Dakota Growers Pasta Company

     Dakota Growers Pasta Company (DGPC) is an agricultural cooperative that processes its members’ durum wheat into flour and pasta products.  The cooperative was incorporated on December 16, 1991 and became fully operational in 1994.  By 1998, Dakota Growers was one of the three largest pasta producers in the United States, with facilities located in North Dakota and Minnesota.  It has approximately 1,100 members located in North Dakota, Minnesota, and Montana.  DGPC was one of the first successful new generation cooperatives in the 1990s. Their success has been an inspiration to others.  Many new cooperatives have used DGPC as a model. 

Industry Profile
Formative Stages of DGPC
Operations
Company Performance
Lessons Learned
Prairie Pasta Producers

Industry Profile

     In 1998, the U.S. Department of Commerce reported that Americans had been increasing their pasta consumption at an annualized rate of between 2 to 3 percent for the past ten years.   In the prior year, North American pasta consumption exceeded 5.0 billion pounds.  On a per capita basis, pasta consumption has increased from roughly 7 pounds of pasta in 1984 to 14 pounds in 1994.  The increase in consumption is primarily attributable to the fact that pasta is a tasty, relatively inexpensive food that is easy and quick to prepare and can be included in many types of dishes, including salads and main entrees.  Products such as boxed pasta dinners and frozen pasta entrees have supported consumers’ demands for quick meals to prepare at home.  Pasta consumed in restaurants has also grown as a result of the increasing trend for Americans to dine away from home.  Pasta is recognized for its nutritional value; along with bread, cereal, and rice, the USDA includes pasta as part of the base of its Food Guide Pyramid.  The USDA advises people to eat more of these foods than any other type on the Pyramid.  In recent years pasta makers have also introduced new shapes and varieties of pasta to expand consumer choice.  For instance, flavored pasta varieties such as tomato basil and lemon pepper have been brought into the market, pasta that does not require boiling before baking as a lasagna product has been introduced, and some makers have even started to market pasta as a dessert, introducing chocolate-flavored pasta.  In the first half of 1994 alone, over 330 new pasta products were introduced.

     There are three main market areas for dry pasta: retail, industrial, and foodservice.  Approximately 63 percent of U.S. domestic production of dry pasta goes to the retail sector, 24 percent goes to the industrial sector, and 13 percent goes to the foodservice sector.  The retail sector includes consumer retail operations such as supermarkets and warehouse club stores.  In the retail market, pasta products are sold as both national or regional brand label products and private, store label products.  Brand labels include Mueller’s, Creamette, Ronzoni, and Catelli.  Brand label products represent about 80 percent of total retail sales and private store labels represent the remaining 20 percent.  Private labels, however, have been increasing in popularity in recent years as consumers begin to accept these store labels as being similar in quality to brand name products.  In some major geographic markets, store labels have already surpassed regional brands as the leader in sales.

     The industrial sector of the dry pasta market includes food processors that use dry pasta as an ingredient in the foods they manufacture.  In this segment, pasta is used to make products such as frozen dinner entrees, canned soups, and dry side dish mixes.  Companies such as Kraft Foods, Campbell Soup, and Stouffers are included in this category.  Many food processors in the ingredient sector choose to internally produce their own pasta for use in their end products rather than purchase it from external sources.

     The foodservice sector includes food preparation operations such as restaurants, hotels, and airlines.  Within this segment, foodservice distributors tend to act as middlemen, purchasing pasta from manufacturers and then selling the product to restaurants, hotels, etc.  The foodservice sector has been growing in recent years, largely due to the fact that Americans are dining away from home more often; in 1996, Americans spent 46 percent of their food expenditures on away-from-home meals, compared to 39 percent in 1980.

     The primary ingredient for pasta is semolina, which is milled from durum wheat.  The volatility of durum prices will therefore affect manufacturers’ processing costs from year to year.  The pasta industry is extremely competitive and price competition is intense.  Therefore, pasta makers cannot easily increase their product prices when their costs of production increase.  Because the semolina made from durum represents a primary input, pasta makers are significantly affected when durum prices rise.  But the high level of industry competition also poses problems when durum prices are low.  In a competitive industry, lower input costs will allow competitors to lower their product prices, and therefore put pressure on other companies to follow suit.  Price competition such as this puts pressure on pasta makers’ profit margins. 

