehicles and develop economically sustainablesolutions to incorporate more alternative fuels into our fuelsystem. The barriers to pipeline transmission need to beovercome.

• Not all business and investment models are created equal.From a rural development standpoint, it is desirable toencourage local ownership and control. It is important thatwe identify ways to facilitate the aggregation of local capitaland create opportunities for farmers and other ruralinvestors to engage.

These and many other issues are explored in these pages. Iurge you to tune in to the larger discussion as well. Renewableenergy and its impacts on farmers and rural development willbe a major focus of USDA’s annual Agricultural OutlookForum, which will be held this Feb. 21-22 just outsideWashington, D.C. Two weeks later, March 4-6, the worldwill gather in Washington, D.C., again for the WashingtonInternational Renewable Energy Conference, or WIREC2008. More than 80 nations will participate in Ministerial-level discussions, while hundreds of companies and severalthousand industry leaders will attend what will be 2008’sleading renewable energy trade show and business conference.

These events are an outstanding opportunity to explore thepotential of renewable energy, and to review best practicesfrom around the nation and the world. I cordially invite youto attend. The renewables train is indeed leaving the station.The opportunity is real. Now is a great time to consider whetherand how you should get involved. I hope to see you there. ■

C O M M E N T A R Y

Capturing Value for Rural America: StrategicChoices for Renewable Energy Investment

2 January/February 2008 / Rural Cooperatives

“This is probably thegreatest newopportunity for wealthcreation in ruralAmerica in ourlifetimes…”

—Thomas Dorr

Rural Cooperatives / January/February 2008 3

Rural Cooperatives (1088-8845) is publishedbimonthly by USDA Rural Development, 1400Independence Ave. 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.

Mention in Rural Cooperatives of company andbrand names does not signify endorsement overother companies’ products and services.

Unless otherwise stated, contents of this publicationare not copyrighted and may be reprinted freely. Fornoncopyrighted articles, mention of source will beappreciated but is not required.

The U.S. Department of Agriculture (USDA) prohibitsdiscrimination in all its programs and activities onthe basis of race, color, national origin, age, disabili-ty, and where applicable, sex, marital status, familialstatus, parental status, religion, sexual orientation,genetic information, political beliefs, reprisal, orbecause all or part of an individual’s income isderived from any public assistance program. (Not all prohibited bases apply to all programs.) Personswith disabilities who require alternative means forcommunication of program information (Braille,large print, audiotape, etc.) should contact USDA’sTARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write to USDA,Director, Office of Civil Rights, 1400 IndependenceAvenue, S.W., Washington, D.C. 20250-9410, or call(800) 795-3272 (voice), or (202) 720-6382 (TDD). USDAis an equal opportunity provider and employer.

Chuck Conner, Acting Secretary of Agriculture

Thomas C. Dorr, Under Secretary,USDA Rural Development

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?Call (202) 720-6483, orFax (202) 720-4641

This publication was printed with vegetable oil-based ink.

Rura

l

COOPERATIVESCOOPERATIVESJanuary/February 2008 Volume 75 Number 1

p. 4

p. 10

p. 16

p. 32

O n t h e C o v e r :

Summaries of four studies that examine important strategicchoices facing the renewable energy industry are presentedin a special section of this issue. The studies werecommissioned by USDA Rural Development.

F E A T U R E S

4 Investor’s Manual New investment models could help reverse decline of local ownership of biofuel plantsBy David Chesnick

7 Tapping farm equity key to greater local ownershipBy David Chesnick

10 Ownership ManualStudy assesses four primary ownership models for biofuels By Anthony Crooks

16 Getting ConnectedStudy sees USDA role in linking electricity from alternate energy sources to gridBy Alan Borst

18 Overcoming constraints to growth in biofuelsindustry By Donald Frederick

22 Using the ‘extra-value index’ to measure agco-op performanceBy Carolyn Liebrand

32 Bison co-op helping Native Americans developproduction, marketing strategyBy Dan Schofer

34 Valuing Your Co-opMeeting weighs value of co-ops in fast-changing business climate By Lynn Pitman

D E P A R T M E N T S2 COMMENTARY

20 IN THE SPOTLIGHT25 CO-OP DEVELOPMENT ACTION27 VALUE-ADDED CORNER 28 MANAGEMENT TIP31 UTILITY CO-OP CONNECTION38 NEWSLINE47 PAGE FROM THE PAST

Spec

ial R

enew

able

Energ

y Sec

tion


By David S. Chesnick

Agricultural Economist

USDA Rural [email protected]

Editor's note: This article presents findingsof Informa Economics, a consulting firmheadquartered in Memphis, Tenn. Thearticle does not reflect any official position ofthe U.S. Department of Agriculture or ofany other government entity.

little more than one-third of ethanol-industry capacity wasowned by farmers andother local investors in

early 2007, according to the RenewableFuels Association. However, only 15percent of new or expanding biofuelplant construction is owned by suchinvestors. A key reason for this shift isthat the larger plants being built todayrequire larger amounts of equity.

Equity investment at this scale can

be difficult to obtain from farmers andother rural investors living in closeproximity to a proposed facility. But iflocal investment wanes, so does the flowof returns from biofuel to thecommunities where it is produced.

Based on the analysis conducted byInforma and interviews carried outduring the course of this project,Informa formulated several investmentmodels that may be used to facilitateinvestment by farmers and other ruralresidents in the renewable energy

A

Investor ’sManual

New investmentmodels could helpreverse declineof local ownership ofbiofuel plants

Investor ’sManual

Bioenergy

New investmentmodels could helpreverse declineof local ownership ofbiofuel plants


Bioenergy

USDA photo by Dan Campbell

sector. This article briefly describeseach of these models.

Closed-end renewableenergy fund

With a closed-end renewable energyfund, investment is limited to farmersand other rural residents seeking toinvest in energy projects. Such fundswould be managed by professionals orinstitutions. These funds will need to belarge enough to invest across multiplefacilities. For example, a $300 million

capitalization fund could own almost allthe equity in three 100-million-gallon-per-year ethanol facilities.

While it is uncertain how muchmoney farmers and other rural investorswould be willing to invest in such afund, some parameters can be placed

around potential contributions.Through interviews, Informa calculatedthat the per-person investments byfarmers and other rural investors tendto be small, in relative terms, generallyaround $10,000 to $50,000. Given theresources of farmers, Informa believesfarmers with gross sales of more than$100,000, a mean net worth of at least$1 million and a debt-coverage ratio ofat least $50,000 would be the mostlikely candidates for participation in arenewable energy fund.

“If local investmentwanes, so does theflow of returnsfrom biofuel to thecommunities whereit is produced.”

Nearly 300,000 farms fall into thefinancial categories just described. Ifeach farmer were to invest at least$10,000, the fund would attract $3billion. New ethanol plants typicallycost $1.95 per gallon of capacity.Typically, they are built using 40percent equity and 60 percent debt.This would be sufficient to provideequity for more than 3.5 billion gallonsof ethanol.

Debenture guaranteesThe debenture guarantee model,

according to Informa’s analysis, wouldbe similar to the Rural BusinessInvestment Program (RBIP), created inthe 2002 Farm Bill and administered bythe Small Business Administration.Under this program, Rural BusinessInvestment Companies (RBICs) areestablished and allowed to issuedebenture guarantees. The debenturesissued by an RBIC are pooled withother issues and sold to outsideinvestors.

The debentures are backed by thefederal government and would carrylower premiums. Informa proposes thata similar program could be used forbiofuel investment projects. The modi-fications of the RBIP program to facili-tate an RBIC program would be as follows:• Because a relatively large amount of

total capital is required to financeconstruction of a new ethanol plant(around $185 million for a 100-million-gallon facility) the maximum,$6 million-net-worth restrictions ofthe existing program would be relaxed.

• Debenture pre-payment requirementsfor dividends may need to be relaxedin order to generate more cash flowto equity holders.

• Leverage fees for debentures wouldhave to be significantly lower to becompetitive against market interestrates.Despite the current drop in the

market price for ethanol, ethanol stakeholders enjoyed short debt-paybackperiods for those that entered themarket early. Thus, the debt market did

not demand a high risk premium fromethanol producers. Furthermore,ethanol plants with a higher probabilityof financial success are able to secureadequate debt financing in the market,Informa found.

New Markets Tax CreditA third investment model is based on

the New Markets Tax Credit (NMTC).The NMTC program is funded andmanaged by the U.S. TreasuryDepartment’s CommunityDevelopment Financial Institutions(CDFI) program. The Models forFunneling Local Investment Capitalinto Biofuel Production programpermits taxpayers to receive a creditagainst federal income taxes for makingqualified equity investments indesignated Community DevelopmentEntities (CDEs).

These CDEs could invest in biofuelfacilities and could supplement thefarmers’ equity, thereby leveraging theinitial farmer investment. Somemodifications would be needed for thebiofuel sector, such as: • The CDE would pledge to invest in a

portfolio of qualified biofuel projects;• Create a new tax credit model that

will mirror the investment mechanismof the New Markets Tax Credit, buttarget it specifically for biofuels andrenewable industry investment.The New Markets Tax Credit could

become a model to help finance a fewfarmer-owned biofuels facilities. Thefederal tax credit provides a subsidythat, if structured correctly, can providesome economical incentives forinvestors to finance farmer-ownedoperations.

Tax credit for projects withminimal rural involvement

Research by Informa indicated thatfarmer groups and rural residents canraise $5 million to $10 million from alimited number of investors in a shortperiod of time. However, movingbeyond this has proven difficult formany groups. To expand this groupwould incur a high cost. Therefore,another proposal would be to use taxcredits for outside investors to helpfarmers finance biofuel facilities.

This program would require anoutside investor to match the farmers’investment in exchange for the project’stax credit. Informa says this is similar tothe Production Tax Credit for wind-generated electricity. In order for theinvestors to gain the tax credit, theywould need to maintain a minimum ofperhaps 25 percent farmer ownership.Using project tax credits for a minimumshare of farmer or rural involvement ispotentially a viable mechanism tomaintain or increase the farmerparticipation in the biofuels sector.

No new investment models?Informa noted that some

interviewees objected to any programthat the government would create forinvestment in renewable energy. Theyindicated that there already aresubstantial amounts of equity flowinginto renewable fuel projects. Theystated that farmer-investors can buyshares in any of the several publiclytraded ethanol companies.

While farmers can use this approachto invest in ethanol, this would notaccomplish the objective of stanchingthe trend of rural investors owning areceding share of renewable fuel-production capacity. This also wouldkeep the returns from biofuels fromrecirculating within the ruralcommunity and thus stimulating furthereconomic growth within that ruralcommunity. ■


The ribbon-cutting in 2002 for the Glacial LakesEnergy ethanol plant in South Dakota.


Editor's note: This article presentsfindings from Informa Economics Inc., aconsulting firm contracted by USDARural Development to perform an initialstudy on financial models used in biofuelproduction. This article represents theauthor’s effort to summarize the studyfindings; it does not reflect officialpositions of the U.S. Department ofAgriculture or any other governmententity.

The ability to tap local equity isthe key to greater local investment inrural business opportunities, such asrenewable energy. One part of thisinvestment-model study includes anexamination of the amount of equityavailable in rural communities thatcould be available for ruralinvestment.

Farm assetsAccording to Informa Economics

and the USDA Economic ResearchService, the value of U.S. farmbusiness assets in 2006 was $1.81trillion, about 6.3 percent more thanin 2005. The value of farm realestate, accounting for 85 percent offarm sector assets, is expected to haveincreased by 7.5 percent in 2006,following a gain of 16.3 percent in2005.

The value of farmland in theUnited States generally follows farmincome and return to assets.However, since 2004, net farmincome declined while rural realestate value increased substantially.This pattern followed the samepattern of real estate valuesthroughout the rest of the country.

Total farm real estate value increasedfrom $1 trillion in 2001, to anestimated value of $1.6 trillion in2006, with most of the increaseoccurring since 2004.

Farm debtWhile there is significant value in

land held by farmers, it is importantto determine the extent to whichthese assets are already leveraged. Itis estimated that total farm businessdebt climbed 1.2 percent in 2006, to$218 billion.

Real estate debt for farmbusinesses has steadily increased overthe past 15 years, growing from $67.6billion in 1990 to $114.3 billion in2005. Real estate debt accounts formore than half of total farm debtoutstanding.

Bioenergy

Tapping fa rm equi ty key to g reaterloca l ownersh ip o f renewable energy

continued on page 8

USDA photo by Dan Campbell


Farm equityFarm business equity was

expected to continue rising in 2006as the increase in farm asset valuesexceeds the rise in farm debt. Farmsector net worth was expected to beabout $1.7 trillion in 2006, up from$1.59 trillion in 2005. The increasein assets relative to debt has liftedfarmers’ net wealth over the pastfew years. The value of debt-to-equity fell from 17.4 percent in2002 to an estimated 12.7 percent in2006.

This growing stock of equitycapital can be used to financeinvestments in rural communities.There are many opportunities forinvestment in the rural communitiestoday, one of the biggest being the renewable fuel sector.

Funds availableWhile U.S. farmers hold a significant amount of assets

and equity relative to debt, the ability to take on moredebt is largely dependent on the ability to generateenough income to service their debt obligations. In otherwords, you can’t mortgage the farm if you cannot coverthe additional debt payments.

One way to measure the amount of additional mortgagefunds available is to look at the unused debt-repaymentcapacity. This value compares the difference between themaximum amounts of debt farmers can afford to theamount of debt they currently hold, given the incomelevel of the farm household. The difference is referred toas the “un-used debt-repayment capacity.”

The debt-repayment capacity is based on the maximumdebt service that operators would be able to pay giventotal income and farm and non-farm expenses. Figure 1illustrates these two values from 1970 to 2006. During thistime period, there was only one year when the debt levelwas more than the repayment capacity. In 1981, theaggregate debt payments exceeded the farmers’ ability torepay these loans, which resulted in many farmforeclosures.

This tells us that farmers could boost their debt load bynearly $1 trillion. However, a number of scenarios couldoccur that could affect the income available for debtcoverage. These include falling commodity prices,increases for input prices or crop failures. On the otherhand, the risk associated with commodity price

fluctuations for the farm operator may be partially offsetby their investment in a biofuel facility.

Demographics show that the farming community isolder. More than one out of every four farmers, and abouthalf of agricultural landlords, are 65 or older. This groupcontrols more than one-third of all farm assets.

How does this affect the attitude of farmers withrespect to mortgaging the farm for investment purposes?In addition to working longer past traditional retirementage, farm-operator households tend to have severalincome sources and different forms of wealth, comparedwith the general population. While fewer farm operatorsare covered by employer-sponsored pensions than arenon-farmers, a majority of farm operators save fromcurrent income on a regular basis and have accumulateddiversified financial portfolios, including individualretirement savings.

Reduced tax rates on capital gains associated with theappreciation in farmland values, along with the prospect ofavoiding capital gains taxes on any appreciation prior todeath, continues to encourage farm owners to hold land.Recent changes in the federal estate tax policies that allowlarger amounts of property to be transferred at death freeof any estate tax further reinforce this incentive.

These factors, along with not wanting to “mortgage thefarm” on risky ventures, will probably keep the equitycapital tied up in the farm business. In order to tap theequity, there will need to be some incentive to entice thefarmer to transfer equity out of the farm and intoownership of biofuel operations.

— David S. Chesnick n



By Anthony Crooks



Editor's note: This article presents findingsof Informa Economics, a consulting firmheadquartered in Memphis, Tenn. Thearticle does not reflect any official position ofthe U.S. Department of Agriculture or ofany other government entity.

he U.S. Department ofAgriculturecommissioned InformaEconomics Inc. to studythe business models in

use in the renewable transportationfuels industry. In addition to providing a

full description of the basic businessmodels used in biofuels production, theobjectives of the study were to:• Articulate the advantages and

disadvantages of each model and theconditions of the marketplaceproducts and raw materials, sources ofcapital and regulatory and taxenvironment that most favor use ofeach particular model;

• Assess public policy and USDA RuralDevelopment programs to alignparticular models to conditions bestsuited to promote energydevelopment.

Industry background, structureThe ethanol industry is by far the

largest component of the renewable

transportation fuels sector, with 3.9billion gallons produced in 2005 and anestimated 4.9 billion gallons in 2006.This represents dramatic growth from1990, when production was 900 milliongallons, and 2000, when production was1.6 billion gallons.

