Joe Farmer, Agribusinessman : Farm-Crisis Survivors Harvest the Profits of Food Processing by Investing in Co-Ops

CARRINGTON, N.D. â€”  Just outside town, by the railroad tracks, stands a year-old, $40-million factory made of corrugated metal. The local crop of durum wheat, from points all over the wide horizon, is milled, pressed and shaped here into linguini, rotini and lasagna.

The owners of Dakota Growers Pasta Co. are the farmers themselves, 1,042 of them, who bought in both with money and a promise to deliver quality grain to their new venture.

Ten miles north through the prairie on Highway 281, the freezer in the reception room of the North American Bison Co-Operative is filled with buffalo steaks and roasts, wrapped for sale. The stockholders must guarantee to raise and deliver the animals that are slaughtered here for meat.

Both North and South Dakota and Minnesota, meanwhile, are dangling tax breaks in a desperate duel to land a new manufacturer of corn sweetener and cornstarch--yet another consortium of growers.

Throughout the nation’s midsection, excited talk flows about such farmer-owned companies, whose business is to finish the fruits of the land into refried beans and tacos, frozen French fries and pizza dough balls, buffalo burgers and spaghetti.

“Out here, we call it co-op fever,� said Jack Dalrymple, a grower, North Dakota state legislator and a board member and investor in four--�so far�--processing cooperatives.

The agribusinesses are providing employment in a region that could certainly use it. The farmer stockholders hope the businesses will allow them to keep their own jobs on the land as well, bringing in income in years when their harvests do not.

The new breed of co-ops cut out the middlemen who have been wringing by far the largest profit out of the huge American food industry. Processing food generally provides about six times the rate of return that growing it does.

Around the nation, farmer-manufacturers are not unknown: Ocean Spray cranberry juice on the East Coast, Delta Pride catfish on the Gulf Coast, Sun-Diamond raisins and walnuts in the West are all processed by the people who grow the raw material.

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But around the Great Plains and Upper Midwest, processing co-ops were rare until the last five years. Co-ops were generally thought of as groups that came together to purchase supplies rather than market a product.

The bad feelings among farmers toward middlemen date back to the earliest days of settlement. But even the Nonpartisan League, which was a political powerhouse here in the early half of this century, went no further than advocating state ownership of grain elevators.

Now the boom is picking up both speed (more than 20 new co-ops in North Dakota alone over the last four years) and sophistication. Around Moorhead, Minn., for example, farmers who double as sugar-beet refiners dream of also constructing a flour mill for the local wheat--and then a bakery that would use both products to make cakes and cookies for grocers’ shelves.

The most fervent see growers’ co-ops coming together, as they have elsewhere, to form major food companies someday. The merely enthusiastic envision joint ventures with the traditional giants of the industry.

On the floor at Dakota Growers, pasta flows like a waterfall off Italian presses, while workers pack the dried product for private labels, such as the Grand Union supermarket chain, that make up 35% to 40% of their business. The pasta also goes to food services and restaurants, such as Olive Garden and Italian Kitchen. The rest finds its way into the bright blue boxes of the co-op’s brand, Dakota Growers, which is available at several Southern California supermarkets.

The plant is operating near 90% capacity, said general manager Timothy Dodd, who has extensive experience in the pasta business. The building, which opened in February, 1994, was designed to be expandable to double production. And 131 employees have been hired--no small number in Carrington, population 2,600.

“It should have happened 20 years ago,� said Donald Senechal, a food industry consultant based near Boston who has watched his tiny North Dakota hometown waste away.

In a way, it took the farm crisis of the 1980s to transform a wide swath of produce cultivators into food-industry entrepreneurs. The co-ops were born of desperation as foreclosures and farm auctions swept the Midwest.

The step into processing was not an easy one to take. This Dakota territory is just three generations away from the homestead, and tradition counts. At least one town in these parts boasts more stars-and-stripes than stop signs. Baseball fans follow the American Legion as closely as the American League; the radio station broadcasts polka standards.

When it came to business, however, staying set in their ways didn’t seem to be an option for survivors of the Farm Belt shakeout, who were working more and more land after small farms failed by the score. “The way agriculture has been going kind of forced us into it,� said Rodney Nelson, 29. Nelson tills 4,000 Red River Valley acres near the town of Amenia with his father and brother. He also owns stock in three co-ops.

