Interview with Joe Tally, Chief Financial Officer 

Interviewer: Michael Boland

Narrator: The Department of Agricultural Economics, in the college of Agriculture at Kansas State University brings you ‘Case Studies in Agribusiness.’ A look inside today’s ever changing world of the business of agriculture.

Lori Oleen: Hi, I am Lori Oleen with the department of Agricultural Economics at Kansas State University. The United States sugar industry has been characterized by volatility in recent years. Joe Talley, Vice President of Finance for American Crystal Sugar Company in Moorhead, Minnesota recently sat down with Michael Boland with the department of Agriculture Economics at Kansas State to discuss the beet sugar industry. Lets hear what they had to say.

Michael Boland: We are here today with Joe Talley, who is the Chief Financial Officer for American Crystal Sugar Company. And we appreciate you coming down Joe to talk a little bit about American Crystal Sugar today. Joe, can you tell us a bit about your background, what’s your work experience been. How long you have been with the American Crystal Sugar Company? And a bit about where you grew up and so forth?

Joe Talley: Well North Dakota and Minnesota is basically my hometown territory. I was born in Northwestern North Dakota, moved to the Fargo Moorehead area when I was fairly young and graduated from high school from Morehead High, and then went to the University North Dakota in Grand Forks. Graduated with a degree in accounting, went into public accounting and spent twelve years with a public accounting firm in Fargo and then moved from there to working for American Crystal Sugar Company as part of the ProGold project. And after that, moved back to become Treasurer at American Crystal Sugar Company and spent time as Treasurer and Finance Director and currently moving into the Vice President Finance role.

Michael Boland: How is American Crystal Sugar Company formed? Can you tell us a bit about it’s history and it’s background?

Joe Talley: American Crystal is a very old company, originally incorporated over 100 years ago in New Jersey. At that point in time, the company was involved in sugar processing primarily from beets throughout the United States at various locations with the majority of the activities being located in Minnesota, Colorado and in California. In 1973 and in the years leading up to 1973, the farmers in the Red River Valley that grew sugar beets and delivered them to American Crystal Sugar Company, felt that the company was not reinvesting enough money into the plant assets that it owned and was essentially in a mode of milking the company so that they would not continue to process beets on a long-term basis in the Red River Valley. The farmers saw that and felt that it was a threat to their livelihood, and as a result, formed together to raise capital in the form of equity and debt capital and arrange a transaction where they were able to buy all of the outstanding stock from American Crystal Sugar Company, which at that time was a publicly traded company on the New York Stock Exchange. And essentially the transaction took it private. And the farmers then used that as an opportunity to gain control of the processing end of the process of turning sugar beets into sugar and obviously selling it throughout the United States.

Michael Boland: Your farmers own American Crystal Sugar Company. What is a typical farmer owner look like?

Joe Talley: We right now, within our shareholder group, have a real diversity of ownership. We are just undergoing probably the last stages of transition from the original owners. And that’s obviously a group that is older, very financially secure, very stable. Then we have probably the largest group of our shareholders are people that are in the, I would call it the forty to fifty year old demographic and they are also fairly financially stable, but they still have a medium-range outlook in terms of how they look at the company, and then we have obviously the next stage the younger farmers who are in the 25 to 35 type of range of age who are just getting started. Obviously they are not as financially stable so they have different needs. So within the shareholder group you have got different financial needs obviously. You also have different views of the future of the company in terms of how long of a time horizon they want to deal with. Within our shareholder group, the investment that the shareholders have in American Crystal Sugar Company is, probably in general terms, the largest single investment that they have off of their firm. And for some of the farmers, depending on the type of structure they have in the organization, it may be the single largest investment that they have period. So American Crystal is an investment or a company that is extremely important to their livelihood and most of our shareholders know that. And as a result they are very focused on the company’s activities and very involved with the company's activities all through the spectrum, beyond just dropping their sugar beets off at the gate in a typical producer-processor type of relationship. We have shareholders that are very involved with the company's governance, very involved in making the major decisions that the company has to make as it moves forward, and very active in annual meetings and shareholder meetings. We have a much closer relationship between our shareholders and the company than you would typically see.

Michael Boland: You have been very successful over this time period. What are some key factors that have contributed to that success?

