new case 1:12-cv-12016-rwz document 61 filed 05/16/13 page 1 … · 2013. 5. 21. · case...

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

Barry K. Winters d/b/a BKW Farms, Stacy Preston Winters, Paul D. Sogn and Rachelle D. Sogn d/b/a Wintersogn Farm, LLC, Michael A. Webb, Rickard W. Jackson, Jackson Farms, Inc., James M. Schaer, Julie A Schaer, Scott R. Vierck, Fred P. Bussman, John L. Meyer, John L. Meyer Cranberries, Inc., Christopher M. Bussman, Deanna M. Bussman, Charles V. Goldsworthy and Timothy R. Goldsworthy d/b/a ThunderLake-Tomahawk Cranberries, Inc. and H.E. Querry, Inc. on behalf of themselves and all others similarly situated as a class,

Plaintiffs,

v. Ocean Spray Cranberries, Inc., an agricultural cooperative, and Ocean Spray Brands, LLC, a limited liability company,

Defendants.

Civil Action No. 1:12-cv-12016-RWZ Expedited Treatment Requested

OCEAN SPRAY CRANBERRIES, INC. AND OCEAN SPRAY BRANDS, LLC’S EMERGENCY MOTION TO STAY RESPONSE TO PLAINTIFFS’

MOTION FOR PARTIAL SUMMARY JUDGMENT PENDING A DECIS ION ON DEFENDANTS’ MOTION TO DISMISS

Ocean Spray Cranberries, Inc. and Ocean Spray Brands, LLC (collectively “Ocean

Spray”) respectfully move the Court to stay their response to plaintiffs’ Motion for Partial

Case 1:12-cv-12016-RWZ Document 61 Filed 05/16/13 of 13

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Summary Judgment (Dckt. No. 57) until this Court decides Ocean Spray’s Motion to Dismiss

(Dckt. No. 47). Ocean Spray’s motion attacks the legal sufficiency of each of plaintiffs’ thirteen

counts, and, if granted, would end this case. This Court should reject out of hand plaintiffs’

attempt to obtain relief on a complaint that does not state a claim.

Plaintiffs’ counsel has refused Ocean Spray’s request to stay the response to plaintiffs’

summary judgment motion pending the Court’s decision on defendants’ motion to dismiss,

necessitating this emergency motion.

INTRODUCTION

Plaintiffs’ Motion for Partial Summary Judgment is based on their completely misguided

view that the fact that Ocean Spray operates two pools of cranberries that provide different

returns to the growers in those pools means that Ocean Spray does not satisfy the operational

requirements for a Capper-Volstead Act exempt association and they should win part of this case

right now. They argue that, since the fact of two pools that have different returns is undisputed,

it means that Ocean Spray has simultaneously “violated” the Capper-Volstead Act, cannot assert

the Capper-Volstead Act as an affirmative defense to their antitrust claims, and automatically

renders Ocean Spray liable for an unfair trade practice under Chapter 93A.1

There are many problems with their position that the two pool structure is evil, not the

least of which is that cooperatives all over the United States operate different pools that provide

different returns to their growers, a structure that the United States Department of Agriculture’s

Rural Business Cooperative Service recommends as an efficient method for marketing a

1 Although stating without elaboration that “deciding this threshold issue now will streamline what would otherwise become a lengthy and expensive case” (Mot. at 2), they concede that “plaintiffs’ antitrust claims will remain following resolution of this motion,” (Mem. at 1), a concession that puts the lie to their claim that a decision on their motion will shorten the proceedings in any way.


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cooperative’s products. See Rural Dev. Admin., U.S. Dep’t of Agric., Cooperative Pooling

Operations – Rural Business Cooperative Service Research Report 168, at 2-3 (“Cooperative

marketing pools use variable payment schedules and marketing agreements” and provide many

advantages to those cooperatives who employ multiple pools), available at

http://www.rurdev.usda.gov/rbs/pub/rr168.pdf (attached as Exhibit A); see also Rural Dev.

