United StatesDepartment ofAgriculture

Rural Business–CooperativeService

RBS ResearchReport 181

Local Cooperatives’Role in the Identity-Preserved Grain Industry

Abstract This study examines how locally owned cooperatives have responded to the transitionfrom commodity to identity-preserved grain marketing. Survey results showed locals’overall commitment to identity-preserved grains was determined more by a culturalreceptivity to innovation than by differences in priorities among grain, feed, and gener-al managers.

Key words: cooperatives, grain, identity-preserved grain, specialty grain, innovation.

Local Cooperatives’ Role in the Identity-Preserved Grain Industry

Julie A. Hogeland, Agricultural EconomistRural Business-Cooperative Service

RBS Research Report 181

August 2001

Acknowledgments Particular thanks are due Dave Seehusen for an extensive contribution to question-naire content; Dick Danielson, Roger Koppen, Barry Whitehall, Clint Van Kley, To mMiller, and Dick Webker for exposure to the many facets of local cooperatives; JeffStroburg, Don Gales and Robert Turek for added perspective; Mike Sweat and AlDombek for an overview of the emerging distribution system; Debbie Dyer, RussSanders, and Joseph Lebeda for an introduction to the identity-preserved grain indus-try; Larry Gambrell and Joseph Prusacki for increasing the statistical precision of ques-tionnaire and sample and easing the clearance process. Thanks also to RBS staffersCharles Kraenzle, who reviewed several sampling alternatives and drew the final sam-ple, and Mike Kane and Dave Cummins.

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Contents Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Organizational Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Cooperative Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Survey Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Experience with IPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

IPG Advantages and Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Grain Producer Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Investment Horizons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Relationship with Regional Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Competition from Vertical Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Discussion and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

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Highlights This study reports the responses of 230 Midwestern cooperative managers (includinggeneral, feed, and grain department managers) to a 1999 survey on their local’sresponse to identity-preserved grains (IPG). All cooperatives surveyed had at least$14.5.million in annual sales with at least 40 percent in grain sales.

IPG offers a case study on how and why local cooperatives choose to innovate. Mostlocally-owned grain cooperatives purchase grain from members and put it into condi-tion for the next level of the marketing chain, not necessarily the end user. Like thegrain industry in general, locals are oriented toward mass marketing, buying in bulkfrom many producers, co-mingling and blending lots for an average (No. 2) quality, andreselling such grain to a variety of users. It has been up to users adapt the grains totheir specific processing requirements. The variation in grain characteristics recentlyintroduced by genetic engineering and advanced plant breeding techniques has begunto shift the burden of adjustment back to the grain elevator and feed mill, who musteither adapt or continue marketing undifferentiated grains.

Identity-preservation requires cooperatives to maintain the purity of the specializedgrain by segregating it from other grain, rather than the traditional blending practice.Such "identity-preservation" costs money and requires extra bins to store the special-ized grain, mill cleaning between runs and testing to assure purity of incoming and out-going grain. Grains developed for specialized food or feed applications require otherrevaluations of locals’ established practices, including market development, contract-ing with growers, specialized facilities, and grower education. Locals’ attitudes towardthese changes were explored in the survey.

The study also evaluated the impact of cooperative culture--priorities and establishedways of doing business--on IPG adoption. Respondents classified their cooperative aseither: an Innovator (being "first" is a priority); Follower (willing to innovate but morecost sensitive); or Status Quo (conservative, cautious, slow to react, and independent).Each category represented one-third of respondents.

Innovator-respondents handled a much greater IPG volume than Followers and StatusQuo. Interdependence demonstrated through partnering with regional cooperativesand investor-owned firms (IOFs) appeared to underwrite Innovators’ willingness to beton new products. The more traditional and independent cooperatives appeared toretain the independence and isolation that is the historical norm of grain cooperatives,including a competitive, even adversarial relationship with regionals. Unlike Innovators,Status Quo and Followers saw less evidence of producers adopting IPG in their mar-keting territory. They preferred to focus on getting the best price for producers througha unidimensional focus on traditional marketing practices. In contrast, Innovators oper-ated in a multidimensional world where many avenues and perhaps some money-los-ing detours could ultimately achieve a similar end.

A new cooperative culture appears to be emerging alongside the established frame-work that includes managers who continually scan the environment for new opportuni-ties, spread risk by partnering, and are psychologically at ease with the time requiredfor new investments to mature.

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Local Cooperatives’ Role in the Identity-Preserved Grain Industry

Julie A. HogelandRBS Agricultural Economist

Introduction

This report is a continuation of a series byUSDA’s Rural Business-Cooperative Services (RBS)examining how locally-owned cooperatives areresponding to industries undergoing significant struc-tural change. Previous reports have examined locals’place in a dairy industry restructured by on-farm feed-ing and a pork industry undergoing vertical integra-tion.1 The advent of grains developed for specific foodor feed applications requires a similar revaluation oflocals’ established practices.

Like the grain industry in general, locals are ori-ented toward mass marketing, buying in bulk fro mmany producers, co-mingling and blending lots toachieve an average No. 2 quality, and reselling thegrain to a variety of users. Users have traditionallyadapted the grains to their specific processing require-ments. The variation in grain characteristics recentlyintroduced by genetic engineering and advanced plantbreeding techniques has begun to shift the burden ofadjustment back to the grain elevator and feed mill,which must adapt or continue marketing undifferenti-ated grains.

To adapt, elevators and feed mills must maintainthe purity of the specialized grain by isolating or seg-regating it to avoid contamination from other grain, arequirement completely contrary to the historical prac-tice of co-mingling and blending. Such "identitypreservation" costs money in the form of extra bins to

store the specialized grain, mill cleaning between grainruns, and testing to assure purity of both entering andexiting grain.

Most locally-owned grain cooperatives have tra-ditionally purchased grain from producer-members,assembled, dried, conditioned and blended it, and soldto the next level in the marketing chain. This may be agrain exporter or processor, not necessarily the enduser. In contrast, the identity-preserved grain market isexpected to be driven by the needs of end users willingto pay extra for a product with greater starch, protein,oils, or other characteristics they need.

The new system requires more contact betweenend user and elevator or mill because specialized vari-eties2 are not as readily available as conventionalgrains. Moreover, market development to locate poten-tial users may be required to achieve scale economiesand maximize use of specialized facilities. Growersmay require education on the market potential of dif-ferent grains or specialized planting requirements.Contracts between growers and users are needed toassure supply.

Close ties with producers and experience withgrain merchandising and processing put cooperativesin an ideal position for this adjustment. Yet it’s unclearto what degree cooperatives are interested in or pre-pared for these opportunities. Characteristic of anemerging industry, limited information is availableabout preferences, resources, and needs of system par-ticipants.3

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1 Hogeland, Julie A., Local Cooperatives’ Role in the EmergingDairy Industry. USDA/Rural Business-Cooperative ServiceResearch Report 162, June, 1998. Also, Hogeland, Role of LocalCooperatives in Emerging Swine Industry, RBS Research Report144, November, 1995.

2 These varieties are typically referred to as “specialty grains,”“identity-preserved grains,” “GMO” (genetically modifiedorganisms), and “value-enhanced” grains. The terms specialtygrains and identity-grains preserved grains are usedinterchangeably in this report.

3 An excellent reference that discusses the characteristics of types ofIPG is “1998-1999 Value-Enhanced Corn Quality Report” by theU.S. Grains Council, Washington, D.C. (www.grains.org).

This study seeks to contribute to an informedresponse by the cooperative sector through a surveydetermining local cooperatives’ resources, preferences,and experience with identity-preserved grain (IPG).Responses are interpreted to determine whether coop-eratives consider specialty grains a subset of a "core"grain industry or a core industry by itself, by nature ofthe specialized investment required.

IPG provides a case study on how and why localcooperatives differ in their response to innovation. Asecond objective is to interpret survey results throughthe filter of documented references to cooperative cul-ture to determine how that shapes decision-making inlocal cooperatives. How regional cooperatives andgrain producers interact with culture are also consid-ered.

The third objective is to examine how internalorganizational roles affects locals’ overall commitmentto IPG. Responses by general managers are comparedwith those of grain and feed department managers todetermine whether individual department constraintsand priorities exert a particular impact on the decisionto adopt IPG.

These findings can be generalized to innovationsand settings beyond specialty grain where coopera-tives have the potential to become a technologicallyleading or lagging sector.

HypothesesSurvey design was guided by several proposi-

tions which emerged from preliminary discussion withindustry observers and literature review:

1. Cooperative culture and organizational roleswill influence commitment to IPG.4

2. Grain cooperatives could find a new role bar-gaining on behalf of growers with technologydevelopers and end users.

3. Trust will be an important factor in reducingopportunism between regional and local coop-eratives.

Discussion of the first hypothesis follows; the lat-ter two will be discussed in the context of surveyresults.

Organizational Roles

Specialty grains present a potentially complexcase of structural adjustment because gaining access totheir benefits could require a considerable disruptionof established methods of food and feed grain market-ing. The variety of applications for specialty grainssuggest that the decision to or not to adopt requiresweighing the benefits and costs accruing to the depart-ments of a local cooperative most affected by their use,feed, grain and agronomy.5 In this context, specialtygrains present a particularly interesting case study ofinnovation because these departments are respondingto different stages of the product life cycle6: geneticengineering has created new products and new growthopportunities for agronomy departments while feedand grain departments operate within mature, well-established product-market configurations.