Joe Talley: Well we have some core competencies that have enabled our company to be very successful. I think the Red River Valley is somewhat unique in the environmental characteristics that we have. We can raise a sugar beet crop without irrigation, which is something that’s somewhat unusual. We also have cold winters, which are ideal for storing sugar beets over a long period of time and that allows us to process the beets over a longer period of time, and therefore more fully utilize our factories than a lot of our competitors can. I think our cooperative structure has contributed greatly to our success. We have a very strong alignment between the producers and the processor level of the company. And what that does is that keeps the focus on producing a better crop, the crop that’s going to process more efficiently, generate more revenue, which flows to both the company and to the shareholders. And then at the same time, we recognize that because of some of the structural things that were going on back in 1973 when the current shareholders essentially bought the company, we were able to buy the company at a reasonable price. Because of the timing of the purchase transaction occurring essentially just before the market for sugar in the United States became deregulated for a short period of time, we were able to take advantage of some spikes in the price of sugar. And what that did is that allowed us to get ourselves on financially solid footing, whereas most top companies when their purchase go through a period where financially they are weak because of the stress, financial stress that comes with the change of ownership, so that allowed us to grow much more rapidly than we would have otherwise.

Michael Boland: Who are some of your customers? Who are some of the people that you market sugar to?

Joe Talley: We sell the bulk of our sugar to industrial users and we classify industrial users as people that are going to process that sugar further into another product before it is resold at the retail level. So that would include people that make confectionary products. You talk about MMR’s, Hershey's, Craft, those types of companies. We also sell a significant portion of our product into the Breakfast Cereal Market. So there you deal with General Mills, you deal with Kellogg’s. And  a small percentage of our product goes retail, which means it sold through grocery store chains into the general population for consumption at the retail level.

Michael Boland: You were looking at the Cornsweetener industry in the early 1990’s among other opportunities as a possible way to further enhance your business and possibly diversify. Can you talk to us about that whole issue of building ProGold and entering into the Cornsweetener industry?

Joe Talley: Back in the early 1990’s fructose was a growth business. Production capacity really it was only barely keeping up with consumption. So therefore it was an industry where the profit margins were fairly good. At the same time our shareholders were just getting into a situation where they were expanding corn production. Traditionally, corn had not been raised in our growing area, but through primarily the advent of improved short season corn varieties, corn was becoming a more important crop and corn works well as a rotation crop with sugar beets. So we took the next step and we looked at the market place and we saw that there were synergies in terms of the customer base between the customers that used sugar and the customers that used fructose. And on the beverage side, they were not large customers currently or I should say at that point in time, but they had previously been when the beverage industry was dominated by sugar. So we had familiarity with those people and actually as it turned out still has some of the same contacts. People that had done business with our company years before were still in positions, where they could influence the decision making process. So we looked at it and we felt we had a situation where shareholders were producing the crop and were very plainly unhappy with the price. It was a good rotation crop, but the prices were very poor for corn at that point in time, particularly in our geographic region where there was a very negative basis adjustment between local prizes and Chicago Board of Trade prices. So we felt that there was a profit opportunity. Our shareholders wanted us to get into that line of business and we felt on the sales end that there was going to be some level of synergy between our current existing customer base and our current distribution channels and the customers that would buy fructose. So that was the basic background of why we got into that industry and began the formation of ProGold in the eventual construction of high fructose corn syrup plant in Wahpeton, North Dakota.

Michael Boland: Can you tell about ProGold as an organizational structure? How much equity you had in that as an organization?

Joe Talley: ProGold is a limited liability company which from a practical prospective means it’s a partnership and it’s a partnership of American Crystal Sugar Company. We own 46% of that entity, Minn-Dak farmers co-operative, which is another sugar beet processor located in Red River Valley they own 5%. And the remaining, I hope I got that right -- the remaining 49% is owned by Golden Growers Co-operative, which was a cooperative formed specifically for the purpose of investing in ProGold and it was a cooperative comprised of corn producers located in the three state area of North Dakota, Minnesota, and South Dakota. So essentially, Progold is essentially a partnership of three entities that came together. We each contributed our proportionate share of a total of 104 million dollars of equity.

Michael Boland: So you decided to enter the sweetener industry, you got involve with HFCS. Tell us about what happened in 1996-97 as that plant begin to come online?

