CROPP Cooperative The Cooperative Regions of Organic Producer Pools
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CROPP Cooperative The Cooperative Regions of Organic Producer Pools A Case Study Prepared for the North Central Initiative for Small Farm Profitability By the University of Wisconsin Center for Cooperatives Funded by the Initiative for Future Agriculture & Food Systems A Program of the U.S. Department of Agriculture Authors: Maria Powell & Greg Lawless January 2003
Introduction rise or fall, reflecting how much products. (Myers, 2000). the farmers expect to benefit In 2001, organic sales at This case study is one of four from their membership in the conventional outlets accounted in a series that are focused on so- future. for 49% of total organic retail called “new generation cooperatives,” or NGCs. While The co-op in this case study sales—with most of the rest might best be termed a “hybrid” (48%) accounted for by health the first recognized NGC dates back to 1972, most were formed NGC. Consideration of the and natural product store sales. in the 1990s, and they continue CROPP Cooperative of La Sales of organic foods to be formed today. Farge, Wisconsin will follow an overall in the U.S. are growing overview of the organic industry 20-25% annually. Organic sales NGCs differ from traditional in which it operates. were estimated at $7.8 billion in cooperatives in several ways. 2000, a 20 percent increase over First, farmers invest significant Organic Industry Trends 1999 sales. Sales over the dollars up front by purchasing Internet are expected to grow shares in the business. Sales of organic food have from $0.5 billion to $3 billion in Second, each purchased grown dramatically in recent the next 4-5 years. share allows and obligates a years in the United States and Organic sales are also producer to deliver a set quantity internationally. In the early increasing in world markets-- of raw product to the co-op. 1990’s, organic food became Third, there are a limited particularly Japan, Denmark, increasingly available to U.S. France, Germany, Italy, the number of shares, and in that customers as natural food stores Netherlands, Switzerland, and sense the co-op is closed or began growing in size and the U.K. The Natural Foods limited to a set number of product selection. The growth of producers. This is intended to Merchandiser (NFM), an natural product supermarkets match incoming raw products to industry trade publication, such as Whole Foods and Wild estimates that exports accounted the capacity of the plant and the Oats helped spur this growth. for about 5% of total U.S. demand for the end product. During the late 1990’s, organic food sales throughout the Finally, the ownership shares moreover, conventional 1990’s. (Greene, 2001) can be traded among farmers, supermarkets began integrating a Not surprisingly, organic and the price of those shares may wider selection of organic farming is increasing along with organic food sales. According to Share of U.S. Organic Food Sales by Retail the USDA’s Economic Research Outlet Type (2000) Service, organic cropland more than doubled in the U.S. during Type of Outlet Share (%) the 1990’s. Organic certifying Mass Market Outlet 49% agencies in several states Supermarkets 44% reported substantial increases in Other mass market 5% organic certification from 1997- Health & Natural Product Sales 48% 1999. Natural food supermarkets 31% In the livestock sector, eggs Natural food stores 12% and dairy are growing even Natural food cooperatives 2% faster than other areas. The Supplement chains/stores 3% number of certified organic milk Farmers’ Markets/CSA’s 3% cows nearly tripled between Total 100% 1992-1997 and nearly doubled between 1994—1997. (Greene, * Drugstores, mass merchandisers 2000) Organic milk sales grew ** Community supported agriculture by 500 percent between 1994 TABLE 1: From Myers, 2001 and 1999 as more organic milk processors entered the market CROPP Cooperative/Organic Valley 1
Bulk Foods Dairy 8% 11% Frozen Foods 8% and more mainstream Packaged Groceries supermarkets began to sell 15% organic products.4 Organic milk Soy 6% sales reached $75.5 million in Snacks & Candy 1999, and in 2000, organic dairy Beverages 2% products made up 11% of U.S. 5% organic food sales. (Myers, Meat 3% 2000)5 CROPP Cooperative/ Organic Valley Produce 42% CROPP Cooperative has Chart 2: Myers, 2001 ridden the crest of this wave of growth in the organic sector. and a significant return on their to the national OCIA for critique. Starting in 1988, they have equity investment. This involved a lot of research grown from nothing to a $100 and meetings. million company in just over Start-up Struggles CROPP also faced regulatory thirteen years. obstacles. Wisconsin laws For most of those years, the Like most other successful businesses, CROPP’s startup was prohibit a group of farmers from acronym CROPP stood for the shipping their milk together “Coulee Region Organic filled with obstacles. The company was initially formed to without appropriate licensing. Produce Pools”. Only recently, Fortunately, several of the in recognition of their now market organic vegetable products. But according to co- original farmers were members national scope of membership, of the NFO, which offered to did they abandon the namesake founder Jim Wedeberg, they soon shifted to dairy, in part handle the required