For as many value-added agricultural ventures that succeed, there are at least that many that fail. That's important to keep in mind as you consider participating in the growing number of new value-added agricultural co-ops and limited liability companies.
“Most of these organizations go through a start-up phase that does not turn out as planned financially,” says Jeff Swanhorst, vice president and team leader of agribusiness lending for CoBank in St. Paul, MN. “Their success is highly dependent on having excess financial resources on the front end of a project. Organizations have to plan for this. It's really rare to not have financial bumps in the road.”
Buying links in the chain
“We have not seen this level of farmer initiative in trying to capture a larger part of the food supply chain since the 1920s when the initial farmer supply co-ops were formed,” says Bill Nelson, director of the Quentin Burdick Center for Cooperatives in Fargo, ND. “The new-generation co-ops first took off in Minnesota and North Dakota in the 1970s and again in the 1990s. In the last few years the activity has spread to other states including Michigan, Kansas, Iowa, Nebraska, South Dakota and Illinois.”
New-generation co-ops sell stock to provide the up-front capital investment for further processing of agricultural products. Only initial stockholders can be members.
Along with a stock purchase comes the right and obligation to deliver crops or livestock to supply the raw ingredients for the value-added venture. Farmers may or may not receive market price for their deliveries.
Farmers share their experiences
Harvey Pyle, Casselton, ND, raises corn, soybeans, wheat and cattle in eastern North Dakota. He has invested in several value-added agricultural ventures. “This is something I can do to add value to what I'm growing and help our local markets,” Pyle states. He has been pleased with his investment in Dakota Growers Pasta and hopes that Spring Wheat Bakers will make a go of it in the frozen bread dough market. He has been disappointed with his investment in ProGold, a corn sweetener plant that has not shown a profit in four years. ProGold now leases its facility to Cargill.
“Without the 10-year lease to Cargill, ProGold would have folded and we would have been out our money [$12,000 was the minimum investment],” Pyle says. “This way we still have the value of the company assets and there is the potential for future profits. In addition, having the plant built in Whapeton has strengthened local cash prices for corn by about a nickel.”
Delmar Mulder, Wilmar, MN, retired from farming five years ago but was an original investor in Golden Oval Eggs. The company has earned members a 25% or better return on investment for several years, although it is facing lower earnings this year.
“New companies need to start out with enough equity to withstand a bad year. It's inevitable a bad year will come. Those with shallow pockets won't make it,” Mulder says.
That's what happened with Southwest Soy Cooperative in Iowa. “Our timing was terrible,” says Ray Gaesser, a Corning, IA, farmer and shareholder. “We started with the worst crush margins in about 50 years. The hog business was losing producers so demand was down. We had a good product, but we couldn't sell enough volume.” After just two years of operation, the majority of the membership voted to liquidate the business. “I felt we needed to invest for a longer period of time, but a lot of our members weren't willing to do that,” Gaesser says.
“We have not seen this level of farmer initiative in trying to capture a larger part of the food supply chain since the 1920s when the initial farmer supply co-ops were formed.”
director of the Quentin Burdick Center for Cooperatives
Jim Sattelberg's investments in value-added ventures have been a mixed bag. The Unionville, MI, farmer took a leap of faith with seven other farmers and invested a lot of money in a colored bean processing plant in 1993. Although the company struggled in its first two years, today Bayside Best Beans is a strong performer with returns exceeding 23%. Sattelberg has also had positive returns from investments in Golden Oval Eggs and Thumboil Seed Producers' Cooperative. His investment in Michigan Alfalfa Producers' Cooperative has not turned out as well. “We hoped to earn $40/acre on the alfalfa we delivered, but we will get next to nothing,” he says. “Farmers have to realize every one of these businesses won't be lucrative. Some will fail.”
Rich Jepson, Granite Falls, MN, agrees: “You have to look hard at each individual situation. Don't risk the farm on it. Some farmers who invested too heavily in a single co-op have suffered significant losses. Value-added processing is a tough business. You are competing in the marketplace with the big boys. It can be cutthroat. You need good management and experienced people working for you.”
