July 1, 2008

Raising the Standard

By Campbell, Dan

Ability to add value, meet member needs fuels West Central's 75 years of growth It was 1933 - in the grip of the Great Depression - that the business known today structure to a farmer-owned cooperative.

Those bleak times of widespread business failure and armies of unemployed Americans drove home the need for farmers to pursue the advantages gained from standing together to market their crops and for purchasing supplies.

It was in 1942, during the middle of another great struggle and the uncertainties of whether America would prevail in World War II against powerful enemies on two fronts, that the co-op made another momentous decision: to begin processing its members' soybeans into livestock feed at home, in west Iowa. Up until then, nearly all the crop was shipped to cotton mills in the South. Processed feed was then hauled back to Iowa, with most of the value-added dollars having been shed along the way. By 1955, the co-op was processing 80 percent of its members' grain.

This "value-added" effort and the desire to keep more profits at home would become a driving business philosophy at West Central for the next six decades.

Today, as West Central celebrates its 75th anniversary as a cooperative, this once humble local co-op that started with a single, 20,000-bushel elevator and one small farm office in Ralston, Iowa, is now a diversified cooperative that had $436 million in sales last year. It is a market leader with a proven track record in developing products ranging from specialized dairy cattle feeds to biodiesel technology.

It is the nation's 16th leading grain marketer, with 18 locations in a 55-mile radius of Ralston that handle about 80 million bushels of grain and oilseeds annually. The co-op has 3,500 members in 10 Iowa counties.

In the 1960s, West Central moved into the liquid and bulk fertilizer markets, and began shipping 20,000-gallon tankers of soy oil to markets as distant as California. To help avoid confusion with a number of other co-ops in the region with "Farmers" in their name, the West Central name was adopted in 1978 (it had been called the Farmers Cooperative Association of Ralston).

The next year, the cooperative doubled in size by merging with a co-op in Boone, Iowa. It has continued to grow through mergers and acquisitions ever since (see "Milestones" sidebar).

In the 1990s, West Central began processing soybeans into biodiesel, eventually becoming one of the largest marketers of biodiesel in the nation. Although its biodiesel operations are now part of another business, Renewable Energy Group Inc. (REG), West Central continues to hold majority interest in that company. REG builds turn-key biodiesel plants for customers, and also provides them with operating and marketing expertise and training.

Following are excerpts from a conversation in April that Rural Cooperatives had with West Central CEO Jeffrey Stroburg and Board Chairman Scott Chesnut. Stroburg, who was raised in south Iowa, was previously CEO at CountryMark in Indianapolis until it merged with Land O' Lakes, taking the helm at West Central in 2000. Chesnut is a fourth generation Iowa farmer with a grain and beef cattle operation north of Boone, Iowa.

Question: The year 1942 was a real red-letter date in the history of the co-op, when it began processing soybeans and making its own livestock feeds, rather than shipping beans out of state. How important has this value-added focus been to your members and rural Iowa?

Stroburg: It was a pretty amazing decision for that time, when you consider that those were war years with hard-to-find steel and supplies. It was a very difficult time to decide to go into value- added processing of commodities. We were one of the very first soy processors in the Midwest, so it was a pretty innovative, daring move that really did set the stage for a culture of value-added at our cooperative.

Chesnut: I think the co-op structure has worked amazingly well when you look back and see that there are now fourth and fifth generation farm families that are still utilizing the cooperative. Not that many things operate continually through that many generations and work just as well now as they did at the beginning.

Stroburg: Regarding the impact on local communities, just consider that every dollar generated here changes hands something like seven times.

Chesnut: The more value we keep here in our own communities, the more it generates growth and stimulates the local economy and spreads out.

Q. West Central is a good example of how a well-managed co-op can grow through mergers and acquisitions. What do you look for in these mergers, and what are the keys to successfully merging two businesses?

Chesnut: We look for strategic growth opportunities. Some co-ops seem to pursue growth just to gain size and structure, but we are looking for long-range strategic solutions that will improve our facilities and benefit our members. We do not pursue growth just to be the biggest. We look for mergers where it is a win-win for both parties. If both parties don't get some benefit from it, it is not likely to be very successful. In addition to strategic growth, we hope to improve the personnel in our organization.

Q. Do these co-ops generally get a seat on the board?

Chesnut: A seat on the board is not automatic, although we do usually provide for representation any time we've had a merger; a board seat has to come from a vote of the membership. So those areas become part of the nomination process, and probably someone will be nominated from that area. We have a nine-member board, with one outside director.