     The pasta industry has undergone significant transformations since the 1960s.  Prior to that time, the industry was mainly comprised of family-owned regional companies.  During the 1960s and 1970s, however, large conglomerates were expanding their product lines, and companies such as Hershey, General Foods and Pillsbury began to buy these  pasta makers’ operations.  Several years later some of these conglomerates began to divest of their pasta operations, selling them to others.  In the process, some companies became even bigger players in the pasta industry, including Hershey and Borden.  By 1997, Hershey had become the largest pasta maker in the U.S.  In the mid-1990s, however, many firms began to restructure and shift their strategic directions.  In 1997, Borden announced that it was leaving the private store brand label market and selling or closing five of its ten North American pasta plants.  This opened the door for many newer companies, including American Italian Pasta Company and DGPC, to increase their market shares.  In 1998, Hershey announced that it was selling its pasta business so that it could concentrate on its core line of confectionery and other grocery businesses instead. 

Formative Stages of DGPC

     There are only a few fully integrated milling and pasta manufacturing facilities in the U.S.; most pasta makers purchase semolina from independent milling companies.  The idea of an integrated milling and pasta plant in the 1990s, however, was not new to North Dakota.  In 1980, Noodles by Leonardo, a privately owned company headed by Leonard Gasparre, opened the country’s first such plant in Cando, North Dakota.  It opened its second plant in 1992 in Devils Lake.  The idea for DGPC partly came out of necessity; at the beginning of the 1990s, North Dakota durum producers were faced with low prices.  The USDA’s National Agricultural Statistics Service reports that the market year average price for durum in 1990 in North Dakota was $2.50 per bushel.  At this price, farmers were hardly covering their variable production costs.  They wanted to find a way to add value to their durum.

     In his USDA manual entitled Creating 'Co-op Fever': A Rural Developer’s Guide to Forming Cooperatives, Bill Patrie discusses the formation of DGPC.  The North Dakota Economic Development Commission (the predecessor to the state’s Department of Economic Development & Finance) had unsuccessfully tried to lure a large pasta cooperative to the state.  The first meeting to discuss the formation of DGPC was held in August 1990, when three people met in Maddock, North Dakota.  Bill Patrie, the newly-appointed director of the North Dakota Association of Rural Electric Cooperative’s Rural Economic Development Program, met with Bob Spencer, manager of Baker Electric, and John Rice, Jr., the president of the U.S. Durum Growers Association.  They soon met with Eugene Nicholas, a member of the North Dakota House of Representatives, and Jack Dalrymple, the chair of the State House of Representatives Committee on Appropriations.  Both Mr. Spencer and Mr. Nicholas had helped to arrange financing for Noodles by Leonardo through their roles in the Durum Triangle Industrial Park Corporation.  These five men were the key organizers of DGPC.  As of 1998, Jack Dalrymple, John Rice, Jr., and Eugene Nicholas were still involved with the company, serving on its board of directors.

     DGPC organizers recognized two primary reasons why a cooperative structure would benefit durum growers: By belonging to a producer-owned cooperative in which delivery rights and obligations were attached to ownership, members would know that they had a buyer for their durum.  Secondly, ownership would allow them to share in the incremental value added to their durum by processing it into semolina and pasta.

     The organizers prepared an outline and budget for the feasibility work that needed to be done.  Funding for the feasibility work was raised from the ND Wheat Commission, Central Power Cooperative, and Baker Electric to match a $25,000 grant that had been received from the North Dakota Agricultural Products Utilization Commission (APUC).  A steering committee was formed, whose members represented the organizations that had provided funding for the study, as well as the U.S. Durum Growers Association, the ND Department of Economic Development & Finance, and the ND Farmers Union.  Mr. Patrie served as the committee’s principal advisor.  In 1990 the consulting firm of Senechal, Jorgenson, & Hale was hired to do the feasibility study.  The study explained the advantages of using a producer-owned cooperative structure for a pasta operation.  By January 1991 the study was completed and the results estimated that a minimum return on investment of 15 percent was possible.

