SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3330 words

COMMITTEE: SENATE AGRICULTURE, NUTRITION AND FORESTRY

HEADLINE: 2002 FARM BILL

TESTIMONY-BY: DAVID KOLSRUD, MANAGER AND MEMBER-OWNER

AFFILIATION: CORN-ER STONE FARMERS COOPERATIVE, LUVERNE, MINNESOTA

BODY:
August 2, 2001

Testimony of David Kolsrud Manager and Member-Owner CORN-er Stone Farmers Cooperative, Luverne, Minnesota on behalf of the National Cooperative Business Association

Before the U.S. Senate Committee on Agriculture, Nutrition and Forestry

Hearing on Rural Economic Development Issues

Good afternoon and thank you, Mr. Chairman and members of this Committee, for the opportunity to testify on behalf of the National Cooperative Business Association about the need for a new source of equity financing to spur economic development in rural areas and other provisions that will help promote and advance cooperatives in rural communities.

I am David Kolsrud and I am the manager and a member of CORN-er Stone Farmers Cooperative in Luverne, Minnesota. CORN-er Stone is a farmer-owned cooperative that processes corn into ethanol through AgriEnergy LLC, in which CORN-er Stone members have a 68 percent ownership stake. I am also a farmer. I grow corn and soybeans on 500 acres. CORN-er Stone Co-op farmer-owners are located in Iowa, Minnesota and South Dakota. CORN-er Stone is a member of the National Cooperative Business Association. NCBA represents cooperatives and cooperative service organizations across all industries including agriculture, food retail and distribution, childcare, energy, finance, housing, insurance, childcare and many others. NCBA worked throughout last year to build consensus around, and a broad coalition in support of, a new source of equity investment.

Senators in this room know all too well that rural America has not shared fairly in the unprecedented prosperity enjoyed by the rest of the country over the last decade. Median income for residents outside of metro areas is nearly $10,000 lower than that of city dwellers and is growing at a slower rate.

Though the challenges for rural America are many, among the most significant include both the lack of diversity in our rural economic base and a lack of equity capital for rural business development.

Though I speak from my perspective as a farmer, a member of a cooperative and a co-owner of AgriEnergy, LLC, I can assure you that raising equity capital is daunting for all rural businesses regardless of whether they are owned by members of a farmer cooperative or by independent entrepreneurs, whether they process commodities or produce other goods and services, or whether they are located in the Midwest, on the East Coast or west of the Mississippi. That's made clear by the broad coalition supporting the National Rural Cooperative and Business Equity Fund Act, which would create incentives for investment in an equity fund for rural America and which I urge you to include in the upcoming rewrite of the Farm Bill.

It is absolutely critical for all rural communities that any legislation that seeks to improve the economic condition of rural areas include authority for a new source of equity investment for all rural businesses. And, in a moment, I'll tell you why.

New Generation Cooperatives

CORN-er Stone Farmers Cooperative falls in the category of "new generation cooperatives." NGCs differ from other farmer-owned cooperatives in many ways. Like many other co-ops, new generation cooperatives process commodity into value-added products and market those products on behalf of their farmer-owners.

But the most significant difference for the purposes of this hearing is that to get started, NGCs require their members to invest a significant amount of equity in the co-op and commit a fixed amount of commodity to the cooperative. New generation co- op members bear a disproportionate amount of risk for the potential reward they can expect to receive.

These requirements are necessary because we often sell our products in niche markets. That means the amount of commodity we can profitably process and sell for our members is limited, and therefore the initial number of member-owners and amount of commodity that we can accept is limited.

The result is the high capital requirements of value-added co-ops are coupled with a limited pool of investors - that is, a restricted number of farmer-owners. And particularly in this farm economy, the resources of those members are slim. These inherent equity challenges create tremendous barriers to the development of new value-added cooperatives and other ventures that farmers and others may wish to invest in to improve their income.

