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					                                         12th Annual
                         Farmer Cooperatives Conference
                                  November 9-10, 2009
                         Thriving in Uncertain Times
                     Farmer Co-op Conference sees opportunity
                     for co-ops that adapt to structural changes


        Although these are times of                 finance, energy, tax and entitlement
economic uncertainty, there are still               programs.
significant opportunities for agricultural                   Agriculture is not exempt from this
cooperatives. This was one of the key               risk and uncertainty, but – in the longer term
messages of the 12th Annual Farmer                  – the farming sector may emerge stronger if
Cooperatives Conference, Nov. 9-10 in St.           it can adapt to the structural changes on the
Paul, Minn. Speakers from the cooperative           horizon, Barr said.
business community, government and                           Future world economic growth will
academia provided perspectives that                 be driven by China and India, and will be
addressed the conference theme: Thriving in         accompanied by the volatility associated
Uncertain Times.                                    with a “resource-challenged world,” Barr
        Terry Barr, CoBank’s senior director        said. Firms will be more vulnerable as they
of industry research, kicked off the                become more export-dependent and face
conference with his outlook for the world           increasing competition in the global
economy, focusing on agriculture. He                marketplace. Farmers can expect to see
described how the economic rebound that             volatility in prices, both paid and received.
has begun will be different than those of the                Quoting economist J. M. Keynes,
past, and will necessitate structural changes       Barr reminded the audience that “the market
across the global economy. Capital markets          can stay irrational longer than you can stay
will not act as a safety valve for excess           solvent.” Increased working capital and
leverage, Barr said, predicting a more              optimal risk strategies will be needed to
protracted recovery period. Some policy             manage more limited capital market access,
proposals that would support an economic            policy uncertainties and changes to currency
recovery have increased the level of                exchange and interest rates, he said.
uncertainty in key economic areas, including

                             More risk means more management

       Managing risk is nothing new for             however, the risk profile has significantly
cooperatives, said Jim Hoyt, vice president         increased, requiring more management time.
of Growmark’s Strategic Planning and                Strategic planning must include a stronger
Corporate Services. For many cooperatives,          risk management component, he stressed.



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        Marshall Bohbrink, Growmark’s                          If a cooperative’s best efforts to
vice president of risk management and                 manage counterparty risk fail, what might
treasurer, described strategies for forecasting       happen in the event of a counterparty
and mitigating credit and counterparty risks.         bankruptcy? Brandy Sargent, an attorney
Risk analysis must look at both the                   with Stoel Rives, described how the
quantitative and subjective characteristics of        bankruptcy process may move very quickly
a firm or individual. A cooperative that              in the initial stages. Early legal notices may
proactively analyzes risk factors on a regular        include motions that will affect the
basis has the flexibility to accommodate              cooperative’s ability to protect its interests,
changing scenarios, such as last year’s               so it is important to monitor the situation
extremely volatile input markets.                     closely.
        In those circumstances, it is                          A cooperative can better minimize
especially important to know the limits of            losses and protect or enhance its position,
vendors and customers and to understand               Sargent said, if it can quickly gather
which requirements are non-negotiable for             information on all counterparty business
the cooperative, Bohbrink said. Policies that         transactions, including recent history,
describe these limits and internal                    current accounts and contracts and
communication requirements support the                upcoming commitments.
effective execution of these strategies.

                                 Lenders positive on ag outlook

        Given the trends in emerging                          However, continued economic
markets, most lenders and mid- to long-term           uncertainty will affect the credit markets,
investors have positive views about                   Bahr stressed. Significant pressure on
agriculture, according to Antony Bahr,                commercial and investment banks because
senior managing director with the Captial             of higher minimum capital requirements is
Markets Division of Cobank. As part of his            likely to continue well into 2010. Banks will
update on capital and credit markets, Bahr            be rethinking their risk management models,
noted that commodities are seen as a good             and internally restructuring and
internal hedge to other institutional                 deleveraging.
investments. Nonetheless, current trends                      Many agricultural cooperatives are
affecting business deals include lower                feeling the impact of the past year’s
leverage and higher equity levels, tighter            economic downturn through changes in
covenants, original-issue discounts and               market demand. Consumer food-purchasing
higher fees.                                          patterns have shifted. Consumers are eating
        Although credit pressure has                  more meals at home, while sales of value-
emerged in the dairy and ethanol sectors, the         priced products have strengthened, said
Farm Credit System is in a relatively strong          Frank Bragg, CEO of MBG Marketing.
position, said Bahr. CoBank has been                  However, MBG – which primarily markets
successful in attracting other banks and              fresh and processed blueberries for growers
investors into customized financing                   in the Upper Midwest and the South – is
structures. Strong risk-management policies           well-positioned to respond to these shifts in
at a cooperative make its loans more                  consumer preferences.
attractive for syndication.                                   To meet the growing consumer focus
                                                      on health and wellness, the cooperative has



