University of Wisconsin Center for Wisconsin
Rural Cooperatives, November/December 1998, pp. 26-30.
Published by the Rural Business and Cooperative Development Service
USDA Loans Help Co-ops Grow
by Catherine Merlo
A cross America, hundreds of rural communities and businesses have been infused with new life, thanks to the financial boost many local cooperatives have received from USDA's Business and Industry (B&I) Guaranteed Loan Program. The B&I Loan Program guarantees loans by eligible lenders to businesses to benefit rural areas. Borrowers first seek financing from a lender in their area, and the lender, in turn, seeks a guarantee from USDA.
"Cooperatives have used these loans to expand into value-added processing, to upgrade or build new facilities, or to jumpstart ailing businesses," says Dayton Watkins, administrator of USDA's Rural Business-Cooperative Service. "The result has been larger profit margins for co-ops and their members, thousands of new jobs and revived rural economies."
This year, the program promises to stimulate even more rural economic development. USDA has allocated $200 million to support the creation of cooperatives during 1999. That's twice the amount of money—or $100 million more—than USDA set aside for the B&I program in 1998. The B&I program has also been expanded to include the purchase of "membership stock" in new cooperatives formed to produce value-added goods from their members crops or livestock.
The following articles take a a closer look at how five cooperatives are using USDA's B&I Guaranteed Loan Program to rejuvenate their operations and strengthen their communities. For more information about how cooperatives can use the B&I program, contact your nearest USDA Rural Development office or USDA Service Center, or call the national office at (202)720-4323.
New co-op gives Arkansas tomato growers clout
How much would your business improve if you set up a totally new company? Bought an older processing plant and its 25 acres and modernized it to state-of-the art condition? Got Burger King as your biggest customer? Then topped it all off with a bumper crop?
The 15 members of Hermitage Tomato Cooperative Association have discovered first-hand what happens, since that's exactly what happened to them and their new company during 1998. The feat was all the more remarkable for being the first year of operation for this tiny tomato processing and marketing association in Hermitage, Ark., population 650.
There's one more piece of the pie, the clincher that made everything—except the bumper crop—possible. In 1998, Hermitage Tomato Cooperative Association received a $3 million Business and Industry (B&I) Guaranteed loan from USDA. From there, the world opened up for the tomato farmers of Hermitage Tomato Co-op.
"Before, these small rural growers were little bitty fish in a big ocean," says Randy Clanton, president and CEO of the co-opt "Now they have clout and the ability to fill big orders on short notice."
The co-op was formed by bringing together several local tomato growers in Bradley County. They had been marketing their tomatoes through two larger farms or at auctions. "They had no chance of surviving," says Clanton. "Most had their own processing equipment on their farms, and it wasn't modern or big enough to handle even another neighbor's production."
Once the growers set up the co-op, they could seek appropriate funding to purchase the land and an existing tomato processing facility, to upgrade and buy equipment, and to provide working capital. The better processing line, packaging and marketing would give members' product a unique look and help them compete in the market.
With help from USDA Rural Development personnel, particularly John Edwards and Shirley Tucker, in Little Rock, Hermitage Tomato Co-op got the B&I loan guarantee, finding its lender in Farmers Bank of nearby Hamburg, Ark. Then the pieces started to fall into place.
The co-op earned nearly $3.9 million in sales during 1998. Its members produced and processed 412,000 20-pound cartons of tomatoes from some 300 acres. For Burger King alone, Hermitage Tomato Co-op packaged 60,000 cartons. The number of jobs created by the new processing facility jumped from 75 to 116. Even last summer's heat wave that ripened the tomatoes all at once didn't stop the co-op from having a successful year.
"The growers feel good about owning their own business," says Clanton. "They use the facility, buy tomato-production supplies from it, and the profits go back to them as patronage dividends."
Prospects are so good, Hermitage Tomato Co-op plans to have a second processing facility in place by June, when fresh tomato packing resumes. That $1 million investment, for which Hermitage will seek a second B&I loan, will add 100 more jobs. Another five growers are interested in becoming co-op members. And Hermitage Tomato Co-op is experimenting with greenhouse tomato production in an effort to expand the growing season from three to nine months each year.
