A Perfect Storm

In today’s ever-shifting world of ag retail, there are many companies that have talked about listening to the winds of change. In the case of West Des Moines, IA-based Heartland Co-op, however, the winds of change were decidedly louder than normal — and much more literal.

“During the summer, a wind storm came through our area and blew the roof off of our fertilizer shed at the Conroy facility,” says Dave Coppess, executive vice president/sales & marketing for the cooperative. “As a result, this outlet could no longer function as a dry fertilizer hub for our operations.”

Naturally, given the importance that having a ready supply of fertilizer has become to Heartland Co-op’s grower-customers (especially since the beginning of 2007), the cooperative immediately began looking at the possibility of building a new dry fertilizer hub with unit train capabilities somewhere within its central Iowa territory. Along the way, Heartland Co-op ended up in discussions with a neighboring cooperative, Farmers-4-County, based in Belle Plaine, which was also looking for a new dry fertilizer hub. But instead of merely partnering on a single outlet, the two cooperatives decided it made more sense — and cents — to merge their operations and utilize an existing outlet as a new fertilizer hub for the combined companies.

“This company is moving forward rapidly to adapt to the changes in the marketplace so we can continue to help our grower-customers grow and be more profitable,” says Coppess of the Feb. 1 agreement that created the new Heartland Co-op. “If we as a company let ourselves get stagnant, we will die.”

This philosophy ties in neatly with many of the corporate culture initiatives that have driven Heartland Co-op forward over the years, he adds. These are profitability, being ethical and honest, facing the brutal facts, empowerment with accountability, being growth-oriented, and striving for continuous improvement.

“These key points help us realize the importance of continually striving to move ahead and help our growers produce and market, profitably,” says Coppess. “Heartland Co-op has our momentum going in the right direction to achieve these goals. [Charles] Darwin reminds us: It is not the strongest of the species that survives, nor the most intelligent, but rather the one most responsive to change.”

A History Of Momentum

Following a path of momentum has been a hallmark of Heartland Co-op since its formation. According to Larry Petersen, CEO/general manager for Heartland Co-op, the original cooperative was formed back in 1987 with the merger of Panora Farmers Cooperative, Farmers Cooperative Co. of Dallas Center, and Minburn Cooperative Elevator. Two other cooperatives — Booneville Cooperative Elevator Co. and Laverty Elevators — joined the company during the early 1990s. The original Heartland Co-op entered the picture in 1993, along with Alleman Cooperative Co., Mitchellville Cooperative, and Avon Grain Co.

During the early 2000s, Heartland Co-op purchased Rippey Farmers Cooperative, Farmers Cooperative Elevator Co. of Waukee, and Enterprise Elevator. Following this, the company merged its operations with Gateway Cooperative in 2001, Farmers Cooperative Exchange in 2002, and Central Iowa Cooperative in 2006. In July 2007, Heartland Co-op merged with Central Counties Cooperative, giving the cooperative outlets throughout central Iowa northeast of its West Des Moines headquarters. This helped boost the cooperative’s annual sales to $560 million with 340 employees spread out among 41 locations.

Just prior to the pairing of Heartland Co-op with Central Counties Cooperative was when the fateful wind storm hit the Conroy outlet. According to Petersen, the cooperative originally was looking only to replace this damaged facility with a new one when the opportunity with Farmers-4-County came up. It became quickly apparent to both management teams that combining some operations and not others “wasn’t the best course to follow.” Finally, the cooperatives agreed that completely merging Farmers-4-County’s seven locations within the Heartland Co-op family was the best way for both companies to grow in the future. The formal merger arrangement became effective Feb. 1.

“Farmers-4-County is a perfect fit within the trade area Heartland Co-op has identified for our retail market,” says Coppess. “Our objective is to build around the strengths of both companies to create and bring new value to growers in that geography.”

Perhaps as important as the growth the merger provided to Heartland Co-op was the decision to not build a new dry fertilizer hub. With the added push northward in its market territory the former Farmers-4-County locations brought to the table, Heartland Co-op was able to use its existing Pickering outlet to serve as the unit train hub.

“The Pickering facility came onboard with the merger with Central Counties Cooperative,” explains Coppess. “At the time it was built, Pickering was an 18,000-ton facility for dry fertilizer with an effective service radius out 60 to 75 miles. But it was not running at full capacity under Central Counties. By adding the Farmers-4-County outlets to our network, however, we were able to justify ramping up production and storage at this location because our market territory was that much further out than before.”

Today’s Challenges

As can be expected with any unification of two companies, says Petersen, there is a bit of “chaos” with these kinds of mergers. By policy, Heartland Co-op has a practice of retaining all employees during a merger and assuring everyone will have role in the new company. But there are challenges — numerous new employees to integrate into the Heartland Co-op way of operating, others that need to be assigned new duties because their old jobs overlap with existing ones, and a general adjustment period for everyone to learn about their new bosses and grower-customers.

