Former Crystal chairman marks first year at CoBank

FELTON, Minn. -- As a Red River Valley sugar beet grower, David Kragnes has spent the past year working to become a leader in the wider world of rural finance.

On Jan. 1, 2009, Kragnes took his seat on the 16-member board of directors for CoBank ACB (agricultural credit bank). CoBank is a $63 billion entity -- one of five entities that finance agriculture and rural infrastructure in the United States. The bank lends directly to some customers but also to "affiliation" co-ops that loan directly to farmers.

Kragnes, 57, acknowledges that it's a position he never expected to hold.

"Often, as I'm coming back from some meeting, I'll look at my wife and say, 'How did this ever happen?'" he says.

Not suddenly.

Among Kragnes' inspirations was his father, Russel, who was a farmer and a former U.S. Marine. Russel raised sugar beets and other crops, but also served on the local township board and on the board of the Kragnes (Minn.) Farmers Elevator.

"I saw him taking time, doing things that were important to the infrastructure of the community, keeping it moving forward," Kragnes says, of the father who died in 2002. "I grew up seeing that (service) was expected and important. And my father raised us with the idea that we could do anything."

Anything?

Well, Kragnes says, without a hint of irony. He decided early on he probably couldn't be a jockey. Six-foot-3, you know.

Crystal roots

Kragnes graduated in 1970 from then Glyndon-Felton (Minn.) High School. He went 17 miles to North Dakota State University in Fargo for agricultural engineering.

At NDSU, he divided his time between the logic of his ag students friends and the leanings of his sister's theater friends. While enjoying this mix at school, at home, he became one of the first to buy cooperative stock in American Crystal, which had been a corporation. After three more winter quarters, he turned his entire focus to the farm.

Kragnes farmed through the 1980s and into the 1990s, when Kragnes started shouldering a series of industry board responsibilities. He was elected to the Red River Valley Sugarbeet Growers Association board, then with served on the American Sugarbeet Growers Association and finally was elected to the American Crystal Sugar Co. board.

Kragnes served as Crystal's chairman in 2006 and 2007.

It was time consuming and he relied on his wife, Peggy, and sons Kyle and Ben, who still work with the farm among their other business and career pursuits. It was a stretch.

"When I went on the Crystal board, I didn't know how to run a 'white pan,' or a diffuser, or any other of the machinery of the sugar manufacturing process," Kragnes recalls of the technical production jargon. And while he learned these particulars, he didn't see this as his main job.

"The first job" of a co-op board of directors is to "hire, fire and compensate the CEO," Kragnes says. "Secondly, they provide direction and warn of dangers and concerns that can affect a co-op or business."

He seems especially pleased to have led the co-op in the transition to replace the popular James Horvath, who had served as president and chief executive officer. The board hired David Berg, who had served in various vice presidential roles at Crystal.

Kragnes says he'd been particularly concerned that the co-op not return to "a revolving door" syndrome with CEOs. He insisted on a process that took time, established goals and identified human traits to fulfill those goals. The board interviewed several candidates, both inside and outside the company, which he thinks added to the credibility to the new CEO.

Another deep dive

Off of the Crystal board in December 2007, Kragnes as nominated for the National Farmer Cooperative Director of the Year award in 2008. At the meeting where he received the award, Kragnes went to supper with Jack Cassidy, a lobbyist for CoBank, and a CoBank board member, Jim Kinsey of Virginia.

"They asked me, when you're done at Crystal, what are you going to do next? And they asked if I knew there'd be an open seat on CoBank's board."

He didn't, but soon, he was thinking a lot about it.

Kragnes was familiar with CoBank as Crystal's lender, but he'd never focused on the board's internal governance policies. Among the 16 CoBank board members, 12 are elected and 10 of those are active farmers. Another four are appointed at large, with an eye toward specific skills, such as finance or telecommunications.

Directors are chosen from three regions and are elected every four years -- three directors every year.

One thing that particularly intrigued Kragnes was that in alternate years, the process is not the same. One year, the elections are based on a straight co-op member vote -- one co-op, one vote, no matter how big or small the co-op or corporate entity.

In the alternating years, the votes are equity-weighted -- big borrowers like Cenex Harvest States would get more votes.

That's good logic

"If you think of that, it's good logic," Kragnes says. "Someone who has a $250 million loan portfolio would have more skin in the game than someone with $1 million line of credit. Perhaps the bigger co-op should have more say. But on balance, three or four co-ops shouldn't get to decide all of the elections all of the time."

