C O V E R N E W V E SN T T OU RR YE S

Two local cooperatives and Land O’Lakes Farmland Feed are maximizing efficiencies in South Dakota.

A SAVV Y PARTNERSHIP By Raylene Nickel

Based in Huron, S.D., Dakotaland Feeds, LLC, sold 60,000 tons of feed from its Huron Mill in 2002. After just two years, the joint venture is surpassing owner expectations.

early three years ago, two local cooperatives— South Dakota Wheat Growers, Aberdeen, S.D., and North Central Farmers Elevator, Ipswich, S.D.— needed greater feed-milling capacity. At the same time, a Huron, S.D., feed mill owned by Farmland Industries was being underused. A joint venture between the three organizations led to the formation of Dakotaland Feeds, LLC. The new company was launched September 2000 as Land O’Lakes and Farmland were merging their feed companies.

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Dakotaland Feeds’ profitability and rapid sales growth show the positive outcome of local cooperatives combining their strengths with a regional cooperative’s feed business. The local cooperatives contribute established distribution networks, while Land O’Lakes Farmland Feed provides technical expertise, quality assurance, volume purchasing power for feed ingredients and wholesale distribution. “The success of our company depends on several factors,” says General Manager Jarvis Haugeberg. “For one thing, we have the sup-

port and technical expertise of Land O’Lakes Farmland Feed. We use its feed formulation services, plus direction in quality assurance and help in developing our safety program. This gives us a competitive advantage in the marketplace. “Because of our other two corporate owners—South Dakota Wheat Growers and North Central Farmers Elevator—we have an incredible distribution network,” Haugeberg adds. “On top of that, we have a great sales team. We’re a new company, and our whole team has a fresh attitude.

Our customers would tell you the same thing.” Combining Retail, Wholesale Sales

“Dakotaland Feeds manufactures a full line of LAND O LAKES dry and liquid feed supplements as well as minerals,” says Haugeberg. The company purchases many of its feed ingredients through Land O’Lakes Farmland Feed. The new LLC purchases grain byproducts, such as wheat midds, soy hulls, linseed meal, sunflower meal and cane molasses, from local manufacturers. Dakotaland Feeds retails 50% of its volume to producers who were formerly served by the two local cooperatives. The remaining 50% of its feed is sold wholesale, with products shipped directly from its mill in Huron to locations owned by wholesale accounts including independent cooperatives. “We look for the most efficient way to distribute products in the areas served by our local corporate parents,” says Haugeberg. “It is more efficient for us to sell semiloads of feed direct to large-scale producers than to go through one of the locations owned by South Dakota Wheat Growers or North Central Farmers Elevator. Likewise, it is not feasible for us to deliver 10 bags of mineral to one of our customers who is 100 miles from the mill.” Dakotaland Feeds Board Member Richard Osterday, who also is board president of North Central Farmers Elevator, adds, “Buying feed directly from Dakotaland Feeds benefits our customers because the price includes only one margin, not the two margins customers pay when buying products from retail outlets.

Dakotaland Feeds sales team strengthens its approach to customers by attending sales meetings that offer information and education from industry experts such as Connie Swenson of Zinpro.

The price reflects this savings.” A possible downside to selling direct to large-volume purchasers is that these large customers may not purchase retail products from the two local cooperatives. “As a result, we thought our retail sales volume would dry up,” says Osterday, “but it hasn’t. We do a phenomenal amount of bagged feed trade from each of the retail locations.” In fact, the financial performance of Dakotaland Feeds has surpassed its owners’ expectations. “In fiscal year 2002, we returned the equivalent of 100% of our corporate owners’ initial investment in cash,” says General Manager Haugeberg. “This money will be passed back to our patrons in the form of dividends.” Sales, Support Staff Excel

And sales continue to grow. Before Dakotaland Feeds was formed, the Huron feed mill sold 38,000 tons of feed each year. “In

2001, we sold 43,000 tons of feed,” says Haugeberg, “and we finished 2002 with a little more than 60,000 tons. Our volume in 2002 was an aberration due to the USDA Cattle Feed Assistance program, but we were running a 6,000-ton increase year-to-date prior to participating in that program.” While the region’s drought and the USDA feed assistance program helped build regional feed demand, Haugeberg also credits the hard work of the LLC’s six-person field sales staff and the support staff of Land O’Lakes Farmland Feed. Key to the sales staff ’s success, says Haugeberg, are face-to-face on-farm visits with producers, plus their direct support of retail outlets. Dakotaland Feeds employs four field sales representatives full-time and contracts with Land O’Lakes Farmland Feed for part-time services of two additional salespeople. Dakotaland Feeds has a combined staff of nearly 30 people.

