Co-op investment tightens basis, but venture is not risk-free
For a group of farmers in western Minnesota, pooling resources to create their own rail hub is a big risk that has paid off—to the tune of a double-digit basis improvement. Several years ago, producer members of three co-ops pledged assets to develop Agassiz Valley Grain LLC. Today the private company, located in Barnesville, Minn., loads 110-car unit trains with grain and sends them to Fargo, N.D., via the Ottertail Valley Railroad short line. The trains then head to the West Coast on the Burlington Northern Santa Fe (BNSF) rail line, en route to Asian markets.
"For soybeans, it’s meant a change in basis of as much as 20¢," says Rick Maier, a Barnesville producer. Maier is a designated member of the LLC board from the Rothsay Farmers Co-op, of which he is also a board member. Rothsay is one of three co-ops that formed the LLC along with Archer Daniels Midland.
Besides the LLC tightening the basis for producers who sell grain to it, the formation of the unit train facility also means other grain buyers have had to tighten their basis to stay competitive.
Corn, soybeans and spring wheat are shipped on the trains. Rothsay Farmers Co-op pledged its Barnsville elevator as its investment in the LLC. Maier says the decision wasn’t easy.
"We were giving up part of our business," he says. "Our co-op, Rothsay Farmers Elevator, was 105 years old. We’ve been building it a long time."
While Maier’s co-op pledged assets, the other business partners pledged a total of $1.5 million, $500,000 each, in cash.
|"For soybeans, it’s meant a change in basis of as much as 20¢," says Rick Maier of the new unit train facility his co-op joined.
Backs Against the Wall. Maier felt his co-op didn’t really have much of a choice but to go all in. He and other board members found their backs against the wall because rail lines would no longer accept co-loaded rail car shipments.
After losing the ability to put grain on railcars in Barnesville, the co-op had become little more than a stopover trucking station, says Maier, who grows corn, soybeans, sugar beets, wheat and barley. "We were losing profit," he notes.
As a result, the boards of the three co-ops were convinced they needed to jointly invest in a unit train facility capable of shipping on the BNSF rail line.
"If we wanted to stay in the grain business, this was our only option. We saw this as an opportunity, which has led to tighter basis," Maier says. "It has increased competition."
While Agassiz Valley Grain has been successful for Maier and the other owners, there are risks that producers, co-ops and elevators considering such ventures should be aware of, says University of Minnesota economist Jerry Fruin.
"This has been going on for 20 years," Fruin says of unit train installations. "There are cases where co-ops have put in train loading facilities designed for 25 or 50 cars, and the co-op down the road puts in one for 100."
The worst-case scenario is a co-op creating a "white elephant" that operates at only 50% or 70%
- November 2011