Q. Do you reach a point ivhere groivth is no longer advantageous to members?

Stroburg: Growth for the sake of growth is not advantageous. If you look at our company, we will do around $400 million of business in a year. In the grand scheme of things, that is still a pretty small company. At what point does size start to work against you? I don't know that that is quantifiable. It's how and why you grow. One plus one does not always equal three. In some cases, one plus one equals less than two.

Q. West Central has a track record of constantly pushing for modernization of its facilities - evidenced in ways such as the automation of your liquid fertilizer and bulk fertilizer facilities, and more recently your grain elevators. This requires some sizable expenditures. Is it hard to get the board to support these types of moves?

Chesnut: The board is always very analytical as we approach these investments to ensure we are making a proper decision, and our personnel are constantly doing analytical work in these areas. The board requires a lot of input and looks closely at all of the numbers. We don't always make an immediate decision - we may request more research first. For the most part, we have accepted projects brought before the board, because by the time we see it, it has been pretty well analyzed. Management knows a bad decision is not likely to get through us, so they usually only bring us good projects that advance our long-range strategy.

Stroburg: Every six months the board updates the strategic plan. That's not to say that it gets changed every six months, but we look at it to see if it still flies. One key component of the strategic plan is automation. So the board is involved in the idea of automating our facilities and has approved of it in the strategic plan. When we bring a proposal to the board, one of first things we address is how it fits in the strategic plan - how does it move us forward? So the board is involved even at the conceptual level.

Chesnut: Automation allows us to more efficiently use our personnel, and that is something we are constantly looking at.

Q. How do you typically finance plant modernization or expansion?

Chesnut: We use income from operations, we use investments from members, we use CoBank and sometimes we look at leasing possibilities. Some bonds have been used for major projects.

Q. In light of your recent storage expansion and having gained access to three railroads, how can grain cooperatives position themselves to compete in a sector where much of the grain now goes directly to biofuel refineries, bypassing the traditional cooperative first handler?

Stroburg: It all comes down to the economic value that we can deliver to the end user. We are on the main line of Union Pacific. Customers, for example, who are feeding chickens in the South will get their grain from people who have the economic advantage, and we have that with our rail access. So we service customers who are ethanol producers - and they are definitely good customers of ours - but we also continue to move grain out of state to livestock producers who have been good customers, some for them for 20 years.

Q. West Central has developed a number of LLCs. Do you see the use of LLCs by cooperatives growing? If so, what impact does this have on cooperatives and their ownership by the farmers who use them?

Stroburg: We've used LLCs since the 1990s, when we formed one to manufacture biodiesel. West Central was the majority owner, but the LLC allowed us to bring in strategic partners to grow that business. Another LLC was formed in the early 2000s with a construction company so we could take the technology we learned in biodiesel and leverage that into a plant construction company. But we had to bring in somebody who had the construction expertise that we lacked. In that case, it was a 50/50-owned LLC between West Central and the construction company. It allowed us to lever and maximize the value of our technology, which we could not have done otherwise. So, LLCs have their place, but like any other business structure they have to be used appropriately Q. An explosion in 2001 destroyed West Central's InterWest soy biodiesel plant, but you managed to turn that tragedy into a triumph by bouncing back with a 12-million gallon, state-of-the-art plant. What were the major steps in the chain of events from the day after the disaster to the opening of the new plant?

Stroburg: We had an employee hurt in that tragedy, and once we handled the near-term issues, it made us step back and think about how we were approaching the biodiesel industry. It forced us to look at what we knew - what knowledge we had gained. We felt we were in the best position to continue in the biodiesel business based on our intellectual capital. It ultimately led to the formation of an LLC where we got economic value from that intellectual capital. This process helped us realize that the real asset was not the building and the pipes, but in our knowledge of how to do it. It allowed us to build a state-of-the-art plant, then take that technology and sell it in the marketplace, which brought revenue in to our stockholders. We had gone through a three- or four-year period where it was very difficult to make any money in biodiesel. Our stockholders had invested a lot in biodiesel - time, energy and capital. By selling technology and building plants for others, we were able to get a return back to our stockholders for that investment.

Chesnut: It fit West Central's long-time model of adding value.

Q. How important was this new plant to West Central, and the overall industry? In what way did it represent a technological advance for the industry?

Chesnut: It was the largest plant in the country and was state- of-the-art, with a new design that West Central had perfected - and continues to perfect today. It set the standard both for quality and cost of production, and continues to add value for our local producers.