Still, he adds, the Heartland/Farmers-4-County transition will be smoother than most. “It’s not like there’s a Heartland location across the street from a Farmers-4-County one and we have to decide which one stays,” says Petersen. “The most difficult part of this kind of integration is how you treat the former main office of the company you are merging with. That’s where you tend to get the most job duplication.”

In the case of Farmers-4-County, he adds, Heartland Co-op is tapping a key former Belle Plaine employee, Rick Petersen, to head Diversified Ag, a division within the cooperative that deals in consulting and crop insurance.

“Overall, we see our role here at Heartland Co-op shifting from being a strictly product supplier to one of being an advisor and consultant as well,” says Petersen. “That’s where we see an entity such as Diversified Ag playing a big role going forward.”

Heartland Co-op also expects its ability to service precision agriculture customers will improve because of the merger with Farmers-4-County. “Our company has built a reputation with our expertise in precision ag,” says Coppess. “This merger allows us to grow the acres already enrolled in this program and provide an even broader database for correlation analysis work that is used to help growers customize their input selections and management practices for optimal results on their specific soil types.”

Consolidation Efforts

In essence, says Coppess, the merger activity by Heartland Co-op in recent years is a direct reflection on the state of American ag in general. “Consolidation is an ongoing process in many business sectors,” he says. “Agriculture is no different. We continue to see consolidation among our suppliers as they adjust to global economics and challenges. As growers continue to consolidate and grow, so must their ag retail suppliers. We need the growing economies of scale to allow us to procure and position product in a least-cost manner to assure competitive pricing and stable supply.”

As stark evidence of this trend in action, Coppess points to the CropLife 100 listing for 2007. (Editors’ Note: This list was already down by one company when it was first published in December 2007 as Agrium Retail U.S. announced plans to purchase United Agri Products.) Within this list, the top 15 ag retailers account for approximately 78% of the total retail input and service sales in the U.S.

“If you believe in the Pareto Principle, which states that 80% of your sales come from 20% of your clients, the remaining 22% of the ag retailers on the list had better figure out how to put together their resources if they expect to remain a speck on the suppliers’ radar screens,” he says.

In many ways, recent changes within the ag community have made this situation even more demanding. For example, Heartland Co-op’s traditional crop split among grower-customers has been 55% corn to 45% soybeans spread out on 5 million acres of land. During 2007, however, as ethanol became the industry buzzword, the crop mix leaned more heavily towards corn, with the percentage climbing to 64%. This increased demand for all forms of fertilizer in the area, not to mention crop protection products, seed, and custom application work. Also, land values and cash rents escalated significantly.

“We expect to see turnover at the farmgate continue, probably much faster than we projected three years ago, based upon the average age of the grower and expected retirements,” says Coppess. “We are also looking at new economics involved with these changes. Available capital and cash flow needs have changed dramatically. Highly leveraged or less fluid organizations will be forced to re-evaluate their positions in the market. Some will choose consolidation as a viable alternative for sustainability.”

Looking Forward

Now that the ag industry is entering the 2008 season, Coppess expects some of these trends to carry over from 2007. Historically, he says, ag inputs have been running around 35% to 40% of the total revenue that growers have been generating. This could change slightly, he predicts, with the recent price increase for glyphosate, which is projected by some analysts to add another $3 per acre to grower costs.

Still, he is confident 2008 will be another strong year for the industry on the whole. “Even with the increases in inputs and land values, commodity prices have been positive,” says Coppess. “Here at Heartland Co-op, we’ve done what we can to make sure our grower-customers don’t have to deal with any fertilizer shortages for the season. But if there is a significant shift in crop mix come next year, it could get more interesting, and not in a good way.”

On a slightly smaller scale, Coppess believes Heartland Co-op’s recent moves within the market have positioned it to fulfill its grower-customers’ needs for years to come. “We were once only known as a grain company,” he says. “But to quote Purdue University‘s Dr. Dave Downey: ‘Marketing is the process by which agribusiness adapts to change.’ With that in mind, Heartland Co-op is striving to become a marketing company by shifting from just selling products to selling programs and solutions at the farmgate. We’ve adjusted our organizational structure to build around the grower’s total needs, breaking down barriers between our grain, feed, petroleum, and agronomy divisions. The jury is still out, but we think we are making progress to integrate our marketing processes and selling efforts focused on improving the profitability of our customer. We are building packages that help them improve their yields and market their produce above market averages. If we can successfully grow their profit per unit, we should earn and retain their business for a long time.”

Petersen agrees with this assessment. For the time being, he believes Heartland Co-op can build upon what its already begun integrating through the merger with Farmers-4-County without adding more outlets — future wind storms included. Still, he won’t rule out more consolidation under the Heartland banner in the future.

“Right now, we are kind of catching our breath after some very busy months of merging operations,” says Petersen. “But we need to stay open to continued growth opportunities for the company. The one thing I can predict without hesitation is that Heartland Co-op will have more market growth from here, however it occurs.”

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