University of Wisconsin Center for Wisconsin
Rural Cooperatives, November/December 1999, pp. 20-25.
Published by the Rural Business and Cooperative Development Service 

Thumbs Up: Michigan soybean farmers keeping value at home with new-generation cooperative

By Laura Moser

Just as the U.S. political and economic climates were ripe for the development of cooperatives 80 years ago, so too is the time right now to take another look at cooperatives.

"New-wave" or "new-generation" cooperatives offer a new set of opportunities and advantages for their member-owners and the idea is catching on. With depressed commodity prices and changing government policies, farmers are looking for ways to take more control of their businesses. One of the latest states to embrace new-generation cooperatives is Michigan. What started as one county's attempt to bolster its agricultural community has grown into a statewide effort.

Three years ago, Michigan State University extension agent Jim LeCureux received a grant from the W.K. Kellogg Foundation to study ways to enhance the rural community through sustainable agriculture. A steering committee was formed to explore different options.

"We were looking for ways to keep farmers farming," LeCureux explains. "We looked closely at the various crops grown in this area and the opportunities they might present."

LeCureux and the committee worked in three Michigan counties Huron, Tuscola and Sanilac-located in the "Thumb" region of the state. They visited other states and Canada to see new, value-added processing facilities and new-generation cooperatives working. It was in Ontario where the committee literally stumbled on the idea they would take home to Michigan: Soybean processing.

"Based on the comments by the owner in Canada, we saw a great opportunity for a soybean extruder in the Thumb," LeCureux says. "Soybeans grown in the Thumb are hauled to northern Indiana, northern Ohio or western Michigan [to be processed]. Soybean meal is then brought back to feed to livestock."

The three-county area produces over 8 million bushels of soybeans per year. Livestock in this tri-county area consume over 70,000 tons of soybean meal. Examining these figures, farmers saw a way to add value to their weakening commodity prices.

By late 1996, the committee was evaluating the feasibility of a soybean processing plant in the Thumb. A series of meetings held throughout the winter months helped educate area producers and determine their interest level.

"We needed a core group of people committed to the cooperative and the ideas to move the business forward," LeCureux says.

Oilseed Co-op launched

In early 1997, feasibility and business plans outlined the goals and objectives of the new cooperative. The steering committee also selected a name: Thumb Oilseed Producers Cooperative (TOPC). The initial stock offering was held in the spring of 1998. Becoming a member required accepting new ideas about cooperatives. Members had to provide more than spirited loyalty. They needed to put up money and guarantee delivery of a set amount of product. Two policies distinguish this and other new-generation cooperatives from traditional marketing cooperatives: shares and delivery rights.

"Shares in a new-generation cooperative do not simply assign membership, they allocate delivery rights," explains Bob Cropp at the University of Wisconsin Center for Cooperatives. "Each share entitles a member to deliver one unit of product to the cooperative. This represents a 'dual contract'—the farmer must deliver a unit for each share purchased, and the cooperative must accept and compensate the farmer for each unit delivered."

The original stock offering was $1,250 a share. Each share gave a producer the right and obligation to deliver 500 bushels of soybeans to the plant. By the time the offering closed, 198 people from 10 Michigan counties had invested and joined the new cooperative.

The individuals investing in Thumb Oilseed Producers Cooperative are not typical cooperative members. While the average age of farmers in Michigan is 57, the average member of this co-op is between 30 and 40. The youngest members were only 13 and 14 when they joined.

"Our membership profile highlights the key point of this entire effort: we can't continue farming under the existing system. We have to have more direct control of our product. These younger members know that they won't be doing business the way their fathers and grandfathers did business," LeCureux explains.

In exchange, the cooperative projects that it will add value worth 40 cents per bushel more for growers than they would otherwise earn. A portion of the added value is due to "basis," or transportation, gain because soybeans will no longer be shipped out of the area. And soybean meal will not be shipped back as feed.

One of the biggest differences between the new cooperative and traditional ones is that this is a closed cooperative. Until demand increases, the cooperative will not accept new members or additional raw product. Only those farmers who have purchased delivery shares will supply product to the plant.

"The market will dictate the need for more members and more product," LeCureux explains. "The market will dictate where the cooperative goes from here."

Commitment is key

The key to success, LeCureux believes, will be the growers' commitment. "The farmers have to view the cooperative as an extension of their farm, like another 80 acres to take care of," LeCureux says.