Because managers of different departments with-in the cooperative are expected to have unique priori-ties, resources, and world views, the degree of commit-ment to an innovation--the strategy pursued by thecooperative--is expected to be the result of a process ofinternal competition for influence, bargaining, andcompromise, subject to the overarching impact of thegeneral manager and board of directors.7

This process of reconciling different commodityinterests is similar to the one producers used whenforming the cooperative. Producers continue to influ-ence the cooperative through external coalitions;departments like feed and grain can be regarded asinternal coalitions.8, 9

As producer-based external coalitions siftthrough potential demands and constraints on thecooperative’s behavior, its goals and objectives emerge.

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4 Reynolds observes, “The lack of systematic studies affectingorganizational culture, and the ambiguous relationship betweenorganizational culture and effectiveness suggest additionalresearch. Two major factors should be considered in all futurestudies of organizational culture--distinctive industry norms andthe organizational roles of the individuals.” See Reynolds, Paul D.,Organizational Culture as Related to Industry, Position, andPerformance: A Preliminary Report, Journal of Managemet Studies23(3), May 1986, 343.

5 Although agronomy departments have an important role aspurveyors of this new technology, only feed and graindepartments were surveyed to simplify the study.

6 The importance of the PLC is stressed in Ruekert, Robert W. andWalker, Jr., Orville Marketing’s Interaction with Other FunctionalUnits: A Conceptual Framework and Empirical Evidence, Journal ofMarketing, 51 (Jan. 1987): 13.

7 To simplify the study and focus mainly on the interdepartmentalrelationships within locals, the impact of the board of directorswas not considered.

8 A constituency-based theory of the firm is developed in Anderson,Paul F. Marketing, Strategic Planning and the Theory of the Firm,Journal of Marketing, 46 (Spring 1982), 19. This section applies histheory to cooperatives.

9 Cooperatives can also be viewed as coalitions of firms. See Staatz,John M., Recent Developments of the Theory of AgriculturalCooperation, Washington, D.C.: National Council of FarmerCooperatives, Journal of Agricultural Cooperation, 1987.

These external coalitions also supply resources to thecooperative which legitimize its existence.Organizational departments or functional areas bestable to respond to these coalitions enhance their influ-ence in the organization.

At the same time, cooperatives must retain suffi-cient flexibility to respond to environmental contin-gencies. Accommodating producer coalitions to ensurethe stability and certainty of resource flows can ulti-mately limit such flexibility and autonomy. The coop-erative’s behavior--willingness to innovate--can thenbe seen as the outcome of the trade offs it has madebetween dependence on producer support and its needto respond to environmental contingencies, such as theemergence of specialty grains.

Differences in roles, expectations, and prioritieswere expected to be among those influencing theseinternal coalitions’ response to IPG, and therefore,questionnaire responses. Because the net impact ofthese factors was unclear, the interdepartmentalapproach used in this study was exploratory, not pre-dictable.

General Managers— They are responsiblefor determining the strategic direction of thecooperative, i.e., whether specialty grains would becompatible with the cooperative’s resources andmission, either now or in the future. Their overridingconcern is the mission and survival of the cooperativeas a whole, while departmental managers focus on thecommon goal through the filter of their individualdepartmental goals.

Feed Managers— They determine theingredients used for manufacturing feed at the localcooperative. If specialty grains are used, the feedmanager must arrange for special holding bins andmanufacturing processes to maintain the grain’spurity. This is a significant decision because a binholding 1 million bushels, the minimum size, typicallycosts $15 million to build.

Commitment to storage is also an issue. At peakharvest times, when storage is tight for commoditygrain produced by farmer-members, specialty grainbins may be half empty. Specialty grains are also risky;high-oil corn is subject to "going out of condition"(becoming rancid) when stored. Even though high-oil

corn (HOC) is commonly regarded as more efficientthan commodity (No. 2 yellow) corn in producing ahigh rate of gain in livestock, cheaper or more readilyavailable energy substitutes are available, such as No.1 white grease, a commodity byproduct from ham-burger production or rendering operations. Grease issprayed on the grain from a fat tank next to the feedmill. The drawback to this straightforward approach isthe potential for fat clumps which can reduce feed effi-ciency.10

Feed managers are naturally interested in the bot-tom line--will customers purchase feed containing spe-ciality grains? Unlike some grain managers who canget business by paying a penny a bushel higher thancompetitors, feed managers must move product to suc-ceed. Moreover, daily feed sales subject the feeddepartment to a disproportionate amount of cost allo-cation compared with other departments where rev-enue is more sporadic.

Grain Managers— The largest department inthe cooperative determines its primary function. Formany locals that department is grain. The grainmanager sells grain on behalf of member grain farmersor buys grain for milling or other processingoperations of the cooperative. A grain manager mayview specialty grains as an opportunity to expand intoa new market with a different customer base than theexport-oriented commodity grain market. If the localhas a high volume from commodity grain, however,the special handling, testing, and transportationrequirements of specialty grain may simply require toomuch adjustment in day-to-day business practices tobe profitable or practical.

Managerial Sampling DesignUsing RBS criteria to define large cooperatives,

only locals with 1998 total annual sales of nearly $15million were chosen for the survey.11 These coopera-tives have departments and probably will have a feedmanager (if selling feed) and a grain manager (if sell-ing grain) or both on the staff.

RBS categorizes local cooperatives as (1) sellingboth grain and feed; (2) completely specialized in feedsales (no grain); and (3) completely specialized ingrain sales (no feed). The population of general man-agers is drawn from all three categories. The popula-tion of feed managers is drawn from cooperatives whosell both feed and grain plus those specialized in feed.

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10 In a larger sense, substituting HOC for animal fats in feedconstitutes a zero-sum game for agriculture as a whole since ittransfers income from one agricultural sector to another. SeeBaumel, C. Phillip, et al., “GM Corn has impact on feedconsumption,” Feedstuffs, September 27, 1999.

11 In 1999, RBS defined large cooperatives as those with annual salesof at least $30 million.

The population of grain managers is likewise drawnfrom cooperatives who sell both grain and feed plusthose specialized in grain.

Yearly fluctuations in grain prices substantiallyaffect whether supply cooperatives with high grainthroughput will be classified as grain cooperatives.12

To capture cooperatives with a high volume of grainsales irrespective of a particular year’s level of prices,supply cooperatives having (1) total sales of at least$14.9M and (2) grain sales amounting to at least 39.5percent of total sales were part of the group sampled.

Information collection was limited to 19 Statesthat are major producers of corn, wheat, and soybeansaccording Field Crops Final Estimates 1992-97(USDA/NASS, Statistical Bulletin No. 947, Dec. 1998).Utah and its two feed cooperatives that service porkproducers, an important target market of specializedgrains, were also included. The States were groupedinto four regions: (1) North Central--Iowa, Minnesota,W isconsin, South Dakota, and North Dakota; (2)Eastern Corn Belt--Illinois, Indiana, and Ohio; (3)South Central--Nebraska, Kansas, Missouri, Texas, andOklahoma; and (4) West--Utah, Colorado, Montana,Oregon, Washington, and Idaho.

Using random sampling, 920 managers werepolled, 386 from the North Central region; 256 fro mEastern Corn Belt; 214 from South Central; and 64 fro mW est.13 The number of feed or grain managers sur-veyed within a particular region was basically a thirdof the region’s total sample.

Cooperative Culture

Restricting the survey to large cooperativesassumed that they probably had the financial resourcesto afford the retooling required for handling specialtygrains, compared with their smaller counterparts.14

Although the survey’s initial focus was the impact ofmanagerial position on attitudes toward IPG, it wasrecognized that cooperative managers’ willingness to

innovate is influenced not only by the mandate of theirindividual departments, but also by the culture oroperating style of their particular local.

Cooperatives do have particular operating stylesor cultures. Reynolds15 identifies different cultures anddecision making norms as factors shaping cooperativemergers; Wadsworth asks whether important aspectsof culture or identity are obliterated in the aftermath.16

Cooperatives also vary in their response to inno-vation. In reviewing the impact of loss of Governmentstorage programs on local cooperatives, Stearns,Cobia, and Warman looked for evidence of computer-ized accounting systems and quality of grain storage,among other factors, in determining progressiveness.17

They delineated three such categories of locals: pro-gressive, intermediate, and conservative.

Progressive managers readily changed merchan-dising practices and participated in mergers and acqui-sitions--changes resisted by intermediate and conserv-ative managers. Conservatives perceived fewercourses of action available to them than their counter-parts, perhaps because they were less aggressive, lesssuccessful in raising margins, and their cooperativeswere smaller. Stearns, et al, observed, "It also appearsconservative managers were unable to implementmany of the changes they thought practical."18 In short,they did not make things happen.

A similar classification was used in this study,based on the premise that some cooperatives preferredto be at the forefront of new concepts while others hada "wait and see" attitude toward innovation.Respondents described the operating style of theircooperative as either:

a. W e value being "first" with new products, mar-kets, and technologies, even though not allefforts prove to be profitable. We typicallyrespond rapidly to early signals about areas ofopportunity.

