Bill Patrie is the rural development director for
the North Dakota Association of Rural Electric Cooperatives and the North Dakota
Association of Telephone Cooperatives. He is also the director of the Dakotas
Cooperative Development Center based in Mandan, ND.
Bill
has been involved in the start up of numerous value-added cooperatives in North Dakota
including Dakota Growers Pasta in Carrington, North American Bison in New Rockford, the
ProGold, LLC near Wahpeton and Central Dakota Growers (potato cooperative) in Jamestown.
Patrie served one year as interim CEO of Northern Plains Premium Beef. Bill received a masters degree in public
administration from Ball State University in Muncie, Indiana; and a BA degree in political
science with a minor in religion from Anderson University in Anderson, Indiana.
To
contact Patrie: email: bpatrie@ndarec.com or
phone:
1-800-234-518.
Video tape copies of his speech are available through the QBCC.
***********************
Disclaimer from Patrie: The views presented here reflect my personal
opinions and beliefs only and are not endorsed by my employer or by the sponsors of this
conference. Let the listener/reader beware!
“New
Generation Cooperatives and The Future of Agriculture”
(Patrie began his address with a poem he
wrote reflecting his thoughts on the current situation facing farmers)
The Young Farmer
The young farmer looks at the rain outside and
searches for the remote,
That thing can hide.
Sinks into a chair, elbows on his knees
And clicks on the ag news on the old tv.
The reporter talks with a dreary tone ...
“beans, corn, wheat are all down.”
Argentina’s crop looks good, Brazil’s is
fine,
Australia’s rains came at just the right time,
the safety net is gone.
It’s every man for himself and he tosses the
remote on the tv shelf.
He walks through the kitchen and pushes open the
door,
The rain is heavier now, it is beginning to pour.
He runs across the muddy yard and the rain hits his
face and it hits it hard.
The truck door shuts like banging tin
And the rain on the roof makes a noisy din.
The engine starts with a soft little bark.
He pulls on the lights. It’s still half dark.
And drives to town, sixty miles away,
Parks his truck in front of an office building that
is mostly grey.
Sits down in a chair in a waiting room
Painted off-white colors of a newly built tomb.
When his name is called he choked back a sob.
This is the first time he has ever asked for a job.
Good
news! I am glad for this opportunity to share good news
with farmers. It is also good news to those of you who sell services to farmers and care
about their well being. The good news is this: through intelligent and courageous
cooperation the farmers of North America can redesign the agriculture and food production
system. In this new world which we will design together, farmers will be prosperous, rural
communities will thrive and the consumers of food products will trust us. Even in the
depths of this current farm depression, I believe in opportunity--opportunity so bright
its nearly blinding.
Bad
news --
I also bring bad news. The bad news is this: If we do not redesign the current system, the
production of commodities in North America by family farmers will be slowly but largely
displaced by commodities produced in other parts of the world. While this scenario does
not mean the loss of the food industry in North America, it does mean the end of
traditional farming as we have known it.
Why? Why
can’t farmers raise commodities like they use to? Many reasons can be given, but they
can be summed into three categories--public policy, perfect competition and technology.
Public
policy --
Public policy is in part aimed at insuring that national populations have enough to eat at
prices people can afford. If the general public in United States and Canada cannot be made
to fear hunger in real ways as a consequence of losing farms, or if they cannot be made to
fear high prices, they will allow the loss of the farms.
I
do not suggest that Europe or Asia will ever allow the loss of farms and the consequential
reliance on imported commodities--they have seen food they couldn’t afford or no food
at all. But US and Canada are different--our vast and fertile lands under the skilled hand
of our industrious farmers have more than fed us all, and we have historically relied on
exports to carry away commodities we could not consume ourselves. Hunger and high food
prices are not top of the mind issues in the United States or Canada.
Our
two nations are democracies--representing overwhelmingly urban populations. Over time,
public policy will reflect the “will” of the people. It is only “over
time” because in fluid democracies the public, “will” can never be
precisely known, and the electorate allows contradictions
within positions. Public opinion is often wave-like, surging and retreating on any given
issue, but the shoreline for agriculture is moving in the direction of less importance. To
restate the bad news related to public policy regarding agriculture--If over time,
commodities can
The
theory of perfect competition --The
marketing price of a commodity will (over time and with competition) decrease to the
production cost. It has been my observation that farmers have frequently produced and
marketed below their cost of production since market prices could not be known at the time
of planting or breeding. Even two years of successive losses may not deter a farmer from
attempting to produce a commodity without a reasonable profit. But over time, bankers will
refuse to lend if profitability is based only on emergency or disaster payments.