During the current decade, ethanolindustry growth has been accelerated bya rise in petroleum prices and thebanning of the competing oxygenatemethyl tertiary butyl ether (MTBE).Farmer-owned facilities participated inthis growth to a greater extent thanever. As of November 2006, farmersand other rural investors owned 50 outof the 107 operating ethanol facilities,or 37 percent of production capacity,and they participated significantly in the

T

Ownersh ipManualOwnersh ipManual

Study assesses fourprimary ownershipmodels for biofuels

Bioenergy

Study assesses fourprimary ownershipmodels for biofuels

industry’s high profit margins.About half of industry capacity is in

the hands of firms structured as either alimited liability company or partnership(LLC and LLP) or a cooperative. Theother half of the industry is controlledby investor-owned corporations, such asArcher Daniels Midland, which owns20 percent of the industry’s productioncapacity. Another 30 percent is ownedby privately held corporations, such asCargill and Abengoa Bioenergy.

Business models for biofuelsWhile a number of diverse business

structures developed in the ethanolindustry in the past 15 years, looking ata cross-section of the industry, withrespect to producer and capacity, reveals

these four main business model types:

■ Corporate ModelThe producer here is a corporation

(typically a Class-C corporation) or asubsidiary of a corporation. Internalstaff manages the plant(s) and thefunctions of grain procurement,biofuels marketing and co-productmarketing. The producer does not ownor manage farmland. If the corporationproduces biodiesel, it is very likely toown integrated oilseed-crushingoperations. Some corporations alsoprovide third-party grain supply andbiofuel and co-product marketingservices to other producers.

Archer Daniels Midland (ADM) is aprime example of this model of

ownership. It is a vertically integratedagribusiness conglomerate and is alsothe largest biofuel producer in both theUnited States and the world, with morethan 1 billion gallons of annualproduction capacity (although apending deal may result in a companythat surpasses its production, see below).The corporation owns an extensivenetwork of grain elevators and is one ofthe world’s largest agricultural process-ors of soybeans, corn, wheat and cocoa.

ADM is a Delaware corporation andits stock is listed on the New YorkStock Exchange. With net sales andother operating income of $36.6 billionin fiscal 2006, ADM is the largestexample of the corporate businessmodel for biofuels. It operates sevenethanol production facilities: Decaturand Peoria, Ill.; Cedar Rapids andClinton, Iowa; Columbus, Neb.;Marshall, Minn.; and Walhalla, N.D. Itis building two new 275-million-gallonplants at its Cedar Rapids andColumbus sites.

ADM has an experienced internalsales force to market its ethanol. Itbegan offering ethanol-marketingservices to independent ethanolproducers last year. The corporationcontrols substantial transportationassets, including 20,000 railcars, 2,000barges and 1,500 tractor trailers. It hasco-product merchandising capability viaits ADM Alliance Nutrition subsidiary. “ADM is uniquely positioned at the

intersection of the world’s increasingdemands for both food and fuel,” saysADM Chief Executive Officer PatriciaWoertz.

■ The Farmer-Owned ModelThese businesses are generally

structured legally as either a cooperativeor an LLC or similar organization.Farmers have a majority ownership inthe facility. In a co-op, or a co-opwithin an LLC or which owns an LLC,


Bioenergy

USDA photo illustration by Stephen Thompson

members have delivery obligations(grain and/or oilseeds) to the facility.They have access to storage, includingon-farm bins and limited storage at thefacility. Especially if the ownership isthrough a cooperative, the business willalso have separate grain-elevatoroperations.

The Chippewa Valley AgrafuelsCooperative (CVAC) is an example ofthe farmer-owned business model. Itwas formed in the early 1990s with theintent of establishing an ethanol facilityin Benson, Minn. CVAC was formedwith more than 650 shareholders, whichincluded producers, elevators and localinvestors. Planning for the ethanolplant began in 1993. CVAC teamed up(with) the design/builder Delta-TCorporation to form Chippewa ValleyEthanol Co. LLC (CVEC). Delta-Tchose to become an equity investorwhen local producers faced a significantshortfall in their original equity drive.

CVEC’s original capacity was 15million gallons, and was later expandedto 20 million gallons. As the size of newethanol plants increased, CVECexpanded again, to 45 million gallons in2003, in order to stay competitive. Inlate 2006, CVEC signed a letter ofintent with Fagen Inc. to build a new40-million-gallon facility next to theexisting facility.

To improve its market position anddiversify its revenue stream, CVEC and

a group of other ethanol producersfounded Renewable ProductsMarketing Group. RPMG wasestablished to collectively and cost-effectively market ethanol byaggregating sales in volumes demandedby buyers. RPMG members also usedtheir combined buying power to reducecosts of enzymes and other raw materials.

CVEC teamed up with Pete’sWicked Ale in 2003 to produce ShakersOriginal American Vodka, a premiumbrand. CVEC has proven that thefarmer-owned business model can beadaptive and progressive and that it canoffer business strengths that go wellbeyond an assured grain supply.

■ Engineer/Builder-Owned ModelThese firms either own facilities

outright or maintain a significantownership interest, along with otherinvestors, in individual plants. In eithercase, the design/build firms maintain acontrolling interest in management.Because of their ownership in multiplefacilities, these firms have the scale tosupport an internal staff that conductsgrain procurement and biofuels/co-product marketing. They may alsoprovide services to unaffiliated plants.

From the Broin family’s small-scaleentry into the ethanol industry in the1980s, it would have been difficult topredict the extensive role that the BroinCompanies now play across theethanol-supply chain today. The familybuilt a small plant on its farm inKenyon, Minn., in 1983. The Broinsthen purchased and refurbished aforeclosed ethanol plant in Scotland,S.D., in 1987.

From such small beginnings, Broin& Associates began providing ethanolfacility engineering and constructionservices for other organizations. By theend of the 1990s, Broin Companiesprovided a range of services to ethanolproducers and became the prototypeengineer-owned business model.Renamed POET in May 2007, thisgroup of companies provides acomprehensive array of services for


The Washington International Renewable Energy Conference (WIREC 2008)will bring together government, civil society and private business leaders toaddress the opportunities and challenges of a major and rapid scale-up in theglobal deployment of renewable energy technology. The conference will be heldMarch 4-6 at the Washington, D.C., Convention Center.

“Renewable energy can quite literally change the centers of power fromurban cities to rural communities,” Thomas C. Dorr, USDA Under Secretary forRural Development, recently said. “It is not often that you have the chance to getin on the ground floor of this kind of development, but that is the opportunity weare being presented with today. WIREC 2008 will bring together government,business and community leaders from around the world to discuss issues, sharesuccesses and identify best practices.”

WIREC participants can expect to: • Acquire a better understanding of the benefits of renewable energy deployment

on energy security, climate change, air quality and economic growth.• Gain an appreciation for the multiple policy options and best practices that

encourage and enable accelerated renewable energy up-take. • Develop networks and find partners with whom to explore and initiate

renewable energy projects. These three objectives will be woven into WIREC’s four cross-cutting and

policy driven themes: Agriculture and Rural Development; Technology/Researchand Development; Finance; and Market Adoption/Deployment.

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

Renewable energy issues focus of WIREC 2008

“With the advent ofcellulosic ethanol…the issues of cost,legal structure andmanagement areexpected to becomeeven more acute.”

ethanol producers. In 1991, it beganoperating a center for plant design,engineering, construction and research.A management company was formed in1994 to provide management servicesfor Broin-designed plants. Dakota GoldMarketing was established in 1995 tomarket Dakota Gold EnhancedNutrition Distillers Products. In 1999,Ethanol Products was formed to marketethanol and carbon dioxide.

Twenty-three operating ethanolplants with a combined productioncapacity of over 1.1 billion gallons havebeen designed and built by POET. Anadditional five plants totaling 375million gallons were under constructionor development in December 2007.

POET retains an equity interest of20-25 percent in its partners’ plants.With its engineering and constructioncapabilities, ownership and manage-ment of partner plants, as well as itsethanol and distillers grains marketingservices, POET has pioneered the“engineer/builder-owned” businessmodel. ■ The “Franchise” Model

This is not a vertically integratedmodel, but rather is characterized by adependence on third-party serviceproviders to link the firm to its supplychain. The plant is a “cookie-cutter”facility designed and built by one of themajor engineering firms (consortiums),and its production process is monitoredremotely by the builder.

Third-party service providers aredepended upon to procure feedstock(grain or oil) and to market biofuels andco-products. New operations under thismodel are generally required by theirfinancial institution(s) to enter intolong-term agreements with theseservice providers. In turn, the serviceproviders might invest a modest amountof capital in the facility.

ASAlliances Biofuels LLC (ASA) wasformed in 2004 by Americas StrategicAlliances LLC, a firm specializing inmerchant banking and investments.ASA’s business plan combines top-tierservice providers with sophisticatedfinancial partners. Each facility is to bebuilt by Fagen Inc. and located adjacentto an existing Cargill Inc. grain elevator.

ASA began construction on twoplanned ethanol facilities in 2006, eachwith a capacity of 110 million gallonsannually, in Albion, Neb., andBloomingburg, Ohio. Constructionbegan on a third facility in Linden,Indiana in 2007.

Cargill Inc. is contracted to providecorn and natural gas procurementservices and ethanol and distillers grainsmarketing and transportation services.United Bio Energy Management LLCwill provide operational andmaintenance support.

In addition to negotiating contractswith the construction, grain supply,product off-take and facilitiesmanagement firms, ASA put togetherthe group of equity backers for thethree facilities and obtained therequired debt financing. A group ofprivate equity firms comprised ofAmerican Capital Strategies Ltd.,Laminar Direct Capital, L.P. (a memberof the D.E. Shaw group), U.S.Renewables Group LLC and MidwestFirst Financial Inc., provided asignificant portion of the equity and all


Elements of a Business Model

4 Pillars 9 Building blocks Answer these important questions.

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

Customers Target customer What customer or segment is offered value?

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

Customer relationships What links the company with its customers?

Operational Value configuration How are activities and resources arranged?

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

Commercial partnerships What arrangements with other businesses are necessary?

Finances Cost structure What are the monetary ways and means?

Revenue streams How does the company make money?

Adapted from Ostenwalder, A. Pigneur and C. Tucci, “Clarifying Business Models: Origins, Present, and Futureof the Concept,” Communications of the Association for Information Systems, vol. 15, May 2005.

Bioenergy


of the subordinated debt to ASAlliancesBiofuels. Challenger Capital GroupLtd., a Dallas-based, full-serviceinvestment bank, secured $148million in equity and subordinate debt.

In September 2007, VeraSun EnergyCorp. announced plans to acquire thethree ethanol plants from ASAlliancesBiofuels LLC for $725 million. Theacquisition is expected to increaseVeraSun's total production capacity toapproximately 1 billion gallons by theend of 2008.

In a sense, the “farmer-owned” and“engineer/builder-owned” businessmodels can be viewed as variations ofthe “franchise” model. However, theyalso have elements of verticalintegration that differentiate them fromthe pure “franchise” model. Farmer-owned operations are linked to thefarmer segment of the supply chain, andin some cases there is integration with agrain elevator. This arrangement canreduce, but not eliminate, the need fora feedstock supply agreement forethanol operations.

Third-party marketingorganizations

The advent of third-party marketingorganizations is an importantdevelopment in the industry and a keycomponent of certain business models,especially the “franchise” model. As ofDecember 2007, there were 120companies owning 134 ethanol facilitiesin operation, with 66 facilities underconstruction.

Besides being costly for each of thesefacilities to have internal sales staff forethanol and distillers grains (the mainco-product of dry-mill ethanolproduction), it would be particularlyinefficient for fuel blenders to have topurchase ethanol from 100 or sodifferent firms. Moreover, rail carriersfavor unit train shipments of about 100cars and a limited number of origin anddestination points (preferably one ofeach). These preferences are reflectedin their rate structures.

Until recently, it was necessary for a

company to have a minimum of 100million gallons of annual production tojustify having an internal sales staff.However, given the proliferation ofindividual plants of that size, theminimum size has increased. Althoughthere is no set rule, operationsproducing an aggregated 300 milliongallons annually are more likely to usean internal sales staff. However,virtually all new entrants into theindustry are encouraged by theirlenders and debt holders to use a third-party marketing company, at least untilthey’ve gained sufficient industryexperience.

VeraSun Energy Corp. owns eightplants with 560 million gallons ofannual production, and has anadditional 330 million gallons ofcapacity under construction.

At press deadline for this article (inearly December), VeraSun had recentlyannounced a proposed purchase of U.S.BioEnergy Corp. of Inver Heights,Minn., which would combine thenation’s No. 3 and No. 4 ethanolproducers into one company. The newVeraSun would have about 1.6 billiongallons of annual production at nineexisting plants, with seven more underconstruction.

The deal was expected to becompleted by March of 2008. Ifcompleted, the combined VeraSun-U.S.BioEnergy would surpass both ADMand POET in production. VeraSunrecently transitioned to market its ownethanol, a service which had been doneby Aventine Renewable Energy.

CHS Inc., the nation's leadingfarmer-owned energy and grain-basedfoods company, had owned about 20percent of U.S. BioEnergy. If themerger is approved, it will own about 8percent of VeraSun.

The CHS board of directors voted infavor of the VeraSun merger. CHS hasmarketed ethanol-blended fuels formore than 25 years and currently is oneof the nation's largest suppliers ofblended fuel products, which itdistributes through 64 terminals.

Cellulosic ethanol applicationsWith the advent of cellulosic ethanol

in the coming years, the issues of cost,legal structures and management areexpected to become even more acute.Capital expenditures per gallon ofcapacity for cellulosic plants areestimated to be at least three timesthose for a corn-based plant. Betweenthe total cost of a facility and obtainingthe rights to use cellulosic ethanoltechnology, it is possible that only largecorporations and private equity fundshave the financial resources to providethe equity for such ventures, especiallygiven the associated risk.

Given the importance of intellectualproperty in cellulosic ethanol and thefact that some of the main engineeringcompanies serving the corn-basedethanol industry are also devotingresources to cellulosic ethanol, theengineer/builder-owned business modelare likely to rise in prominence.

Collection and storage systems haveyet to be established for crop-basedfeedstocks, although central millinglocations exist for some forest and paperproducts. Given the scale of theinvestments and the role of intellectualproperty in cellulosic ethanol, it ispossible that the farmer-owned businessmodel will struggle to be relevant in thenew industry. However, farmers willstill be the main source of cellulosicfeedstock. A hybrid business modelcould be developed to bring feedstockproducers into the ownership structure.

The Broin/POET system ofpartnering with farmers and other ruralinvestors seems to be adaptable for thispurpose of tying together capital,intellectual property and feedstock. Butthe feedstock supply linkage will needto be enhanced. Given the legal andmanagement issues discussed above, itseems imperative to ensure that anynecessary modifications to legalstructures and management systems beput in place during the next few years iffarmers and other rural investors are to

continued on page 44



By Alan Borst



Editor's note: This article presents findingsof Booz Allen Hamilton, a consulting firmheadquartered in McLean, Va. The articledoes not reflect official positions of the U.S.Department of Agriculture or any othergovernment entity.

SDA RuralDevelopmentcommissioned BoozAllen Hamilton (BAH)to: examine current

renewable energy markets for electricitygeneration; identify various barriers thatinhibit further development of theseresources by rural residents; analyzebusiness model options that can beapplied to better enable the profitablesale of on-farm generated power to theelectric grid; and recommend programsor policies that USDA could undertaketo promote greater capture of renewableenergy benefits by rural communities.

Affordable and accessible electrictransmission remains the greatestobstacle to the development of ruralrenewable energy projects overall. BAHconcluded that USDA, as the largestlender to rural electric cooperatives fortransmission upgrade projects, has animportant role to play in working witha variety of stakeholders and regulatorsto develop comprehensive, equitableand transparent transmission accessrules that provide the opportunity toparticipate fully in the growingrenewables market.

Despite the lack of comprehensive,nationally applicable transmissionpolicies, there are emerging policysolutions at the state and federal level.These include provisions of the EnergyPolicy Act of 2005, which call on thefederal government to create newtransmission corridors in renewable-

resource-rich areas. Regulatorydevelopments at the state-governmentlevel will likely make transmissionaccess more transparent and affordablefor renewable energy projects. BAHfound that USDA could play asignificant role in helping analyze andpublicize these developments to ensurethat rural communities are able tocapitalize on them to the greatestdegree possible.