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12 RBS classifies a grain marketing cooperative using twocharacteristics: the value of the products marketed throughtransacted sales represents its largest source of business volume,and the cooperative markets only grain, or grain and otherproducts. If it markets other products, grain accounts for thelargest share of its marketing volume.

13 Sampling was done with a 90 percent confidence level and 5percent level of precision.

14 It can be argued the small cooperatives in a survival mode mightbe more willing to dedicate their facilities to specialty grains.However, this study limited variation in size to focus onmanagerial variation.

15 Reynolds, Bruce, James J. Wadsworth and Donald A. Frederick,Cooperative Merger/Consolidation Negotiations--The ImportantRole of Faciliation. USDA: Rural Business-Cooperative Service,Cooperative Information Report 52, March 1996.

16 Wadsworth, James J. Cooperative Unification: Highlights from1989 to Early 1999. USDA: Rural Business-Cooperative Service,RBS Research Report 174, September, 1999.

17 Stearns, Larry, David W. Cobia, and Marc Warman, Strategies forSurvival by Cooperative Country Elevators--Revisited, USDA:Rural Business-Cooperative Service, RBS Research Report 158,December 1997.

18 Ibid., 8.

b. W e seldom are "first" with new products.However, we monitor our major competitorsto see if we can be second with a more cost-efficient, perhaps more innovative product.

c. W e try to maintain a secure niche in a relativelystable product or area. We try to protect ourdomain by offering higher quality, superior ser-vice, lower prices, etc. We tend to ignore indus-try changes that have no direct influence on cur-rent areas of operation or commodity priorities.

These can be classified as "Innovator," "Follower,"and "Status Quo" positions.19

These descriptions cast Innovators as highlyproactive, curious, and more interested in maximizingsales than profits. From this, it is likely Innovators willhave more experience with IPG than either Follower orStatus Quo locals because they want to be "first."Followers take a more reasoned, financially cautiousapproach to innovation. Status Quo locals areautonomous, preferring to operate within establishedboundaries, geographic and otherwise. They are notrisk takers.

Iowa’s West Central Cooperative has developedthis innovation-friendly approach over the pastdecade.20 Noticing how rapidly some managers foldedonce they encountered obstacles, West Central con-cluded, "A key dimension of a culture based on inno-vation is that we must be willing to allow for experi-ments and accept failure."21

Applications—Although the size of respondentswas expected to automatically relegate them to theInnovator category, important features of cooperativeculture correspond to the Status Quo position.

For grain cooperatives, the "secure niche" pre-ferred by Status Quo locals could be the straightfor-ward objective of getting producer-members the high-est price. They would not dilute this focus even if lackof diversification increases financial stress on core ser-vices. "Service at cost," a cornerstone of cooperativephilosophy22, would reinforce this by minimizingexpenditures that could erode members’ return.

At the extreme, such cooperatives would operateminimally maintained, fully depreciated facilities. Thecooperative may even be operating in the red to pro-vide basic services. Reynolds identifies feed mills asone of top money-losing services among local coopera-tives in Oklahoma.23 Such feed operations might belimited to mainly grind and mix mills because thecooperative cannot afford or justify advances like pel-leting, biosecurity or computerized formulations. Infact, members’ reluctance to finance needed facilitieshas been cited as a core problem in the grain producer-cooperative interface.24

Under such operating constraints, the marketingpractices of the cooperative are likely to be similarlystreamlined--primarily buy-sell, where the cooperativefunctions as a middleman between grower and thenext level of the marketing channel. (Ginder observesthat the cooperative grain system has been developedon a buy-sell basis from its inception).25 The coopera-tive’s income then depends on the marketing margins(spread between the buying and resale prices) forgrain. Some risk losing member business by trying tocompensate for inadequate capitalization throughmaximizing the spread. Slowness in acknowledgingbasis movements and quickness in discounting graincould be the result of attempting to maintain them-selves as a viable economic entity.

By default or design, the secure niche may also bea homogeneous customer base of relatively small,often older, diversified family farmers. The linkbetween cooperative and customer is a trust based onfamiliarity ("We grew up together."). Established loyal-ties may mean that the cooperative neither gets newcustomers, nor loses the existing ones. Unlike moreaggressive suppliers, such cooperatives are often par-ticularly sensitive to farmers other suppliers mightwrite off as inefficient.

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19 Gupta, Ashok K., S.P. Raj, and David Wilemon, A Model forStudying R&D--Marketing Interface in the Product InnovationProcess, Journal of Marketing, 50 (Apr. 1986), 15. In theirframework, Innovators are “Prospectors” Followers are“Analyzers,” and Status Quo, “Defenders” and “Reactors.”

20 Seaman, Wayne, “The Chain is Only as Strong as the WeakestLink: The Need to Strengthen Human Capital in Cooperatives,”Farmer Cooperatives in the 21st Century Conference Proceedings,Iowa State University, June 9-11, 1999.

21 Ibid, 43.

22 ”Service at cost is a generally accepted principle of cooperation. Itusually is acomplished by the allocation of net margins to patronson the basis of business done with the cooperative. This proceduremay or may not result in all patrons receiving service at thecooperative’s cost of serving their class of transaction.” See Menzie,Keith L, Paul V. Preckel, and Lee F. Schrader, Cost-of-Service vs.Uniform Pricing in a Cooperative Feed Manufacturing andDistribution System, Journal of Agricultural Cooperation, 1987, 31.

23 Reynolds, Bruce J., Decision-Making in Cooperatives with DiverseMember Interests, USDA: Rural Business-Cooperative Service,RBS Research Report 155, April 1997, 5.

24 Thurston, Stanley K., Michael J. Phillips, James E. Haskell, andDavid Volkin. Improving the Export Capability of GrainCooperatives, USDA: Farmer Cooperative Service, FCS ResearchReport 34, 53.

25 Ginder, Roger. Restructuring the Grain Industry andCooperatives Role. Ames, Iowa: Iowa State UniversityDepartment of Econmics Staff Paper, Rev. 1991, 14.

Developing a loyal customer base may be a nec-essary counterpart to the value placed on indepen-dence by their customers--their option to sell any-where that they can get another penny a bushel.Cummins, et al., explain: "The grain producer tends tosell at the best price, often discounting the value of theservices and overall benefits provided by the coopera-tive. . . even though the producer invests in the coop-erative, an obligation to do business [with it] is oftenlacking."26

Paradoxically, the value members place on inde-pendence also encourages them to form--and keep--their "own" cooperative, even if its marketing territoryis small, limited to a county or two. Fulton observes,"Joint ventures and strategic alliances allow the localcooperatives to preserve their status as separate busi-ness entities and therefore, the loyalty and commit-ment of their members."27

This parochialism contributes to a certain isola-tion, although members may not perceive it as such.Reynolds observes, "Members who prefer smaller,more localized cooperatives value their familiarity andacquaintance with the membership--a condition whichis often diminished by consolidation with a coopera-tive outside their community."28 Parochialism may alsoaffect another core issue in the producer- cooperativeinterface: whether producers can be served more effec-tively through unifying two adjacent cooperatives, adifficulty observed by Thurston, et al.29

Independence is expressed in other ways. Thelocal’s grain is typically sold to the highest bidder,even if its own regional cooperative wants it.Describing the grain industry of the 1980s, Dahlobserved, "Regional cooperatives have few captivecustomers among their affiliated locals. Their pricebids must be competitive with investor-oriented firms(IOFs) or they lose the business."30

Such opportunism among locals can carry overinto other activities and result in situations where anoncooperative partner is valued or trusted more thanthe regional they own. While economics may makesuch choices valid in any particular instance, overall,the cultural emphasis on independence can lead toissues of ownership and control within the federatedsystem. For example, although a group of locals ownsthe regional cooperative, some may not necessarilyidentify with it. At the extreme, the regional becomesjust another agribusiness supplier, one that can beplayed off others to get the best deal.

While member affiliation with a particularregional cooperative may be tenuous from year to yearin the local’s search for the best deal, often the bedrockimage or identity of the cooperative is intrinsicallylinked with the persona of its general manager. Thelate Truman Torgerson’s comments reflecting on hisexperience managing Lake to Lake, dairy cooperativein Wisconsin suggest this possibility:

W e have learned that the influence of the manag-er (chief executive officer), next to the loyalty of themembers, exceeds all other influences. And the suc-cess of the cooperative depends on his integrity, skills,and ability in developing with directors a constructivebusiness plan and policy that effectively meets variousconditions as they arise.31

Cooperative managers have a pivotal role in fos-tering innovation. Those who define their role simplyas moving more product than the previous year (e.g.,fertilizer), may not see the need to develop new, morecomplicated services and products, such as precisionagriculture and speciality grain. For some, marketingis simply a matter of, "You sell it for $1.50; we’ll sell itfor $1.49." Others, who literally try to maintain the sta-tus quo, may approach competition gingerly: "You stayin your territory and I’ll stay in mine." This approachis changing, although , as managers become more will-ing to declare, "This county is mine."

