University of Wisconsin Center for Cooperatives
Rural Cooperatives, July/August. 1998, pp. 18-21.
Published by the Rural Business and Cooperative Development Service
Fever Pitch: A first-hand report from the man who helped spark co-op fever in the Northern Plains
Rural Development Director Editor's Note: For many years, the author has been assisting with the development of new cooperative businesses in North Dakota and other states. He began his career as an economic development specialist for a regional commission, later joined the North Dakota Economic Development Agency, and currently is with the state's association of rural electric and telephone cooperatives.
Editor's Note: For many years, the author has been assisting with the development of new cooperative businesses in North Dakota and other states. He began his career as an economic development specialist for a regional commission, later joined the North Dakota Economic Development Agency, and currently is with the state's association of rural electric and telephone cooperatives.
A convergence of circumstances, personalities, economic conditions, political culture and government actions created the phenomenon in the Northern Plains that has come to be known as "co-op fever." During the past 10 years in North Dakota, farmers and ranchers facing similar economic challenges became enthused with the possibilities for creating expanded marketing options through the formation of "new-generation" cooperatives.
While the causes of "co-op fever" are multiple, the courage, intelligence and willingness of farmers to take a risk for reasonable returns are the primary reasons. These "new" or "next generation" cooperatives have flown in the face of such traditional cooperative operating principles as estate retirements, open membership and a competitive yardstick.
Sugar co-op pattern
The new cooperatives have followed a pattern first used by American Crystal Sugar Co. and Minnesota Com Processors. Years ago, sugar beet growers in the Red River Valley of North Dakota and Minnesota—faced with the loss of their only market—purchased American Crystal's sugar processing operation and converted it to a cooperative.
The newcomers followed a limited membership pattern used by California cooperatives which involves producer agreements and "up-front" equity investments by members. Two leaders surfaced who would later reappear in future cooperative developments: George Sinner from Casselton, N.D., and Pat Benedict of Sabin, Minn.
In establishing the corn wet-milling plant at Marshall, Minn., Minnesota Com Processors generated delivery rights for farmers. It also required growers to deliver specified amounts of corn, and, if necessary, at below-market prices. The processor could count on a dedicated supply of raw product, adequate operating margins and limits on losses. That encouraged lenders to finance the cooperative.
American Crystal Sugar had sought to establish a successful cash flow by spreading out payments to growers during the processing and marketing year. The final payment reflected the actual operating margins achieved. The volume required for an efficient processing operation was assured. This created a strategic advantage over other competing processing plants.
Distinguishing characteristics of these two cooperatives emerged:
Dakota Growers Pasta Co.
When discussion began about forming a cooperative to produce pasta, durum was selling for $2.20 per bushel. Farmers were not even returning their cost of production. Converting durum into pasta was simply a way to improve net farm earnings.
Soon after joining the state rural utility association, I met with Bob Spencer and John Rice, Jr. at Maddock, N.D. Both were early proponents of the pasta cooperative.
Spencer managed Baker Electric, which served the Noodles by Leonardo pasta plant in Condo, N.D. He chaired the Durum Triangle Industrial Park Corporation that had recruited and helped finance the private pasta company plant in 1980. Rice, a young farmer from Maddock, was president of the U.S. Durum Growers and a strong proponent of better prices for producers.
Others joined the original team of Dakota Growers Pasta Co. They included Eugene Nicholas, a member of the North Dakota House of Representatives from Cando and a director of the Durum Triangle Industrial Park Corporation. He helped acquire funding from the Bank of North Dakota for the Leonardo pasta plant. Jack Dalrymple, a farmer from Casselton, like former Gov. George Sinner, chaired the State House of Representatives Committee on Appropriations.
Organizational steps follow
In the feasibility study for Dakota Growers Pasta Co., steps were outlined and a budget was prepared. Spencer, Nicholas, Dalrymple and Rice helped raise funds to match a research grant from the North Dakota Agricultural Products Utilization Commission (AgPUC). A Massachusetts consultant specialized in the food system and cooperatives was hired.
To form the co-op's steering committee, members selected contributors to the study: U.S. Durum Growers, the North Dakota Wheat Commission, AgPUC, Baker Electric, Central Power, the North Dakota Department of Economic Development and Finance, and the North Dakota Farmers Union. Rice chaired the committee and I was the principal advisor.
For an interim board, Dalrymple was elected chairman and subsequently was named interim chief executive officer (CEO). Legal and accounting service contractors were chosen. A grant from AgPUC for $150,000 in organizational funds was matched by contributions on a nickel-per bushel basis from durum farmers. Armed with a $300,000 organizational budget, the board recruited Tom Dodd as CEO. He was operating a pasta plant in Missouri and brought along his sales manager and engineer.
The board then launched the equity drive, which encountered some resistance due to the then-recent failure of several new cooperatives.
The plant was designed to use 3 million bushels of durum annually. The equity share price was set at $3.85 per bushel. But to cut that price, the board negotiated a loan with the Bank of North Dakota on a subordinated basis to the St. Paul Bank for Cooperatives. More than 1,000 producers made a personal commitment (on a per-bushel basis) to cover any default.
