Ag needs fuel cooperative approach

In Northern Colorado, where agriculture strongly influences local economies, the agricultural cooperative — the "co-op" — stands out as a unique creature among other agri-businesses.On the one hand, the co-op is a business form much like that of the corporation. It incorporates under state laws, creates bylaws, elects directors, employs day-to-day managers, makes a profit and pays income taxes,
On the other hand, the co-op is an entirely different species.
"What distinguishes a cooperative is that the users of the cooperative, the customers, also own the business," explained Richard King, executive director of the Colorado Cooperative Council, a voluntary, nonprofit trade association for agricultural cooperatives in Colorado.
Just like owners in other businesses, owners of a co-op, generally called members, decide policy, elect a board of directors and often receive dividends paid on profits.
But unlike other businesses, everything in a co-op is decided on the democratic principle of one-member, one-vote, and the dividends, usually called benefits or patronage, are paid in proportion to use of the co-op, King explained,
An ongoing dilemma co-op owners face is whether to price the goods and services below that of their competitors, King said.
"But then maybe you don˜t make enough to update your equipment to be competitive down the road. Co-ops have to generate revenue to survive, and yet the individual producer expects as cheap a price as possible. Balance. That˜s the great dilemma," King said.
Many co-ops include voting and nonvoting memberships. In the case of agricultural cooperatives, however, King said the law requires that "the (voting) member must be an agricultural producer or derive a significant portion of income from agricultural products."
Most agricultural cooperatives got started in the 1920s and 1930s because farmers weren˜t able to obtain supplies and get their goods to market, King said.
"A lot of economists say that co-ops only succeed when there is a failure in the marketplace, either no services or only one or two. Co-ops solve that failure," King said.
Colorado˜s largest agricultural cooperative is Agland Inc., founded in 1905 in Eaton.
Since inception, the company has sustained a steady growth that culminated this year with total revenues reaching $73 million. That˜s a milestone for the co-op and a 7 percent increase over 1996 revenues, said General Manager Bob Mekelburg.
"Our strong growth over the years has certainly been helped by our geographic location, but more importantly I think, it˜s been the fortitude of the membership to stay and do some different things, to diversify and grow," Mekelburg said.
Other signs of Agland˜s growth rationale include the recent purchase of a 12,000-square-foot facility in Gilcrest to augment its crop production center there and the consolidation in August of Agland˜s feed mill operations in Eaton with those of Farmland Industries in Ault.
Primarily a supply cooperative, Agland operates a crop-production division, field agronomy services and a petroleum business that provides almost half the co-op˜s annual revenue. It also markets feed and beans for its members.
But perhaps most visible to the non-agrarian public are Agland˜s retail operations: convenience stores in Greeley and Eaton, car-care centers, tire sales and farm and ranch supply stores that sell feed, tack and hardware.
American Pride Cooperative is "almost a carbon copy of Agland," said Al Shivley, president and CEO of the Brighton-based cooperative. "Only they˜re larger than we are," he added, citing revenues of almost $30 million last year.
American Pride includes about 8,000 members, including 1,600 ag producers. Membership costs $10, "the same $10 it cost back in 1936" when the co-op was formed, Shivley said.
"I˜ve had a number of (urban) members come in after they received a check for $26 (in dividends) and say they˜d like to buy more stock if they can get that return on their ($10) investment. But it doesn˜t work that way," Shivley said.
American Pride˜s retail operations include an Ace Hardware in Brighton that Shivley said grossed about $2 million last year.
"The Ace Hardware (parent) corporation is a co-op of hardware stores. Each individual store is not run as a co-op because they are owned individually, like private enterprises, but the parent corporation is a cooperative, like Farmland Industries in Kansas City," Shivley said.
The character of a co-op˜s memberships and its distribution of profits vary from co-op to co-op and are determined by its bylaws.
However, Art Nolen, general manager of Poudre Valley Cooperative Association in Fort Collins, said the law requires that a co-op distribute at least 20 percent of its profits back to members each year.
Nolen said the Poudre Valley co-op distributes 40 percent of profits through dividends paid in three commodity lines: fuels, general merchandise and fertilizers and chemicals, Each commodity line pays a rate set by annual audit, he said.
For example, if it˜s determined that the fertilizer line will pay a 6 percent return, a member who has purchased $20,000 in fertilizers that year will receive $1,200, taxable to the member. Forty percent, or $480, is paid immediately, and the remainder, $720, is deferred for operations, Nolen explained.
Another, yet different, type of agricultural cooperative is the credit cooperative.
"Our membership, or stockholders, are our customers. Because of our federal charter to serve only farmers and ranchers, they are the only people who own stock," said Mike Flesher, vice president and corporate secretary of Mountain Plains Farm Credit Service in Greeley.
Flesher explained that the lending institution is a regional association of the national and international Farm Credit System and serves as the management structure for the old Federal Land Bank Association and Production Credit Association, which were placed under joint management in 1986.
About three-fourths of the co-op˜s $450 million loan portfolio is in real-estate ag loans to ag producers in Northern Colorado, whether full-time or part-time, Flesher said, In fact, Flesher˜s office has "roughly 50 percent of all the ag real estate loans made in this area," he said.
The remainder of the portfolio, or about $112.5 million, is in operating and equipment loans.
"Our existence came about in 1917 because of the lack of commitment shown by commercial banks at that time to finance agriculture. They would be there to make agricultural loans available in the good times, but would disappear in the bad times," Flesher said.
Funding for Farm Credit System loans comes from farm credit bonds sold principally to institutional investors on Wall Street, Flesher explained.
"Commercial banks are tied to local deposits before they can make loans. We don˜t have that restriction. We˜re able to bring capital from the main capital center of the U.S. to capital-starved, if you will, rural America," Flesher said.
Membership in the co-op occurs when a farmer or rancher obtains a loan. The membership fee, or "stock requirement," is based on 2 percent of a loan balance or $1,000, whichever is less, membership continues as long as the loan exists, but once a loan is paid off, the stock is redeemed and membership ceases.
Current membership is about 1,900, Flesher Said. All are ag producers and, as members, have one vote, elect directors and set general policy.
Unlike other co-ops, however, the lending co-op has no patronage program, or dividend payments.
Agricultural cooperatives are growing, King said, but in the same manner as agriculture itself — fewer but larger, with a lot of mergers.
Some new co-ops are springing up. The Mountain View Harvest Cooperative recently formed and acquired Gerard˜s French Bakery in the Del Camino portion of Weld County. But new co-ops are few and far between, probably because "the most difficult thing is to fund a cooperative because there are no absentee investors," King said. "It is literally the people who are going to use the cooperative who raise the funds."
But when a co-op is profitable, it returns those profits to the members — the users, the owners — so the money stays within the agricultural community, and that˜s a real positive, King said.