     The cooperative filed its articles of association in December 1991, and the steering committee was dissolved and replaced by an interim board of directors.  Jack Dalrymple became its chairman (Mr. Dalrymple has since remained as chairman of the board).  The cooperative hired legal, accounting, and business planning services, and received an additional $150,000 from APUC to help with the development process.  With this grant, DGPC became the first business to receive funds from APUC's newly-created Cooperative Marketing grant category.  The organization proceeded to hire Tim Dodd as CEO.  Mr. Dodd came from the American Italian Pasta Company in Missouri, where he had been vice president of manufacturing since its commencement in 1988.  American Italian Pasta Company is North America’s second largest producer and marketer of dry pasta.  Dodd, who had also been the head miller for Noodles by Leonardo at one point, recruited the American Italian Pasta Company’s director of retail sales, Gary Mackintosh, and director of engineering, David Tressler, to join DGPC. 

     In January 1992, the company held a seed money drive in which 1,200 farmers contributed $.05 per bushel to indicate their level of interest in the cooperative.  The contributions amounted to approximately $150,000, which matched the APUC grant.

Initial Equity Requirements

     A business plan was completed, and the company determined that it would build a plant with an annual capacity of approximately three million bushels.  An equity drive was planned, with the objective to obtain enough equity to finance 35 percent of the plant’s cost.  DGPC determined the share price by dividing the amount of equity needed by the number of shares to be issued.  The result was a price per share of $3.85. 

     The minimum individual producer investment required was set at 1,500 equity shares.  At $3.85 per share, this amounted to $5,775.  The cooperative held its first grower informational meeting in January 1992.  DGPC received some unexpected publicity to help its equity drive when the media quoted the owner of Noodles by Leonardo as saying that farmers were too dumb and lazy to run their own plant.  The comment angered Noodles by Leonardo’s durum suppliers, and the owner consequently ran a full-page apology in the state’s newspapers. After 33 equity drive meetings and an extension to its deadline, the cooperative reached its target to raise approximately $12.5 million in equity.  The equity was raised from 1,042 durum producers, making the average individual investment approximately $12,000.

     Each producer also had to purchase one membership share for $125.  Voting rights arise from ownership of a membership share.  No member of the cooperative can own more than one membership share.  DGPC’s structure is based on the cooperative principle of one-member one-vote, which implies that all members have equal voting rights, regardless of the number of equity shares they may hold.

     The majority of the debt financing for the cooperative came from the St. Paul Bank for Cooperatives, which granted the company a loan of over $20 million.  DGPC’s board also negotiated a deal with the Bank of North Dakota (BND) to provide some financing on a subordinated basis to St. Paul Bank.  The bank granted a loan of $6.5 million, but on the condition that only producers with a minimum net worth of $50,000 be allowed to join the cooperative, and that these producers give a personal commitment to cover any loan default.  This was the largest loan that BND had ever granted.  The cooperative had also received two zero-interest loans through the state’s rural electric and telephone cooperatives, each valued at $100,000.  The estimated cost of constructing the plant was $40 million.

     In June of 1992, Carrington, North Dakota was selected for DGPC’s plant location.  Thus, the selection of DGPC’s first facility was not chosen until after the equity drive was completed.  Carrington was one of 27 communities that had competed for the facility.  Groundbreaking ceremonies for the plant were held in July 1992, and construction began in September.  Bill Patrie estimates that the cost to get to this stage (the planning and development that took place between August 1990 and July 1992) was less than $500,000. 

     The plant was designed to have a capacity to grind 3,200,000 bushels of grain and manufacture 120 million pounds of pasta each year.  It became fully operational on January 1, 1994.  After running a deficit in its first operating fiscal year, 1994, the company has since been reporting profits.  (As the fiscal year end is July 31st, fiscal year 1994 only comprised seven months of operations.)

