University of Wisconsin Center for Cooperatives
Rural Cooperatives, September/October 1998, pp. 18-23.
Published by the Rural Business and Cooperative Development Service 

When Cooperatives Combine: The merger boom is reshaping the look - and the future - of America's rural co-ops

Catherine Merlo

Editor


In the history of American cooperatives, there has never been a year like 1998.

This year alone, there have been more mergers, consolidations, acquisitions, joint ventures, and alliances among U.S. cooperatives than in all the history of cooperative development. While major restructuring is not new to U.S. cooperatives—a boom of mergers took place during the 1970s—it's the size of the recent participants and the magnitude of their megadeals that makes this an unprecedented era in American business.

"The amount of structural change among U.S. cooperatives during the first three quarters of 1998 has been phenomenal," says Randall Torgerson, deputy administrator of USDA's Rural Business Cooperative Service.

Driven by global marketing forces and often seeking a national presence, cooperatives are merging to create critical mass, achieve economies of scale and build market share. Like banks, oil and telecommunications companies, auto makers and supermarket chains, cooperatives have been converging in an astounding mix involving billions of dollars and hundreds of thousands of people.

The goal? To carve out their share of profits and control in a neck-and-neck global economy. The result? Fewer but bigger players who are changing the shape—and the future—of corporate America.

"These are very far-reaching decisions," says Torgerson, who has advised numerous cooperatives and their boards on restructuring. "They are clearly a manifestation of competing in today's global marketplace."

Changes in the marketplace have been key drivers in the merger boom. There has been a significant increase in the relative market power of the food-retailing segment, where the name of the game is getting preferential treatment for name-brand products on the retail shelf. Promoting private-label store brands and deli-foods services also has become a crucial element in the competition for retail business.

As the food-retailing segment has become more concentrated, retailers and processors are looking for fewer, rather than more, suppliers. A "Rule of Three" has merged, asserting there's only room for two or three major competitors in any sector. They are the companies that can supply the volume needed to support demand.

"Bigger may be better in the global marketplace," Torgerson says. "One way for farmers to compete has been to develop more unification horizontally among their different units. If co-ops want to be one of the big players, they've got to position themselves. If they're not pro-act*e, it's possible they'll be picked apart."

Also driving the restructuring trend is the value added concept. Cooperative members not only are looking to produce commodities to sell raw, but to vertically integrate and develop commodities into higher-value end products.

According to Torgerson, other reasons for the merger boom include the continuing boom in the U.S economy, low interest rates and the use of tax-free stock exchanges by investor-owned firms (IOFs).

The big deals

The recent merger boom involves some of the largest cooperatives in America, although there also have been many joint ventures, alliances and repositionings at the smaller local level.

So far, the largest co-op merger in U.S. history is the "unification" or merger of two well-known Midwest cooperatives, Cenex and Harvest States. Now called Cenex Harvest States, the newly joined co-op became official June 1, 1998, after a 90 percent approval vote by members. One of the nation's largest cooperatives, Cenex Harvest States represents 1,800 local cooperatives across the country. At the time of the unification, the combined sales of the two co-ops, both headquartered near Minneapolis, totaled $10 billion.

Another major restructuring—perhaps the first of the mega-consolidations - took place on January 1, 1998, in the form of Dairy Farmers of America (DFA). Four major dairy cooperatives from across America's heartland combined to create DFA. They were Mid-America Dairymen Inc., the Southern Region of Associated Milk Producers, Inc. (AMPI), Milk Marketing Inc., and Western Dairymen Cooperative. Today, DFA serves 22,000 dairy producers in 43 states, coast to coast and border to border.

"No agriculture commodity coop has ever attempted to operate with the diversity and magnitude that DFA possesses," says its president and CEO Gary Hanman.

DFA also participates as an investor in numerous fluid-milk joint ventures within the dairy industry.

