CROPP Cooperative

May 1999
Interview with: George Simeon, CEO; Theresa Marquez, Director of Marketing; Jim Wedeberg, Dairy Pool Coordinator; Pam Saunders, Meat Pool Coordinator; and Robert Koch, Produce Marketing Coordinator.
Goal: Secure stable, profitable prices for small-scale producers through development of new markets for organic dairy, vegetable, and meat products.
Date Established: February 1988
Area Served: United States
Number of Members: 170
Key Challenges: Cash flow and equity financing
Helpful Resources: National Farmers Organization, Cooperative Development Services, Wisconsin Center for Cooperatives, Wisconsin Center for Dairy Research, USDA Rural Development Division.

During the farm financial crisis of the late 1980s, producers responded to depressed commodity prices and federal program changes with a range of solutions. Some farmers organized a call for enhanced government assistance while others quietly tried to survive by taking off-farm employment. Elsewhere, in Wisconsin’s Coulee region, 35 farmers conceived of a pooled marketing cooperative that could promote sales of premium organic products and secure stable prices for its members. This group of farmers formed the Coulee Region Organic Produce Pool (CROPP) in February 1988 and is now the largest farmer-owned organic cooperative in North America, shipping organic dairy, beef, poultry, vegetable, pork, and egg products across the country under its "Organic Valley" label.

Why market collaboratively - identifying a need and an opportunity

Throughout the 1980s, many producers in central Wisconsin’s Coulee region operated small-scale grain, vegetable, and/or dairy farms that included one to three acres of tobacco as a cash crop. When federal programs and prices began to collapse for these and other commodities, many of the area’s producers started thinking about a different way to farm and market. "A lot of the Upper Midwest’s small family farmers were on the verge of going out of business," explains CROPP marketing director Theresa Marquez. "As a last resort, some farmers turned to niche marketing, which in their case meant organic sales." According to Marquez, many of CROPP’s early founders were already farming organically as a way to save money on inputs prior to the Co-op’s formation. "After investigating organic production requirements, a lot of farmers realized that they qualified for organic certification," says Marquez.

In early Fall 1987, 35 Wisconsin farmers, many of whom were producing tobacco and vegetables, began talking seriously about the creation of an organic vegetable and dairy marketing cooperative. The idea for a cooperative structure stemmed from tobacco growers’ experience with the Northern Wisconsin Tobacco Cooperative, which pooled tobacco for collective sales.

The primary goal of the Cooperative was to establish and secure a stable target price for members, regardless of commodities produced. "A target price is different from a premium," explains CROPP’s meat pool coordinator Pam Saunders. "A target price is not tied to conventional prices in any way so that it does not fluctuate with that market." Target prices are just that - price goals established to pay the producer for his/her costs of production plus a profit. Coupled with profitable pricing goals was the need to build price stability. "Price stability is very important for farm survival," says Saunders. "Farmers need to be able to plan around a price. It enables a farmer to make sound production and marketing decisions."

A second but equally important goal of the proposed cooperative was to create a marketing arm that could develop sales, arrange processing, and distribute products. The group envisioned hiring staff who could market products on members’ behalf. "Farmers saw the co-op as a bridge between the producer and the consumer," says CROPP cooperative pool manager Jim Wedeberg.

With these goals firmly in mind, a small steering committee was organized to explore: (1) consumer demand for organic vegetables and milk; (2) processing feasibility; (3) financing options; and (4) distribution alternatives.

Exploration of an idea

Dairy Pricing and Supply Management
A target price of $17.50 per hundredweight was established for fluid milk when CROPP began operations in 1988. Targets were also set for eggs and meat. Production quotas, similar to those instituted under the federal tobacco programs, combined with a "last on, first off" principle and alternative pricing incentives were proposed to manage target prices. Under this system, farm member production quotas were established based on equity contributions. These quotas remained fixed. According to plans, however, the last member to join a milk route was the first one removed from CROPP’s milk pick-up list as a way to manage prices during surplus supply periods. Likewise, members who remained on the milk pick-up route were required to produce within their quota.

Individual delivery quota rights, based on the amount of equity contributed by each member, are observed through a price incentive system. Target prices were and continue to be paid for all milk shipped within quota. Milk shipped over quota is subject to conventional pricing, although Saunders says that approximately 95 percent of all milk sold to CROPP Cooperative is distributed as organic.