Survey Results

Managerial Responses— The survey nettedresponses from 143 general managers; 49 feedmanagers, and 38 grain managers--a 25 percentresponse rate overall. General managers represented62 percent of all respondents; feed managers, 21

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26 Cummins, David E., Franicis P. Yager, Charles Hunley, MichaelKane and Bruce Reynolds, Cooperative Involvement in GrainMarketing. USDA: Agricultural Cooperative Service, ACSResearch Report 38, August 1984, 14.

27 Fulton, Joan R., Michaell P. Popp, and Carolyn Gray, StrategicAlliance and Joint Venture Agreements in Grain MarketingCooperatives. American Cooperation 1996 Yearbook, Washington,D.C.: National Council of Farmer Cooperatives, 2.

28 Reynolds, Bruce, Specialization Networks Offer Alternative toConsolidation of Local Cooperatives, USDA: Rural Business andCooperative Development Service, Farmer Cooperatives,February, 1995, 146.

29 Thurston et al., 53.30 Dahl, Reynold P., “Structural Change and Performance of GrainMarketing Cooperatives,” Journal of Agricultural Cooperation, 1991,72.

31 Torgerson, Truman, Building Markets and People Cooperatively:The Lake of Lake Story. USDA: Agricultural Cooperative Service,1990.

percent; and grain managers, 17 percent.32, 33 Returnswere heavily skewed in favor of general managers,despite repeated follow-ups to other managers, aresult which may demonstrate the primacy of that rolewithin cooperatives.34

More than 40 percent of managerial respondentswere from the North Central region (Iowa, Minnesota,W isconsin, South Dakota, and North Dakota) and 30percent from the Eastern Corn Belt (Illinois, Indiana,Ohio) (Table 1).

Innovator Response— Overall, respondentswere evenly divided among the categories ofInnovator, Follower, and Status Quo (Table 2).35

Regional distribution by innovative style is shown inTables 3 and 4.

Survey Overview— Locals were instructed toselect all responses or alternatives that described theirsituation. Survey topics are discussed in the followingsequence:� experience with IPG� assessment of advantages and disadvantages;grain producer response;

� investment horizons;� relationship with regional cooperatives;� competition from vertical integration; and� discussion and conclusions.

Experience with IPG

To ascertain links between IPG experience andattitudes, respondents indicated the volume of identi-ty-preserved and commodity grain handled by theirlocal during 1998 and expectations for 1999.36

Corn

1998 IP Corn—Varieties include blue, hardendosperm, high amylose, high starch, organic, postharvest pesticide free, waxy, white, high oil (HOC),nutritionally dense/high protein, high lysine/opaque,

and low phytase.Across the 135 respondents reporting, the aver-

age amount of such grains handled by their local was142,000 bushels. Maximum amount handled was 2.3million bushels. Sixty-three locals did not handle anyIP corn.

At 257,000 bushels in 1998, Innovators’ averageIPG corn volume was almost double that of Followersand five times as much as Status Quo locals (Table 5).These were significant differences (p>.005) accordingto F-test values from an analysis of variance (Table 6).Statistically significant differences in average volumewere not apparent between Innovators and Followers,nor between Followers and Status Quo locals.

The maximum volume handled among Innovatorlocals was 2 million bushels; 2.3 million amongFollowers, and 0.7 million bushels among Status Quolocals.

1998 Commodity Corn— The primaryexample of this category is No. 2 Yellow Corn. Acrossthe 177 locals responding, the average amounthandled was almost 4.2 million bushels. Maximumvolume was 33.8 million bushels. Only 5 localshandled no commodity corn.

At about 7.3 million bushels, the average amounthandled by Innovators exceeded Followers by almost 4million bushels and Status Quo by 4.5 million bushels(Table 5). Only a slight difference existed between theaverage volumes of Followers and Status Quo locals.Innovators’ volume compared with Status Quo wasextremely significant (p>.0001), and compared withFollowers, highly significant (p>.001) (Table 6).

Across respondents, an average of .03 of a bushelof IPG corn was handled for every bushel of commodi-ty corn. Among Innovators and Followers, this ratiowas .04 and among Status Quo, .02

The maximum amount of commodity corn han-dled among Innovator locals was almost 34M bushels,compared with 16M bushels for Followers, and 13Mbushels for Status Quo locals. Maximum Innovatorvolume was twice that of Followers and 2.6 times thatof Status Quo locals.

Anticipated 1999 IP Corn—The averageanticipated volume was 246,000 bushels according tothe 128 locals responding, representing a 42 percentincrease over average 1998 volume. Maximumexpected volume was 5 million bushels.

At 408,000 bushels, Innovators expected toalmost double their average expected volume in 1999.Followers anticipated moving from 1998's 141,000

7

32 Total percentages may not add up to 100 due to rounding.33 Responses from managers provide the largest numerical basis forconclusions, and so are reported first.

34 Such results negated the survey’s random sampling.35 Where multiple managers were surveyed from the same local,some ratings of innovativeness may have differed. Few responseswere received from multiple managers within the samecooperative, so such overlap was ignored.

36 Minimum volume for all grains was zero.

bushels to 208,000 bushels. Status Quo locals anticipat-ed a 241 percent increase--from 50,000 bushels to168,000 bushels. Differences between innovator classesin expected outcomes were not statistically significant,however.

Expected 1999 Commodity Corn—The 162respondents expected an average of 4.4 million bushelsto a maximum of 35 million bushels.

Innovators expected to handle an average of 7.3million bushels; Followers, 3.5 million bushels; andStatus Quo, 3.2 million bushels. Respective maximumswere 35 million; 14 million; and 20 million. Differencesbetween all three groups were extremely significant(p>.0002); as well as between Innovator and StatusQuo (p>.0009). The difference between Innovators’ andFollowers’ expected commodity volume was highlysignificant (p>.002).

Wheat

1998 IP Wheat—Most wheat varieties--hardred winter, hard red spring, soft red spring, soft redwinter, durum, hard white, and soft white--aretypically considered wheat classes, with traits moreinherent than genetically engineered.37 Such traitsconstrain end uses to particular applications--pastarather than confectionary goods. Wheat cannot beswitched among alternative uses, while the defaultmarket for genetically engineered corn is the No. 2yellow corn market.

Eighty-one locals did not handle IP wheat.Average volume of the 87 respondents was 60,000bushels, with a minimum of zero and a maximum of0.5 million bushels. When considering average volumeby innovator class, differences were marked:Innovators averaged 41,000 bushels; Followers andStatus Quo, 2,000 bushels each (Table 5). Differencesbetween all three groups were significant (p>.05); aswere the differences between Innovators and StatusQuo (p>.07) and Innovators and Followers (p>.09)(Table 6).

1998 Commodity Wheat—The 126respondents handled an average of 1 million bushels,with a maximum of 13 million bushels. Twenty-ninelocals did not handle commodity wheat.

Innovators led again, handling an average of 2.1million bushels, compared with Followers’ 452,000

bushels and Status Quos’ 905,000 bushels (Table 5).Innovators’ maximum was 13 million bushels, with 9million for Followers and 8 million for Status Quo.Differences between all three groups were highly sig-nificant (p>.001), as well as between Innovators andFollowers (p>.001). Significant differences existedbetween Innovators and Status Quo (p>.04), but notbetween Followers and Status Quo (Table 6).

Anticipated 1999 IP Wheat—Among the 76respondents reporting, average 1999 volume wasexpected to be 19,000 bushels, with a maximum of750,000 bushels. The patterns apparent in actual 1998bushels by innovative style were duplicated for 1999expectations, although Innovators expected to almostdouble their volume (Table 5).

Expected 1999 Commodity Wheat—Average volume projected by the 108 respondents was3.2 million bushels, to a maximum of 250 millionbushels. Innovators anticipated 1.9 million bushels to amaximum of 10 million; Followers expected 7.3 millionbushels to a maximum of 250 million; and Status Quoexpected 748,000 bushels, to a maximum of 4 millionbushels. Only differences between Innovators andStatus Quo were significant (p>.03).

Soybeans

1998 IPG Soybeans—Varieties include tofu,high oleic, low linolenic, and high protein. Themaximum volume among the 114 respondentsreporting was 1 million. bushels, with an average of45,800 bushels. Seventy-five locals did not handle IPsoybeans.

The average volume of Innovators was 100,000bushels, to a maximum of 1 million bushels. Followers’average was 28,000 bushels, to a maximum of 260,000bushels. Status Quo average was 23,000 bushels, up to300,000 bushels (Table 5). Differences between all threegroups were highly significant (p>.03); and betweenInnovator and Status Quo, significant at p>.05, and forInnovator and Follower compared, significant at p>.07(Table 6).

1998 Commodity Soybeans—The maximumvolume for the 166 respondents was 22 millionbushels, with an average of 1.6 million bushels. Only10 locals did not handle generic soybeans.

Innovators’ average volume was 2.5 million to amaximum of 15 million bushels (Table 5). Followers’average volume was 1.1 million to a maximum of 4

8

37 Sparks, Inc., has observed that no biotech wheat product has beencommercialized yet due to the presumed greater difficulty in itsgenetic modification and scientific delay.

million bushels. Status Quo average volume was 1.4million to a maximum of 22 million bushels.Differences between all three groups were highly sig-nificant (p>.01); between Innovators and Status Quosignificant (p>.06); between Innovators and Followers,highly significant (p>.002); and not significant betweenFollowers and Status Quo (Table 6).

