Farmland plight confirms co-ops' challenges. (Cover Story).

At the end of May, Farmland Industries, Inc., the nation's largest traditional farmer-owned supply and marketing cooperative, filed for Chapter 11 bankruptcy protection, which could eventually turn into liquidation. At the discretion of creditors and the courts, the company is in the process of developing a reorganization plan.

Farmland's financial skids started back in the late 1990s before growing more calamitous. Along the way, the large conglomerate failed to secure a merger with Cenex Harvest States, another prominent regional cooperative, and then resorted to renting its beleaguered grain operations to ADM.

The most immediate effect of the bankruptcy is that local Farmland-affiliated co-ops will be forced to their stock investment in Farmland. It's not first time. In the mid-1980s, share value declined by more than 30 percent. This time the amount is likely to be 50 percent, says David Barton, agribusiness management professor and director of the Arthur Capper Cooperative Center at Kansas State University. But he says Farmland's devaluation alone is unlikely to put any local co-ops or farmers out of business. Local cooperatives are likely to pass the loss through to their members as a tax writeoff.

"From a political, emotional and psychological point of view, the downsizing or possible dissolution of the largest agricultural co-op in the country has an impact," Barton reflects. "In terms of the impact on co-op market share, that's uncertain. If you look at the last 50 years, cooperatives have increased their market share. Since the grain marketing and farm supply business has really been done by local co-ops, as long as they remain strong, I expect very little change there due to Farmland's situation."

Other large regional co-ops, such as CHS Cooperatives and Land O' Lakes, are likely to fill gaps in the cooperative network, perhaps through expanded participation in the numerous joint ventures they already have with Farmland, Barton adds. They include Agriliance, the agronomy marketing venture, and Land O' Lakes Farmland Feed.

"If the business with local co-ops simply shifts over to other regional cooperatives, you still have the same basic system just under a different umbrella," he says.

LESSONS LEARNED

The Farmland case reaffirms some traditional business principles and also provides examples of some challenges relatively new to modern agribusinesses, the experts say.

Agribusinesses require a strong balance sheet. "One of the lessons that will come out of this is that these types of businesses will be less aggressive in the future and protect their balance sheets more," Barton says. Farmland grew its company at the expense of its balance sheet, putting its financial solvency at risk, he says. A series of business setbacks, combined with a weak balance sheet, created a worstcase scenario.

"It boils down to: What is your strategy and how much do you emphasize growth?" Barton says. "Agriculture is a high-risk business whether you are a farmer, a local coop or a regional co-op, and that implies that you need to have a really strong balance sheet to survive the tough times."

Agribusinesses will continue to expand resources through joint ventures. "There's a limited amount of capital available for farmers to invest in agriculture beyond the farm gate," Barton says. "Any agricultural business has to have enough capital to finance its assets. If you are a farmer and you want to have a cooperative system that is vertically integrated, that takes a lot of capital. One of the disadvantages of co-ops is limited capital availability, so that forces them to either limit growth or join with other capital providers."

Diversified firms need to be managed as independent businesses. "It's important to look at diversified firms as a complicated group of smaller firms, which have to be evaluated independently for the risk and reward each small piece provides," points out Jeff Katz, associate professor of management at Kansas State University. "To the degree these enterprises become unrelated to each other, the more difficult it is to understand the risk involved."

That challenge has reversed the trend toward a "diversified portfolio" business approach. "Twenty to 25 years ago, many firms were widely diversified," he continues. "Today they are scaling back the breadth of their diversity to focus on their core competencies, and that is a trend Farmland was also starting to follow."

Farmland's fall has more to do with governance and management issues than with the co-op business model. Cooperative farmer-ownership will remain popular and strong, Katz predicts. "Farmers are pretty good businesspeople, and they can usually get together and find a way to be profitable," he says. "The surge of new-generation cooperatives tends to reflect that interest."

FARMLAND STATISTICS

Hometown: Kansas City, Mo.

Age: 73

Dimensions: 1,682 management/administrative employees; 6,100 hourly workers; 600,000 farmer-members; 1,700 local co-op members

Income (Annual Sales): $12 billion

Motto: Proud to be farmer-owned

RELATED ARTICLE: Farmland experts shift roles to manage crisis.

"Everyone loves progress," Mark Twain once said. "It's change that everyone is concerned about." Just ask the top communications and employee relations managers at Farmland.

"The same principles apply whether you are communicating good news or bad news," says Sherlyn Manson, Farmland director of corporate communications. "We are trying very hard to find cost-efficient, effective ways to communicate with a wide range of audiences."

The company has teamed with Fleishman-Hillard, Kansas City, Mo., for communications counsel. "We've been very concerned that announcements and communications reach all of our audiences and that information reaches our employees first, especially considering all the speculation out there," Manson shares. "We've gotten good feedback on that."

Careful management of information and a heightened effort to keep everyone informed have been the goals of the company's "crisis communications" strategy, she says.

"One of the key things we are using is the Web," she says. "All of the public information and everything Farmland has published is on the Web site. And we have really encouraged people to visit that site frequently. It would be very hard without that. It's a wonder that anyone can have all of the legal pleadings at their fingertips like that."