"We want to be on the cutting edge, not left behind," says Clanton.
The B&I loan has likewise given the area a much-needed boost.
"I met with the mayor of Hermitage this morning," Clanton says. "The people here are very excited about the increased opportunity and business activity in this area.
"I just want to emphasize," Clanton adds, "that the B&I loan and the public-private partnership involved has worked out very well for Bradley County."
The most- eagerly awaited event in southwest Minnesota opened last fall to rave reviews.
Agri-Energy LLC's $20.5 million corn-to-ethanol facility in Luverne, Minn., was completed in September 1998, with the help of a $5 million B&I loan. The new processing plant not only adds value to the local grain crop and improves prices for 201 area farmers, it also provides jobs for 28 local residents.
"This is the last step in a long journey to receive better prices for our corn," David Kolsrud, chairman of the board of Corn-er Stone Farmers Co-op, said at the plant's start-up. "This facility represents what can be achieved by having farmers, bankers, government officials, contractors, engineers, politicians and city officials all working together."
A year in the making, the Agri-Energy plant is a joint venture between Corn-er Stone Farmers Cooperative, Fagen Inc. and Corn Energy Investors. The three owners are already seeing their investment perform better than expected.
"The plant is running at 125 percent of design capacity," says Kolsrud. "The outlook is bright. People are excited."
The facility utilizes more than 5 million bushels of corn per year to produce 15 million gallons of ethanol. It also produces 37,000 tons of high-quality dairy feed (known in the industry as DDGS) each year.
Without the new plant, Kolsrud says, the area would have seen depressed grain prices from a surplus of corn. The plant consumes 4.5 million bushels of corn a year. That's equal to 100 acres of corn per day.
Additionally, the facility has helped local residents. A nearby beef processing plant closed six months before Agri-Energy opened, leaving 380 people without jobs. "We were able to hire many of them in technical jobs in the new plant," says Kolsrud. The plant generates a yearly payroll of $900,000.
While the B&cI loan represented only part of the money needed to build the facility, it played an important role. "Bankers don't like risk," Kolsrud says. "The USDA Rural Development loan made this project much more secure. In doing so, it lowered our equity requirements and helped in negotiating favorable interest rates. We couldn't have got financed without it."
Primary lender is Stearns Bank of St. Cloud, Minn. Secondary financing came from Luverne's Minnwest Bank and First Farmers and Merchants Bank, Medicine Co. Bank of Granite Falls and Corn Energy Investors.
The plant, which sits on 22.5 acres, was designed to facilitate expansion. Kolsrud expects that within five years, volume will double to 25-30 million gallons of ethanol per year.
"The ethanol industry is still in its infancy and is continuing to grow and find new markets," he says. "By being environmentally friendly, we're seeing a lot more interest and growth in our larger populated states, especially where air and water quality are being compromised."
If nothing else, the last two years have taught Kolsrud and the grain farmers of Corn-er Stone Co-op where and how to seek help if they want to look at other value-added projects. "We have learned that there are a lot of government programs already in place that will help producers if they have a project that makes sense."
Necessity usually is the mother of consolidation. At least it was for two South Dakota grain cooperatives.
In the farthest corner of southeast South Dakota, 600 livestock producers and grain farmers needed a grain-loading facility in order to be more competitive when shipping their crop to national markets. The two small grain cooperatives they owned were too small individually to raise the capital needed for the $5 million project. And without more competitive access to distant markets, the future looked dim for the two co-ops.
Together, however, they found a solution. In 1997, Farmers Elevator Co. of Elk Point, S.D., and Farmers Elevator Co. of Jefferson, S.D., terminated their operations and consolidated into Southeast Farmers Elevator Cooperative.
The new co-op's balance sheet then showed enough financial strength to make the new grain terminal achievable. With a $2.1 million B&I loan, and another $2.78 million from public and private loans and grants, Southeast Farmers Elevator Co-op achieved its long-sought dream.