Another key player in the merger boom has been Land O'Lakes, the 77-year-old dairy cooperative with one of the most recognized brands in America. In its goal of creating a national milk sourcing and dairy processing system to serve its customers, Minnesota-based Land O'Lakes has completed mergers with two successful dairy cooperatives at opposite sides of the country. In 1997, it joined with Atlantic Dairy Cooperative, headquartered in Pennsylvania. Just this summer, Land O'Lakes merged with the California-based Dairyman's Cooperative Creamery Association.

Also this year, Land O'Lakes acquired the farm supply and marketing operations of Countrymark, the Indiana- and Ohio-based cooperative. In addition, Land O'Lakes has entered into a joint feed venture with Cenex Harvest States and GROWMARK

Further south, Southern States Cooperative of Richmond, Va., has just completed its purchase of the wholesale and retail farm supply assets of Gold Kist, the farmer cooperative headquartered at Atlanta, Ga. It's a big buy, although terms of the sale have not been disclosed.

The acquisition will expand Southern States' retailing territory from its six Mid-Atlantic states to seven more southern states. Included in the purchase are 100 Gold Kist retail farm supply stores, peanut and grain buying stations, cotton gins, fertilizer plants and ter~ninals, crop protection distribution centers, feed mills, and related operations located primarily in the Southeast and Texas.

Gold Kist will focus on poultry production and processing. It is the nation's second largest poultry producer.

"Clearly, the members and management of both organizations believe this move will be good for the farmers who own these successful cooperatives," says Wayne Boutwell, Southern States president and CEO. "It will give both of us an opportunity to focus on what we do best."

Southern States already had started restructuring earlier this year, when Michigan Livestock Exchange (MLE) merged with the

Major 1998 Cooperative Dynamics

Mergers:

Land O'Lakes and Dairyman's Creamery (Calif.)

Countrymark and Land O 'Lakes

Land O'Lakes and Atlantic Dairy (Penn.)

Southern States and Michigan Livestock Exchange

Farmland and FS Services (Ark.)

Consolidations:

Cenex Harvest States

Dairy Farmers of America (Mid-Am, AMPI, Milk Marketing, Western Dairymen)

Agricore (formerly Alberta Pool and Manitoba Pool Elevators)

Alliances:

Farmland and Cenex Harvest States (forming Country Energy, LLC)

Joint Ventures:

Land O'Lakes and Cenex Harvest States (feed)

Tennessee Farmers Cooperative and Alabama Farmers Cooperative {still exploring)

Acquisitions:

Southern States (Gold Kist's farm supply and marketing)

Pro-Fac/AgriLink (Dean's vegetable operations)

Richmond-based cooperative. MLE was one of the largest livestock cooperatives in the U.S., with 60,000 members and more than $700 million in sales in 1996. Last year, Southern States did $1.2 billion in sales. With the addition of 3 million head of hogs and 600,000 head of cattle from the MLE merger, sales should exceed that amount in the coming year.

Today, Southern States serves 400,000 farmer-members.

As if big weren't big enough, two of the nation's largest farmer-owned cooperatives, Farmland Industries, Inc. and Cenex Harvest States Cooperative, this summer formed a new alliance, Country Energy, LLC. The alliance will market, sell and distribute refined fuels, propane, lubricants, and petroleum to its customers. Each cooperative's assets, such as refineries, pipelines and plants, are not included in the alliance.

In its first year, Country Energy is expected to generate some $3 billion in combined revenues for the parent companies. That makes Country Energy the largest farmer-owned petroleum entity in North America.

Merger benefits

If hostile takeovers dominated the 1980s, mergers and consolidations have been the tour de force of the '9Os. Unlike the usual result of a hostile takeover— where corporate raiders won while executives and employees often lost—mergers appear to offer a win/win outcome where both sides share the power and the money.

A persuasive merger advantage for DFA members included the $20 million the consolidation would save them. The savings stemmed, in part, from streamlining operations and reducing the workforce. There would also be proceeds from the sale of excess office space.

