Serving Member Needs in Changing
Markets: the Case of Pro-Fac
Cooperative
11th Annual Farmer Cooperatives Conference
Research on Structure, Strategy, and Finance
November 18, 2008 in St. Paul, MN
Brian M. Henehan and Todd M. Schmit
bmh5@cornell.edu
Dept of Applied Economics and Management
Cornell University
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Acknowledgements
Co-author, Dr. Todd Schmit, Asst. Professor,
AEM, Cornell University
 Gail Malone, graduate student in AEM, Cornell
University
 Jenna VanLieshout, undergraduate student in
AEM, Cornell University
 Kevin McAvey, graduate student, AEM, Cornell
University
 Steve Wright, General Mgr. Pro-Fac
Cooperative
 Kevin Murphy, Member Relations, Pro-Fac
Cooperative

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Cornell Cooperative Enterprise
Program
 Long
standing relations with Ag.
Cooperatives in region and U.S.
 Lecture in undergraduate courses and
collaborate with graduate students
 Conduct applied research
 Deliver extension and outreach program
 Coordinate with the NE Cooperative
Council, (NECC)
www.cooperatives.aem.cornell.edu
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Why Study Pro-Fac Cooperative?
 Original
Formation Based on Highly
Innovative Business Structure
 Pro-Fac Has Effectively “Re-Designed”
Itself Throughout It’s History
 Useful Case for Understanding How A
Cooperative Strategically Re-positioned
During Times of Significant Change
 Case Includes Review of Structure,
Strategy and Finance Dimensions
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Speakers from Previous Farmer
Cooperative Conferences
 CB,
 PF
CFO
General Manager
 Agrilink,
CEO
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Pro-Fac Cooperative
Pro-Fac Cooperative is an agricultural
marketing cooperative of 488 members who
provide fruits, vegetables and popcorn for
processing facilities across the country. These
commodities are marketed as branded, private
label and food service products, primarily
through its main customers, Birds Eye Foods
and Allens, Inc. The total value of crops
delivered in 2007 was $61.1 million.
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Map of Pro-Fac Member Crops
Source: PF web site – www.profaccoop.com
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Pro-Fac Member Crops by State










California: Peaches
Delaware: Limas, Peas
Florida: Potatoes
Illinois: Popcorn
Michigan: Apples, Asparagus, Blueberries, Carrots, Dry Beans,
Peaches, Potatoes, Tart Cherries
Nebraska: Popcorn
New York: Apples, Beets, Butternut Squash, Carrots, Corn, Kraut
Cabbage, Peaches, Peas, Red Cabbage, Snap Beans, Tart
Cherries
Oregon: Cucumbers, Potatoes
Pennsylvania: Potatoes
Washington: Cucumbers, Dry Beans, Potatoes
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Presentation Will Focus on Three
Periods of Transformation
 Discuss
Why the Transformations Took
Place
 Present Strategies and Structures
Utilized for Redesign During Each Phase
 Review Financing Approaches
 Welcome Kevin Murphy from Pro-Fac
 Provide a Member-Relations Perspective
 Allow time for Discussion
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Three Phases of Redesign
1.
2.
3.
First Phase starts with the Formation of the
Cooperative in 1961 and runs to 1994
Second Phase Starts with Acquisition of
Curtice-Burns Operations in 1994 and ends
in 2002
Third Phase Begins with Inclusion of Vestar
Capital, an Equity Partner Who Becomes
Majority Owner of Processing and Marketing
Assets in 2002 to today
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Phase 1.
 PF
Formed to Help Salvage Fruit and
Vegetable Processing in New York
 This Period Saw Dramatic Restructuring
in the Industry in U.S. and NY
 Post WWII Saw Dramatic Decline in
Number of Firms and Plants
 Two Such Firms Located in W.New York
– Curtice Brothers and the Burns-Alton
Corp. Came up for Sale
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GLF Steps In
 The
Grange League Federation, GLF
(later became Agway) was the major
supply cooperative operating in the
Northeast in the 1960’s
 Producer concern over the future of the
Fruit and Vegetable Processing Industry in
New York State
 GLF had seen the negative impact of the
loss of processing firms on it’s members
as well as on it’s supply and input sales
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GLF/Agway as a Catalyst
GLF Acted as a Catalyst to Effect the Merger
of two family canning business to form CurticeBurns, (CB)
 Concurrently Helped to Form and Capitalize
Pro-Fac Cooperative, (PF)
 Pro-Fac is a Contraction of the terms
“Producers” and “Facilities”
 GLF (and later Agway) Assisted in Developing,
Financing, and Managing the Joint Venture
Between CB and PF