Anticipated 1999 IPG Soybeans—Themaximum expected volume for the 144 respondentsreporting was 28 million bushels, at an average of 1.8million bushels.

Innovators anticipated an average of 169,000bushels, to a maximum of 2 million bushels (Table 5).Followers anticipated an average of 109,000 bushels,also to a maximum of 2 million bushels. Status Quoforesaw an average of 76,000 bushels, to a maximum of1 million bushels. None of these differences were sig-nificant (Table 6).

Anticipated 1999 Commodity Soybeans—Theaverage anticipated volume among the 144respondents was 1.7 million bushels, to a maximum of28 million bushels (Table 5). Innovators expected toaverage 2.6 million bushels, to a maximum of 15million bushels, and for Followers it was an average of1.1 million bushels, to a maximum of 4 millionbushels. Status Quo expected to average 1.6 millionbushels, to a maximum of 28 million bushels.Significant differences existed between all three groups(p>.08) (Table 6). Only the difference betweenInnovators and Followers was highly significant(p>.01).

IPG Handling PremiumsLocals reported their typical commodity grain

handling margins are generally 10 cents/bushel.Industry observers said that an IPG premium muchbeyond that would place local elevators at a seriouscompetitive disadvantage, potentially precluding acooperative role in the specialty industry. Cunninghamand Unnevehr report a survey of Midwestern grainhandlers indicated they paid a premium to the farmerof 30 cents/bushel above the market price, and the"country elevator usually received that amount plusten cents more from whomever they delivered to."38

Low premiums are also supported by test results fro m

Bremer County, Iowa, where local elevators incurredan additional handling charge of only 5 cents/bushelwhen handling high oil corn, compared with conven-tional corn.39

Survey results from locals indicated 61 percent ofgeneral managers wanted a premium of at least 10cents/bushel, making IPG, at a minimum, twice asexpensive as conventional grain (Table 7). Grain andfeed managers were more willing to accept to acceptlower premiums.

Interest in larger premiums persisted when inno-vative style was considered, especially among StatusQuo locals (Table 8). Yet, Innovator locals were almosttwice as likely as Status Quo locals to charge a premi-um below 10 cents, 35 percent versus 18 percent.Follower locals fell in between at 28 percent. Moreover,Follower and Status Quo locals were almost threetimes as likely as Innovator locals not to know IPGhandling costs.

Recent industry opinion regards IPG as a productstill in many ways unknown, including handling costs.Nevertheless, survey evidence shows Innovator localsspecializing in IP corn (i.e., handling over the survey’saverage of 142,000 bushels) are considerably more like-ly to have lower handling costs--65 percent charged lessthan a 10 cent/bushel premium (Table 9).40 These man-agers have transferred the volume- driven mentality ofthe commodity sector to IPG, to use facilities as inten-sively as possible--which suggests getting into IPG maybe something of an "all or nothing" proposition.

Specialized IPG ServicesIPG involvement can be regarded as growing

from simple activities to complex ones like manufac-turing pasta or handling high volumes of multiplevarieties. From the standpoint of volume, resultsshowed locals were at two extremes--either heavily orbarely involved. Further survey results revealed that,irrespective of grain species, keeping up with develop-ments in the IPG market was the most popular activitypursued by locals (Tables 10-12). Providing technicalinformation and seed distribution followed in impor-tance, although each was pursued by less than 20 per-cent of respondents.41 Processing activities--milling,crushing, refining--and grain quality or compositionassays--were rarely conducted.

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38 Cunningham, Carrie J. and Laurian J. Unnevehr, MarketSegmentation for Genetically Modified Corn and SoybeanExports. Presented at Transitions in Agbiotech: Economics ofStrategy and Policy,” June 24-25, 1999, Washington, D.C., 9.

39 Baumel, 23.40 Small sample size for Follower and Status Quo precludedgeneralizations about their practices.

41 Bias from a small number of respondents may explain whyFollower wheat activities were less concentrated in outlookmonitoring.

IPG Handling CapabilitiesPhysical involvement with IPG demands special-

ized resources. Respondents ranked their capabilitiesfor handling several key aspects of IPG, from seed dis-tribution and access to cleaning, drying, and storage(Table 13). Cooperatives reported their most significantweaknesses in grain testing, e.g., (1) NIR--near-infrared technology--to measure composition, and (2)assays for grain quality, fat content, etc. A lesser con-cern, but nevertheless reported by 60 percent of allmanagers, was the scarcity of bins at the elevator dur-ing the peak harvest period. Commitment to IPG prob-ably cannot happen by the cooperative sector as awhole unless infrastructure is substantially improvedin these areas.

Combining "excellent" and "adequate" ratingsrevealed cooperatives were strongest in obtaining anddistributing IPG seed, including accessing seedexchanges when needed, and providing technical sup-port. Grain cleaning and drying facilities appeared tobe suitable for the present, with 57 percent of all man-agers providing a combined favorable rating, but prob-ably not adequate for greater stress on the existing sys-tem.

Managers were largely consistent on these issues,irrespective of position (Table 14). Differences by inno-vative style were also not apparent (Table 15).

Buyer AvailabilityBuyer availability has generally been considered

to be a moot issue for IPG insofar as most grains aregrown under contract for a specific user and thereforewould not be sold on the open market. Demand isexpected to generate its own supply, not the reverse.Nevertheless, about 20 percent of managers routinelyexperienced difficulty finding buyers (Table 16). Morethan 25 percent of Status Quo cooperatives also experi-enced problems, compared with 15 percent ofInnovators and 23 percent of Followers. Whether eval-uated by managerial position or innovative style, theconsensus was that more development is needed toidentify potential IPG buyers.

The survey asked whether buyers were readilyavailable or required effort--particularly market devel-opment--to locate (Table 17). More Eastern Corn Beltlocals than those in other regions reported buyersrequired little or no work to identify. Cooperativesfrom the South Central region stressed the need formore market development.

IPG FeedTwenty five percent of all managers reported

their local had manufactured IPG-based feed during1998-99 (Table 18). Manufacturing was more frequentamong Innovators (37 percent) than Followers (27 per-cent) and Status Quo (10 percent).

IPG Advantages and Disadvantages

Trait PreferencesWhen choosing traits for seed originated (sold)

by their locals, the priority among managers was max-imizing net returns for grain producer-members, fol-lowed by compatibility with grain facilities and exper-tise (Table 19). Accessibility of traits was third,indicating specific germplasm, as a "manufactured"product, may have limited availability.

Feed concerns influenced choice for 10 percent ofrespondents, via interest in traits lowering ration costor increasing feed efficiency, or those directly support-ing locals’ own feed manufacturing. Sensitivity to suchissues was particularly marked among feed managers.Maximizing producers’ returns, facility compatibility,or trait access were markedly more important amonggeneral managers than feed managers. Grain man-agers were generally in accord with general managers.

Results suggest locals’ priorities are independentof other agribusinesses. Little support was demonstrat-ed for the food or feed operations of regionals orinvestor-owned firms, implying minimal vertical coor-dination and integration between locals and others inthe supply chain.

When considered by innovative style, the over-whelming priority was maximizing grain producerreturn, (80 percent, Status Quo locals; 76 percent,Innovators; and 72 percent, Followers (Table 20)).42

Compatibility with grain facilities and supportinglocals’ feed manufacturing were a distant second andthird.

IPG AdvantagesConcern about members’ returns also skewed

perception of IPG advantages: 24 percent of all man-agers viewed IPG as a way for members to diversifyand increase revenue (Table 21). Second was IPG’spotential as a new opportunity for cooperatives, andthird, the competitive edge conferred by these grains--a factor less apparent to feed managers than others.

10

42 It is not clear why preferences according to managerial positionshould be more diverse than those revealed by innovative style.

Feed managers were more enthused about IPG’s rolein higher quality feed rations and increased feed effi-ciency, while grain managers viewed IPG as a newproduct opportunity.

The member focus demonstrated in trait prefer-ences and perceived advantages undoubtedly reflectcooperatives’ reason for being. Wadsworth says thatthe ultimate goal of cooperatives undergoing industrychange should be to serve producer members in themost efficient and beneficial way.43 This benefit may beself-limiting, however. Citing cooperatives’ historicallylimited role in grain exports, Ginder observes, "the sys-tem tended to concentrate on activities directly relatedto the grain and farm products produced by the farm-ers who owned the system."44

"New opportunities" dominated member returnsas the primary advantage of IPG irrespective of innov-ative style, particularly among Follower locals, whomay be seeking a way to take their cooperative to thenext level (Table 22). Second among Status Quo localswas IPG as a way for members to diversify andincrease revenue. Innovators’ second priority, main-taining a competitive edge in grain marketing, as wellas Followers, high quality feed rations, exhibit a subtlebut telling difference in emphasis from Status Quo.The latter appears to be driven by a singular focus ofraising the prices members receive for grain, a goalother locals may pursue indirectly through more var-ied approaches.

IPG DisadvantagesThe need for premiums to drive change at each

level of the grain marketing system and questionsregarding the "true" value of a product produced out-side the open market have frequently been consideredobstacles to IPG’s adoption. These and other issueswere evaluated in a lengthy survey question.Responses have been grouped according to whetherthey reflect (1) overall system concerns, i.e, the needfor premiums and end-use demand to drive the IPGmarket; (2) grower issues; or (3) concerns aboutchanges in the day-to-day practices of cooperative ele-vators.