In the case of Cenex and Harvest States, there was a strong common goal that could be achieved by merging. "We wanted to create a seamless agricultural food system to link producer to consumer," says Elroy Webster, co-chairman of the board of Cenex Harvest States.

Cenex specialized in the farm supply side of the business, the petroleum, agronomics and chemicals. Harvest States focused on gram marketing, processing and the food business. With the unification, Cenex Harvest States now offers the full range of food production—from inputs to processing and marketing to consumer products.

The Country Energy alliance of Cenex Harvest States and Farmland is expected to result in significant savings to the cooperatives and their member-owners. "The savings come from maintaining a single inventory of energy products, from streamlining information systems and from achieving improved economies in fuel transportation," Webster says.

In addition, the alliance will explore longer range opportunities to deliver other energy products to rural America.

For DFA, the benefits of combining the resources of four major dairy cooperatives into one mega-cooperative "reduced administrative overhead, cut hauling costs and gained bargaining strength in the marketplace," according to DFA's Hanman. Together, he said, the four dairy co-ops also could more effectively market and promote the sale of milk.

"It took a consolidation like DFA's, national in scope, to create an organization able to forge business relationships that could, ultimately, begin to impact national and international markets," says DFA board chairman and dairy farmer Herman Brubaker.

Merger doubts

Not every cooperative, however, believes it will benefit from a major consolidation. Concerned about its members' interests, the North Central Region of AMPI was one major dairy group that chose to pull out of DFA's merger talks in 1997.

"Size can be traded for the members' best interests," says Mark Furth, general manager of North Central AMPI in New Ulm, Minn."You get bigger to create positive efficiencies but the best interests of local members are traded for the greater good of the whole."

During the DFA merger talks, North Central AMPI directors and members expressed concern about the redirection of capital. "Our members would have been asked to make the largest new investment of equity, while capital expenditures were planned for growing dairy areas to the West rather than in shrinking production areas like the Midwest," Furth says.

In the end, Furth says, "North Central AMPI didn't fit in the DFA merger." It separated from AMPI's South Region and formed its own dairy cooperative on Jan. 1, 1998. AMPI's South Central region merged with DFA. Today, North Central AMPI represents 5,000 member-farms and operates 12 manufacturing plants. Still, Furth says, the cooperative continues to pursue merger opportunities that could benefit its membership.

Most recently, Dr. Bill Heffernan, professor of rural sociology at the University of Missouri-Columbia, has voiced concerns about the merger trend.

"My main concern is not the merging of co-ops with co-ops," says Heffernan. "It's the merging of co-ops with investor-owned firms (IOFs). Co-ops were set up to be alternatives to the private investment companies. We are eliminating the alternatives."

Already, Heffernan notes, 80 percent of the world’s grain market is controlled by a handful of IOFs, such as Continental, Cargill and Archer-Daniels-Midland. Heffernan also points out that IOFs control the genetic material for seed and other critical components of the entire agricultural system.

"Don't kid yourself," Heffernan says. "The IOFs are calling the shots."

Heffernan believes co-op mergers with IOFs are obvious indicators that the infrastructure supporting the family farm is disappearing. During the 1930s, when many cooperatives started, there were 7 million farmers in the U.S. Today, there are less than 146,000 farms with sales above $250,000 per year. Half of the country's 2 million farmers report sales of less than $10,000 per year.

"In the next 10 years, we won't need as many farmers," Heffernan says. "We're seeing a contraction of the farm cooperative system. It's not that co-ops have failed but that family farms have diminished or are being pushed out.

"As the family farm system is replaced by industrialized agriculture, we will no longer need the infrastructure that supported the family farm," says Heffernan. "Co-ops were key to that structure."

Sticky points

Even those who support the merger boom agree that restructuring can be a major job. While mergers and their cousins offer strong benefits, they do bring sticky issues to the table.