Supporting rural renaissanceRural energy production holds much

promise as a means of supporting our

national energy needs and contributingto the rural renaissance in America. Ahigh percentage of the estimated U.S.wind and solar capacity and virtually allof the biomass-derived electricitygeneration capacity is located in ruralareas. BAH found that wind energycurrently offers the highest potential forprofitable development, followed bybiomass and solar opportunities.Unlocking the economic potential forthese renewables requires analysis of thevarious value chains to identify thefunctions with the greatest potential forcapture by rural residents. Realizing

Study sees USDA role in linkingelectricity from alternative energysources to grid

Get t ingConnected

U Get t ingConnected


this value will require larger scaleprojects, which in turn will inform thechoice of best business models.

The primary business model involveslarge-scale (primarily wind) projects bylarge and remote corporate developers,including investor-owned utilities andprivate energy companies. Theseprojects bring some limited economicbenefits to the local community butreturn the majority of the earnings tooutside investors. Capturing the valueinherent in renewable energyproduction requires major shifts in theway rural residents think about and actupon these opportunities.

Rural entrepreneurskey to effort

The first step in promoting theseshifts is the dissemination of technical,business and policy information in amanner that America’s ruralentrepreneurs will understand. Thisinformation must be timely to ensure amarket-based solution to both energyand rural development needs.

The greatest opportunities forcapturing renewable energy value willbe realized if rural communitiesaggregate their resources, either in theform of land-lease rights or capitalformation, to develop new projects atthe local level. However, suchaggregation will only work if ruralinvestors are able to secure access toexpertise on various technical andcontracting mechanisms that govern

power production, including siteselection, project operation and powerpurchase agreement negotiation.

There is no current means fordistinguishing renewable energygenerated and owned by ruralcommunities. An examination ofmarketing and outreach mechanismsthat could stimulate greater demand forcommunity-owned renewable energyshould be undertaken.

Facilitating best practicesGiven the pace of change in the

renewable marketplace, new policiesand business models are emerging onan almost daily basis that fundamentallyalter the feasibility of rural- owned and-operated rural energy. By providingrural Americans with easy access to suchinformation, USDA would facilitate amore rapid transition to creative newbest practices and help rural Americansincrease their profitability by adoptingcutting-edge policies and business models.

Providing access totechnical expertise

On-farm energy generation willentail a number of technical decisions,ranging from identifying appropriateenergy source, technology and size, toproject-related decisions involving siteselection and connecting to the grid.Business challenges include theaggregation of financing and findingand negotiating a power purchaseagreement.

In most cases, tackling all of theseissues requires outside expertise orcounsel, which is often time consumingand expensive. BAH suggests thatUSDA help rural constituents overcomethis barrier by establishing a programthrough which it would provide ruralinvestors access to experts on thevarious aspects of renewable energy.These experts would be pre-screened byUSDA to determine their level ofexpertise and experience.

Promoting ‘green branding’To assist in developing a local market

for on-farm energy products, toolscould be developed to create additionaldemand for rurally owned renewablepower. The government has usedsimilar branding campaigns to buildconsumer awareness and markets forenvironmentally friendly products togreat success, most notably with theENERGY STAR Program. The federalgovernment could assist ruraldevelopers in creating “green-market”branding campaigns to help the publicconnect the benefits of rural-basedrenewable energy generation to thoseregions and to their own lives.

Increasing use offinancial incentives

The federal Production Tax Credit(PTC), with its relatively shortauthorization periods and lapsesresulting from delays in reauthorization,has had the effect of creating boom andbust periods in the industry. To avoidsuch cycles in the future, BAH suggeststhe federal government should developguidelines for a consistent, integratedset of financial incentives targetedspecifically at renewables and on-farmgeneration, including making the PTC,Clean Renewable Energy Bonds, andRenewable Energy ProductionIncentive long-standing and consistent. Reforming the PTC to allow it to beapplied against ordinary income, insteadof passive income, would significantlyincrease rural ownership opportunities.

In summary, USDA can play asignificant role in helping ruralcommunities to profitably invest inrenewable energy projects. Renewable-resource-rich rural areas can, and will,lead the way in helping America toreach its energy independence andenvironmental goals while alsofurthering their own economicdevelopment. ■

Bioenergy“The greatestopportunities forcapturing renewableenergy value will berealized if ruralcommunities aggregatetheir resources…todevelop new projects atthe local level.”


By Donald A. Frederick

Program Leader for Law,

Policy & Governance;

USDA Rural Development

Editor's note: This article presents findingsof Booze Allen Hamilton, a consulting firmheadquartered in McLean, VA. The articledoes not reflect official positions of the U.S.Department of Agriculture or any othergovernment entity. The author of thisarticle recently retired from USDA.

he U.S. Department ofAgriculture asked BoozAllen Hamilton (BAH)to identify the obstaclesto rapid expansion of

the biofuels industry and actions toovercome those barriers. The target isU.S. production and use of 60 billiongallons per year (BGY) of biofuels by2025. This would meet 17 percent ofthe projected 250 BGY United Statestransportation fuel demand for 2025.

Expanded domestic biofuelsproduction and use will have severalimportant benefits, including: 1) lessenour dependence on foreign oil; 2)improve the environment; 3) reduceU.S. foreign trade deficits; 4) enhancethe economic well-being and quality oflife for rural Americans.

The 60 BGY target represents whatpolicymakers believe to be the mostaggressive, yet achievable, goal forbiofuel production (i.e., ethanol and, toa much lesser extent, biodiesel) in theUnited States. BAH concludes that thegoal is attainable, but will requiresignificant technological, logistical andsocio-economic changes to the current

system of producing, transporting andusing transportation fuels.

Initial findingsMost biofuels production today is

corn-based ethanol, most of which isused as an additive to petroleum-basedgasoline, producing a blend of 90 per-cent gasoline and 10 percent ethanol.

As early as 2012, BAH says ethanolproduction from corn will reach 15BGY. This will saturate the currentblend market and the use of corn forethanol production will begin toadversely impact other uses of corn,notably as livestock feed.

Further growth of the biofuelsindustry will require a new set ofgovernment policies that will facilitatethe development of new, dedicatedenergy crops, commonly referred to ascellulosic feedstocks. Additional policyinitiatives will be needed to encourageinvestment in infrastructure anddistribution capacity that will makehigh-blend fuels – such as an 85 percentethanol fuel (E85) – readily availableand cost competitive with fuels entirelyor primarily produced from oil. Finally,drivers will have to want to purchaseand have easy access to affordablevehicles that operate efficiently onbiofuels.

BAH found that as annual biofuelsindustry production progresses towards60 BGY, constraints will arise in all fourmajor components of the biofuels valuechain (feedstock, conversion, transportand end use). The BAH reportidentifies those constraints andrecommends actions that USDA andother government institutions can take

to address them. Forward thinking isessential to coordinate the simultaneousexpansion throughout the biofuels valuechain that is necessary to avertconstraints which could cripple theindustry.

FeedstockFeedstock production involves the

growth and harvesting of traditionalcrops such as corn and soy, futurededicated energy crops and biomassavailable from forest and agriculturalresources.

BAH found that significant feedstockconstraints are:• Land and water use requirements for

feedstock production sufficient tosupply a 60 BGY biofuels market arenot well understood;

• Severe drought and low crop yieldscould significantly impact thefeedstock availability for conversionto biofuels;

• Current re-enrollment of CRP land ishigh and there is no incentive for landreintroduction for growing dedicatedenergy crops.

T

Overcoming const ra in ts to g rowth in b io fue ls indust ry

“Further growth of thebiofuels industry willrequire a new set ofgovernment policies thatwill facilitate thedevelopment of new,dedicated energy crops.”

The recommended action to addressfeedstock constraints is to create amechanism to determine what agri-

cultural practices must be present in2025 to support a 60 BGY biofuelsmarket and still meet food and feedrequirements. This study should examine:• The balance between existing

agriculture and introduction of newenergy crops;

• The pace of land introduction and/orconversion needed to meet futurebiofuels feedstock productionrequirements;

• The potential of introducing drought-and pest-tolerant and high-yield seedhybrids;

• The benefits of creating a "strategiccrop reserve" as a hedge against lowcrop yields;

• How subsidies could impact theproduction of newfeedstocks/dedicated energy crops;

• How improved feedstockdensification processes can lowercosts and risks of biofuels facilities.

ConversionEthanol and biodiesel plants each

have their own unique processes for

converting renewable feedstocks intobiofuels. A sustainable Americanbiofuels industry capable of replacing asignificant amount of imported oil willrequire new technologies which canconvert different and more plentifulrenewable resources into biofuels.

The significant conversionconstraints are:• Environmental challenges of

conversion technologies affectpotential plant siting;

• Economics of new bioconversiontechnologies are highly dependent onvolatile feedstock and biofuels prices.

• Biodiesel production is well belowexisting refinery capacity.The recommended actions to address

these conversion constraints are:• Work with states to determine how

emerging carbon trading programs,water rights issues and air permittingrequirements will impact biofuelsindustry development;

• Create a biofuels security subsidy witha price floor on oil and a price ceilingfor feedstock outside of whichgovernment support would betriggered to maintain positive eco-nomics within the biofuels industry;

• Create additional Renewable FuelsStandards specifically for E85 andbiodiesel to increase both nationwideavailability and demand of E85 andbiodiesel.

TransportCurrent biorefining finished product

volumes are small enough that barge,rail and truck shipments are economicaland efficient. But moving a greatlyenlarged amount of product fromdispersed biorefineries to local fuelterminals will require expanded andinnovative transportation systems.

The significant transport constraintsare:• The existing biofuels transport

infrastructure is incapable ofsupporting 60 BGY of biofuels;

• Rail tank-car construction is back-logged 18 months and rail spur linesare becoming overburdened withcurrent shipments of freight and fuel;

• No determination has been made asto the feasibility of converting existingpetroleum pipelines to accommodatebiofuels;

• There is a long permitting process


Moving increased volumes of ethanol will require expanded and innovative transportation systems. Rail tanker-carconstruction is backlogged 18 months, and some rail spurs are already overburdened. USDA photo by Dan Campbell

Bioenergy


By Lindsay Atwood USDA Rural Development

rue Value hardware.Ocean Spraycranberries. BlueDiamond almonds.Land O’ Lakes butter.

Dunkin Donuts. Best Western hotels.Sunkist oranges. These are all commonbrand names known by mostAmericans. The fact that they are allcooperative brands separates thesebusinesses and their products fromothers.

Almost half of Americans aremembers of cooperatives, althoughmany are unaware of it, and almosteveryone in America regularlypurchases products produced bycooperatives. Co-ops are part of thebasic fabric of our daily lives, but toomany Americans are unaware of this, orof the major role cooperatives play inthe marketplace.

That is all going to change ifRoberta MacDonald has her way.MacDonald, senior vice president ofmarketing for Cabot CreameryCooperative in Vermont (part of theAgri-Mark dairy co-op), wasinstrumental in creating the newMarketing Committee of the NationalCooperative Business Association(NCBA). As chair of the committee, hergoal is to combat public ignorance ofco-ops. Helping the public tounderstand what co-ops are can give co-ops a better edge in the marketplace

and spread this member- andcommunity-oriented business structure.

Spreading the wordAlthough she makes her living

promoting farmer-owned CabotCheese, MacDonald is a city kid whodid not have a farming or cooperativebackground.

“I come from consumer products,glitzy D.C., New York and SanFrancisco,” says MacDonald. “I wasactually somebody that didn’t evenknow where milk came from.”

In the almost 20 years sinceMacDonald started working for Cabot,a few things have changed. She creditsher teammates with helping Cabotgrow from a cooperative with $30million in annual sales to one with $350million in sales. During that time, shehas come to truly appreciate andsupport the cooperative business model.

“Long before I was a zealot aboutco-ops, I was a zealot about farmerownership,” she says. “I then came toappreciate what the cooperativestructure meant.”

Understanding and appreciating theco-op business structure makes herposition with Cabot more than simply ajob. It may be her job to market Cabot,but her mission is to advocate Cabot’scooperative advantage — and theadvantages of cooperatives in general— to the nation.

“People don’t get that it’s analternative to other business structures,and it can be just as profitable, just as


I N T H E S P O T L I G H T

Miss ion to Market Co-opsMacDonald, NCBA Marketing Committee workto expand public understanding of cooperatives

T

“Long before I was a zealot about co-ops,I was a zealot about farmer ownership,”says Roberta MacDonald. Above right:the new Girl Scouts’ Co-ops forCommunity merit badge. Opposite page: anew co-op education Web sitehomepage.

effective, but certainly…moretransparent,” she says.

From this dedication, both to Cabotand to the entire cooperative sector,MacDonald has poured her efforts intopromoting cooperatives. She is wellaware that what is true for Cabot is truefor other co-ops: that on their own, co-ops simply do not have enough moneyto do serious consumer marketing.Joining forces is mutually beneficial toeach and every one of them.

“We represent the largest potentialvoting bloc of any group in the UnitedStates,” she says. “We are a politicalforce to be reckoned with if we ever gottogether.”

MacDonald was nominated to theNCBA board about four years ago,making her goal of promoting co-opadvantages and forging cross-sector co-op alliances more attainable. She usedher position on the board to advocatethe creation of an NCBA MarketingCommittee open to board members andany cooperative members’ marketingteam leaders.

“The committee was really her idea,”NCBA President Paul Hazen says.“She’s a marketing genius.”

“I thought the marketing committeewas the perfect place for the outgoingchair [of NCBA] to serve as chair,”MacDonald says. “Instead, what theydid was to make me chair.”

Marketing the co-op advantageSince its creation, the NCBA

Marketing Committee has developedsome powerful tools for reaching out topeople and educating them aboutcooperatives. These tools, including anew co-op Web site (www.go.coop), anew introduction to cooperatives videoand a new Girl Scout “Co-ops forCommunity” patch, all tout cooperativeadvantages. MacDonald played a part ineach of the projects but creditsteamwork for making them all happen.“No one person accomplishes anything,if you ask me,” she says. “It’s always ateam.”

Every member of the NCBAMarketing Committee, which includesrepresentatives from several cooperative

associations — including the CreditUnion National Association, theNational Rural Electrical CooperativeAssociation and the National Council ofFarmer Cooperatives — was crucial tothe effort, she stresses. Staff fromNCBA, dotCooperation LLC (whichoversees the .coop Web URL domain)and NCB (formerly NationalCooperative Bank) were especiallyhelpful to the effort, as was theNational Cooperative GrocersAssociation. The grocers associationalso played a key part in creation of the

.coop URL. Having researched whatconsumers thought of cooperatives withtheir members, they landed on the GoCo-op phrase, which was turned intothe committee’s Web site for themarketing program.

Many cooperatives are already takingadvantage of the .coop URL, but thecommittee appreciates that there has tobe serious marketing on an ongoingbasis to increase public awareness. “Toofew people even realize there’s a .coopURL,” MacDonald says.

As part of National Co-op Month inOctober, the NCBA MarketingCommittee launched a month ofsponsorship announcements onNational Public Radio, promoting thenew co-op Web site. “Two weeks intothe campaign, we had thousands of hitson our Web site and many stayed to

look through all we had to offer,”MacDonald says.

The Web site is also home to thevideo created to educate people aboutwhat co-ops are, what they do and howthey benefit people. The videohighlights housing, electric, grocery,healthcare, farm and financial co-opsacross the nation. Cabot, along withNCBA, also spearheaded the effort tocreate the Girl Scouts “Co-ops forCommunity” patch program as a part ofthe overall co-op awareness campaign.

“Roberta has always wished to dosomething to spreadthe word on what co-ops are,” says DebLowery, the NationalGirl Scouts projectcoordinator for CabotCreamery. This is oneway she has been ableto directly involve co-ops in teaching thenext generation abouthow they canpersonally becomeinvolved.

“I probablyhave about 200 orders[for informationpackets on the co-opmerit badge program]that have come in

from cooperatives,” Lowery says.“There’s a tremendous amount ofinterest. The orders for the booklets arejust coming in hand over foot.”

Although the booklets were createdfor Girl Scouts, MacDonald emphasizesthat any children and youthorganizations can use the materials. “I think once 4-H gets hold of it, it’llgo a lot of places,” she says. “It’s notjust for Girl Scouts.”

The benefits of this Girl Scoutspatch program are in keeping withMacDonald’s long-term goals for thefuture of cooperatives. She wants to getyoung people interested in co-ops,understanding co-ops and involved inco-ops.