Q. How has the REG business changed since its inception?

Stroburg: Renewable Energy Group LLC was formed in 2003 with Todd & Sergeant, a construction company, and we each held 50 percent ownership. In 2006, we brought in outside investors, and we rolled all of our biodiesel activities - all that we had been doing in biodiesel since late 1990s - into a single entity: REG Inc. It was no longer an LLC. At that point, we brought in outside investors - financial and strategic investors. These included Natural Gas Partners in Dallas, Texas, Bungee North America and E D & F Man Holdings Ltd., a London-based company that does business in the United States as Westway. In the process, we raised about $100 million to move forward with the biodiesel company.

Q. The soaring price for soybeans is causing distress for many biodiesel processors, although it has certainly been good for growers and soy oil processors. How has this impacted West Central and REG?

Stroburg: As a soybean processor, West Central sells oil to REG, and the high prices have been good for soy processors, but tough for the biodiesel industry. We are only one investor in REG. So while West Central is not making that much money on its investment in biodiesel right now, the economics of crushing soybeans is pretty good.

Chesnut: The soy-crushing operation has been adding tremendous value to our producer-members.

Stroburg: Scott and I were at a meeting two or three weeks ago with some investors in REG. It just so happens that most of them were also farmers and stockholders in West Central, so we started out by saying that the biodiesel industry is not doing so well right now - that there is not a lot of money to be made. On the other hand, you are getting $12 for your beans. So it is a counter- cyclical investment.

Q. It seems as if almost overnight, biofuels have gone from being one of the great hopes for a world that desperately needs renewable energy, to being vilified in the media. Does this surprise you? How should the industry be responding?

Chesnut: Sometimes these articles do damage us, and sometimes the information they use is inaccurate, based on old studies and research. Both the soybean and corn growers associations have done a lot of research on biofuels and are trying to bring forward information that counters the misinformation. We all have to work hard to get this information out. It's an ongoing education process. The price of petroleum products going up so much, so rapidly, is actually what is causing a lot of the problems.

Stroburg: It's a matter of balance. If we rely strictly on petroleum-based energy, there will be problems. When you think about what biofuels can do for the world, there are some negatives and we need to deal with them. Like clearing rain forests in Indonesia to plant palm. We need to minimize impacts on the environment. But if you look at biofuel in general, it creates an opportunity for countries around the world to participate in energy production in a way that they never have before. Petroleum resources are highly concentrated in nations such as Saudi Arabia, Venezuela, Iran, Iraq and the Persian Gulf countries. When you look at energy made from new carbons, that we create year by year, we create tremendous new opportunities for farmers in places like India, Africa and Central America to participate in energy production.

High food prices are not driven solely, or even primarily, by renewable fuels, but rather by the investment community moving into commodities. We are seeing runups in prices for wheat, which is fairly unconnected to biofuels. Rice prices are going up, and so are metals like platinum and copper - you name the commodity, and we are seeing the prices boom. This is not driven by biofuels. It is driven by hedge funds and other financial institutions that see commodities as a hedge against the falling dollar, and maybe as a safe place to put a portion of their portfolio. That portion might be $3 billion or $4 billion. That has really contributed to the runup in commodities. It is not fair to blame it all on renewable fuels.

Q. What is the position of West Central and REG regarding the emergence of renewable diesel?

Stroburg: It is just part of the process. We will see renewable diesel manufactured in traditional petroleum refineries. What it doesn't do is create additional refining capacity. It might even diminish refining capacity to the extent that when refineries run vegetable oil, it slows down capacity. So, I think we will see refineries using feedstocks other than crude petroleum. It will just be another part of the industry.

Q. How does West Central ensure the succession of strong board members, and do you do anything to promote director education once they join the board?

Chesnut: West Central has a policy of finding strong board members. In the late 1980s, we started an associate director program that allowed us to have one or two associate (nonvoting) directors on the board who serve alongside regular directors. They attend all the meetings and go through all decision-making processes. They do not necessarily become regular board members, but they have the potential to do so. It allows more people to bring input back to the board and to relay information to the membership. The board works with the nominating committee each year to help identify the type of skills an individual needs to make a good candidate.

Once on the board, we stress ongoing education. We have outside experts come in to help with strategic planning, and we attend the National Council of Farmer Cooperatives meetings, which include strong board education programs. The Iowa Institute of Cooperatives also has good educational programs. West Central also has an education program for employees, and board members participate in that as well.

Q. What major projects are on the West Central drawing board right now?

Chesnut: We are always looking for value-added opportunities, and have three or four new products in the development stage, but can't really discuss them at this point. They involve converting soybean meal into other products.

Q. How do you think the co-op will be different in 10 years?

Chesnut: I'm sure that technology will make huge changes that we are not even aware of yet. Changes are occurring so rapidly, it is almost hard to keep up. The size of operations that we deal with will be bigger, and we will have to move faster.