In late 1998, the co-op completed construction of its new elevator and 110-railcar loading facility. Located halfway between Elk Point and Jefferson, the new terminal is expected to handle almost 10 million bushels of grain in its first year. It's able to load the 110'ar "shuttle trains" in one shipment—a streamlined operation that increases efficiency and substantially helps reduce freight rates. And if the terminal can load the entire shipment within 15 hours, it receives even further rate reductions.
The result is higher prices to members, says Donald Truhe, general manager of Southeast Farmers Elevator Co-op.
"The price of corn to our farmers is now 7 to 10 cents per bushel above what we were paying with a truck-only market," Truhe says. "It also allows the co-op to make 3-to-4-cent larger margins to pay for the new facility Overall, we're seeing 10-12 cents more per bushel."
Situated just inside South Dakota, where Iowa and Nebraska meet, the new facility has brought numerous other benefits to the area. "We're taking heavy traffic off the interstate," says Truhe. "We're retaining corn in South Dakota instead of shipping it off to Nebraska or Iowa."That's saving the co-op 6 cents per bushel in truck freight rates alone.
The new facility eventually will create up to 10 new jobs over the next 2-5 years, for a total of 32 employees.
The B&I loan also offered the co-op an unexpected benefit. "The requirements of the loan kept us environmentally correct," Truhe says. "It made us approach the facility in the proper way, making sure that it wasn't a historical site or a wetland. Those are things we wouldn't even have known."
In addition to the B&I Loan guarantee, Southeast Farmers Elevator received a $1.1 million loan from South Dakota's Dept. of Transportation for 12,000 feet of railroad track (including steel and ties). The co-op also received a $750,000 "Redi Fund Loan" from the Governor's Office of Economic Development and a $309,000 grant from the state. Southeast Farmers Elevator kicked in $700,000 of its own money to build the facility.
"The B&I loan guarantee removed the risk for the bank and allowed us to get a lower interest rate," says Truhe.
The co-op plans to add a grain dryer to its operations in the next 2-5 years, "now that we see how well it works," Truhe says. With that will come the need for more capacity Now able to store 506,000 bushels of grain, the facility could jump to a 1.5million-bushel storage capacity.
The first two trainloads, launched in December 1998, headed offto chicken feed mills in Arkansas. But that's only the beginning. "Our shipments can go anywhere the Burlington Northern Santa Fe Railway goes," says Truhe. And if all goes as planned, they will.
Idaho co-op strikes gold in new convenience store and fuel loading station
The board of directors of Valley Co-ops Inc. of Jerome, Idaho, thought their co-op had a gold mine. A B&I guaranteed loan made sure that it did.
Valley Co-ops, a 3,000-member farm supply co-op, owned a small, outmoded store and service station in the nearby farming town of Shoshone, right where three major highways intersect. Those roads lead to places like Sun Valley and the Sawtooth Mountains, which offer year-round recreational activities.
Although Shoshone has a population of only 1,500, Valley Co-ops thought the store's busy-corner location and the heavy traffic flow offered real opportunity to improve its business. Co-op directors Karen Fields and Don Tabor began studying the location's potential, and eventually came up with a project plan.
With backing from a $1.17 million B&I loan from USDA, Valley Co-ops received the funding it needed from cooperative lender CoBank to tear down the old facility and build a new one from the ground up. Demolition of the old buildings began in June 1998. The new 4,000-square-foot convenience store opened in October 1998.
At the same time, Valley Co-op built a bulk-rack facility, where bulk fuel delivery trucks fill up with gas, diesel or home heating fuel. Both the bulk-rack facility and the convenience store are affiliated with Cenex Harvest States, the large cooperative from which Valley Co-op has long purchased its petroleum-related products.
"Both are a really nice addition to the community," says Valley Co-op's general manager Donn Bordewyk. "Sales are brisk. We're excited about this."
Not only did the new venture bring 20 new jobs to the community, making Valley Co-ops the town's largest nongovernmental employer, but Bordewyk is especially proud of the environmental precautions the co-op took with the new bulk-rack facility. "We did some things that were real pluses there," he says. "With that much petroleum and being in the heart of Shoshone, we wanted to be sensitive to environmental concerns."
