December, 2000

Fruits of Thought

Does Cooperation Bring Prosperity

Ocean Spray has long been seen as the crowning example of the cooperative movement in agriculture. This co-op took the cranberry – a scarcely edible highly seasonal fresh product – and created a world-class beverage company that has more similarity to Coca-Cola Company than to other produce firms. So great has been the esteem with which Ocean Spray was viewed that when Sunkist was struggling a few years back, it was the head of Ocean Spray who was flown out to Sherman Oaks to speak on how a co-op should be run.

But Zeus’s lightning flies to level mountains, and now the future of Ocean Spray is unclear. The cause is, as always, multiple. But as in a Greek tragedy, hubris surely played a part. When a fellow who wasn’t a member of the old boys’ cranberry club – but instead was an outsider, an outspoken high school athletic coach in Wisconsin who bought up bogs – wanted a board seat, the Ocean Spray board denied him. He left the co-op and started a substantial competitor, Northland Cranberries.

That spelled the end of Ocean Spray’s virtual monopoly on cranberry juice. The combination of competition, leading to undercutting on price, and Ocean Spray no longer being able to gently control production, has led to a disaster in the cranberry bogs.

Cranberry growers are in a fix. Fruit prices that hit $80 a barrel in 1996 are now not even $11 a barrel. With growers’ costs estimated to be more than three times the current price, the financial statements must be written in cranberry red.

A group of growers has fixed upon a solution. Ocean Spray is a cooperative, which means its growers own it, but the co-op fixes the value of Ocean Spray shares at $25 per share. Estimates are that if the company as a whole were sold to an outside party, it would bring upwards of $300 per share. Pretty appealing to a cranberry grower.

These growers are seeking the possible sale of Ocean Spray, thinking that the value of the Ocean Spray name can bail out their hemorrhaging cranberry growing operations.

Intrigue is piling upon enigmas as the Board of Directors has declined to explore a sale and has decided to suppress a report purportedly showing that growers could profit big time through a sale. Now some growers have filed a lawsuit to compel the release of the report and the exploration of a sale.

The whole situation highlights a couple of dilemmas for the produce industry: The lack of flexibility of the cooperative structure for conducting business in the present day, and the enormous difficulty of trying to increase grower returns by increasing demand.

Co-ops suffer from a structural conflict of interest in their boards of directors. Instead of a board of directors acting as a kind of strategic planning committee for the business, co-op board members tend to view each decision within a personal context. This is why, say, Sunkist – which should by all rights be the largest importer of clementines in the United States – is not. Because board members, instead of wearing a Sunkist corporate hat and thinking of what will be best for the organization, think about their own personal interests as growers of Western citrus.

Today, in the Ocean Spray situation, a lack of financial flexibility hamstrings the co-op. There are legal restrictions in the antiquated Capper-Volstead Act – which authorizes co-ops – that also deny co-ops the kind of flexibility they need to raise outside capital by selling shares to third parties and selling different classes of shares and so forth.

When things go well, co-ops may well have enough money to grow and, indeed, some co-ops have acquired immense assets over the years. Sunkist owns thousands of acres of valuable California timberland, a relic of the day when wood supplies were necessary for making orange crates. Ocean Spray growers allowed the co-op to plow money back into marketing and thus created such a powerful brand name that most carbonated beverage producers would gladly pay a premium to own it.

But a willingness to invest seems to last only as long as growers see rising year-to-year returns. When times turn bad and co-ops need money to defend market share and undertake growth initiatives to capitalize on the next upturn, a bunch of cash-poor farmers is not an attractive place to turn.

Co-ops seem like a logical answer during a period of retail consolidation. In theory, a co-op gives growers an opportunity to band together to meet the supply needs of large buyers while maintaining their independent growing operations. But without the ability to attract and retain outside capital, it is hard for a substantial business to operate today. So the future of the co-op movement may well depend on legal changes to the enabling legislation.

If co-ops are not a panacea, neither is increasing demand. In 1994 a Harvard University study indicated that cranberry juice was useful in dealing with urinary tract infections. This confirmed grandma’s wisdom that cranberry juice was good for the kidneys. This news, combined with significant marketing efforts, led to a boom in cranberry consumption. But production boomed even more. During the 1990’s at Ocean Spray alone, cranberry acreage was up by almost 70 percent and independent acreage was up by about 175 percent.

Note the lesson here: No matter how good a job a promotional board may do at increasing demand for a product, no matter how powerful may be the 5 A Day message, there is no force more powerful than growers planting more crops. Even the strongest increases in demand can quickly be outpaced by increases in supply. pb