licensing, of their local area in favor of the write milk checks, and test milk more expansive “Cooperative because they realized that a year- round-market for organic dairy as long as CROPP dairy Regions of Organic Producer members joined the NFO. Pools”. products would be more stable than seasonal vegetable markets. According to Wedeberg, the And while familiar to “NFO was the reason we got off consumers around the country by Furthermore, they decided to focus on cheese products, which the ground.” (McNair, 1994) In their brand name, "Organic addition to the regulatory and Valley,” closer to home the co- have a longer shelf life than fluid milk and therefore required less administrative assistance, the op is known simply as CROPP. NFO helped finance the co-op’s In 1998, the co-op was intense management and staff. Getting into the organic dairy initial cheese inventory with a recognized by the Governor of substantial loan offered under Wisconsin as the state’s #1 Rural market, however, was difficult. When Wedeberg approached exceptionally good terms. Initiative. This was an acknowledgement of the impact George Siemon in 1988 about that the co-op has had in the forming an organic milk pool, state, especially within the farm there were no standards available economy. Driven by a company for certifying milk as organic. At philosophy that is strongly that time, the Organic Crop committed to the family farm, Improvement Association CROPP’s success has been (OCIA) concentrated on fruits transferred back to its farmer- and vegetables. Consequently, members in the form of Jim and the other dairy farmers consistently higher milk prices had to form their own organic standards on feeding and herd health practices and submit them CROPP Cooperative/Organic Valley 2
“Creative financing” was CROPP Mission Statement another key to CROPP’s early success. For instance, they We, the family farmers of Organic Valley, are committed to: needed a building to house their new operation, and found one in • Cooperatively market the finest in certified organic products produced exclusively by our family of farmers. La Farge that cost only $25,000. However, the cash-strapped • Market nutritious, wholesome food as directly as possible to the founders lacked the money for consumer. even that modest investment. So they worked out a deal with the • Establish farmer-determined prices which provide the farmer with building’s owner to liquidate an enough profit to sustain his family and his farm. old vat in the basement of the • Encourage a farming future that emphasizes ecological diversity property, and they used the and economic sustainability. income from that sale to cover their down payment! • Enable a healthy human livelihood by providing quality Ultimately, however, the employment, cooperation, organic education, and community growth. ability of the cooperative to survive these early years was due • Practice environmental awareness and cooperative principles in to the commitment of the all aspects of production, handling, marketing and operations. CROPP farmers and their willingness to take financial • Promote a respect for the dignity and interdependence of human, risks. The seven original CROPP animal, plant, soil, and global life. producers shipped 20,000 Sidebar 3: From the CROPP Website: organicvalley.com pounds of milk every other day in 1988. Cheese was made at market, Wedeberg says that the equity capitalization at the end of Springdale Cheese Factory near farmers “were determined to this case study, at which point Richland Center. At that point, hang in there and see it through.” we will also consider how CROPP was not involved in (McNair, 1994) CROPP varies from the “new marketing their products, but Fortunately, CROPP generation co-op” model. relied instead on a distributor. received a grant at this time from In those early years, the the Wisconsin Agriculture Creating a Marketing prices that the co-op paid its Department’s Agricultural Company farmers for their milk hardly Development and Diversification covered their higher organic Jerry McGeorge is a member (ADD) program. They used production costs. That’s because of the CROPP management team these funds to improve upon their original distributor sold less and carries the title of their label and hire more sales than 40% of the member’s Cooperative Coordinator. people. They began showing According to McGeorge, one of production through organic their products at trade shows channels, unloading the rest at CROPP’s biggest marketing around the country, and they also commercial market prices. challenges early on was started cutting and wrapping Through 1991, after creating consumer education. During the their own cheese in their La its own label and trying to co-op’s first few years, there Farge headquarters. expand its distribution network, wasn’t any money in the budget Around this time the co-op CROPP still only had 10 for consumer education about also ran a successful equity members. Organic premiums organics. General public drive—members agreed to held steady at about $2 per awareness of the meaning and provide $11 of equity for each hundredweight over the purported benefits of organic 100 pounds of average month conventional price. And while food was still quite low, and milk production. (McNair, 1994) local lenders were leery of what consumers balked at the high We will return to this issue of prices of CROPP’s organic dairy was then a very unproven CROPP Cooperative/Organic Valley 3
