Spurred by Drought, 2 Big SD Farm Co-Ops Vote to Merge After Nixing Idea in 2015

Two years after they narrowly rejected the idea of merging, farmer members the South Dakota Wheat Growers cooperative based in Aberdeen and North Central Farmers Elevator co-op headquartered 30 miles west in Ipswich gave a resounding ‘yes’ to the idea.

A several-year droop in the farm economy and the 2017 drought across the Dakotas spurred co-op leaders to revisit the idea of joining two farm co-ops with 6,500 farmer members and 60 facilities mostly in north-central South Dakota to boost earnings, they said in letters this summer to members.
It would make it easier to make money if the co-ops joined, leaders told members since early this summer.

On Friday, the USDA reported that spring wheat production this year in South Dakota was only 20.8 million bushels. That’s the lowest since the big drought year of 1988 when it was 15.6 million bushels; and it’s a full 63.4 percent below the average annual production of 56.8 million bushels in the 28 years from 1989-2016, according to USDA data.
Winter wheat production, as chance would have it, also totaled only 20.8 million bushels this year in the state, the lowest since 2002 and 61 percent below the 28-year average of 53.3 million bushels per year from 1989-2016.

The grain elevator business is about bushels and low production cuts profits for cooperative elevators.
The two co-ops announced the vote results on Thursday, Sept. 28.

The new, still-unnamed giant co-op will be based in Aberdeen once the merger goes into effect Feb. 1 and Wheat Growers CEO Chris Pearson will head the merged organization that.
The North Central grain facility in Pierre is that co-op’s westernmost of 22 sites east of the Missouri River, west of Interstate 29 and north of I-90 in South Dakota, with two of them in south-central North Dakota. North Central also has a wholesale petroleum dealership.

Highmore, South Dakota is one of 40 locations for Wheat Growers, including both grain elevator sites and agronomy stores with seed, fertilizer and pesticide supplies and service clustered mostly along or near the James River, including one near Jamestown, North Dakota.

The merger will create the largest such member-owned ag cooperative in the nation made up only of farmer members, with annual sales of $2 billion, co-op leaders told the Capital Journal in 2015 when such a vote failed.

The merger could lead to the closing of some facilities, especially in places such as Highmore, where both North Central and Wheat Growers have facilities, according to co-op leaders. But no employees of either co-op will lose their jobs “as a direct result of unification,” co-op leaders say.

“With the many open positions in our two organizations, any future adjustments to employment will be handled through attrition and retirements,” North Central leaders said in an info letter posted on its website in August before voting opened.  More than 4,100 farmer members voted over the past month, making for a 58-percent majority of North Central members and a 63-percent majority of the Wheat Growers voters approving the merger.

The 4,100 votes break down to 1,598 yes and 954 no votes in Wheat Growers and a 911-to-657 approval in North Central.
Both co-ops issued the same news release on their websites, with quotes from their leaders.
“We listened to our members and it was based on their comments that we brought this to a vote of the membership,” said Rick Osterday, president of the North Central Farmers Elevator board. “We’re pleased that they concluded that the unification of both cooperatives can bring additional value to members and ensure the long-term relevance and viability of a unified cooperative. We want to thank them for their support and participation in this important part of cooperative governance.”
The two co-ops, with headquarters 30 miles apart, sprawl across eastern South Dakota with a few locations in south-central North Dakota and have members in both states.
About 1,000 farmers belong to both co-ops and can then vote in each co-op, leaders of the groups have said.
So the total number of farmers in the two co-ops which have a combined membership of about 7,500 is about 6,500.
In June 2015, the merger failed when only 49 percent of North Central’s members voted for it; the Wheat Growers members voted 61 percent to 39 percent for the merger at the time.
State law for such co-op mergers requires each co-op to approve it by a majority of votes.

North Central was formed in 1915 and the Wheat Growers date to 1923. By about 1900 as farming in the Dakota began ramping up as the railroads expanded, small grain facilities were built about every six miles. That’s about as far as a farmer could haul by horse or ox a wagon full of 50 bushels or so of wheat to be “elevated” into bins for later loading to rail cars and get home the same day.
This year’s drought only highlights effects of changes in the ag economy worldwide that mean South Dakota farmers need to find ways to be “proactive” and “create a stronger cooperative that can continue to provide the service, technology and access to markets and talent needed to remain competitive, relevant and valued by our member-owners,” co-op leaders said in August.
“This is a merger of two financially strong, legacy-rich cooperatives,” said Wheat Growers’ President Hal Clemensen. “Our mission now is to seize this opportunity to build a new, even stronger cooperative better able to serve our member-owners. As we go forward, we will create new efficiencies, take advantage of new technologies and continue to build a strong employee team – all in order to create more value for our members.”

Until the merger becomes effective in February, each co-op will continue to operate as before, independent of the other, co-op officials said.
As in the 2015 voting, Eide Bailly accounting/auditing firm administered the vote and counted the ballots.
A new name will be developed for the merged entity, post-vote this time, which is a change.

In 2015, leaders of both co-ops had chosen a new name, CentraGro Cooperative, which apparently was stillborn when the vote failed.
At that time, co-op leaders said the merger would save $44 million in the first four years. Also in 2015, co-op leaders had promised a payout of about $13.6 million to farmer members 90 days after the merger, if it had passed, based on expected higher earnings That would have amounted to about $2,000 per farmer member.

Both co-ops reportedly have lost a few members in the past two years; in 2014 co-op officials said North Central had 5,500 members and Wheat Growers had 2,500 members.
Both co-ops also have expanded in the past 20 years, merging with local or smaller grain elevators and co-ops, closing some facilities in the process.
Such farm cooperatives began in South Dakota and North Dakota in the early 20th century as a way to pool farmers to present a united front against “Eastern” bankers and mills and railroads and grain traders to give farmers a stronger say in how much they receive for their crops.

The theory includes not only higher prices paid at the elevator for farmers’ crops, but divvying up the co-op’s profits among the farmer members to some extent.
But some who opposed the merger two years ago said when such co-ops get too large, they perhaps look more at making money “from farmers,” not “for farmers,” as one farmer member told the Capital Journal two years ago. Some also said that the merger would lead to less competition to buy farmers’ crops.  But co-op leaders in 2015 told the Capital Journal that such a merger would give farmer members a bigger footprint in the market, with one grain-buying department, not two, gaining higher prices for farmers through more muscle and less duplication of services.

The merger also will gain farmers better rates from the railroads for shipping grain and more cooperation loading large 105-car shuttle trains at large loading facilities, co-op leaders said.
The Wheat Growers, in becoming a partner of the wholesale petroleum business that North Central has, will save costs and share profits, co-op leaders said.
This past summer, Wheat Growers President Clemensen told members in a letter that the merger needed to be tried again.
“A lot has changed over the past two years. Among these changes, we’re all aware the ag economy has turned downward. That downturn at the farm level is affecting farmer profitability, and the farm level impacts are affecting both co-ops’ profitability as well. At the same time, add in several mega-mergers, increased competition locally and globally, and a drought year that will likely affect our yields negatively at harvest,” Clemensen said. “Meanwhile, the potential advantages of a unification that we identified previously still exist, even more so today given all of the market changes and pressures.”