The board no limit on number of terms, but it has an age limit is 70, and his predecessor had hit it.

"It's a big district," Kragnes says. It runs east to Michigan, south to Tennessee and west to Wyoming. "It's very unlike American Crystal's Moorhead (Minn.) factory district, where I knew all the people who were going to vote for me by name pretty much."

CoBank has a nominating committee that interviews candidates, and they narrow it to two. If the co-ops don't like those nominees, they can petition in other candidates.

Kragnes, who stopped short of a college degree, says he was flattered to be in the company of candidates. His opponent in the election had an MBA and good co-op experience.

Kragnes started to run for the CoBank board in March 2008. Banks in the U.S. then were considered safe. By September 2008, when Kragnes got notice of his election to the board, the banking system was in the middle of a disaster.

"I really wondered what I'd gotten myself into," Kragnes says. "The good news is that Denver is a long way from Wall Street, both in attitude and in responsible leadership, and the mission to serve."

Farmers' common sense

Kragnes thinks rural America's stability through the current crisis is partly based on common sense.

"I keep wondering, what would have happened in some of those boards if they had some old farmer on them asking what they were doing, lending money for people without jobs to buy houses, and then bundling and selling those mortgages."

A year ago, CoBank was concerned about Farm Credit System getting swept up in the enthusiasm for creating new regulations for banking. As part of the Farm Credit System, CoBank is a government-sponsored entity. The FCS falls under the jurisdiction of the House Agriculture Committee. CoBank is concerned that FCS will stay that way and not be shuffled under the control of the congressional banking committees.

Of course, Kragnes surprised CoBank colleagues by his familiarity and access to Rep. Collin Peterson, D-Minn., chairman of the House ag committee. They went to the same high school and Kragnes went to school with one of Peterson's younger sisters.

"Rural America could not be better served at this moment than to have a guy (Peterson) with CPA background as chairman of the committee that oversees Farm Credit," Kragnes says. "He gets it."

Financial reform is on the back burner in Congress, but Kragnes thinks the agriculture committee will retain control, partly on the logic that derivative trading a lot like futures contracts in commodities exchanges, which the committee also regulates.

Compensating the CEO

In February, Kragnes was in a familiar position -- helping to figure out how to compensate a CEO. In co-ops, this is complicated by the fact that board members can't own stock, he says. In short, the co-op was advised by U.S.-based consulting company Towers Perrin to look at what executives with comparable responsibilities earn and then "try to hit the 50th percentile."

Co-op presidents making hundreds of thousands need to be seen in context he says.

"The Wall Street banks that have these $10 (billion) and $20 billion pay packages are bizarre."

Kragnes also was named to CoBank's "risk" committee. This committee reviews any loan larger than $250 million and all of those that are in nonaccrual status or are in danger of default.

"It's been fascinating," Kragnes says. "You see that the things that are in danger are things that eat corn at night -- chickens, turkeys, hogs and dairy. And ethanol plants."

He says the rule of thumb is that the smaller the animal, the quicker the industry can adjust production.

CoBank requires its board members to attend at least two training events per year, as well as six regular meetings. Kragnes figures the entire obligation is at least 40 days of service during the year.

Occasionally, CoBank's board meets in the Upper Great Plains Last August, the group met in Bismarck, N.D., where members toured coal gasification production.

"The main topic of discussion was 'cap and trade' and what that's going to do with our electrical distribution and energy portfolios," he says.

In December, the meeting was in New York, where the board went to the Federal Farm Credit Banks Funding Corp., the entity where the system gets its base funding. There also are "customer meetings" around the country, which he says are akin to the American Crystal factory meetings.

'Act' outside the box

On the side, Kragnes is a speaker, entertaining cooperatives at annual meetings.

His favorite topic: "Get out of your box, while you still can. If you're a farmer, then read poetry someplace," he says. "Or teach high school football, or T-ball."

Besides his farming, Kragnes has finished a new home. He's built two experimental aircraft and three boats. He's entered a competitive poetry "slam," with some notable success.

With a native sense of humor, Kragnes writes once a month for the Sugarbeet Grower magazine, in his column, "Write Field." Farmers can do lots of things and should do what they can.

"As farmers, we're required to have a reasonable understanding of taxes, finances and financial ratios, plant pathology. We need to know some psychology, for our employee relations," Kragnes says. "We have a lot more diverse education than we realize."

A central theme for Kragnes is that local jobs, local cooperatives need leadership.

"Even if you're not an expert in Roberts Rules of Governance, that doesn't mean you can't bring something of quality to these positions."