products—which were the only As Wedeberg says, it’s an Organic Valley Sales by Category ones on the shelf in most stores. arrangement works out well for Nevertheless, McGeorge all parties. Meat - 1% Eggs - 9% believes that CROPP entered the Many of the co-processing market at a good time. During plants that currently work with the early-to-mid 1990s, the CROPP were operating under organic market really took off, capacity when the co-op and other companies began approached them to custom Dairy - 90% offering organic dairy products. process on their behalf. These 3/02 At that stage, there was plenty of cheese makers, creameries and Chart 4: Source: CROPP Co-op room for competitors, and bottling plants were willing to McGeorge actually believes that adhere to organic processing brand, “Valley Family of Farms”, the new entrants to the market rules in order to attract the new to market certified organic beef, actually helped CROPP. “When business. pork, turkey, and chicken. (At consumers saw that others were In 1990, CROPP introduced that point, USDA rules did not st charging prices similar to the nation’s 1 organic butter, permit organic meat to be CROPP, they realized that the and in 1992, they became the marketed with the word co-op wasn’t charging them organic milk supplier for “organic” in the brand name.) st unfairly.” In addition, America’s 1 nationally Currently, approximately McGeorge and Wedeberg both distributed organic yogurt brand. ninety percent of CROPP sales believe that increasing public Between 1995 and 2000, they are dairy products, 9 percent are concern about Bovine Growth launched several more “firsts” in eggs, and 1 percent is meat. In Hormone (BGH) around 1994 the organic industry, including recent years, the co-op decided helped organic dairy sales Parmesan cheese, cottage cheese, to market other products like tremendously. string cheese, “high heat orange juice, mainly because in One of the keys to CROPP’s processed” fluid milk, as well as many stores these products are success is that they never a lactose-free milk. sold in refrigerated cases invested much money in “bricks In the meantime, they also alongside dairy products, and and mortar”. Instead, they “co- built up a sizable business in having a wider space on the shelf pack” with 45 different dairy organic egg sales. And in 1999 gives them more exposure to the processors around the country. CROPP launched a second customer. A big part of CROPP’s success has been its development of its primary brand identity: “Organic Valley”. Currently, about 75% of its sales are under C V PM that brand, compared to 7% M RM B PM H M private label, 11% bulk product, PM CVM C B E M CP R E and 7% for manufacturing BH V ingredients. M C During the mid-1990’s, E CROPP grew dramatically. In 1993, orders from natural food stores increased, and by the end J of 1994, CROPP handled 2.5 PM million pounds of milk (a 150% increase over 1993) and had 59 members. Milk routes expanded 3/02 to include eastern, western, and Map 5: Source: CROPP Co-op CROPP Cooperative/Organic Valley 4
northern Wisconsin and Most CROPP farmers are distributing premiums in the Minnesota. considered small to medium- milk checks every two weeks. CROPP’s customer base sized—although classifications Not only is this a variation of expanded nationally when vary depending on the region. the more traditional co-ops, companies started using The average herd size for which often retain 70-80% of CROPP’s organic milk in their CROPP dairy farms is about 50 profits each year in order to build dairy products. And from the cows, but herd sizes range from equity, but it’s a variation from mid-1990s to present, both co-op 20 cows to as many as 400. the new generation co-ops too, membership and sales have CROPP includes very few which typically pay market rates grown tremendously. In 2001, dairies on the high end of this for farmers product upon CROPP’s sales reached $100 range—most of which are delivery, and wait until the end million, and 2002 sales are located in California and the of the year to distribute profits projected to reach $125 million. Pacific Northwest. By back in the form of a “value Furthermore, it is estimated that comparison, in 2000, 12 percent added check”. CROPP members their products are currently found in some 25-30,000 stores, including many Walmart outlets. While CROPP’s dairy and eggs sales are going strong, its meat sales are not doing so well at this time. That is partly because of USDA organic labeling issues. In October 2002, however, new USDA labeling policies should finally allow them to include the word “organic” more prominently on their meat label, which may improve sales. Impact on Co-op Members 3/02 As of March 2002, Chart 6: Source: CROPP Cooperative CROPP had 417 producers— 296 dairy producers, 35 egg of dairy farms nationwide had 50 insisted that they receive larger producers, 9 pork producers, 28 or less cows, 22 percent had milk checks up front. beef producers, 31 vegetable between 50-100 cows, 35 CROPP’s “pay prices” are producers, 4 broiler producers, percent had between 100-500 probably the number one reason and 14 citrus producers. The cows, and 31 percent had over most dairy farmers joined the co- citrus producers are under their 500 cows. (USDA, 2001) op. Essentially the dairy own umbrella—only one of them Members benefit financially members collectively set the pay is an official member of CROPP. in three ways. First and price based on their costs of Producers are located in ten foremost, they receive significant production. As a result, states: Oregon, California, premiums for their organic milk. throughout the 1990’s and up to Minnesota, Iowa, Wisconsin, CROPP has essentially made a present, CROPP farmers Illinois, Vermont, New York, decision to transfer its received milk checks that Pennsylvania, and Florida. profitability back to its members hovered substantially above on an on-going basis, by conventional prices. CROPP Cooperative/Organic Valley 5
