The Carrot and Stick

A Conversation with Bill Patrie, the Man Who Helped Spark Co-op Fever 

The following remarks are from an interview Farmer Cooperatives editor Dan Campbell conducted with Bill Patrie, rural development director for the North Dakota rural electric cooperatives, during a recent cooperative tour in North Dakota.

Question: Last night Lee Egerstrom (author of "Make No Small Plans - A Cooperative Revival for Rural America") referred to the "glass ceiling" cooperatives encounter which denies or limits their access to supermarket shelves. He said he believes farmer cooperatives should concentrate on further processing of food but, in most cases, leave retail marketing to others, or venture into retail marketing only in joint partnerships with companies that already have retail access. Do you agree?

Answer: "I think this is an area where Lee is going to continue to be surprised. I think back to what Jack Dalrymple, board chairman of Dakota Growers Pasta Co., said: "Farmers are smarter than you think." Marketing is not for every co-op. Some should definitely not try to be their own retailer or even their own wholesaler. But it is never wrong to look at it. If there is money to be made by marketing, don't assume that they can't do it. It would sure be a mistake to say that Sunkist or Ocean Spray doesn't understand marketing.

"We were kind of timid about a brand name when we put together the Dakota Growers Pasta plant. We said you aren't going to see our brand name on shelves (very often); we're going to lay fairly low. But it (the co-op's brand) has really taken off. In some cases, co-ops directly linked to farmers have a marketing advantage that they can exploit.

"Retail stores want to link to farmers. It's certainly true in the retail meat industry. New Yorkers want to know that a calf grew up with lots of room and nice green grass and a loving mother. Stores are actually including that type of information on their shelf 'talkers' -- they'll have a pastoral scene of where that meat came from.

"In the main, Lee is right. But there are important exceptions and we should always be looking for those exceptions."

A. "I'm in equilibrium. I regret that I've not done some things as well as I would have liked, and I'm also surprised at some of our successes. I've been involved in economic development in North Dakota since 1975. Between 1979 and 1990 we experienced some of the toughest years imaginable. So the success of recent years has been a real rush.

"The pasta plant was a super thrill. I had the initial idea, and to see an idea transformed into a $40 million plant is very gratifying. The bison co-op -- which has an element of romance and a beautiful facility -- is an idea I've been working with since the 1970s. I'm happy with how things are going and optimistic about the future.

"The negative part -- where I haven't done a good job -- is I don't always know how to communicate with people in existing co-ops who may not understand or have the same vision. Some of them can get petty. We serve 20 rural electric cooperatives and nine telephone cooperatives, and they are not all happy. There's no pasta plant in northwestern North Dakota yet, and to some, that's my fault. 'Why are you ignoring my part of the state?' some people ask me. That is a problem.

"How do you make these people feel like winners when their farmers are participating in a processing plant but it doesn't happen to be located in their region? We haven't solved that problem and maybe we never will. There's tension and it can be exasperating. You work as hard as you know how to work, but have to deal with complaints that you are not doing enough."

A. "There are reasons it might not occur as rapidly elsewhere. The first rule of successful economic development is probably dumb luck. You happen to have the right people at the right time, they bump into each other and you have the right set of economic circumstances. Like with the pasta growers. I'd been economic development director for North Dakota and had just gone to work for the rural electrics. As economic development director for the state I lost a contest to get Bordens to build a hyper pasta plant in Casselton, N.D. They built it in St. Louis instead.

"I'd gone through all the numbers and I knew that it would work in North Dakota. Even though I was no longer working for the state at that point, Jack Dalrymple, a state legislator and durum grower, and Gene Nicholas, also in the state legislature and chairman of the Agriculture Committee, were friends of mine who wanted the state Agricultural Products Utilization Commission to get more money out to farmers for these types of ventures. Bob Spencer at Baker Electric Cooperative and John Rice, president of the U.S. durum growers, were also thinking along similar lines.

"We all had the idea, we knew each other, we knew the institutions and we knew that there was a real opportunity there. We had confidence in our skills. That has to happen. When that core of technical and financial assistance and political and economic leadership comes together, it's amazing what can happen.

"You can't always replicate that situation. USDA likes to replicate models with formulas to get uniform growth across the country. But there is spontaneity here that can't be planned for. If those conditions don't come together, you're not going to be successful.