Michael Holien learned this the hard way. The Sacred Heart, MN, farmer says he “took a financial bath and nearly lost the farm” after investing heavily in a hog production co-op. He's since sold his shares in that venture and in another value-added venture that was profitable.
“If you can't afford to lose 100%, don't invest in these ventures,” he warns. “Most ventures don't earn a return for several years and some haven't been able to pay market price for the crops. If you factor in compounding interest on the money you've invested, it takes some exceptionally good returns in later years to make up for the years you had your money tied up without any earnings.”
Many agricultural leaders in the USDA, land grant colleges and state departments of agriculture have pushed value-added ventures, but Jepson says they're not the savior that a lot of people tout them to be. “I'm in western Minnesota which could be called the co-op capital of the U.S.,” he says. “A number of growers are co-op poor right now. Some of the shine has come off these ventures and people in our area are being very cautious about new ones.”
Alliances seek to pick the plums
Value-added ventures may be risky, but some farmers are still interested in investing in one if it will add value to their farms. “I don't see the narrow profit margins for production agriculture changing. If we don't move up the food value chain, we'll be left with only contract production,” says farmer Brad Petersburg, Hanlontown, IA. “By owning further processing facilities, farmers can capture more value and keep profits at home in our rural communities.”
That's why there has been growth in value-added farmer alliances that review potential ventures on members' behalf.
Currently at least seven farmer alliances have been formed to evaluate and give birth to new-generation ag co-ops: 21st Century Alliance (Kansas), South Dakota Ag Producers Ventures, Farm Connect (Minnesota), Golden Oval Eggs (Minnesota and Iowa), Ag Ventures Alliance (Iowa), Producers Alliance (Illinois) and Innovative Farmers of Michigan.
“Quite honestly, like many farmers I've invested more on emotion instead of using sound business analysis,” says Petersburg who serves as vice president of Ag Ventures Alliance. “The goal of Ag Ventures Alliance is to help its members evaluate ventures and understand the risk. We require an independent business analysis of any venture that we bring to our members.”
“You have to look hard at each individual situation. Don't risk the farm on it. Some farmers who invested too heavily in a single co-op have suffered significant losses. Value-added processing is a tough business. You are competing in the marketplace with the big boys. It can be cutthroat. You need good management and experienced people working for you.”
Granite Falls, MN
Similarly, the Producers Alliance out of Bloomington, IL, hires legal and financial experts to help evaluate potential agricultural ventures for its members. “The biggest realization for me has been how difficult it is to come up with a project that will return the desired amount and have a reasonable chance for success. There are a lot of opportunities but few meet our criteria,” says farmer board member Stan Blunier, Forrest, IL. The Producers Alliance's criteria include a return on investment of 12%, strong market potential, distinct product differentiation and a reasonable capital investment by farmers.
Twenty-first Century Alliance in Kansas has given birth to five value-added ventures in recent years and has three additional companies in various stages of development. CEO Lynn Rundle advises, “Be market driven, raise more equity than you think you'll ever need, develop a sound business plan and hire experienced industry people from the get-go to avoid major mistakes.”
Show me the money
It typically takes two to three years before most new ventures return a profit, which needs to be taken into account when evaluating potential investments.
“Overlooking the time between the purchase of equity stock and when returns come in can make an investment seem much better than it really is,” says Frayne Olson, associate director of the Quentin Burdick Center for Cooperatives.
Here are snapshots of the performance of more than 20 value-added agricultural ventures. The companies or their board members supplied the information. Most of the companies have been in business for five years or less. Some are profitable, some are new and unproven, and some have not made any money or have lost money for their investors.
