Ocean Spray: Cooperative or Corporation? Ongoing Discussion with Randy Jonjak and Tom Gelsthorpe
11/14/99 From Tom Gelsthorpe: First Randy, I offer my sincere apologies for putting words in your mouth on the subject of Proctor & Gamble's knowledge of agriculture. I know how infuriating it is to be misquoted. The wrong words were entirely my fault -- simple laziness in failing to look up the exact remark. I hope hurt feelings do not distract from the main question in that regard: Why is it that knowledge of agriculture is so important that a company selling a farm-based product must have a Board expert in agriculture and virtually nothing else? Second, I hope you will reconsider continuing this debate. I believe we are performing a valuable service in giving readers food for thought. Anyone who might "lose patience with our verbosity" can simply scroll on to other articles. In my estimation, we disagree about surprisingly little -- our analysis of current problems is about the same; we seem to differ on probable solutions. I once felt as you do, that the coop was the best arrangement for the grower, and might be viable indefinitely. I don't believe I have ever implied that Ocean Spray was an "ill-conceived concept from the beginning." I think it was an excellent concept that worked for many years. What I now believe is: as a marketing coop, Ocean spray has outgrown its usefulness, due to its inability to maintain crop share, market share, premium price advantage to its members and capital requirements for competing in increasingly larger-scale markets. Why resist acknowledging facts or proposing restructuring to adjust to them? If all you expect from Ocean Spray is "price per barrel," it has to be higher than the independent price or erosion will lead to extinction. What I would like from you, if you're willing to reply, is a proposal to restore the profit advantage to the members before scores of growers go out of business or leave the cooperative. With carryover growing, Ocean Spray market share and earnings in free fall, berry payments chronically below independents, and now below cost of production, I don't see how the coop can generate the capital to increase sales and pay growers enough to survive financially. I'm delighted that you've had a 25-year run of prosperity. We've only had prosperity in Massachusetts since the early 1980's; the 70's were terrible. Even so, 25 years of prosperity is not reason enough to gloat, nor enough to endow the next generation, nor a record neither oil companies nor IBM can match. Ocean Spray's "run" peaked over 10 years ago in relative terms. We've been successful -- for a coop -- but let's not delude ourselves. Ocean Spray hardly compares in importance to IBM or even a second tier oil company. The oil industry is one of the largest and most important industries in the world, and has been since fifteen years after its birth in the 1850's. IBM is arguably the most significant corporation of the late 20th century, not only in leading its field, becoming one of the largest corporations in the world in sales, earnings and market value, but even more importantly in pioneering the entire field of information technology. Yes, Proctor & Gamble is "somewhat removed from agriculture." Nevertheless, P & G's 1998 annual report has a cover photo of an Iowa farmer, pertaining to Olean, a soybean product developed by its Crisco oil division. Even with large marketing and research budgets, P & G has increased its dividends annually for 43 consecutive years. If a grower had sold his marsh and bought a million dollars worth of P & G stock in 1988, he would have received $34,800 in dividends the first year and it would have grown steadily 218% to $110,900 by 1998. More importantly, the first $1,000,000 worth of stock would have grown in value to $8,800,000 today. If all dividends had been reinvested, the value would have grown to $10,766,000. Why would Randy say, "stock appreciation does not count, because in this hypothetical, the owner has no intention of selling his stock." Most investors seek a combination of dividends and appreciation for total return, with the intention of building a nest egg until some of the stock can be sold at a profit without depleting the principal below a certain comfort zone. Why posit "never" selling stock, unless the only investment goal is to die rich? In the P & G example above, an investor may decide that once a goal of $4,000,000 is attained, he can reuse the proceeds in excess of that figure. A "blue chip" with a reliable growth pattern like P & G, enables an investor, having attained his $4,000,000 goal, to sell $500,000 worth in a year it rose from $4 to 4.5 million. He could take the income in the form of capital gains, which is taxed less than dividends, live off the proceeds, invest some of it elsewhere and let the $4 million worth resume growing. Once an investment reaches a certain size, most investors can, and do, manage it cautiously for capital gains, without endangering the basic nest egg. To buy stock and "never" sell it, can be miserly -- ridiculously rich for no purpose. An example, which I have more complete figures for, is Coca-Cola. One share of Coke, bought at the IPO in 1919 for $40 would be worth $307,296 today -- $6,581,189 with the dividends reinvested.