Steering committee members conducted preliminary, informal market research to investigate retail demand for locally produced organic vegetables, fluid milk, and value-added dairy products. "The group really didn’t have much money available for marketing research in the beginning," says Marquez. "It was also hard to develop consumer demand projections in the organic market at that time since there were no precedents, particularly for dairy products." Working within their budgets, steering committee members contacted natural foods stores in Madison and Chicago to inquire about demand for a range of fresh, organic vegetables and dairy products.

A formal prospectus, stating the group’s mission, planting intentions, and future product availability, was mailed to retailers and followed up with a phone call. Although retailers’ response was better than expected, buyers were unwilling to sign purchase contracts until vegetables and other products were actually available. "So we moved ahead with our plans, despite no firm commitments from retailers," recalls CROPP CEO and founding member George Seimon. "We could have spent another year on business planning, product development, and grower trainings, but we decided to move forward because of the tremendous amount of enthusiasm brewing out in the fields. With little to lose at that time, farmers wanted to move ahead with the Cooperative."

With potential markets identified, the group next made phone calls to local vegetable distributors to get a feel for wholesale prices, warehouse storage availability, and transportation expenses. At the same time, the group consulted with another local distributor called North Farm Cooperative, which had already established a market for "natural" cheese. The distributor was interested in selling organic cheese and therefore agreed to package and market all the organic cheddar cheese that CROPP could produce. Soon after their conversations with North Farm Cooperative, steering committee members contacted nearby processors with expertise in cheddar production to discuss production requirements and processing capacity. Lastly, the steering committee explored financing options with a local bank in Wisconsin to discuss cash-flow and equity needs before filing as a cooperative.

Challenges

From the start, CROPP Cooperative anticipated two finance-related challenges that would limit its long-term success: cash-flow constraints and the need for plant capacity to process and package dairy products.

"Like most businesses that process a product, we faced a long turn-around time between raw commodity pick up from farm members and payment from the retailer after product delivery," explains Saunders. This expected cash-flow problem was addressed first on paper and then in practice through an equity-building strategy and a partnership agreement with the National Farmers Organization (NFO). According to CROPP’s financing and membership plan, new members are required to contribute the equivalent of one month’s worth of production in the form of a certificate of deposit (CD) at a local bank. The CD, owned jointly by the farmer and the Cooperative, is pledged as an equity guarantee against loans issued to finance cash flow. "This base equity has enabled CROPP to manage its cash flow effectively," says Saunders. Moreover, an agreement forged with NFO enabled CROPP to reserve its base equity for marketing efforts rather than financing infrastructure and logistics. NFO agreed to organize an organic milk program within its existing fluid milk pooled delivery and sales program, whereby CROPP’s paperwork and transportation logistics were handled internally by NFO.

As for the group’s processing and packaging needs, Saunders says CROPP Cooperative has become a "specialist" at establishing relationships with existing meat, dairy, and egg processors. "CROPP founders decided not to rush into brick and mortar purchases," Saunders explains. "A lot of time was, and is, devoted to the development of relationships with local processors." Co-pack agreements were signed with plant owners under which CROPP managed organic production within existing processing facilities. CROPP Cooperative now works with 30 different processors across the country to process and package dairy, meat, and egg products.

The success of CROPP Cooperative’s processing relationships is also related to industry consolidation. Saunders explains that many small and medium-sized processors were left without customers following farm foreclosures in the late 1980s and large-scale processor consolidation in more recent years. "Many of the plants, particularly butter and cheese processors, were eager for customers," says Saunders. "The meat-packing plants have become more interested in working with us now that the USDA has approved an organic meat label." All processing facilities under contract with CROPP Cooperative are certified organic and subject to quality standards set by CROPP.

Begin operations

Based on positive feedback from natural foods stores, an equity financing plan from their bank, and processing agreements, steering committee members agreed to formally launch CROPP Cooperative in February 1988, the first organic pooled marketing group in the country.

Shortly after forming as a cooperative, CROPP recruited new members through local newspaper ads and town meetings. In total, 55 farm families joined the Cooperative, most of them small-scale dairies or diversified vegetable and tobacco farmers.

