CHS Inc.

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CHS Inc.

5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
U.S.A.
Telephone: (651) 355-5151
Toll Free: (800) 232-3639
Fax: (651) 355-4554
Web site: http://www.chsinc.com

Public Company
Incorporated: 1998 as Cenex Harvest States Cooperatives
Employees: 8,000
Sales: $7.85 billion (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: CHSCP
NAIC: 311119 Other Animal Food Manufacturing; 311211 Flour Milling; 311991 Perishable Prepared Food Manufacturing; 311830 Tortilla Manufacturing; 311823 Dry Pasta Manufacturing; 311941 Mayonnaise, Dressing, and Other Prepared Sauce Manufacturing; 324110 Petroleum Refineries

CHS Inc. is a leading regional agricultural cooperative in the United States. Its 325,000 members are concentrated in the Midwest and Northwest. The co-op processes and sells grain and soybean products on behalf of its farmer members and sells them petroleum, fertilizer, and other farming inputs. CHS was formed when Cenex Inc. and Harvest States Cooperatives were combined in June 1998. By such moves as acquiring tortilla factories and developing close ties with pasta makers, the co-op has extended its involvement in finished consumer products in order to offset lower prices for agricultural commodities in the face of increasing global competition. The co-op has operations in 24 states.

Origins

CHS Inc. traces its origins to a number of individual cooperatives that operated in the Northwest and Midwest. The oldest of these organizations was North Pacific Grain Growers, Inc. (NPGG), a regional cooperative formed in Lewiston, Idaho, in December 1929. NPGG relocated to Portland, Oregon, in 1938. It would merge with another cooperative to form Harvest States Cooperatives in 1983.

Cenex was formed as Farmers Union Central Exchange on January 15, 1931 in St. Paul, Minnesota, by about two dozen local oil cooperatives. According to the Star-Tribune, the venture was founded with a $25,000 loan from the precursor to Harvest States Cooperatives. Farmers Union opened its own warehouse, oil blending plant, and headquarters in 1935.

The Farmers Union Grain Terminal Association (GTA) opened in St. Paul in June 1938 with the support of 121 local coops. GTA acquired Rush City, Minnesota-based Amber Milling Company in 1942, entering the wheat milling business. The next year, it acquired three elevator lines and some lumberyards.

Cenex was making investments in petroleum refining. In 1942, the co-op began marketing feed, seed and fertilizer. Cenex built a new headquarters building in St. Paul in 1957.

Expansion in the 1960s and 1970s

Cenex, GTA, and NPGG continued to expand in the 1960s and 1970s, which were a period of growth for the farming industry and agricultural cooperatives. Cenex expanded in the Pacific Northwest in 1971. The purchase of Northern Cooperative Services brought Cenex into transportation in 1972. "Where the customer is the company" became Cenex's motto in 1973. In 1976 and 1977, Cenex added 80 more local co-ops in Utah, Washington, Oregon, and Idaho. Sales to members exceeded $1 billion in 1979. At the time of its fiftieth anniversary in 1981, Cenex had 1,500 member co-ops in 15 states. That year, Cenex became a top ten propane supplier with the acquisition of Solar Gas.

Harvest States Formed 1983

Harvest States Cooperatives was formed in 1983 by the merger of GTA with NPGG. The 1980s saw a contraction of the farming industry in the United States, and the number of large co-ops fell due to bankruptcies and consolidation. In 1977, GTA had made an important acquisition, that of Wisconsinbased Holsum Foods. Its processed foods business would be an important cushion against falling grain prices in the coming years.

Cenex began the 1980s with earnings of $32 million a year. However, it posted a pretax profit of just $426,000 on sales of $1.4 billion in 1985, while Harvest States logged sales of $2.3 billion and a pretax profit of $12.1 million.

Petroleum accounted for two-thirds of Cenex's revenues in the mid-1980s. At the time, Land O'Lakes and Cenex were ranked two and three behind Harvest States Cooperatives in the Midwest region.

In 1986, Cenex teamed with Land O'Lakes to manage certain of their operations jointly. Cenex directed petroleum operations, Land O'Lakes managed feed and seed, and the two companies jointly managed their fertilizer and chemical businesses through a joint venture called Cenex/Land O'Lakes Ag Services.