Grower commitment was the salient issue amongmanagers: Were returns sufficient to sustain farmerinterest enough to develop a consistent market, giventhe potential for yield drag (reduced yields arisingfrom limited pollination or other factors) (Table 23)?Elevator obstacles ranked second as a group, mainly

reflecting the need for considerable or expensive facili-ty adjustments required to accommodate IPG, and lossof income and flexibility from blending--a standardrevenue-generating practice in the industry.

Specialty seed grain appears to be a market apartfrom seed distributed by farmers. Despite industryconcerns about competition from farmer-dealers, coop-erative managers did not see a potential conflict ofinterest.

Status Quo locals particularly were concernedabout maintaining established operating practices andfacilities (Table 24). Ten percent of Status Quo wereconcerned about the need for potentially expensivefacility adjustments, compared with 5 percent ofFollowers and 1 percent of Innovators. Twenty-fivepercent of Status Quo were concerned about IPG’simpact on the revenue and flexibility offered by grainblending, compared with 14 percent of Followers and10 percent of Innovators. Blending different grains toreach an average No. 2 quality is diametricallyopposed to the segregation and purity required forIPG marketing.

Innovator managers were looking toward futuredevelopments in IPG, insofar as 17 percent said,"Multiple (stacked) traits interest us more than the cur-rent single trait emphasis of IPG."

Grain Producer Response

For any agricultural cooperative, paying atten-tion to many different grower trends would seem to bea necessary part of business. In contrast, the survey’sdefinition of Status Quo managers was those who"tend to ignore industry changes that have no directinfluence on current areas of operation or commoditypriorities." And, in fact, the aptness of this descriptionshowed in their observations regarding four aspects offarmer behavior: extent of IPG adoption and trendover the past year; size of producer adopting IPG; andproducer size most likely to increase.

1999 Farmer Adoption—Respondentspredominately saw IPG having a scattered impact onfarmers within their marketing territory (Table 25).Grain managers particularly saw evidence of IPGadoption. Nine percent of all managers did not knowwhat impact IPG had within their area.

Sixteen percent of Innovators saw IPG makingsubstantial inroads, measured by farm numbers orsizes, compared with 7 percent of Followers and 1 per-cent of Status Quo (Table 26). Twelve percent of Status

11

43 Wadsworth, 4.44 Ginder, 16.

Quo did not expect IPG to have any impact in thefuture on producers in their marketing territory. Only5 percent each of Followers and Innovators felt thesame. Fourteen percent of Status Quo said they didn’tknow the extent of farmer adoption in their territory,compared with 4 percent of Innovators and 7 percentof Followers.

Trend from 1998 to 1999—About 40 percentof respondents saw increased planting from 1998 to1999, coinciding with industry observations (Table 27).Sixty percent of Innovators observed increasedplanting, compared with 36 percent of Followers and26 percent of Status Quo (Table 28). Only 4 percent ofInnovators did not know what the trend was, alongwith 12 percent of Followers and 21 percent of StatusQuo. Pfeffer and Salancik observe that organizationalenvironments are not given realities; they are createdthrough a process of attention and interpretation.45

Here, it is evident cooperative managers see what theylook for. If they are interested in IPG they studyproducer trends.

Size of Producer Adopting IPG—Amongrespondents, almost 50 percent saw IPG adoptiontaking place predominately among large producerswith 500 to 1,500 acres (Table 29). Grain managerswere more definitive about this aspect of IPG thangeneral and feed managers. Almost 20 percent sawIPG adoption occurring regardless of producer size.Another 20 percent of managers simply didn’t know.

Findings were similar when evaluated by innova-tive style (Table 30). Thirty percent of Status Quodidn’t know the trend, along with 18 percent ofFollowers and 13 percent of innovators.

Product Size Likely To Increase—Here,again, large producers predominated, whetherconsidered by managerial opinion or innovative style(Tables 31-32). Those who didn’t know were 17 percentof Status Quo, 16 percent of Followers, and 14 percentof Innovators.

Causes of Turnover—Inadequate premiums,yield drag, and limited elevator storage were theleading reasons accounting for turnover amongcontract growers, according to managers (Table 33).The significance of elevator availability highlights theimportance of cooperative infrastructure to back up

members’ planting intentions.Grain and feed managers in particular believed

IPG was too much work for producers compared withother grains, an observation made by only 3 percent ofgeneral managers. Departmental managers perceived ahigher level of producer concerns about elevator stor-age and perceptions of a small and inconsistent mar-ket, leading to a "wait and see" response by producers.

Investment Horizons

A particularly appropriate role for locals identi-fied by industry observers is bargaining on behalf ofgrowers for inputs and prices. This is an unconven-tional role for grain and supply cooperatives, but thespecial demands of IPG have opened to question manyestablished roles and behaviors. These and relatedissues were examined in a series of questions explor-ing the various dimensions of investment: the antici-pated accommodation required for IPG; preferredways of integrating IPG into the business; and willing-ness to wait for a satisfactory ROI (return on invest-ment).

Anticipated Impact on Locals—Virtually nomanagers anticipated making major adjustments intheir grain operations to accommodate IPG (Table 35).Almost half expected to be making at least someadjustments and 30 percent expected to have minimalinvolvement with IPG--"business as usual." Only 2-3percent concluded IPG would have no impact on theirlocal. Close to 20 percent didn’t know what to predict.

These findings were duplicated by innovativestyle (Table 36). Curiously, 21 percent of Innovatorsdidn’t know what to expect, compared with only 11percent of Followers and Status Quo. Given StatusQuo’s low receptivity to the many aspects of thesegrains, it is possible they had already decided not tohandle IPG.

Preferred IPG Activities—For 25 percent ofall respondents, coordinating feeding of cooperative-or member-owned livestock with member-producedIPG was the most attractive option (Table 37). Twenty-three percent chose developing strategic alliances withIPG seed companies or technology developers.Bargaining regarding producers’ contract terms ofinputs was chosen by 17 percent, the same percentwho saw themselves jumping in and out of the IPG

12

45 Pfeffer, Jeffrey and Gerald R. Salancik, The External Control ofOrganizations. New York: Harper & Row, 1978, 13.

business as warranted by grain prices.Innovators were highly in favor of feeding live-

stock (43 percent) compared with 33 percent ofFollowers and 18 percent of Status Quo (Table 38). Thelatter liked being an in-and-outer in response to grainprices, 40 percent compared with 9 percent ofInnovators and 22 percent of Followers.

From these results, it is not inconceivable toadvocate a bargaining role for local cooperatives. Thecaveat is that they prefer more traditional roles of feed-ing livestock or pursuing strategic alliances--roles withwhich they are more familiar.

Return on Investment—Fully 50 percent ofall respondents wanted to wait and see how the IPGmarket develops before they would consider investing(Table 39). Twenty-five percent were willing to waitfrom 2 to 5 years for a satisfactory return on aninvestment of at least $250,000, a benchmark used toqualify as a major investment. This, and the 14 percentwilling to wait 5 years suggest cooperative managershave some appreciation of the time required forinvestments to mature.

By innovative style, however, a different consen-sus emerges. Sixty-two percent of Status Quo wantedto "wait and see," compared with 36 percent ofInnovators and 51 percent of Followers (Table 40).Innovators were almost 3 times as likely as Status Quolocals to be willing to wait from 2 to 5 years for a satis-factory payoff.

Clearly, Status Quo locals were skittish aboutcommitting investment resources to IPG. Innovatorsfavored a bolder approach, reflecting their priority onbeing industry leaders and greater willingness to risklosses.

Relationship with Regional Cooperatives

Competition with LocalsMost local cooperatives are members of one or

more regional cooperatives upon whom they rely foradvanced grain marketing programs; further assembly

and processing; assisting in modernizing and con-structing grain facilities; and providing merger andother economic and legal assistance.46

The ties between regionals and locals havealways been weaker than in other commoditiesbecause most grain locals can and do market indepen-dently of regionals’ own assembly and marketingefforts. As member grain producers routinely seek thebest price on their own,47 so do their locals. This inde-pendence has shrunk the grain volume available toregionals; limited the cooperative presence in exportmarkets; and generated a gradual pullback by region-als from what is considered to be a commodity "firsthandler" business for cooperatives. Alliances withinvestor-owned firms such as Cargill or ADM appearto have filled in the blanks in the regional-local inter-face.48

The scope of regionals’ services to locals is alsochanging. They are frequently considered too stretchedto adequately serve member locals.49 This may notmatter for large successful locals, who may no longerrequire the regional’s services and bypass it.50 It maywell matter for less successful locals who can be con-sidered "a burden to the regional cooperative."51 Suchlocals may not be able to afford the service feesincreasingly required to gain access to specialized ser-vices and technical assistance offered by regionals tomember cooperatives. Other neighboring locals maybecome the source of such services, perhaps as a pre-lude to a merger or joint venture. Or, the local maybecome a division of a regional cooperative, in a merg-er process called "regionalization."52 The latter, in par-ticular, has been perceived by locals as a potentialthreat to their autonomy and the integrity of the feder-ated system.53

Interviewed locals appear to be defining region-als more as global-reach food companies than as graincooperatives (particularly as locals themselves enterexporting). Regionals’ identity as service providers forlocals also appears to be diminishing--unless locals arewilling to merge with the regional. Regionals appear tobe specializing in one arena and locals in another.