“When you get kids involved froman early age in anything, it becomes




By Carolyn Liebrand, Ag Economist

USDA Rural Development, Cooperative Programs

Editor’s Note: The extra value index was developed by USDACooperative Programs previously to evaluate dairy cooperativeperformance. Results for dairy cooperatives can be found in

Research Reports 166 and 212, and also in “Rural Cooperatives”magazine (Nov./Dec. 1996 and Sept 1998 issues). This articlesummarizes the results of “Measuring the Performance ofAgricultural Cooperatives,” a new USDA report that extends theanalysis to all types of agricultural cooperatives. To order a copy ofthe full report, see ad on page 15.

Using the ‘ext ra-va lue index’ to measureagr icu l tu ra l cooperat ive per fo rmance

Photo illustration from photo by Bruce Campbell


he task of measuring the financialperformance of cooperatives is problematicbecause of the attributes of the cooperativeform of business. One such feature is the useof member equity to finance cooperatives.

The cost of member equity is often overlooked. Most of the commonly used financial measures — return

on equity, return on assets, return on operating capital, netmargins on sales, net margins per unit and so forth — do notyield unequivocal conclusions about a cooperative’sperformance, in large part due to the treatment of equity.Another complicating factor is a cooperative’s lack of publiclytraded stock. For public companies, the stock price may serveas a proxy for a company’s performance and market value.

For these reasons, it is difficult for members to judge theircooperative’s performance. However, members need to be

able to fully evaluate their cooperative’s performance. Themore complete the measure of cooperative performance, thebetter equipped the board is to guide the cooperative and toevaluate and appropriately reward cooperative managers.

What is extra value?In previous reports, USDA Cooperative Programs took an

innovative business-school tool for measuring theperformance of a business and modified it for use withcooperatives. This method is fairly simple. It calculates the“extra value” a cooperative generates through its operationsby subtracting an interest charge on equity capital from netsavings:

Extra value = Net savings - Interest on equityInterest on equity = member equity x interest rate for equity

Performance was measured using three different interestrates for the charge on equity to reflect a range of riskpremiums. The December average of the British BankersAssociation’s London Inter-Bank Offered Rate (Libor) plus200 basis points provides the basic reference rate. This Libor+ 2 “basic” rate reflects the commonly held opinion thatbanks in the United States will generally extend loans to afirm with a better-than-average credit rating, at an interestrate of about 200 basis points above the Libor.

The extra-value approach enables a cooperative’s use ofmember-supplied funds to be fully measured — whethermember capital is earning more, or less, than it could inalternative investments. The value a cooperative generatesover and above its expenses, including an opportunity cost forits equity capital, is termed “extra value.” A positive extravalue indicates that a cooperative has created value by itsoperations, while a negative extra value means that acooperative has actually diminished the value of members’investment.

Extra value was also calculated at two higher rates – thebasic rate plus 5 percentage points and the basic rate plus 10percentage points – to account for the fact that equityinvestments are riskier than debt and require higher rewards.

For comparisons over time and among different types ofcooperatives, extra value is expressed as a percentage ofoperating capital. This common-sized index is thus scale-and operating mode-neutral.

Extra-Value Index = Extra Value / Operating Capital x 100Operating capital = fixed assets + net working capital

Fixed assets = non-current assetsNet working capital = current assets minus current liabilities

Selection criteria for cooperativesAgricultural cooperatives that were on the “Top 100” list

(compiled by USDA Cooperative Programs, based on a co-op’s revenue) for at least four years in both of the five-yeartime periods 1992–96 and 2000–04 were included in this

T


study. Multiple years were averaged to help minimize theimpact of extraordinary factors on results. Use of this criteriaresulted in the selection of 65 agricultural cooperatives.

Based on their main source of revenue, the cooperativeswere grouped into seven general types: cotton, dairy, farmsupply, fruit and vegetable, grain, sugar and “other.” The fewdiversified (where marketing and supply operations bothgenerate significant revenue), rice, poultry and livestockcooperatives were combined in the “other” category.

Ag co-op performancePerformance was assigned to one of five categories,

according to the cooperatives’ return on equity and extravalue generated at three different interest rates:

Category I — Negative returns. Cooperatives in thiscategory had a negative average return on equity for the five-year period.

Category II — Positive return on equity, but no extravalue generated. These cooperatives averaged positivereturn on equity for the five-year period, but showed anegative extra value when the basic rate was charged forequity capital.

Category III — Extra value generated at a basic interestcharge for equity. These cooperatives were adding sufficientvalue through their operations to cover the opportunity cost

of member-supplied capital at a rate similar to what theywould have had to pay for debt capital.

Category IV —Extra value generated with a moderaterisk premium on equity capital. Cooperatives in this groupshowed positive average extra value when interest on equitywas charged at a 5 percent premium over the basic rate.

Category V — Extra value generated with a higher riskpremium charge for equity. Cooperatives in this categorywere able to average positive extra value for the five-yearperiod when applying a 10 percent risk premium (over thebasic rate) to reflect the historical risk premium for equityinvestment.

Table 1 shows the numbers of cooperatives, according totype, that performed in each category for each time period.More cooperatives showed positive extra value (category III,IV or V) in the second time period (46 cooperatives) than inthe first (39 cooperatives). The different types ofcooperatives followed suit, with the exception of the farmsupply cooperatives, where there were two fewer cooperativeswith positive extra value — at any interest charge for equity— in the second time period.

For 2000-04, all of the cotton cooperatives showedpositive extra value and more than 80 percent of the grainand dairy cooperatives generated extra value. A majority of


I X 1992-96 0 1 0 0 0 1 2 42000-04 0 1 1 2 1 0 0 5

II X 1992-96 1 4 2 9 4 2 0 222000-04 0 2 3 5 1 2 1 14

III X X 1992-96 0 4 4 3 5 2 1 192000-04 1 5 5 5 8 3 1 28

IV X X X 1992-96 0 3 2 1 2 0 0 82000-04 0 3 0 1 2 0 1 7

V X X X X 1992-96 2 4 1 2 2 1 0 122000-04 2 5 0 2 1 1 0 11

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

Group

NegativeROE

PositiveROE

PositiveEVI@BasicRate

PositiveEVI @Basic+5%

PositiveEVI @Basic+10% Period Cotton Dairy

FarmSupply

Fruit &Veg Grain Other Sugar Total

Number of cooperatives meeting criteriaCriteria met


By Melanie Bowden

Editor’s note: Bowden is a freelance writer, writingteacher and writing coach. She has written for morethan 100 publications.

’ve lived here for more than 15years,” says Lina Hernandez, amother of three. “Before theKnights Landing Children’sCenter,

there was no reliablechild care. My husbandworked days and I hadto work the swing shift.”

Now, Lina has a dayjob as a case managerfor the Yolo FamilyResource Center. She’smuch happier nothaving to look for swingshift agricultural orretail work. And herfour-year-old daughter,Esmeralda, is happiertoo.

Staff from the newCalifornia Center forCooperative Development (CCCD), along with a parentorganizing committee, spent a year planning for the parent-run cooperative’s opening in January 2004. In 2007, theCCCD helped the co-op upgrade its financial accountingsystem. CCDC helped educate the members and the boardof directors, which is comprised of parents. It also assistedwith other structural supports that have helped strengthenthe co-op, which offers families in the rural community ofKnights Landing, Calif., a place for children age 2-6.

The co-op meets the unique needs of parents in a ruralagricultural community. Many of them work in a nearbycannery or in the fields. Since the center is open year-roundfrom seven a.m. in the morning to five p.m., parents have

time to drive back andforth to their jobs and stillput in an eight-hour shift,something that wasimpossible when the solepreschool in town offeredonly a three-hourprogram.

USDA RuralDevelopment recentlyprovided a $224,000 grantto the Yolo MutualHousing Association(YMHA), which is the newCenter for Cooperatives inCalifornia. YMHA workswith cooperatives onvarious projectsthroughout the state,including providingtechnical assistance andsupport to KnightsLanding CooperativeChildren’s Center.

Parents make thedifference

The operation ofKnights Landing Children's Center (KLCC) is designed tomeet the needs of its members--and to adjust when thoseneeds change. Parents make decisions and solve problems onsuch issues as tuition, staff hiring, hours of operation andbudget. The parent-elected board of directors meetsmonthly, and membership meetings are also held regularly.

“It’s the parents working together who have kept thecenter open,” says Clare Purtill, a board member and ateacher at KLCC. “Without the parents’ help, we wouldn’tbe able to offer three different programs: four-hour, six-hourand full day."

A sliding-scale fee has also been established, with the helpof a combination of grants, donations and volunteer parents

School ’s In !

C O - O P D E V E L O P M E N T A C T I O N

California parents create childcare co-op

“IDirector-teacher Clare

Purtill greets an

arriving student at the

Knight Landing

Cooperative Children’s

Center. Above: the co-

op’s playground. Each

member-family must

perform five hours of

work at the Center

each month. Photos

by Melanie Bowden


doing jobs that would otherwise require paid help. Sincethe highest fee is less than the lowest fee typicallycharged by local child care providers, KLCC is able toserve more families living on low incomes.

For their part, each member family is required toparticipate five hours a month, either helping in theclassroom or performing functions such as bookkeepingor purchasing supplies. Parents are expected to attendthe annual membership meeting and to participate in aminimum of six education classes that focus on parentingissues.

“It is humbling to work with the parents and staff ofKnights Landing Children’s Center,” says Kim Coontz, anationally known co-op development specialist who nowserves as executive director of the new California Centerfor Cooperative Development. “The parents and thededicated staff of KLCC put a high value on theircooperative and have been true partners in identifyingthe education and training needs that would best help itsucceed. They have worked hard to implement thechanges needed to make their cooperative strong.”

Facing the future, togetherThis solid base of support will be tested in the coming

months. Grafton Elementary School has notified the co-op that next fall, it will need the classroom currently usedby KLCC. The school has offered the cooperativeanother temporary classroom until the following fall, butthen the co-op will need to have a more permanentlocation. Some of the help provided by the cooperativedevelopment center has included identifying potentialfunding sources for this move and developing a brochureand templates for other types of information, which areuseful for fundraising.

Gricelda Cardenas, a board member and the co-op’streasurer, appreciates all that KLCC has to offer. “Ireceive parenting and educational support from the staffand the other parents. Parents are encouraged toparticipate in their children’s education, both at thecenter and at home, and are given the necessary tools tohelp their children learn.”

Esmeralda Hernandez, Lina’s four-year-old daughter,likes getting to play with all her friends at school.“Teacher Clare takes us to the library every week,” shesays. “One time we went to the clinic and learned howto listen to a heartbeat from the doctor.”

Asked what she likes best about her school, she says, "Ilike everything.” And she likes having both of her parentsat home at the end of the school day, too.

For more information on the California Center forCooperative Development, visit: www.cccd.coop. ■

“The Art and Science of Cooperative Business Development,”now in its fifth year, is the only training program available in theUnited States that addresses the unique attributes of developingand expanding cooperatively based enterprises.

Twice each year for five days of intensive training,participants are immersed in learning the practical applications ofcooperative business development skills. The training uses amulti-faceted format that includes lectures, interactive sessions,case study analyses, panel discussions, study tours to localcooperative, and plenty of opportunities to network with facultyand students.

The program is produced by CooperationWorks!, a nationalservice cooperative for co-op development centers. It takes placeat the University of Wisconsin and Madison, a national nexus forcooperatives and credit unions.

Energy independence director speaksA special highlight of the September 2007 session was a

reception for the Madison co-op community, featuring guestspeaker Judy Ziewacz. Currently the director of Wisconsin's newOffice of Energy Independence, she was previously deputydirector of the Wisconsin State Department of Agriculture, Tradeand Consumer Protection. Before that she was a national leader incooperative development and one of the founders ofCooperationWorks!

Ziewacz spoke about the role co-ops can and are playing inthe move toward energy independence. Wisconsin's governor haschallenged the legislature to mandate that 25 percent of electricityand 25 percent of transportation fuel come from renewable fuelsby 2025. The state’s dairy co-ops (part of a $20.6 billion industry)seem to be in a good position to benefit from such initiatives.

Ziewacz told the Madison crowd that people who look togenerating renewable energy from the rural landscape but areintimidated by big projects should not be concerned. That’sbecause the co-op model offers a way to make this happen bybecoming more, not less, independent.

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

said in a recent interview, “we positioned cooperatives as a ruraldevelopment tool that aggregates individual producers’enterprises in both vertical and horizontal linkages to the market.As the renewable energy field develops, we don't have to reinventthe wheel,” she emphasized. “We already know a model thatworks.”

The 2008 “Art & Science of Cooperative BusinessDevelopment” program will begin this spring. For moreinformation, contact Audrey Malan at 307-655-9162 [email protected].

—By Jane Livingston

Art & science of energy independence


Ohio co-op’s soy-crush ing p lant p roducesfor expanding t rans-fat- f ree o i l market

V A L U E - A D D E D C O R N E R

By Michael Jones

Public Affairs DirectorUSDA Rural Development, Ohio

eveloping new marketsand responding swiftly —and correctly — tomarket changes arequalities all successful

businesses share. Mercer Landmark Inc.,a northwest Ohio cooperative, exhibitedthose business skills in positioning itselfto become a significant regional supplierof soybean-based products.

Mercer, a 74-year-old, locally ownedfarm cooperative, has more than 2,000producer-members and operates 15facilities in Mercer, Darke, Van Wert andPaulding counties. Although Mercer focuses on delivering avariety of agronomy, livestock, grain-marketing and relatedservices to its members, it constantly evaluates newopportunities that could increase the cooperative’s overallprofitability.

The motivation to financially reward its producermembers prompted Mercer to investigate the potentialmarket for soybean oil. To do so, Mercer sought USDARural Development’s help, securing a $30,000 Value AddedProducer Grant to evaluate the soy-oil market. The grantprovided half of the funding needed to conduct a feasibilitystudy and complete a business plan. The study, completed in2006, confirmed that Mercer’s management was right ontarget in seeking to enter the soy-oil market.

“When we look at growth opportunities, our mainconcern is making sure whatever decisions we make producepositive financial returns for our members,” says Mike Fry,president and CEO of Mercer Landmark. Fry has been withMercer since 1995 and is responsible for directing andleading the business operations.

“This venture is an opportunity for us to position Mercerto benefit from current trends, as well as to anticipate andincorporate any future industry developments,” adds Fry.

Study leads to crushing plant As a result of the feasibility study, Mercer constructed a

small soybean-crushing plant where it processes a speciallow-linolenic soybean, grown under contract by 200 Mercerproducer-members. The co-op then sought, and received, asecond Value Added Producer Grant: $300,000 in workingcapital for the soybean-crushing venture.

Producer members will earn a premium of 60 cents perbushel when delivering this product to the plant at harvest, or70 cents per bushel if the soybeans are stored on their farmsuntil the plant calls for their crop. Mercer’s producer-members will also share in profits from operations at thesoybean-processing plant.

Using a mechanical extrusion technique, the processseparates soybeans into food-grade soy oil and soybean meal.The extrusion process, which doesn’t use chemicals, producesa premium-quality trans-fat-free oil and high-protein soybeanmeal that can be used in feeds.

“We’ve been very deliberate in our approach to launchingthis venture and have specific marketing goals in mind,” saysScott Boulis, facility manager for Mercer Landmark.“Developments within our industry occur very rapidly and we

D

Denise Myers determines the linolenic acid concentration of a new soybean shipment.Mercer Landmark CEO Mike Fry (left) and Manager Scott Boulis display raw soybeans,high-protein soybean meal and soy oil. USDA photos by Michael Jones



By Bruce J. Reynolds, Ag Economist

USDA Rural Development/Co-op [email protected]

t is puzzling that many businesses andindividuals forgo opportunities to join ororganize cooperatives when such actionswould benefit them. One reason for suchmissed opportunities is that “go-it-alone”

decisions sometimes offer more immediate payoffs, or morecertainty of outcome, than do efforts that involve sharingresources or participating in orderly marketing efforts.

Game Theory analysis helps identify situations that maylead to coordinated decisions among various “players,”depending on the way incentives are structured. An incentivestructure can be conveniently displayed in a 2 x 2 pay-offmatrix. These matrices provide a way to distinguish between“dominated” and “contingent” choices, which is a key tounderstanding the prospects for coordinated decisions. This

analysis will be applied in this article to hypothetical raftingbusinesses that share a thin strip of white water on the NorthFork Canyon Run.

