University of Wisconsin Center for Wisconsin
Rural Cooperatives, July/August 1999, pp. 4-9.
Published by the Rural Business and Cooperative Development Service
Amber Waves of Change: Kansas grain cooperatives adapting to global marketplace
By Pamela J. Karg
The winds of change are blowing across Kansas, ushering in changes that may seem small at first glance. But when strung together like bits of cloth on a kite's tail, the compound impact of these changes is helping farmers and their cooperatives re-direct their efforts to meet the challenges of an expanding global marketplace.
One cooperative literally made chicken feed of a disaster and created new markets for farmers and jobs for a rural community. State legislators have amended tax laws, providing incentives that encourage construction and repair of grain storage facilities. Farmers are funding research into new varieties of wheat and their potential uses by food manufacturers around the world. USDA is also helping them, examining a program to encourage cleaning wheat bound for export markets.
The king of Kansas
Wheat rules over the economy of Kansas. Amber waves of grain dominate not only the physical, but also the cultural landscape of the region. Tourists and native Kansans alike stop to watch teams of combines move through the countryside in June and July. Wheathearts, an auxiliary organization of the Kansas Association of Wheat Growers, stages a national annual Bake-and-Take promotion the fourth Saturday in March to encourage people to make baked foods for neighbors. Dozens of similar events and celebrations are held across the state each year in honor of the state's top crop. Kansas wheat groups even sponsor Web sites to help kids learn about wheat.
Of its 31 million acres of cropland, Kansas farmers harvested 495 million bushels of wheat last year, down 1 percent from the 1997 record crop of nearly 502 million bushels. The '98, harvest was 94 percent above the 1996 crop, which was devastated by exceedingly wet conditions that prevailed in large portions of the state. The 1998 crop would make nearly 34.6 billion loaves of bread, or enough to provide every person on earth with nearly six loaves of bread. Kansas is also tops in wheat flour milled and wheat flour milling capacity.
Mennonite immigrants from southern Russia introduced Turkey Red wheat seed in Kansas during the 1800s. Today, hard red winter wheat dominates the Kansas countryside. However, crop prices have been seriously depressed in recent years, so farmers are experimenting with hard white wheat varieties. This year's field trials should yield some answers to farmers' and marketers' questions about how these varieties will fare in the Kansas soils.
"Farmers want to know if there's going to be anymore money in these varieties and buyers want to know how they are going to mill," says Bob Gales, president and chief executive officer of Farmers Cooperative Association (FCA), a grain marketing and farm supply cooperative headquartered in Lawrence.
Red vs. white wheat
Two-thirds of the Kansas wheat crop is exported even though the world wheat demand is far greater for the white kernels. That makes some people wonder if the entire state should convert to white wheat. But if the conversion happens too quickly, premium payments for white wheat could be lost. Others believe total conversion to white wheat—combined with a strong marketing program, a commitment to identity preservation of individual grain deliveries and investments in cleaning facilities—would position the state's farmers as global players.
Foreign buyers take white wheat from other countries before purchasing red wheat from the United States, according to trade reports. So Kansas agricultural experts are encouraging farmers to plan their transition to white wheat as red wheat clogs shipping channels.
"Hard white wheat is a tool we can use to regain our presence in the world wheat market," says Eldon Lawless, a Belle Plain farmer on the Kansas Wheat Commission. "We can become competitors again, rather than the suppliers of last resort."
A handful of elevators have been designated for white wheat deliveries this summer. That number will rise over the next two years it will take producers to switch while maintaining the integrity and purity of their new white wheat stands. Government and agribusiness are opening communication with each other and with global buyers in the hopes of producing a product that will sell better in the global market.
Meanwhile, business consolidations are impacting the Kansas countryside.
"I have been saying for a long time the grain industry would consolidate, like the livestock industry," says Ron Koehn, general manager of Midwest Cooperative, a grain marketing and farm supply co-op in Quinter. "If this happens, it will give us a stronger cooperative presence in the grain industry,"
This spring, the nation's two largest regional grain marketing and farm supply cooperatives, Farmland Industries and Cenex Harvest States, announced plans to consolidate. A feasibility study and governmental review of the proposal could be completed by late this year. If the proposal passes this review, member meetings would take place in early 2000, followed by a vote of the memberships of both cooperatives. The cooperatives have tentatively set June 1, 2000, as a goal for completing the transaction to create a $20 billion cooperative.
Like Koehn, Gales also applauds the announcement of the consolidation. If grain farmers hope to be equal players with multi-national corporations, their cooperatives need to grow to at least the size Farmland and Cenex Harvest States would achieve through their proposed consolidation, he says. The market power that size offers to growers is also the reason Gales' FCA has redesigned its grain marketing strategies.
FCA farmers were already taking grain to Farmland's Topeka and Kansas City facilities when the two cooperatives decided to work out a new arrangement. Farmland allocated one million bushels of its terminal storage at the two sites to FCA. Farmers now delivering grain to either location receive a term price, earn patronage on the delivery and still receive settlement from FCA . their local cooperative that they know best. The move also means FCA will not have to invest in railroad infrastructure, which saves its members money. Gales estimates about one-seventh of the cooperative's assets would have been tied up in building a new rail loading facility if the arrangement had not been worked out. At the close of its 1998 fiscal year, the agreement between FCA and Farmland also meant 2 cents per bushel in patronage on grain delivered directly to the terminals.