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Having Observed Fruit and
Vegetable Cooperative Failures

The Founders of Pro-Fac Observed a Number of Pitfalls
that Failed Cooperatives Encountered:
• Being under-capitalized
• Carrying the expense of an over supply of raw
product in inventory
• Inexperienced management that did not understand
the market for member products
• Marketing single crops and a lack of product
diversification
• Not allowing professional management to operate at
arms length in daily operations
• Lack of diverse sources of capital
• Inability to turn around unprofitable operations lacking
a strong marketing focus
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Member
Farm
Food
Service
Member
Farm
Ag. Crop
Coordination
Services & Harvest
Member
Farm
Member
Farm
Food
Crop
Delivery Manufacturing
Branded
Products
Sales &
Marketing
Distribution
Retail
Production Planning
----- F a r m P r o d u c t V a l u e
C h a i n ----------
Specialty
Products
CB Functions
PF Functions
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Summary of Curtice Burns and Pro-Fac Cooperative
Integrated Agreement, 1961-1994
Curtice Burns
-Net proceeds derived from total sales; shared with
PF 50/50
-Common stock listed on AMEX, 1973
-Conducted all marketing activities
-Owned brands, made acquisitions
-Developed new products
-Supervised and managed business and properties
of PF
-Maintained relations with lenders, kept books for
joint
venture
-One PF director on CB board
-Payment for crops based on CMV
-As CB operations expanded, PF given first right to
supply new plants
-Developed sales plan that determined volume
produced for each commodity
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Pro-Fac Cooperative
Finance
-Financed ownership of plants, leased facilities to CB
-Equity loaned to CB; seasonal & term loans from Bank
for Coop’s
-Sold delivery rights based on common stock to
members
Marketing
-Recruited members from new acquisition farming areas
-Reserved first right to purchase brands upon dissolution
-Farm products provide basis for new products
Management &
Governance
Supply Agreement
-PF and Agway had access to books and financial
information
-1 CB and 1 Agway director on PF board
-Committee for each commodity
-Committees determine CMV in concert with PF
management and approve crop agreements
-Payments made from a single, multi-commodity pool
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Pro-Fac Cooperative, GLF/Agway, and Curtice Burns
Organization and Integrated Agreement, 1961 – 1994.
GLF/Agway Farmer-Members
Elect Directors
Pro-Fac Grower-Members
Elect Directors
GLF/ Agway Inc.
Board of Directors
Pro-Fac Cooperative (PF)
Board of Directors
Controlling interest in CB
Appoints CB Board
Agway Rep. on Board
CB Rep. on Board
Curtice Burns (CB)
Board of Directors
PF Rep. on Board
Curtice Burns (CB)
Management & Staff
Pro-Fac Cooperative (PF)
Management & Staff
Integrated Agreement:
1. Finance
2. Management
3. Marketing
4. Supply
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Phase 2. Begins in 1992
 Agway,
Holding Majority Ownership, is
Forced to Sell It’s CB Interest to Raise
Cash
 The Long Standing Integrated Agreement
Venture with CB Came to an End in 1994
as PF Purchases Agway’s Interest
 Created Initial Leverage on PF’s Balance
Sheet
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Member
Farm
Food
Service
Member
Farm
Ag. Crop
Coordination
Services & Harvest
Member
Farm
Member
Farm
Food
Crop
Delivery Manufacturing
Branded
Products
Sales &
Marketing
Distribution
Retail
Production Planning
----- F a r m P r o d u c t V a l u e
C h a i n ----------
Specialty
Products
Pro-Fac/Agrilink
Functions
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Phase 2. Developments
 PF
Becomes the First Farmer
Cooperative to Acquire a Publicly Traded
Company
 Later Becomes the First Farmer
Cooperative with a Security (cumulative
preferred stock) Listed on a Major
Exchange – NASDAQ (symbol PFACP)
 To Signify It’s Role in Linking the
Agricultural and Marketing Segments, CB
Changed It’s Name to Agrilink
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Pro-Fac Cooperative, Curtice Burns/Agrilink/Birdseye
Foods Organization, 1994-2002.
Grower-Members
Elect Directors
Pro-Fac Cooperative (PF)
Board of Directors
12 - Elected by Membership
3 - Independent, appointed by
elected directors
Pro-Fac Cooperative
Management & Staff