"One of the most important stages occurs after the consolidation," says DFA's Brubaker, "when you look around and assess your similarities and differences, then deal with them."

"There are complexities in bringing two large organizations together and challenges in getting through a transition," agrees Cenex Harvest States' Webster. "Cooperative members are rooted in tradition and personal feelings of ownership."

Part of the difficulty in getting large cooperatives together is the perceived loss of an organization's institutional history and culture. "Working that out can be a huge task," says Torgerson. "And there's often a fear that large cooperatives treat members differently."

Months of discussion, debate and compromise are needed to determine how the new co-op will operate, and how the former organizations will make the transition. Key nuts-and-bolts decisions involve which and how many directors will serve on the board, who will manage the new organization, what employees will be let go, where it will be headquartered, and how debt and equity will be handled. In addition, decisions often have to be made to ensure that there's no duplication of services.

In the case of Southern States, its board of directors will expand to 24 members, with six seats allocated in the current Gold Kist territory. Districts will be established using Southern States' historic volume-based formula. And faces in the newly acquired retail stores will be familiar. More than 1,000 Gold Kist employees connected with the affiliated operations have joined Southern States.

For DFA, the consolidation certainly meant adjusting to a new culture. It meant downsizing staff (DFA has reduced its workforce by 2,700 in the last year), plant closings, and modification of product mixes on manufacturing lines. It also prompted a move to new headquarters in Kansas City.

For members who like to see the assets they own, having co-op headquarters far away can seem "like a huge gulf between owner and organization," Torgerson says.

Faced with a merger to create a national presence, members often point to smaller cooperatives that have succeeded on their own with a national brand. They look at Tillamook, Sun Maid, National Grape, at Tree Top, Ocean Spray, and Citrus World, all smaller cooperatives with clout in the national marketplace. "Members wll ask, "If those co-ops can be successful without merging, why can't we?'" Torgerson says.

Concerned that feelings of identity loss or unequal power sharing might surface when Cenex and Harvest States merged this year, management pronounced the move a "unification."

"It's legally a merger," says Webster, "but we wanted to present it to the membership as a joining of equals."

Merger aftermath

In the aftermath of restructuring, the new co-op "operates in a fishbowl," Torgerson says. "The behavior of the organization has to move to another level. That includes informing and empowering members."

DFA's Brubaker was well aware the entire dairy industry was watching the start-up of the brand new cooperative in early 1998. "Both here and abroad, dairy producers and processors are waiting to see what we will do, how we will react to the changing marketplace, and, of course, they are looking for mistakes and failures," Brubaker told members.

"We opted for change, accepting the fact that there may be a mistake or two along the way," Brubaker said in early 1998. "If we do it right, there are going to be few mistakes."

When restructuring creates a mega-cooperative, according to Torgerson, the administrative hierarchy can get far removed from the cooperative's member orientation unless there are proper safeguards. Without those, there's a danger that the co-op could be viewed as just another business. There are also concerns that a mega-cooperative might shift to a culture whose identity is more corporate than cooperative. It might seek nonmember business or outside investors and lose its member-user orientation. It also might focus on the interests of larger producers at the expense of the medium and smaller ones who are also member-users.

"The cooperative's administrative structure has to be ever mindful that the tail doesn't wag the dog, that the co-op doesn't take on a life of its own apart from its members," Torgerson says.

For staff, it's after the merger that the real work often begins. By January 1998, when DFA was officiaUy in operation, Hanman had already appointed key managers to head the co-op's various operations and start consolidating to gain efficiencies. Hanman knew the task would take time. "It's a challenging process that will take up to three years to fully accomplish," he told members.

Mega-mergers also invariably raise concerns about potential antitrust implications. But so far, the U.S. Department of Justice has not stopped major cooperative deals from going forward. "That's because the new cooperatives, even though large for co-ops by historical standards, are small compared to multinational IOFs," Torgerson says.