In 2000, for example, the returned until they retire.) The Board of Directors is active and Organic Valley price was state CROPP policy is to return farmer-controlled. All of the $17.18, which, they reported, members’ retained equity on a produce categories are grouped was $6.61 over the conventional seven-year cycle. If true, this into producer pools, and each price of $10.57. (See Chart 7 would be a fairly quick pool meets monthly to make below. Data for conventional turnaround compared to many decisions. Each region elects a prices was provide by CROPP traditional co-ops, which may representative to make sure that and was not verified by UWCC.) take fifteen tot twenty-five years concerns of farmers in that In 2001, they reported that to revolve back equity. region are heard by the CROPP conventional prices rose to There are many other management team. $13.74, while CROPP prices advantages to CROPP Overall, CROPP producers remained steady at $17.53. For membership in addition to good interviewed for this study were farmers, the stable pay prices pay prices. As with all co-ops, very pleased with their that CROPP maintains are a CROPP members are owners of experience of the cooperative. welcome relief in a relatively the organization. Most All of the farmers (4 dairy unstable farming environment. importantly, according to producers and 1 egg producer) The second way that Wedeberg, even as the company were already organic when they members benefit involves a grew from “seven farmers sitting joined CROPP, but were getting CROPP policy of paying their around a table” to a large conventional pay prices and were members 8% interest on their organization, it built in ways to having a hard time making it equity investment. This is quite make sure that members could financially. CROPP gave them unusual in the co-op sector. participate in the decisions of the higher pay prices and did the Finally, members also benefit organization if they wanted to. marketing work that they did not financial from a relatively fast Farmers still have a lot of say have time or background to do return of their retained (non- in determining pay prices, on their own. direct) equity investment. (Their marketing strategies, and other All five farmers interviewed direct equity investment is not organizational decisions. The came into the program with a Chart 7: Source: CROPP Cooperative. Data for conventional prices was provide by CROPP and was not verified by UWCC. CROPP Cooperative/Organic Valley 6
strong commitment to organic about 13 years, whereas on the Several farmers mentioned farming and sustainable big conventional farms, animals that they were pleased with agriculture. Jim Grimm, a live much shorter lives. Both CROPP’s organizational Wisconsin dairy farmer with 45 farmers believe that the quality structure and producer pools, cows, said that he joined CROPP treatment of animals is one of because they encourage active in 1993 after farming organically CROPP’s most important involvement and give farmers on his own for about thirteen requirements, and one that more voice in decisions made by years. He said that even though contributes greatly to the high the organization. most of the farmers in his area quality of CROPP’s products. were conventional farmers who Beyond their firm Growing Pains just “went with the group”, he commitment to organic Despite the affirmative “always knew that organic was production, the farmers attitudes of CROPP members the right thing for the soil and for interviewed all felt that CROPP and the upward trend in the the animals.” membership was helping them cooperative’s gross sales, major Joe Placke, another survive financially. Joe Packe challenges lie ahead. Both Wisconsin dairy farmer with 70 said that the “biggest thing is that CROPP farmers and managers cows, joined CROPP four years CROPP helps me get a better expressed concerns related to the ago after farming organically for price for my milk.” Bushman growth of the co-op and the about six years. Like Grimm, he stressed that alone, farmers pressures of outside competition. switched from conventional cannot make it in the organic Some of the farmers when he decided that he “just niche market, but farmers interviewed (who wished to didn’t want to use chemicals working together through remain anonymous) expressed anymore” because he felt that CROPP can hold a significant concern about how the organic was “healthier for the portion of the organic market increasing size of the people and the animals.” and make a profit. organization would affect farmer Duane Bushman runs an egg Bushman said that he participation and their voice in and dairy farm in Iowa along appreciates the stable pricing