Technology
-- Technology,
likewise is a threat to our current agricultural system. Technology was the fountainhead
of our prosperity. Farmers invented and adapted their way to extremely proficient farms.
In the 1930s one United States farmer could supply 9.8 persons in his own country and
abroad. By 1994, one farmer could supply 129 people in the United States and abroad. It
was technology that made this possible, the steam engine for shipping by boat and rail,
barb wire, the internal combustion engine, electricity, rural electrification, plant and animal genetics, herbicides, pesticides, portable refrigeration,
radio, television, communication technologies, jet
engines, and the Internet.
Technology
no longer belongs to only those North American farmers with the capital to buy it and
apply it. Trans-national corporations have nearly unlimited sources of capital to
purchase, develop and employ technology where ever they can make the most money.
Trans-national corporations currently control the food system in the United States and
Canada. Our national governments, and governments world wide, respond to the needs of
these companies by developing strategies that can produce commodities at the lowest world
wide prices. As farmers, there is something bothersome about this system of commodity
production at the lowest price. Perhaps it is the genetic memory of European serfdom.
Adjusting
the current system -- Many
in both of our countries believe the system only needs modest adjustment. Both nations
puff out their chests as protectors of the farmer-- suggesting either trade barriers or
collective marketing strategies that are designed to give “their” farmers an
advantage. They define external enemies and promise to fight them. By defeating these enemies, it will be better, they say, for their farmers.
Many
national farm and commodity groups weigh into the arguments of who is right and who is at
blame by separating out their constituents or commodities for preferred treatment. All of
this amounts to a din of voices childishly quarreling in the pilot house of the
“Titanic”. The passengers on this ship need to quit quarreling and change
direction.
Toward
more perfect competition -- The
quarreling has been over direction. The assumed direction is that government actions
should be targeted to helping farmers compete in the world market. The question has been
“ how?” If we could assume for a moment that farmers could agree on the
“how”, what would they win? Farmers would become lowest cost producers at the
highest possible volumes. This way out leads back in!
How
to give farmers the ability to compete is, in itself, an absurd question. Farmer
competition is near perfect and cannot be made much better--in fact farmers want their
governments to make it less fair. Farmers currently compete with other farmers. Farmer to
farmer competition is based on individual ability to reduce production costs and increase
prices. Individuals then seek to cooperatively compete through organizational advantages
of size, supply, control, government support, regulations and customer perceptions and
preferences.
The
beneficiary of this robust competition is not the farmer. Try as they might to fix the
“system through adjustments” that make the competition “fairer” or to
“level the playing field,” most farmers will not likely survive the price
competition that is coming. Some processors will survive and thrive, some marketers will
be profitable. Most of the current participants in the world food system don’t need
to change much to survive. It is ironic that only farmers, and those who sell to farmers,
must change the system to preserve a place in it for themselves.
Help
from regional cooperatives not enough
-- Farmers own large regional cooperatives that market commodities or provide inputs. It
is natural that they look to these organizations to find ways to continue to farm. These
organizations are trying to gain efficiencies that can benefit the farmer. Regional
cooperatives are trying consolidations and mergers, acquisitions, and seeking public
investors, to gain maximum operating efficiencies to lower farmer input costs or increase
per bushel margins. Some are experimenting with value-added manufacturing. In spite of
these serious efforts, commodity production will not be enough for a farmer to live on.
All farmers, and the regional cooperatives they own, must understand the difference
between leaner and meaner and economic starvation.
Handling
and processing plants not enough -- Economic
starvation can occur even in a land of apparent plenty. The sight of a processing plant
that buys commodities was, at one time, a welcome sight. A main line railroad terminal
that could load unit trains was a sign of progress. Commodity handling and processing
facilities were signs of investment in the infrastructure of agriculture--an encouragement
to keep on farming because farmers believed their products were needed. In North Dakota,
three companies raced to build sunflower crushing plants. Sunflowers were worth $12 per
hundred weight. The plants now crush other oil seeds in addition to sunflowers and offer
$6.80 per hundred weight to get all the sunflowers they want. Sub-terminal elevators are
still going up in North Dakota, while wheat prices fall.
When
the last production side efficiency is gained, and the processor can get commodities
cheaper at another location, they will leave. The kill plants for cattle used to be in
Chicago at the rail heads, until IBP discovered it was cheaper to buy cattle near the
feedlots. Each town used to have a bakery until it was found to be cheaper to ship bread
by truck. Textile mills moved from the North Eastern part of United States to the South
where the cotton was grown and taxes were cheaper, only to leave for the Philippines and
Malaysia, where it became cheaper to make clothes.