Admin., U.S. Dep’t of Agric., Understanding Cooperatives: The Structure of Cooperatives,

Cooperative Information Report 45 Section 3, (Oct. 1994), available at

http://www.rurdev.usda.gov/rbs/pub/CIR%2045_3.pdf (attached as Exhibit B)

But the real problem with plaintiffs’ gambit is that they have to have a viable legal claim

in the first place that could be decided solely on the basis of the existence of the two pool

structure. Ocean Spray has moved to dismiss plaintiffs’ complaint on the ground that it does not

state a single cognizable claim. Dckt. 47. And Ocean Spray has even sought sanctions for

plaintiffs’ maintenance of several of those claims, since they fail Rule 11. Dckt. 45. Plaintiffs’

opposition to both motions offered nothing that establishes that any of those claims are legally

viable, let alone that plaintiffs are entitled to judgment on any of them. See Dckt. 55-1 at 1-2, 6-

12.

The Court should rule on the pending motion to dismiss (and dismiss plaintiffs’ third

amended complaint in its entirety) before committing judicial resources to this case, and

requiring Ocean Spray to continue to expend time and resources to address plaintiffs’ premature

and meritless motion for summary judgment. Ocean Spray respectfully requests a stay of any

response to plaintiffs’ motion until the Court renders its decision on the motion to dismiss.


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ARGUMENT

I. PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT IS MEANINGLESS BECAUSE THEY HAVE NOT STATED ANY LEGALL Y COGNIZABLE CLAIMS IN THE COMPLAINT

Apparently believing that the best defense is an aggressive offense, plaintiffs ask the

Court to grant judgment in their favor on Counts I, II and III of their complaint, before the Court

even determines whether plaintiffs’ complaint has stated a claim as to any of those counts. But

Ocean Spray has moved to dismiss these claims because they are not legally cognizable, even if

everything that plaintiffs allege in their complaint is true (and of course it is not). See Dckts. 47

and 48.

Here is why plaintiffs’ motion is so misguided. Counts I and II allege that Ocean Spray

has violated the Capper-Volstead Act (Count I) and that that violation is also an unfair trade

practice (Count II). But, as Ocean Spray shows in its motion to dismiss, those counts fail

because (as plaintiffs implicitly admit in the summary judgment motion), the Capper-Volstead

Act is an affirmative defense to a violation of the antitrust laws, and not a statute that a

cooperative can “violate.” So, even if plaintiffs could establish as a matter of undisputed fact

that Ocean Spray does not operate the cooperative for “the mutual benefit of its members as

producers” (and they will never be able to do that), that would be meaningless in the context of

Counts I and II because there is no legally cognizable claim that would be proved by that fact.2

Similarly, Count III alleges that Ocean Spray has “violated” a 55 year old consent decree

between its predecessor and the Antitrust Division of the United States Department of Justice by

supposedly engaging in “discriminatory pricing” between its members under the two pool

2 Count II also does not state a claim under Chapter 93A because plaintiffs do not allege how Ocean Spray’s supposed failure to satisfy the Capper-Volstead Act’s conditions for immunity is unfair or deceptive. Dckt. 48 at 6.


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structure. But again, even if plaintiffs could establish as a matter of undisputed fact that the

different returns that A Pool and B Pool members receive constitutes “[d]iscriminating among

members in the administration of any pooling of cranberries” under Section F(2) of the Consent

Decree (and they will never be able to do that either), that fact would not entitle them to

judgment on Count III because they have absolutely no legal right to enforce the Consent

Decree. As Ocean Spray showed in its motion to dismiss, Section 5(a) of the Clayton Act, 15

U.S.C. § 16, bars plaintiffs from using the Consent Decree for any purpose, including attempting

to enforce it (and, since they were not parties to the decree, they lack standing to enforce it in any

event).3 See Dckt. 48 at 6-7; Dckt. 55 at 10-12.

Finally, plaintiffs’ attempt to obtain summary judgment on Ocean Spray’s yet-to-be pled

affirmative defense that it is entitled to immunity under the Capper-Volstead Act suffers from the

same problem. Plaintiffs ask the Court for an order “stating that Ocean Spray is not entitled to

Capper-Volstead immunity because its pricing structure does not operate for the ‘mutual benefit’

of the cooperative’s members.” Dckt. 57 at 4. But Ocean Spray’s immunity is not an issue that

the Court must address unless plaintiffs have stated a claim for a violation of the antitrust laws.