Joe Talley: The initial construction and shake out faces of the plant process went very well. Construction was completed ahead of schedule, and below the original construction budget. The plant came online in terms of production slightly early and produced high quality saleable product right out of the gate. So we were very happy up until that point. And just as we were moving into the marketplace in terms of delivering product, we saw a two-fold situation, which negatively impacted prices, negatively impacted profitability. On one-hand corn prizes spiked to very high levels, increased to a point where they are probably 2½ times the level that they had been at when we made the decision to begin construction. At the same time in the marketplace, not only was this plant coming online, which represented the market share of approximately 5% of the total market, but our competitors in the industry had also made the decision to bring some additional capacity online and did so at just about the same time. Because of the nature of their existing plant facilities, they were able to start construction later than we did, yet finish about the same time and get involved in the same selling season. As a result of that, we saw a situation where there was excess capacity in the system and naturally that caused prices to drop substantially. The fructose production is a very fixed cost intensive business and therefore when you have to make the incremental sales decision and if there is an excess supply of capacity in the market place, prices will drop very rapidly and that’s what happen. As a result, the plant was extremely unprofitable in its first year and our forecasts were that the market was not going to turn around very rapidly and we quickly saw that we were in danger of being one of those startup’s that became a statistic that doesn’t work and has to go through the bankruptcy process. As a result of that, we made the decision that we were not going to be financially able to support the losses of the plant that was going to incur. And went into the marketplace - essentially to the competitors - and said we need to strike some type of deal to get ourselves out of this business. We were able to strike a deal with Cargill whereby Cargill leases the plant from ProGold on an extended basis and for ProGold, that transaction was a lifesaver, to be very blunt about it. It’s a transaction where by Cargill is essentially paying lease payment that are high enough to cover ProGold’s costs, Progold therefore is a viable financial entity today and actually earning a small profit.

Michael Boland: You also got involved during this time period by expanding productions in terms of acres of sugar beets in the Red River Valley. And you also completed another desugarization plant. Can you tell us about those two assets as well?

Joe Talley: In the Red River Valley sugar beets are the most profitable crop and toward the north end of the valley, they are by far of the most profitable crop. And the primary factor in that is the lack of profitability of the alternative crops - which are primarily wheat barely, to some extent corn and soybeans and then a few other relatively minor corps in terms of acreage such as edible beans and potatoes. So when you are in a situation where sugar beets are clearly the most profitable crop that our shareholders can produce, they naturally want to produce more and squeeze out the less profitable crops from their rotation. Our shareholders clearly felt that way, they plainly express that to the company. And as a result, we felt that expansion was a good idea and that there was demand for increased sugar production acres within our growing area. We went out to the shareholders and explained that our plan would be to increase production capacity through two different means, one was an expansion of our daily processing capacity and another would be an increase in our storage assets which would allow us to process sugar beets over a longer period of time. And combined, they would significantly expand our production capacity and allow us to increase our production base by little over 61 thousand acres. As a result we sold shares of preferred stock to our shareholders.  In our company, we have a typical relationship of one preferred share allows and requires a shareholder to produce once acre of sugar beets. So the shareholder contributes money to the company in relationship to the volume of acres that they are going to produce. And as a result, the company has additional equity from which we can go forward, use that money, combine it with additional debt, and increase capacity. So we went through that process, raised additional equity, increased our production capacity, and that process, overall, has been fairly a successful one. We did encounter a little higher level of construction risk and an initial operation risk than we expected. The plant didn’t operate quite as well the first year and a half to two years as we had hoped that it would. But in the end, as we go through the look back process that we typically do with capital expenditures, that project has been a successful project for us. And one that has been very well received by our shareholders because it allows them to increase the number of acres on their farm that are producing sugar beets rather than producing a less profitable crop, and therefore increases, what we call on farm profits, which is the primary measure of financial performance that we use in our company.

Michael Boland: You used the expression that these different projects all helps stress your balance sheet during the late 1990’s. Can you tell us what you mean by that?