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46 Grain Cooperatives, USDA: Agricultural Cooperative Service,Cooperative Information Report 1, Section 15, Revised September1990, 30.

47 Cummins, 14.48 Examples are joint ventures between Ag Processing Inc and ADM;Growmark and ADM; and AGRI Industries and Cargill. SeeWarman, Mar, Cooperative Grain Marketing: Changes, Issues,and Alternatives, RBS unublished ms., 1992.

49 Hogeland, 1995, 16.

50 Fulton, Joan R. and Robert P. King, “Relationships amongInformation Expenditure, Economic Performance, and Size inLocal Grain Marketing Cooperatives in the Upper Midwest,”Agribusiness 9(2), 1993, 144.

51 Ibid.52 Stevens, Bob, “Regionalization: A Tool for Maintaining aCooperative Presence,” American Cooperation 1998. Washington,D.C.: National Council of Farmer Cooperatives, 39.

53 ”Cenex-Harvest States starts move to linked system,” Feedstuffs,December 21, 1998, 20.

As the cooperative sector enters the IPG business,this specialization and division of labor could precludethe procurement competition between large locals andtheir regionals that ultimately forestalled meaningfulcooperative participation in export markets. Globalmarket development is considered a prerequisite formaximizing IPG’s potential--high oil corn, for exam-ple, can have particular value in hot climates that can-not store grease. Yet entrenched perceptions of compe-tition between the two levels of the federated systemcould circumscribe cooperative participation in thisfurther evolution of the grain market.

To explore this, locals were asked how much theycompeted with their regional cooperative in the com-modity grain business. For a quarter of all managers,specialization was evident because the regional serveddifferent markets than the local (Table 41). For 28 per-cent, very little competition occurred because the localpartnered with the regional in key activities.Competition did hang on among a third of respon-dents, driven by the need to maximize grain prices forproducer-members. Only 10 percent reported consider-able competition, such that the regional was one oftheir chief competitors in the grain business.Diminished regional participation in grain mayaccount for this response. Managers were consistent inthese viewpoints, aside from those feed managers whoconsidered their local above competition because itwas a superlocal or so-called "mini-regional."

Important differences were evident by innovativestyle (Table 42). Partnering diminished competition forat least 32 percent of Innovators and Followers butonly 19 percent of Status Quo locals. Getting the bestprice for growers drove 40 percent of Status Quo localsto compete as necessary with their regionals, com-pared with 22 percent of Innovators and 32 percent ofFollowers.

Preferred Regional ParticipationAsked how they preferred to work with their

regional in IPG activities, 43 percent of managers said,"work closely as a partner" (Table 43). Fifteen percentwould like their regional to invest in IPG food or feedprocessing operations to complement locals’ raw mate-rial acquisitions. This may be considered a very limit-ed endorsement of upstream integration by regionals.Some interest was expressed in alliances with otherlocals or with technology/seed companies.

By innovative style, a slightly greater percent ofStatus Quo expected the regional to partner with them;more were also concerned about potential competitionfrom regionals (Table 45). Innovators were particularly

interested in pursuing alliances with technology devel-opers/seed companies, a finding which echoes com-ments by interviewed locals: In IPG, what do regionalsbring to the table ?

If locals decide not to participate in IPG market-ing or handling, regionals could decide to go it alone, amove consistent with their evolving sphere of activityin food processing. Confronted with this possibility, 42percent of respondents expressed concern that region-als might bypass locals (Table 45). Yet, 37 percent werewilling to interpret regional involvement as a founda-tion for their future efforts. Responses expressingslight reservations or an unequivocally endorsingdirect participation were rejected. From this it seemsapparent that how regionals enter IPG could makemember locals pleased or not.

Direct participation was highly acceptable to 24percent of Innovators; 10 percent of Followers, butonly 8 percent of Status Quo (Table 46). Similarly, 51percent of Status Quo were concerned about beingbypassed, compared with 34 percent of Innovators and46 percent of Followers. Almost one-third ofInnovators and Status Quo were willing to regarddirect participation as a foundation for their ownefforts, however, along with 42 percent of Followers.

By managerial position or innovative style, localsoverwhelmingly rejected the notion that they or theirregionals should stay out of IPG. So, although there issome polarity among responses by innovative style, acertain amount of flexibility exists--which regionalscan either cultivate or override.

Partnering AdvantagesMany possibilities were listed in the survey to

determine what aspects of regionals appealed to localsconsidering IPG activities. Among all managers, theprimary advantages were regionals’ alliances withother system participants (15 percent); global marketaccess/share uncertainty and risk (both, 13 percent);and their potential to offer a total system, from seed tofood or feed (11 percent) (Table 47). The relativelysmall percent for each item probably results from thelarge number of potential advantages contained withinthe survey question.

Consistent with locals’ evolution to a position ofless day-to-day dependence on regionals, only 4 per-cent cited their technical production expertise as anadvantage. Another four percent said they trustedregionals more than other partners, another indicationthat the traditional regional-local interface is changingsignificantly.

14

Historically, regionals have wholesaled theirmanufactured inputs to locals and provided researchand technical support. Locals have been, in theory, theretailer, providing credit and customer technical sup-port.54 Yet regionals have increasingly gone direct tocustomers, blurring traditional boundaries, and in theprocess, perhaps throwing all aspects of traditionalroles open to question.

If trust is defined as the "expectation that one’sexchange partner will not act opportunistically,"55 thenregionals have, to a degree, failed their locals by goingdirect, because, "The possibility of opportunisticbehavior by a partner generates the most salient trans-action costs in the alliance context."56 Increasingalliances with noncooperative partners can then beunderstood as a sanction imposed on regionals bylocals, a loss of repeat business with the same part-ner.57 Regionals then lose out on "character-basedtrust," where firms more readily trust others sociallysimilar to themselves.58 Such trust is an important safe-guard or control mechanism in alliances, reducing oreliminating the need to "spell everything out" beforeproceeding.

Fuzzy and permeable boundaries between localsand regionals may be attributed to the fact that thesurvival of the federated cooperative system hasalways been implicitly predicated on double marginsor from the farmer perspective, double markups. Suchconflicts can only be minimized by carefully circum-scribed, nonoverlapping roles. But the shrinking cus-tomer base for locals has introduced a destabilizingelement in the federated system by forcing locals toserve larger marketing territories to survive. In theprocess, they have co-opted many of the activities for-merly the exclusive domain of regionals.

For both regionals and locals to survive as a sys-tem, it becomes increasingly important to scope outactivities exclusive to each. Interviews and surveyresults coincide here, by identifying system alliancesand networks and building a global presence as properactivities for regionals, things locals are only equippedto do only in rare instances.

The importance of system alliances and globalaccess became even more prominent when innovativestyle was considered (Table 48). Also important herewas regionals’ potential for a "total system" encom-passing the entire production and marketing channel.Innovators in particular favored alliances 35 percent,versus 28 percent of Followers and 22 percent of StatusQuo.

Partnering DisadvantagesThe most pronounced disadvantage to regional

partnering concerned the pivotal role of farmer-mem-bers, how to get sufficient return per acre to sustaintheir interest in IPG, cited by 24 percent of all man-agers (Table 49). This issue, and sharing margins withregionals, preoccupied grain managers, in particular.Feed managers stressed the potentially sluggishresponse induced by regionals’ administrative layersand the need to sustain a low-cost supplier position byminimizing input costs. Potentially conflicting priori-ties between regional and local also concerned them.General managers were more likely than their feed orgrain counterparts to see no disadvantages at all topartnering with regionals.

Having adequate technical support to delivernew technology to farmers was not considered a par-ticular hurdle, perhaps because locals have evolvedtheir own internal pool of expertise, making technicalsupport from regionals less critical.

Status Quo locals were particularly concernedthat IPG would not deliver enough return/acre tofarmers, another reflection of their mandate to providehigh prices to growers. They, along with Followers,had twice the concern of Innovators about sharing IPGmargins with regional partners. This again demon-strates Status Quo’s’ emphasis on autonomy and inde-pendence.

It is important to note that, across innovativestyles, aside from concern about returns/acre, mostlocals said there was no disadvantage to working withtheir regional in IPG.

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54 Halverson, Duane, The Need for Cooperative Restructuring inLight of the Changing Structure of Agriculture and ChangingMarkets: Is a Seamless System Possible?, Proceedings, FarmerCooperatives in the 21st Century, 1998, 26.

55 Gulati, Ranjay, Does Familiarity Breed Trust: The Implications ofRepeated Ties for Contractual Choice in Alliances, Academy ofManagement Journal, 1995, 38(1), 89.

56 Ibid., 99.57 Ibid., 93.58 Ibid., 95.

Competition from Vertical Integration

Industry observers have been concerned that thecontract production and producer-processor relationsfound in the broiler and pork industries will be repli-cated in the grain industry as IPG-contract productionspreads.59 Coffey asks bluntly, "Will pork, beef, sheep,grain, and vegetables all eventually wind up in totalintegration akin to the present broiler system?"60 Heanticipates local farm suppliers might be bypassedinsofar as farm customers (contract growers) arerequired to buy supplies from the contractor--the typi-cal situation in pork and poultry.

