University of Wisconsin Center for Wisconsin
Farmer Cooperatives, August 1995
Published by the Rural Business and Cooperative Development Service

Temperature Rising
Co-op Fever is Still Sizzling Across North Dakota;

But Will the First Failure Cause it to Dissipate?

Dan Campbell, Editor

Editor's note: A group of cooperative educators and others, many from the Northeast, traveled to North Dakota in July to tour some of the state's new cooperatives and other rural business ventures. The tour, arranged by the North Dakota Association of Rural Electrical Cooperatives and the Cooperative Development Institute, provided insight into why North Dakota has been such a hotbed of new cooperative development.

There's a new "spaghetti western" playing in Carrington, N.D., and it looks like the good guys are winning. Thanks to the formation of the new, Dakota Growers Pasta Company (a growers' cooperative), durum wheat growers here may never again have to sell their crop for less than the cost of production.

Seven dollars a bushel for durum may not buy heaven on the North Dakota prairie, but it makes for a nice downpayment. And compared to the $2.20 per bushel growers were receiving in 1990, $7 a bushel at present "sounds like pure heaven," says Bill Patrie, business development specialist for the North Dakota Association of Rural Electric Cooperatives. Patrie, who helped hatch and nurture the pasta co-op, says it is no coincidence that durum prices shot up as soon as the cooperative opened its $40 million pasta processing plant in November 1993.

Now in its second year of operation, the Dakota Growers Pasta Co. (DGPC) operation has given growers new clout in the marketplace. The plant currently processes 3 million bushels of durum per year and was built so that production can be doubled to 6 million bushels.

In addition to producing and packaging private label pasta products for other food companies, DGPC also is marketing pasta under its own "Pasta Growers" label. The co-op brand is accounting for a much larger share of sales than had been anticipated so soon.

Rural Communities Benefit

The day the plant opened, members were transformed from commodity producers into processors and marketers of a finished, value-added food product.

"We've taken control of our fate," says Don Lentz, a member of Dakota Growers Pasta and a director on the Baker Electric Cooperative board. "Our plant represents a guaranteed form of income. We know what we will get for our grain," adds Lentz, who grows durum near Perth, N.D. "The boom and bust crop price cycle has been the downfall of agriculture and a major reason why we have lost so many farmers. This plant is bringing some price stability to our market and to our lives."

The pasta plant is having a "profound effect on durum prices and the economic vitality of the area -- it's putting more money in the pockets of growers," Patrie agrees.

The pasta plant created 180 new jobs in Carrington, helping to make this rural community vibrant and thriving at a time when so many other small rural towns across the grain belt are withering on the vine. Drive down Carrington's main street, and you won't see the boarded-up windows that are a common fixture in so many heartland communities. Stores and shops are busy, well maintained, and the owners are smiling.

"Many people who had left the state came back to North Dakota to fill positions at the pasta plant," Patrie says. And, of course, more teachers, store clerks, barbers etc., were needed to support those new residents.

Success Snowballs

The success of DGPC has been credited for helping to ignite a wave of new cooperative formation in North Dakota. Twenty new co-ops have formed since 1992, with many more on the drawing board. DGPC's success was, in turn, inspired by the creation of American Crystal Sugar Co. in Moorehead, Minn., in the early 1970s. American Crystal and DGPC are both "closed" or "select member" cooperatives, in which equity was raised by selling stock to members. In so doing, members entered into contractual agreement to deliver a specified amount of product each year to the co-op's processing facility.

DGPC's stock initially sold for $3.90 per share but is currently selling for $7 a share, says Lentz. He and his son bought 5,000 shares (1,500 was the minimum purchase). "Our $20,000 investment is now worth $35,000," Lentz says. Even more important are the improved grain prices the cooperative has helped to bring about, adds Lentz, a fourth generation North Dakota farmer. "We have a waiting list of growers wanting to join the cooperative."

Although closed, or select member, cooperatives are common in California and some other parts of the nation, the idea of a closed cooperative is still considered a little bit radical in North Dakota.

"The model of a closed co-op is not very well understood (here)," says Patrie. "Even in some major co-op states, people see marketing and supply co-ops all around them and assume that when we use the term, we are talking about more of the same.

"They can't understand how the closed co-op concept would be relevant to them. People are surprised here that someone would be brash enough to ask them to invest a lot of their own money in a cooperative, because we've been running away from that. Cooperatives here have catered to the farmer as a customer, and now we come along and tell them 'you are the investor and the owner of the company. You have to put money in.' It's a different way of thinking."

The first reaction of many farmers when approached with the concept is to ask Patrie whether he's "getting a piece of the action." They become more accepting once they understand the consequences of their investment and how stock in a carefully managed closed cooperative can appreciate and build value, Patrie says. "Once they understand that, they warm to the idea. In the past we haven't had too many good models to show them. We have had to haul people a long way to show them something that works."

Member Equity Essential

Jack Piela, Patrie's partner in the business development effort, says he typically likes to see producers invest 40 to 50 percent of the initial equity needed for a project. "Lenders want to see sufficient commitment on behalf of producers and enough capital to cover the losses which often occur in the first years while penetrating new markets."