"The other success factor we have here is necessity -- the mother of invention. People were pressed. Durum prices were so low that they had to try something. They were losing money on every bushel, so why not take a risk? They did, and they made it work."

A. "You see the same thing happening with cattle. The danger to development of a cattle cooperative is that the big companies have so much influence over cattle prices. They can push prices up and take away the organizational incentive to do anything about it. They could have done that with durum, but they didn't think we were serious. We were. Now they are probably thinking, "Geez, $7 durum is a little more than we intended to pay." Well then, why weren't you paying $4 instead of $2.20 in 1990!"

A. "Yes, to some extent. But we teach our directors that the farmer-investor comes first and the co-op comes second. If the co-op isn't trying to deliver to its shareholders -- especially in a closed co-op -- and put money back into their pockets, then that co-op is not long for this world. We don't need more co-ops with nice office buildings, big staffs and educational programs in Europe and Africa. We have enough of those! We have to figure out ways to put money back in the pocket of the farmer."

A. "Regional co-ops in North Dakota and the Upper Midwest are big, strong, influential and politically well connected. Most are well run and often brilliantly managed. We just visited a co-op (Basin Electric Power Cooperative's coal gasification plant in Beulah, N.D.) that bought a $2 billion coal gasification plant. You can't get a much more complicated operation! And this is a bunch of rural farmers from seven states -- owners of 118 electrical distribution co-ops -- that bought that big erector set. That's a sign of the political and economic clout they have. They are very well organized.

"But at sometime in the process, they started to look a lot like their competition. They got lean and mean and customer friendly, as they should. But they also started looking for certain efficiencies. For example, in our business (the electrical business), it doesn't pay to serve a customer way over there with electricity; we might say, "sorry, you have to pay for that line extension." But when electric cooper atives got started, we all paid $5 and got electric service no matter where we lived.

"Times have changed, and some regionals began to look a lot like the investor-owned companies. In that evolution, as the regional tried to survive, some lost that direct connection -- that customer loyalty that built them. It does not have to be that way; regional co-ops can re-invent themselves, and they are trying. They certainly have many resources at their disposal to help them do so.

"This situation is probably most difficult in the dairy industry. There is no co-op dairy that really wants the milk from here (western North Dakota). We are too far away from their processing plants. The members of Dakota Dairy Specialties (a new, local dairy co-op in Hebron, N.D.) believe they were being paid substantially less for their milk even after accounting for transportation differentials. If so, that goes against basic co-op principles. I'm not blaming the (regional) co-op in this case. To some extent, getting kicked out was probably the best thing that could have happened to those guys. They either had to quit the business, move to the Red River Valley (in eastern North Dakota) or look at the market to see if there were altematives. As a result, they are starting their own (cheese) processing plant and should soon earn what farmers are making 30 miles to the east. Kicking them out forced them to rethink what they were doing and they came back with a better solution."

A. "I started on the project in the summer of 1993 with a guy named Daryl Chisholm from Gary, Minn. He was a corn grower before joining American Crystal and had worked in a Cargill corn wet milling plant. He wanted American Crystal to get into corn wet milling. American Crystal Sugar co., AGP and Harvest States had actually broken ground at a site in Jefferson, S.D., but some strange things happened. The plant was never built. Financing was ready, but it got scrubbed.

"American Crystal still had the feasibility study, which they paid a lot of money for, and they gave it to a steering committee. American Crystal said, "well it didn't work because our two partners left. But we still have an interest in a high-fructose corn syrup plant. Our customers are saying they like buying sucrose from us, but they also want us to sell high-fructose corn syrup." So American Crystal wanted to be a complete sweetener supplier. While they didn't feel they could do it by themselves, they were willing to be part of the process.

"That's where it really started. A fairly large steering committee was formed made up of people from North Dakota and Minnesota. We had 21 meetings and had a new feasibility study done -- it cost a lot, but we had to get it right. Then we raised the money (by selling stock in the cooperative). I kept the minutes for the group for quite awhile, until they had money to hire professional staff. It was exciting. We had such quality leadership on that steering committee that it was amazing.