Joe Talley: We typically, and from a historical prospective have measured our balance sheet strength by looking at our debt-equity ratio. And we do that because a more typical measures such as liquidity measures really have never been a problem for us. We have never had a limit in terms of our access to capital. It just becomes a question of cost and how much risk you want to take in terms of your company’s ability to endure a down turn or a negative cycle in terms of pricing in the marketplace and therefore the profits we can deliver to our shareholders. So we moved through a situation where our debt-equity ratio, which at some points had been as low as .5, .6 to 1, moved up to a high point of somewhere in the range 1.1, 1.2 to 1, depending on the point in the year in which you want to measure. And as a result we felt the company was more at risk financially and less able to endure a negative cycle from an economic prospective. Since that time, we have been able to improve the balance sheet strength. And I would say that if you go back and look at the long term plans that we had in place at that time, it clearly showed that we expected our debt-equity ratio to peak at a certain point and then come down as we had a decrease need for capital expenditures. And as the proceeds from the stock sale that we executed in connection with our expansion came in, that stock sale was executed in a manner where our shareholders were allowed to pay for the stock over a period of years. And so that money trickled into our equity section over that period of time. And as a result, as we looked back at the time period and question, our financial forecasts for the company’s balance sheet turned out to be very, very accurate, in hindsight somewhat amazing how accurate that they were. And as a result, that’s lent a great deal of creditability to our company in terms of our relationship with our lenders and the public rating agencies, etc. the rate our debt. American Crystal is considered to be a company that is not only financially stable today, but is a company that has the ability to predict its financial performance with a fair degree of accuracy. And that’s something that becomes very important, because in today’s financial markets credibility within the finance function is a primary factor in your ability to executive feature transactions.

Michael Boland: You talked about the fact that after six months with ProGold you decided you better start looking at some options of what to do and ultimately you signed a long time lease with Cargill.  At what point you decide that something had to be done?

Joe Talley: That was a decision that essentially evolved as a result of our expectations for the marketplace and how fast the supply demand would balance and therefore prices were going to come back to a level, which would allow us to be financially viable.

As we went through the selling season in early 1997, we felt that we saw things in the marketplace that indicated to us that it was not a short-term decline in prices, but rather the declined in selling prices was going to stick around for an extended period of years. And as a result we looked at the financial results that we would be generating at that point and compared that to the ability of the three owners of ProGold to fund the losses that were going to occur. And to do that you have to look it to the balance sheets of those entities and the ability of those entities then to fund losses.

At American Crystal Sugar Company, we felt we had the ability to fund several years at least of our share of the losses but at the same time we did not really willing to do it because the structure of the organization was such that we were financially isolated and could have walked away from the deal if we wanted to. We looked at our partners and felt that particularly the Golden Growers Cooperative did not have the ability or the willingness to fund losses on an extended basis. As a result, the ProGold Board came together and said, ‘we need to figure out what our exit strategy is from this business at this point in time.’ And then we began the process of looking for an alternative to operating the plant ourselves. And all alternatives were considered from closing the plant to selling the plant, trying to renegotiate our debt arrangements and essentially go through the bankruptcy process and try for some forgiveness at that point, and leasing the plant to another operator was also considered. In the end, the leasing option, which was brought forward in our discussions with Cargill, turned out to be the option that was the most financially advantageous for ProGold and left us with the most options down the road. And at the end of the lease then we now have the option to decide if we want to sell the plant, we want to lease the plant to someone else, or we want to take over operation again and get back in the business because we view the future differently at that point of time.

Michael Boland: You talked about all the positive reasons for going into ProGold, the relationships you had with some previous buyers and so forth. What did you learned about competition in sweet industry, once you made the investment and started the actual plant construction and started to try to sell product in the market?

Joe Talley: I think there were a couple of things that we learned. Number one, you should never underestimate the competitive nature of other players in a marketplace. The competitors were much more willing to defend market share than they had been in the past. Because we didn’t jump into this completely blindly, we had watched another player enter that market. We had also watched the changes in the various market shares occur and from that we had attempted to gauge some level of the competitive nature of the industry. And I would say that, what happened was we underestimated the vigor with which they were try to keep a new player out of the market and therefore defend their own market share.

I think that as the year unfolded, another thing we learned is that often times in business there is a lack of information or a lack of knowledge between the senior management of a company and the sales force of a company or the operations end of a company. There were deals being done in the marketplace that I am quite certain senior management did not know were being executed. And I would say not by our company but by some of our competitors. And this is not information that we knew at that time but through subsequent discussions with the various players, we found out the desire to maintain market share was very, very intense, particularly at the lower levels of other organizations. And they did that very well, they defended their market share very well, but as a result, the buyers in the market place received a great advantage that to some extent they are still maintaining today. So the competitive aspect and the intensity with which the other players in the industry would compete with us was a factor that we underestimated very clearly.

