Farmers Question Co-op Merger

South Dakota Producers, Co-ops Have Different Takes on Competitive Pressures

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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The South Dakota Wheat Growers Association grain elevator in Mellette competes with a North Central Farmers Elevator in Northville, just 4.5 miles away. Management at the cooperatives want to merge to reduce what they see as inefficient competition, but local farmers note at times one elevator might offer them a better deal over the other. (DTN photo by Chris Clayton)

MELLETTE, S.D. (DTN) -- Lannie Mielke is leading a group of farmers in north-central South Dakota who want to buck the trend of local farmer cooperatives merging just because bigger is better.

Mielke and others don't see the benefits of their two local farmer co-ops merging. Instead, they view the merger as a loss of local competition in South Dakota. They haven't been swayed by the pitches made at 46 local meetings explaining why bringing together South Dakota Wheat Growers Association and North Central Farmers Elevator is a good idea.

Opponents of the merger question the rationale when they see two local competitors that are healthy and strong. For Mielke and others concerned about the merger, local competition is the central issue.

"We have no issues with the co-ops," Mielke said. "We love the co-ops, but in this day and age, one less competitor is a big thing."

Mielke later added, "I want to stress we are not against the co-ops. It's just the opposite. We want it to stay the same."

The cooperatives signed a letter of intent to merge in early March and announced at that time that they had been analyzing the situation since last spring. The merger would combine more than 30 Wheat Growers locations with 24 North Central locations. The new cooperative, which would be named CentraGro, would have a territory stretching from central North Dakota to southern South Dakota, though the dominant coverage area would be the central strip of South Dakota running east and west of Highway 281. http://www.growingtogether.coop/…

South Dakota Wheat Growers Association is ranked as the 11th-largest cooperative by USDA based on 2013 revenues of $2.1 billion. North Central Farmers Elevator is ranked as the 40th-largest cooperative in the country with about $906 million in revenue in 2013. Based on those 2013 figures, the combined cooperative would be somewhere in the top eight largest cooperatives in the country, if the merger is successful.

Stephen Briggs, senior vice president of agronomy and corporate marketing for Wheat Growers, said critics aren't looking at the growing competition the cooperatives face from various grain companies building facilities in both North and South Dakota. Briggs points to facilities owned by Cargill, ADM, Gavilon, as well as the Japanese firm Mitsui and Co., which have all more aggressively built elevators and locations in recent years.

"Since 2010, 17 of these elevators have been built by what I call non-local, multi-national companies in our trade area -- 17 shuttle loaders," Briggs said. "They are all around us."

From an agronomy side, Briggs said there are 174 competitors in the trade area selling seed, fertilizer and chemicals. "We are not without agronomy competition."

Briggs said those companies are coming in, competing and taking money out of South Dakota. Thus, backers of the merger -- including unanimous support from both cooperative boards -- see the need for the cooperatives to provide greater efficiencies in both inputs and grain sales. Briggs said opponents are failing to look at the bigger picture of competition. Right now, farmer-owners are paying for duplication and redundancy with both cooperatives.

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"What's happening now in our trade area is we're starting to waste -- call it waste -- farmer money because we're starting to duplicate a lot of assets. We're driving by each other's elevators with our own trucks to get to our own elevators, instead of going to the nearest elevator. We've got people spreading fertilizer almost in neighboring fields sometimes, and that's terribly inefficient."

In quantifying the duplication of elevators and fertilizer facilities, etc., Briggs said the merger would save $44.4 million for farmers over four years just by avoiding duplication. "In these tough economic times, I don't know why farmers would want to continue wasting their money by duplicating and running inefficient operations."

Yet, Mielke and others point to the duplication of facilities as creating the true competition which benefits local farmers. They fear the loss of service and local grain competition. "If they merge together and farmers gain services, that's one thing, but these co-ops are mirror images of each other," Mielke said.

Mielke and other farmers cite a study showing that despite the corporate development in the region, Wheat Growers and North Central combine to market more than 80% of the soybeans and roughly 75% of the corn in the Aberdeen area, based on data from a South Dakota State University Extension study last year.

The two cooperatives also at times can offer different basis, storage programs, quality discounts and drying charges. Sometimes one elevator might not be taking a commodity such as wheat while the other one just down the road is in position to buy. All of that adds up at times to cause producers to question the benefits of both local elevators operating under the same management.

"All of that goes away," said Brent Gabler of Faulkton, South Dakota. "That's the whole thing. If you get disgusted with one elevator, there's a choice."

Mielke, Gabler and others point to a situation during harvest 2013 when there was a 50-cent spread for corn between Wheat Growers' elevator in Mellette and North Central's elevator in Northville, just 4.5 miles away. The spread narrowed but a price gap continued for about three weeks. In another situation, one of the elevators was holding up wheat deliveries over vomitoxin tests while the other elevator continued taking wheat while conducting the tests.

Farmer Corey Johannsen of Tolstoy, South Dakota, credited the growth of North Central over the past 15 years in the smaller towns along Highways 20, 281 and 12. Johannsen said farmers and local residents have had a lot of input about the services they want and the locations of facilities.

"North Central has kind of come into these smaller communities and helped kept our local communities alive," Johannsen said.

Gabler was frustrated with the effort by the two cooperatives to tout the deal, which includes not only dozens of meetings, but also mailings and a website filled with details about why the merger is necessary.

"We're spending our own money to fight this and they are spending our money to support this," Gabler said. "We're fighting our own money."

Consolidation has been a long-standing trend for cooperatives. A Kansas State University study last year looking at the relationship between farmer co-operatives and Farm Credit showed the number of ag co-ops had declined from 8,000 to about 2,000 since 1976. A lot of that consolidation had to do with turmoil and government programs in the 1980s, as well as inefficient co-ops being snatched up by others.

Other mergers continue with farmer support. Just last month, farmers approved merging three smaller cooperatives in northwest Iowa while another cooperative in Washington State agreed to join CHS Inc., the nation's biggest cooperative.

Though the vast majority of cooperatives remain small in sales, the 30-40 cooperatives nationally with $1 billion or more in sales -- about 2% of all co-ops -- make up more than 50% of total gross sales for all cooperatives nationally, the K-State study showed.

Wheat Growers has about 5,500 members and North Central has about 2,500 members. Briggs said roughly 1,000 farmers qualify to vote for both cooperatives and will be allowed to cast ballots with each co-op. A simple majority is needed by members of both cooperatives for the merger to happen.

Ballots will be sent out the last week of May and voting will carry on for about three weeks. The two cooperatives are planning 17 more meetings about the merger during the first part of June.

Mielke said he believes opposition has grown and become more vocal over the past couple of weeks. He spent much of last Wednesday and Thursday on the phone with other farmers who also voiced their concerns after holding a meeting earlier in the week in Aberdeen, South Dakota. The group also has created a Facebook page to get their message out called Anti-Merger Alliance.

"It's grown a lot in the last couple of days," Mielke said. "We're representing, we know, a larger group of people."

Website for the CentraGro merger: http://www.growingtogether.coop/…

Anti-Merger Alliance https://www.facebook.com/…

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(CZ/AG)

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Chris Clayton