Within one year of formation, CROPP’s members produced the country’s first organic cheese for sale in retail markets, primarily natural foods stores in the cities of Madison, Wisconsin, and Chicago. Next, thanks to a grant from the State of Wisconsin, CROPP hired a Green Bay marketing firm to develop and design a label for its dairy products. CROPP Cooperative launched its "Organic Valley" label in 1989. At the same time, using member equity, CROPP purchased an abandoned creamery in central Wisconsin to serve as an office for its six employees and warehouse storage for its products. Processing and distribution were contracted locally.

Member recruitment, responsibilities, and benefits

The Reisgraf’s Story

Jeff and Pam Reisgraf are typical of many CROPP members. They own and operate a 40-head organic dairy farm in Jordan, Minnesota and market their milk through CROPP Cooperative every month. Prior to joining CROPP, the Reisgrafs farmed organically, but sold their milk through conventional markets. "We weren’t being paid for organic milk," says Jeff. "And when we sold our milk in conventional markets, prices bounced around a lot. That’s the difference with CROPP and what I like best about the Co-op. We are able to get a higher, stable price for our milk."

CROPP’s philosophy of working with small-scale, family farms is also important to the Reisgrafs. "They understand our goals and our needs as a family operation," says Pam. "And they incorporate ‘family farming’ into their advertising. I like this because it helps educate the public about who we are."

In 1994, when joining CROPP, the Reisgrafs contributed a total of $6,300 in the form of a CD. "Our contribution was based on herd size and monthly milk production," explains Pam. "We also pay a $0.25/cwt check-off with each milk delivery to cover Co-op transportation and marketing expenses." In addition to their financial investments, the Reisgrafs feel strongly about "giving time" to the Cooperative by attending annual and monthly dairy pool meetings when possible and getting involved in CROPP’s marketing and management decisions. "We’d actually like to get more involved," says Jeff. "But we can’t always take the time to get to the meetings in Wisconsin." As a trade-off, the Reisgrafs are in constant contact with their dairy executive committee pool representative who distributes meeting minutes and other updates to ensure members are informed and have a chance to be involved.

Jeff and Pam Riesgraf with their children (left to right) Kelby, Derek, and Rachel

CROPP Cooperative’s original 55 members have grown to nearly 170 members over the past 10 years. Most members are small and mid-sized family farmers scattered across 10 states including Minnesota. Members are divided into commodity pool groups, such as the dairy pool, vegetable pool, and meat pool. Pools elect a representative and meet once per month to review CROPP policies, marketing strategies, and other issues.

Seventy percent of CROPP members belong to the dairy pool. Member herd sizes range from 18 to 300 cows, although the average pool member herd size is 45 cows, according to Wedeberg. The remaining 30 percent of CROPP’s growing membership produce organic vegetables, eggs, and meat. The Cooperative is constantly recruiting new members, particularly vegetable growers, as pool members prepare to launch a new line of value-added frozen potato, sweet corn, green bean, and pea products.

Upon joining the Cooperative, dairy farmers are required to contribute the financial equivalent of approximately one month’s worth of production to CROPP Cooperative in the form of a CD. A formula, equal to $11.00/cwt times the member’s average monthly milk production, is used to calculate the CD investment. Vegetable growers, on the other hand, make a one-time CD investment equal to five percent of annual sales. CD contributions can be financed over a number of months by paying a portion of each delivery to the Cooperative. Upon leaving the Cooperative, the CD is cashed out to the individual farm member. Since 1993, dairy members have been charged an additional fee, equal to $0.25/cwt, to cover product inventory, maintenance costs, and other expenses, according to Wedeberg. Likewise, vegetable growers pay an annual fee equal to one percent of gross sales to help cover the Co-op’s variable operating expenses.

In return for their financial support, CROPP Cooperative members have gained control over their products from farm gate to the retail store, as well as the opportunity to add value to their products and secure stable prices under a nationally recognized brand name. Collaborative marketing has also allowed members to "focus on farming" rather than sales, storage, and transportation management, says Koch. By pooling equity contributions, farm members gain access to capital equipment and marketing expertise for minor individual investments. "It doesn’t make sense for a vegetable grower, for example, who sells $15,000 worth of product each year to invest $50,000 in infrastructure - like walk-in coolers, fork lifts, and ice-packing machines," explains Koch. "The cooperative structure allows farmers to grow their operation slowly according to their goals and risk little on capital investments."