Curtice Burns / Agrilink /
Birds Eye (CB/AL/BE)
Board of Directors
15 – Appointed by PF Board
Curtice Burns / Agrilink /
Birds Eye
Management & Staff
Notables:
• CB/AF/BE wholly-owned subsidiary of PF (1994)
• Pro-Fac Board & CB/AL/BE Board meet jointly as a single board, separate votes as necessary
• CB changes name to Agrilink Foods (1997) & to Birds Eye Foods (2003)
• Agrilink controlled brands, including acquisition of Birdseye & other brands from Dean Foods
Vegetable Co. (1998)
• Dean’s acquisition effectively doubles size of Birds Eye Foods
• Birds Eye Foods finds itself in a highly leveraged position
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Phase 3. Begins in 2002
 Agrilink
is in a Highly Leveraged Position
 Thin Margins Limit Earnings
 Capacity of Members to Provide Needed
Equity is Being Tested
 Board Explores Other Sources and
Reviews Many Options
 Accepts Proposal from Vestar Capital
Partners and Approved by Member Vote
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Number of Pro-Fac Members, 1974 Figure _. Number of Class A Pro-Fac Members
2008
900
Phase 1
Phase 2
Phase 3
Number
800
700
600
500
400
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
300
Year
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Pro-Fac shareholder and member
capitalization and investment, 1974-2008.
Figure _. Total Pro-Fac Shareholder and Member Capitalization and Investment
300
300
250
250
200
200
150
150
100
100
50
50
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
0
1974
0
Value per Member (Nominal, $000)
Pha se 1
Total (Nominal, $Mill.)
Pha se 3
Pha se 2
Year
PF Shareholder/Member Equity/Capitalization
PF Class A Common Stock per Member
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Commercial market value (CMV) of raw product
deliveries, total and per member, 1962-2008
Figure _. Real Commercial Market Value (CMV) of Raw Product Deliveries, Total & Per Member
Phase 1
Phase 2
Phase 3
80
140
70
120
60
100
50
80
40
60
30
40
20
10
20
0
0
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Million 2006 Dollars
160
Thousand 2006 Dollars Per Member
90
Sources: Pro-Fac, Curtice Burns, & Agrilink
Annual Reports, Pro-Fac SEC 10-K Filings
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Year
Total CMV
Average CMV per Member
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Pro-Fac debt levels and debt ratio,
1974Figure
- 2008
_. Pro-Fac debt positions, measures of solvency
1,200
120%
Phase 2
Phase 3
1,000
100%
800
80%
600
60%
\
400
40%
200
Debt Ra tio (%)
Tota l Lia bilities, nomina l $mill.
Phase 1
20%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
0%
1974
0
Year
Sources: Pro-Fac, Curtice Burns, & Agrilink
Annual Reports, Pro-Fac SEC 10-K Filings
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Total Liabilities
Debt Ratio (%)
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Member
Farm
Food
Service
Private
Private Label
Label
Products
Products
Member
Farm
Ag. Crop
Coordination
Services & Harvest
Member
Farm
Member
Farm
Crop
Delivery
Allen’s
Food
Manufacturing
Bird’s Eye
Brand
Products
Sales &
Marketing
Sales &
Marketing
Distribution
Retail
Supply agreements
----- F a r m P r o d u c t V a l u e
Allens Foods
Functions
Birds Eye Foods
Functions
Vestar Majority
Owner of BEF
C h a i n ----------
Specialty
Products
PF & Farm Fresh
First, LLC
Functions
Minority Share of
BEF
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Pro-Fac Cooperative, Vestar, & Birds Eye
Foods Organization, 2008
Grower-Members
Elect Directors
Vestar Capital Partners
Private Equity Firm
Vestar LLC
Capital Investment - 56%
Pro-Fac Cooperative (PF) – 41%
Board of Directors
Management - 3%
Birds Eye Holdings LLC
Board of Directors
12 - Elected by Membership
3 - Independent, appointed by
elected directors
9 – Vestar
2 – Appointed by PF board
Pro-Fac Cooperative
Management & Staff
Birds Eye Foods, Inc.
Management & Staff
Notables:
• Vestar holds controlling interest in Birds Eye Holdings LLC
• Birds Eye Holdings owns facilities (assets) and Birds Eye brands
• Allens Inc. purchased NY plant facilities and private label brands in
2006
• PF received $120 million distribution from Birds Eye Holdings in
2007, used primarily for equity redemption and dividend payments
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Phase 3. Developments
In August 2002, Vestar Becomes Majority
Owner of Agrilink (approx. 56%)
 Agrilink Name Changed to Birds Eye Foods,
BEF
 PF:

• Maintains significant minority ownership of BEF
(approx. 40%) with management accounting for
(approx.4%)
• Has 10 year supply agreement
• Receives $10 million annually for 5 years
• Can secure $1 million line of credit for each of 5
years
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Phase 3. Developments
 Bird
Eye Foods Rolls Out Successful
New Products
 Vestar Sells Processing Plants and
Private Label Business to Allens, Inc. in
2006
 Vestar Subsidiary- BEF Holdings
Distributes 120 Million to PF
 PF Uses Distribution to Redeem Equity
and Pay Dividends on Selected
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Securities
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Management and Governance for
Each Phase

Phase I.



Phase II.




Phase III.

Integrated Agreement Includes
Management
Interlocking Boards of Directors
Create Board for Subsidiary and
Meet Jointly
Manage All Phases of Operations
Board Representation on Holding
Company Board
PF Manages Supply and
Procurement Operations Only
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Information and Knowledge for
Each Phase


Phase I.


Phase II.




Phase III.

Valuable feedback from processing and
marketing arm of CB
Interlocking Boards of Directors Exchange
valuable knowledge
PF & Subsidiary Boards Meet Jointly
Strong Market Signals Transmitted Back to
PF from Birdseye Foods
Board Representation on Holding
Company Board – BEF, LLC
Limited Access to Market Info. from
Privately Held Firms
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Phase
Strategy
Financing
Structure
1
Buy Plants &
Integrate
Operations with
Marketing Firm
*Member Equity
*Diversity of Sources
*Tap into Pubic Markets
Joint Venture with
Integrated Operations
2
Vertical
Integration
*Maximize Level of
Acquired JV Firm and
Member Equity
Major National Firm as
*Debt Used for Leveraged Subsidiary
Buyout
3
Interact with
Private Equity
Firm
*Continue Access to
Public Markets
*Raise Capital from
Private Equity Firm
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*Act as Preferred
Supplier
*Assume Minority
Position in Holding
Co.
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Summary
 The
PF story present a unique case in
the world of cooperatives
 A Number of “Firsts” for a farmer
cooperative:
• leveraged buyout of publicly traded
company,
• having a security listed on a major exchange
 Continue
to Change and Adapt to New
Players and Markets
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Summary, cont’d

Utilized a number of innovative strategies to
overcome potential constraints encountered by
traditional agricultural cooperatives:
•
•
•
•
•
Transferable delivery rights
Multi-commodity pool
Diverse set of crops and products
Board geographic membership base
Conversion of equity to publicly traded securities to
create liquidity for member investment
• Partnering with successful firms and capital groups
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Current Situation for Most Members
 Significant
Increase in Prices for Most
Crops (Input costs also increasing)
 Growing Demand Results in Increased
Acreage for Most Crops
 $120M Distribution in 2007 Generated
Higher ROE
 Situation Varies Across Crops and
Regions
 It Remains to Be Seen, How Long It will
Last
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Phase
Relationship
Understanding of
Investment
Information
Provided
1
OK
Poor
A Lot
2
Better
Poor
Some, Not As
Timely
3
Minimal
Good
Some, Not As
Timely
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