Cenex faced some of its most difficult years in the mid-1980s as the price of its two main commodities, petroleum and fertilizer, fell. Cenex lost $12 million in 1986, resulting in layoffs and a scaling back of facilities in Cenex's 13-state territory.

Adding Value in the 1990s

Processed food accounted for $459 million of Harvest States' annual sales in fiscal 1991. The company was expanding in this area to make up for declining margins in the grain trading business, acquiring Great American Foods of Chicago, Lewis Albert & Sons of Omaha, and Private Brands of Philadelphia. Honeymead Products, which processed soybean oil for salad dressing, and the Amber Milling pasta unit were star performers of the processed foods division. Total annual revenues were about $3 billion a year in 1990 and 1991, when the co-op handled a record 740 million bushels of grain.

By the early 1990s, Cenex had seen a complete turnaround and was distributing record disbursements to its member cooperatives. It refunded $52.8 million based on fiscal 1992's $64 million profit on sales of $1.8 billion.

In the early 1990s, Cenex invested $80 million in an upgrade of a refinery in Laurel, Montana, which had been operating since 1930. By this time, Cenex served 1,800 local cooperatives in fifteen states. It supplied farmers with automotive accessories and tires as well as petroleum products and fertilizer. A subsidiary of Cenex acquired Rockford Gain Growers Inc., a small co-op based near Spokane, Washington, in 1994.

Harvest States formed a canola oilseed joint venture with Mitsubishi's SeedTec International unit in 1992. In the same year, it formed a pet and dairy food venture with Farmland Industries, using an existing extrusion feed mill Harvest States owned in Owatonna, Minnesota.

In 1992, Harvest States' Holsum Foods Division acquired Portland-based Gregg Foods. Holsum produced salad dressings and oils. In 1994, the division expanded into California with the purchase of Los Angeles-based Saffola Quality Foods.

Harvest States formed another joint venture with another Japanese-owned company, Mitsui & Company's Wilsey Foods Inc. unit, to acquire a Pennsylvania salad dressing plant from H.J. Heinz in 1995. In addition to expanding Harvest States' value-added foods business (it already owned a smaller dressings plant), the venture, eventually called Ventura Foods, LLC, was designed to increase the co-op's prospects for food sales in the Far East.

John Johnson became CEO of Harvest States in January 1995. He had joined the co-op 19 years earlier as a feed consultant. While the co-op's three previous CEOs had come from a grain merchandising background, Johnson's marketing experience was particularly important to Harvest States at that time as it embraced the value-added mantra, reported the Star Tribune. Johnson replaced CEO Allen D. Hanson, who retired at the end of 1994.

In the mid-1990s, Harvest States' member co-ops represented 125,000 farmers. Harvest States was building flour mills in Kenosha, Wisconsin; Houston, Texas; and Mount Pocono, Pennsylvania. In 1998, American Italian Pasta Company built a factory next to the Kenosha plant, which was originally constructed to supply bakery flour to commercial baking customers in the Chicago-Milwaukee area. Harvest States was also supplying Kraft with flour for its macaroni.

Harvest States invested $2.5 million in Minnesota-based tortilla producer Sparta Foods Inc., attaining an 18 percent stake in the company. The Star Tribune reported the tortilla market was growing between 10 and 15 percent a year, and the co-op supplied Sparta with its main ingredients: flour, corn and oil.

Company Perspectives:

At CHS, we believe success is not just measured by the numbers we report on the bottom line for a single year. Real success occurs over an extended time. Real success is about the values and vision held deep within our organization. Amid the business environment of the past year, CHS directors and management recognized the need to take a close look at what we do and how we do it. The results build confidence that this member-owned company operates at the highest standards every day and for the long term. What do we mean by that? We mean our relationships with customers, owners and employees, and business partners must be conducted with utmost trust and integrity. We are commixed to growing this system for its stakeholders with a deliberate and thoughtful approach that some may consider conservative, but one we believe will support the system's ability to add lasting value for its owners and customers. In all decisions, we must balance the competing needs of our current infrastructure with embracing appropriate opportunities for growth and providing our member-owners with sufficient return on their investment. And we must always focus on our first priority: maintaining the investment-grade financial health essential for the long-term success of this company.