Game Theory is applied to studying situations where pay-offs to each participant are interdependent, i.e., determinednot only by the decision of an individual but also by thedecisions of others. For the sake of simplicity, this will beexamined as a two-person game.

Although the pay-offs are interdependent — mutuallyaffected by how many rafts in total are operated — thedecisions about how many rafts to operate are oftenindependent of what the other participant does. In thesecases, the incentive structure is based on dominated choices— that is, the decisions of one participant do not influencethe other operator’s decision and vice versa.

Two-person gameThe North Fork Canyon Run is a narrow branch of a river

that runs through a large and mountainous park. Several

I

M A N A G E M E N T T I P

Shar ing the Nor th Fork Canyon RunInsights from Game Theory for Cooperatives

Photo courtesy Chattanooga Area Chamber of Com

merce


small rafting companies provide tourists with white waterrafting recreation during the non-winter months. These tripsprimarily are made on a couple of the larger rivers in thepark and, to a limited extent, at the North Fork Canyon Run.

This run is navigable only during a couple months in thespring. Due to its narrow channels and frequent spots whererafts get briefly hung-up, the park authority established aone-raft-at-a-time rule. The park provides a dedicated phoneline between the entry and exit points so the rafters knowwhen to start the next raft trip. Rafting companies must havea permit to operate in the park.

Near the entry point for the North Fork Canyon Run isan access road along which visitors can park, as well as asmall parking lot. Visitors come for a popular scenic outlook,hiking trails and to get on the waiting-list for raft rides whenoffered during the spring. The park authority believes thatthere is only adequate space for two rafting companies to setup and operate on any given day.

The first two permit-holding raft companies to arrive inthe morning get exclusive rights to operate for that day.Different rafters operate on different days, depending upontheir customer bookings and business on larger rivers in thepark.

Daily revenue is determined by the number of rides perday, which in turn is affected by river conditions. Differencesin water level occur from changes in the volume of snow meltin the mountains. When the water level is low, the rafts getstuck or hung-up more often on rocks, reducing the numberof rides. Based on water levels, the two raft operators canestimate how many trips they’ll make in the day, which is alsoaffected by their respective decisions to operate one or tworafts. Four rafts usually operate, two per company, on theNorth Fork Canyon run. However, the optimum is usuallythree rafts, sometimes two — but hardly ever four rafts intotal.

Let’s take a look at three recurring payoff situations forrafting businesses sharing the North Fork Canyon Run.

Dominant choicesThe outcome for two rafting companies in making a

decision to operate one or two rafts is displayed in the payoffmatrix for the relatively high water level that usually prevailson the North Fork Canyon run during the spring (Figure 1). Table 1 shows the number of rides per raft and the effect ofthe number of rafts operated on the total payoff for each cellin the matrix. Although there is a cost in operating anadditional raft, the business owners want to keep their raftguides or navigators busy. When the first two operatorsarrive to establish their claim to operate for the day, eachplans on using two rafts.

The incentive structure of the payoff matrix in Figure 1creates a dominant choice of two rafts each regardless of whatthe other does. Column Rafting Co. has payoffs in the upperright corner of each cell. The second column has a payoff ofeither 20 or 14, which are larger than column one payoffs of

12 and 10 when operating one raft. A column is “dominant”when the payoff of at least one of its cells is higher and all itsother cells are not lower than the adjacent cells of all othercolumns in the matrix. Likewise, for Row Rafting Co., thepayoffs of both cells for operating two rafts dominate thepay-offs for one raft (lower left corner of each cell).

Combined revenue would be maximized with three rafts intotal. The dominant choices would not have to be made ifthe two companies shared the day’s proceeds from operatingthree rafts. Such coordination is difficult because there isusually a different combination of two companies operatingon the North Fork Canyon Run from one day to the next.

When overnight temperatures are lower than normal,refreezing occurs in the mountains and water levels can dropenough to reduce the number of raft rides, whether operating2, 3 or 4 rafts. Figure 2 and Table 2 report the impact of alower water level on the number of rides. When more thantwo rafts are operated in these conditions, back-ups at theentry point may cause some customers to leave or otherdelays, in contrast to the immediate turnaround when usingtwo rafts. The incentive structure of pay-offs again producesdominant choices in the 2nd column and the 2nd row.However, in this case maximum revenue is the northwest cell,where each operates one raft. This payoff structure is known

Figure 1 — Normal water level rafting and dominated choices

COLUMN RAFTING CO.

ROWRAFTINGCO.

1 raft 2 rafts

1 raft

2 rafts

12

12

10

20

14

14

10

20

Table 1: Rides per raft

Rafts Rides Total

2 12 24

3 10 30

4 7 28

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

COLUMN RAFTING CO.

ROWRAFTINGCO.

1 raft 2 rafts

1 raft

2 rafts

11

11

7

14

8

8

7

14


Rafts Rides Total

2 11 22

3 7 21

4 4 16


as “the prisoners’ dilemma.” Volumes have been written about the prisoners’ dilemma

because it focuses on what is lost when participants cannotcommunicate. In the original story, two prisoners are inisolation and both choose to confess, hoping to get a betteroutcome. Unfortunately, since they both confess, they eachget the worst payoff. The two prisoners lack the trust in eachother to stick to their “not-guilty” story and mutually get thebetter results of the northwest quadrant.

Many studies use the prisoners’ dilemma to discuss theimportance of improving upon worst outcomes through trustand understanding. But on the North Fork Canyon Run, theparticipants in the two-person game differ from day to day,which can be enough to thwart communication and thebuilding of trust. As pointed out by Thomas Schelling, it’snot really a “dilemma” at all but a game of dominated choices(Thomas Schelling, Strategies of Commitment, 2006, viii).

Contingent choicesWeekends in the park are crowded with sightseers, hikers

and tourists wanting raft rides. The difficulty of findingconvenient parking for the vans and raft trailers increases theturnaround time when more than two rafts are operated. Athird raft encounters occasional delays but still results inmore rides than if two rafts were operated. A fourth raftresults in a series of delays on crowded weekends. Thedecision for each operator about one or two rafts iscontingent upon what the other operator does.

Figure 3 and Table 3 report the payoffs of an incentive

structure that involves contingent choices. Without adominant choice, each participant will consider the benefitsof coordinating their decisions to be able to operate threerafts – one company operates two, the other companyoperates one raft, and they split their combined revenue.

The contingent choices of Figure 3 may not always resultin coordinated decisions. The first rafting company to set upon the North Fork Canyon Run on a weekend day couldchoose to operate two rafts on the expectation that thesecond company to arrive will prefer to use one raft with a

payoff of 9, as compared to 6 if a fourth raft were added.This game has a “first-mover” advantage.

The potential success of a first-mover in operating asecond raft depends on the other rafting company’s sensitivityabout fairness. The second raft company could be indignantabout the lack of revenue sharing and decide to operate tworafts. The first-mover advantage is defeated if raft operatorsalways react indignantly and chose to operate a second raft.In that case, the “first-to-arrive” rafting company may chooseto use just one raft so as to secure the pay-off of 12 tripsrather than risk getting only 6.

Clearly, weekends on the North Fork Canyon Run involvecontingent choices that do not come up during the weekdayswhen operating two rafts each is the dominant choice for anytwo companies.

Challenges in coordinating decisionsGame Theory analysis may appear to be an

oversimplification of actual business decisions, but its purposeis to highlight cooperation opportunities and their prospectsfor success. In each of the three scenarios on the North ForkCanyon Run there are opportunities to jointly maximizeearnings with coordinated decisions. Although only twoparties have to reach an agreement, the fact that thecompanies operating raft trips frequently vary from day today diminishes the patience and trust necessary fornegotiating a plan for either three or two rafts.

A payoff matrix reveals the decision cell with the highesttotal earnings, but participants estimate their payoffs eitheralong columns or rows. In other words, each player estimatesits payoffs from a go-it-alone perspective. They don'tcompare the total value of each cell or quadrant in a payoffmatrix. This orientation is natural and practical whenthinking in terms of operating alone.

Finally, a Game Theory analysis also demonstrates whythe prospects for coordinating decisions are much improvedif participants are dealing with contingent, rather thandominant, choices. Participants understand that to choosefor the highest pay-off, they risk getting the lowest pay-off,while their other choice offers pay-offs between the highestand lowest. This uncertainty, in contrast to dominant choices,encourages the parties to seek an agreement on three raftswith revenue sharing.

The benefits and challenges of coordination in a one-dayencounter may be extended to the longer term of formallyorganized cooperatives when the earnings from individualdecisions are interdependent. Market participants are morelikely to become members of a cooperative when theirdecisions are contingent upon what other market participantsdo than if their choices are dominated.

The lesson from Game Theory is that while businessesand individuals are committed to their "bottom line," theirgoals can be self-defeating if they allow this singular commit-ment to create tunnel vision. An eye for opportunities tocooperate is a useful skill in the pursuit of individual gain. n

Figure 3 – Normal water level rafting and contingent choices

COLUMN RAFTING CO.

ROWRAFTINGCO.

1 raft 2 rafts

1 raft

2 rafts

12

12

9

18

6

6

9

18


Rafts Rides Total

2 12 24

3 9 27

4 3 12


By Anne Mayberry

USDA Rural DevelopmentRural Utilities Programs

entral Electric Power Cooperative in SouthCarolina is not an average utility, and neitherare its members average electricityconsumers. The co-op recently saluted itsmembers for their efforts to embrace

conservation, use renewable fuels and fund research intoclean-air technology. The co-op and its members havecommitted up to $10 million per year to fund projects thatwill help improve the environment and meet future energyneeds.

“Our members deserve credit for what they’ve done, ” saysRon Calcaterra, the co-op’s president and CEO. Because oftheir support, the co-op is “committed to investing inrenewable energy and energy efficiency.”

Studies prompt actionRecent actions by the co-op are the result of two new

studies commissioned by Central Electric to address itsgrowing energy needs. Calcaterra explains that the rapidgrowth in the state — combined with the fact that most of itsenergy is purchased — triggered the need to base the co-op’sfuture direction on factual information rather thanspeculation.

“There were lots of comments about how we should meetour energy needs. We wanted to know what was possible, notjust technically achievable,” Calcaterra says. Rural electriccooperatives are searching for safe, reliable and affordableelectric power, but worry that they won’t find it beforedemand surpasses capacity. They’re not alone in having thatconcern.

Measures to increase use of renewable fuels and decreasecarbon emissions will remain before Congress for theforeseeable future. Investors are looking for a silver bullet togenerate returns on renewable fuels and carbon-capturetechnologies. While the decision to move toward arenewable-fuel portfolio can win accolades, it requires carefulevaluation.

“There has been a lot of speculation about the best way toaddress climate change,” says Van O’Cain, spokesperson for

the Electric Cooperatives of South Carolina. “Unfortunately,there isn’t always a lot of information that tells you the bestway to proceed.”

The challenge to meet future needs while providingreliable, affordable and environmentally responsible powerled to the two independent, third-party studies. One studyreviewed energy-efficiency programs while the otherexplored the value of renewable energy investments. Resultsof the studies are guiding South Carolina rural electriccooperatives as they determine which programs will deliverthe greatest return on investment in addressing climatechange issues.

ReliabilityThe energy studies focused on several sources of power.

Currently, wind is not a viable alternative for providing theamount of power that electric cooperative utilities will needto meet demands growing at twice the nationwide average,Calcaterra says. “Setting up wind turbines off shore mightprovide more electric power, but there’s a whole gamut ofproblems with getting that power back on shore.”

Use of solar power would cost five-to-ten times the cost ofcoal, and “the sun doesn’t always shine when you need it,”Calcaterra notes. Baseload power must be available 24 hourseach day, seven days a week.

C

U T I L I T Y C O - O P C O N N E C T I O N

Ron Calcaterra, CEO of Central Electric Power Cooperative(CEPC), tells co-op members about how compact fluorescent lightbulbs can save electricity. Photo courtesy CEPC

South Caro l ina co-op pursu ingthree-pronged energy s t ra tegy



By Dan Schofer

[email protected]

Editor’s note: Schofer was a co-opdevelopment specialist with USDA RuralDevelopment, but recently became deputydirector for outreach with USDA’s FarmService Agency.

he Intertribal BisonCooperative (ITBC) isa nonprofit tribalorganization with 57tribal members across

19 states committed to restoring buffaloherds to Indian Nations. This is beingdone in a manner that is compatiblewith the spiritual beliefs and culturalpractices of these tribes. ITBCcustomers include the restaurant at theSmithsonian National Museum of theAmerican Indian in Washington, D.C.It also provides buffalo robes and skullsfor museum displays.

Helping ITBC in this effort is thefunding it has received under the Smalland Minority Producer Grant (SMPG)program of USDA Rural Development.This program provides funds andtechnical assistance to cooperatives orassociations of cooperatives of small-scale, minority agricultural producers.The co-op or association must have agoverning board and/or membershipcomprised of at least 75 percentminorities.

The role of ITBC, as established byit members, is coordinating themovement of surplus buffalo fromnational parks to tribal lands anddeveloping marketing strategies. It alsoacts as a facilitator for educational andtraining programs.

ITBC provides technical assistanceto members to help them developmanagement plans that will enabletribal herds to become self-sustaining.To do this, tribes need to acquirebusiness tools to develop andimplement long-term business andmarketing plans for their individualherds.

T

Bison co-ophelp ing Nat ive Amer icansdevelop product ion ,market ing s t ra tegy

Bison (below and opposite page) are rounded up and herded through chutes atBadlands National Park. The Intertribal Bison Cooperative (ITBC) is helping its membersmanage their herds as sustainable businesses while also preserving the tribes’ heritage.Photos courtesy ITBC

Bison co-ophelp ing Nat ive Amer icansdevelop product ion ,market ing s t ra tegy


Combining heritage andeconomics

Many Native American communitiesand tribal governments manage theirherds solely for heritage and spiritualpurposes. The challenge facing them isto also manage their herds aseconomically self-supporting businesses.

Some tribes regularly take childrenenrolled in tribal Head Start programson tours of the buffalo herds to teachthem about nature and the heritage oftheir tribes. Tribes also slaughter aselect few animals for special events,sun dances and for consumption by theelders of the tribe.

“All of our member-tribes know ittakes money to manage a herdproperly,” explains Greg Wrangel,marketing director for ITBC. “Peoplehave been waiting for a comprehensiveapproach to make the tribal herdseconomically viable, as well asembodying our heritage andspiritually.”

In its effort to use buffalo as aneconomic resource, USDA awardedITBC funds from the Small andMinority Producer Grants program toprovide tribal members with:• An assessment of current

management and business practices;• Business and marketing software;• Regional training on using new

software for each tribe’s buffaloprogram;

• The newest available production andherd-management techniques;

• A national conference, includingtraining and the delivery ofpreliminary project evaluations.The first phase of the project

involved evaluating currentmanagement and business practices forindividual tribal herds. Most membersdid not previously have any writtenbusiness or marketing plans, workingonly on verbal directives from tribalcouncils or leaders. These directives areoften subject to sudden change becauseof tribal elections.

A software package — designed tohelp them develop their own feasibility

analysis, business plans and marketingplans — was purchased and distributedto tribal members. ITBC then held fiveregional meetings in New Mexico,Wisconsin, Oklahoma, North Dakotaand Oregon to familiarize tribalmembers with the software and relatedbusiness concepts. Training sessionshave been conducted for 42 tribes so far.

“We had members bring theirlaptops, loaded with the software,”Wrangel says. “Then we walked themthrough the business plan process. Eachmember was able to create a unique,basic business plan for his her tribe’sbuffalo herd during the training session.”

Binders were distributed containingthe most up-to-date information onherd management, organic- andnatural-production guidelines, newveterinarian techniques, feedinstructions, pasture management,noxious-weed management anduniversity/extension bulletins onmarketing. A second binder wasdistributed highlighting relevantgovernment services and contacts thatmay be beneficial to herd managementand marketing.

Hide tannery studied Additionally, ITBC is looking into

the economic feasibility of operating ajointly owned and operated tannery.The Ponca Tribe of Nebraska operates

a small tannery, which currentlyprocesses hides from ITBC and othertribes. The Santee Sioux Tribe, alsolocated in Nebraska, is looking todevelop its own tannery business for itstribal members, as well as for ITBC. A business partnership between ITBCmembers and tribal tanneries, combinedwith a solid marketing plan, couldcreate an alternative and profitablerevenue stream for tribal buffaloprograms.