At the same time, FCA's grain merchandiser moved to Farmland's Kansas City marketing office. The move has opened up communication and improved marketing programs at FCA, as well as at other local cooperatives. The FCA merchandiser can sell grain from any of the cooperative's locations to anyone. He is not limited to marketing exclusively to Farmland.
"Our grain merchandiser, Larry Coffman, has over 30 years of experience and Farmland has always tried to get the best prices for us," Gales says. "But moving up there to work side-by-side with Farmland has shown us more places we can market our grain."
Farmland also holds regular marketing strategy conference calls, which the FCA merchandiser and merchandisers from other local cooperatives attend. They gain market intelligence on a global perspective while providing Farmland with current information about what's happening on Kansas farms, he says.
Because of the Farmland terminal allocation combined with the increased market intelligence, FCA can offer effective "price later" and "minimum pricing" contracts to farmers, as well as cash markets. "Price later" contracts allow the cooperative to take title of the grain so it can sell or move it. Producers are then paid on request. "Minimum pricing" contracts allow producers to sell grain to the cooperative to stop storage charges. The cooperative then purchases "calls" on behalf of farmers, who pay the costs incurred in purchasing the call.
Says Gales, "Local buyers have had to raise their prices paid to farmers a bit because it was their job to pit me against my neighbor. But now we're working with our neighbors through Farmland. We're doing what we were supposed to be doing all along—cooperating with our neighbors!"
Grain marketings through Farmland by FCA had dropped off before these new communication systems were put in place. Today, the amount marketed by FCA through Farmland has doubled.
Golden egg emerges from ashes
"There's been a lot of internal growth as well as mergers among cooperatives here," observes Bob Nattier, general manager of Mid-Kansas Co-op Association. His organization has experienced both. In rapid succession, Nattier runs through the steps his cooperative has taken in a shifting Kansas agricultural environment.
Headquartered in Moundridge, the cooperative went through a growth spurt in 1992 and today includes 16 grain elevators with combined sales volume of $90 million. Wheat receipts average 9 million bushels annually. The co-op also handles grain sorghum, corn and soybeans.
The feed grains raised by members fill the needs of a local, diversified livestock industry. In fact, after a fire destroyed a co-op mill in 1986, Mid-Kansas formed a business alliance with egg processor CalMaine. The commitment between the two allowed the cooperative to justify re-building the mill. Now it runs two shifts a day and the cooperative supplies the processor with 25,000 tons of feed annually.
The cooperative is also part of Haven Commodities LLC, a pork production system. It annually markets 150,000 hogs which are fed with 55,000 tons of Mid-Kansas feed.
In a partnership with Farmland Industries, Mid-Kansas has access to a 100-car rail loader. Members don't have ownership in the loader, yet their cooperative does gain a stronger position to do more grain business.
Three years ago, the cooperative started working with cooperatives in Walton and Andale to do joint grain merchandising. Other arrangements, including mergers, could be in the offing between the organizations. Nattier believes anything is possible as local boards of directors and farmers consider the future.
"Kansas farmers are getting a better understanding of global marketing," he explains. "They're looking at ways to reach out to those markets. When they get to that point, they can cut out the middle people and capture more for themselves."
Mid-Kansas is one of 11 cooperatives that formed Cen-Kan LLC. The company
collects the problematic straw left after wheat harvesting and converts it into strawboard.
"It's been a painful experience because we all thought we had a better handle on the market," Nattier explains. Everyone thought it was enough to be a "green" product. No trees are cut down to produce this board. No formaldehyde is used in its processing. Unlike its wood chip fiberboard cousin, though, strawboard is still considered a new product in some market segments.
"We could just sell it to builders and contractors, but that's a very commodity-based market. We want to develop a niche market," Nattier explains.
There were equipment problems and major production down-times. But the manufacturing system is now in its third year. Slowly, a market is being built for the strawboard.
"I think members appreciate that we're trying. Anything we can do that's new or innovative, members and directors will give us a certain honeymoon period to try it. They want us to look outside the box—and inside the box, too."
At FCA in Lawrence, Gales agrees that farmers are willing to examine options that lie both inside and outside the traditional realm of agricultural cooperatives. His grain marketing and ag supply association was founded in 1953 and grew through six mergers to now serve over 12,000 rural and urban customers in 13 Kansas counties and two Missouri counties. FCA owns l9 elevators with a combined grain storage capacity of 12.1 million bushels and shipped 15 million bushels of grain during the past fiscal year.
In 1997, members of Pauline Farmers Cooperative in Pauline established a closed cooperative called P&B Processors. In turn, P&B became majority owner of Soy King, a limited liability company that produces and sells soybean oil and meal from an expulsion-extrusion mill derived from its members' soybeans. It was one step taken by producers to add value to their soybeans. The Pauline cooperative merged into FCA in late 1998.