Dakota Growers Pasta Company, Carrington, ND
Formed in 1992; production began in November 1993
Dakota Growers Pasta Company has been one of the biggest success stories among new generation co-ops. It began processing durum wheat into pasta in November of 1993 and is now the third largest pasta producer in North America. It has 1,100 farmer members. The initial stock offering was $3.85/equity share with a minimum purchase of 1,500 shares or $5,775. Each share represents delivery of 1 bu. of wheat. Growers had to purchase one membership share at $125, which gives them the right and obligation to deliver durum each year to Dakota Growers. Over the years, the stock has appreciated. Subsequent stock drives for expansion have been successful at share prices of $5.50 and $7.50. Growers are paid market price for the wheat they deliver. Over the last five years, they have earned dividends of $0.20, $0.32, $0.65, $1.00 and $0.80/share. The plant was originally built to grind 3 million bushels of durum wheat. Today it has the capacity to grind 12 million bushels and produce 450 million pounds of pasta annually. Dakota Growers markets its pasta through store brand, food-service and ingredient channels. It also sells under its own brands Dakota Growers, Zia Briosa and Pasta Sanita.
Golden Oval Eggs, Renville, MN
Formed in 1994; production began in 1994
Another success story is Golden Oval Eggs with returns exceeding 25% for several years. In 1994, approximately 265 Minnesota farmers invested $4 million to start an egg production company. Shares cost $3.50 with a 2,000-share minimum ($7,000). Each share represents the delivery of up to 1 bu. of corn. The closed co-op expanded in 1995, 1998 and 1999. Farmers from Minnesota, Iowa, South Dakota, Wisconsin, Illinois and Michigan invested another $14 million. The 1999 stock offering was $5/share. Golden Oval has two laying operations with egg-breaking facilities that sell liquid eggs. The facility in Renville, MN, houses 2 million birds, and the Thompson, IA, site will house 2.7 million layers when phase one is completed in December 2001. Farmers have been paid market price for the corn they deliver. The company lost money in the first year but had excellent returns after that. Members received from $1.30 to $1.70 over the average market price of corn in 1997, 1998 and 1999. During those years, shareholders realized a 25 to 43% return. Facing the lowest egg prices in three years and recent expansion costs, Golden Oval members still earned $0.20/bu. over market price in 2000.
Exol, Albert Lea, MN
Formed in 1994; production began in spring 1999
Five hundred farmers in Minnesota and Iowa raised the money for this $21 million ethanol plant. Farmers invested $1/share with a minimum investment of $5,000. Each share represented delivery of from 6/10 to 1 bu. of corn. Farmers have received market price or higher for their corn. The plant has been operational for two years and has been profitable in the current environment of high-energy prices and low corn prices. Profits have been well over 50% return on investment. In the past year and a half, Exol has paid dividends of $0.75/quarter on deliverable bushels. Exol has an expansion under way that will increase its capacity from 15 million to 36 million gallons by October 2001. It will also be adding a CO2 facility.
South Dakota Soybean Processors, Volga, SD
Formed in 1994; production began in 1996
Farmers invested a minimum of $5,000 in this $34 million soybean meal and oil-processing plant. Initial shares cost $2.00 each and represented 1 bu. of soybeans. Members have been paid market price for their soybeans upon sale. The company has been profitable during all four years of operation. First-year profits were retained. Patronage was paid in years two through four. Forty-five percent of the investors' original investment has been returned to them in cash patronage ($0.95/$2 share). The company's stock has had a three-for-two stock split. Stocks have appreciated and traded recently at $2.88.
Bayside Best Beans, Seibwaing, MI
Formed in 1993; production began in 1995
A small group of about eight farmers invested $30/share to renovate an old milk plant into a colored bean processing plant. The small size of the colored bean market made it difficult for large companies to efficiently segregate the beans and process them separately; thus farmers weren't paid a premium. Bayside Best Beans weathered two difficult start-up years but has since become quite profitable. Its current return on investment exceeds 23% annually. Each share represents a hundredweight of beans.