"There was tension between American Crystal and the corn growers cooperative. The corn growers thought that the sugar-beet farmers were trying to use them. The beet farmers said, "you don't know what you're dealing with -- we worked hard to become what we are and we're not going to give the corn fanner a free iide, he's got to pay for it." All that tension had to get worked out. We kept a lid on it and it did work out. Joe Famalette (until recently the CEO of American Crystal) is a very expressive man who says what's on his mind. Midwestern farmers don't always do so. So it was quite a contrast -- but it worked.

"ProGold will have a profound effect (on the economy of the region). We are aggregating 28 million bushels of corn in the southeastern comer of North Dakota. And that corn can still be fed to cattle after they take out the sweeteners. It's also good news for people right here in Beulah, and Hazen and Hebron (in the western part of the state)."

A. "The players are different each time, so you have to adapt the process to suit the opportunity. But in general, it's about a four-step process. The first step is always to understand who is interested in the idea. If you're dealing with bonafide, credible people -- more than one -- then it's worth exploring. We always insist on a quality feasibility study. No way we will do project without one."

A. "Northern Plains Premium Beef is the most dramatic of all co-op development projects in the state. We will be trying to take a product into the most competitive market that you can imagine -- trying to sell beef on the East Coast. The marketing aspect is treacherous enough to keep you awake nights. It's so competitive.

"The cattle industry is faced with a declining market for red meat. So this co-op will be venturing into a mature, declining market against heavy competition. This will have to be done with producers who have never been organized before. Ranchers in this part of country have never worked together. They've always competed with each other. To complicate matters further, we're talking about an international co-op. We need the Canadians (to get adequate volume) but Montana has been investigating the influence of Canadian cattle on U.S. beef prices, perhaps looking for a scapegoat. So there is tension there. There is no love lost between American and Canadian cattlemen, per se. We have to overcome that.

"We're talking about a closed co-op again, and a fairly large scale operation -- about 300,000 head per year. That's not a big packing plant by some standards, but 1,000 head a day is a big deal for us. We'll also be finishing cattle. That in itself is a huge challenge. People think you can't fatten cattle on the Northern Plains because the energy loss is too great because of the cold weather. We've got hard-nosed research data that says that is not true. But we had to get the research data and encourage researchers to get the trials done.

A. "We had a co-op feedlot in North Dakota organized by Farmers Union and it failed. But it's almost an axiom that the more difficult a project is to put together, and the more hurdles you jump, the more force you get behind it. Difficult things build character. It's a difficult challenge, worthy of Howard Cowden's motto: 'make no small plans, for they lack the capacity to stir men's souls.'

"I am impressed with the quality of leadership among those young ranchers. They are bright, they are committed and will not back down. There is some fear, but they do not lack the courage to overcome it. This is the time. They are talking about 50-cent calves this fall. Are you going to keep getting beat up, get out of business or fight back?

A. "The Ag Products Utilization Commission (APUC) has been the most faithful partner you could imagine, APUC has received Rural Enterprise Grants from USDA, but it has not always been a perfect relationship. USDA is concerned that the money be used in a way that meets all the federal criteria.

"When USDA started sending Don Warren (of USDA's Rural Economic and Community Development state office in Bismarck) to the Commission meetings, it helped greatly. Once Don became a part of the process, it helped USDA understand that we were not a bunch of charlatans and that we were putting the money to use in bonafide rural enterprises.

"Cooperatives were a new concept to many of the USDA rural development people. Many of them thought co-ops were small, home-based businesses -- beauty shops, etc. And here we were doing some fairly large-scale projects through the co-op system. So it kind of surprised some of them. There seems to be a feeling among some USDA people that rural development programs should not benefit farmers because they can get help through the commodity programs."

(Editor's Note: USDA funding ofAPUC has helped fund 21 development projects in North Dakota since 1992. "Without the federal grant (to APUC), funding for these projects would not have been possible," Warren reports. He cites the example of the Central Dakota Growers cooperative, which credits assistance from APUCI USDA for helping it fulfill a portion of a national market expansion effort which resulted in the creation of newjobs and expanded the irrigation potential of central North Dakota. With the funding of the feasibility study, cooperative organization and legal assistance, the central North Dakota area can moue ahead with the dream of developing up to a rnillion acres of irrigated farmland, which will bring about added ualue and a strong tax basis for the state, according to a co-op spokesperson.

A. "Yes!"

A. "It is in North Dakota. We always sbelieved that the government should come ave us, but now it's pretty clear that it is not going to. We always believed that the big processors were benevolent, but now it is evident that they (especially the big packers) are not benevolent. They don't share. They don't feel they need to. So if we want to have viable farms in North Dakota, it is up to us to start adding value to our products, or else we're going to lose it."