In return, the cooperative projects a return of 15 percent on investment to its members, and the co-op plans to return 80 to 100 percent of its earnings to members each year.

Like other cooperatives, TOPC is member driven and governed. The seven-person board of directors is President John Knoerr, Sandusky; Vice President Vern Reinbold, Caro; SecretaryTreasurer Scott Krohn, Bad Axe; Scott Bernia, Akron; Rob Gerstenberger, Sandusky; Don Schulkebier, Bridgeport; and Ron McCrea, Bad Axe. The plant manager is Bruce Knudson, and LeCureux serves as consultant and part-time chief executive officer.

Cropp lists four advantages to the delivery-share policy:

  • Adequate equity capital is raised at the outset of the business.
  • The burden of capitalization is distributed equitably, in proportion to the future use each member will make of the cooperative.
  • Because each member is substantially invested in the business, they all have an interest in seeing it succeed.
  • By selling their membership shares, exiting members may redeem their invested equity immediately—at a value that reflects the performance of the cooperative.

When members deliver beans to the plant, they receive the market price. Likewise, when they buy back soybean meal for cattle, members pay the market price. The member advantage comes in the form of value-added checks received at the end of the year. As the success of the plant and cooperative grow, the member's equity and membership should also gain in value.

The community benefit is great, too. The new plant will employ up to seven people and become a major customer for the area electric utility. The added income generated for the farmers will also return to the community.

"Money generated as a result of increased income for farmers and new employment will benefit the entire community and its residents," LeCureux says.

Vertical integration

Adding value to commodities after they leave the farm makes thousands of dollars. Unfortunately, farmers rarely see the extra income. LeCureux's study found that getting producers involved in processing their product is essential to increasing farm profitability.

"The trend in agriculture is vertical integration, to capture more of the money from the processing side of the business," LeCureux says. "By moving up the vertical ladder, we even out some of the peaks and valleys of commodity prices."

Having a market before processing is critical to new-generation cooperatives, and is the essence of being market driven rather than supply driven.

"When the producer also becomes the processor, he gains more of the control and more of the value of his product," LeCureux states. "Vertical integration lets the farmer become more active in moving the product from the field to the plate."

Depressed commodity prices and dwindling government support programs make cooperatives such as Thumb Oilseed Producers Cooperative appealing to farmers. If commodity prices were strong, enthusiasm would not be as great, some say.

"If we were seeing $8 beans and $3 corn, we would not have as many people interested in new co-ops. But with commodity prices the way they are, the farmers want a way to generate more money from their crops," LeCureux says.

In the long run, farmers must do something to take back more control, LeCureux says. "Government support for agricultural commodities is declining, global markets are changing, the percentage of raw agricultural products being shipped abroad is dwindling— with more being shipped as processed food – all of which are increasing risks to farmers.

"Against this picture, we've decided to do something that moves us higher up the food chain to capture more of the end-product dollar," he says. "It will also give more income stability than we can derive from fluctuating markets and provides opportunity for increased equity."

A declaration of independence

Through the exploratory process, the TOPC group connected with a Colorado-based company that was developing a new line of vegetable-based motor oils. Agro Management Group works to develop new products while enhancing rural communities. It connects local groups and government agencies to bring in new business to rural areas. Agro Management's use of agricultural commodities also develops new uses for old crops.

The idea and enthusiasm for the Thumb processing plant grew. Soon several local and state agencies showed interest, including USDA Rural Development. In August 1998, a declaration of support and commitment to the "Michigan Rural Development and Community Enhancement Model" was signed by leaders of private, state and federal government agencies on the campus of Michigan State University.

With the signing of this declaration, Michigan became the first state to participate in a commercialization project to produce an initial core product of sustainable, non-toxic and biodegradable crankcase oil and lubricants being derived from Michigan-grown soybeans and canola.

"We have a very non-conventional product to introduce to a conventional market," said dim Lambert, partner of Agro Management Inc. "We were looking for a non-conventional approach that met our goals and objectives."

Donald L. Hare, state director for USDA Rural Development programs in Michigan, said the project has broad ramifications for agriculture.

"What we are signing here today will be our own declaration of independence from the strong reliance on foreign petroleum products," Hare said at a groundbreaking ceremony for the facility. "It is also our declaration of independence from non-environmentally friendly products and a declaration of financial independence for our Michigan soybean and canola producers and their local communities.

