Co-op born of growers' frustration with processor's lack of long-term outlook.
Nothing frustrates a sugarbeet grower more than not being able to deliver harvested beets to the processing plant on a cool, dry autumn day. But there were a lot of frustrated growers around the Red River Valley on such days in the late 1960s and early 70s. That's because the Valley's dominant processor--American Crystal Sugar, then an investor-owned company--was not investing in piling equipment needed to keep up with farmers, who had made giant leaps in their ability to rapidly dig and deliver sugarbeets. Virtually no maintenance was being done on pliers during the offseason, which lead to frequent breakdowns during harvest.
Indeed, it appeared more and more that "the company was being bled to maximize short-term profits, without making the type of critical capital investments needed for the long-term future of the industry," says American Crystal board member Dave Kragnes, who grows beets and grain on his Felton, Minn., farm. "The growers [including his father] could see that there was money to be made if the plants were operated more efficiently; truck drivers needed to be paid to drive, not sit. When the company needed money, it simply cut back on capital expenditures. The trust was milking the company dry. The growers felt they could run it better."
The Red River Valley Sugarbeet Growers Association even offered to pay for some new facilities to help speed the harvest and stockpiling, but the company refused, fearing that growers might then want a voice in how the facilities were operated. In 1971, growers became more worried when the company suddenly shut down its plant in Chaska, Minn., rather than investing several million dollars to meet stricter air pollution standards. While earlier plant closings had concerned growers, this one scared them. The company was also threatening to cut back acres, along with rumors of a factory closing in the valley.
In the face of these cutbacks, growers concluded that they could only influence the company's direction from the inside. Al Bloomquist, the association's executive vice president, learned that food giant Borden was willing to sell 100,000 shares, or 9 percent, of American Crystal's common stock, for $2.3 million. Through the purchase of those shares, they hoped to gain a voice in the future direction of the company. Bloomquist informed the company of the association's intent to buy the shares while simultaneously including a note that asked whether the company's board would entertain a buyout offer based on book value for its facilities.
During an industry meeting in Phoenix in March 1972, the company indicated it would be interested in a sale, although most officers and the directors had serious doubts that the farmers could pull off such a deal. At that time, the company's book value was 66 percent higher than its stock was trading for, hence ears perked up when there was mention of a sale at those terms. Bloomquist was told to invite the growers' executive committee to meet with the American Crystal board in Denver in one week.
If the idea of buying a sugar company scared the growers, losing such an opportunity was worse. So the committee unanimously decided to pursue the buyout.
Bloomquist may not have been universally loved by the growers, but he was well respected and known as a man of integrity who was not afraid of big ideas. The growers also had faith in their attorney, William Dosland, one of the Valley's most respected legal counsels. He advised the growers' executive committee that the key to making a good deal was to hire the right legal and financial professionals who could help them through mountains of paperwork, including prospectus and proxy statements, and through potentially rancorous negotiations with skilled corporate lawyers. This they did, although the board had to swallow hard before agreeing to spend $500,000 for such services.
The law firm they hired quickly concluded that the company was not doing as well as indicated by the generous dividends it was paying; they suspected the company was playing tricks to keep stockholders happy. Uncovering the company's true worth, they advised, would not be easy.
Undaunted, on March 8, the full 40-member association board voted 37-3 to pursue a deal.
After meeting with the St. Paul Bank for Cooperatives, it was decided the company should be operated as a cooperative if a deal could be reached. Not only were commercial lenders not interested in offering long-term financing, but a co-op offered tax advantages and liability protections that a for-profit business did not. The cost was calculated at $60 million, plus $26 million more to retire short and long-term loan obligations. The bank wanted growers to come up with $20 million.
One week after making the initial proposal, the growers' team flew to Denver to meet the company's board. American Crystal directors were impressed by what the growers brought to the table and gave them one month, until April 15, to raise the money. The growers then hired the Wall Street investment firm of Loeb Rhodes to polish their offer and, at the bank's insistence, hired a German company, BMA, to more closely appraise American Crystal's seven sugar factories. BMA concluded that the factories were in better shape than the growers thought, and could be operated as they were. The Bank for Cooperatives issued a letter of credit for $66 million for the purchase, and $30 million more for seasonal operating loans. It said it was willing to study further loans for capital improvements.
The growers were advised it would be best to form a stock corporation to buy American Crystal, which in turn would immediately be purchased by the co-op. But that also necessitated bringing in an intermediate lender, since the Bank for Co-ops could not finance a stock corporation. A consortium of four banks was forged to finance the initial buyout, until the co-op took over.
To finance the growers $20 million investment, the association developed a plan to expand the Valley's beet acreage and required growers to invest $100 for each acre of beets they raised. Total acreage base was set at 200,000--or 40,000 more than contracted for in 1972. Mast growers supported the plan, although some were unhappy about having to pay for something they previously got for free--a beet contract. But Bloamquist countered that a beet contract was never guaranteed as long as someone else owned the company.
Organized grower opposition circulated flyers saying it would be better to let American Crystal go broke, or to ship their beets to processors outside the Valley. The proponents' education efforts stressed that the buyout meant growers would own their beet contracts, that they could vote in haw the company was operated and that they would share in any profits. Further, the co-op would increase acreage and invest in plants for the long term.
In the end, hope of success spoke louder than fear of failure.
On April 10, 1973, 1,500 growers jammed into the Grand Forks Armory to vote. Seventy percent of them (1,065) voted in favor.
The growers' experts had to make sure there were no unresolved liabilities or outstanding tax issues. After a month of negotiating, during which the growers' team had flown 100,000 miles back and forth to Denver, a deal was approved pending completion of financial arrangements and approval by American Crystal's shareholders.
Financing for growers' still hinged on the cooperation of small, local banks and production credit associations. In the end, nearly 60 Valley banks and PCAs loaned money to cover the growers' investment.
Company shareholders overwhelmingly approved the sale on Jan. 23, 1973. On Feb. 21, Crystal Growers Corp. paid $86 million, then merged into American Crystal and ceased to exist as a corporate entity.
Later that night, a joint celebration dinner was held at Denver's Brown Palace hotel. Bloomquist recalls that several company directors told him they had never even been in the Red River Valley, nor ever seen a sugarbeet. Most said they had doubted the farmers could pull off the deal. "You really showed us something" one said to Bloomquist.
The transition to a co-op was completed on June 14, 1973, and--after 74 years of being headquartered in Denver or New York City--American Crystal had truly found a home in the Red River Valley.
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|Date:||May 1, 2004|
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