On keeping Ocean Spray An ongoing discussion with Randy Jonjak and others Tom Gelsthorpe
6/11/99 Here is the next part of my reply to Wisconsin grower Randy Jonjak's Op-Ed piece. (Earlier discussion here.) I'm still researching the answers to a number of questions -- how much better off are Blue Diamond almond growers, Sunkist orange growers, etc.? -- but let's tackle the questions of "incentives" for outside directors and the real meaning of the slogan: "Keep the company grower owned and grower run." So far as "grower owned" is concerned, look up the financials in our most recent annual report. From 1994 to 1998 shareholders equity as a percentage of assets has declined from 36.8% to 23.9%. Institutional debt has risen by more than 50%, from $217 mm to $342mm and the leverage ratio has risen from 46% to 61%. Our "grower owned" portion of the company has shrunk to less than a quarter of total assets. Institutional debt now exceeds the value of common stock (at $25/share) by more than three times. In addition, with the issue of $150mm of standard preferred stock, the nominal value of stock owned by outsiders now exceeds the nominal value of common stock held by active growers by nearly 50%. Since Ocean Spray grower/owners are bound by three-year contracts to deliver fruit which is now priced below cost of production, and those prices are not supported by earnings even at current levels, the value of membership in Ocean Spray now consists of an obligation to provide the coop with fruit raised with money from growers' personal savings or off-farm income. Can we expect grower ownership to function as a sort of charity, until an inept management and a befuddled Board can get their bearings again? Tom Bullock himself has said -- not that he has an impeccable record of veracity -- that it might be three to five years before price per barrel improves much. How can growers raise cranberries at their own expense for three to five years? The only growers who can support that scenario are those who already have such substantial off-farm income, or large outside investments, that they are, in essence, hobby farmers already. And yet the most unsung "grower owned" asset we possess -- and the only one that can provide growers with enough capital to survive until this horrendous over-supply is sold -- is the brand name. Current management has made a travesty of our brand name by promiscuous overuse. A marketer of Proctor & Gamble or Nestle's caliber could restore the brand to its former luster -- enriching shareholders and, not incidentally, selling all available fruit, which would raise the fruit's value. Now for the concept of "grower run." Nobody has to argue against this because you're arguing with yourself. Jonjak suggests that growers do not know how to run a large company -- they hire management to do that. If growers do not know how to run a large company, have never intended to run a large company and do not now intend to run the company, why include it in the slogan? The answer to Randy Jonjak's question: "What incentive would an outside director have to serve on the Ocean Spray Board of Directors?" is simple. Pay them. Currently, Board members, except for the Chairman, serve essentially as volunteers. A public $1 billion + corporation would pay Directors between $40,000 and $80,000 per year, with meetings one day a month, rather than three days five times a year. A Board with a conventional pay scale and conventional scheduling would be much more apt to attract candidates with the requisite bodies of expertise and to elicit proper attention to their responsibilities. If they could have stock options or "phantom" options, so they shared a profit goal with growers, all the better. Growers, knowing they were paying board members 40 or 50 thousand dollars a year, would demand conventional, profit-oriented results. One of the handicaps of the Ocean Spray Board is the "clubbiness" -- the fact that we know and like our Board members personally. It actually inhibits our ability to be businesslike. Witness the current catastrophe. The slighting of Proctor & Gamble's Board by Randy Jonjak ("what do they know about agriculture?") suggests that any company selling an ag-based product must have a Board versed in agriculture and nothing else. By that reasoning, Proctor & Gamble, who sells mostly detergents, paper goods and coffee, should have a Board made of chemists, loggers and coffee growers; an oil company should have a Board made entirely of geologists; a textile manufacturer should have a Board made entirely of cotton growers. Ocean Spray need not "crumble" and growers need not be limited to thinking that the only meaningful way to profit from the industry is by $/bbl. paid for fruit. We don't even have to "give up the coop." We can keep it as a handler -- who you say will be the "winners" -- and sell the marketing company to a better-financed and better-positioned corporation. A brief scan of USDA statistics shows that even in the hard-core farming areas of Iowa and California's Central Valley -- the richest farmland in the world -- nearly one third of all farmers have their principal job off the farm. With cranberry-growing at non-profit levels for at least a few years, the only growers who are going to survive are the ones who have already made the leap to generating income from other sources and other financial instruments, not just from raising a commodity. If our remaining growers can make the mental leap now -- that stock ownership in a varsity marketing corporation is the likeliest route to future prosperity -- we can negotiate a stock-for-stock merger to our mutual advantage, before anyone has to go down to ruin. And remember -- one of the truly different factors in cranberry growing is that our farms have little alternative value once the bogs are no longer profitable. An insolvent corn grower can sell his land to the soybean farmer next door; a dairy farm near a city can be subdivided into real estate development. An abandoned cranberry bog reverts to unproductive wetland -- falling in value from $30,000 to $300 -- a loss in property value of around 99%. The consequences are overwhelming if the cooperative attempts the impossible but fails. When we have a history and a brand name so illustrious, it would be a completely avoidable tragedy to let our company and our growers go down in flames simply because we cannot adapt to changing business realities. "Loyalty" should not be blind and it should not have the characteristics of unrequited love. The "my co-op right-or-wrong" crowd is sounding more and more like the sad man in the old, pop waltz "When a Man Loves a Woman," which I will paraphrase, with apologies to Percy Sledge. "When a farmer loves his co-op Deep down in his soul, It can cause him such misery. If it's playing him for a fool, He's the last one to know. Loving eyes can never see."
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