CROPP also provides members with technical assistance and access to relatively scarce inputs. For example, vegetable pool coordinator Mark Shepherd works full-time to answer growers’ questions about seeds, planting dates, and pests. Likewise, dairy producers can obtain highly demanded organic feed via CROPP’s on-line "organic trader" site. The site is organized as an advertising space where buyers and sellers of organic feed can exchange information about supply availability and demand. "This is an important service," says Saunders. "Organic feed is a critical input for most of our members who produce livestock and milk."

Marketing and management strategy

Prior to 1994, when a full-time sales force was hired, Cooperative members conducted their own marketing and were able to limit marketing investments because they "had no competition," according to Marquez. CROPP founders had successfully identified a niche market for organic butter and cheese when starting out. "CROPP was the only producer of organic butter and cheese during its start-up years," says Marquez. "But it wasn’t long before things changed and CROPP found itself competing for sales with other organic processors."

As CROPP’s competition grew, the Cooperative was forced to adapt its marketing strategy. Fifteen full-time brokers and regional marketing managers were hired in 1994 to place products, open new accounts, and plan promotions. "Our marketing strategy continues to change and adapt," says Marquez. "Competition, customer demand, and our own growth has made it necessary to remain flexible at all times."

In addition to flexibility, CROPP’s marketing and management strategy is built around a second component - diversity. CROPP marketing staff are dedicated to the promotion of two general product lines that target different customer markets: (1) retail products such as the Organic Valley line and fresh produce; and (2) processor "ingredient" products. "The Co-op offers a diverse line of products that enable us to target different markets," says Marquez. "For example, by producing an ingredient line, such as egg white powder and grated cheese for entrees, CROPP is able to target processor markets, whereas our brand-name products open the door to retail sales." These two product categories are just one element of CROPP’s diversified marketing strategy. CROPP also directs its marketing efforts at different types of retailers, wholesalers, and processors. "We work with them all - chain supermarkets, small natural foods stores, and start-up processors," Marquez explains. By marketing to a diverse customer base, the Cooperative limits its risk and exposure to market failure. "If one market collapses, we always have another market to turn to," explains Marquez.

Product diversity is also a tool for utilizing by-products and coping with fluctuations in customer demand. Skim milk, for example, a by-product of butter production, is used to produce a range of ingredient products so that more value is added to member commodities. Likewise, the mix of highly perishable fluid products and "hard" products gives CROPP a little more flexibility to adjust inventories based on changes in retail and processor demand. "If demand for fluid milk begins to wane as a result of seasonal or other factors," explains Marquez, "CROPP can turn its fluid milk into hard product, like cheese, which is more storable."

The last element of marketing diversity and flexibility involves membership distribution. CROPP believes that it is important to spread its membership base across the country. A diverse membership base enables CROPP to build new markets more efficiently and to ensure commodity supplies during periods of county, state, or regional natural disaster. As CROPP begins to develop new markets, for example, it can supplement sales with products from other parts of the country, if necessary, to ensure supplies. "Once we have a new market secured, CROPP can then recruit new members in that area to locally supply market demand," says Marquez.

Current operations

After 10 years of collaboration, market development, member recruitment, and equity building, CROPP Cooperative is booming. Projected revenues will total $30 million in 1999. It is successfully generating stable profits for farm members, building new markets for high-quality products, creating new jobs for 65 rural residents, and promoting environmental stewardship.

In recognition of its success, CROPP Cooperative was ranked Wisconsin’s number one rural development initiative (among 50) by the state’s governor in 1998.

Products, which have expanded from vegetables and milk to meat and eggs, are distributed under the Organic Valley label to customers in all 50 states, although dairy products remain CROPP’s top achievement. CROPP Cooperative was recognized with first-place quality and taste awards in 1996 and 1997 by the American Cheese Society for its Organic Valley cheddar cheese and Organic Valley cultured butter, respectively.

Most recently, in 1999, CROPP Cooperative purchased its first processing plant, which will be used to manufacture organic cultured and salted butter, organic milk powder and to re-load organic fluid milk into tankers for further distribution. The $1.1 million investment will allow CROPP to keep up with its rapid growth in market demand for organic dairy products and to build long-term assets. "CROPP had been preparing for this opportunity over the past 10 years," says Saunders. "When the plant became available, Co-op members agreed they were financially and organizationally ready for this type of investment." The plant, located in Chaseburg, Wisconsin, employs six people and produces 100,000 pounds of butter monthly.