The culmination of the SMPGproject was a national meeting of ITBCin Rapid City, S.D., Aug. 6-10,coinciding with the 2007 InternationalBison Conference. This provided anexcellent opportunity to finish trainingtribal members on the use of their newsoftware and provided follow-upassistance for fine-tuning business andmarketing plans.

The concurrent conferencesprovided an opportunity for ITBC andits members to learn from other, non-Native ranchers and the buffaloindustry as a whole. It also helpedtribal members establish industrycontacts and build professionalrelationships. ITBC provided enter-tainment for the internationalconference, which included tribal dancers,re-enactors and a traditional village.

For more information on the SMPGprogram, visit: www.rurdev.usda.gov. ■

USDA funds are helping the ITBC educate member tribes about new herd managementtechniques and to adopt modern business and marketing software.

By Lynn Pitman,

University of Wisconsin Center for Cooperatives

nderstanding the true value of a cooperativeis crucial to meeting the many strategicdilemmas facing cooperatives as they adapt toa changing business landscape. To explorethis critical issue, more than 180 U.S. and

Canadian co-op leaders (a record attendance) gathered in St.Paul, Minn., in early November for the 10th annual FarmerCooperatives Conference. The University of WisconsinCenter for Cooperatives (UWCC) presents the annualconference, funded by the Farm Foundation and otherorganizations, to provide co-op directors and managers,professional organizations, government representatives andacademics with information on major trends and issuesaffecting agricultural cooperatives.

Do co-ops create or destroy value?Chris Peterson, professor at Michigan State University,

provided a solid framework for the conference with hispresentation: “Do Cooperatives Create or Destroy Value?”Each cooperative is built around a value proposition, saidPeterson. Whether value is gained or lost is determined byhow well the cooperative fulfills that proposed businessarrangement.

The traditional value proposition — in which acooperative business is organized and run for the mutualbenefit of its members — provides market access for

members and deals with them fairly. Public policy providesthese co-ops with some preferences (as in areas of anti-trustexemptions and tax treatment). Problems with this modeloccur when capital needs for either business investment ormember equity redemptions exceed equity generated frommembers. As market conditions evolve, the co-op may not bethe only avenue for “fair dealing.”

Another type of value proposition is based on theeconomic value created by the cooperative enterprise. Herethe annual return of investment, adjusted for a given risklevel, is the key metric for assessment. It was on this basisthat the 2002 McKinsey report concluded that agriculturalco-ops had destroyed more than $1 billion of value in 1999.Under this scenario, there is no value added by the use of thecooperative business structure, because financial measures donot reflect or encompass the mutual benefit provided tomembers.

A third type of value proposition recognizes that acooperative can create value both at the member-farm level(which was not considered in the McKinsey study), as well asat the co-op business level. While returns at the co-opbusiness level can be measured by the net income used forpatronage refunds and dividends on capital, the returns at themember-farm level are more difficult to quantify.

There are other variations of the cooperative structurethat are being used to create and capture value, but thesestructures use trade-offs in member control to gain broadermarket access, alternative sources of equity or otheropportunities. Peterson concluded that co-ops can create


Valu ing Your Co-op

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

U

value when the value proposition both fits member needs andperforms well as a business. Some cooperatives aresuccessfully accomplishing both, but this continues to be achallenge.

Doug Sims, retired CEO of CoBank, focused on economicvaluation. He stressed that a cooperative must first functionsuccessfully as a business before it can deliver the otherbenefits that are also associated with the cooperative businessmodel. Sims said he believes that cooperatives historicallyhave coasted on the value of member refunds withoutaddressing inefficiencies within the business.

A co-op’s value proposition must be able to generate areturn on investment that meets or exceeds the cost ofcapital, Sims said. Given that ability, however, a member-

owned and controlled co-op can be an exceptionally strongmodel for a customer-oriented business.

Valuing assets during changing timesThe co-op business structure can meet both economic-

and member-benefit criteria. A change in market conditionswas compelling enough for a group of Michigan Sugar Co.(MSC) producers to buy the company and create a producer-owned enterprise. When the parent company went intobankruptcy and put MSC up for sale, sugarbeet growers werefaced with the possibility of losing demand for their crop,which produce a higher net return per acre than other crops.Mark Flegenheimer, CEO of MSC, described how producersbought shares based on acreage and raised $24 million inequity to start this new-generation co-op.

United Producers Inc. — a livestock marketing co-op thatalso offers risk-management and production managementservices – decided to maintain its core cooperative structureafter a lawsuit wiped out the co-op’s equity, forcing it toreorganize. CEO Dennis Bolling pointed out that thecooperative previously had been structured so that the risk tofarmers was limited to their retained earnings. But the futureof the business depended on greater equity participation bymembers.

Because they recognized the value the co-op brought totheir individual operations, farmers were willing to continueto patronize the co-op and provide equity for refinancing itsoperations. UPI is implementing cooperative-based solutionsto meet its capital requirements through new capital retainsand preferred membership programs. It has also created acommunity markets program to organize new cooperativesaround its local facilities. While these efforts are notsufficient to meet all of the co-op’s capital needs, they haveprovided significant member value while addressing financialrequirements.

In other cases, the evaluation of the cooperative’s value hasled to the conversion to other business structures. FCStoneCEO Pete Anderson described the rationale and the processof converting from a cooperative to a public corporation.FCStone was created in 2000 when the FarmersCommodities Corp. and Saul Stone and Co. merged to formone of the nation’s largest volume commercial grainbrokerage firms. The business needed increased capital tofinance expansion while maintaining member service levels.However, annual payments to members limited thecompany’s ability to raise and retain equity.

The cooperative structure also did not provide liquidity ora means for members and employees to benefit from thecompany’s growth, in both market value and incomegeneration. After a comprehensive strategic assessment, thecooperative converted to a stock company controlled byexisting members. The new company included an employeestock ownership plan (ESOP) and increased investmentopportunities for members. Two years later, the companyconverted from a private to a public corporation, with an


Clockwise from center: Amy Gales of CoBank discussesfinancial perspective on co-op valuation; Swiss Valley Farmsfound advantages re-incorporating as a stock co-op underIowa’s new cooperative law; South Dakota SoybeanProcessors (seen here is a night photo of its plant in Volga,S.D.) transitioned from a new-generation co-op to aproducer-owned limited liability corporation (LLC).

initial public offering (IPO) of commonstock.

Case study measures benefitsKansas State University Professors David

Barton and Michael Boland, in theiraccompanying case study of FCStone,evaluated member benefits, before and afterthe conversion. Access to risk managementservices was similar, and for the next fewyears, at least, the original local co-ops willmaintain control of the board. However,FCStones’s IPO generated unparalleledmultiples of book value, with the possibilityof large equity payouts to co-op andproducer owners, a scenario that was uniqueto this conversion and its business position.

Rodney Christianson, CEO of SouthDakota Soybean Processors (SDSP),described how SDSP converted from aclosed new-generation cooperative to anLLC in order to expand into theburgeoning field of vegetable oiltechnologies. Projected growth wouldthreaten the cooperative’s single taxationtreatment, required more equity forexpansion and a larger pool of producers.

In Barton and Boland’s case study,expectations that drove the conversion werecompared to the results. The growth innon-patronage-sourced business has notbeen as strong as expected, althoughbusiness growth has been sufficient toincrease the demand and the price forsoybeans in the area. While producers andthe plant are now both free to pursue thebest respective buy/sell relationships, theactual transactions continue to follow thepre-existing pattern.

Equity liquidity has increased, as hasaccess to new equity capital. Stock priceshave fluctuated, but have remained above theoriginal equity drive purchase price. Whetherthese changes would have occurred under theco-op structure is unclear.

Gold Kist conversionThe Gold Kist transformation from cooperative to public

company to takeover target was described by Dan Smalley,past board chair of the cooperative. Gold Kist had evolvedinto a major poultry production and marketing enterprisewith a homogeneous board and membership. Its financialsuccess raised member expectations for payouts at the sametime that the cooperative began to lose market share, facedlarge equity redemption obligations and needed access to

capital. Serious conflict ensued among board members, and the

board eventually recommended converting to a publiccompany with an IPO. The conversion was intended toprovide flexibility, liquidity for equity holders and anindependent board with expertise and perspective (whichSmalley believed was particularly needed by the cooperative).The membership approved the conversion, Gold Kist wentpublic and a new board (with a majority of independentdirectors) was formed.

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


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

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

professor at the University of Missouri. He noted the many

different member-value propositions that were described during

the Farmer Cooperative Conference.

The range of member-value propositions reflect the

complexity of the cooperative structure, while value created by an

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

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

patrons or as investors, and the cooperative should understand

where along the patron-investor spectrum its membership wishes

to be.

Traditionally, farmer cooperatives have been formed to secure

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

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

their efforts as individual entrepreneurs. The current shift in

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

markets through value-added efforts. Members look to the

cooperative to serve a more “collective entrepreneur” function,

and capital formation becomes a larger issue, Cook noted.

Because there are many ways to create value, cooperative

members need to share a common interest. Cooperative life

cycles can be seen as a process in which divergent interests

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

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

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

cooperative can have multiple life cycles. ■

Value definition can evolveduring co-op’s life cycle


Pride, a privately held enterprise. Smalley felt that theoutcome ultimately benefited cooperative members,allowing them to capture the full market value of theircompany. But former members, who continue to be contractproducers for Pilgrim’s Pride, have no investment in, orcontrol over, the company.

The issues that commonly lead to conversion can bestrategically addressed, said John Schmitz, CHS executivevice president and chief financial officer. He described theadvantages of CHS’ cooperative structure as four-fold: asingle level of income taxation, an orientation toward long-term planning, potentially closer customer ties and earningsthat ultimately benefit the member. CHS equity andenterprise valuations are similar to an average of publiclyheld agribusiness corporations; earnings are the mostimportant source of capital for creating value for theshareholder and for the business.

Valuing assets and measuring performancePerformance measures and asset valuation are also key to

assessing a cooperative’s value. David Holm, executivedirector for the Iowa Institute for Cooperatives, described anew cooperative benchmarking project, which will provide apowerful tool for assessing results of management decisions.

Harry Fehrenbacher, president of Effingham Equity,described the co-op’s decision-making process for capitalassets, which analyzes how well an investment will profitablysupport core business strategies and systematically evaluatesthe return on assets by facility and department. Amy Gales,regional manager of CoBank, reviewed financial perspectiveson valuation, which establishes a present value for the co-op’s relevance and viability both now and in the future.

Member-value propositionThe value proposition for members was part of Swiss

Valley Farms’ structural reassessment, undertaken when a50-year sunset clause in the bylaws kicked in. GordonToyne, co-CEO, and Don Peterson, a director, providedperspectives on the process of reincorporating under thenew Iowa cooperative law as a stock cooperative, rather thana membership co-op.

The board compared the limits of traditional banklending practices to the impact of new sources of equityneeded for maintenance and growth. The new law alsoallowed co-op boards to add outside (non-member) directorswho could provide needed expertise in areas such as finance,mergers and acquisitions. The governance committee andthe attorney worked to define and codify in the bylaws thedifferent interests allowed under the new law and providedfor member voting rights and a producer-member boardmajority.

The new structure gives the co-op the ability to issuepreferred stock, which provides equity flexibility and a wayfor both employees and co-op members to invest in the co-op. The co-op’s mission statement has been broadened to

recognize its commitment to its workforce and customers, aswell as to its owners and members.

Because the change was so significant, extensivemembership communications on this issue began fivemonths before the vote, allowing time for members to askquestions. Peterson felt that this step was critical to memberengagement and the eventual success of the reincorporationeffort.

Kevin Sexton, manager of River Country Cooperative,explained how the co-op redefined its member-valueproposition in response to changing demographics. The co-op repositioned itself to serve both consumer and farmerneeds. Almost half of its earnings are now from petroleum,with the remaining earnings from farm supply activities.The co-op is attempting to maintain its program of cashrefunds to members while building its unallocated reserve tosupport its growth.

Branding and corporate responsibilityA broader perspective on the cooperative value

proposition was provided by Jean-Marie Peltier, presidentand CEO of the National Council of Farmer Cooperatives(NCFC). Peltier pointed out that traditional cooperativevalues — farmer ownership and control, economic viabilityof farm businesses, stewardship of natural resources andrural community — fit in well with the current emphasis ofsustainability and social responsibility in the corporaterealm.

NCFC is developing a cooperative stewardship initiativeby working with Wal-Mart on a producer score-cardprogram, and by exploring other tools for self-regulation,rather than using a third-party certification process forsustainability compliance.

To market this initiative, NCFC is developing acommunications program that will capitalize on the desireby consumers to buy products that are values based. Peltierurged farmer cooperatives to create a vision of sustainabilitythat is aligned with grower needs, saying that “you can’t gowrong by doing good!”

Value creation criticalto future co-op viability

It is clear that the ability of a cooperative to createeconomic value, as measured by standard financial metrics,is critical to the ongoing viability of the business. But thevalue proposition for members can encompass a wide rangeof benefits that may be difficult to accurately assess. Benefitsmay have a patron- or investor-orientation, which maychange over the life cycle of the cooperative. This can befurther complicated by market valuation increases that canbe difficult for members to capture.

Cooperatives continue to explore structural alternativesthat can support the value proposition for members andmeet capital formation challenges, while weighing thepotential impacts of the trade-offs in member control. ■


Income, revenue climb atRiceland Foods

Riceland Foods Inc., Stuttgart, Ark.,had $947 million in revenue for 2007(its fiscal year ended July 31), anincrease of $10 million from 2006.Income before distributions was $549million, up $60 million from theprevious year. The co-op reports thatmore than 98 percent of the earningswere returned to farmer-members asseasonal pool settlements or cashpayments for grain.

Speaking at Riceland’s 87th annualmeeting in Jonesboro, Ark., Presidentand CEO Danny Kennedy said thefarmer-owned cooperative had met itsthree performance targets of providingcompetitive crop returns, protectingfarmer-members’ investments in assetsand providing a high level of service.

Riceland’s 2006-07 marketing poolsreturned $4.38 per bushel for long-grain rice and $5.28 per bushel formedium-grain rice, both of whichcompared favorably with othermarketing opportunities.

The return for Riceland’s soybeanmarketing pool was $6.85 per bushel,compared to the harvest price of $6.11.The wheat marketing pool returned$3.74 per bushel, compared to a harvestprice of $3.45.

Kennedy said that the cooperative’sbalance sheet continues to reflect solidperformance. Total assets stood at $525million, while permanent assets were$262 million. Members’ equity,including base capital and retainedearnings, was $205 million, he said.Long-term debt was $57.5 million andworking capital was $59 million.“We understand that our membersevaluate us at the end of the year onhow our final settlements come out, but

N E W S L I N E

Send items to: [email protected]

Crucial farm and rural development topics, including forces influencingrenewable energy development, will be in the spotlight when USDA hosts the 84thannual Ag Outlook Forum, Feb. 21-22 at the Crystal Gateway Marriott Hotel inArlington, Va., just outside Washington D.C. The forum attracts about 1,500 peopleannually, and is widely considered the nation’s foremost conference for thosewith an interest in farm and rural issues.

The title for this year’s conference is “Energizing Rural America in the GlobalMarketplace.” Speakers include a wide array of national leaders from privateindustry and government. “Getting it Right: Responding to Market Forces” is thetitle of a panel talk that will follow the secretary of agriculture’s address. Jean-Mari Peltier, president and CEO of the National Council of Farmer Cooperatives,will moderate the panel, with members that include: C. Larry Pope, president andCEO of Smithfield Foods; Thomas E. Stenzel, president and CEO of United FreshProduce Assoc.; and Paul Schickler, vice president and general manager ofDuPont and president of Pioneer Hi-Bred.

There will be 25 other panel talks in the following six topic tracks: RuralAmerica, Energy and Technology, Policy and Trade, Food Risk and Security,Conservation, and Commodities. There will also be additional luncheon and dinnerspeakers.

Rural Development track panel topics include: “Innovative Business Modelsfor Rural America” and “Innovative Financing for Rural America,” among others.Energy and Technology track sessions include: “Ethanol: Is it a SustainableAlternative?” “New Sources for Biofuels: What Are They?” and “Solar and WindTechnologies Coming of Age,” among others.