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In 2002, drought on the Dakota Plains and USDA’s Cattle Feed Assistance program helped build regional feed demand. Dakotaland Feeds’ six-person field sales staff worked closely with producers to customize feed formulas.

The technical expertise Land O’Lakes Farmland Feed brings to the partnership also enhances Dakotaland Feeds’ sales, says Osterday, who runs a cattle seedstock operation. “Through LAND O LAKES Feed we can provide customers with quality assurance and cutting-edge technology in feed formulation.” This advantage, he adds, allows Dakotaland Feeds to custom-formulate minerals and supplements for bulk purchasers based on nutrient analyses of all ingredients and water supplies. “Before Dakotaland Feeds purchased the mill, all supplements and minerals were formulated according to the average nutrient composition of feedstuffs in a sixor seven-state area,” says Osterday. “But there’s a wide variation in nutrient composition between crops grown on my farm in South Dakota and crops grown in Kansas, for instance.” After feeding his cattle supplements and minerals custom-formu-

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lated for their specific nutritional needs, Osterday sees improved herd health and productivity. Ethanol Partnership

The expertise in nutritional formulation that Land O’Lakes Farmland Feed brings to Dakotaland Feeds has helped the LLC diversify and expand its business activity by forming working partnerships with area ethanol plants. “We are the marketing arm for distiller’s grain sold by the ethanol plants in Huron and Aberdeen, S.D.,” says Haugeberg. “We provide a comprehensive nutrition program for our customers, positioning our co-products with our LAND O LAKES formula feeds to maximize herd health and performance.” Distiller’s co-products make excellent ingredients for livestock feeds, adds Haugeberg, but their unique nutritional properties require advanced formulation skills. By formulating co-product feeds Dakotaland Feeds is able to

enhance the value of the distiller’s grain in a way the ethanol plants could not accomplish on their own. In sum, Dakotaland Feeds is “a savvy LLC,” says Rex Carlson, Director of Business Development for Land O’Lakes Farmland Feed. “The new partnership provides good service, has great products that are fairly priced with good market share, and receives strong support from its member-owners. Dakotaland Feeds is profitable because the LLC does many things right.” ■

Name: Dakotaland Feeds Location: Products/Services: 2002 Sales: Number of Employees:

FINANCE MATTERS By Jessica J. Lamker

In a recent study by Member Services, 37% of local cooperatives are generating 10% or greater return on local equity.

From manager meetings, director workshops and Cooperative Profiles survey responses the message is clear: Cooperative leaders want information to help build and maintain profitable cooperatives in a challenging business environment. This article kicks off a Cooperative Profiles series that will highlight critical issues for cooperatives: finance, marketing, asset management and cooperative leadership. ou’ve heard the saying, “This is not your father’s Oldsmobile.” Cooperatives of today, though still governed by the same principles that established the cooperative movement at the turn of the 19th century, cannot be operated like yesterday’s cooperatives. Changes in the financial and banking industry are as much drivers for an efficient cooperative as changes in agriculture. In the late 1990s, banks began offering

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differential pricing for loans based on the perceived quality and risk of each loan. Borrowers today are rewarded when their businesses are designated “investment grade,” a status given to companies that show balance sheet strength, consistent earnings performance, adequate working capital, manageable term debt service and appropriate cash flow and debt coverage. A bird’s eye view of the cooperative system illustrates that not all cooperatives have the luxury of generating the returns needed to service capital requirements and revolve owner equity (see Figure 1). The Member Services Division of CHS Cooperatives–Land O’Lakes has tracked local cooperative financial data for more than 10 years. The data is collected by Member Services regional and business service managers in 16 states. Member Services staff work

one-on-one with local cooperative boards and management on strategic planning, forming new business arrangements, and general and mid-management placement and training. Analysis of the 2002 data from more than 500 local cooperatives and CHS Country Operations locations reveals a collective average return on local equity of 8.5%, almost two percentage points below the acceptable

Critical Issues for Cooperatives

✓Finance

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Marketing

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Assets

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Leadership

Figure 1: Local equity return data from a Member Services study of more than 500 cooperatives.

level for a cooperative business, says Tom Larson, CHS Cooperatives executive vice president of Member and Public Affairs and CHS–Land O’Lakes Member Services vice president. “Without at least a 10% return on local equity, a cooperative will be challenged to revolve patronage, invest in plant and equipment, and provide the right people to grow the market.” Though 78% of cooperatives made money locally in 2002, 40% of local cooperatives are generating no return or only half of the return on local equity needed to succeed as a business. Wall Street has minimum rules of thumb for businesses, says Chris Peterson, professor and Homer Nowlin Chair on Consumer-Responsive Agriculture, Michigan State University. “Sales growth should be two to four times the rate of inflation; net income growth should be 10 to 15 percent; annual return on equity should be at least 12 to 15 percent; and total debt to total assets should be 40 to 50 percent.”

