“The Decision To Merge”
Daniel Wolf
November 18, 2008
Company Backgrounds
Upstate Farms Cooperative, Inc.
Niagara Milk Producers Cooperative, Inc.
Pre-Merger Structure
Niagara
DFA
Upstate Farms
Farmer Members
Niagara Milk
Cooperative
Wendt’s Dairy
- Fluid milk
Bulk Sales
- Niagara Milk
Coop.
Farmer Members
O-AT-KA Milk Products
Cooperative
Market
Balancing
Commercial
Activity
Upstate Farms
Cooperative
Upstate
Commercial
- Fluid milk
- Cultured
Bulk Sales
Reasons to Consider Merger

The primary missions of both Niagara Cooperative and
Upstate Farms Cooperative were to be value-added
marketers of raw milk:



Generate above class price returns for their members
Stable competitive milk markets
Return on Equity

Through many years of working together at O-AT-KA,
Niagara Cooperative and Upstate Farms had come to know
and respect one another

We had merger conversations in the past
Reasons to Consider Merger
■
Timing Seemed To Be Right
■
■
■
Both companies were at similar earnings level.
Each company would receive full value of their members’
equity shares in the combined company.
Apparently without the need for any adjustments to that equity.
Reasons to Consider Merger

The merger of the two cooperatives would lead to even
higher returns on milk marketing activities for both
cooperatives versus what they could accomplish on their
own:




A strong leadership position in Western New York;
Synergies in milk hauling, processing and administration;
A sound capital base for more effective execution of growth
initiatives (product and geographic)
Increased competitive position to better serve our customers
Reasons to Consider Merger
Operational Opportunities

Utilization or rationalization of excess plant capacity:
■
■
■

Combined entity likely will not require 3 fluid milk plants serving
the same geography
Consolidation of fluid production should yield substantial
savings
Fluid milk production consolidation will create an opportunity to
examine new production; such as, specialty products not
currently manufactured by either company.
Other Potential Synergies:
■
■
Savings in administrative costs
Savings in distribution network may be possible
Reasons to Consider Merger
 Our World Is Changing
 Merge or Retreat
Reasons to Consider Merger
Strategic Opportunities
■
Niagara and Upstate operate similar businesses with similar
goals:
■
■
■
Profitably market member milk long-term, including
downstream profits
Greater business value
Operate essentially in the same geography
Niagara Milk Production by Zip Code
Highest
High
Low
Lowest
Upstate Milk Production by Zip Code
High
est
High
Low Highest
Low
est
High
Low
Lowest
Combined Milk Production by Zip Code
Highest
High
Low
Lowest
Upstate Farms Cooperative and Niagara Milk Cooperative Pre-Merger
Membership Issues - Benefits
Premium programs offered by both
cooperatives include:



Volume Incentive Premium
Quality Incentive Premium
Hauling Volume Discounts
Membership Issues – Equity Investment
 Upstate
 Base capital plan; $4.00 per
cwt. annual production.
 Current average member
equity investment of both
organizations is near equal
on most recent annual
production.
 No membership dues.
 No capital deduction.
 Niagara
 Five year revolving plan.
 Current average member
equity investment of both
organizations is near equal
on most recent annual
production.
 Membership dues.
Pre-merger Governance Structure
 Upstate
 3 areas
 12 person board; staggered
3 year terms
 Current 47 person delegate
body
 Niagara
 12 districts
 12 person board; annually
elected by districts
 No delegate body
Board Representation Proposal
Board

Interim Board For 3 Years




From Upstate: 12 Existing Members
From Niagara: 5 Existing Members
For A Total Of: 17 Members
After 3 Years


Likely 12 – 15 Person Board Elected From The Delegate
Body
Determined By Interim Board
Delegate Representation Proposal
 Interim
 Upstate Delegates; 47 Members
 Niagara Board; 12 Members
 For Total Of 59 Members
 After 3 Years
 From Each Area, Based On Delegate To Member Ratio
As Determined By Delegate Body and By-Laws.
Other Strategic Considerations



O-AT-KA Included in the Consolidation
Tax Considerations
Potential Pension Withdrawal Liability
The Merger – Unity/Issues



Delegates of Upstate Farms and members of Niagara
Milk Cooperatives voted and approved the merger
A few Niagara Milk members left
Even fewer Niagara Milk members became “dissenters”
using NY State Law

Asking court to be paid more than the amount in their equity
account
UPSTATE NIAGARA
The Cooperative
That’s Just
A Little Different
The Merger
Upstate Niagara Cooperative, Inc.