organizational and marketing with his three sons; altogether CROPP offers for his eggs and decisions. Moreover, to handle they have 140 dairy cows and milk, and the fact that CROPP marketing and sales, CROPP’s between 18,000-20,000 “makes sure profit goes into administrative staff has grown to chickens. Bushman had an even farmer, not into the co-op.” Jim about 200—about one-half the more personal reason for Grimm said “if it wasn’t for number of farmer members. switching to organic. In 1982, a CROPP, I’d get out of it.” (The Most of these employees are not bag of insecticide broke in his challenge of balancing prices farmers, and have been trained in hands, and he later got a brain paid to members with the equity conventional marketing. A few tumor that, in his opinion, is needs of the business can be an farmers expressed concern that connected to exposure to the Achilles heal of cooperatives. these employees might not be insecticide. This will be discussed further in committed to the co-op’s central Bushman marketed his the conclusion.) mission. organic products on his own Busman described neighbors As CROPP’s sales levels and until the early 1990’s, when who were desperately trying to national recognition grow, CROPP began their egg compete with the bigger farms— farmers from around the nation program. He expressed growing from 100 or fewer cows are joining the organization. One particular concern about the to 500-600 cows—but never farmer said he was concerned overuse of hormones in animals, quite able to keep up. Many of about commitment and calling it “one of the saddest them, Grimm said, “don’t even experience of some of the things about conventional own their farms and probably farmers joining the CROPP commercial herds.” never will.” Several other bandwagon, and more Jim Grimm, similarly farmers described similar importantly, the quality of their claimed that his own cows live to scenarios in their areas. CROPP Cooperative/Organic Valley 7
products. As he said, “people “farmers become removed from CROPP, but focused on who aren’t true farmers, a lot of what’s happening in marketing fluid milk and them from out East, are joining management.” Newsletters, he eventually became the leader in CROPP. These people could added “only tell us some of the that category. Horizon now give Organic Valley a lot of story, the part the management controls about 50% of that problems.” wants to tell, and other things are market, compared to 35% for For example, he has seen hidden…they feed everyone the CROPP. new CROPP members who were same information.” He added Buyouts by big dairy new to egg production make bad that even though meetings and companies are also becoming decisions about feed and cause other decision-making processes more common, intensifying CROPP egg quality and were open to farmers, agendas competition in the dairy market, production levels to go down. for the meetings were often set and making it difficult for These bad decisions, he says, beforehand by management. consumers to know who is affect everyone in the egg CROPP management is producing and processing the pool—and ultimately everyone definitely aware of the product they purchase. The in the co-op. He felt strongly that challenges that have come with entrance into the organic market one of CROPP’s challenges as growth and success. They seem by companies like Suiza (which they grow will be to “identify particularly concerned today recently merged with Dean who is a farmer…the people who Foods, which itself owns a 12% give us trouble are people are stake in Horizon) has further aren’t real farmers.” intensified competitive Several farmers said that pressures. even though they were very pleased with their past A “Hybrid” New Generation experiences in CROPP, they Cooperative were a bit worried about Before considering CROPP’s CROPP’s current direction. strategies to deal with its capital More specifically, they weren’t limitations, we will first return to confident about the co-op’s the topic of “new generation decision to “go big” and compete cooperatives, or NGCs, and with the other major players in CROPP members shown in their explain how CROPP represents a dairy and organic foods. As one promotional literature. “hybrid” version of that model. farmer said: “As we get bigger, At first glance, it might we try to compete with all the with increased competition and appear that CROPP reveals none other products out there... the limitations of their capital of the four structural traits of everyone thinks we need to have base. NGCs. Farmers are not required it all. We’re trying to get bigger Jerry McGeorge says to make “up front” investments, than Horizon. But that’s not competition is certainly but rather portions of their milk necessarily where the farmers becoming more acute. When the checks go toward their equity want to be.” co-op first started, there were accounts until they meet their Moreover, a few farmers only a few other regional players commitment. expressed concern that as the in the market– such as Brown Furthermore, CROPP does organization and administrative Cow, which captured a large not utilize “capital shares” like staff grow, they are becoming portion of the northeastern U.S. most other NGCs. Shares are less able to address the wide market. not traded, they don’t change in range of concerns of the farmers. Today, CROPP’s number value, and they don’t obligate a The co-op increasingly depends one competitor is Horizon, a producer to deliver a set quantity on newsletters to communicate private firm that entered the of raw product. Lacking all of with its hundreds of producers, market about the same time as and as one farmer stated, CROPP Cooperative/Organic Valley 8