See, e.g., Allen v. Dairy Farmers of Am., Inc., 748 F. Supp. 2d 323, 344 (D. Vt. 2010)

(dismissing plaintiffs’ price fixing claim against two defendants on the ground that Copperweld

barred the claim,4 without addressing whether the Capper-Volstead Act also protected the

defendants from liability for the same claim).

3 Even if plaintiffs could base a Chapter 93A claim on the Consent Decree, plaintiffs do not allege how the alleged violation of the decree (as opposed to the conduct that plaintiffs allege) itself violates 93A. 4 There, a cooperative of dairy farmers (“DFA”) and its agent (“DMS”) moved to dismiss the plaintiffs’ claim that they had conspired to fix milk prices on two grounds: first, they argued that they could not conspire with each other as a matter of law under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). Alternatively, they argued that, even if they


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Here, plaintiffs simply have no antitrust claim. Their Section 1 claim is based on an

alleged conspiracy between Ocean Spray and Ocean Spray Brands and, supposedly, its Board

members and management, that is flatly barred by Copperweld v. Independence Tube Corp., 467

U.S. 752 (1984); see also Dckt. 48 at 9-10; Dckt. 55 at 4-6. Their Section 2 claim fails to allege

either exclusionary conduct or antitrust injury, both of which are required elements of their

claim. See Dckt. 48 at 13-16; Dckt. 55 at 1-4. Thus, even if plaintiffs could establish as a matter

of undisputed fact that Ocean Spray does not operate the cooperative for the “mutual benefit of

its members as producers” (and again, they will not be able to do that), plaintiffs do not have a

claim that makes that finding relevant to anything.

II. IF THE COURT CONCLUDES THAT PLAINTIFFS HAVE STATED A COGNIZABLE CLAIM, OCEAN SPRAY WILL PRESENT SUBSTANT IAL EVIDENCE THAT WILL DEFEAT PLAINTIFFS’ MOTION FOR PA RTIAL SUMMARY JUDGMENT

Plaintiffs’ assertion that the Court should jump right over the legal viability of their

complaint and decide their motion for summary judgment now because it only presents “a

question of law as applied to a single undisputed fact” (Dckt. 57 at 1) is simply wrong. Plaintiffs

attach ten single spaced pages of so-called “undisputed” facts that they concede are “material” to

the determination of their motion. These “facts,” for the most part, are either grossly wrong or

completely insufficient to support the legal determinations that plaintiffs ask the Court to make.

could conspire, that DFA’s creation of DMS as its marketing agent was protected activity under the Capper-Volstead Act. See Defendants’ Memorandum in Support of Motion to Dismiss, Allen v. Dairy Famers of Am., Inc., 2010 WL 1814496, at *9-11 (D. Vt. Feb. 8, 2010). The court dismissed the plaintiffs’ claim that DFA and DMS conspired with each other on Copperweld grounds without considering whether the Capper-Volstead Act applied to that claim. Allen, 748 F. Supp. 2d at 344. As in Allen, Ocean Spray raised Capper-Volstead Act immunity in their motion to dismiss because, to the extent that the Court determines that plaintiffs have stated an antitrust claim under the Sherman Act, their complaint fails to allege facts that suggest that Capper-Volstead immunity does not apply. But the Court first must decide whether plaintiffs have stated an antitrust claim.


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And those “facts” are not the only ones that will be in issue on plaintiffs’ summary

judgment motion. Plaintiffs are attacking the structural viability of the Ocean Spray cooperative

in an enterprise threatening lawsuit. Ocean Spray is entitled to have all the time that it needs to

amass and present all of the evidence in its possession, or that it can acquire from third parties, to

defend itself from this attack, and requiring it to do so in a hurry up process to suit plaintiffs’

tactical objectives would compromise Ocean Spray’s right to a fair adjudication on the merits.

A brief set of examples demonstrates that opposing this motion is not an overnight task.