Operations

     DGPC began start-up operations in November 1993 with a single vertically integrated plant in Carrington, North Dakota and 180 employees.  The plant was not fully operational until 1994.  Initially, the plant had four pasta production lines and a capacity to manufacture 120 million pounds of pasta and grind 3,200,000 bushels of grain each year.  In early 1994, DGPC relied on “co-pack” agreements and government customers for a significant portion of its sales.  Co-pack arrangements occur between pasta manufacturers in all market segments for dry pasta.  Under these arrangements, a pasta manufacturer sells dry pasta to another manufacturer so that the latter is able to meet any short-term volume deficiencies that may arise in filling its customer orders.  The volume of these co-pack agreements has decreased since the DGPC's start-up, largely due to the fact that the industry began to experience excess capacity and manufacturers were therefore not short of supply. 

     By October 1995, DGPC’s Carrington plant was producing at full capacity.  The facility underwent expansions in 1996, 1997, and 1998.

 1996 Expansion & Stock Offering

     Due to increased demand for its products, the cooperative announced in 1996 that it would expand its production capacity.  This expansion would double DGPC’s milling and pasta production capacities, increasing the company’s share of total domestic pasta industry capacity from less than 3 percent to approximately 6 percent.  Its milling capacity would increase from 4 percent to over 7 percent.  The company managed to obtain a complete property tax exemption for five years on the property constructed in this expansion, and a partial exemption for four more years.  The estimated cost of expansion was $20 million.  In order to help finance this expansion, DGPC held a stock offering in January 1996.  The company offered up to 500 membership shares at $125 each and 2,070,000 equity shares at $5.50 each (par value of $3.85) for sale.  When the offering terminated in April 1996, the cooperative had issued 1,788,008 equity shares and 81 membership shares.  DGPC received net proceeds of $9.72 million from the offering.

     Expansion began in late 1996, and by the end of 1997, DGPC had doubled its original capacity.  It could now grind 7,000,000 bushels of grain and manufacture 240 million pounds of pasta each year.  It had six production lines and produced over 60 different pasta shapes, up from 55 the year before. Capital expenditures of $17.8 million were incurred in 1997, compared to $1.5 million and $1.3 million in 1996 and 1995, respectively.  Expenditures in 1994 were $12.3 million, reflecting the remaining initial construction costs of the Carrington facilities. 

     The company also ordered an additional pasta line in July 1997 that was estimated to cost $5.5 million.  This line, which became operational in July 1998, would add an additional 30 million pounds of capacity. 

 Stock Split 

     In August 1997, the cooperative’s directors voted in favor of a 3 for 2 equity stock split, in order to bring member durum delivery commitments in line with the expanded capacity of the plant. 

1998 Primo Piatto Acquisition

     Even with DGPC's expanded capacity, it still found itself short of its production needs.  In 1998, the cooperative decided to acquire Primo Piatto, Inc., a company that had been established in 1997 by a group of Borden employees who purchased two Minnesota plants that Borden was planning to close.  The transaction cost $24.2 million.  According to Tim Dodd, the acquisition created the largest non-branded pasta company in the U.S.  Through this acquisition, DGPC expanded its operations into Minnesota.  Primo Piatto’s physical assets included two production facilities specializing in retail production and a distribution center.  The facilities contain a total of 10 production lines and have the capacity to process 200 million pounds of pasta each year.

     With the acquisition of Primo Piatto, DGPC became the third largest pasta manufacturer in North America.  By the end of 1998, DGPC was manufacturing over 80 different pasta shapes and had 493 full-time employees.

1998/1999 Milling Capacity Expansion

     The Minnesota facilities did not include any milling operations, however, and DGPC had to purchase their semolina requirements on the open market.  In order to supply enough of its own semolina to the newly acquired Minnesota plants, the company announced in 1998 that it would be upgrading its Carrington milling facilities.  By providing its own semolina to all of its operations, the company anticipated significant cost savings and consistent quality in all of its products.  DGPC obtained favorable long-term rail rates to ship the semolina from the Carrington mill to the Minnesota facilities.  The upgrade would double the company’s milling capacity, raising it from 20,000 to approximately 40,000 bushels per day.  The estimated cost of the upgrade was $11 million.  The mill expansion was completed in May 1999.