From the packaging of Organic Valley products these traits, how can the co-op be and income grows year-to-year, to do with it, often accepting low considered a hybrid NGC? their capital requirement also prices from buyers and passing One reason is that CROPP is increases, and they must pay little or no profit back to their essentially a closed co-op, which more into their equity account. members. is a key feature of NGCs. New Members also contribute The theory behind new members are taken on only as equity in the form of “retained generation co-ops, on the other demand for organic milk patronage refunds”. When a co- hand, is to limit supply to match increases. Furthermore, current op is profitable, the board of demand, and often they target members only receive premium directors has the option of higher value markets in order to prices for milk that is sold into returning some or all of the generate profits that can then be organic markets. (Currently profits back to the members in transferred back to the members about 98% of the co-op’s milk is cash at the end of the year, in cash as quickly as possible. sold as organic.) Matching distributed in proportion to each CROPP is certainly market- supply to demand is an essential member’s patronage. oriented. Bedessem explained characteristic of new generation Alternatively, they may retain that they are not a production co- cooperatives. profits and allocate them to op, in the sense that they do not And while CROPP members members’ equity accounts, to be focus on “moving” raw product. may not have made their equity “revolved” back at a later date. Nor are they a processing co-op, investments “up front”, since Finally, the board may choose to focused on turning milk into 1988 they have made significant retain profits but not allocate cheese and other dairy products. capital contributions. Some of them to individual members. Instead, they can best be the larger members have up to The latter equity essentially described as a marketing co-op, $90,000 invested in the co-op. becomes common property, and focused almost entirely on CROPP members currently will stay with the co-op until it getting their “Organic Valley” contribute capital to their co-op dissolves. branded products into in two ways. First, there is the Another feature of NGCs that consumers’ refrigerators. They “direct equity” investment, is often sited is their orientation invest approximately 14% of which requires that every toward meeting market demand their earnings each year into member make an equity in order to achieve profitability. promoting their brand. contribution equivalent to 5½ Certainly many of the older Finally, the fact that CROPP percent of their annual income generation of agricultural has been able to transfer its from CROPP. (This can be paid marketing co-ops would also success back to its members all at once or more typically is claim to fit that description. But would further establish them as a subtracted from the milk check most traditional co-ops accept new generation cooperative. A until the obligation is met.) That unlimited supplies of raw visit to their modest headquarters means that as their production product and then figure out what in La Farge, Wisconsin is an CROPP Cooperative/Organic Valley 9
indication that cooperative investment. A major constraint dividend payments to preferred profits are not being diverted is that their current and incoming stock would still apply. Also, unnecessarily from where they members cannot supply capital these preferred shareholders really belong: back in their as quickly as it’s needed. would no voice in the members’ pocketbooks. Another option, which governance of the co-op, with CROPP does not appear to be the exception of decisions that Conclusion considering, is to lower the affect the value of the stock Recent years have been prices that they pay for their (mergers, dissolution, etc.) exceptionally good to CROPP members’ milk. High pay prices The limits on dividends and and its members. The obvious are what attracted many voting power would typically question is how long will the members to the co-op and to turn off many investors. good times last? It will certainly organic production practices. However, Bedessem says that not be easy to compete in the However, there is a balance that there is substantial support for market with larger players like must be achieved. If high prices the company among consumers Dean Foods. As members and are paid to farmers now, while in Wisconsin and nationwide, managers have expressed, the neglecting to position the co-op and CROPP hopes to raise as challenge before CROPP now is to be competitive in the future, much as $2-3 million from sales whether and how it can continue then the gains now could turn of preferred stock. to compete without forfeiting its into tragic losses down the road. Other agricultural co-ops commitment to family farm In the past year, several have turned to additional profitability. significant bankruptcies among capitalization strategies in recent Essentially, they are facing