Two things happened after the fall. Those who were left with large holdings could accumulate the money to invest in processing. And the farmers still in business were exhausted, so diversifying beyond tilling the soil had strong appeal.

“We’ve been running ourselves ‘bout half ragged,� Nelson said. “We thought: There has to be a better way than farming half the county.�

In 1960, he pointed out, his father supported a family of five on 1,000 acres. Dad got the same price for wheat then that it fetches today, but a tractor that 35 years ago cost $5,000 now goes for $80,000. With cuts expected in the government subsidies that keep fields fallow, grain prices could dip still lower.

But Nelson’s 8,500 shares of stock in Dakota Growers give him a hedge against low durum-wheat prices. As grain prices fall, pasta profits--and hence his dividend from the pasta co-op--would likely go up.

Those in the thick of what the jargon-happy call the “value-added� co-op movement tend to already be affluent. But the generation of more wealth in these rural areas could, Senechal says, help preserve their agrarian flavor, while other changes--such as new crops--take decades to root.

“It buys time� for the American farm country, Senechal said.

Here, the roots of the new crop of co-ops were sunk in 1972, when a group of farmers from Minnesota and North Dakota bought a struggling beet-sugar production facility and turned it into a co-op known as American Crystal Sugar.

Their investment has grown twentyfold.

“It’s just been kind of a steady growth, no one big jump,� said Patrick Benedict, an investor and grower from Sabin, Minn. “Our lot in life has definitely improved.� One of his sons works as an engineer at the plant, as well.

The Minnesota Corn Processors co-op, begun in 1982, is one of the world’s largest producers of ethanol. The company operates facilities in Marshall, Minn., and Columbus, Neb.; each is slated for a major expansion.

The real explosion in processing co-ops, though, started 10 years later.

Dalrymple and other durum growers were worried about the effect of the Canada-United States free trade agreement, which would open them up to far more competition from north of the border. Dalrymple, who studied Western history at Yale University, had invested in American Crystal Sugar and wondered if the durum growers ought to go the co-op route.

In the wheat farmers’ case, however, a co-op meant building a factory and a hierarchy from scratch, not taking over an existing firm. It meant entering an established industry, not getting in on the ground floor of a new one.

“This was the cold, mean world,� Dalrymple said.

At first, the organizers had trouble getting farmers to their meetings. Then, an executive at a traditional pasta company was quoted as betting that he’d be able to buy the co-op within a year at 10 cents on the dollar--and as opining, for good measure, that lazy farmers who “work three months a year and go to Arizona the other nine months� would be unhappy running a processing business.

“All of a sudden,� Dalrymple recalled, “we had hundreds coming to hear us.�

Construction of the Dakota Growers factory began in November, 1993. Operations during the first, short fiscal year, from February through July of 1994, broke even, Dalrymple said. Since then, he added “we’re in the black,� he said. The company sells 10 million pounds of pasta each month.

Nelson, who bought 1,500 shares initially, advertised last summer in the Foster County Independent for more. He purchased another 7,000 units from five people, one of whom used the proceeds to buy shares in the corn processing co-op and four who were taking profits.

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Right now, the huge conglomerates that dominate the pasta industry are not quailing; Dakota Growers controls about 4% of the nation’s dried-pasta market.

But they are taking notice.

“We know about this. It hasn’t come into play with our business strategies, but it’s something to keep our eye on,� said Lynn Anderson, a spokeswoman for Borden. The pasta makers’ success has spawned much more interest in co-ops, including a direct competitor being organized in Leeds, N.D.

One small town, the southern Minnesota hamlet of Renville, already boasts three co-ops: Midwest Investors, an egg production operation owned by chicken farmers; Phoenix Composites, which makes soybeans into a hard fiber material and ValAdCo, a hog feedlot owned by corn growers who pooled their money to buy the facility and who contribute their produce to provide the meals.

ValAdCo is working with another co-op, venerable Farmland Industries of Kansas City, Mo., to start a slaughtering business, said Gary Sloan, senior credit officer at the St. Paul Bank for Cooperatives.

“Then they’ll control everything,� Sloan said, “from the corn to the chop.�

Of course, financial danger also lurks. “It’s a heck of a risk,� said Nelson, pondering his plunge into co-op holdings. “This could be my downfall, too.�

The most common co-op errors, veterans of the movement say, come when novices try to run an operation themselves rather than hiring someone with experience--or else pay too little to attract the most qualified managers.