1998 Stock Offering

     In November 1998, DGPC held another stock offering to help finance the mill expansion and to help reduce the debt load from the Primo Piatto acquisition.  The equity shares were to be sold on a priority basis to existing members, and any remaining unsold shares would be offered to growers who wished to join the cooperative.  The equity shares were offered at a per share price of $7.50 to existing members, and $11.00 to new members (if necessary).  The price of a membership share was $125.  An additional 345,570 equity shares were offered from selling stockholders, but DGPC would not receive any of the proceeds from these shares.  The stock offering was completed February 28, 1999, and the cooperative had sold a total of 3,624,782 equity shares and 2 membership shares.  After paying the selling stockholders their portion of the proceeds and the net costs of the offering, the company received over $24 million. 

Grower Agreements & Durum Delivery 

     Each member is obligated to enter into a Growers Agreement with the cooperative.  The Growers Agreement is used to ensure that a stable source of durum is available for the company’s operations.  The agreement is tied to the equity stock: for each equity share held, the member is obligated to deliver one bushel of No. 1 hard amber U.S. durum wheat annually to the cooperative.  DGPC has the right to reduce this delivery amount on a pro rata basis and will do so, depending on its marketing needs.  The durum delivered must meet certain quality standards stipulated by the cooperative.  The cooperative has established three, four-month marketing periods throughout the year.  They are:

August 1 to November 30
December 1 to March 31
April 1 to July 31.

     For each marketing period, DGPC establishes the members’ delivery obligations.  The cooperative gives each member notice of his delivery obligation for the upcoming period.  In 1995, the cooperative utilized its power to reduce the delivery per share amount, decreasing it to .979 bushels per equity share.  The delivery requirement was also slightly less than one bushel in 1996, 1997, and 1999.  In 1998, the delivery obligation remained at one bushel per equity share for the year.

     In 1998, the cooperative established a non-profit organization called Northern Grains Institute (NGI) to administer its delivery arrangements set forth in the Growers Agreement.  Effective August 1st, 1998, a Durum Pool Agreement was established among DGPC, its members, and NGI to create a durum pool.  All deliveries of members’ durum to the cooperative must pass through this pool.  Essentially, NGI acts as each member’s grain handling and delivery agent: it arranges the logistics of durum delivery as well as payment and accounting matters.

     Prior to each marketing period, DGPC establishes a projected average price (FOB Carrington) per bushel of durum for that period.  Based on this price and the amount of durum that it will deliver in the member’s name to DGPC, NGI invoices the member.  Each marketing period, the member is assigned by lottery a date on which he must settle this delivery payment.  On or before that date, the member must make payment of the amount, which is equal to DGPC’s deduction for retainage on the durum to be delivered, plus a per bushel transaction fee.  In 1998 and 1999 the deduction for retainage was 10% of the projected price per bushel for each period.  The Growers Agreement allows for this amount to be as high as 20 percent.  In fiscal 1997, the amount was 15 percent.  The per bushel transaction fee was projected to be $.03 for fiscal 1999.  This transaction fee will be refunded to the member if he sells and delivers under his own contract milling quality durum to NGI.  If delivery is not made by the grower and the contract requirement is unfulfilled, the transaction fee is not refunded.

     Once the member has made payment of the invoice, NGI delivers durum to DGPC and receives the initial payment from DGPC on the member’s behalf.  To the extent that its earnings provide the necessary funds and allows the cooperative to remain in compliance with its lending agreements, DGPC will pay directly to the members the amount of the retainage 45 days after the marketing period ends.  Including fiscal 1999, the cooperative has never withheld a unit retain indefinitely. 

     The members make actual delivery to the durum pool by contacting NGI and arranging for a delivery date.  NGI posts durum bids FOB Carrington on a daily basis.  Within 14 days of delivery, the member is paid this DGPC spot market price for the durum.  If the member is unable to grow and deliver the required amount of durum in order to fulfil his obligations, he must purchase the needed amount elsewhere for delivery to DGPC.  In such a situation, the member is exposed to the risk that the price he must pay for the durum may be greater than the price paid to him by DGPC.