A. "We have a lot of those. The NFO (National Farmers Organization) has tried to do collective marketing in North Dakota but has been fairly unsuccessful. The breakthrough has been this select membership/closed cooperative model where you pledge a product through processing to an end market. Nothing else seems to work quite that well. It ties up product and gets it committed, rewarding those people handsomely for doing it. It's a carrot and a stick that works. Bargaining co-ops or supply co-ops don't have that kind of economic clout. They don't make that much difference in the life of the individual farmer/rancher.

"We have big insurance cooperatives and wall-to-wall rural electrics in North Dakota. The telephone co-ops are expanding -- they're buying U.S West and GTE properties here. So we have good models in other cooperative areas. It was in value-added processing that we were not performing."

A. "We would like to have a partnership with the federal government -- a true partnership that recognizes us on equal status and is a dependable partner. We've had a grant through USDA for 1994 to help put a business development specialist -- Jack Piela -- to share the workload with me (a portion of his salary has been provided by the Dakota Cooperative Development Center, which has received USDA rural development grants). We need that continued support -- it can't be herky jerky. You can't get into this thing and all of a sudden find you have no people to do it.

"We would like to expand our program to also serve South Dakota, which has much in common with North Dakota. But USDA voted "no" on our application to renew our rural cooperative development grant because new regulations say co-op development funds must go to one of the 500 poorest counties in the nation. So they awarded the money to someone else -- we don't know who. That was a little surprising to us, and we have objected.

"We do believe in bringing people up our of poverty, and will work in poverty areas here (primarily Indian reservations). But you don't understand rural development if you think poor people by themselves are going to form successful cooperatives and market their product nationally or internationally. They need to merge with other farmers who have financial resources and marketing know-how to do that. All we are saying is that a rising tide will lift all boats."

A. "We're glad for the help, but -- and I'm not trying to cheat anybody out of getting credit for co-op development -- I don't think it will work very well. I'm hired now by the private sector, and I'm an advocate for projects. I meet with bankers and I can twist arms. Now if USDA is a player in financing, can they also play the advocacy role? I think probably not."

A. "Right. I can understand in other states the desire to create this capability in-house. But there are two levels of expertise needed. The first level in rural development is in general economic development. Co-op development doesn't work if you don't understand economic development. If you can't get the numbers right and make a project fly on paper, who cares what your organizational skills are. You need them both."

A. "We are very, very excited about Jill Long coming on board at USDA. We've been promised an opportunity to meet with Jill to think this thing through. I'm optimistic that something good can come from that."

A. "USDA seems to be suffering an identity crisis. Is USDA a poverty program that will focus on the 500 poorest counties? That is a surprise to some. Or is it what it has been in the past, an apologist for American agriculture? Or is it the research arm for industrial agriculture? Or is it a promoter of small-scale, sustainable agriculture? Or is its purpose to extend water and sewer to rural areas? And we could go on. These issues that cry out for champions are blunted and stifled because USDA can't call out to its people and say, "Here is where we are going, come with us or fight us."

"Strategic planning only works from the bottom up. That's where the creativity is and the potential for problem solving is. But that can't happen (at USDA), because the inputs are coming from the top. Congress is beating on the department to get it to do what it wants it to do. But Congress talks with 300-plus voices, so that's not working. It's a rocky road ahead. Fred Kirschenmann (an organic farmer and theologian who addressed the tour group on the spirituality of cooperatives) had an interesting perspective last night: maybe it all has to get worse before it will get better. Maybe Humpty Dumpty really was pushed."

A. "I'd like to see it focus on things that work, not on constituent groups. I'm willing to take that risk, understanding it is a risk that our particular interests might not get represented because some may doubt that our rural efforts through cooperative development actually work. "Big gets small and small gets big. The rough places shall be made plane, and the Valley shall be exalted," the Bible says. You see that phenomenon happening in organizations.

"USDA has expanded time and again -- food stamps, social programs, development programs, finance programs, all kinds. It has to change. People need organizations they can understand. Once an organization takes on so much complexity and becomes so confused that it does not have a recognizability, it needs to be changed. It needs to get focused again. This is not something to be feared, but to be expected."