I think we also overestimated the loyalty we had in our existing customer base through our sales organization United Sugar’s Corporation. We felt that there was a great deal of loyalty in that customer base and that we would get a fair amount of volume in terms of fructose sales as a result of that loyalty, and we found out, I think, that customers were very loyal as long as we are the lowest price guy in the market place. And you know that when you are the lowest price in the market place, you are generally not the most profitable.

Michael Boland: Joe, one of the things that strikes me about this ProGold decision was the impact that are charismatic and strong CEO can have on an organization and help dictate changes and help dictate a company’s strategy. Could you talk to us about how the CEO and the impact he had on this ProGold?

Joe Talley: Well as you indicated American Crystal was in a situation at that point in time where the President CEO was a person, who was very domineering, very charismatic, was very good at leading people to the decisions that he wanted made. And that’s not all bad, a CEO like that can do a lot of positive things for an organization, but you also have to recognize that in that type of the scenario, decisions often get made with as much emphasis on the emotional side of the decision-making process as is put on the analytical side of the decision-making process. And I think it’s also important to recognize that at that point in time that type of attitude played to the strength, I would say, of the attitudes of a great deal of our shareholders and our Board of Directors.

We have been a company that was very successful and there is no other way to describe it. We have done very well for our shareholders. And as a result, you get in a situation where people feel that they have more ability than probably they really have. And they feel that their company stronger than maybe it really is. And I think those were some factors that led to the decision to invest in the ProGold facility. We had an attitude I think as a company that we were very strong, very successful, and very capable in terms of our ability to forecast what is going to happen in the market place. And as a result, we made some decisions which were probably as much based on the ego of the players involved as they were based on the analytical and market-based information that came forward. And as a result, I think that’s something that is not atypical, but it is the situation that has to be closely monitored. Situations like that often occur in business and the results are often the same or worse than we encountered. People move forward based on their emotional or gut decision more so than on the analytical side of the decision-making process. And you have to be careful about letting one or even a small group of players have too much influence in your organization.

Michael Boland: And yet you looked at numerous alternatives before you went into a fructose. As I recall, you were looking at different uses of corn and other commodities that were grown in the Red River Valley by your company. So you did do some analytical analysis and in this case you almost got hit by the thousand-year flood, I mean the NAFTA, the fact of historically high corn prices - a number of things converged about the same time that they caused the industry to become much more volatile than it had been historically.

Joe Talley: I think your comments need to be considered for a fair analysis because the company did go through an extensive evaluation of alternatives. We were in a situation where our shareholders clearly wanted us to expand beyond sugar beets into the processing of other crops that are produced into the Red River Valley. And as a result, the company did go through a very long and very detailed analysis of a lot of alternatives. In the Red River Valley the land is very fertile - we produce potatoes, edible beans, wheat, corn, soybeans as well as variety of other lesser volume crops. And we looked at the opportunities for further processing most of those other crops. And the fructose industry, based on all the information that we were able to gather, clearly presented the most likely opportunity for us to be successful in the long run. It was the market that was growing the fastest and offered the most profit potential. And as you said, there was a situation where a number of factors converged that made that an unprofitable investment. I think that it’s important for the postmortem process to go on and look back at the decision, look at what things went right, what things went wrong, and why that happened. But most importantly we think its important to look back at the process you went through to make the decision. And are there changes that you would make to the process. And as a practical matter, we look back and we think the process we followed was very stable. It was very thorough and only contained what were whate we would term minor flaws. What I would say is that even though the process was fine, there were some pieces of the information that we misinterpreted and there was some information that we were not able to obtain. And both of those latter factors obviously put us in a situation where we made a decision, where in hindsight, it doesn’t look so good. But at the time, based on the information that was available at hand and the process we had gone through, the decision seemed very logical.

Michael Boland: Can you tell us about the desurgarization plant that you built? And what that whole process means to your organization?

Joe Talley: The molasses desurgarization product essentially takes molasses, which is a byproduct from processing sugar beets and further refines it to extract more sugar than is possible through the initial processing phase. Without the molasses desurgarization process, molasses is sold into two primary markets, one going into animal feed and in that area - primarily cattle feed as a product formulation device. The secondary use is to go into the yeast market from which it's used as a fermentation vehicle for producing yeast. In both of those markets it has a relatively low value. As you take that product and run it through molasses desurgarization plant, we are able to extract an additional amount of sugar because it's essentially an ion exclusion process that segregates the molecules of the molasses into the sugar component and the remaining components. The remaining components that are sold typically into the same place the molasses was sold into, that being the cattle feed formulation market. And we are able to move the other liquid that comes out of that process through the refining end of our factories and produce granulated sugar.

