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Dan Mott, general counsel for American Crystal with the Oppenheimer Wolff & Donnelly firm in Minneapolis, gave presentations to growers at five recent factory district meetings about co-op rules that prevent the "renting-out" of beet stock.

Different rules

The issue came to light this past summer when the federal government's payment-in-kind program paid farmers to destroy healthy beet acres as a way to reduce the government's potential pile of forfeited sugar in its commodity loan program.

The U.S. Department of Agriculture's Farm Service Agency, which administered the "PIK" program, couldn't recognize some of Crystal's joint ventures as eligible "persons" for payment limitation purposes. Each "person," under FSA rules, was eligible for a $20,000 payment limit under the program.

"I think it's fair to say that shareholders thought they would have (more) entities eligible to PIK than they found out weren't eligible," Mott says. "So then questions came back to us: If we meet your (co-op membership) rules, why aren't we eligible to PIK? The question was asked of FSA as well."

One of the tests the FSA has for joint ventures is that there must be separate bank accounts, Mott says.

"My understanding is that a lot of these entities don't have separate bank accounts," Mott says.
Crystal's internal membership rules don't require separate bank accounts, but they do require that both the general and operating partners are "at risk" for the crop. In other words, beet stock joint ventures must be handled more like share rent on land, rather than cash rent deals, which guarantee fixed payments to landowners.

The honor system

In joint ventures and limited partnerships, an established owner of beet stock may decide not to grow beets anymore.

There are numerous reasons, Mott says. Among them is that the grower is ready to retire. Another is that his land has been too dry or too wet to produce beets. Maybe the shareholder needs a break in the beet rotation to break a disease cycle. Or perhaps he simply doesn't want the intense management responsibility or high investment load in growing beets.
In any case, the beet stock owner finds another farmer who wants to grow beets and forms a "joint venture."

The policy has been good for the original stock owners at American Crystal, as well as the co-op, which needs a constant acreage and supply of beets to keep its factories running at full capacity.

Mott says a farmer who wants to do a stock transfer, or sale, or wants to form a joint venture with another grower must approach Crystal staff.

"An authorized representative of the transferee -- usually the limited partner -- certifies that the new joint venture still (is) eligible to be a member," Mott says. "Part of that is to say that the entity is 'at risk' and that there is no 'cash rent' of the stock going on."

There's no good way to verify this, Mott acknowledges. Sources say more than half of American Crystal's shares are involved in joint ventures of numerous descriptions.

There are hundreds of stock transfers in a given year. The company has more than 1,250 grower units, but just short of 3,000 shareholders.

"We have no reason to think that there's any shenanigans going on in that regard," Mott says. "We trust their answer and expect that what they tell us is how they'll operate. We have not gone in and audited shareholder agreements.

"Short of asking each one for a copy of their agreement, I don't know what we could do," Mott says.

"Even if you ask for a copy, who's to say their practice is what's in the agreement? If they wanted to deceive Crystal on these issues, there's no way we can stop them. But they need to understand the consequences -- both for the co-op and for themselves."

The consequences?

Theoretically, a competitor could ask the U.S. Justice Department for an investigation, Mott says.

Or, if American Crystal were to merge with some other company, or form a common marketing arrangement, the government could look into producer eligibility. Mott says no such review was done in 1994 when Crystal formed United Sugars Corp., a marketing cooperative with other beet cooperatives.

Mott says he doesn't lose sleep wondering whether Crystal is in compliance with underlying Capper-Volstad, a co-op law, but acknowledges growers need to be reminded of the rules.

"Lots of times you get on these slopes, the proverbial slippery slope, but we don't want to go there," Mott says.

Co-op underpinnings

The famed Capper-Volstad Act, passed in 1922, gave legal status to cooperatives.

"It's a limited antitrust exemption," Mott explains. "It allows growers to operate collectively in the sale and pricing of, in this case, beets. It allows associations of producers to form common marketing agencies for products like sugar. The exemption is only available to producers."

While the term "producer" is not defined in the law, the conventional wisdom in tax and other law is that it means one who is "at risk for the production of the crop."

"That takes you back to why and what American Crystal cares about," Mott says. "If you have nonproducers in your organizations, you risk loss of the Capper-Volstad exemptions. Whether anybody would challenge that or not is an open question."

Mott knows of only two cases in which companies have been challenged, both to the U.S. Supreme Court. In 1967, Sunkist Growers of California temporarily lost its Capper-Volstad status and had to restructure because its packing house partners weren't at risk for the production of the crop. In 1978, National Broiler Marketing Association vs. United States, determined that a Georgia co-op not be a co-op if some of its "members" were chicken processors, and not fully involved in production of chickens.

Renting language

When farmers in the coffee shop talk about their joint venture deals, the original stock owner -- the "limited" partners -- simply say they're "renting out" shares to a general partner, another grower.

"We don't like them to refer to it that way, but they do," Mott says. "But what they use for their short-hand terminology isn't the issue that's critical."

Shareholders entering new joint ventures must certify to Crystal that their income will be "divided," Mott says. What's prohibited is a "rent" arrangement that protects the original beet stock owner and leaves the operating farmer bearing the price and production risk.

Exactly how the income is divided is between the joint venture partners -- the limited partner and general partner. That can be changed after the fact without notice to the co-op or a new certification, according to Mott.

Little oversight

American Crystal's co-op forefathers established a policy that requires the partners to be at risk.

"It was a precaution," Mott says. "I think it's a conservative approach to assure that Capper-Volstad is complied with. To the best of our knowledge, the line hasn't been crossed," but he says he's heard "anecdotes that it may have been."

"In fact, if they're not in compliance with those requirements, they should go and get it fixed," Mott says.

At the same time, Mott acknowledges there is no "good way of verifying" that members are following the rules.

Outlawing joint ventures and limited partnerships at Crystal is probably not an option, Mott says.

"It would cause a lot of difficulty for people in the valley who have used the flexibility of these joint ventures over the years," Mott says. "It's not necessary to do that."

Other co-ops

American Crystal's joint venture issue seems unique in the region's ag cooperatives. Minn-Dak Farmers Cooperative of Wahpeton, N.D., requires that shareholders be actively engaged in some kind of farming -- not necessarily personally raising beets.

Unlike American Crystal, Minn-Dak allows shareholders to rent out their beet shares on a crop-share lease. They allow but don't require joint ventures or limited partnerships. Minn-Dak requires that lessees report their crop sharing arrangement with the Farm Service Agency on their 502 forms, even though it's not required by the government.

"We've done that to ensure that our growers are in compliance with IRS regulations," says Allen Larson, interim chief financial officer. "Because of that requirement, all of our members had on file at FSA that they were crop-share leasing and all were eligible for PIK."

Al Ritacco, president and chief executive officer for Southern Minnesota Beet Sugar Cooperative in Renville, says the owner of beet shares must share more than 50 percent of the risk.

Southern Minnesota members can lease out up to 15 percent of their acres on an annual basis, but only to other members, and only after they report it to the co-op.