Dodd came to Dakota Growers with milling and management experience at private firms in Minnesota and North Dakota. He also oversaw construction of a pasta plant in Kansas City for a partnership of Americans and Italians.

The co-op is a new experience.

“The rules change,� he said. “You’re not working for a corporate structure. Our owners are out here with the grain everyday. . . . You spend a lot of time on grower relations.�

More than once, he’s had to reject a shareholder’s wheat contribution because of poor quality. “When it happens, we have a problem,� Dodd said. “The owner is very upset. Luckily, I’ve had a board that stands behind management.�

For the most part, however, Dodd says the link between field and mill has improved the state of the durum. The co-op has published a guidebook with tips on how best to work the crop.

Now, the main challenge seems to be a minor one: putting the product in the kitchens of the grower-owners, who--like most of the locals--are overwhelmingly of Scandinavian stock.

“Getting Norwegians to eat pasta isn’t easy,� said Dodd, with a wince followed by a quick smile.

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Biggest Agricultural Co-Ops

By uniting in co-operatives, farmers squeeze the middlemen out of processing and marketing their products. Because the big money in agribusiness is in these value-added steps, co-ops give farmers a bigger share of the ag dollar.

Top 15 co-ops, ranked by 1993 revenue:

1. Farmland Industries. This Kansas City, Mo., company--better known by its generic trade name, Co-Op, markets oils, fertilizers, feeds, meats and petroleum products. $4.723 billion

2. Harvest States Cooperatives. This St. Paul, Minn., group markets and processes grains, meats and pet foods. $3.433 billion

3. Agway. This Syracuse, N.Y., co-op sells feeds, fertilizers and farm chemicals, animal health products and petroleum products. $3.149 billion

4. Land o’ Lakes. One of the nation’s most familiar dairy brands is produced by this Minneapolis-based co-op. $2.733 billion

5. Associated Milk Producers. This dairy co-op, based in San Antonio, has 4,300 employees. $2.652 billion

6. Cenex. Much of this Inver Grove Heights, Minn., co-op’s business is in petroleum products, but it also markets fertilizers, agricultural chemicals and farm equipment. $2.048 billion

7. Countrymark Cooperative. Based in Indianapolis, this co-op makes farm supplies and markets grains and field beans. $2.007 billion

8. Mid America Dairymen. This co-op based in Springfield, Mo., is a leading Midwestern dairy. $1.832 billion

9. Gold Kist. With 13,000 employees, this Atlanta-based co-op markets poultry, pork, pecans, fertilizers and farm chemicals. $1.401 billion

10. Ag Processing. This Omaha-based co-op markets grains and field beans. $1.219 billion

11. Ocean Spray. The Middleboro, Mass.-based group markets cranberries and other canned fruits and juices. $1.137 billion

12. Sunkist Growers. California’s biggest co-op, based in Van Nuys, markets fresh fruit and juices. $1.055 billion

13. Southern States Cooperative. Based in Richmond, Va., this co-op makes and markets feeds and fertilizers. $0.937 billion

14. CF Industries. This Long Grove, Ill.-based co-op is a leading producer of fertilizers. $0.906 billion

15. Darigold Farms. This prominent brand-name dairy producer is based in Seattle. $0.878 billion

Sources: National Cooperative Bank, Standard & Poor’s

Where the Co-ops Are

Top 10 states, by number of agricultural co-ops*

1. Minnesota: 404 2. N. Dakota: 302 3. Texas: 291 4. Iowa: 279 5. Wisconsin: 248 6. Illinois: 224 7. California: 200 8. Kansas: 172 9. South Dakota: 170 10. Nebraska: 157

Top 10 states, by total revenue of agricultural co-ops*

1. California: $8.3 billion 2. Iowa: $6.5 billion 3. Wisconsin: $6.4 billion 4. Minnesota: $6.2 billion 5. Illinois: $4.3 billion 6. Nebraska: $3.3 billion 7. N. Dakota: $3.1 billion 8. Kansas: $2.9 billion 9. Texas: $2.5 billion 10. Florida: $2.4 billion

* Co-op revenues are counted in the state where they were generated.

Note: Data is for 1993.

Source: U.S. Department of Agriculture

Researched by JOHN BECKHAM / Los Angeles Times