For example, if the Court concludes that a plaintiff may assert a cause of action for a “violation”

of the Capper-Volstead Act, Ocean Spray will present substantial affirmative evidence that it

operates the cooperative for the “mutual benefit of its members as producers” because the two

pool structure provides benefits to all members of the cooperative. Ocean Spray will prove that

it set up the B Pool in 2006 in response to requests from its growers that they have a separate

way to participate in the commodity market for cranberry concentrate. At that time, cranberries

were in short supply, so the returns for commodity concentrate exceeded the returns on

concentrate used in the branded business. The B Pool permitted Ocean Spray’s growers to

diversify, participating in both the branded market and in the commodity market for concentrate.

It also gave Ocean Spray a way to attract new growers into the cooperative and to offer the

potential opportunity to new B Pool growers to participate in the A Pool through its policy that

the cooperative will accept new acreage into the A Pool from B Pool acreage.

B Pool members enjoy benefits from the cooperative that are in direct proportion to their

contribution to it. The B Pool members contribute far less capital to the cooperative than do A

pool members. When the commodity price of cranberries exceeds the branded price (as it did in

2007, see Third Amended Complaint, Chart 1), the B Pool members obtain a far greater return


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on their lesser investment that A Pool members did on their larger one. The reverse is true when

there is a cranberry surplus. B Pool members also share in the benefits of the cooperative in

terms of access to Ocean Spray’s Agricultural Science Support, potential access to the A Pool,

and a guaranteed home for their fruit even in times of oversupply.

Each pool has a separate marketing agreement that spells out, among other things, the

different capital requirements for each pool, and the different markets for which the fruit is

destined. Growers voluntarily choose the acreage that they will commit to the pools when they

join them. Members of both pools benefit from the cooperative’s investments in the advertising

and promotion of cranberries around the world, expanding the market for the cranberry products

that both the A Pool and B Pool growers sell. Other benefits include the Board’s decisions on

investments in new plants and equipment, and entry into new markets. All of these facts will

establish that the cooperative has operated for the mutual benefit of all of its members in both

pools.

Similarly, if the Court decides that plaintiffs have a right to enforce the Consent Decree,

Ocean Spray will prove that it has not violated the Consent Decree because Ocean Spray’s B

Pool structure does not involve “discriminating among members in the administration of any

pooling of cranberries”. For example, Ocean Spray will present evidence that it does not

discriminate among the members in the administration of each pool; members share in the

returns of each pool in direct and equal proportion to the fruit that they contribute to it.

Finally, if the Court determines that plaintiffs can state a claim under 93A for an unfair

trade practice, Ocean Spray will present substantial evidence that “bifurcation” of the

cooperative is a common practice among cooperatives, one that the federal government has

recognized has enormous advantages for the cooperatives such as risk sharing, improved


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marketing, increased seller market power to resist powerful customers, quality control and

economies of scale. See Cooperative Pooling Operations, Ex. A at 2-3. For example, the

National Grape Cooperative Association & Welch Foods Inc. operate through two pools, the

Eastern Pool and Western Pool, that operate (as here) under separate marketing agreements. The

calendar year 2007 crop of grapes earned $214 per ton for members of the Eastern Pool and $186

per ton for the members of the Western Pool. See Welch’s 2009 Annual Report at 19-20,

available at http://www.welchsinternational.com/resources/annual.shtml (attached as Exhibit C).

Evidence that other cooperatives utilize similar structures to the Ocean Spray structure is

significant because a court must consider a trade practice in the context of practices in the

relevant commercial marketplace in determining whether it violates 93A. See Ahern v. Scholz,

85 F.3d 774, 798-800 (1st Cir. 1996) (noting that Ch. 93A is governed by “the standard of the

commercial marketplace,” and reversing 93A liability because the conduct in question “did not

rise to the [requisite] level of rascality” (internal quotation marks and citations omitted)). Thus,

participation in an industry standard practice, such as bifurcation of the cooperative via pooling,

militates against 93A liability here. See, e.g., James L. Miniter Ins. Agency v. Ohio Indem. Co.,

112 F.3d 1240, 1251 (1st Cir. 1997) (affirming summary judgment denying 93A claim where

defendant adhered to “industry custom”); Govoni & Sons Constr. Co. v. Mechanics Bank, 51

Mass. App. Ct. 35, 51 (2001) (no violation of Ch. 93A even though bank’s procedures were

negligent and improper because they “were widely utilized by similar banks in the area”).