Today, Soy King ownership is split between farmers (50 percent), private investors (30 percent) and FCA. As the Pauline facility went up, soybean crush margins narrowed.
"Every idea farmers and their cooperative come up with is worth considering, but timing is everything," Gales says. "Any new venture needs to assure it has adequate start-up capital to weather those first years of operation."
Adding more value
"A major challenge facing farmers and other rural people is the need to make the transition from being producers of raw commodities to producers of value-added products, thereby keeping more of the profits from their labor at home," says USDA Under Secretary for Rural Development Jill Long Thompson.
The members of 21st Century Alliance would agree.
After years of reading about the success stories of other closed farmer cooperatives in North and South Dakota and Minnesota, 750 producers from Kansas and six other Midwest states decided it was time to make their own moves toward the marketplace through value-added products. They invested $750 each to develop value-added businesses and were given the first opportunity to purchase delivery rights with U.S. Premium Beef Ltd., a vertically integrated beef cooperative (see Jan./Feb. 1998 issue of Rural Cooperatives). The Alliance has started five new-generation cooperatives in the past three years, including a flour mill, two commercial dairies, a dry edible bean cooperative and a cooperative to procure straw for new value-added ag fiber companies.
Recently, 21st Century's Chief Executive Officer Lynn Rundle said that "getting farmers to build relationships with consumers is the future of agriculture. It won't be for everyone, but for farmers who have a vision of being true food farmers and not just commodity growers, it's going to be a big part of their future. I think we're just at the very beginning of it."
In 1997, 375 of the Alliance members created 21st Century Grain Processing Cooperative, a wheat delivery cooperative, and then bought and renovated a Rincon, N.M., flour mill. Farmers invested $5,000 per share of stock and promised to deliver 2,850 bushels of hard red winter wheat for each share. The membership stock drive raised $3.2 million to buy the mill.
Its formation is part of a trend by wheat farmers to get into the milling business and closer to consumers. Thirteen southwest Oklahoma cooperatives formed Southwest Grain Marketers LLC, and invested $16 million in a flour mill in Saginaw, Texas, near the DallasFt. Worth area. The other partners in the LLC formed in 1996 are Farmland Industries Inc., of Kansas City, Mo., and family-owned Bay State Milling Co. in Quincy, Mass.
Hispanic and Native Pueblo grain farmers in New Mexico are also eyeing an organic milling operation (see page 14 of this issue).
Back at the Alliance, value-added ventures continue. On the heels of the mill acquisition announcement came news that the Alliance would build a 1,500-head dairy with farmer investments. This summer, cooperative officials announced that a 2,800-head dairy was expected to be up and running by year's end. It will employ 32 people with an annual payroll of more than $600,000.
The Alliance has formed 21st Century Agriculture Fiber Procurement Cooperative, also known as Golden Forest Ag Fibers. It aims to be a front-runner in the development of the agriculture fiber and wheat straw particle board industries, Rundle says. The cooperative members will contract to deliver straw to manufacturing companies. The cooperative could even expand into other ag fiber such as corn stalks for paper.
"There are a lot of opportunities out there for farmers," Rundle says. "I could spend all my days talking to new customers working on new ideas where farmers can make money in this system, but the key part is building credibility with the customer."
USDA provides loans
Late last year, USDA made $200 million available to support the creation of cooperatives and stimulate rural economic development. Several Kansas cooperatives have invested in infrastructure through use of USDA funds, including its Business and Industry Guaranteed Loan program.
"We are convinced that producer- and consumer-owned cooperatives can provide a powerful economic vehicle to help rural people meet the challenges they will face in the 21st century," USDA's Long Thompson says.
Rather than duplicating services and investments, north-central Kansas cooperatives are striving for more cooperation and communication between cooperatives.
For example, Farmway Co-op of Beloit, Delphos Co-op, Cloud County Coop of Concordia and Randall Farmers Cooperative Union merged their grain marketing departments into AgMark LLC. The joint venture is now constructing a 110-car loadout facility in Concordia. The site was formerly owned by Cloud County Co-op which sold it to AgMark. When completed in 2000, the facility will handle 1.6 million bushels. Its five employees will load rail cars in as little as 10 hours (see related story, page 6).
While some cooperatives are investing in loading facilities, another Kansas cooperative has sold its rail line. Garden City Co-op sold short line Garden City Western Railway to Pioneer Rail Corp, of Peoria, Ill. The cooperative had operated the line since 1982.
With five grain facilities and one fertilizer facility on the lines, the railway was purchased to ensure service to those operations. The co-op made certain the line went to a company capable of running it, General Manager Irv Clubine reported to members in a recent newsletter. Selling the line enables the cooperative to focus on upgrading its grain storage and fertilizer facilities, he added.
Changing never stops
Remember this: When you're through changing, you're through. So says a sign that sits on Gales' desk. He repeats the slogan often to himself, fellow employees and the cooperative's members.
"We're not going to be—in five or 10 years—the same as we are today," says Gales. "We know that. And our jobs, as cooperatives, are going to be to manage risk and help our members understand how to manage risk. If the lean times in agriculture haven't brought this fact to light yet, the next year or two will. And it's the people who can manage that risk who will survive."