Restructuring terms

Merger: Two or more co-ops combine assets, membership volume, and established markets to give them a broader reach than before. Often, one co-op survives legally as the dominant corporate entity while the other gives up its former corporate identity. Examples: Land O'Lakes and Dairyman's Cooperative Creamery, Southern States and Michigan Livestock Exchange.

Consolidation/unification: Two or more co-ops come together, combining assets, membership and customer base, and consolidate into a newly established business. Both organizations lose their legal identity and a new cooperative identity is established. Example: Cenex Harvest States, Dairy Farmers of America.

Marketing-Agency-in-Common: The corporate identity of the involved co-ops is preserved while they benefit in a marketing-agency-in-common from combined strengths, such as coordinated marketing services. Generally not asset-intensive. Example: Amcot, United Sugars, Sun Diamond Growers, Cooperative Brands Inc.

Joint Venture Another strategic alliance arrangement, generally to provide a key step in value-added processing chain. Example: Land O'Lakes/Cenex Harvest States Feed, LLC.

Acquisition: Co-op acquires the assets of an investor-owned firm or another cooperative, or one in another line of business to diversify its portfolio. Example: ProFac/AgriLink's purchase of Dean Foods (Bird's Eye brand); Land O'Lakes' acquisition of Alpine Lace (a deli cheese distributor) and Countrymark.

"We feel DFA has immunity granted agriculture co-ops under the Capper-Volstead Act," says Hanman. "The mergers being allowed in the telecommunications industry dwarf DFA by comparison, but the nature of milk, as an important and necessary ingredient in our food chain, draws attention to DFA."

Are more mergers likely?

While mergers are likely to continue, they probably won't occur at 1998's pace, says Torgerson.

In the meantime, the consolidation trend continues. In late October, the boards of directors of the St. Paul Bank for Cooperatives and CoBank announced the intention to merge the two institutions. Stockholders of the two banks, both part of the Farm Credit System, are expected to vote on the merger next spring. If approved, the merger would be effective by July 1999.

In the South, Tennessee Farmers Cooperative is exploring an "alignment" with Alabama Farmers Cooperative. Two Florida dairy cooperatives have consolidated, and other East Coast organizations are similarly exploring unification.

And there's growing competition for potential merger partners. One West Coast dairy cooperative, California Cooperative Creamery, known for its California Gold brands, recently was courted by two of the industry's biggest players, DFA and Land O'Lakes, before deciding in late October to merge with DFA.

What do the 333 members of California Gold achieve in merging with DFA? According to DFA's Brubaker, "they gain more market efficiencies, services, manufacturing potential and bargaining power—all of which translates into a better market position for dairy farmers.

"In exchange," Brubaker notes, "DFA members gain an important, high-quality milk supply in California and Nevada to service growing West Coast markets."

Land O'Lakes joint venture proposal— quite different from a merger—would have allowed California Gold to maintain its own well-established identity. But despite its joint venture rejection by California Gold, Land O'Lakes already has made it clear that its dairy consolidation and concentration are not over.

"From Land O'Lakes' perspective, if we are going to continue as the only farmer-owned, branded dairy marketing cooperative, we must continue to explore strategically advantageous opportunities for further growth," says Jack Gherty, president and CEO of Land O'Lakes.

As U.S. cooperatives forge ahead with restructuring activities, it's clear they're doing what they think best for their members. In a global market dominated by big IOFs like Continental, Cargill, ConAgra, and Archer-Daniels-Midland, such repositioning may be the best strategy for bulking up competitive size and status.

Still largely tied to family farms but caught in the trend of the industrialized global food system, co-ops are reaching beyond traditional boundaries to better compete. Perhaps no other period in co-op history has rested so much on the future. How the race will end is sure to generate close observation by farmers and ranchers. But for now, America's rural cooperatives are out of the starting blocks. The race goes on.



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