For Manson, who has been with Farmland for six years, other changes have involved suspending the regular publications, including Farmland System News, and mailing updates to equity holders instead. Her department staff is now down to four after three positions were eliminated.

But along with the changes have come opportunities, she says. "I'm learning a lot about the process and about how companies operate. It's a great opportunity to learn more," she says. "It's also very hard to be in the situation of a company reorganization. It is difficult to hear some of the stories we hear."

On the other hand, she has been inspired by the amount of support Farmland has around the country. "People want our company to be successful," she says. "Everyone has been extremely supportive and that is what is going to help us recover. People care about Farmland because they care about the farmers who own the company."

For Phil Wilt, Farmland's director of employee development, the bankruptcy filing has meant replacing standard training courses with a three-prong program on change management.

"The first part is an online class on Chapter 11 reorganization that employees can take anywhere, which describes the process and what it means. It is designed to help them know what to do and how they fit in," he says. "We knew going through a company bankruptcy would not be easy, so we asked ourselves how we could help our employees deal with it."

The second part, launched in mid-July, is an optional company-wide training course called "Exploring Change." Change ultimately occurs on the personal level and always involves a journey, which is why we chose the theme, Wilt says.

"We go through and look at the change curve itself," he explains. "There are four stages: denial, resistance, exploration and then commitment. No matter what happens, when you are hit by some major change in your life, you will go through all four steps. This is the same for both personal and professional change, and we will make that correlation throughout the class."

Everyone is on a different timetable with a dynamic status, he points out. "How we are wired makes all the difference in the world. If someone likes change, they are in the exploration phase quickly, but others will avoid change at all costs," he observes. "Also, new information can move you back a phase or two. People move around, rather than just progress, on the curve."

After helping employees recognize the stages, he then introduces a four-step decision-making process, which includes the following steps:

* Accept what has happened.

* Control your reactions.

* Communicate with others.

* Come up with a plan.

To conclude the program, Wilt is designing a course on how to manage stress. Addressing the personal effects of change has become extremely important to modern businesses, he says. Research shows that once employees have gone through the first three stages of the change curve to reach commitment, they regain productivity, and companies re-establish profitability.

"We've also learned this in our joint ventures," Wilt observes. "Many times the cultural problems that prevent an exciting business prospect from developing as planned happen because people aren't through that change curve yet. Fortunately, companies are now spending money educating employees about change instead of ignoring it and putting their heads in the sand like they used to do."

RELATED ARTICLE: Making the case for cooperation.

Mike Frickenschmidt is a co-op diehard. For him, farmer cooperation borders on religion.

A member of three local co-ops since the late 1950s--when he "scraped the door of the elevator turning out too sharp" the first time he drove the wheat truck to town--he was aware of "how local farmers banded together to buy supplies cheaper and improve their market leverage" by using the co-op business model.

In fact, the co-op mission became his career. He was hired as director of member and field services and then promoted to director and manager of placement services by Union Equity, the largest regional grain co-op at the time, based in Enid, Okla. He held those positions for eight and a half years.

Farmland's May bankruptcy filing is not the first time his faith has been tested. In the early 1990s, his position was eliminated when Union Equity was sold to what was to become the world's largest farmer-owned cooperative, Farmland, headquartered in Kansas City. Traumatic as the resulting changes were for him and his colleagues, they never dampened his faith in cooperatives. Within three years, he was named the executive director of the Oklahoma Agricultural Cooperative Council, providing support and education to co-ops throughout the state and working closely with Farmland.

"I still believe the farmer-owned cooperative system needs to be in existence for the farmer's well-being," he now says. "It is the single most important entity in helping farmers and ranchers capture another part of the agricultural food dollar and the food chain to allow them to compete in the multi-national world food business."

The system of local co-ops invites farmers to come to an annual meeting to review financial reports and ask questions. "It was created by farmers for farmers," Frickenschmidt says.

It wasn't a small feat for producers like his grandfather to put the first co-ops together, and it certainly wasn't intended to be a short-term investment, he reflects.

"The whole thing was developed more than 75 years ago because those farmers wanted to have a choice," he says. "That's really Co-op 101. Young and old farmers need to remember. this very basic structure, why it was formed, who is directing it and who is managing it.

"I'm fearful that especially the young farmers don't appreciate the infrastructure that we have," he adds. "They want all of their profits up front. That's short-sighted thinking. They need to be motivated by something larger than simply wanting all of the profits now."

Farmland's financial foibles could actually end up breathing new life into the cooperative movement for that reason alone, Frickenschmidt believes. He likes the old jingle, "use it or lose it."

"I hope what's happened with Farmland is a huge wake-up call to those farmers and managers who believe in the cooperative system," he says. "You can't take a broad brush and whitewash the whole system based on what's happened here. But it is a reminder that we do need to take care of what we have and be actively involved in trying to improve it. We need to look to the future, be willing to change and be flexible."

Candace Krebs is a free-lance journalist based in Enid, Okla.