"The Michigan model speaks to the heart of USDA Rural Development's belief that we must find ways to assist agricultural producers in developing value-added products," Hare added.

LLC formed

Part of the Michigan model is the formation of a limited liability company with stockholders. TOPC and Agro are 50/50 shareholders in the motor oil project. Economic development corporations from Tuscola, Huron and Sanilac counties are also equity shareholders.

Bringing the economic development corporations into the LLC fit well with the rural communities' goals to enhance the farm economy and to support rural development. Many of the rural economic development corporations were becoming discouraged with traditional programs of bringing outside firms into the area that would, in turn, offer lowwage incomes to the residents while returning profits to stockholders far removed from the community. The counties' shares of the profits will go into a venture capital fund to help spur more agricultural business development.

Huron County EDC Director Carl Osentoski liked what LeCureux and the group of innovative farmers were doing, and he got involved.

"Recruiting business to invest in your area is OK," Osentoski says, "but growing local business is better. It builds a local knowledge base and changes the local mindset, so further economic development happens."

Osentoski works closely with James McLoskey from Tuscola County and Richard Lessner from Sanilac County. Together, they formed the Tri-County Coalition, an equity shareholder and a financial supporter of the Michigan model.

Offering preferred shares in the new-generation cooperative allows the community to support the project. When the cooperative is successful, it captures jobs and wealth that are shared by the community, says Wisconsin's Cropp.

"At a bare minimum, each of the three communities can net $34,000 annually to reinvest into the community," says Jim Lambert of Agro Management. "Each member farmer could net $1,850 annually."

The numbers were based on the use of the new lubricant—AMG2000— in only 1 percent of the registered vehicles in Michigan.

"The potential is huge," Lambert stresses. "The bare minimum numbers don't include small engine applications of the oil or other projects."

The Michigan coalition is revolutionary in terms of sustainable agriculture and rural development. The vested financial resources by communities and individual farmers to produce a value-added product are a new approach to enhancing rural communities. Even President Clinton is aware of the potential generated by such a partnership. On August 12, he issued an executive order to states to find a way to use biomass engineering to empower farmers and their communities. The people in Michigan were already working in that direction.

The Michigan Model is doing just what the President is encouraging others to do: invest in communities and local farmers. The Agro Management and TOPC partnership also includes agreements to use the co-op to process any new products developed.

The U.S. Postal Service is using AMG2000 in its Michigan fleet to evaluate the product's effectiveness. The lubricant is also used in other state-owned vehicles at Michigan State University, the Michigan Department of Agriculture (MDA) and USDA. Lambert expects to go public with it in early 2000.

USDA's commitment to co-ops

USDA strengthened its commitment to new cooperatives and farmer-owned enterprises that help generate more income for farmers. The Rural Business-Cooperative Service of USDA worked closely with LeCureux and the farmers to establish the cooperative.

"We are working with several groups of producers in the state who are looking to start their own processing cooperative," says Jason Church, cooperative development specialist for USDA in Lansing. "We offer financial and technical resources to producers who are looking for ways to become more involved in the processing of their commodities."

TOPC received a grant from USDA to hold meetings and conduct feasibility studies. USDA also offers co-ops help in securing loans and educational training for members.

"The 1996 Farm Bill began the phase-out of farm subsidies. The alternative solution to subsidies is helping producers to be self-sufficient and self reliant—to rely on their own efforts rather than farm subsidies," Church explains.

The MDA also committed to the new cooperative and the development of more value-added processing facilities by opening the Office of Agricultural Development.

"The soybean oil production facility represents the coming together of the 'new wave,' farmer-owned cooperatives and value-added agriculture in Michigan," says Dan Wyant, Michigan agriculture director.

Up and running

After three-and-a-half-years of planning, study and research, the TOPC processing plant extruded its first batch of soybeans.

The 900,000-gallon-capacity plant is small in comparison to others, but will meet the needs of its 198 members. The $2.2 million plant, located in Ubly, will provide a local market for about 20,000 acres of soybeans. The plant is expected to generate a high-quality food oil and a high-energy soybean meal in addition to the lubricant.

The facility is extruding beans through heat and pressure. The natural process creates opportunity to fill a niche market in European countries where non-genetically modified organisms generate a premium. This natural process does not use hexane to separate the meal and oil. Because the natural process does not extract all the oil from the meal, livestock producers who use the meal will have to adjust their animal feed rations for its higher energy and lower protein levels.