Indeed, the lack of equity investment in these types of businesses often means they can't get off the ground. Viable business plans are not the problem. Access to lucrative markets is frequently not the problem. Even access to a substantial portion of the equity needed for debt financing is not the problem; often rural businesses, and even farmer owned cooperatives are able to raise impressive amounts of equity, considering the state of the farm economy. But all too often, though, viable businesses that would bring jobs and income into rural areas either cannot get off the ground, or those that need to expand cannot, because they can't raise enough equity.

CORN-er Stone Farmers' Cooperative

CORN-er Stone's own experience is a perfect example of the problem.

In 1995, several farmers in Southwest Minnesota got together to form a cooperative with the goal of building an ethanol plant. As a group, we spent two years trying to raise equity and secure financing. Due to the capital requirements of the project, estimated at $21 million, this turned out to be an almost impossible task.

The goal of our equity drive was $9 million. We were able to raise only $3 million from 201 farmers, or nearly $15,000 per member - which is still a substantial investment for our family farm members.

Only with the help of Stearns Bank, local banks which provided subordinated debt, private investors, tax incremental financing from our municipality, a guarantee from USDA's Business and Industry Loan Program, and $4 million in personal guarantees - some from farmers who put their homes and entire farming operations at risk as a guarantee - were we able to build enough equity to secure debt financing for our remaining capital needs.

In just our first three years of operation, AgriEnergy, LLC has generated over $50 million in additional revenue through value- added processing, created 28 high paying jobs and returned to our co-op member-owners a dollar per bushel over the market price in the form of a value-added payment.

This success story almost never happened because of the difficulty we faced in raising equity capital. We came very, very close to abandoning the project.

Equity Challenges Facing Cooperatives and Other Rural Businesses

In order for more viable businesses like CORN-er Stone to get off the ground, rural America needs a source of equity investment. There are hundreds of examples of how equity constraints are limiting the ability of farmers and others in rural America to increase income and quality of life in our communities.

Here are just a few:

In 1996, Northern Plains Premium Beef Cooperative had a functioning board of member-ranchers, a CEO and full time staff who, together, put together a sophisticated business plan to build a value-added new generation co-op. The co-op's equity drive collected nearly $12 million - a staggering amount - in equity from ranchers across the Northern Plains - just under half its drive goal of $25 million. But in the spring of 1997, the co- op disbanded after it was unable to raise additional equity and state law forced it to return the equity it had raised.

There is no question that the co-op would have provided a new source of income for the ranchers who had committed equity capital, ranchers who were facing low cattle prices. A scaled down version of the co-op exists today as the Dakota Beef Co-op, but hasn't come close to the vision for the original co-op.

Natural Meat Cooperative, owned by ranchers in Colorado, Wyoming, Montana and Nebraska helps improve farmer income by targeting sales to the fast growing natural foods market at retail. Natural Meat Cooperative is currently looking for an equity partner so it can purchase an existing natural meat processing facility that already has strong market penetration and brand loyalty. Successful retail penetration is critical to the long-term success of the co-op. But to do that, they need an equity partner. Their efforts to buy an existing facility have stalled because that partner has been hard to find.

And more recently, Mountain View Harvest Cooperative, a Colorado- based new generation cooperative owned by wheat farmers that produces baked goods, was able to raise the equity capital it needed to buy a facility several years ago. It has been wildly successful. But as the business has grown, the co-op needs another bakery. And that requires equity. Lots of it. The co-op has had to consider bringing in private investors, which could reduce the farmer-control and with it, the size of producer returns.

Though Mountain View was ultimately able to find an investment partner in a large federated farmer-owned co-op, that deal may not be realized as the partner has suffered from decline in the rural economy.

Rural businesses of all types face these challenges. The fact is, with a few exceptions, it is hard to attract equity investment to our rural communities in a manner that keeps income in the rural communities.

Fortunately, there is a solution.