One hundred shares -- $4,000 in 1919, about the price of a house in those days -- passed down through two generations in a tax-sheltered trust, would now be worth $658,000,000. What a nice legacy for the grandkids! The fact that there are very few fortunes this large is testimony that even very frugal people feel it is silly to "never" sell stock. More than a few shrewd Coca-Cola investors have bought a house or two in Atlanta (or Newport or Palm Springs) somewhere along the line. Probably some of our own growers who are not apoplectic about the current price drop are relying on some investments made along these lines. If Randy's hypothetical grower had sold his marsh in 1988 (when Ocean Spray leveled off) and he'd bought $1,000,000 worth of Coke stock, that stock would be worth $12,200,000 ten years later -- $13,500,000 with the dividends reinvested. This brings me to a scenario about the "family farm" and how a foresighted person might sustain it. Suppose a grower with 60 acres of land and 50 acres of bog back in 1988, had a neighbor with 100 acres of bog who just had to have 50 acres more. What if the 50 acre grower had anticipated the current situation and sold his bog for $30,000 an acre to his next door neighbor, kept the ten acres his house stood on, hired himself back to the new owner as foreman of the 50 acres, and invested the proceeds of the bog sale (minus one third combined state and federal tax) of $1,000,000 in Coca-Cola stock. He could have earned enough to live on by working virtually the same job, with the same house, same friends, same "lifestyle." If he'd never saved another cent, that foreman/Coke investor would now be sitting on Coke stock worth more than $13 million, and the 150 acre grower who employs him might be wondering how the hell he's going to make ends meet on $30 cranberries. Whose kids are more likely to maintain the "lifestyle," go to college, experience a sense of life's opportunities -- the Coke investor's or the suddenly land-poor "big" grower's? In another year or two, the way things are going, the Coke investor will be able to buy out his neighbor, 150 acres in all, the equipment, the house, the swimming pool, the private plane, the condo in Florida, and still have millions of dollars in Coke stock left to rely on, while the original big grower, now destitute, slinks back to ask him for a job. It wouldn't surprise me if there were a few "dumb farmers" out there doing exactly that. Probably they're not talking -- yet. Why make "members of the club" feel like saps? In fact, by 1994, the Massachusetts "Drollett group" anticipated just such a debacle as we are now facing. They tried to warn people what would happen if this itty-bitty cooperative got in bed with Pepsi, tried to "go international" with limited capital, made rash promises about "leading the world" and so on. They suggested that we begin to investigate a merger from the position of strength that we occupied during the 1995-1996 boom but nobody powerful took them seriously. To my regret, I've been a Johnny-come-lately on this issue because I've been on board for only about two years. If Ocean Spray had sold our juice business to Coke for only $450 in stock in 1995 -- a lower multiple of sales than Pepsi paid for Tropicana -- our Coke stock would be worth more than $800 already. Coke stock may not be this good forever, but nothing lasts forever. Poorly run, undercapitalized companies most definitely don't last forever. In Massachusetts, the independents have received a higher price than Ocean Spray growers for five years running. Independents are now at the break-even level and Ocean Spray growers well below. For the three years 1995 thru 1997, the price spread was so large that Ocean Spray could not catch up in total return even if we exceed their level by 10% per year for a decade -- and no such catch-up is likely. Just when the price spread starting reaching alarming levels in 1995, and growers were beginning to complain, one Director stated, "Ocean Spray provides an umbrella for the whole cranberry industry," and that it was acceptable for us to fund advertising and promotion for the whole industry as long as our returns were adequate. Since that speech, it has become apparent to me that a critical fraction of the Board believes it is okay for Ocean Spray to function as a sort of charity, with the largest benefits going to non-members! Randy's "bench mark" remark seems to endorse that concept. There is also a school of thought that believes that if you can just grow 200 or 300 bbls. acre, then you wouldn't complain. But a corporation, be it coop or other, ought to plan and calculate returns on a per share basis. Randy Jonjak is correct that per acre costs are more uniform than per barrel costs. The higher the yield, the lower the per barrel cost, all other things being equal. But a critical factor which doesn't show up in the cost surveys is: capital cost and debt load, and how the recent, unanticipated price drops affect growers with high debt loads. The gravest injustice being visited upon Ocean Spray growers is not the premium going to non-members; it is the fact that the most vulnerable members are the ones who based their plans on erroneous projections from management! Growers who counted on $60+ $1/year additional, and invested heavily in renovation or new acres are the ones who are most highly leveraged. Growers who think they can survive for the time being should not jettison yesterday's optimists! If 200 bbl. growers jettison 150 bbl. growers and Wisconsin growers jettison Washington and Massachusetts, who is going to help them when someone puts in 350 bbl. hybrids in Chile, where land and labor costs are half the U.S.A.? We should face reality now and seek a restructuring that can reward grower/owners on a per share basis. Ocean Spray growers could be duly repaid for their long-term investment and it could reduce the chaos in the industry without Ocean Spray giving away the store, and without coop members losing the group benefits that are truly useful, that they rightfully cherish. |