21st Century Bean Processing Cooperative, Sharon Springs, KS
Formed in 1998; production began in September 1998
Seventy-five producers from Kansas, Nebraska and Colorado have invested in this co-op, which processes dry edible beans. Farmers needed to purchase at least three shares valued at $1,500 each. Each share represented 300-cwt bags of beans. The company paid a dividend of $1,200/share at the end of its second year of production.
Thumboil Seed Producers Cooperative, Ubly, MI
Formed in 1997; production began in July 1999
This soybean-processing cooperative has reached the break-even point in its first year and a half of production. In its first year, the newly built $2.2 million plant processed 1.1 million bushels of soybeans, exceeding business plan projections. It processes soybeans into soybean meal and oil. There are 198 shareholders from 10 mid-Michigan counties. Each share cost $1,250 and requires the shareholder to deliver 500 bu. of soybeans. The minimum share investment was two shares. In a second offering now under way to generate capital for a refinery for non-genetically modified cooking oil, stock is priced at $1,500/share. The farmers have been paid about $0.25 less than market price for their beans, and no dividends have been paid. Dividends are anticipated in 2002.
Phenix Manufacturing, Mankato, MN
Formed in 1997; production began in 1999
About 1,000 farmer members mainly in Minnesota invested $2,333/share in Phenix Manufacturing. The minimum investment was $7,000. Each share represents the delivery of 200 bu. of soybeans. Farmers have not been paid market price for their soybeans; instead they have received a credit for the market value and will receive interest at 12% on the unpaid portion.
“Most of these organizations go through a start-up phase that does not turn out as planned financially. Their success is highly dependent on having excess financial resources on the front end of a project. Organizations have to plan for this. It's really rare to not have financial bumps in the road.”
vice president and team leader of agribusiness lending
St. Paul, MN
The initial stock offering in 1997 raised $12 million from farmers and an equal amount from the founding shareholders of Phenix Biocomposites, which was first formed in 1992 in St. Peter, MN. The stock drive funded the construction of a new plant in Mankato to take wheat and soy straw and convert it into engineered panels, particle board and structural panels to replace plywood. Production began in the summer of 1999. The original plant in St. Peter uses soybean proteins to make Environ resins for decorative uses.
No dividends have been paid so far. The company expects to be profitable by the end of 2001.
Minnesota Corn Processors, Marshall, MN
Formed in 1980; production began in 1983
Over the last 17 years, MCP has had good years and bad years in processing corn into corn syrup, high-fructose corn syrup, starch and ethanol. For those farmers who were initial investors, overall returns have been good after some difficult start-up years. The stock has appreciated from an initial offering price of $2.06 to $4.50 in the mid-1990s. As a result of several stock splits in the mid-80s, initial shareholders tripled their stock holdings.
For later investors, returns have been less than spectacular. There have been years without dividends. MCP experienced some difficult years in the late 1990s because of an oversupply in the fructose market. In 1997 MCP restructured and brought in ADM as a 30% owner with non-voting shares. This was necessary because financial institutions were unwilling to negotiate long-term financing. The company is back to making money, but dividends have been modest — $0.10/share in 1999. For initial investors who, because of stock splits, have a share basis of less than a dollar, that's a decent 10% return. For those who have a basis of $4/share, it's only a 2.5% return.
MCP has 5,000 stockholders in Minnesota, South Dakota, Iowa and Nebraska. Original shares were valued at $2.06 and represented 1 bu. of corn. The minimum purchase was 5,000 shares.
In the mid-80s, the co-op added ethanol to its Marshall corn wet milling plant. These shares sold for $3. In 1991 the co-op offered shares for $3.50 to start construction on an ethanol plant in Columbus, NE. In 1994 shares were sold at $4.50 in order to add high-fructose corn syrup production at both plants. MCP is the second largest ethanol producer in the United States.