The co-op installed an underground oil-water separator tank to contain contaminants from any leakage or spilled fuel. It also built an elaborate retention pond for excess runoff from the property. "With the combination of the two, we've got a good plan for any potential spills," Bordewyk says.
The convenience store has adopted the fast-food franchise of Orion Foods, which supplies many Cenex Harvest States’ convenience stores. Inside, hungry travelers can find "Hot Stuff Pizza," "Smash-Hit Subs" and "Cinnamon Street Bakery."
Valley Co-op expects to generate more than $3.5 million a year from the convenience store and bulk facility. Its diversified operations already bring in $25 million annually. The co-op operates several farm supply and hardware stores, bulk delivery trucks and full-service agronomy centers. It sells fertilizers, chemicals and petroleum—and most everything else members need to produce their potatoes, sugar beets, wheat, alfalfa, corn, barley and beans, and to run their dairies.
"Without the B&I loan, the feasibility of this project would have been much more difficult," Bordewyk says. "The loan guarantee was the conduit to us getting a 6percent interest rate. That had a direct impact on the profitability of the project."
Bordewyk credits Terry Stigile and Daryl Moser of USDA-Rural Development's office in Boise, Idaho, and Dave Sartel out of Cobank's Spokane, Wash., office, for their help in securing the funding. CoBank provides financial services to 2,000 cooperatives and utility systems across rural America.
"Our relationship with all has been very good," says Bordewyk.
Valley Co-op has other ideas for the future, including possible petroleum and agronomy ventures. But for now, its new convenience store and fuel dock have provided a boost to downtown Shoshone. "They've not only improved the Main Street look and are a great asset to the community", Bordwyk says, "but they’re an important part of the co-op’s growth plan."
California dairymen move up with ice cream
In Northern California's Humboldt County, where a declining timber industry has cut deeply into employment levels, one business has found a way to bring muchneeded dollars back into the area.
Humboldt Creamery Association, an 80member dairy marketing cooperative in Fortuna, recently expanded its ice-creammaking capabilities with the help of a $3 million B&I loan.
"The expansion gives us an opportunity to grow our business," says CEO Rich Ghilarducci. "It allows our members to move the* raw product into a more stable value-added market and not have them stay in a volatile commodity market."
The 70-year-old co-op traditionally has produced butter, fluid milk and powdered milk. But the volatility of the butter market has made it difficult to compete in the international arena. Producing a value-added product like ice cream moves the coop into more stable domestic channels.
"Humboldt Creamery was looking at its future and the products it makes," says Joan Rainwater-Gish, a senior vice president at nearby Six Rivers National Bank, the loan lender. "It had been heavily involved in butter production, which is an involved and costly process. It looked at products for more profitability that would position the coon in the high-end market."
The future, it seemed, lay in ice cream. Although Humboldt Creamery had been producing ice cream since 1994, the expansion allowed the co-op to double its production. Of the $3 million B&I loan, Humboldt Creamery used $1.6 million to purchase new ice-cream-making equipment and to expand existing facilities. The other $1.4 million was used to refinance part of Humboldt Creamery's working capital line of credit in an overall debt-restructuring plan to improve the co-op's cash flow.
The facility enlargement was completed in July 1998. It employs 100 people, including 20 new employees. Humboldt Creamery now produces 6 million gallons of ice cream per year. The co-op has contracts to package ice cream under various labels. In all, Humboldt Creamery makes 140 flavors of ice cream.
Humboldt Creamery no longer produces butter, although it continues to produce both fluid and powdered milk. Total co-op sales now reach $40 million per year, but that number is expected to grow with its value-added move into ice cream. The co-op plans to increase its ice cream production to 10 million gallons over the next two years. For both the dairy farmers and the residents of Humboldt County, the B&I loan has opened new doors.
"The community is very proud of the jobs Humboldt Creamery has created in this area," Ghilarducci says. "They're manufacturing jobs that offer good benefits and pay.
"It would have been impossible to do what we did without this loan," he adds. "The capital needed would have been hard for these small dairymen to raise."
Ice cream, it turns out, is not only an incredibly delicious treat, but can also be a dairyman's salvation as well.