The molasses desurgarization plant was another investment alternative that we had in front of us and it was one that was going to be very high cost. As we looked at the company’s balance sheet and the situation we were in with having made a large investment in ProGold and looking forward and looking at the expansion of acreage that we were wanted to execute as well, we felt that the molasses desurgarization plant would be a real strain financially to execute. At the same time it clearly contributed substantially to our overall strategy of being one of the lowest cost providers of sugar in the marketplace. Producing molasses from sugar is much less expensive in terms of its final laid-in cost than any other alternative we had. So, we decided we wanted to go through with that, at the same we felt we had to protect our balance sheet strength in some form or fashion. So as we move forward, we setup a structure where we brought in an outside partner, setup another limited liability company that would go out and become its own self-sufficient operation with a certain equity contribution from us and from our partner and outside debt. As a result, we were essentially able to keep that asset and the related debt off of our balance sheet. Thereby, at least on the face of the financial statements, protecting our financial strength. And yet move forward with that transaction. We had to do somethings as part of that transaction which delay the benefits to our shareholders but put us in the situation where when the plant is paid off in full, which will be in a relatively short period of time, our shareholders will be able to get a great deal of cash flow out of that operation. So in hindsight, that’s an investment that’s working fairly well for us. We did again encounter some construction risk that we maybe didn’t plan adequately for - the construction period took a little bit longer than was expected and the plant didn’t operate quite as efficiently as first year as we had hoped. But at this point in time it’s operating as planned producing the volume of sugar that we expected that it would at the cost structure that we had hoped for. And so at this point in time, its performing well. We are also in a situation where, because its an off balance sheet finance vehicle, it has not degraded the condition of our balance sheet and we are able to move forward from a financially very strong position yet receive the benefits from a project like that. So that’s an investment that’s working out fairly well for our company.

Michael Boland: What are the biggest challenges that you see for your organization in the next three to five years?

Joe Talley: Well, the biggest challenge that we typically face in terms of outside risk is renewal of the farm bill. And we are right now; we are looking at the situation where the farm bill is going to be in existence through the 2007 crop. So we have some level of stability through that period of time, baring of course the situation where Congress decides that they want to look at the farm bill again prior to that date. So that is one major exterior or external risk that we think we have in a box at this point in time. Foreign trade issues are always a threat for sugar industry. The North American Free Trade Agreement (NAFTA) as it was originally signed was an agreement that provided certain levels of access to the United States market for the Mexican sugar producers. That agreement was subsequently amended through what's in laymen’s terms is called the side letter. And that essentially delayed the implementation of a common market for a certain period of time. The North American Free Trade Agreement also opened up the fructose market in Mexico to fructose from the United States. Now having said that that is what the agreements state, subsequent implementation of those agreements has not gone as they were written. Mexico has not allowed fructose to flow freely into their country. As a result of that, their domestic sugar industry has not rationalized as would have been originally expected under the terms of NAFTA. And we are now in a situation where because of Mexico's noncompliance, they are a real threat to the sugar market here in the United States. The unfortunate thing about trade agreements and particular the way the United Stated enforces those trade agreements, is that even if you win the appeals cases that go on, the damages done, as a practical matter, cannot be reversed. Mexico affectively delayed the introduction of fructose from the United States into their market. They were in multiple WTO and NAFTA hearings, proven that they what they were doing was not legal according to the terms of any of the agreements. And as a result of that, they were suppose to change their processes. What they have done is, repeatedly filed new cases, new tariffs to essentially delay the process and as a result they are going to get the benefits of the sugar segments of NAFTA without paying the price that they should have paid under the cornsweetener provisions of NAFTA. And are going to be in a situation where if that’s not changed, they will be have a very unfair advantage in the marketplace, due not only to the fact that they didn’t go through the rationalization process relative to fructose that our industry did, but also the subsidies that have been provided to their industry from their government are extremely large in relation to the size of their industry.