United in 1998

CENEX, Inc. and Harvest States Cooperatives merged in June 1998, forming Cenex Harvest States Cooperatives (CHS). Combined, they had annual revenues of $10 billion. This was less than massive companies like Cargill; however, the size of the new company did help its member farmers deal with a market that was seeing more global competition. CHS aimed to build a vertically integrated organization that would provide farmers with supplies and consumers with value-added specialty foods.

In 1999, CHS officials held talks with Farmland Industries Inc., a cooperative based in Kansas City, about combining their grain-handling operations. This led to merger talks. They were roughly equal in size. Officials said a merger would allow the combined firms to save $100 million a year.

CHS shareholders barely failed to approve the merger by the required two-thirds majority of its 44,000 farmer-owners. Dissidents cited management incentives as a stumbling point. Other issues were a potential tax liability, which was resolved in Farmland's favor, and Farmland's dependence on the declining nitrogen market.

Partnering in 2000 and Beyond

CHS bought two Minnesota tortilla businesses in June 2000: Sparta Foods Inc. and Bec-Lin of Perham, Inc. Rodriguez Festive Foods of Fort Worth, Texas, was added in 2001. The Harvest States Foods division began building a new tortilla plant in Newton, North Carolina, in 2002.

The main ingredients in tortillas were wheat flour and vegetable oil derived from soybeans, both of which CHS already processed. The co-op saw such vertical integration as the best chance for its members to be profitable as agriculture markets consolidated and prices for a variety of commodities such as grain, livestock, petroleum, and flour reached record lows.

CHS partnered with Farmland and Land O'Lakes, Inc. in Agriliance, LLC, a joint venture created in 2000 to deliver agronomic inputs to farmers. At the same time, CHS was joining Cargill Inc. and DuPont in developing an e-commerce site for farmers called Rooster.com. The Wall Street Journal reported that analysts thought the agriculture business was an excellent candidate for online success, since geographically isolated farmers were facing fewer options for acquiring supplies in their local markets. Rooster.com was envisioned as a kind of online shopping mall, with the three founders as anchor tenants. They aimed to attract hundreds of other merchants. Farmers could sell crops as well as buy supplies at Rooster.com.

CHS revenues reached $7.85 billion in fiscal 2002. The co-op would return $56.5 million, or 45 percent of earnings, to its members.

CHS Cooperatives—the name had been streamlined in 2000—officially became known as CHS Inc. in mid-2003.

CHS continued to seek better efficiencies of scale by partnering with other companies. It teamed with Cargill, Inc. in a wheat milling joint venture called Horizon Milling, LLC.

Key Dates:

1929:: North Pacific Grain Growers (NPGG) is formed in Lewiston, Idaho.
1931:: Farmers Union Central Exchange is formed in St. Paul, Minnesota.
1938:: GTA is formed in St. Paul.
1942:: GTA acquires Amber Milling Company.
1983:: NPGG and GTA merge to form Harvest States Cooperatives.
1998:: Harvest States Cooperatives and Cenex, Inc. merge to form CHS Cooperatives.
2003:: CHS Cooperatives is officially renamed CHS Inc.

Principal Subsidiaries

CHS Holdings, Inc.; CHS-Agri Valley; CHS-Chinook; CHSConnell, Inc.; CHS-Crookston; CHS-Devils Lake; CHSEdgeley; CHS-Garrison; CHS-Glasgow; CHS-Grangeville, Inc.; CHS-Highmore; CHS-Jasper; CHS-Kalispell; CHS-Kindred; CHS-Lewistown; CHS-Madison; CHS-Philip; CHSRichey; CHS-Salol/Roseau; CHS-Sioux Falls; CHSStevensville; CHS-Tracey/Garvin; CoGrain (54.5%); Cooperative Business International, Inc.; Country Hedging, Inc.; Front Range Pipeline LLC; HSC-Edmore; HSC-Herman/Norcross; HSC-Minot, N.D.; Ventura Foods, LLC (50%).