To defeat this supposedly narrow motion, Ocean Spray is entitled to discovery from

many third parties. For example, Ocean Spray will require discovery from other cooperatives to

prove that the pooling structure is common; discovery of other processors and handlers

concerning their sales in the commodity concentrate market to prove the benefits of participation


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in that market when supply and demand conditions are different than they are today; and

discovery from plaintiffs and other growers to prove up the benefits that participation in the

cooperative provides.

In sum, Ocean Spray is entitled to mount a full factual defense to plaintiffs’ attack on its

existence, and plaintiffs have given the Court no reason to preclude Ocean Spray from doing so.

III. PLAINTIFFS’ EFFORT TO INDUCE THE COURT TO ENTER JUD GMENT ABOUT IMPORTANT ASPECTS OF THEIR CASE WITHOUT DECID ING ITS LEGAL VIABILITY IS INCONSISTENT WITH SUPREME COURT PRECEDENT AND THE ORDERLY PROCESS THAT THE FEDERAL RULES ENVISION

Plaintiffs’ attempt to short circuit the way cases are normally managed is not a

justification for the Court to jump over the law that says that plaintiffs have to state a claim

before they can win a case. In Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the

Supreme Court held that, to satisfy Rule 8 of the Federal Rules of Civil Procedure, a complaint

must state a claim to relief that is plausible on its face. Id. at 555. The rationale for the Court’s

decision was that discovery in antitrust cases is so expensive that “when the allegations in a

complaint, however true, could not raise a claim of entitlement to relief, ‘this basic deficiency

should . . . be exposed at the point of minimum expenditure of time and money by the parties and

the court.’” Id. at 558 (quoting 5 Charles Alan Wright & Arthur R. Miller, Federal Practice &

Procedure § 1216, at 233-34). Thus, the Court’s decision emphasized the importance of

determining whether a plaintiff has sufficiently stated a claim to relief at the outset of a case,

before allowing the plaintiff to burden other parties and the court with the expense of litigation.

Twombly dealt with the sufficiency of a complaint’s factual allegations, and Ocean

Spray’s motion here relates to the complaint’s legal sufficiency, i.e., even assuming that

everything that plaintiffs allege is true, they still have not stated a legal claim. But Twombly’s

rationale underscores the importance of using Rule 12(b)(6) to test a complaint’s legal


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sufficiency at the outset of a case. See also Peck v. Hoff, 660 F.2d 371, 374 (8th Cir. 1981)

(describing motions to dismiss as the “usual and proper method of testing the legal sufficiency of

[a] complaint”). A 12(b)(6) motion allows the court “to eliminate actions that are fatally flawed

in their legal premise and are destined to fail, and thus spare litigants the burdens of unnecessary

pretrial and trial activity.” Christopher & Banks Corp. v. Dillards, Inc., 805 F. Supp. 2d 693,

695 (S.D. Iowa Aug. 3, 2011) (quotation and citation omitted).

This Court has the inherent power to stay proceedings to ensure the efficient management

of the cases before it. Clinton v. Jones, 520 U.S. 681, 706–07 (1997) (“The District Court has

broad discretion to stay proceedings as an incident to its power to control its own docket.”);

Marquis v. Fed. Deposit Ins. Corp., 965 F.2d 1148, 1154-55 (1st Cir. 1992) (“It is beyond cavil

that, absent a statute or rule to the contrary, federal district courts possess the inherent power to

stay pending litigation when the efficacious management of court dockets reasonably requires

such intervention.”). Courts routinely exercise that authority to stay a party’s response to an

early summary judgment motion while a dispositive motion to dismiss is pending.

For example, in Hamrick v. Farmers Alliance Mutual Insurance Co., 2004 WL 723649

(D. Kan. Mar. 11, 2004), the plaintiff filed a motion for summary judgment while the

defendant’s motion to dismiss was pending. The court stayed the defendant’s response to the

plaintiff’s motion until after a ruling on its motion to dismiss, explaining that the defendant’s

motion to dismiss raised a question that was “a threshold determination that must be made prior

to determination of the merits of plaintiff’s claims.” Id. at *1. Thus, the court concluded that it

was “in the interest of judicial economy to defer briefing and determination of plaintiff’s

summary judgment motion” until after the Court decided the pending motion to dismiss. Id.