Competition

     The pasta industry is extremely competitive and has undergone various changes within the past decade.  In its 1998 prospectus DGPC reported that its main competitors included Borden, Hershey Pasta Group Division, and American Italian Pasta Company. The cooperative acknowledged that it competes against more established companies that have a greater amount of resources.  In that year, eight companies, including DGPC, controlled over 50 percent of total industry production capacity.  About a quarter of the domestic capacity comes from large established companies that manufacture pasta for their own end-use products.  These companies include Kraft, General Mills, and Campbell Soup Co.  Foreign competition is also present, including Italian, Turkish, and Mexican interests.  Imported pasta represents approximately 12.5 percent of the domestic market.

     The pasta industry has undergone various changes throughout the 1990s.  In January 1999, Hershey Foods, the largest pasta maker in the U.S. at the time, sold its pasta business to New World Pasta LLC so that it could focus on its core business lines instead.  In the prior year, Hershey held a 27 percent market share of the U.S. pasta market.   In 1997, Borden Foods announced a major restructuring that included closing five of its ten North America pasta plants.  At the time, Borden held about a 23 percent market share of the U.S. pasta market.  The company announced another plant closure in 1998.  Borden’s restructuring helped DGPC to gain a greater share of the private store brand label market segment.

     With a few exceptions, most pasta manufacturers purchase their semolina needs from a third party milling company.  DGPC and American Italian Pasta Company are major U.S. pasta producers that own vertically integrated milling facilities.  Barilla, one of Italy's largest pasta makers, has also recently completed construction of an integrated facility in Iowa.

     In the cooperative’s opinion, there are five main factors that influence the level of competition.  These are: 
 

1) industry capacity utilization
2) product distribution costs
3) customer service
4) price of raw materials
5) ability to meet customer specifications with consistent quality.


     DGPC believes that industry capacity utilization is the most important factor affecting the degree of competition.  In 1999 there were estimated to be 60 to 65 major U.S. plants producing dry pasta.  Throughout 1996 to 1999, DGPC asserted that there was excess capacity within the industry.  Companies were announcing their plans to increase capacity, either through expansion of existing facilities or construction of new ones, and foreign competitors were establishing North American operations.  In recent years, many companies were repositioning themselves in the industry.  As mentioned, Hershey announced it was selling its brand name pasta business, and Borden announced its plans to exit the private label pasta segment and close five of its ten plants.  Meanwhile, one of Italy’s largest pasta makers, Barilla, was expanding its branded label marketing efforts.

     Durum is the primary raw material used in pasta production; in 1996, it represented 48 percent of DGPC’s total cost of product sold.  The volatility of durum prices will therefore affect the company’s processing costs from year to year.  Since the company was organized, the price of durum steadily rose until the end of 1996.  From 1995 to 1996, DGPC reported that the average cost of durum increased by 10 percent.  In 1997, the cooperative reported the average per bushel cost had decreased by 12 percent, primarily because of a large durum harvest in 1996.  In 1998, DGPC reported that its average cost of durum ground had unchanged from the previous year.

     Because of the intense competition in the pasta market, pasta makers cannot easily increase their product prices when their costs of production increase.  Because durum represents their primary input, pasta makers are significantly impacted when its price rises.  But the high level of competition in the industry also poses problems when durum prices are low, because it puts downward pressure on pasta prices.  DGPC asserted that intense price competition occurred in 1998 and 1999 as a result of low durum prices and excess industry capacity.  Price competition such as this puts downward pressure on pasta manufacturers’ profit margins.  Product price competition, particularly among branded products, has increased in recent years.  In 1998, many brand name pasta companies were facing increased competition from store brands and imports.  Consumers were beginning to recognize that the quality of store brands was similar to that of brand labels.  With a decreasing average price for brand name products and the resulting decrease in price differential between branded and private label items, DGPC is concerned that its private label market, one of its major strengths, will face more competition.

Company Performance

     In 1996, DGPC reported that its market share of the domestic dry pasta market was less than 3 percent.  By 1997, the company reported that it had achieved an average annual growth rate of 38 percent since it began operations, and was one of the five largest pasta producers in the U.S.  In 1998, DGPC, with the acquisition of Primo Piatto, Inc., reported that it had become one of the three largest producers in the country.