The
lesson to be learned from observation is that having a processing plant built in your
neighborhood, that is not owned by farmers, is a sure signal that you are expected to be
the low cost producer. Instead of raising commodity prices, it may lower them. I have
personally seen profitable processing plants for milk and potatoes closed, with limited
resale value, so a company could gain a greater processing margin somewhere else.
Food
headed toward perfect competition -- I
have more bad news that is related to information technology, the Internet and brand
names. Advertising and brand name identification was once a way to secure markets. Service
was another. The Internet may well eliminate those traditional ways of market
differentiation. The Internet and information technology will likely change how people buy
food products. Shopping for groceries will get easier, and with the aid of computing
capacity inherent in the Internet, the consumer will force food companies into near
perfect competition. A buyer will, at the touch of a button, be able to select from dozens
of brands, which is the best performer at the best price, and have it shipped directly
from the factory to the kitchen door, without having read the label. The brand name and
logo may even be eliminated to avoid cluttering your computer’s memory capacity with
unnecessary information.
Doing
two things at once -- I
said I came with good news, so how do farmers get out of this mess? Think differently! They must do two seemingly
contradictory things at once. They should worry about all of the passengers as human
beings and design a system that will save as many as possible. Collectively, farmers
should not refuse to act because they cannot save everyone.
Turning
the ship
-- In the pilot house arguments, the prow of the ship never changed course because we
could not move the rudder. While declining in percent of the Gross National Products of
our two countries, Agriculture is still a huge economic sector. Turning this sector in a
new direction requires a great deal of force on the rudder--more force than farmers have.
They must find ways to make the rudder easier to turn. How can they do that? Ocean going
ships have massive rudders. With millions of gallons of water flowing by the rudder, the
rudder itself is hard to turn. Ocean going ships have a trim tab on the rudder which is
really just a very small rudder itself. By turning this small rudder, it catches water and
pulls the main rudder in the direction you wanted to turn, thereby steering the ship.
New
generation cooperatives the key to changing direction -- The trim tabs in agriculture
and the food system are new generation cooperatives. New generation cooperatives will
demonstrate a way to gain significant economic advantages for farmers and increase system
wide efficiencies and accountability in the information age. By this demonstration, others
will want to go there and add their pull to turn the main rudder.
Example of opportunity -- So where is the
brightly lit opportunity? I have compared the
dollars received per bushel for Western Canadian Amber Durum, by Canadians, # 1 Hard Amber
durum by United States producers and members of Dakota Growers Pasta (DGP). These are the
average actual dollars paid to producers in North Dakota and Manitoba on a per bushel
bases in US dollars adjusted for currency exchange rates and transportation differentials:
Year USA Canada Dakota Growers DGP versus USA DGP versus Can*
1994 4.67
4.92
5.95
+$1.28
+$1.02
1995 5.75
5.04
5.80
+$0.05
+$0.76
1996 4.53
4.28
6.52
+$1.99
+$2.24
1997 4.91
4.44
6.74
+$1.83
+$2.34
1998 3.00
2.94
6.64
+$3.64
+$3.70
Source,
Manitoba Agriculture, North Dakota Wheat Commission, USDA Ag Statistics, Dakota Growers
Pasta Company’s, 1998 annual report.
Why
does vertical integration work? Vertical
integration in the pasta industry by farmers allows the accumulation of profits at
whatever level they may be occurring, whether its in the production of durum, the milling
process, the manufacturing process or the distribution process. In the example of the new
generation cooperative used above, the net return per bushel to new generation cooperative
members fell only 10 cents from 1997 to 1998 even though the price per bushel paid to
non-members in the United States fell $1.91. That 10 cent drop may have been due to the
increased competition and price reductions in the sale of pasta.
Discipline
required to achieve success -- While
this good news is simple, achieving these results are complex. Vertical integration
through a new generation cooperative requires several disciplines that many farmers find
difficult.
Equity
investment -- The first discipline is an equity investment
proportional to the patronage of the cooperative. The farmer must purchase one equity
share for every single unit of production they intend to deliver. The equity investment is
at risk and can be lost. The farmer is the owner of the company, and under the cooperative
structure, must elect a board of directors who hire management and run it. Food companies
are not simple to direct.
Production
contracts -- The
second discipline requires a commitment to produce to a specified quality and volume and
to deliver to the processing facility. This is a binding contractual obligation between
the member and the cooperative he/she owns. The entire processing capacity of the facility
is supplied by members who have contracted to raise the commodity to be processed.
