University of Wisconsin Center for Wisconsin
Farmer Cooperatives, August 1995
Published by the Rural Business and Cooperative Development Service
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,
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.
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
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
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
"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
Best Opportunities Ahead
Patrie and Piela believe the best is yet to come in North Dakota's cooperative
"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
"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
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