Natural Foods Merchandiser

Collaborative Business Model Revived

The 515 members of the Organic Valley Family of Farms aren't getting rich. But being part of the LaFarge, Wis.-based producer co-op does make what Chief Executive George Siemon says is the hardest part of farming a little bit easier.

"The toughest part of farming is walking to the mailbox, knowing that you've worked hard," he says, "and finding out you made 20 percent less money than you did the month before."

Organic Valley paid its producers nearly double what conventional dairy farmers were paid per hundredweight of milk in 2002. The co-op logged $125 million in sales of milk, cheese, eggs, juice and meat last year and Siemon says sales are forecast to grow by another $30 million in 2003 and could reach $212 million by 2005.

"We were fairly naive and green when we started," he says. "We did not realize who we would become."

Producer and distributor co-ops have breathed new life into the idea of collective business. Though they have struggled, participation can mean the difference between the life and death of a small family farm or a small retail operation.

"The co-op movement has a lot of history and has gone through a lot of surges," Siemon says. By the 1980s, he says, there wasn't much difference between what farmers were paid if they marketed their conventional products individually or through a co-op.

"Ours started because we were in a brand new market no one was approaching," he says.

The Coulee Region Organic Produce Pool formed 15 years ago, when a group of eight farmers Siemon calls do-gooders were looking for a cash-crop alternative to the small plots of tobacco grown in the valley about 50 miles east of the Mississippi River. The tobacco market was crumbling and Siemon and his partners worried it would take that family farm with it.

"We decided the organic marketplace was an up and coming thing," he says. "I was a dairy farmer and not too interested in produce, but I was an organic enthusiast, so a bunch of us got together and decided to do an organic project."

Initially, the farmers formed a dairy pool and sold their organic milk to North Farm Co-op. The co-op had a large natural cheese program and saw huge potential in an organic program. But North Farm only sold to part of the country. "They helped us get started, but they had their own objectives," Siemon says.

Going It Alone
By 1990, CROPP was oversupplied, and members quickly realized they needed to start developing their own markets and products, and the Organic Valley brand was born. "We expanded into butter and all the way down the list into many, many industry firsts," Siemon says.

All along the way, CROPP has stuck to its original mission and provided stable pay for the family farms that have joined the Organic Valley Family of Farms.

"We believe organic farming should represent economic sustainability for farmers, and part of that should be a stable price," Siemon says. "No one gains from wild fluctuations in price."

Today, there are 515 farms in 17 states producing for the Organic Valley brand and 17,800 cows and 75,000 acres of land under the co-op's organic umbrella. In 2002 alone, Organic Valley brought 94 new farmers, 3,810 cows and 15,000 acres of land into its program.

"A co-op in the right situation can be tremendously successful," says David Gutknecht, publisher of Cooperative Grocer magazine. "That the member producers of Organic Valley, some who may have only 50 or 60 cows, can have a significant national market impact says a lot about the co-op model. It's very values driven. It is preserving the family farm and treating their animals decently. And they produce a great product that people can trust has not been polluted."

Though there has been a tremendous surge in demand for Organic Valley products, particularly in the past three or four years, the co-op has been methodical about managing its growth. CROPP has made no brick-and-mortar investments, instead partnering with existing regional cheese factories and bottling plants to handle production. This is a departure, Siemon says. "The organic diary industry was built on a lot of hauling and freight."

Today, 45 certified organic processing plants, located near where the milk is produced, bottle product on behalf of Organic Valley. This has opened the door to another opportunity to market to shoppers who like to buy locally. Milk produced in the northeast is distributed under the Organic Valley New England sub-label, for example. "We believe food should be produced locally, and that the organic consumer wants to support the farmers in their region," Siemon says.

Rapid growth has required CROPP to be financially nimble.

Though Siemon says he knows he could always ask farmers to take a pay cut if the co-op were in a jam, CROPP has changed its financial structure to allow outside investment. "We have sold preferred stock to outsiders," he says. "There are always people out there looking for meaningful investments in the sustainable movement or the green movement."

Farmers who have recently sold their operations also invest in CROPP. "We have a large amount of money that comes in that way," Siemon says. "People are looking for something to believe in."

Luck And Advice From Others
Siemon acknowledges that Organic Valley was just plain lucky to get started at the right time with the right group of people who had enough skill and imagination to make a go of their idea. Not all producer co-ops are so fortunate.

"There have been a number of attempts that have not survived at the grower level," says Mark Lipson, policy program director for the Organic Farming Research Foundation in Santa Cruz, Calif. Lipson is also a part of a tomato-growing collective, Molino Creek Farm, that operates much like a co-op. "The co-ops that were working on a model of pooling fresh produce generally haven't worked. There are a lot of things that can trip up those attempts."

Farmers clearly understand their operations can be more profitable if they can figure out a way to add value to a raw product. But those operations face their own set of challenges, often with distribution or finance. Dakota Growers Pasta Co., a co-op owned by Midwestern wheat growers and the third-largest manufacturer of pasta in the United States, last summer converted to a corporation. The conversion allows the company, which has organic and private label programs and plants in Carrington, N.D., and New Hope, Minn., to raise much needed capital. At the time of the conversion, executives said they felt the co-op had missed out on several significant expansion opportunities—particularly when Borden exited the pasta business—because of a capital crunch.

Frontier Natural Products Co-op, too, saw opportunity in capitalizing on what it does best: sourcing high-end organic ingredients. Chief Executive Officer Andy Pauley says the co-op's revenues had begun to level off at around $40 million in 1999, and the executive committee began to recognize the financial limits of a customer-owned co-op.

As a remedy, Frontier created a hybrid structure that allowed the co-op to own a corporation, Frontier Natural Brands, which was charged with developing and manufacturing new products, including the Simply Organic line of spice mixes and packaged foods, which would be flavored with Frontier herbs and spices.

The idea was that Simply Organic would funnel profits back to the co-op and its 18,000 members as well as into product development under the Natural Brands unit.

But Frontier ran out of money before the Simply Organic line could work its magic and in the process, the co-op's successful core businesses were ignored.

The co-op has regrouped and today is looking for an investor or a buyer for Simply Organic, and has started to put back together the businesses that made it successful—including its wholesale distribution program.

Reclaiming Distribution
With the acquisition of Northeast Cooperative, which closed in January, there now are only three independent co-op distributors—Frontier, Tucson Co-op Warehouse and Ozark Co-op Warehouse—in a landscape nearly equally divided between United Natural Foods Inc. and Tree of Life.

"Frontier is a second-tier distribution system. We can serve smaller stores and they can get from us stuff they can't get from others, and with lower minimums," Pauley says. "For the last two years, this part of the business was something that had just been barely maintained.

"I think there is room for us to play and even get bigger. The larger distributors just aren't going to meet the needs of our retailers in the same way that we can."

Pauley now is looking to massive European cooperative businesses for guidance. In March, he plans to take a trip to Spain, to visit the giant worker-owned Mondragon Corporacion Cooperativa, and to Italy's Emilia-Romagna region, where the co-op is the dominant business model.

"I'm interested in the nuances," he says. "How did Mondragon buy 167 companies and fold them into a structure that works, because clearly it does. And why couldn't Frontier acquire other companies?"

Natural Foods Merchandiser volume XXIV/number 3/p. 52, 57-58

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