     Net revenues and pasta volumes have increased every year since the company began operations in 1994.  Volumes increased by 20 percent between 1996 and 1995, by 38 percent between 1997 and 1996, and by 61 percent between 1998 and 1997.

     Since it began operations, DGPC has made a concerted effort to maintain a diversified customer base in order to limit its reliance on any single customer.  In 1995 the company reported that two customers accounted for approximately 25 percent of total revenues, but by 1996 and throughout 1999, the cooperative reported that no single customer accounted for more than 10 percent of sales.  DGPC’s sales mix has trended towards higher retail sector sales.  By 1996, the company reported that the retail sector represented approximately 40 percent of its total pasta sales, while the foodservice sector accounted for 34 percent and the ingredient sector for 26 percent.   By 1998, the retail sector had accounted for 55 percent of DGPC’s total pasta sales and the foodservice and industrial sectors accounted for 25 and 20 percent, respectively.   In 1999, the breakdown was approximately 60 percent in retail and 20 percent each in the other two sectors.  Most sales are done by purchase orders, in which the company and customer do not enter into any long-term agreement. 

     DGPC has concentrated its marketing efforts in the private store brand label segment of the retail sector, whose customers include U.S. food chains such as Stop ‘n Shop.  In 1997, DGPC reported that its total store brand sales increased by 67 percent from the prior year.  By 1998, the cooperative reported that it had the industry’s leading market share in this market segment, estimated at 37 percent.  DGPC’s private store brand label business received an added boost when Borden announced in 1997 that it was exiting the private label market to focus on its branded product sales.   DGPC’s own brand labels include “Pasta Growers,” “Pasta Sanita,” and “Zia Briosa."  In 1997, these brands accounted for 8 percent of the cooperative’s total sales.  The "Pasta Growers" name has recently been changed to "Dakota Growers".

     DGPC’s foodservice sector sales have experienced steady growth.  This is largely due to the fact that the cooperative’s foodservice clients have benefited from the growing trend for people to dine away from home more often.  DGPG’s customers in this sector have included The Olive Garden and T.G.I. Friday’s restaurant chains.

     Within the industrial sector, DGPC estimates that approximately 75 percent of the needed pasta is manufactured by companies such as Kraft Foods for use in their own end products.  DGPC has therefore focused its marketing efforts on the remaining 25 percent of the sector.  The cooperative reported that sales within this market segment in 1997 had increased by 33 percent from the prior year, and in 1998 the number of customers had doubled.  The cooperative has attributed its performance in the industrial segment to the consistency and uniformity of its product’s quality, two characteristics needed for pasta to be used as a food ingredient.  DGPC’s pasta has been used as an ingredient in products such as Betty Crocker’s Hamburger Helper and Michelina’s frozen pasta dinners.

     In addition to dry pasta products, the company sells any excess semolina and durum wheat flour to other pasta manufacturers.  In recent years, however, this amount has been minimal; in 1999, less than one percent of the company’s net revenues came from these sales.  The cooperative also sells byproducts from its milling process, such as millfeed and second clear flour that is used for animal feed.

     The cooperative distributed its first patronage allocations in November 1995, which represented allocations for fiscal 1995 earnings.  DGPC reported that fiscal 1998 was the fourth consecutive year that it had paid nearly 70 percent of net earnings to its members in the form of patronage dividends.  A member's patronage is determined by the quantity of wheat he delivers to the cooperative.

Selected Financial Data:

                                              Fiscal Year Ended July 31st 
                                     (in thousands, except per share information) 
 

   1994    1995    1996   1997    1998
1999
Net revenues $20,008 $41,239 $50,494 $70,702 $119,621 $124,869
Patronage and 
non-patronage earnings
      (249)     1,394     2,579     6,890       9,359      4,416
Average equity shares outstanding     4,674     4,674     5,568     7,356       7,356      8,603
Basic earnings per average equity share     (0.05)       0.30       0.46       0.94         1.27        0.91
Patronage & other distributions per share      0.00       0.20       0.32       0.65         1.00        0.80
Total value of members' durum      5.95       5.80       6.52       6.74         6.64        n/a
Return on equity (percent)      (1.7)       10.4       13.9       25.1         27.9        n/a
Sources:  Dakota Growers Pasta Company 1998 Annual Report,
 Pre-Effective Amendment No. 2 to Form S-1 filing with the Securities & Exchange 
 Commission, November 19, 1998, 
and Dakota Growers Pasta Company 1999 Annual Report Form 10-K filing with the Securities & Exchange Commission
n/a Not available

