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ARCHIVED  October 8, 1999

Co-ops branch out with customer in mind

Cooperatives, or co-ops, trace their beginnings back to early America, Forced to evolve in order to remain viable, to this day, they remain an integral part of the agricultural economy of Northern Colorado.

Historically, members formed co-ops in order to access services, supplies or markets not available to them individually. These members owned and operated the co-op for their own benefit.

Today, co-ops function in much the same way.

“Agricultural co-ops are owned and controlled by their customers ãfarmers and ranchers,´ said Richard King, executive director of the Colorado Cooperative Council, a nonprofit trade association for agricultural and rural service co-ops. “You have to be a customer to be a member; there are no absentee stockholders, no foreign interests.”

The rationale behind co-ops reads like a lesson in microeconomics: By acting together, members can create economies of scale and bargaining power. Co-ops can negotiate for volume discounts or special terms from suppliers. On the marketing side, members can lower their distribution costs and sell their products in amounts that will attract better offers from purchasers.

Two main types of ag co-ops exist: the supply co-op and the marketing co-op. A supply co-op purchases or manufactures inputs, such as herbicides, pesticides, diesel fuel, propane, seed and feed, on behalf of its producer-members. A marketing co-op sells the producers’ products. It also may provide processing services, such as milling.

A co-op functions like any other business. It incorporates under state laws, establishes bylaws, elects a board of directors, pays taxes and generates profits.

A popular misconception holds that co-ops offer their goods or services at or below market cost on behalf of their members. But, in order for co-ops to exist, they must generate some earnings to continue operations. Co-ops do mark up goods and charge handling fees. However, the margins don’t go to a middleman, co-ops take the margins and use them to conduct business or return them to their members at the end of the year, if a profit is made.

The co-op differs from traditional corporations mainly in two respects. First, the co-op follows a different corporate philosophy. King said that although co-ops strive to generate profits, they emphasize customer service.

“Because there is local ownership and control, the main focus is customer service not a profit,” he said. In fact, King attributed co-ops continued existence to their emphasis on customer service.

Robert Mekelburg, general manager and CEO of Agland Inc., an Eaton-based co-op with $70 million in annual sales, summed up the mission of co-ops this way: “They are owned by members, for members’ benefit.”

Co-ops also differ from traditional corporations in the distribution of earnings. If a co-op generates profits, then it typically retains a portion to cover operating costs, but, unlike a corporation, it will pay out additional earnings to its customers, the member-owners. These dividends, usually called patronage, are paid out in proportion to a member’s use of the co-op, in particular, a member’s use of a profitable commodity line.

Each co-op creates its own patronage schedule in its bylaws. Terry Seelhoff, general manager of Roggen Farmers Elevator Association, a Weld County marketing and supply co-op, said that at the end of the year, Roggen will determine the rate of return for each product line.

The co-op then pays out 35 percent of the return in cash and 65 percent into the member’s equity in the co-op.

For example, if the petroleum product line will pay a return of 5 percent, and a member purchased $10,000 of petroleum in the year, that member will receive $500 in dividends. Thirty-five percent, or $175, is paid out immediately in cash. The remaining 65 percent, or $375, will remain in the member’s equity account.

Profits retained in the equity account are used to finance on-going operations, but are eventually paid out on a revolving basis. Roggen is currently on a 10-year schedule; in 2009, in the example above, the member will receive the remaining $375 of his 1999 dividends as the equity is retired.

Membership requirements, too, differ among individual co-ops. Roggen, which has 640 members, requires an applicant to be a producer, reside in its trade territory and pay a $50 one-time fee.

Virginia Stark, office manager of Poudre Valley Cooperative Association, a Larimer County co-op, said that the co-op has two kinds of members, voting and nonvoting. Its 2,810 common stockholders with voting rights must derive 51 percent of their income from agriculture. Preferred stockholders become members by opening an account and purchasing one share of stock. Preferred stockholders can’t vote.

Co-ops face many challenges, few of which are unique to them. “We face the same challenges as any business: labor costs, labor shortages, competition, the economy,” Mekelburg said.

Most concerns are similar to those faced by any agricultural businesses. The shrinking agricultural base is prime among them. “Land is being consumed by urban development,” Mekelburg said.

And dwindling land means that there are fewer customers to service, King added. “Only 2 percent of Colorado’s population is still on the farm,” he said.

New environmental regulations also pose a challenge. Co-ops must comply with increasing federal environmental regulations while battling record-low commodity markets.

As a result, many co-ops are looking to nontraditional ag business to make money. For example, Agland now owns convenience stores, car-care centers, car-wash facilities and tire shops.

Poudre Valley owns an Ace Hardware franchise, which sells hardware and gardening supplies.

Mekelburg said that one-half of Agland’s business is derived from nonmembers. Although they can’t always compete with large, retail farm-supply stores, they have an advantage in their customer service focus, he said.

Co-ops are also making a move toward consolidation, King said, “As there are fewer and fewer producers and as more land is converted to urban use, a lot of consolidation and mergers among co-ops will take place.”

Roggen exemplifies this trend. Since 1989, the co-op has purchased or merged with four ag concerns: American Fertilizer and Chemical Co., Consumers Oil Co., Bennett Grain Co. and Union Equity Elevator Inc.

In an effort to reduce costs, many co-ops have entered into joint ventures. Agland began a joint venture with Farmland Industries, a regional co-op based in Kansas City, in July 1998. Agland-Farmland Feed LLC mills and manufactures custom-formulated bag and bulk feed at a facility in Eaton.

Both Agland and Farmland market the feed products under their own brand names. The joint venture enables both firms to lower manufacturing costs by running one facility at a higher capacity rather than two facilities at a lower capacity while also retaining autonomy in marketing their products.

The effort is part of the evolution that keeps co-ops such as these focused on the future but mindful of the past.

Cooperatives, or co-ops, trace their beginnings back to early America, Forced to evolve in order to remain viable, to this day, they remain an integral part of the agricultural economy of Northern Colorado.

Historically, members formed co-ops in order to access services, supplies or markets not available to them individually. These members owned and operated the co-op for their own benefit.

Today, co-ops function in much the same way.

“Agricultural co-ops are owned and controlled by their customers ãfarmers and ranchers,´ said Richard King, executive director of the Colorado Cooperative Council, a nonprofit trade association for agricultural and rural service co-ops. “You have…

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