Testing Times for a Giant U.S. Co-op

A commodity slump and farmer retirements pose challenges.

One of the co-op’s fuel refineries in the 1950s.

One of the co-op’s fuel refineries in the 1950s.

Photographer: Michael Cannon

At the start of the Great Depression, some grain growers in Idaho banded together to command better prices for their crops. Today, after a string of mergers, that farm cooperative is the largest in the country, with 550,000 farmers represented by 1,100 voting member co-ops and 75,000 farmers with individual votes. After five years of breakneck expansion, CHS faces slumping commodity markets and plunging oil prices, which have cut into its two largest businesses: refined petroleum products and grain handling.

With almost $35 billion in annual revenue, CHS is an agro giant in its own right, alongside the so-called ABCDs—Archer Daniels Midland, Bunge, Cargill, and Louis Dreyfus. “It takes that scale to play,” says Carl Casale, who as chief executive officer has presided over an expansion that has netted CHS a presence in 25 countries including Brazil, Hungary, and Taiwan.

CHS does for its farmer-owners what many can’t do on their own. That includes storing millions of bushels of grain and refining petroleum into diesel fuel to power farm equipment. It also crushes canola for salad dressing and operates convenience stores where farmers can buy milk at 10 p.m. after a long day of harvesting. Farmer-owners decide how they want to tap CHS. Some sell crops to it; others only buy fertilizer, diesel, or price hedging services. Members get a cut of CHS profits based on how much business they’ve done with the cooperative each year.

CHS is cutting expenses this year and will freeze costs during the next two to avoid large-scale layoffs, says Casale, who’s been at the helm for five years and was previously the chief financial officer at Monsanto. It’s delaying completion of a big software upgrade and may trim refinery expansion plans and slow the tempo of grain terminal additions, he says. CHS has as much as $6 billion left of the $11 billion earmarked for capital expenditures from 2011 through 2019, and Casale says he may still take advantage of investing opportunities at the bottom of the cycle.

As Casale steers CHS through the commodity downturn, he is keeping in mind the example of Farmland Industries. Once the largest farmer cooperative in the U.S., it filed for Chapter 11 protection in 2002, after a slide in fertilizer sales and a cash crunch. CHS, which is about three times larger than Farmland was at its peak, manages its balance sheet “much more conservatively,” he says.

Howard Haas, board chairman of member MaxYield Cooperative in Iowa, understands that CHS needs to bulk up to compete with the ABCDs. Still, he questions whether farmers have benefited from some recent investments. In August, CHS announced it was shelving plans to build its own fertilizer plant in North Dakota and instead taking a $2.8 billion stake in a subsidiary of CF Industries Holdings, a global leader in fertilizer. Haas says the deal curbs competition in an already concentrated industry and that he would have preferred the cheaper fertilizer coming from the CHS plant over a share of CF Industries’ profits.

Agricultural cooperatives, of which there are more than 2,100 in the U.S., will be tested in the coming years by a generation of retiring farmers, who may be replaced by fewer growers, each cultivating bigger tracts of land. CHS and other companies serving the industry will have to “step up their game,” says John Campbell, a managing director for Ocean Park Advisors. Casale acknowledges the challenge. “If you show up on a farm and they know more about what’s going on than you do, you’re probably not going to get a second call,” he says. “Loyalty has to be earned, and I believe it can be.”

That loyalty may be cemented in tough times such as these, when farmers face plunging incomes. CHS can offer farmers products and services to increase yields, hedging to reduce risk, and succession planning as grandparents and parents retire. “The cooperative is in it for the long haul,” says Todd Ludwig, CEO of member cooperative Central Farm Service in Truman, Minn. “We need a partner in good and bad times.”

The bottom line: Falling prices for grains and fuel are squeezing CHS’s two main businesses, but the co-op isn’t ruling out new investments.

(Corrects the date of the photograph.)

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