For a program preview, roster of session topics and speakers, and to register,please visit: www.usda.gov/oce/forum. Registration is $300 for those who registerby Jan. 11, and $350 after that. For updates on the meeting, send your e-mail andpostal address to [email protected], or write to: 2007 Outlook Forum, Room4426 South Building, USDA, Washington, D.C. 20250-3812. ■

‘Energizing Rural America’ theme of USDA Ag Outlook Conference


that must be in balance with service,which comes at a cost,” Kennedy said.

Scott Gower, vice president forcommodity operations, said Ricelandreceived 116 million bushels of grainduring the 2006 fiscal year, and expectsto receive approximately 119 millionbushels from the 2007 crop.

Carl Brothers, senior vice presidentfor international rice, said that U.S. riceexports from the 2007 crop areexpected to increase 14 percentcompared to the previous year. Ricecarryout at the end of the 2007-08marketing year is expected to be 30

million bushels, down 52 percent fromthe previous year. “The low carryout,along with rice competing for acreagewith other grain prices, has created afriendly, if not bullish, marketingsituation for U.S. long grain rice thisseason,” Brothers said.

USDA currently projects the 2007rice crop average price for all types(long, medium and short) in the mid-range of $4.73 per bushel, 35 centshigher than USDA’s current projectionfor the 2006 rice crop, he said.

Riceland introduced two new value-added products: a quick-cook whole-grain parboiled brown rice that cooks inhalf the time of regular brown rice anda yellow rice mix which foodservicechefs can use to create a variety ofethnic dishes.

Brian Furnish to leadBurley Tobacco Co-op

The Burley Growers CooperativeAssociation has chosen Kentucky nativeand farmer Brian Furnish as its newgeneral manager. Furnish, who has a1,000-acre tobacco and beef cattle

operation, says tobacco has a strongfuture ahead.

“As a young tobacco farmer myself, Ibelieve there are a lot of opportunitiesfor our members,” he says. “We allneed to work together to communicateand figure out ways to make money forthe co-op and our farmers.”

Furnish has served as marketingdirector at the Kentucky Department ofAgriculture and then as deputy directorof the Governor's Office of AgriculturalPolicy. He also worked previously in

government relations for the BurleyTobacco Cooperative.

“Brian brought to the board ideasand enthusiasm to help move theorganization forward,” said RogerQuarles, president of the BurleyTobacco Cooperative Board. “He is aproven winner and we think he is aperfect fit for us at this time.”

GROWMARK, FS Seed Support Ag in the Classroom

The FS Seed Division ofGROWMARK has renewed itscommitment to Illinois Ag in the

Classroom programs with acheck for more than$50,000. This year’scontribution brings the co-op’s four-year totalcontribution to theprogram to nearly$235,000.

“Many children havelost the connection to thefarm and aren’t aware thatreal people grow the foodthat ends up on their platesat the dinner table, andthat real people raise thecorn and soybeans andother products that areturned into the renewablefuels that run their parents’cars and other vehicles,”says Bill Davisson, CEO ofGROWMARK, theregional agricultural supplyand grain marketingcooperative comprised ofFS member cooperatives.“Through the Illinois Ag in

the Classroom program, we’re workingto make sure they know where theirfood and related products come from.”

Florida’s Natural squeezes outrecord revenue

Florida’s Natural, the nation’s thirdlargest seller of orange juice, had recordrevenue of $401.5 million for the 2006-07 season, despite a 7-percent drop injuice volume. The co-op reported thatreturns to its growers were 5 percenthigher than the citrus industry average

David Feilke, a Riceland Foods member and director, checks on his crop near Stuttgart, Ark.Riceland handled about 119 million bushels of 2007 crop, and had revenue of $947 million.Photo courtesy Riceland


for the 2006-07 season. It was the co-op’s highest grower return since 1984,following a major freeze, according toThe Ledger.

The improved returns came after atwo-year program of cost-cutting thatincluded selling a processing plant inBartow and a packaging plant inFullerton, Calif. Florida's Natural alsotrimmed the number of differentproducts it offered by about 30 percentto concentrate on the most profitablelines, The Ledger reported.

Record earnings for CHSCHS Inc., an energy and grain-based

foods cooperative, had record netincome of $750.3 million for fiscal 2007(which ended Aug. 31), up from $490.3

million for fiscal 2006. Revenue forfiscal 2007 was $17.2 billion, also arecord, and was up 20 percent over$14.4 billion for fiscal 2006. The 2007results mark the fourth consecutive yearof record earnings for the producer-owned cooperative and reflected strongperformance by every CHS operatingunit. The company issued a record $253million in cash patronage, equityredemptions, preferred stock anddividends. Another record cash return isexpected during 2008, based on fiscal

2007 results.Once again, refined fuels earnings

led overall results, largely due to strongmargins generated by the two CHSrefineries. CHS is the nation’s largestcooperatively owned refiner. Recordrevenues were attributed to increasedrenewable fuels volumes, and highervalues and volume in grain.

While earnings were led by theperformance of the company’s Energysegment, CHS also achieved strongresults in its Ag Business and Processingsegments and corporate businesssolutions operations. Ag Businessearnings — which include agronomy,grain marketing and retail operations —were led by both strong domestic grainmarkets driven by increased renewable

fuels demand and continued growth inexport markets, along with increasedenergy sales and grain movement at theretail level. Agronomy earnings wereboosted by a shift to corn acreage whichdrove demand for crop nutrients andincreased margins.

Processing performance improvedsignificantly over fiscal 2006 for oilseedcrushing earnings. CHS also reportedimproved earnings from its share of theHorizon Milling LLC wheat millingventure and strong performance from

its share of Ventura Foods LLC, avegetable oil-based food manufacturingand packaging business. CHS also sawrecord performance in its corporatebusiness solutions operations, whichinclude its insurance, risk managementand financial services businesses.

Pappajohn drops planto acquire ethanol plants

Iowa businessman John Pappajohnhas shelved his plan to buy a controllinginterest in as many as 10 farmer-ownedethanol plants, which he planned tooperate as a single, publicly ownedcompany. He had hoped to raise about$800 million from investors to buycontrol of the plants, according to theDes Moines Register. The sharp drop inethanol prices in recent months driedup investor interest, making his planunfeasible. “At some point you need toacknowledge the market isn't there,” hetold the newspaper.

NCBA awarded $8 million grantto help Mozambique farmers

The National Cooperative BusinessAssociation (NCBA), through itsCLUSA international developmentprogram, is the recipient of an $8million grant from the Bill and MelindaGates Foundation to improve thelivelihoods of 60,000 small-scale cottonfarmers in Mozambique. The grant willfund The Cotton Value ChainImprovement Project, a five-year projectaimed at increasing Mozambicanfarmers’ cotton yields and profitsthrough improved efficiency.

The project brings together theCLUSA International Program withbusiness partners DunavantMozambique, an international cottontrading company wholly owned byDunavant Enterprises Inc. of Memphis,Tenn., and GAPI, Sarl, a Mozambicanfinancial services company thatpromotes investment in small- andmedium-sized businesses. GAPI will beproviding much-needed credit andfinancial management service to theproject’s farmers.

“We believe that the combination ofNCBA’s long experience in organizing

CHS Inc.’s refinery operations helped the co-op enjoy record income of $750million and record revenue of $17.2 billion in 2007. Photo courtesy CHS Inc.


farmers, plus Dunavant’s progressivemanagement approach, productionexpertise and long-term commitment tothe African farmer and GAPI’s uniqueapproach to value chain lending in ruralareas, will create a successful model thatcan be replicated in other regions orcountries,” said NCBA President andCEO Paul Hazen.

Blue Diamond saleshit $658 million

Blue Diamond Growers,Sacramento, Calif., had $658 million insales for the 2006-07 marketing year,the second highest in the co-op’s historyand just $16 million less than the 2005crop year. Speaking at the co-op’s 97thannual meeting, Board ChairmanClinton Shick attributed much of theco-op’s success to its ability to developnew markets, offer innovative productsolutions for health-consciousconsumers and partner with leadingalmond users.

Shick reminded growers that themost powerful tool for producing a“top-quality, safe and nutritional food isthe power that we, as growers, wieldwhen we pull together in a cooperativerelationship to deliver to the biggestand most versatile marketer." He calledBlue Diamond’s co-op business model adynamic one that identifies “leading-edge technology systems and processesthat provide the best quality almonds toconsumers worldwide.

“As owners, we provided ourcooperative with almost 90 percent ofits short-term borrowing needs throughthe investment certificate and deferredpayment programs,” said Shick, who isbeginning another three-year term aschairman. “This is not only a powerfulindicator of grower confidence in BlueDiamond, it also lowers our cost ofoperating capital.”

Blue Diamond had earnings of $3.4million from non-patronage businessother than from almond sales. Thisreduces the need for retained earningstraditionally used to offset costs andprovides for additional capitalinvestment in the business, Shick said,adding that almond demand has

increased 5.4 percent compoundedannually for the last 25 years.

With 150,000 new almond acres setto bear record crops over the next threeyears, Shick cautioned growers toprotect their investment with a handlerwho plans and invests long-term inmarkets and innovative product mixesthat increase customer demand.

Frederick named ‘Honored Cooperator’

The National Cooperative BusinessAssociation has presented DonaldFrederick the Honored CooperatorAward for his long career working withcooperatives while at the U.S.Department of Agriculture (USDA),including his efforts to make theInternal Revenue Code and regulationsrelating to cooperatives more accessibleand comprehensible.

“His knowledge and efforts regard-ing law, tax policy and governance havebenefited cooperatives and cooperativeadvisors and will have a long-lastingeffect on cooperatives,” said NCBAPresident and CEO Paul Hazen.

In addition to his co-op tax referencebooks, Frederick is the author of some

of the mostly widely read co-op primersin the world, including “Co-ops 101”and “Do Yourself a Favor, Join a Co-op” (both of which are available fromUSDA Rural Development). He alsowrote the popular “Legal Corner”column in USDA’s cooperativemagazine, Rural Cooperatives.

The Honored Cooperator Awardgives national recognition tooutstanding individuals, includingpublic figures, co-op employees andvolunteers, who have worked todevelop, advance and protectcooperatives. Frederick recently retiredfrom USDA and now works part timewith the National Society ofAccountants for Cooperatives.

South Central Grain to merge with CHS

South Central Grain in NorthDakota has voted to merge with CHSInc. The co-op includes elevators inNapoleon, Kintyre, Wishek andHazelton. The vote was 154 for themerger and 25 against it, according to areport in the Bismarck Tribune. SouthCentral Grain and CHS already jointlyoperate a shuttle grain-loading facilityat Sterling.

CHS has been leasing the fourelevators based on a depreciationschedule. The elevator leases with CHSwere set to expire at the end of 2008.The expiration will be accelerated andthe merger formalized by the end of2007, the Tribune reported.

Florida sugar co-op and partnerpurchase Veracruz sugar plant

American Sugar Refining Inc. —owned by the Sugar Cane GrowersCooperative of Florida in Belle Gladeand by Florida Crystals Corp. of WestPalm Beach — purchased a sugar milland refinery in Veracruz, Mexico, lessthan a month before the final phase-inof the North American Free TradeAgreement. The purchase of IngenioSan Nicolas S.A. de C.V. gives the U.S.company a refinery that produces75,000 tons of refined sugar annually,according to a report in the Palm BeachPost.

Blue Diamond Chairman ClintonShick and his fellow growersproduced another huge crop lastyear, which their co-op processedand marketed for $658 million –second best in co-op history. Photoby Catherine Merlo


On Jan. 1, all sweetener traderestrictions with Mexico were setto disappear, and trade among theU.S., Canada and Mexico will beopen. The Post article notes thatsome in the sugar industry areworried that a glut of sugar couldbe coming into the United Statesfrom Mexico, while others say theopen borders present anopportunity. “It is a two-waystreet,” sugarcane farmer FritzStein Jr., a member of the SugarCane Growers Cooperative, toldthe newspaper. “Come Jan. 1, wecan go south and they can comenorth. I don't think they aregoing to destroy our market uphere.”

Sunkist to consolidate citrus juice and oil units

Sunkist Growers isconsolidating its citrus juice andoil operations, which processcitrus fruit into juice and otherbyproducts. The lemonprocessing operations currently housedin Ontario, Calif., will move to Sunkist’sstate-of-the-art processing facility inTipton, Calif., which currently focuseson processing oranges and tangerines.

“By consolidating the two operationsin the heart of the San Joaquin Valleycitrus-growing area, we achieve greatereconomies of scale and increasedefficiencies,” said Ted Leaman, vicepresident of Sunkist’s juice and oilbusiness. “The Tipton facility is anewer, more modern facility.”

The shortage of lemons caused bythe freeze last January makes this theoptimum time for Sunkist toaccomplish this consolidation, Leamannotes. The bulk of the current season’slemon crop will be sold into the freshmarket, leaving very little fruit forbyproducts. Sunkist will contract forwhat processing capacity is needed untilMarch 2008 when the new lemon linesare expected to be up and running atTipton. Post-processing functions areexpected to continue at the Ontarioplant for about a year, until the move iscomplete.

The Sunkist plant has been a fixturefor many years, anchoring a largeportion of Sunkist Street in eastOntario. Built in 1926, the complex ishome to the plant that processes citrusjuices, oils and aromas, and — untilrecently — Sunkist’s research facilities,where many of the innovations found intoday’s citrus packinghouses wereinvented. The Tipton facility was builtin 1981, and its operations have beencontinually upgraded.

Sunkist Citrus Juice & Oil is aleading supplier of value-added citrusproducts and has staked out a successfulniche in its line of citrus byproducts.“Not-from-concentrate (NFC) orangejuice is a key market,” said Leaman,“and Sunkist supplies fresh quality juiceto the major brands — with a WestCoast shipping advantage.”

Walton EMC returns$3 million to members

Customer-owners of Walton ElectricMembership Corporation (EMC),Monroe, Ga., received a capital crediton their December bills totaling $3

million for all members. Thatbrings the co-op’s 20-year total forcapital credits issued to membersto more than $31 million.

Capital credits are thecustomer-owners’ portion ofmoney left over once all expensesare paid. Walton EMC holdsmargins as a reserve to retire debt,build equity and to prepare foremergencies. Once sufficientreserves are accrued, additionalmoney is returned to thecustomer-owners as capital credits.

The amount each customer-owner gets is determined by theamount of electricity he/shebought during 1983, 1984 and2006. Walton EMC serves 116,000accounts over its ten-countyservice area between Atlanta andAthens.

Minn-Dak revenue tops$278 million

Minn-Dak FarmersCooperative, Fargo, N.D.,

reported revenue of nearly $278.6million in 2007, up from about $177million in 2006. The co-op madepayments to members (net of unitretains) of $140.6 million, up from$71.6 million in 2006. Patronage of$7.8 million was credited to memberaccounts.

The co-op’s growers harvested 2.2million tons of sugarbeets from morethan 107,000 acres. Average sugar yieldwas 20 tons per acre.

Speaking to members at the co-op’s35th annual meeting in Fargo,Minn–Dak President/CEO Dave Rochesaid the 2006 crop was the largest in theco-op’s history. Despite increases in theprices of other crops, Roche urgedgrowers to keep their acreage planted insugarbeets.

Doug Etten, Foxhome, Minn., waselected chairman, succeeding MikeHasbargen, Breckenridge, Minn., whostepped down from the post butremains on the board. Brent Davison,Tintah., Minn., was elected vice-chairman. ■

More than $1 million was raised last summerfor March of Dimes charities throughSunkist’s “Take a Stand” program. About11,000 children age 7-12, including thesePortland, Ore., citrus-drink moguls, receivedfree lemonade stands and juicer kits from theco-op to raise money to help fight birthdefects. Photo courtesy Sunkist


required for construction of new pipelines.

The recommended actions to address these transport constraints include:• Determine the government’s role to ensure adequate biofuels transportation

capacity;• Determine when the current biofuels transport infrastructure will be pushed

beyond its capacity to accommodate additional volume; • Examine opportunities to modify existing pipelines or use existing rights of way to

transport biofuels; • Fund research on reducing siting and construction constraints to enable

infrastructure development necessary to support rapid industry expansion;• Conduct analysis on the “least-cost” strategy for handling the transition to a 60

BGY future.

End useBiofuels will reach their potential only if energy companies, vehicle

manufacturers, retail service stations and consumers all have sufficient incentives tochange their operations and habits to embrace renewable fuels. Like the changefrom leaded to unleaded gasoline, this will require a clear and sustained campaign tomatch supply and demand on an evolving basis.