It took 33 meetings before the drive reached striking range of the $12.5 million equity needed to capitalize the plant. More than 1,000 farmers agreed to be individually liable for the additional loan of several million dollars.
Ground was broken at Carrington, N.D., on July 9, 1992. The first dividends were paid to durum growers in November 1995. The cooperative sold an additional 3 million shares at $5 each to finance doubling the commercial milling capacity. Another pasta line was added. The extra bank loan was retired from earnings.
Shares originally purchased at $3.85 after a two-for-one split sold for $14 to $15 each. Dakota Growers subsequently purchased two pasta plants in Minnesota, making this cooperative the second largest pasta operation in the United States.
Marketing bison comes next
Bison producers were next to form a cooperative association. It would come to be called the North American Bison Cooperative. Steering committee meetings were often highly charged. The feasibility study was completed, an interim board was selected, and legal counsel was named. Ken Throlson became the first president. Directors and the attorney conducted equity meetings to discuss plans to build a slaughter plant and market bison meat.
Producers were projected to receive a 47-percent return on their equity investment. In 28 days, these producers raised $1 million in equity subscriptions. The Bank of North Dakota made AgPACE (the interest buydown program for farm-based enterprises or non-traditional products) loans at a subsidized interest rate to farmers buying bison.
By 1995, the co-op had built a $1.6-million processing plant and office building in New Rockford, N.D., and were processing 3,000 buffalo per year.
Meanwhile, Sarah Vogel, former North Dakota agriculture commissioner, joined U.S. Senator Kent Conrad in January 1993 at an annual event called the "Marketplace of Ideas." Vogel described the vibrant interest in forming new cooperatives as "Co-op Fever."
The media picked up the phrase and, in 1993, the Associated Press listed "Co-op Fever" as one of the top 10 stories of the year. Vogel and Conrad subsequently added "Co-op Night" to the state's annual marketplace conference agenda. These activities began to attract media attention.
In 1994, Lee Egerstrom, a writer for the St. Paul Pioneer Press, produced a book titled, Make No Small Plans: A Cooperative Revival for Rural America. He listed 50 new or emerging cooperatives, 20 of them from North Dakota.
The Fargo Forum produced a special report called "Processing on the Prairie" that sought to identify the causes of "Coop Fever." USDA's Rural Cooperatives magazine featured Throlson and the bison cooperative in a cover story titled, "Expounding the Co-op Gospel in North Dakota." Rural Electrification magazine, published by the National Rural Electric Cooperative Association, promoted the state's development work in a cover story titled, "Brainstorming for Co-ops." The Indianapolis Star carried a two-page story on "Farmers Helping Farmers," which advocated value-added cooperatives and featured comments by then-governor Sinner.
The 67 new cooperatives created in North Dakota during the past five years range in size from 15 members to more than 2,000. Dollar value ranges from several hundred thousand to $261 million. (The latter figure is the cost of a corn wet-milling plant built by Golden Growers Cooperative in association with Pro-Gold, a limited liability company). The operations serve geographical areas that range in size from several counties to the massive region of Northern Plains Premium Beef, whose equity drives covered six states and two Canadian provinces.
Why 'Co-op Fever'?
The commitment of the rural electric and telephone cooperatives to economic growth enabled me to serve as a facilitator or catalyst. AgPUC was critical in financing new feasibility studies and cooperative startups. The Bank of North Dakota made loans to farmers interested in investing in value-added cooperatives. The St. Paul Bank for Cooperatives was the first choice for financing because of the expertise and leadership of its loan officers.
The state spent four years developing a strategic plan for economic growth. An organization was launched to create a common economic direction called "Vision 2000." A Stanford study called for a four sector economy made up of advanced agriculture and food processing, energy byproduct development, export services and tourism, and advanced manufacturing.
Dennis Hill, executive vice president of the North Dakota Association of Rural Electric and Telephone Cooperatives, was a member of the "Vision 2000" committee. We were joined by several legislative and farm group leaders as well as the director of North Dakota State University Extension Service and the president of the Bank of North Dakota. We developed a legislative strategy called "Growing North Dakota."
Charles Fleming, Sinner's chief of staff, chaired the legislative campaign. After leaving the state government in 1990, I contracted with Sinner's office to prepare the draft that went to the legislative council and subsequently became Senate Bill No. 2068. The law dedicated $22 million from the profits of the Bank of North Dakota to economic development.
The legislation created an equity capital corporation and a science and technology corporation. It also provided additional monies to AgPUC and funded AgPACE and PACE (Partnership for Assisting Community Expansion), which provided matching funds to buy down interest rates for primary sector businesses.
The organizing members of many of these new "value-added" cooperatives are college educated, aggressive, young, and not intimidated by sophisticated marketing and processing plans. Many already operate profitable farms. Investing in a processing cooperative was simply an extension of their current enterprise. Those with the right experience and skills appeared in the right place and time.
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