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Published December 09, 2013, 09:17 AM

Crystal CEO asks growers to be resilient

David Berg, in his annual address, called on the pride of co-op members who, while celebrating 40 years of the company as a farmer-owned cooperative, would be resilient in the face of potential hardship.

By: Mikkel Pates, Agweek

FARGO, N.D. — American Crystal Sugar Co.’s annual meeting isn’t so much about nitty-gritty financial disclosures anymore. Sometimes it’s a celebration, but this year it was kind of a big cheerleading session, for a team heading into a tough battle.

Shareholders got the nuts-and-bolts news about lower beet payments at factory district meetings in November. That was when farmers in the Moorhead, Minn.-based co-op learned they’d be paid $300 million less than they were paid for their 2012 crop. The $38-per-ton projected payment is about half of the payment for the 2012 crop and on a smaller crop.

David Berg, in his annual address, called on the pride of co-op members who, while celebrating 40 years of the company as a farmer-owned cooperative, would be resilient in the face of potential hardship.

“For 40 years, turning this company into a cooperative and going through the various challenges we’ve had, there is resilience there already,” Berg said. “I am more or less a cheerleader, saying, we’re in a bad spot right now but use the resilience — look down inside yourselves — and we’ll conquer this challenge like we have in the past.”

Crystal is not alone. The co-op’s beet-growing “cousin” Minn-Dak Farmers Cooperative of Wahpeton, N.D., has announced a $40 per ton — “plus or minus” — payment for 2013. New president Kurt Wickstrom has looked ahead to 2014 and 2015 and seen potential payments that might be in the “high $20s and mid-$30s at best.” The two co-ops market sugar together in an entity called United Sugars Corp. of Bloomington, Minn., and byproducts through Midwest Agri-Commodities of San Rafael, Calif.

Similarly, the Southern Minnesota Beet Sugar Cooperative of Renville, Minn., held its annual meeting Dec. 5. Farmers there are being paid just over $36 per ton for 2013 beets, according to a shareholder source. That compares to a payment of over $71 per ton for 2012 beets. Discussions of possible consequences for not producing beets didn’t come up at the meeting, the source said.

Berg declined to project payment ranges for the 2014 crop.

“I will say that I don’t know that we’re out of the price trough yet,” Berg said. “I don’t know if we’ve formed a bottom. I don’t think we’ve begun to go up. It doesn’t appear to be going down,” he said. “Now, the fact is the current price of sugar doesn’t give me a lot of hope for improvement for the 2014 crop.”

Mexican sugar

Berg rests the blame for the immediate financial collapse squarely on the North American Free Trade Agreement and a new flood of sugar from Mexico. The NAFTA — like other trade agreements — is designed to give either party unfettered access to each other’s markets. But Berg suggests that if the Mexicans can’t be convinced to voluntarily reduce their exports to the U.S., they could upend the U.S. market and hurt themselves.

There appeared to be no immediate political backlash from the news. Robert Green of St. Thomas, N.D., was elected to his second year as chairman and Steve Williams of Fisher, Minn., re-elected as vice chairman.

“Anybody who has been farming for any length of time at all has seen prices go up and go down. It isn’t always easy to see what is going to make things change, but we want to be there when it turns around,” Green said.

Green acknowledged that the company has gotten “a lot of questions” about the nature of joint ventures and their obligations and who’s responsible for what. “While the company doesn’t have an interest in how individual members make up their joint venture, we can answer questions about their responsibility to the company,” Green said.

Shareholders have the obligation to produce beets for the cooperative whether they’re profitable at the farm level or not. Berg declined to offer specifics in advance of the Dec. 11 shareholder meetings, first in Grand Forks and then in Fargo. Shareholders have received mailings with common questions and answers regarding these obligations.

The company owns five factories that require a predictable minimum amount of beet production to cover fixed costs.

But things have changed over the years. Today, a “substantial” number of Crystal acres are not grown by the original shareholder but instead by joint venture partners, co-op officials confirm, without supplying any numbers. Original shareholders from 30 to 40 years ago might have sold shares to new producers — but the co-op won’t say how many — have put their shares into joint venture arrangements.

Shareholder issues

Stock ownership in itself allows you the right to deliver, company officials explain. The obligation to deliver is covered in a separate delivery obligation agreement, negotiated every five years. The current agreement covers crops from 2013 to 2017. The entity could request that the shares be transferred to a new entity, a process that takes place in the winter months.

One source, who declined to be quoted by name, said a new joint venture offers considerable legal responsibility for both parties. Joint ventures are truly partnerships, and for a partnership to dissolve, Crystal’s board must approve a new one in its place.

Some of the grower-partners might be tempted to think they can decide to scale back their production to fewer acres if they anticipate producing at a loss, and that the responsibility lies solely on the initial shareholder. One source said that if the joint venture were to fail to deliver beet acres, Crystal allows the co-op to recover its fixed costs — maybe several hundred dollars an acre. Further, those costs might be taken out of unpaid amounts from patronage or unpaid amounts of previous crop payments. At the extreme, the partnership could forfeit its shares, and incur other civil damages.

“The people that make up the sugar beet industry here — both limited partners (the original shareholder) and general partners (operators) — are a lot of level-headed people who are flexible,” Green said. “They negotiate. I am quite confident that we’ll get it done.”

This is the first time Crystal has faced such questions, but it isn’t entirely new for sugar producers.

In 2003, Southern Minnesota officials told shareholders that the co-op could take legal action against a shareholder who refused to grow beets as per their obligations. In that situation, the co-op had suffered financial losses because of a dispute with a construction contractor during a plant expansion and because of a dispute with insurance providers when freeze-damaged beets went into the storage piles and spoiled.

Also at Crystal’s annual meeting, growers heard some hopeful news about progress on a farm bill conference committee, to pass a five-year bill that initially has been under negotiation in Congress since 2011. It is unclear whether the bill, initially called the 2012 farm bill, and now the 2013 farm bill, will be passed this year or wait until 2014.

Sens. John Hoeven, R-N.D., and Heidi Heitkamp, D-N.D., addressed the annual meetings, saying it still might be possible to pass a farm bill before the end of the year. Hearings started in 2011.

Kevin Price, Crystal’s lobbyist in Washington, said the fact that sugar provisions in both House and Senate forms of the bill are similar and both passed their respective house. That means the sugar provisions theoretically would not be changeable in a conference committee compromise between the two bodies. “We wish with all our might they can get this across the finish line, and a five year farm bill in place,” he said. “The sugar industry never rests.”

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