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partnered with a South American firm and              program involving Walmart. It plans to
growers in California to market fresh berries         expand the program during next summer’s
year around under the Naturipe Farms                  peak growing season. The co-op is also is
brand. Last year, MBG capitalized on the              focusing on “value retailers” by offering
interest in fresh local foods with a successful       larger packages of frozen berries.

                                     Marketing sustainability

        Consumer preferences have also                        Michael Cook, an ag economist at
contributed to an increased focus on                  the University of Missouri, presented a
sustainability within the business world.             conceptual framework that links a
David Darr, vice president of sustainability          cooperative’s marketing, strategy and
and public affairs at Dairy Farmers of                governance. These activities are more
America (DFA), described how the co-op                integrally connected in cooperatives than
has identified sustainability as a competitive        they are in private or investor-owned firms,
strategy that helps deliver value to its              he observed.
cooperative members. Sustainability has                       Co-op directors must have the ability
moved to a holistic view of a product’s life          to probe and ask hard questions if their
cycle and encompasses the “triple bottom              cooperative is to navigate challenging
line” perspective of impacts on the                   economic times, Cook continued. Such
environment, the economy and society.                 questions are driven by a clear concept of
        Conducting business through the lens          the cooperative’s strategy: the integrated,
of sustainability will require more                   externally oriented concept of how the
information and a greater degree of                   cooperative will accomplish its objectives.
transparency with consumers than in the               Cook discussed the components of strategy
past, Darr said. DFA has a large                      development, including market and product
environmental footprint, so being proactive           definitions, structures, timing and the
on sustainability issues is an integral part of       economic logic and results.
the co-op’s strategic plan.

                                Energy and environmental issues

         Agriculture’s link to the energy             incurred by farmers. The election cycle and
sector is providing a significant set of              the focus on the health care debate are
opportunities and challenges for farmer               presenting significant challenges to the
cooperatives. David Ladd, manger of                   passage of an energy bill, Ladd noted.
government affairs at AgriBank, FCB,                           An “on-the-ground” perspective of
provided an assessment of the current                 environmental credits and how they can
political considerations affecting ongoing            work was presented by David Miller,
efforts to create energy policy legislation.          director of research at the Iowa Farm Bureau
         Legislators are grappling with               Federation and chief science officer for
questions about the trade-offs between                AgraGate, an Iowa Farm Bureau entity that
cropland and forested acreage for carbon              aggregates carbon credits. AgraGate is the
sequestration, the influence of policy on             first licensed aggregator on the Chicago
farmers’ cropping decisions, and the pass-            Climate Exchange (CCX), handling about 6
through costs that could potentially be               million carbon credits annually.



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        Miller explained that while 7 percent       have currently volunteered about 16 million
of U.S. greenhouse gas emissions are                acres in CCX, or only 1.4 percent of the
generated by agriculture, agriculture and           potentially eligible working lands.
forestry account for 11 percent of the                      Many issues surround carbon offsets,
nation’s carbon sequestration. This gives           such as quantification methodology,
the sector a net 4 percent sequestration rate       verification, permanence and enforcement.
that could be used for credits in a cap-and-        As the carbon market matures, continued
trade program adopted to manage                     opportunities are likely to emerge for the
environmental performance. U.S. farmers             agriculture and forestry sectors.

