Agriculture banks in the Upper Midwest are taking advantage of a boomlet in the cooperative business.

Rural bankers say co-ops are a welcome new source of loan and deposit business - and also offer much-needed cash flow to their borrowers who are members.

"The idea behind the co-op generally is to allow a producer to retain a larger percentage of the profit," said Tom Watson, senior vice president of $85 million-asset Security State Bank of North Dakota, Hannaford. The bank helped finance a cooperative bison processing plant in New Rockford, N.D.

"That translates into greater cash flow, which translates into a stronger financial statement," he said. "Your producers are better off for it; our banks are better off for it."

Members of co-ops sell their products to the organization and, as "shareholders," share in the profits after the cooperative processes and sells the product.

But some financing needs of the cooperative can be too large for the local community bank.

"Some of the larger co-ops take so much money, it's way beyond (community banks') lending limit," said Bob Gruman, senior vice president for lending at the state-owned Bank of North Dakota, which has participated in loans to cooperatives.

Many loans are handled by the St. Paul Bank for Cooperatives, a Farm Credit System entity in Minnesota specializing in financing agricultural cooperatives.

However, rural banks have organized successful participations with other banks, the Bank of North Dakota, and other government agencies, said Marvin Duncan a professor of agricultural economics at North Dakota State University, Fargo.

"The community bank still wants to be part of the process," he said.

Mr. Watson's bank participated in the loan to the bison cooperative. Security State also has seen loan business from area farmers who wanted to start buffalo herds for the processing plant.

However, "as far as our business goes, (the cooperative has) helped build our deposit base more than our loan base," he said.

Southwest State Bank, Windom, Minn., already has financed more than 100 producers who are buying from $5,000 to $50,000 each of stock in an ethanol plant for which ground is expected to be broken this fall.

With construction costs too large to finance, Southwest hopes to make a $1.5 million operating loan with another bank, said James Redding, president of the $115 million-asset bank.

Stan Seyler, executive vice president of $30 million-asset Security Bank of Hebron, N.D., said a cheese processing plant for which Security participated in a $1.5 million loan will increase farmers' cash flows.

"There seems to be an ever-increasing squeeze on cash flows," Mr. Seyler said. "Something needs to be done to generate more profits locally. If the town dries up, I guess the bank will go along with it."

Cooperatives gained their prominence in the Upper Midwest because many of its people have roots in Scandinavia, where cooperatives originated, said Ed Lotterman, an agriculture economist at the Federal Reserve Bank of Minneapolis.

New cooperative activity has been extremely strong in the region in recent years, said Stuart Peterson, chief credit officer of the St. Paul Bank.

Bank of North Dakota's Mr. Gruman tied the resurgence to a successful pasta plant that was opened in Carrington, N.D., in 1993 to process durum wheat.

"I think it opened people's eyes as to what co-ops can do," Mr. Gruman said.

Cooperatives allow farmers to keep their products in the area and receive dividends from the co-op's earnings.

The structure ensures a market for farm products, and it offers tax benefits and valued added from processing and marketing, said Mr. Duncan, the North Dakota State professor.

The new co-ops have the same types of risk any new business must face, said Mr. Gruman, who has seen no loan losses from related loans, although many still are very new.

He said that he expects the co-op trend to continue, which could create opportunities for more farm lending. "We're looking at several other projects right now," Mr. Gruman said.

Mr. Lotterman, the Minneapolis Fed economist, said potential organizers will monitor the profitability of existing co-ops as they consider founding new ones. "I see it continuing slowly," he said.

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