Ag Guild of Illinois, LLC, Bloomington, IL
Formed in 1999; first production contracts were issued in spring 2000
This company seeks to negotiate value-added crop production contracts for its 34 farmer members in central Illinois. Each farmer paid $500 to join the Ag Guild and committed 200 acres or 20% of his acreage, whichever was less, for Ag Guild production. Members are to keep that acreage open until March 15 of each year. In the spring of 2000, the Ag Guild contracted with end users to produce 20,000 acres of non-genetically modified, high-isoflavone soybeans for an undisclosed premium that exceeds $0.20/bu. Negotiations are under way for 2001 contracts. The company's bylaws state it will not invest in bricks and mortar.
Producers Alliance Inc., Bloomington, IL
Formed in 1999; first production contracts issued in spring 2000
The mission of the Producers Alliance is to provide subscriber members with agricultural business opportunities in production, marketing and value-added investments. About 350 farmers representing more than 450,000 acres of crop production and 27 million bushels of on-farm grain storage in Illinois and a few other states have already joined. New members can join by paying a one-time fee of $250 plus an annual fee of $250. The group developed and coordinated contracts for premium identity-preserved corn and soybeans for 2000 and is currently negotiating contracts for 2001. It is also evaluating equity investment opportunities for its members in further processing co-ops.
Spring Wheat Bakers, Fargo, ND
Equity drive began in 1997; production began in July 1999
“I don't see the narrow profit margins for production agriculture changing. If we don't move up the food value chain, we'll be left with only contract production. By owning further processing facilities, farmers can capture more value and keep profits at home in our rural communities.”
Approximately 2,800 wheat farmer members invested a minimum of $4,800 ($6/share, 800-share minimum) to build a plant in McDonaugh, GA, to manufacture frozen dough and par-baked bread products for the food-service market. Each share represents the delivery of up to 1 bu. of spring wheat. Farmers receive market price for their wheat. In the first year and a half of operation, no dividends have been paid. The company expects to break even by the end of 2001.
Value Added Products Co-op, Alva, OK
Formed in 1999; production began in August 2000
Producers in eight states invested a minimum of $5,000 each to form this cooperative, which makes frozen dough bakery products (pizza, bread and Danish). Each share cost $5 and equals the delivery of 1 bu. of wheat. The 724 farmer members are getting paid market price for their wheat. The first dividends aren't expected until 2002.
21st Century Grain Processing Cooperative, Rincon, NM
Formed in 1997; production began in August 1998
About 375 wheat producers from six different states, but primarily Kansas, raised $3.2 million to reopen a flour mill in Rincon, NM. Each share cost $5,000 and represented 2,850 bu. of wheat. Farmers are paid market price for their wheat. No dividends have been paid yet. The company is running at 80% capacity and became profitable in July 2000. The first dividends are expected in 2001.
21st Century Grain Merchandising LLC, Manhattan, KS
Formed in June 2000
This company's mission is to preserve a safe food supply. It was created to market new identity-preserved systems for both wheat and corn. Twenty-first Century Alliance has successfully employed the systems in wheat. The alliance has generated on average over the past three years a $0.25/bu. premium over the local market price for members' wheat. About 4 million bushels of wheat have been grown under an identity-preserved contract for several major milling companies.
Ladder Creek Dairy, Tribune, KS
Formed in 1999; production began in December 1999
About 130 farmers from primarily Kansas and Colorado each invested a minimum of $5,000 to build a 2,800-cow, $10 million dairy. This is the first rotary parlor dairy in Kansas. Each share cost $5,000 and required the delivery of 1,200 bu. of grain/share. In the first year of operation, members have been paid market price for their grain, but no dividends have been paid.
Washington County Dairy, Linn, KS
Formed in 1998; production began in March 1999
Ninety-six Kansas farmers each invested a minimum of one share valued at $5,000 to fund this 1,500-cow, $5 million dairy. Each share represents delivery of 500 bu. of corn for which the shareholder receives market price. No profit has been made yet.