                                     Biofuel opportunities

         Biofuel development continues to be        He based his comments on experiences with
part of the mix of energy-related                   Inbicon’s wheat-straw biomass refinery
opportunities for agricultural cooperatives.        operating in Denmark. Johnson suggested
Randy Kyle, of Kyle Consulting Group Inc.,          that a separate cooperative structure that
described his efforts on behalf of Landmark         procures feedstock from the farmers and
Services Cooperative, exploring the market          sells to the end user may be an effective way
potential of aggregation and processing of          to deal with the many harvesting, quality,
biomass for commercial electricity                  storage and pricing considerations.
generation. Landmark has responded to                        Ethanol production continues to be
overtures from the nearby University of             significantly directed by federal and state
Wisconsin-Madison about providing                   policies. The existing corn ethanol capacity
biomass for a campus energy plant retrofit.         already exceeds the demand for fuel with a
Favorable transportation and storage options        10-percent ethanol blend, explained Wally
exist, but there is uncertainty around the          Tyner, an ag economist at Purdue
program’s ability to offer member returns           University. Production costs in the near
that would be sufficient to consistently            future for cellulosic ethanol – refined
attract the acreage needed for aggregation.         through either biochemical or
The interplay of prices for oil, corn and           thermochemical conversion processes – are
beans, other inputs, the program’s financial        likely to remain more costly than are those
viability without Biomass Crop Assistance           for corn ethanol, he noted. Market
Program (BCAP) payments, and alternate              uncertainty will stymie investments in
uses for crop residues are uncertainties that       second-generation biofuel plants unless new
would need to be addressed.                         government programs for fixed or variable
         Larry Johnson of Inbicon, a biomass        subsidies, purchase contracts, or loans and
technology development firm, provided an            grants are developed, Tyner said.
industry perspective on biomass potential.

                          Adjusting to slow down in organic market

        Adapting equity strategies to support       foods marketing co-op, is to provide pricing
cooperative growth opportunities requires a         that supports farmers based on ecological
clear understanding of the interests of the         and economic sustainability, said Jerry
cooperative members. A central goal of              McGeorge, the co-op’s director of
Organic Valley, the nation’s largest organic        cooperative affairs. Maintaining this focus



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has been facilitated by sales growth rates of        successful equity program for Organic
20-50 percent during the past 12 years.              Valley, and now comprises 45 percent of its
However, organic sales nationwide leveled            equity mix, McGeorge said. This higher
off this past year, and Organic Valley is not        level of non-member equity has been
optimistic that double-digit growth rates will       acceptable to the board because the
return soon.                                         preferred stockholders do not have member
         Organic Valley’s capital base plan          voting rights.
requires that members make equity                            McGeorge noted that because
investments in preferred stock, based on the         Organic Valley’s focus is on serving its
value of annual deliveries. This plan was not        current and future professional farmers,
supplying sufficient equity to support               consideration of Organic Valley’s market
Organic Valley’s growth, so a preferred              valuation is secondary to cooperative
stock series was marketed to outside                 business priorities. Much of the
investors who support the goals and values           cooperative’s profit has flowed back to its
of the cooperative.                                  producer members, and the cooperative will
         The co-op preferred stock offers an         continue to manage its finances with the
annual dividend at a fixed rate. While stock         goal of maintaining the independence that
redemption is made at the board’s                    comes from farmer control over equity, he
discretion, the board has honored                    said.
redemption requests and maintained investor
confidence. It has been an extremely

                                  Brand is co-op’s ‘umbrella’

        Paul Stajduhar, Ocean Spray’s vice           generation farm families, the review process
president for corporate strategy and business        resulted in nearly all the growers agreeing to
development, described how the cooperative           invest larger amounts of equity in the
has averaged a 6 percent annual sales                cooperative to maintain 100 percent patron
growth since 2000, with more than 90                 control. Plans to assure adequate fruit supply
percent of its sales now coming from                 as the cooperative grows were also
branded products. The brand is the cranberry         developed.
co-op’s “umbrella,” noted Stajduhar,                         Branded and non-branded fruit
allowing smaller growers to thrive and               pools, a non-patronage fruit reserve and the
providing members the value they seek from           development of cooperative-owned land
the cooperative.                                     reserves for future production are all
        To support profitable brand growth           approaches that are expected to provide
in the future, Ocean Spray recently re-              Ocean Spray with the flexibility to meet its
examined its equity options. While its               future growth goals.
membership runs the gamut from
investment-oriented landowners to multi-




This article also appeared in the May/June 2010 issue of Rural Cooperatives magazine



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