Cooperative development in the state has been helped tremendously by the Bank of North Dakota's program to buy down interest rates for new cooperatives, Piela says. The bank will typically reduce interest rates by half and share half the risk with a local bank. Cooperatives get interest rates of 4-5 percent, which reduces their cash-flow needs in the early years.

In the case of each new cooperative, producers must find their own champions to lead the effort. "You can't force-feed the concept to them," Piela says. "Farmers have to take ownership of the concept and drive the project."

The reason it took 20 years -- from 1972 when farmers bought American Crystal Sugar until ground was broken for the DGPC pasta plant 1992 -- was because of a number of failures of small cooperatives in the intervening years. These failures primarily involved ethanol cooperatives, Patrie says.

"Those failures throttled back any investor interest for many years. You only had to lose one time and the word spread that this wasn't going to work. So this notion that farmer cooperatives would work -- until the pasta plant punched through to a successful equity drive -- was hampered by previous failures."

Will a failure in the future cause similar results? That's the one thing that worries Patrie and Piela the most.

"What will happen when our first project fails?" Patrie repeats. "We've had no failures yet, but eventually we will. I don't know the answer to that."

Where the Buffalo Roam

Failure appears to be about the last thing on the mind of Doc Throlson, who makes his home where the buffalo roam -- and plans to keep it. This North Dakota bison rancher has taken strong action to ensure the future prosperity of his industry through the creation of the new North American Bison Cooperative, of which he is a director.

As was the case with DGPC and most of the other new co-ops in the state, the bison co-op received technical assistance from the state rural electric association in the form of guidance from Patrie and Piela.

Throlson and 180 fellow bison ranchers have purchased 5,000 shares of stock to finance construction of a brand new, $1.6 million processing plant and office building in New Rockford, N.D. The plant is currently processing 3,000 buffalo per year and will expand to 5,000 head by 1998. Live bison go in one side of the plant, and white packages of neatly trimmed buffalo meat come out the other. Each box bears the co-op's own brand and is emblazoned with a "USDA inspected" stamp, making this the only USDA approved facility in the nation exclusively for bison processing.

Bison meat is exported all over the world, with Europe proving to be one of the fastest growing markets.

The livestock industry has traditionally been one of the most difficult agricultural sectors to organize into cooperatives. At first glance, bison ranchers did not appear to be prime candidates to break that mold. They are frequently said to have a temperament that closely resembles that of the animals they raise.

"All ranchers are rednecks, and buffalo ranchers are the biggest rednecks of all," Throlson jokes. But with a fiery speaker like Throlson to provide leadership, the pieces fell into place.

"I get angry when I think of how many millionaires North Dakota ranchers and farmers have created in other states by shipping their crops and livestock to others to add value to while we died poor out here on the prairie," Throlson says.

The lesson of the 1980s is that "you can't be just a producer if you want to remain in agriculture into the next century," says Throlson, looming nearly as large over his pasture as the bison he raises. "If you do, you will produce yourself broke! If North Dakota is to move forward, we need to get more dollars from manufacturing and marketing."

Buffalo, he says, require only 10 percent of the work of cattle, but need 200 percent of the management. For example, he says it's impossible to chase a buffalo anywhere except a place it wants to go. However, you can lead them. To prove his point, Throlson hops on an ATV and pulls a feed wagon across his pasture. When he returns, he's leading a gently charging herd of a dozen hungry buffalo.

A little of the same philosophy was used in organizing the bison ranchers. The key to success was showing them that they would fare better if they added value to their herds by processing and marketing bison meat and byproducts themselves.

Stock Binds Members to Co-op

Members must hold a minimum of 10 shares in the bison cooperative. The maximum allowable stake by one member is 500 shares, although the largest owner at this point holds 200 shares. For each share, the owner must deliver one animal for slaughter to the plant annually. If a member does not deliver the animals, the co-op has the Tight to buy that number of animals on the open market and charge the stockholder accordingly for any loss.

"We have not had to resort to that, and I don't think we will have to," says Dennis Sexhus, co-op general manager.

Dave Cobia, professor of agricultural economics at North Dakota State University, says that contract stipulation is also used by the pasta growers. "It's a new wrinkle" added to the closed cooperative contract to make the concept more palatable to North Dakotans, Cobia said. It's a compromise around the "sue 'em if they don't deliver" philosophy of West Coast closed cooperatives which still addresses the "free rider" problem faced by Midwest open cooperatives, Cobia explains.

Transfer of stock on the secondary market must be approved by the bison co-op's board. There have been about 20 stock transactions in the last year, many involving producers who decided that they would rather ran a cow-calf operation and not get involved in feeding animals to slaughter weight. The co-op provides information to stock buyers regarding those wishing to sell.

Bison meat prices have been on a steady incline for the last decade. Members contract at a fixed price, which can cause problems in a climbing market. Some co-op members grumble when they 44can get a dime a pound more down the road."

"We are always dealing with that type of dissatisfaction," says Throlson. "We tell them without us, that kind of price would not have been there. By our entry into the market, the co-op did an awful lot to increase the value of bison because we provided a ready market for bison meat. If this cooperative had not started, I think we would have self-destructed."