Most importantly, CROPP Cooperative has achieved its original target price goals. The Cooperative reached its initial target price of $17.50/cwt in 1994/95. Soon after, with a member vote, the target price was increased to $18.00/cwt, though actual prices paid to producers in 1998 equaled $17.60/cwt (minus fees). Over the life of the Cooperative, Wedeberg says dairy members have been paid on average $3.00 to $4.00/cwt above conventional fluid milk prices.

Likewise, as conventional milk prices fluctuated wildly, Wedeberg explains that CROPP’s target price for fluid milk has remained stable. "Conventional prices will occasionally spike to levels near our target price," he says. "But it doesn’t take long for the conventional market to plummet, whereas the CROPP target price remains stable."

Partnership and assistance

CROPP has worked closely with dozens of state agencies, banks, and non-profit organizations nationwide to build markets for top-quality organic products and create a successful business for its members. In addition to NFO and a local Wisconsin lender, CROPP members consulted with Cooperative Development Services and the Wisconsin Center for Cooperatives over the past 10 years to conduct board training sessions. The Cooperative has also worked with USDA Rural Development in Washington DC, the Wisconsin Agriculture Development and Diversification Grant Program, as well as the Wisconsin Center for Dairy Research who provided technical expertise on issues such as business development and milk production. "We’ve utilized most resources that are out there," says Seimon. "But we never became heavily dependent on outside help."

Words of advice

Looking back over his 11 years of experience with the Cooperative and as a dairy farmer in central Wisconsin, Wedeberg says that the success of CROPP has been its ability to involve consumers and farm members in marketing and management decisions. "We have worked hard to build the link between farmer and consumer," says Wedeberg. "And, as the Cooperative has grown, we’ve made every effort to ensure that producers remain active in marketing their products."

Consumer feedback is an important part of the CROPP Cooperative philosophy. A toll-free number is provided on all product packaging to encourage customer comments. A website, inviting questions and comments, was recently launched. According to Wedeberg, CROPP receives calls and Internet inquiries about a number of topics, including product ingredients, animal welfare, and family farm issues. "These are valuable tools for us to assess consumer needs and concerns," says Wedeberg. "It is a direct way for consumers to give us suggestions, comments, and criticism. As a marketing co-op, we want to respond to the needs of our customers and this type of direct marketing is a great way to stay in touch with these needs." CROPP Cooperative also conducts periodic surveys of its retail buyers to learn more about customer preference and retailer needs.

Marketing information obtained from direct customer feedback and retail surveys is always carried directly to CROPP Cooperative members. Producer pools meet with marketing staff and executive committee representatives once every month to discuss the creation of new products, changes in organic certification standards, prices, and supply needs. "We tried to design CROPP from the beginning as a bottom-up business," says Wedeberg. "We know that the Cooperative will do well if we stay informed, work together, and make sure that individual members’ and consumers’ needs are being met."

December 1999 update

With new changes to regulations governing the organic certification of meat in place, CROPP launched a new line of organic meat in September and October of 1999. Their meat products are marketed under the label "Valley’s Family of Farms." As Saunders explains, "The USDA’s allowance of the word organic on meat labels is very narrow, precluding any use of the word organic on the label other than in the phrase certified organic by (certifying entity). This means that we are still unable to use our registered brand name/trademark (Organic Valley) on our meat products." CROPP now has a beef, a hog, and a poultry pool, and has 22 beef, pork, and poultry frozen retail products in national distribution in addition to a limited regional fresh beef program.

Some major changes have taken place in CROPP’s farmer investment. All the CDs are being converted to shares of preferred stock as of December 31, 1999. The preferred shares are owned only by producers, are issued in an amount equivalent to approximately 5.5 percent of expected annual gross sales by that producer (for any of the pools), and carry voting privileges. However, there is still only one vote per member. According to Saunders, "This means that the farmer investment, instead of sitting in the bank as collateral for borrowing, is now part of the cash flow equation." In addition, individuals, including but not limited to producer members and employees, may invest in the Cooperative by buying class B stock at $50 per share and 8 percent interest. The class B shares do not carrying voting privileges. All the pools will convert to this stock scenario. According to Saunders, CROPP will have close to $50 million in sales in the year 2000.

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