Ventures without a return
ProGold, LLC, Whapeton, ND
Formed in 1995; production began in November 1996
This corn wet milling plant has yet to show a profit in the four years it has been in operation. Golden Growers Cooperative members are a 49% owner of ProGold. Each farmer invested a minimum of $13,800 (4,000 shares at $3.45) in the cooperative. Each share represented 1 bu. of corn. Almost immediately after the $255 million corn wet milling plant was completed in the fall of 1996, prices for high-fructose corn syrup crashed from $0.14 to $0.20/lb. to less than $0.10/lb. and have remained low.
The company was in serious financial trouble in its first year. The board of governors for Golden Growers Cooperative, along with the other owners of ProGold, American Crystal (46%) and Minn-Dak Farmers Cooperative (5%), decided to look for a partner that could withstand the losses. It negotiated a deal with Cargill. Cargill leases the facility for an amount that lets ProGold meet debt obligations. ProGold maintains ownership of the facility and Cargill bears any losses during the 10-year contract period which ends in 2007. The 1,900 Golden Grower farmer shareholders have been paid market price for the corn they deliver. No dividends have been paid.
Southwest Soy Cooperative, Prescott, IA
Formed in 1996; production began in December 1997
Within two years, this soybean-processing cooperative was out of business. According to a former shareholder, the co-op started operations with the worst crush margins in about 50 years. In addition, demand was down because many hog producers were leaving the business. Farmers were paid market price for the soybeans but earned no dividends. Farmers paid $1,500/share, which represented the right and obligation to deliver 1,300 bu. of soybeans.
Michigan Alfalfa Processors Cooperative; Akron, MI
Formed in 1999; production began in July 2000
This cooperative built a $4.5 million alfalfa cubing plant with the capacity to process up to 30,000 tons of alfalfa for bagged and bulk delivery to livestock and horse customers. Farmers paid a $500 initial membership fee plus $150/share with a minimum purchase of 20 shares. Each share represented the alfalfa production from one acre. The 179 farmer members delivered alfalfa this summer but, as of December 2000, had not been paid anything for it. Assuming an alfalfa price of $40/ton and production of 5 tons/acre, growers are out $200/acre, plus seed and harvesting costs. The plant's costs have been higher than expected and sales have been slower than anticipated.
Minnesota Valley Alfalfa Producers, Granite Falls, MN
Formed in 1994; production began in 1996
This 500-member co-op was started to add value to alfalfa through pelleting for feed and biomass energy. Initial shares were sold for $45/share, representing 1 ton of alfalfa. The biomass energy part of the business never materialized because of regulatory and technological problems. The plant currently pellets alfalfa and produces leaf meal for feed formulators. According to a member, growers have been receiving below-market prices for the alfalfa they deliver to the plant. No dividends have been paid.
Minaqua Fisheries, Renville, MN
Formed in 1996; production began in October 1997
Stock was offered for $2,500/share with a two-share minimum. Each share required the delivery of 75 bu. of soybeans. Three hundred twelve Minnesota farmers are shareholders in the venture, which raises tilapia for the live tilapia market in Asian grocery stores and restaurants. The farmers have received market price for their soybeans. No dividends have been paid. The company has struggled, but prospects seem better because of steady demand and because some competitors have left the market.
ValAdCo, Renville, MN
Formed in 1991; production began in 1992
This co-op maintains four hog farms with approximately 12,000 sows. It finishes and markets the pigs it produces. The co-op has about 125 members. Shares representing 1,000 bu. of corn were offered for an initial price of $3,019/share in 1991. Two other stock offerings were made at $3,040 and $4,040. Farmers were required to purchase a minimum of two shares. ValAdCo struggled in its first four years of operation and during the devastating 1998 hog market. Equity was lost, but the business has managed to stabilize and begin rebuilding its lost equity, according to management. During the last eight years, farmers have earned dividends only once, and for two years they have received less than market price for their corn. ValAdCo is in litigation with a shareholder that says the company has defrauded it in respect to all of its investments. The shareholder claims to have lost in excess of $2 million in stock and unpaid corn deliveries.