Throlson sees no similarity between the bison market and the ratite market (ostrich, emu and rhea) which is struggling to transition from a speculative, breeders' market to a meat and byproducts market. The difference, Throlson says, is that the bison industry developed a meat market from the start. He remembers some advice he gave to an elk growers group in Canada several years ago. "I told them do not depend on the sale of antler velvet, but to require that at least 10 to 25 percent of their animals be marketed for meat each year if they wanted to avoid a crash."

Sarah Vogel, North Dakota agricultural commissioner, says the Bank of North Dakota changed its categorization of buffalo ranching from "non-traditional" to "traditional" the day the cooperative's bison plant went on line. "Every banker in the state now would die for a buffalo loan," Vogel says.

The state Agricultural Products Utilization Commission contributed funds for the bison plant feasibility study, but also required the bison ranchers to put up $4,100 of the cost (41 members each paid $100). The cities of New Rockford and Maddock also paid part of the cost of the study.

"We decided to go with a cooperative because it's a producer-friendly form of business and it facilitates raising capital," Throlson said. "We're lucky we did it when we did. Otherwise, someone else would have done it by now."

Cheese Plant to Offset Isolation

The town of Hebron, N.D., lies just beyond the boundary for the Federal Milk Order 68. As a result, dairy producers have been receiving about $2 less per hundred- weight than producers just 30 miles to the east, says Jerome Messer, a dairy producer and board chairman of the new Dakota Dairy Specialties (DDS) cooperative, which recently bought out the Hebron Creamery Cooperative.

That's a huge price differential, and one which caused many young producers to question their future if something didn't happen to improve the price picture. Even more disconcerting, they felt that they were still earning substantially less even after accounting for the transportation differential.

A feasibility study was undertaken which outlined three basic options: sell condensed milk, produce American-style cheese, or produce specialty cheeses. The producers group opted for the third option and to pursue it with a new, closed cooperative which would buy out Hebron Creamery Cooperative, which had existed since 1945 as a traditional, open dairy cooperative.

Members were to invest $1.80 per hundredweight of their annual production in DDS to buy the stock that is financing construction of a new cheese plant, which will be added on the cooperative's receiving station in Hebron. That translated into a hefty investment of about $13,000 on average for each of the 60 members. To pay for the $1.6 million plant, additional financing was also arranged through the Bank of North Dakota.

Cheese plant construction is to begin by September. When operating, the plant will process 200,000 pounds of milk a day into 20,000 pounds of cheese. Provolone will be its main product, but it will make other specialty cheeses as well. The plant is small enough that it can shift to producing another type of cheese in a single day; many large cheese plants don't have that type of flexibility, Messer says.

No Pie-in-the-Sky Promises

Ten producer meetings were held during the equity drive. "We had to give producers a good reason to join," Messer recalls. 'We didn't make any pie-in-the-sky promises. We tried to be totally honest, saying that all we could promise was that we would do our best to increase the value of their milk. There's nothing much we can do if the price of cheese falls, but in this way we'll be doing the most we can to add value to our product. We told them that if they wanted a stake in the future, producers had to take action on their own. Nobody else was going to do it for us."

Some of the larger dairy cooperatives and private companies "aren't that excited about what we're doing," Messer says.

Stock that originally sold for $1.80 is now selling for $2.25. DDS currently has 35 million pounds of milk committed to the co-op (members committed an average of 75 to 80 percent of their production) and plans to keep membership open until it secures 50 million pounds.

"I think a lot of producers are sitting on the fence waiting to see how we do," says Messer. Once they see the cheese plant up and running, many more will join, he is confident. Currently, about 40 percent of producers in the area belong to DDS. The co-op also buys non-member milk, but non-members don't receive dividends.

DDS has developed a prototype for its own cheese label, and hopes to initially pack about 20 percent of its cheese under this brand, says Jerry Chase, co-op general manager.

The average DDS member is in their early 40s, nearly 15 years younger than the state average. DDS is proud of its young farmer program, which will allow beginning farmers to buy stock at the old price of $1.80 and allow them five years to pay for it. Some 36,000 shares, or 10 percent of the total, is available for young farmers.

Co-op members milk an average of 70 cows, and many would like to stay with that size operation. If the co-op is successful, "they may be able to avoid the need for expanding to 150 cows," which in turn could keep a larger number of producers in business here, Messer says.

Messer said Patrie and Piela "showed us how to implement ideas without tripping over too many things."

Best Opportunities Ahead

Patrie and Piela believe the best is yet to come in North Dakota's cooperative development effort.

"The cooperative movement is really an economic revitalization effort. It is not geared -- as in the past -- by some governmental idea (federal, state or county) that we ought to do this, but as a corporate entrepreneurship effort of farmers," says Patrie. "The results seen on this tour show a workable model of sustainable rural economic development.

"Without doubt, the biggest opportunities are ahead of us," Patrie says. "Whether we will be able to seize them is unknown. There is no real degree of predictability. Momentum is still behind us, pushing us forward. We have not been daunted."

This material has been reproduced in electronic format with the permission of Farmer Cooperatives.

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