Lessons Learned

     In its short history, DGPC has become a key player in the dry pasta industry.  The cooperative attributes several factors for its success, some of which are the following: dedicated leaders and professional management, timing, dedicated members, a stable supply of its primary input, aggressive pursuit of a particular market segment, and a diversified customer base.

     There is a commonly held view that one of the cooperative's primary strengths is its leaders and management.  Three of the men who were involved in the initial organization of the cooperative are still with it today: Jack Dalrymple, Eugene Nicholas, and John Rice, Jr.  all serve on DGPC's board of directors.  Mr. Dalrymple has remained as Chairman since the cooperative's inception.  Management has also remained; Tim Dodd, who joined the company in the beginning as its CEO, is now its President and General Manager.  He also serves as second vice chairman of the National Pasta Association, and is in line to become its chairman in 2001.  Gary Mackintosh, who joined in 1991 from American Italian Pasta as General Manager of Sales, is now its Executive Vice President - Sales and Marketing.  David Tressler began as the cooperative's Project Engineer and is now its Vice President - Operations (North Dakota).  The majority of DGPC's officers came from other established pasta manufacturers, in particular Borden Foods and American Italian Pasta.  DGPC has therefore had continuity in its leadership, as well as an experienced executive team.

     Mr. Dodd has also noted that the timing of DGPC’s entry into the pasta industry was opportune.  Growth in the demand for pasta was strong, and the level of competition in the industry was not as intense as it currently is.  He expressed his doubts that a project could succeed if it started out small today, just as DGPC did in 1994. 

     DGPC attributes the dedication of its members as part of its reason for success.  For instance, even though the agriculture sector was going through hard times, members still supported the cooperative in its 1998 stock offering and made that equity drive a success.  By doing so, Mr. Dodd has said that members displayed their confidence in the cooperative, and their belief in owning a value-added durum processing business because durum prices alone are not enough to cover production costs.

      DGPC also believes that its durum delivery arrangement with its members is a key strength of its operations.  A commitment of members to deliver durum to the cooperative allows it to have a stable supply base of its primary raw material.  This delivery arrangement also helps the cooperative to control the quality of its product, as the Durum Pool Agreement explicitly states the minimum standards that members' durum must meet. 

      The cooperative's leading market share in the retail store brand label pasta segment is also recognized as one of its key strengths, especially since it represents a growing market.  DGPC has aggressively pursued the private label market and believes that this sector is particularly important because consumers are beginning to recognize the comparable quality of store brand label pasta to that of brand names. 

     In addition to a leading market share in the retail private label segment, DGPC believes that maintaining a diversified customer base has allowed it to perform well.  Since its inception, DGPC's customer base has continuously expanded.  By 1998 the cooperative had over eighty customers, including such established companies as General Mills, Safeway, ConAgra, and Costco.  In that year, the cooperative’s top 10 customers accounted for 48 percent of its total sales, down from 56 percent the year before.   As previously mentioned, no individual customer accounts for greater than 10 percent of sales.  By maintaining a diversified client base, the cooperative has reduced its reliance on any particular customer.

     Finally, the cooperative asserts that it maintains state of the art processing facilities in both its North Dakota and Minnesota locations.  It uses advanced Italian pasta processing equipment that allows for efficiency in producing consistent, premium quality products.  This advanced technology allows the cooperative to achieve lower production costs than competitors who have older, less efficient facilities.

Prairie Pasta Producers

In January 2001, Dakota Growers Pasta Company signed a memorandum of understanding with Prairie Pasta Producers, a Canadian grower-owned cooperative.  To read more on this development, refer to DGPC's news release   (the release is included on DGPC's web site, www.dakotagrowers.com ).

Sources

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