United Potato Cooperative: Flawed from the beginning? - The Packer

United Potato Cooperative: Flawed from the beginning?

12/13/2011 04:28:00 PM
Tom Karst

Was the founding strategy of the United Potato Growers of America flawed from the beginning? News of an Idaho court ruling against the potato cooperative seems to say so. From The Packer's coverage: 

 In a Dec. 2 ruling, U.S. District Court of Idaho judge Lynn Winmill rejected Salt Lake City-based United Potato’s motion to dismiss a suit brought against it by Jamestown, N.Y.-based Brigiotta’s Farmland Produce and Garden Center Inc.

TK: The crux of the issue, as the judge explained, was the question of whether an agricultural cooperative could both set prices and limit production.  From U.S. District Court Judge Lynn Winmill:

 The Court first notes that there are no cases where a court specifically approved, under the Capper-Volstead Act, a pre-production agricultural output limitation as opposed to a post-production marketing decision such as withholding of product from market. Likewise, there are no cases where a court has concluded that Capper-Volstead immunizes cooperatives and their members who seek to collectively implement production controls in order to raise prices.

However, the language of the Capper-Volstead Act itself indicates that it does not apply to production limitations. The Court must construe statutory terms in accordance with their ordinary meaning. Federal Deposit Ins. Corp. v. Meyer, 510 U.S. 471, 476 (1994); United States v. Nader, 542 F.3d 713, 717 (9th Cir. 2008). The key phrase of the Act, “processing, preparing for market, handling, and marketing,” applies to acts done to an agricultural product after it has been planted and harvested. Thus, under the plain language of the statute, coordinating and reducing acreage for planting is not allowed.9

Still, Defendants argue that because Capper-Volstead cooperatives are allowed to fix prices, they must also be allowed to restrict production. This argument is unpersuasive. The reason an agricultural cooperative can fix the price at which their good is sold is because if the price rises, farmers will produce more and consumers will not be overcharged. Individual freedom to produce more in times of high prices is a quintessential safeguard against Capper-Volstead abuse, which Congress recognized in
enacting the statute.

For these reasons, the Court concludes that acreage reductions, production restrictions, and collusive crop planning are not activities protected by the Capper- Volstead Act.

TK: Though the court's ruling seems ominous indeed for the cooperative, we will continue to watch the case play out. To give you a sense of the absolute confidence that the potato  industry had in their efforts to improve grower returns, story below explains the view in October 2006:

 United potato cooperative works to balance supply, demand
    By Tom Karst, National Editor
    IDAHO FALLS, Idaho -- What is the "shelf life" of the United potato cooperative?
    The leader of the organization in Idaho believes the cooperative is best if used indefinitely.
    "This needs to go on for years and years and years," said Jerry Wright, chief executive officer and president of the United Potato Growers of Idaho.
    The leadership of United Potato Growers of Idaho -- and its parent organization, United Potato Growers of America -- believes they have contributed significantly to grower profits in 2005-06 and will play a role in reprising reasonable returns for growers in 2006-07.
    For the current season, Wright believes the total fresh crop in the U.S. should range from 101 million cwt. to 103 million cwt.
    "We will have an ample supply, but not an oversupply of potatoes," he said.
    The challenge for the cooperative, Wright said, will be to recover cost increases growers have absorbed in fuel and inputs.
    The cooperative doesn't believe that supply management is the only answer for potato growers. In fact, Wright said the cooperative is very supportive of the promotion efforts of the Idaho Potato Commission, Eagle.
    "What we have done is attacked the short-term circumstances that growers were in to deal with oversupply and restore profitability, but our long-term future lies with increasing demand," he said.
    After growers created the group in Idaho in the middle of several years of depressed prices, the cooperative concept has extended beyond the state and national borders and beyond russets.
    The Idaho cooperative formed in November 2004, and Wright was hired in March 2005.
    Wright said the cooperative members grow about 85% of the fresh potatoes in the state.
    After coming on board, Wright and Albert Wada, president of Wada Farms Potatoes Inc., Idaho Falls, traveled to other potato-growing regions to recruit members.
    In late March 2005, the United Potato Growers of America was formed, with original charter cooperative chapters from Washington/Oregon, the Klamath Basin of Oregon and California, Colorado, and Wisconsin.
    Wada is chairman of the Salt Lake City-based United Potato Growers of America.
    Canada's growers, under the leadership of the Prince Edward Island potato industry, formed the United Potato Growers of Canada cooperative, affiliated with United of America.
    In addition, cooperatives in the U.S. have formed since the spring of 2005 in California's Kern County and the Kansas-Nebraska-Texas region.
    In July 2005, United created a strategic alliance with the Southern Idaho Potato Cooperative. That cooperative, Wright said, provides about 60% of the processed potatoes in the state of Idaho to French fry processors.
    "We have about two-thirds of the processed potato growers in the state as members of the cooperative," he said.
    What's more, a seed division of the cooperative claims about 95% of Idaho's seed potato growers.
    The cooperative scheduled a meeting in San Diego prior to the Produce Marketing Association Fresh Summit, where growers from all the red potato-growing regions have been invited to organize as part of the United cooperative.
    Secrets to success: Wright said the basic objective of the cooperative is to improve grower profitability by managing supply.
    There are several strategies to manage the supply:
    * control the acres cooperative members plant;
    * after members plant, monitor the supply situation and remove any excess supply before harvest; and
    * once the crop is harvested, manage how it flows into the market place.
    Being a member of the cooperative entails a three-year contractual commitment that obliges them legally to participate fully in United's programs of acreage management and abiding by United policies, including dues.
    Ultimately, dues are assessed on the basis of production, Wright said.
    Supply corrections: The United cooperative didn't waste time in exercising supply management after it was formed.
    Facing a significant excess of supply from the 2004-05 crop, United acted in April and May to remove 6.4 million cwt. from the market in Idaho.
    Part of that volume was ground up and made into dehydrated potatoes and the balance was fed to livestock or disposed of.
    Wright said the cooperative exercised volume control on the remaining 2004 crop to meter the rest of the volume in a rational way.
    "That turned the market around nationally, that in combination with the ability to get major growers and shippers in the United States on a national marketing call," he said.
    Shippers from all over North America now have weekly to talk about the market outlook.
    Wright said the cooperative uses data on what to plant, harvest and ship.
    The first year cooperative members reduced plantings was the 2005 crop, and Wright said more than 44,000 acres nationally were not planted to the fresh market as a result of volunteer efforts and an acreage buy-down program.
    In the 2004-05 crop, U.S. potato growers shipped 107.5 million cwt. into the U.S. market. For the 2005-06 crop, Wright said the U.S. supply was throttled back to 103 million hundredweight.
    "We reduced the national crop by 4 million bags," he said.
    Wright said there have been doubts about whether the cooperative would be successful once growers were profitable.
    However, he said Idaho growers this season reduced their fresh potato area by 12.4% compared to 2004 plantings.
    United members cut acreage by 18% compared with 2004, he said. United uses 2004 as a basis of comparing acreage and supply needs of the market because it was the starting point for the cooperative, Wright said.
    Acreage cuts by United members this year also occurred in Washington, Wisconsin, the Klamath Basin and other regions.
    All growers who join the cooperative must declare whether their acreage is fresh or processed. The cooperative maps its members' acreage amounts, and United Potato Growers of America has audited 25% of its members to verify that members cuts the acreage they say cut.
    "This is a real business and we really mean business," he said.
    Wright said cooperative has had a net gain of two or three growers since its inception.
    The bottom line: Growers averaged $2.52 per cwt. in 2004-05, when the cost of producing potatoes was well over $5 per cwt., Wright said.
    In 2005-06, grower returns jumped to $6.87 per cwt.
    "United strategies have helped return the category to profitability," he said.
    Wright acknowledged there are still pockets of growers in Idaho and other states that haven't joined United, perhaps because they don't feel they are large enough or because it doesn't fit their philosophy.
    However, he believes the value of information generated by the group, in addition to its supply management policies, will be a powerful incentive to join.
    "All we can do is continued to prove our value to our growers and provide a meaningful return on their investment."

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