The National Rural Cooperative and Business Equity Fund Act

Last October, Chairman Harkin and Senator Craig introduced the National Rural Cooperative and Business Equity Fund Act along with a bipartisan group of cosponsors. Similar legislation was included as part of S.20 introduced earlier this year by Senator Daschle. On behalf of NCBA and other members of the equity coalition, thank you Mr. Chairman, and members of this committee who cosponsored that legislation, for your support and leadership.

The legislation takes a unique approach to the economic challenges facing rural America. It would create a public/private partnership designed to attract equity investment into cooperative and other business ventures in rural America.

Why is this so critical?

As the above examples and hundreds of others like them make clear, often the most insurmountable barriers that would-be rural businesses and cooperatives face is obtaining equity investment needed to leverage both traditional and government sources of debt financing. Existing rural development programs administered by the U.S. Department of Agriculture provide some support in guaranteed loans, but still fall short of the need. And as evidenced by the support of the legislation by both the American Bankers Association and the Independent Community Bankers of America, and by our community lenders in Luverne, there is no shortage of lenders for rural business development. But lenders interested in investing in their communities must still require equity to secure their loans.

The National Rural Cooperative and Business Equity Fund Act, will encourage private investment in value-added agriculture enterprises, producer-owned and other member-owned cooperatives, and other projects that existing venture capital funds do not accommodate.

Briefly, the legislation introduced last year and included in S. 20 does the following:

- Authorizes the creation of a private corporation that would operate the Equity Fund.

- Provides the Secretary of Agriculture and two of her appointees with seats on the Fund's 12-person Board of Directors. The remainder of the Board will be made up of representatives of authorized investors, such as commercial banks, cooperative banks and other institutional investors.

- Provides incentives to attract private investment in the Fund from entities listed above. Those incentives include a federal match to private investment, a 50 percent guarantee, and authority for the Fund to take out loans from private investors that are 100 percent guaranteed by the federal government.

- Requires a business applying for equity from the Fund to be sponsored by a local entity, such as a bank, a regional or local development council, a cooperative, or a community group.

- Promotes private investment in value-added agriculture enterprises, producer-owned cooperatives, and other projects in rural America that have difficulty attracting venture capital.

- Prohibits the Fund from competing with conventional sources of debt financing.

- Requires the Fund to invest in a diverse range of viable projects, representing a variety of business structures operating in rural communities of diverse size.

- Requires cooperatives and other businesses receiving equity from the Fund to invest a substantial amount of their own capital.

Investments made under this legislation will provide off-farm income, additional markets for agricultural products, and new business opportunities in rural communities.

Equity Capital Must Be Made Available to All Types of Rural Businesses

Now, a word of caution: Rural America will benefit most if any new source of equity investment is available to all rural businesses including co-ops and non-co-ops and both agricultural and non-agricultural businesses. It is not just a matter of geographical fairness to those areas of the country without a lot of crop production, it is a necessity if rural America is to diversify its economic base and withstand fluctuations in the farm economy. Farmers and others in rural communities should be able to invest in ventures that improve economic growth regardless of whether they involve processing agricultural commodities.

In my own community of rural Minnesota, I can identify several non-crop related needs for equity investment. A venture we're evaluating to augment farm income is energy production from wind turbines. Though a wind turbine operation would be capital intensive, it also has the potential to generate huge economic benefits for farmers. Wind is free and turbines can be located in economically depressed areas, and on farmland.

Forestry cooperatives create another source of non-commodity income for farmers and others who own small woodlots in the countryside. Several forestry cooperatives have been formed in Wisconsin to allow farmers to harvest the wood from their lots in a manner that generates a sustainable revenue stream over time. Too often, farmers are given the choice by paper and wood companies of cutting all of the wood on their lots or none of it. But forestry cooperatives, particularly if they can build their own kiln and other facilities, can create new markets and a source of long-term income for farmers.