So the potential threat of essentially having to compete at American Crystal Sugar Company’s level with the government of Mexico puts us in a situation where obviously that’s a significant threat. They have the ability to raise funds through taxes that we don’t. So as we look forward, we have to deal with that and we have to come up with a solution. Our expectation is completely, at this time, that a solution will be found because there a whole lot of provisions of NAFTA, which are important to both countries and there are a large number of supporters of our domestic sugar industry in Congress, as a result, it naturally flows that there will be a solution that works best for everybody or perhaps if it doesn’t work best, its just the least painful alternative for all the players.

So that’s a major factor as we go forward. Those are factors that are somewhat outside the normal course of operating a business that everyone has to deal with. We see our competitors in the sugar industry getting better every year. So we have to get better, do it faster, smarter, cheaper than we did the year before. And at the same time we have to maintain customers satisfaction. We have a very sophisticated customer base for the majority of our product and they know how to bargain for prices. They know how to bargain for services. And they know how to make sure that all alternatives are always considered. So customers service is a priority and producing a quality product is definitely a priority. Those are issues that most businesses have to deal with and like anybody else we have to deal with those too.

Michael Boland: We are almost at a point now where virtually all of the sugar grown in United States through sugar beets is going to be owned by farmer owned cooperatives. What implications does that have for the future of the sugar beet industry?

Joe Talley: We think cooperative ownership of processing facilities, in general, is a good thing for the ag economy. From our perspective, if cooperatives own the processing facilities, we are essentially able to marry the interest of the farmers and the processors and bring them into alignment. And therefore when the people that are involved in agriculture have to sit down and attempt to formulate an agricultural policy, we are in alignment there is more unity within the industry and that makes it a lot easier and as a practical matter more efficient to develop agricultural policy, which is good for this country. At the same time there are some interesting dynamics that come into play when you have, essentially farmers owning the processing plants and having to make the decisions that come with that level of ownership and the trade-offs that come between investments on your farm and investment in your processing company. And that presents in challenges in terms of governance and in terms of capital allocation. But at the same time, overall, we think it is a good thing that producers move down the food chain so to speak and own processing capacity and move closer to the consumer. And therefore, have a larger control over the financial results that they generate in their businesses.

Michael Boland: Joe, American Crystal Sugar Company is somewhat unique in that is able to use sheds to store beats in the winter time. You have got your own seed companies. You can do some own breeding and so forth. What are some of those things that American Crystal Sugar Company does that's different than your competition and really makes you a unique organization?

Joe Talley: The cooperative structure really allows us some advantages that some of our competitors don’t have. It's much easier for us to create alignment between the people that grow sugar beets in our company, as the processor in the chain. We own our own seed company that produces a significant portion of the sugar beets seed that our shareholders use. Obviously there are other competitors in the market, but by owning that production capacity or that seed sales capacity, we are able to provide a lot of guidance to the marketplace about the type of product that our shareholders should be grow and pricing so that they can continue to be profitable on the farm. So that provides an advantage to us. We also control the varieties of seed that our shareholders can plant. We won't take delivery of any sugar beets that are not produced from seed that is not on our approved variety list. And we use that process to make sure that the seed that is being produced and sold to our shareholders is not only the seed that may work best on their farm, but it's also producing sugar beets that will work best in our processing facilities. And so we were able to manage the balance between what might sometimes otherwise be competing objectives. At the same time, due to our geographic location, we have winters that are longer and colder than most of our competitors. That provides a real advantage. Sugar beets are a vegetable and as soon as they are harvested, they begin to deteriorate. The sooner those sugar beets can be frozen, the sooner the deterioration can be stopped. And as a result, those beets can be stored longer, processed over a longer period of time. And what that does is that it allows us to operate our plant facilities over longer period of time. And therefore more efficiently use these assets. And when you are in capital-intensive business, the more days you can run your assets, the more profitable you are going to be. We are in a situation where we run a processing campaign that is typically 250 days long. Most of our competitors run processing campaigns that are in the range of 180 days to 210 days. That extended campaign allows us to use our assets much more efficiently and therefore generate more profits for our shareholders. So we are using the environmental conditions that we have in the Red River Valley to our advantage.

Michael Boland: Joe, we want to thank you today for coming to Kansas State University and visiting with us about American Crystal Sugar Company. You have got a wonderful company and it's been very successful over the past 20 to 25 years. We hope you have similar success in the future and hope that you and your company do well as we move into the 21st century.

Lori Oleen: American Crystal Sugar Company and the US Sugar Industry is a fascinating story. We hope you enjoyed this interview with Joe Talley, Vice President of Finance for American Crystal Sugar Company.