In its start-up phase, the facility is concentrating on making meal and oil. In addition to its efforts with Agro Management, though, TOPC is working with the MSU food science department to develop a flavored, soy-based drink. The cooperative is willing to take a look at other soy-based products.

In contrast to traditional cooperatives, TOPC will remain focused on processing soybeans. It has no interest in broadening out to other commodities or services.

That does not mean there is not an opportunity for other commodities to join the new cooperative movement. On the contrary, LeCureux is already working with some alfalfa growers who want to build an alfalfa-processing facility. Around the state, several other new-generation cooperatives are in their preliminary stages of development.

"This type of cooperative will work for any commodity. There may even be more than one fit for the commodity," LeCureux states.

He has taken his new-generation cooperative mission throughout the state. The Innovative Farmers of Huron County has changed its name to the Innovative Farmers of Michigan. LeCureux's position at MSU Extension was changed to reflect his new efforts. He is now the value-added agent for the state, working with groups around Michigan that want to start new cooperatives and value-added processing facilities.

LeCureux and Church have worked with other commodity groups, conducting feasibility studies and producer surveys. Some the groups exploring their options include turkey growers, who recently lost their processing facility when the company left the state; beef cattle producers; apple growers; blueberry growers; and maple syrup producers.

Editor's note: Laura Moser is an agricultural writer based in Williamston, Michigan.

Factors for co-op success

George Sinner, former governor of North Dakota and a long-time organizer of new-generation cooperatives, offers the following recommendations for developing a successful new cooperative:

  1. Farmers need to make significant investments in order to secure an appropriately sized plant and the proper equipment.
  2. A dual contract must commit the farmer to specific deliveries and the co-op must accept those deliveries. This offers stability to both the members and the cooperative.
  3. Professionalism is required on the part of farmer-members, directors and the hired management team.
  4. The cooperative must be knowledgeable about its customers and about the marketplace in general. The value-added product chosen and the facilities needed to produce it must be based on accurate measurements of demand for that product, and the cooperative must be willing to adjust quickly to changes in the marketplace.
  5. A new-generation cooperative must be large enough to meet the needs of its buyers and to match or beat the prices and the quality of its competitors" products. In a small niche market, the cooperative may be on a small or moderate scale, as long as it's large enough to compete effectively within that niche.
  6. Most, if not all, of the profits from the cooperative must be returned to its members as cash at the end of each fiscal year. This is necessary to keep members interested in and committed to the cooperative. If capital is needed for expansion, the board and management must make the case for expansion and offer shares to pay for it..

Alfalfa growers form cooperative

Since the successful TOPC startup, in Akron, Mich., is expected to begin farmers in Michigan's Thumb have created another cooperative – Michigan Alfalfa Processors Cooperative. In June, 8,855 shares of stock were sold to 178 producers. They purchased shares giving the rights and obligations to deliver product to a new alfalfa cubing business.

"Shares in the cooperative sold for $150 per acre the first 30 days they were offered. The price increased $10 after the first 30 days," says Jim LeCureux, MSU value-added extension agent. "We sold 90 percent of the shares in the first 30 days."

If there was one lesson LeCureux learned from the formation of TOPC, it’s that stock prices should increase over time. By increasing after 30 days, producers have an incentive to buy stock sooner. When the stock offerings were open with the oilseed cooperative, the last half of the share sold in the last four days, creating a nervous situation for the steering committee.

The alfalfa processing plant, located in Akron, Mich., is expected to begin operations in 2000. The business expects to employ 20 people with an annual payroll over $550,000. In addition, discussions have started with individuals and businesses interested in doing the custom harvesting and trucking. Another 10 to 15 people will be employed in this phase of the project.

"While cubing is the first step, we are currently investigating additional technology which may allow us to move into other industrial, human and animal nutritional products that will add extra value to our product," says Chris Grekowicz, chair of the alfalfa cooperative’s steering committee.

Members are in the process of electing a board of directors and hiring a plant manager. Many of the members of the alfalfa cooperative are also members of the oilseed cooperative.

"The joke around here is that for about half the cost of a good pick-up you can get involved in a cooperative," says LeCureux. "A lot of farmers think that’s a pretty good deal."

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