Rewards
-- These
two disciplines of equity investment and contractual marketing obligations create exciting
business rewards.
Share
appreciation
-- The most impressive of these rewards is the appreciation of share values. The initial
share price paid by producers in the new generation cooperative in the example above was
$3.85. That entitled and required the investor to deliver one bushel for every share
owned. Should a farmer wish to discontinue farming or raising durum, they have the right
to sell that share to other eligible farmers. These shares can appreciate or depreciate
based on actual earnings. The trade value of the share is usually 7 or 8 times actual
earnings. In this case, the new generation cooperative needed additional durum without
additional money and authorized a 3 for 2 share split. Even after that split, shares that
cost $3.85 are trading at $14 to $15. The share trading price has continually appreciated
even though there have been two subsequent offerings to raise additional equity at lower
than the trading price. Original members have purchased most of the new equity offered.
Single
taxation -- A
second benefit of these disciplines is single taxation. The cooperative passes through its
earnings to the members in the form of patronage for durum, thus avoiding federal
corporate income taxes on the value added converting durum to pasta.
Efficiencies
--
A third benefit is reduced procurement costs and associated efficiencies. Scheduling can
be done to insure timely and uniform delivery to the mill, reducing the need for on site
inventory storage and carrying costs. Quality is also assured, allowing the company to
sell product in advance of production knowing that the quality grain will be there.
Alliances
-- A
fourth benefit of this structure is the ability to form alliances with manufacturers and
marketers already in the business. Cotton growers in Texas bought a denim plant from a
brand name manufacturer and contracted back with that company to operate the plant and
market the blue jeans. It reduced the tax burden of the plant, assured a consistent supply
of cotton and provided better bottom line numbers to both the cooperative growers of
cotton and the denim manufacturer.
Examples
of alliances -- There
are two examples in the corn syrup business of these alliances. Minnesota Corn Producers
Cooperative at Marshall, Minnesota have accepted a preferred stock investment in their
company by Archer Daniels Midland and Pro-Gold of Wahpeton, North Dakota has signed a
management and operating agreement with Cargill.
The
United States’ fourth largest beef packer, National Beef, which is owned by Farm Land
Industries, sold an ownership position to US Premium Beef, a cooperative made up primarily
of beef feedlot operators. In this case, Farm Land Industries is a traditional federated
cooperative and U.S. Premium Beef is a new
generation cooperative. Both cooperatives have reported better earnings as a consequence.
Questions -- Several questions gnaw at most farmers about
new generation cooperatives:
1.
Is it a good investment of my money? Or, more recently, where will I get the
money to invest?
2.
Will I be trapped in my uniform marketing agreement if commodity prices
spike?
3.
If this is a good idea, why haven’t the big companies already done
it?
Answers
-- The
answers may have to be experienced to be believed but here is what I have found:
1.
Wise investment?
Dakota Growers Pasta Company reported a 28% average return on equity in 1998. Farming
generally returns 2% or less. There are examples of losses, however it appears that
investments in successful new generation cooperatives will earn more than a comparable
investment in land or equipment and is more likely to appreciate. Money is not easy to
come by, but corn growers who built Pro-Gold in Wahpeton North Dakota raised $51,000,000
and attracted another $49,000,000 from sugar beet cooperatives.
2.
Trapped at below market prices? It could happen but is not likely. We know that
privately owned companies sometimes pay more for a commodity than it is worth as a
finished product and then make up those losses by paying less than it is worth some other
time. It all works out over the long pull.
3.
Why haven’t the big companies already done it?
Big companies are like big ships, they are slow to turn. Organizing from
scratch without any fixed assets is easier than liquidating or acquiring them. New
generation cooperatives have the advantage of picking and choosing among appropriate
technologies, facilities, locations and markets, existing companies don’t. New
generation cooperatives can form alliances easier than existing competitors. New
generation cooperatives have active investors who care about the long term viability of
the business rather than passive investors who want the highest quarterly earnings
possible.
Invisible
opportunities -- Bright
opportunities can still be invisible to many farmers and farm services suppliers because
of perception problems. The farmers’
ability to see and seize business opportunities in the food system is restricted by how
they perceive themselves. Ocean Spray was started by dairy farmers in New England trying
to find a use for boggy farm land. They no longer see themselves as dairy farmers.
Canadian farmers may be blinded to opportunities because of existing marketing and
political structures, self- perceptions and most of all by the inability to imagine.