Q. What basic advice can you offer to the leaders of other local co-ops that might ivant to emulate West Central's success?

Chesnut: Over 75 years, one thing West Central has always had is strong management. We've been very fortunate that the co-op has had only a small number of managers [three], which has been a great benefit. Each of those managers were able to take what was on the table when they came in and grow the organization and make it stronger than it was. Long-range strategic planning has been something that has helped West Central look forward and develop our programs, facilities and personnel.

Stroburg: Looking at the long-range strategy every six months does two things: either it confirms that you have the right strategy, or, if that can't be confirmed, it means the strategy should change. It also reminds everybody of where we are headed.

From left: a West Central field representative and a member check on a field of soybeans; a co-op rail tanker transports SoyPower biodiesel to market; West Central has facilities in 18 locations in west Iowa. All photos courtesy West Central.

West Central Milestones

1933 Existing grain business incorporates as Farmers Cooperative Association of Ralston. Two years later it hired its first manager, Karl Nolin.

1942 Begins processing locally gown soybeans in its new processing plant.

1955 Begins branding its bean meal as "Farmers Feeds." Annual report notes that 80 percent of grain received was processed at co- op's own feedmill rather than shipped out of state. 1958 First issue of Co-op News published in 1958 to help combat "anti-co-op propaganda running rampant."

1959 Co-op expands to Jefferson.

1960s During the 1960s, the liquid fertilizer and ammonia business takes off.

1960s Early in the 1960s, a major change in farm policy means local elevators are no longer needed to store government grain, diminishing these organizations' storage income and creating space in storage facilities. With inflation up and a drop in storage income, the co-op is forced to look at improving efficiencies and lowering costs.

1964 Co-op explores futures markets and hedging. It is one of the first handlers in the region to begin using hopper cars and unit trains. It reaps the benefits of giving farmers a better price for their grain and opening new markets.

1967 A new type of hog feed is introduced: pelleted "sow brickettes." A sow can be hand-fed three to four pounds of them a day, with little waste. The brickettes contain 20 percent protein.

1971 Karl Nolin, the only general manager the co-op has ever known, retires, to be succeeded by Wayne Seaman as general manager and Tom Feldman as marketing manager.

1972 First 50-rail car shipment out of Jefferson.

1974 Becomes one of the first co-ops to lease its own rail cars. Rail cars are at a premium, so this secures the co-op's supply. The co-op paints all rail cars pink, bringing national attention and gaining accessibility to the cars - because very few others wanted to use pink cars.

1978 Changes name to West Central Cooperative.

West Central is the nations 16th largest grain handler.

West Central Milestones

1979 Merges with Farmers Elevator and Livestock Co., Boone, Iowa, doubling its locations.

1983 Merges with Farmers Cooperative at Halbur and Templeton; purchases an additional elevator in Templeton, boosting capacity to 21.5 million bushels and gaining access to the Burlington Northern Railroad.

1984 West Central receives grants to examine ruminant protein value of expeller-processed soybean meal. The co-op has been looking at feeding swine high-protein bean meal, and is curious about potential bypass value the meal could have in cattle. As a result, SoyPlus feed launched, with sales skyrocketing throughout the '80s.

1986 With the popularity of the SoyPlus product, soy processing is expanded at the cooperative with the expansion of the soy plant in 1986. By then, SoyPlus was being shipped across the United States by both truck and rail.

1989 Unites with Farmers Cooperative of Audubon-Exira.

1991 Purchases Adair Feed & Grain, gaining access to Iowa Interstate Railroad and new markets.

1995 Unifies with Consolidated Cooperative in Gowrie.

1996 Begins to process soy oil into biodiesel in a plant owned by InterWest, an LLC owned equally by West Central and InterChem.

1998 Unifies with Farmers Elevator Co-op of Scranton-Bagley and Farmers Co-op Elevator Co. of Boxholm.

2000 After 42 years with the co-op, Wayne Seaman retires and is succeeded by Jeff Stroburg.

2002 Opens 12-million gallon biodiesel plant, the nation's largest. Begins to market biofuel intellectual property though new subsidiary, Renewable Energy Group, a collaborative effort with Todd & Sargeant, a construction and engineering firm.

2006 REG completes a $100 million private equity financing deal, into which West Central invests its biodiesel facilities; West Central maintains controlling interest in REG.

2008 Co-op marks 75th anniversary.

Co-op CEO Jeffrey Stroburg and Chairman Scott Chesnut prepare for a board meeting in April.

By Dan Campbell, Editor

Copyright Superintendent of Documents May/Jun 2008

(c) 2008 Rural Cooperatives. Provided by ProQuest Information and Learning. All rights Reserved.