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To the same effect are Viracon, Inc. v. J&L Curtain Wall LLC, 2013 WL 269006, at *1

(D. Minn. Jan. 24, 2013) (briefing on summary judgment stayed pending resolution of motion to

dismiss); Crotty v. Mass. Parole Board, 2012 WL 3628904, at *1 (D. Mass. Feb. 23, 2012)

(same); Hamilton v. United States, 2011 WL 1298578, at *1 (D. Me. Mar. 31, 2011) (same); Hill

v. Chalanor, 2008 WL 907363, at *1 n.1 (S.D.N.Y. March 31, 2008) (same); Ramirez v. Meli,

2005 WL 984365, at *1 (W.D. Wis. Apr. 27, 2005) (same). These cases confirm that the Court

should reject plaintiffs’ premature attempt for a hurry-up strike and first consider whether they

have any right to be in court at all before addressing how the case should go forward.

CONCLUSION

For all of the reasons stated above, Ocean Spray Cranberries, Inc. and Ocean Spray

Brands LLC respectfully request that the Court stay their response to plaintiffs’ motion for

partial summary judgment until the Court has ruled on the pending motion to dismiss.

Dated: May 16, 2013 Respectfully submitted,

/s/ Margaret M. Zwisler

Margaret M. Zwisler (admitted pro hac vice) Marguerite M. Sullivan (admitted pro hac vice) Jennifer L. Giordano (B.B.O.# 650537) LATHAM & WATKINS LLP 555 Eleventh Street, NW Suite 1000 Washington, DC 20004 Telephone: 202-637-1092 Facsimile: 202-637-2201 Email: [email protected] Alfred C. Pfeiffer, Jr. (admitted pro hac vice) LATHAM & WATKINS LLP 505 Montgomery Street, Suite 2000 San Francisco, CA 94111-6538 Telephone: (415) 391-0600 Facsimile: (415) 395-8095 Email: [email protected] Attorneys for Ocean Spray Cranberries, Inc. and Ocean Spray Brands, LLC


LOCAL RULE 7.1 CERTIFICATION

Pursuant to Local Rule 7.1(a)(2), I hereby certify that prior to the filing of this Motion,

counsel for the parties conferred and attempted in good faith to resolve and/or narrow the issues

raised by this Motion, but were not successful.

/s/ Margaret M. Zwisler Margaret M. Zwisler

CERTIFICATE OF SERVICE

I hereby certify that this document filed through the ECF system will be sent

electronically to the registered participants as identified on the Notice of Electronic Filing (NEF)

and paper copies will be sent to those indicated as non-registered participants on May 16, 2013.

/s/ Margaret M. Zwisler Margaret M. Zwisler


EXHIBIT A

Case 1:12-cv-12016-RWZ Document 61-1 Filed 05/16/13 Page 1 of 21

United StatesDepartment ofAgriculture

Rural Business-CooperativeService

RBS ResearchReport 166


Pooling is a marketing practice distinct to cooperatives and refers to a particularmethod by which a cooperative markets the crops of its producer-members.Commodity pools are most prevalent in the fruit, vegetable, nut, rice, and dairy indus-tries. This report will discuss the pooling practices of fruit and vegetable cooperativesas a marketing alternative for their producer-members. The intent of this report is toclarify cooperative pooling practices and to present the structural, managerial, finan-cial, and coordination aspects of a successful commodity pooling program.

Keywords: Cooperative, pooling, fruit, vegetables, marketing

Cooperative Pooling Operations

Andrew A. JermolowiczRural Business-Cooperative Service

RBS Research Report 168

May 1999

Price: Domestic-$5; Foreign-f550


Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TypesofMarketPools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AdvantagesofPooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RiskSharing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Improved Marketing .......................................... .3

Increased Market Power ....................................... .3

Quality Control .............................................. .3

EconomiesofScale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Potential Barriers to Successful Pooling ............................... .3

Delayed Payments ............................................3

Loss of Individuality ...........................................4

Less Flexibility ...............................................4

ManagerialExpertise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketing Agreements .............................................4

Pooling Illustration ................................................5

Pooling Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Determining Market Value .......................................