a long standing co-ops have years. Some establish joint problem that is common occurred at least in part because ventures with investor-owned throughout much of the this delicate balance was not firms, which usually requires an agricultural co-op sector, maintained. abdication of some control over namely, how to compete with Rather than lower pay prices, the shared enterprise. One private firms who have fewer CROPP is currently reexamining notable new generation co-op in restrictions on access to capital. its approach to equity and North Dakota went so far as There is only so much money capitalization. One option on the converting to a private that a group of farmers can table is to end the policy of corporation. afford to invest off their farms. paying interest on members’ There seems to be no A related challenge for equity. This policy is relatively indication that CROPP is CROPP, and for most rare in among farmer considering such strategies. As agricultural co-ops, is the need to cooperatives, and those interest long as they maintain their revolve equity back to the payments could go instead current level of profitability, they members. CROPP members toward capitalizing the co-op. will have some flexibility to currently have about $5.5 million Nevertheless, discontinuing the convert profits into much needed in equity invested in the co-op. interest payments would be a equity capital. But as the In recent years, about 20% of the clear retraction of member organic industry becomes more co-op’s profits have been used to benefits. competitive, that will be harder revolve back the members’ CROPP is also in the process to do. retained equity. To continue of getting a 521 IRS exemption It would seem that the their present rate of revolvement, so that it can meet the members of CROPP are facing a CROPP must maintain requirements of the Security and critical juncture in the evolution profitability. Exchange Commission (SEC). of their cooperative. Together, But for CROPP to stay This will facilitate the sale of they have been part of something profitable, it needs to remain preferred stock to the general very successful, watching their competitive, and that will public. sales grow to phenomenal undoubtedly require new capital As stipulated by Wisconsin heights over the past fourteen statutes, an 8% limitation on years. Where they go from here CROPP Cooperative/Organic Valley 10
will depend a lot on the growth marketplace. They must the mission and the principles of organic markets and the maintain a sufficient level of that got them where they are actions of their competitors. capitalization to compete there. today. They must identify where they Hopefully, they can accomplish will fit best within that those goals while staying true to 2003 Update: On December 30, 2002, a CROPP press release reported 2002 sales surpassed $125 million. They are projecting sales of $212 million by 2005. They report that the organic industry is still growing steadily at 20%, driven in part by organic milk sales, which are growing at a rate of 27%. CROPP continues to ride this wave of growth with their Organic Valley brand of food products. Ninety-four new farms joined the CROPP family in 2002, increasing their national membership to over 500. Their members brought 94,000 more acres into organic production in 2002, for a total of 75,000 acres. 3,810 cows were added to their system, for a total of 17,800 cows. CROPP CEO George Siemon reported that in November 2002 CROPP members in Wisconsin received a pay price of $20.02 per hundredweight, while the conventional price, as they reported it, was about $11. Competitive pressures, of course, have not lessoned, and the co-op still faces the fundamental challenge of meeting their capital needs in order to remain competitive and profitable in the future. Meanwhile, the Wisconsin Federation of Cooperatives and the Minnesota Association of Cooperatives are each working in their respective states to create new co-op legislation. Modeled after a new Wyoming co- op statute, the new co-op laws, if passed, should make it easier for co-ops to attract outside (non-farmer) capital. In exchange for the flexibility on capital acquisition, farmers will forfeit some degree of control as well as a share of any profits the company earns. Reorganizing a preexisting co-op like CROPP into the new co-op structure will probably involve prohibitive tax penalties. However, the new state laws, which would essentially create a modified limited liability company (LLC) with a co-op name, may be the best option for farmers who are looking to start new ventures but lack sufficient capital to do it entirely on their own. CROPP Cooperative/Organic Valley 11
REFERENCES Green, Catherine, “U.S. Organic Agriculture Gaining Ground. Agricultural Outlook. Economic Research Service/United States Department of Agriculture. April, 2000. Greene, Catherine, Dimitri, Carolyn, & Richman, Nessa. “Organic Marketing Features Fresh Foods and Direct Exchange.” Food Review. Volume 24, Issue 1. January-April, 2001. McNair, Joel. “Wedebergs Worked Hard to Get $17 Milk.” Agri-View 1994 Myers, Steve and Somlynn Rorie, “Facts and Stats: The Year in Review.” Organic & Natural News.December, 2000. ________. U.S. Department of Agriculture, National Agricultural Statistics Service, Dairy and Poultry Statistics. 2001.
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