To determine whether locals were equally con-cerned, they were asked if their local cooperative wasconcerned that IPG developers/suppliers will takeover the grain market just as large integrators havemade inroads in the pork market and other agricultur-al products.

In fact, locals were concerned that integrationwould be replicated in the grain industry. Fifty-fivepercent agreed (strongly or somewhat) and 26 percentdisagreed (strongly or somewhat) (Table 51).

By innovative style, 14 percent of Status Quoagreed strongly, compared with 7 percent ofInnovators and 11 percent of Followers (Table 52). The"agree somewhat" response was concentrated in theInnovator and Follower categories: essentially 50 per-cent each, compared with 35 percent for Status Quo.The Innovator response may have been moderated bytheir willingness to pursue alliances with technologydevelopers/seed companies.

Perhaps as another reflection of their relativeindifference to the IPG market, 24 percent of StatusQuo had no opinion, compared with 14 percent ofInnovators and 19 percent of Followers.

Discussion and Conclusions

This study began with the premise that changesby local cooperatives would occur through a process ofbalancing the conflicting interests and resources at var-

ious managerial levels, not unlike the process experi-enced by producers when forming the cooperative.Survey results from 230 managers found that such aconstituency-based model of innovation did notdescribe local cooperatives’ response to the innovationof identity-preserved grains (IPG). With minor excep-tions, feed and grain department managers agreedwith the priorities of their general manager: coopera-tives spoke with one voice.

Despite internal consistency and uniformity ofsize, cooperatives differed markedly in their receptivi-ty to innovation, which can be attributed to their oper-ating style or culture. At one extreme, cooperativestook a circumscribed view of their activities anddomain, largely limiting themselves to a single over-riding objective: getting the best grain price for mem-ber producers. At the other extreme, cooperativesoperated in a multidimensional world where manyavenues and perhaps some money-losing detourscould ultimately achieve a similar end. Cooperativeswere found between these extremes but overall theyresembled, in volume and attitudes, the more con-stricted cooperatives.

Yet either group, uni- or multidimensional, wassuccessful by the standard of annual sales, a minimumof $14.5 million. By this standard, each could afford toinnovate. Nevertheless, the singular focus of the unidi-mensional cooperatives may have insulated them fro ma wider world view. If their grain marketing approachgives them adequate sales and volume today, they maynot look for evidence that their approach may be lesssuccessful tomorro w.

Although changes among producers would beexpected to trigger adjustments in the cooperativesthey own, survey results showed that unidimensionalcooperatives were slow to acknowledge such changes.Unlike their more progressive counterparts, they sawless evidence of producers adopting IPG in their mar-keting territory and were less likely to observe rele-vant characteristics of such producers, like size. Howmuch of this operating style is due to members’ man-date is not clear. The motto of a prominent Midwesternlocal, "We change--but only when farmers need us tochange," highlights what for many locals is a culturalimperative.

For multidimensional locals, the cultural priorityplaced on being first and willingness to bet on newproducts, like specialty grain-based feed, appears to beunderwritten by relationships with regional coopera-tives and IOFs. These cooperatives emphasize interde-pendence, while unidimensional cooperatives appearmore likely to retain the independence and isolation

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59 Hamilton, Neal D., Tending the Seeds; The Emergence of a NewAgriculture in the United States. Drake Journal of Agricultural Law(1), 1996. See also, Hamilton, “Why Own the Farm If You CanOwn the Farmer (and the Crop)? Contract Production andIntellectual Property Protection of Grain Crops. Nebraska LawReview 73 (48), 48-103.

60 Coffey, Joseph, D. Ag Analysis: Alternatives to the Integration ofAgriculture, Cooperative Farmer, Richmond, Virginia: SouthernStates Cooperative, July-August 1997.

that is the historical norm of grain cooperatives,including a competitive, if not adversarial, relationshipwith regional cooperatives.

Recorded dimensions of cooperative culture haveemphasized that cooperatives, like their farmer-own-ers, are conservative, cautious, slow to react, and high-ly independent. A new cooperative culture is emergingto take its place along this established framework toinclude managers who continually scan the environ-ment for new opportunities, who spread risk by part-nering, and who are psychologically at ease with thetime required for new investments to mature. Suchmanagers are, however, not quite ready to engage inbargaining activities on behalf of IPG contract growers.Their preference is for activities closer to their experi-ence, feeding cooperative-owned livestock with mem-ber-produced IPG grain, for example.

These results indicate local cooperatives can andshould be segmented by regional cooperatives or oth-ers addressing their needs. That is, they should grouplocals according to behavioral traits, such as (1) theprimary objective or focus of the cooperative (e.g., asingle-minded focus on maximizing grain price versusmore multidimensional objectives); (2) willingness totolerate financial uncertainty; (3) responsiveness toprior innovations; and (4) willingness to move outsideestablished product or geographic boundaries; anddevelop programs accordingly. These are all aspects ofdecision-making style.

Locals particularly valued regional cooperatives’potential to develop system-wide alliances and theirglobal market access, things they themselves are poor-ly positioned for. Some expressed concerns aboutregionals’ proceeding independently of locals in pur-suing IPG activities. Trust did not rank high as a moti-vator for associating with regionals over other poten-tial partners. Many locals have reached a point of lessday-to-day dependence on regionals, making themless willing to automatically turn to the nearest region-al when seeking alliances and partnerships.

Next to feeding livestock, locals envisioned them-selves pursuing strategic alliances with IPG seed com-panies or technology developers. These findings sug-gest regionals need to be aggressive in puttingpartnerships and alliances in place which compensatefor shortcomings of the cooperative sector. Otherwise,raw materials and product could ultimately besiphoned from the cooperative system as locals buildalliances on their own with noncooperative partners.

Because the specialty grain market has beenslower to develop than anticipated, no wholesaleaccommodation to its requirements is immediately

required by the cooperative sector. It is likely thatcooperative managers will have time to see whichpockets of opportunity offered by particular grains areworth cultivating. Controversy over the grains role infood and feed will give managers needed time toimprove their infrastructure and testing capabilities.

Nevertheless, survey results strongly suggest IPGare primarily attractive to those cooperatives alreadydeeply committed to the grain industry, as evidencedby their greater volumes of commodity corn, wheat,and soybeans. These managers have transferred thevolume-driven mentality of the commodity sector toIPG, to use facilities as intensively as possible. Thissuggests IPG may be something of an "all or nothing"proposition. It is likely that many cooperative man-agers will continue their focus on commodity grain foras long as possible.

The subtle drawbacks to this position may not beimmediately apparent. Some industry observersbelieve the costs of separation are often greater thanwhat profits can capture, making share gain in so-called "soft assets" (the relationship with the customer)the primary incentive for participating in IPG. Suchassets are an indispensable advantage in a rapidly con-solidating agribusiness environment. As supply chainslock into place, some cooperatives may never be ableto compensate for delayed entry into IPG. Otherobservers conclude IPG will eventually represent thecream of the grain crop, making the commodity sectora lower quality, residual market.

Although the magnitude of specialty grains’impact may not meet initial industry projections, theywill bring more testing and quality control into thedomestic industry. Managers focused solely on com-modity grains will probably resist these changes andbecome poorly positioned to compete in an evolvingmarketplace requiring greater precision. For them, spe-cialty grains are a core industry by themselves, requir-ing too high a cost in cultural change and specializedresources to pursue. For multidimensional managers,it is clear that specialty grains are a subset of a coregrain industry and so, an inevitable component oftheir operations.

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Table 1--Region of Respondents, Managers

Manager

General Feed Grain All

------------------------Percent------------------

Region:

West (Utah, Colorado,

Montana, Washington,

Idaho Oregon) 9 2 5 7

North Central (Iowa,

Minnesota, Wisconsin,

South Dakota, North

Dakota) 36 61 54 44

Eastern Corn Belt

(Illinois, Indiana,

Ohio) 37 14 22 30

South Central

(Nebraska, Kansas,

Missouri, Texas,

Oklahoma) 18 23 19 19

— — — — — — — —

Total 100 100 100 100

Table 2--Innovator and Managerial Classification of Respondents

Manager*

General Feed Grain Total

N Percent N Percent N Percent N Percent

Innovator 42 30 21 47 10 28 74 33

Follower 44 32 13 29 17 47 75 34

Status Quo 52 38 11 24 9 25 73 33

— — — — — — — — — — — — — — — —

Total 138 100 45 100 36 100 220 100

* Total manager distribution was 143 general managers; 49 feed managers; and 38 grain managers.

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Table 3--Region of Respondents, Innovative Style

Innovator Category

Innovator Follower Statu Quo

-----------------------Percent------------------

Region:

West (Utah, Colorado,

Montana, Washington,

Idaho, Oregon) 9 3 12

North Central (Iowa,

Minnesota, Wisconsin,

South Dakota, North Dakota) 51 46 33

Eastern Corn Belt

(Illinois, Indiana, Ohio) 19 33 37

South Central (Nebras