Created by the Merger of Upstate Farms & Niagara
Milk on July 1, 2006


USF created by merger of local Cooperatives in 1972
Niagara Milk created by farmers in Niagara County in 1933
Included 90% ownership of O-AT-KA
 Owned by Farmers & Cooperatives



400+ Individual Dairy Farmers
Other Cooperatives
 Dairy Farmers of America (DFA)
 Dairylea
The Merger
O-AT-KA

Created to clear markets and ensure home for all
member milk





Founded in 1958 by Genesee Valley Cooperative & WNY
Cooperative of the Rochester market
Frontier Federated joined in 1961
Dairylea joined in 1962
Niagara County Cooperative (Niagara Milk) joined 1967
O-AT-KA Board approved the sale of Dairylea ownership to
Dairy Farmers of America (DFA) in 2005
The Milk Marketing System
The Milk Marketing System
Upstate Niagara
Commercial Division
Farmer Members
Upstate
Niagara Coop.
O-AT-KA Milk
Products
DFA
Other Coops
Dairylea
Bulk Truckload Sales
(Other processors)
The Milk Marketing System
Corner Stones of:
The Milk Marketing System
Packaged
Fluid Milk
Market
Balancing
The Milk Marketing System
The Milk Marketing System
 O-AT-KA provides security by guaranteeing markets
and adding value in three key areas



Market Balancing (dairy commodities)
Core Products (evap milk 30% US/PR market)
Value Added Specialty Beverages
Upstate Niagara Governance
Members
Nominate and Elect
Area Delegates = Delegate Body
9 Area Directors
(elected by Area Delegates)
6 At-Large Directors
(elected by all Delegates)
____________________________________
15 Member Board of Directors
Transition Period
 Directors
Total Directors
2008
16
2009
15
2010
15
2011
15
2008
57
2009
55
2010
53
2011
51
After Election
 Delegates
Total Delegates
After Election
2008 Member/Voting Units
AREA II
AREA I
129
Voting Units/
Members
138
Voting Units/
Members
BENTON
SPARTA
PORTAGE
NUNDA
OSSIAN
HUME
Area II
Town/County (not shown)
Addison/Steuben
Fayette/Seneca
RUSHFORD CANEADEA
AREA III
Thompson
OH
Corry
PA
131
Voting Units/
Members
Revised
Upstate Niagara Governance
Upstate Niagara



3 Areas
Board of Directors
 3 Area Directors from each area
 6 At-Large Directors
 Staggered 3 year terms
Delegate Body
 Area Delegates, based on delegate to member ratio as
determined by Delegate Body and By-Laws
 Approximately 50 delegates
 Staggered 3 year terms
 Current Ratio 1:7 (1 delegate to 7 members)
Voting Units/Representation
Area I
398 Voting Units
October 2007
387 Voting Units
October 2008
Current
Governance
Information
Representation
7 to 1
138 Voting Units
134 Voting Units
20 Delegates
19 Delegates
5 Directors
Area II
129 Voting Units
125 Voting Units
18 Delegates
18 Delegates
6 Directors
Area III
131 Voting Units
128 Voting Units
19 Delegates
18 Delegates
5 Directors
Directors
12
Dir-at-large
4
Total Board
16
Total Delegates
57
Goals for transition from Interim to Permanent Governance Structure:
•Approx. 57 delegates after 2008 elections and approx. 55 delegates after 2009 elections
•16 directors after 2008 elections and 15 directors after 2009 elections
55
Upstate Niagara/ O-AT-KA Structure
Members
Delegates
O-AT-KA Board
U-N Board
CEO
CEO
Executive Secretary
COO
CFO
COO
Executive Assistant
VP Business
Development
GM
Membership
CFO
Legal
Counsel
Chief Dairy
Economist
Human
Resources
Upstate Niagara Simply Working,
Together
Toward
Tomorrow
Thank You