“Some cooperatives achieve this level of performance,” adds Larson. “They will drive the success of the cooperative system in the future.” Completing the Financial Picture

In discussing financial performance, profitability ratios are just one financial measurement. When

comparable markets. The following ratios (Figure 2) answer these questions about business performance. For details on analyzing these ratios, contact your business service manager. Larson says a cooperative’s operating expenses to sales comparison also indicates financial success. “The top 25 percent of local cooperatives in the CHS– Land O’Lakes system experience 15.4 percent operating expenses to sales. In the least profitable cooperatives, operating costs to sales is 18.5 percent. “Top-performing cooperatives have 3.1 percent less in expenses,” he adds. In other words, he explains, for a cooperative with $25 million in sales, there’s a $775,000 difference in profits due to increased efficiencies. Another factor involves measuring how well a cooperative uses its assets—plant, property and equipment—compared to sales. As a system, the top 25% of coopera-

Figure 2: These ratios answer core business performance questions. Ratio

Business Performance Question

Operating

Are we operating efficiently?

Profitability

Are we making enough profit?

Solvency

Do we have the right balance of debt and equity?

Liquidity

Can we pay our bills on time?

Activity

Are we using our resources effectively?

For an analysis of these ratios at your cooperative, contact your Member Services business service manager.

conducting long-range planning sessions, Member Services business experts also calculate operating, liquidity, solvency and activity ratios. They use benchmarks for cooperative financial performance so local cooperatives can track their performance against history and budget and compare it to other

tives are out-managing the asset portfolio, with a net book value compared to sales of 12.6%. For the lowest quartile, net book value compared to sales is 15.1%. A closer look at the cooperative study illustrates that 37% of cooperative businesses are responsible for 93% of the local savings for

cooperatives in the study. “It is very important that we help the remaining 63 percent strive to achieve 10 percent or more return on equity,” says Bob Walker, director of Member Services Market Planning and Development. For cooperatives falling into this category, Walker figures an expense reduction of roughly 10% could increase profitability by about 70%. Taking the Test

So how does your cooperative measure up? How profitable are your cooperative’s businesses and what decisions must be made to improve overall profitability? To compete and win in today’s economic climate, local cooperative managers and directors need to emphasize operating performance and balance sheet management. It’s about writing a business plan, then executing the plan for each department at the cooperative and each product area within a department. Governing and managing a profitable business requires an enormous knowledge base. Though sometimes unpopular, successful co-ops have even developed board committees that focus on non-performing assets (sometimes referred to as “kill committees”). To become more profitable, Larson suggests neighboring co-ops might be partners, competitors and/or customers of each other. In fact, when observing the entire trade territory, unifications continue in a decade-long trend at an average of 50 per year. That’s more than 500 cooperatives combining as new companies, joint ventures or limited liability companies to create more economic value for member-owners.

Michigan State University Economist Chris Peterson discussed the economic value of cooperatives at recent Member Services leadership institutes for managers and directors.

Business Strategy Takes a Turn

Cooperative managers and directors know that margins generated by farmer-owned cooperatives the last few years have been flat. So, as cooperatives change their business strategy, every board member and employee needs to understand the distinction between a commodity business strategy and a differentiated product business strategy, explains Peterson. Directors and general managers who attended leadership institutes offered by Member Services heard Michigan State Economist Peterson discuss the value of cooperatives to farmer-owners. “With a commodity, price is the only thing we exchange. If I’m producing and selling a differentiated product or service, I must market that, because it may not be obvious to the buyer. This makes the people issue that much more critical. My people have to understand that I can’t just shave price to create value. I have to market the benefit and that is very hard to do.”

By completing the financial planning worksheet on the next page, board members can begin to better understand the current financial picture at their local cooperative. Armed with this information about cooperative financial performance, boards can understand profitability and identify the additional information they need to provide leadership for change and innovation at their cooperative. Watch the next issue of Cooperative Profiles for the second installment in this series, which will examine market segmentation and how local cooperatives can adapt to changes in the marketplace and remain profitable. ■ Editor’s note: For more details on the information in this series, contact your regional or business service manager. These individuals are listed by state at www.mbrservices.com (choose About Member Services from the menu).

FINANCIAL PLANNING WORKSHEET 1. What is our local cooperative’s return on local equity?

2. What is our long-term debt to local equity ratio?

3. What are our co-op’s total operating expenses compared to sales?

4. How much money does our cooperative need to make each year?

5. Why does our cooperative need to make this much money?

One way member cooperatives can measure financial success is to compare its assets — plant, property and equipment — to sales.