Albert Einstein said, “The human being experiences himself, his thoughts and
feelings as something separated from the rest--a kind of optical delusion of our
consciousness. This delusion is a kind of prison for us, restricting us to our personal
desires and to affection for a few persons nearest us. Our task must be to free ourselves
from this prison by widening our circle of compassion to embrace all living creatures and
the whole of nature in its beauty.”
(The
Fifth Discipline by Peter Senge, p. 70) Imagination
is more important than science, economics or politics. It is through our imagination that
we create a new way to accurately view the current reality.
Barriers
-- Farmers
everywhere are blinded by their inability to imagine, and seek instead the comfort of
known barriers. Cattle press up against fences, people build their houses next to the
highway by-pass even if it is built three miles from town. The space between those homes
and the existing city residents will be filled in later. When asked to imagine the future
for agriculture, our first thoughts go to known structures. They don’t have to.
Columbus proved that the earth was round by first imagining that it was, and assuming that
you could get to the west by sailing east. He didn’t focus on the edge of the earth.
Imagine
-- Imagine
with me that farmers reverse engineer the food system in North America. They look at those
parts they want to own, those they want to lease, and those parts that can be provided by
alliance partners. Through imagination, farmers can see clearly all the way to the human
beings eating food. Now that farmers can see these people, they can learn from them,
listen to them, talk to them, and eventually, get to know them as fellow human beings. Now
that we know each other as persons rather than demographic data sets, we can buy goods and
services from each other with a great deal of trust. Their success is ours and ours is
theirs. Imagine that no one can come between you and your customer unless you let them.
Imagine that you are not afraid of the future but look forward each day to the
opportunities you will discover--imagine what you will find!
Opportunities
-- Bright
opportunity markers are flashing like neon lights--in beef, in dairy, in cereal grains,
even in the potential to attract people to live in the rural places of this continent and
share their lives with us. The information age is upon us and it is freeing us from the
prison of the industrial age. For the first time in the history of the world, we have
escaped the barriers of structures both physical and political. Information collapsed the
Berlin wall, it will reunite Cuba with the Americas, and it will bring Farmers of the
world together to build a new food production system. Information is the carrier of truth.
I have come to tell you good news. Agriculture will not die, but will be reborn. What this
new system of food production will grow up to be in the next century depends on what you
imagine it will be. And that is the truth.
References
Building
the Future of North Dakota Agriculture, Commission on the Future of Agriculture 1998
Built
to Last,
Jerry Porras and James Collins, Harper Business 1994.
Dakota
Growers Pasta Company Annual Report 1998.
Forbes
Magazine, Rich Karlgaard, E-Business Conference, Bismarck, ND September 1999.
I
and Thou,
Martin Buber, Charles Schribner’s Sons, 1958.
Manitoba
Agriculture, Carol Gunvaldsen, September 1999.
North
Dakota Wheat Commission, Judge Barth, September 1999.
The
End of Agriculture in the American Portfolio,
Steven C. Blank, Quorum Books 1998.
The
Fifth Discipline,
Peter Senge, Doubleday, 1990.
Harvest
States, American Italian Pasta Company, and the Canadian Wheat Board web pages.
Conversations
with colleagues: Dennis Hill, Warren Enyart, Lori Capouch, Mike Gustafson, Denise Spanjer,
Keith DeHaan and my wife, Marcia Patrie.
Special
thanks go to the members of the working committee for the Commission on the Future of
Agriculture: John Bollingberg, Jack Dalrymple, Jerry Effertz, Neil Fisher, Patricia
Jensen, Roger Johnson, Fred Kirschenmann, Ron LeClerc, Wade Moser, Richard Schlosser,
Howard Schmid, Robert Sorenson, and Steven Tomac.
Roger
Johnson (North Dakota’s Agriculture Commissioner), and Dr. Keith DeHaan (a livestock
consultant) contributed the perfect competition theory.
Peter Senge is the source of the trim tab idea and the quote from Albert
Einstein. Theologian Martin Buber taught me that people are never “its” (or
demographic sets) and customers are always people--of equal importance to the producer (I
and Thou). Porras and Collins taught the sustaining power of “vision.” Rich
Karlgaard helped me see the power of the Internet to free us from the prison of distance.
A
profound thanks, goes to Timothy Dodd, president and general manager of Dakota Growers
Pasta and directors: Jack Dalrymple, Allyn Hart, Roger Kenner, James Link, Eugene
Nicholas, John Rice, Jeff Topp, Curt Trulson, and Mike Warner who acted on a dream and
built an outstanding company.
And
finally, thanks to the thousands of farmers who believe and invest in new generation
cooperatives and make them work. You are the reason for and the object of success.