These are just a few of the types of businesses that rural Americans could develop if they had greater access to equity capital.

The National Rural Cooperative and Business Equity Fund Act is supported by a broad range of organizations, including the National Cooperative Business Association, the National Rural Electric Cooperative Association, the Rural Telephone Finance Cooperative, the National Rural Utilities Cooperative Finance Corporation, the Farm Credit Council, CoBank, Agribank, the National Cooperative Bank, the National Farmers Union, the American Bankers Association, and the Independent Community Bankers of America. Two of those organizations are testifying in favor of a new source of equity investment for rural America at today's hearing. Other members of the coalition have indicated their support in testimony before the House Agriculture Committee.

Resources Needed for Cooperative Development

The Committee should also include additional provisions in the upcoming Farm Bill that will enhance economic growth and promote the development of new cooperatives.

The Rural Cooperative Development Grants Program

Funding for the Rural Cooperative Development Grants program should be made mandatory. Currently, the program, the only one administered by USDA that is devoted solely to developing new cooperatives in rural areas, is subject to appropriations. Though it is authorized at $50 million annually, it has yet to achieve appropriations that reach even 10 percent of that level. The program is too important to rural America, and subject to far too much demand to linger at these funding levels. We urge the Committee to make this program mandatory.

Housing for Rural Seniors

Another unmet need in rural America is senior housing. Far too often in our rural communities, our seniors, retired farmers and others, who no longer wish to maintain their own homes, are left with two choices: leave the community in which they've lived and raised their families in order to find affordable multi-family housing, or enter an assisted living facility that offers far more services than able-bodied seniors need.

Rural senior housing cooperatives are a proven method of ensuring that seniors retain equity ownership while remaining in their communities with family and trusted friends. My state of Minnesota is home to seven rural senior housing cooperatives. A recent USDA funded survey of those residents, carried out by the Cooperative

Development Foundation, indicates overwhelming satisfaction with the housing option, with nearly 80 percent of the residents stating that living in the co-op has positively contributed to both their health and life satisfaction. It is no surprise. Not only can they

continue to socialize with friends and family, they control the co-op. The seniors, as owners, get to decide what services will be offered to them, when, and for how much; they make decisions on the financial management of the cooperative; and they hire and fire staff. They're in control.

Unfortunately, the pre-development cost of housing cooperatives is often prohibitively high, the expertise in cooperative housing is limited (few developers have it), and there are few sources of federal or state funding to help communities develop this type of housing.

Upcoming farm legislation should include a dedicated and mandatory source of grant funding to aid those experienced in cooperative development in the planning and other pre-development costs associated with creating new rural senior housing cooperatives.

Cooperative Coordination within USDA

Finally, we urge this Committee to include a provision within the Farm Bill that would establish a permanent standing intra- departmental cooperative council made up of all the USDA agencies that have missions that directly or indirectly affect cooperatives. The Council should evaluate how it can better make USDA programs available to cooperative business, how to address barriers associated with cooperative development, and develop a Department wide strategic initiative for cooperatives in rural America. This should include all of the agencies within Rural Development - the Rural Business Cooperative Service, the Rural Utilities Service and the Rural Housing Service - as well as agencies such as the Forest Service, which plays a role in forestry cooperatives, the Natural Resources Conservation Service, which can assist farmers and other cooperatives through its Resource Conservation and Development Program and the Foreign Agricultural Service which administers foreign aid and export programs that help cooperatives expand their markets overseas.

The Department has for too long lacked a unified strategy for advancing all cooperatives in rural America. A requirement to establish a Department-wide strategy for cooperative advancement across all types of co-ops (housing, electric, agriculture, utility, forestry, and others) would go far in helping the owners of rural cooperatives - the residents of rural America - enhance their income and improve quality of life in rural America.

Thank you, again Mr. Chairman and members of this Committee for this opportunity to testify.



LOAD-DATE: August 8, 2001