Farmland's Trouble: Near End for Co-Ops?
Jun 9 11:35am ET
By Chris Stebbins
CHICAGO (Reuters) - Since the Great Depression of the 1930s, farmer-owned cooperatives have helped individual farms hold their own in a marketplace dominated by giant corporations.
Some, like Ocean Spray (cranberries), Land O' Lakes (butter) and Sunkist (oranges), did their jobs so well they became huge multi-billion dollar behemoths themselves.
But a high-profile bankruptcy filing by one of the biggest such co-ops last week has raised new worries about their ability to compete in a cut-throat pricing environment in which quick financial maneuvers are needed to survive.
The 73-year-old Kansas City-based co-op Farmland -- actually a network of 1,700 smaller co-ops owned by some 600,000 farmer-members in the United States, Canada and Mexico with almost $12 billion in sales last year -- failed to meet a $10 million loan payment due last month and filed for Chapter 11 bankruptcy protection.
Industry experts said Farmland's filing does not necessarily sound the death knell for cooperatives. Those that remain focused, and resist the temptation to provide everything to everyone, may still survive. But many need to move out of their stodgy old management styles and adopt to a harshly competitive environment.
"The question is: can they adapt fast enough as we consolidate industrialized U.S. and global agriculture?" said Mike Cook, an economist with the University of Missouri who specializes in cooperatives.
Before its Chapter 11 filing, Farmland had sold off assets like its grain exporting business but also resisted selling off its meat business, seen as its crown jewel, to pork giant Smithfield Foods Inc.
In a sign of the times, Smithfield, just days later, closed on the purchase of an Italian food maker. The acquisition, Smithfield said, "fits perfectly with our strategy of focusing on the value-added, high margin segment of the business."
Farmland managed to turn Black Angus into a name brand, but it's still saddled with big portfolio of commodity type meat products that compete with more heavily advertised brand names. It also is heavily invested in money-losing businesses like fertilizer, sold to its financially strapped farmer-members.
Many farmer-owned co-ops, which unite to expand volume buying power for farm supplies and also sell collectively to customers like grocery stores, are struggling to survive in the face of stagnant sales, lower revenues and operating losses.
Farmland, with its almost $12 billion in sales last year, stands at No. 170 on the Fortune 500 list. But it lost $32.3 million in the six months ended Feb. 28, compared with a $20.3 million loss a year earlier.
Other co-ops are also struggling. The U.S. Agriculture Department, in a June 2001 report on the 100 largest farmer cooperatives, said big co-ops like Farmland that provide a range of products and services saw their net profit fall 60 percent to $134 million in 1999 from $337 million in 1998.
Hundreds have disappeared. In 2000, there were 3,345 farmer-owned cooperatives, compared with 3,791 four years earlier. Co-ops in search of economies of scale continue to merge or form alliances. And experts agree that they must continue to do so if they hope to succeed.
NEW FORMS OF COOPERATION?
Going it alone is more difficult. Farmland was crushed by debt built up in the early 1990s as it aggressively expanded, striving to become not just a food company with retail meat brands like Black Angus beef but a full-service agribusiness -- supplying fertilizers, feeds and fuels as well as buying its members' grains, cattle and hogs.
Its timing was unlucky. A glut of grain and meat in the late 1990s hurt both margins and exports, while lower farm prices hurt fertilizer use and idled expensive plants.
"To be competitive in the world marketplace or even in a regional marketplace, companies don't have all the resources and all the connections. They need to team up," said David Burton, director of the Arthur Capper Cooperative Center at Kansas State University.
Agribusiness corporations -- under the same cost pressures as big co-ops -- have also pushed for more co-op "partnerships" and investments. Archer Daniels Midland has long been a leader in this and other giants like Cargill Inc. and Conagra have also been active.
Not only do the larger companies bring more money to the table, but also the experience to manage an agribusiness. Cooperatives are run by their boards of directors, in most cases farmer members, who often may lack the business savvy of corporate managers.
Traditional co-ops like Farmland or grain cooperative CHS, for example, also have "open" membership reflecting grass-roots democratic principles. But such unwieldy organizations are giving way to a leaner new generation of co-ops, dubbed "new gens," which require member-farmers to meet specific production and delivery requirements.
Experts say the driving factors behind such new forms is the ability to move and make decisions more quickly, much like a private corporate management. Some "new gens," such as Dakota Growers Pasta, are taking the evolution even further and becoming common stock corporations.
"We'll see a lot of interest among the traditional co-ops justifying their existence and we'll see new ones develop," Cook said of the outlook for farmer-owned cooperatives. |