The significant end-use constraints are:• As ethanol production moves beyond 15 BGY, a significant increase in consumer

demand for E85 will be required to support increased ethanol production;• Current E85 and biodiesel retail availability is limited;• Current production and sale of flexible fuel vehicles (FFVs), capable of running

smoothly on either gasoline or biofuels, is limited;• Additional outlets for ethanol are not established to accommodate an imbalance

where supply exceeds national fuel demand.

The recommended actions to address these end-use constraints include:• Sponsor public education programs to increase consumer demand for biofuels and

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

encourage purchase of both E85 and biodiesel;• Work closely with auto manufacturers to establish incentives to increase

production of FFVs; • Develop an export market for U.S. ethanol to support continued ethanol industry

expansion through a possible slow transition to E85.Failing to address the critical issues facing the biofuels industry will lead to

bottlenecks which constrain continued rapid industry expansion and limit itscapacity to lessen America’s dependence on foreign oil. It will also hamper efforts toimprove the environment, reduce trade deficits and enhance the economic well-being of rural America.

Eliminating these constraints will require considerable discussion andcoordination with states and industry to determine the benefits and risks of variousgovernment interventions. While the range of issues and stakeholders is large, thetimeframe for ethanol’s transition beyond 15 BGY provides an opportunity forrobust debate and for developing reasoned responses. The time to begin is now. ■

Overcoming constraints to growth in biofuels industrycontinued from page 19

have to strategically respond to themif we want to remain competitive.”

For instance, he says, recentconsumer focus on healthier eatinghas created more incentives forcompanies to expand their productofferings. “That’s what we’re doingwith production of the soybean oil,”Boulis says. “We’re also responding tothe agriculture industry’s demand byproviding our high-end soy meal foruse in their feeding practices. I thinkadaptability is the key to our businesssuccess.”

Reducing transportation costsAs Mercer consolidates its

operations and brings its soybeanprocessing plant to full capacity, iteliminates the roundtrip costs oftransporting soybeans to regionalprocessors. Since Mercer currentlybuys soy meal from these sameregional processors and has it shippedback to Ohio, bringing the plant intoproduction will reduce producttransportation costs by more than 50percent.

Additionally, health benefits fromusing trans-fat-free oils are triggeringan increase in consumer demand.Major fast food chains and foodmanufacturers either have changed, orare considering changing to trans-fat-free oils in their food preparations.These developments have helped tovalidate Mercer’s market projectionsand its decision to initiate this newventure.

Cooperatives exist for the singlepurpose of improving the businessprofitability of their members. Thecommitment of Mercer’s managementand its ability to reach beyond currentoperations and find new venues togenerate positive financial returnsreflect the spirit and mission of allcooperatives. ■

Value-Added Cornercontinued from page 27


the other types of cooperatives generated positive extra valuein the second time period.

Five cooperatives showed consistent, strong performance— generating extra value with a 10 percent risk premiumadded to the basic charge for equity capital in both timeperiods (category V). Three of these high-performers weredairy cooperatives.

Furthermore, except for farm supply cooperatives,cooperatives of each type were found in the highestperformance categories, IV and V, in 2000-04. This indicatesthat a range of agricultural cooperatives are capable ofperforming admirably, regardless of the product they mayhandle.

On the other hand, with the exception of cottoncooperatives, at least one cooperative of each type failed togenerate sufficient value to cover a basic charge for the use oftheir members’ equity. However, fewer cooperatives of eachtype (except for farm supply cooperatives) lost value in thesecond time period than in the first. In fact, farm supplycooperatives were the only type where a majority dropped inperformance category between 1992-96 and 2000-04.

Group average extra value indexThe simple average of the individual cooperatives’

performances is shown in Table 2. The 65 cooperatives inthe study averaged positive extra value in both time periods atthe basic plus 5 percent rate, a category IV performance. For2000-04, this group of agricultural cooperatives created 2.3cents in extra value for every dollar of operating capitalexpended, on average, when a charge for equity capital with a5-percent risk premium over the basic interest rate wasapplied.

However, if members’ risk premium was 10 percent, the65 cooperatives, on average, fell short of being able to paymember-producers this premium by 1 cent for each dollar of

operating capital used. Grouping cooperatives according to their main product

showed a range of performance. Cotton cooperatives, onaverage, outperformed the other types. They generatedpositive extra value, with a 10-point risk premium chargedfor equity (performance category V) in both time periods. Asa group, dairy cooperatives performed almost as well, butthey dropped to performance category IV for 2000-04,missing members’ expectations by an average of just 0.8 centper dollar of operating capital when equity was charged a 10percent risk premium over the basic rate.

The other five types of cooperatives all performed atcategory III for 2000-04, averaging positive extra value whencharged a basic rate for their use of equity capital.

The averages obscure the fact that performances ofindividual cooperatives of the same type often varied widely.For example, at the basic plus 10 percent rate, four of the 16dairy cooperatives ranked in the top 10 of the 65 cooperativesin 2000-04.

At the same time, a dairy cooperative showed the largestdrop in rank between the two time periods among the 65cooperatives. Another dairy cooperative was among thebottom 10 in rank for 2000-04. Similarly, of the three cottoncooperatives represented in the sample, two were in the top10 in 2000-04 while the third cotton cooperative showed thesecond largest drop in rank of all 65 cooperatives.

The highest and lowest ranking cooperatives were bothfruit and vegetable co-ops. Likewise, there was one graincooperative in the top 10 for 2000-04, with two graincooperatives ranking in the bottom 10.

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

the cooperatives operated in the same general economicconditions of each time period, some saw their performanceimprove, while other cooperatives’ performances worsenedbetween the two periods. However, at least one of each typeof cooperative (with the exception of sugar cooperatives) in atleast one of the two five-year time periods considered, was

Using the ‘extra-value index’ to measureagricultural cooperative performancecontinued from page 24

participate fully in the cellulosic ethanolindustry of the future.

Business models are likely to becomeeven more complex with the advent ofcellulosic ethanol. For while corn is thepredominant feedstock for the ethanolindustry of today, a variety of feedstocks— corn, agricultural wastes, dedicatedenergy crops such as switchgrass andmiscanthus, forestry products and

others — are expected to be used by thecellulosic ethanol industry of tomorrow.The feedstock producers of tomorroware, therefore, likely to be much morethan row crop farmers. The “farmer-owned” business model will have to ex-pand to embrace these new producers.

With the advent of biorefineries, thenumber and specialization of co-products should multiply and require amore diverse and complicated mix ofthird party marketing firms. In the caseof some products with highly technical

applications, the use of specializedmarketing firms or long-term off-takeagreements will be necessary because ofthe extraordinary expense of a facilityhaving internal staff to perform such ahighly specialized and technical salesfunction.

It’s quite likely that more businessmodels will be created by the advent ofcellulosic ethanol. And we can expectthem to be even more complex thantoday’s business models. ■

Owner’s Manualcontinued from page 14

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


1992-1996 Averages

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

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

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

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

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

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

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

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

2000-2004 Averages

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

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

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

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

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

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

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

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

Change

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

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

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

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

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

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

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

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

ROE BASICRATE(LIBOR +2)

BASICRATE+5

BASICRATE+10

Perfor-manceCategory

Rank Equityshare ofoperatingcapital

E X T R A V A L U E I N D E X

able to add value sufficient to reward members for the use oftheir capital at a rate representing a 10-point risk premiumabove the basic rate.

Thus, this exercise of measuring cooperative performanceby the extra value method tells us that cooperatives of alltypes can be very able performers.

Some factors such as a cooperative’s pricing policies arenot captured by the financial statements and thus are notreflected in the various financial performance measures,

including the extra value measure. The value of intangiblecooperative benefits is also elusive and hard to quantify.

However, these benefits are very real for members. Forsome cooperatives that did not appear to be fully rewardingmembers for the use of their equity, it may very well be thatcompensation came through avenues not captured by theextra-value measure.

For references used in this article, please contact theauthor at [email protected]. ■


Gary Stooksbury, CEO of Aiken Electric Cooperative in SouthCarolina, echoes Calcaterra’s comments. “I think we were somewhatsurprised that there was not more renewable power available in SouthCarolina.” But, he adds, these studies will help people understand that itwill be difficult to rely on renewable energy for 15 percent of the nation’senergy portfolio in the near future.

The biggest surprise contained in the study concerned biomass. “Thereare as many as a half-dozen sites across the state with wood waste thatcould be converted to electric power,” says Calcaterra. “Part of the cost ofbiomass is a function of how far you have to transport the wood. But it is arenewable resource.”

The energy-efficiency study put into perspective what would have thegreatest impact, with the additional advantage of being among the easiestprograms to implement. Stooksbury explains that the study showed thatconservation and wise use of energy offer “the most advantageous andquickest payback.”

For this reason, the decision was made to immediately tackle one of thestudies’ recommendations. “We’re launching a massive plan to distribute 7million compact fluorescent lights (CFLs) to our members, beginning thisspring,” says Calcaterra. “Because CFLs use one-third of the energy andlast up to 10 times longer than standard bulbs, their total energy savingsrepresents electric power used by about 35,000 homes.”

AffordabilityAffordability is a key consideration for South Carolina cooperatives and

an additional reason to expand energy conservation and efficiencyprograms. Conservation efforts that would cost $500 annually perhousehold are not realistic for many South Carolina rural electriccooperative residents, Calcaterra explains. He notes that more than 20percent of the co-op’s consumers live in manufactured homes.

Programs that increase heating and cooling efficiency result in savingsthat the study characterizes as having not just “technical potential,” butalso significant “achievable potential.”

Environmentally responsibleRenewable energy, conservation and energy-efficiency programs

individually may not achieve significant energy savings. But together, theycan, Calcaterra says. “There is no silver bullet, but there may be silverbirdshot.”

That’s why net metering — which pays consumers who install theirown renewable-energy generation equipment (such as solar panels) intheir homes — is part of the South Carolina strategy. “We want thoseentrepreneurs. We believe in our members. We want to set up a systemthat gives incentives for helping find solutions,” Calcaterra says.

South Carolina cooperatives expect to be part of the solution. Theyhave invested $2.5 million to fund research at the University of SouthCarolina to look for ways to burn coal cleaner.

Calcaterra explains: “We have become very efficient at burning coal.The new plants are far more efficient and cleaner than those built 20 yearsago. And those plants were much better than those built 50 years ago. Butit has taken us anywhere from 20 to 50 years to accomplish that. We willtake care of the problem, but it cannot happen overnight.” ■

Utility Co-op Connectioncontinued from page 31

second-nature to them,” Lowery says. “Thevalue is in the education process andteaching kids these things from the verybeginning. It becomes more natural tothem.”

Just as technology and computers havebecome second-nature to America’syounger generations, they hope thatcooperatives will do the same.

Long-term visionAll of these efforts and accomplishments

by the NCBA Marketing Committeesupport MacDonald’s vision for co-ops.She foresees “wild success” for co-ops inthe future, but says advancing thecooperative business model must itself bean exercise in cooperation.

“We did it the first time,” she says of thecommittee’s work, “but other people haveto pick up the gauntlet.”

She is convinced that co-ops’ biggestpriority has to be educating the nextgeneration about co-ops and the power ofwhat she considers the most democraticform of business. Perhaps it will give thema reason to believe that they don’t have tomistrust business.

All the responsibility should not be laidon co-ops, though, MacDonald says. Hergreatest hope is that business schools willstart teaching more about cooperatives.

“Cooperatives are the better businessmodel,” she says. “I see cooperatives ashealing the world, bringing peace,educating.” Co-ops are typically muchmore community oriented than other typesof businesses, some of which are now tryingto emulate the co-op philosophy of “givingback to the community.”

It is this cooperative difference thatkeeps MacDonald going — day after day,week after week, year after year. “Iabsolutely love the people I work with, so Ihave this great sense of contribution andaccomplishment,” she says. “It’s verysatisfying to my soul.”

For MacDonald, serving cooperatives isnot about the money; it’s not about therecognition; it’s not about the status. It is allabout devoting her life to a worthy cause.

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

Mission to Market Co-opscontinued from page 21

50 Years Ago...From the January 1958 issue of News for Farmer Cooperatives

Cooperatives: tools for self-helpMany agriculture problems today are too big to be handled

singly by the individual farmer, notes USDA FarmerCooperative Service Administrator Joseph G. Knapp in thelead article of a special issue on co-op and self-help effortsnationwide. Knapp asks: Can an individual farmer providehimself with the quality of feed, fertilizer, seed or othersupplies that he requires? Can an individual farmer findsatisfactory markets for his products, or have any influence inthe market in which he operates? The answer to these ques-tions is, of course, “no.” However, through organization, anindividual can obtain these and many other benefits forhimself.

The form of organization that is peculiarly adapted to theneeds of farmers is the farmer cooperative. Through a co-op,an individual farmer can maintain his independence of actionas a farmer and still obtain the benefits of large organization.The farmer-owned cooperative not only helps farmersincrease their efficiency, and thus their farm income, but itsuse gives strength and character to the user as well as to thewhole rural community and nation.

30 Years Ago...From the January 1978 issue of Farmer Cooperatives

Co-op’s olive pits yield energyCooperatives in California are drawing attention for

projects that save energy. For example, Lindsay OliveGrowers, Lindsay, Calif., is charting a new course throughconverting its olive pits into a source of fuel.

At Lindsay’s headquarters, management struggles overwhat to do with 27 tons of olive pits every working day.Through the years, Lindsay has tested the pits as livestockfeed, fireplace logs, ground cover, soil conditioner, aningredient in blasting powder, a plastics filler, a bug-baitcarrier, olive oil and as a source for making methane gas.However, none of the uses has been competitive withmaterials already on the market.

On recommendation of Lindsay president Earl Fox, thecooperative’s board of directors authorized proceeding with aplan to use the pits as boiler fuel for the plant’s steamgeneration.

J. R. Webster, Lindsay’s research director, recentlyreported: “Last week we burned about 125 tons of olive pits.And we only had 30 gallons of ashes to take to the countydisposal site.” Explains Fox: “As fuel becomes more expensive,the savings from the pits will become more valuable.”

Lindsay adapted a unit capable of burning wood chips with60 percent moisture so that the pits can be fed into the boilerfuel unit in a moist condition. They can be converted into ayield of nearly 4,000 Btu’s of heat per wet pound.

10 Years Ago...From the January/February 1998 issue of Rural Cooperatives

How co-ops give power to the people Electric co-ops are working to help members feel and act

like utility owners.How is an electric or telecommunications cooperative

different from any other business that provides the sameservice? Electric, telephone and most other types ofcooperatives were born out of necessity. There was a need.The neighbors of that community did not have electricity.There was no phone service. These services were longavailable in larger cities, but not in the small towns and not onthe farm. No one was interested in serving these high-costrural areas.

The emotional reaction that came with electric power wasoverwhelming. A farmer giving witness in a Tennessee churchin the early 1940s said, “Brothers and sisters, I want to tellyou this: The greatest thing on earth is to have the love ofGod in your heart, and the next greatest thing is to haveelectricity in your house.” Connection of the first telephonelines erased loneliness and provided a connection to friendsand neighbors across the countryside.

Neighbors worked together to organize cooperatives andsign up members. They held endless meetings to determinewhere power lines would go. They worked with employees ofthe Rural Electrification Administration (one of thepredecessor agencies of USDA Rural Development) to makesure the project was feasible and could get the neededfinancing.

Today, that same cooperative spirit continues. Nationwide,there are 1,000 rural electric co-ops and 1,000 rural telephoneco-ops providing the same types of help, services andleadership to rural communities. Members today are workingtogether to ensure that their communities have access toquality education, healthcare, housing and business develop-ment. The “co-op way” brings out the best in all of us. ■

P A G E F R O M T H E P A S T

From the archives of Rural Cooperatives and its predecessor magazines



United StatesDepartment of AgricultureWashington, DC 20250

OFFICIAL BUSINESS

Penalty for private use, $300

NOTICE:❏ Check here to stop receiving this publication,

and mail this sheet to the address below.❏ NEW ADDRESS. Send mailing label

on this page and changes to:

USDA/Rural Business–Cooperative ServiceStop 0705Washington, D. C. 20250-3255

Periodicals Postage PaidU.S. Department of Agriculture

Date post:	21-Jul-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times