Determining Costs and Returns ................................. .6

Sample Pool Calculations .......................................6

Single Versus Multiple Product Pool .................................. .8

The Question of Subsidization ......................................11

Cooperative Examples ............................................12

Ocean Spray Cranberries, Inc.: ................................ .13

National Grape Co-operative Association, Inc. /WelchFoods Inc., A Cooperative: .....................................13

Citrus Marketing: ............................................14

Summary.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..15

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..16

i


Cooperative Pooling Operations

Andrew A. Jermolowicz

Pooling is a marketing practice distinctive tocooperatives and refers to a particular method bywhich a cooperative markets the crops of its producer-members. Commodity pools are most prevalent in thefruit, vegetable, nut, rice, and dairy industries and to alesser extent, cotton and grain industries. This reportfocuses on the pooling practices of fruit and vegetablecooperatives as a marketing alternative for producer-members. Cooperative pooling practices are discussedalong with structural, managerial, financial, and coor-dination aspects of a successful commodity poolingprogram.

Introduction

Pooling is a unique business agreement andrefers to the combination of production from manyproducers under the marketing skills of a specializedstaff. Cooperative marketing pools use variable pay-ment schedules and marketing agreements. Successfulpooling operations require considerable coordinationbetween the cooperative and producers regarding theproduction, harvesting, and delivery of commodities.

Each producer-participant is paid the averageprice received for all product of like quality deliveredduring the duration of the pool. A member’s share ofthe pool proceeds is determined by the volume ofproduct contributed and may be adjusted for eitherpremiums or discounts related to quality differences.Pool operating costs are allocated among producersand deducted from their returns prior to settlement.The typical pool: provides an advance payment at, ornear, the time of product delivery; makes progresspayments as pool contents are sold; and-makes a finalpayment to participants once the pool is liquidatedand all costs are reconciled.

Pooling is a distinct cooperative method of mar-keting with one major difference from either outrightpurchase or selling on individual accounts where theidentity of each individual grower is preserved andthe grower is paid exactly what was received in themarket. In a pool, the producer turns over decision-making authority to the cooperative and no longercontrols when or for what price the crop is sold.However, the increased volume of member productfrom commingling production increases the coopera-tive’s leverage and impact in the market and mitigatesrisk.

A cooperative operating a commodity pool for itsmembers must address a number of rather complexissues. For example, when developing a pooling plan,the cooperative must decide on the number of pools touse and how each will be separated regarding com-modity type and grade, the production areas to beincluded,, and how long it will remain open. Carefulconsideration must be given to each of these factorsand analyzed for their effect on the operation of thecooperative. The pooling program must be fair to allmembers by providing the appropriate differentials forvariations in product quality or timing of delivery,ensuring equitable distribution of marketing risks, andassigning equitable allocation of expenses. To somedegree, the success of a pooling program depends onhow effective the cooperative communicates theimportance of forgoing short-term gains for long-termstability to its members.

vpes of Market PoolsAlthough a number of alternative structures exist

within each, there are basically two classes of marketpools, seasonal and contract. With the more commonseasonal pool, the cooperative’s management staff isresponsible for all marketing decisions. Member pro-

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duction is commingled and marketed. Producersreceive payment based on the average price the coop-erative obtains from joint marketing. Althoughreferred to as seasonal, there is no set length of timethis class of pools can remain open. Given the widearray of horticultural crops marketed by cooperativesand the fact that no two associations face exactly thesame circumstances, the length of time a pool remainsopen varies from one cooperative to another. Twofactors that may influence the duration of a seasonalpool are the type of commodity being marketed andthe geographic area being served. Certain high-value,highly perishable, or commodities subject to extremeprice variability may require daily or weekly pools inorder to efficiently and equitably market a crop.Commodities capable of being stored, processed, oravailable in ample supply throughout the year usuallyrequire longer pooling periods, some up to a year oreven longer.

Geographic differences among producer-mem-bers also affects how a pooling program is structured.For example, a cooperative may have producers in twoor more distinct producing regions of the country. Inthis case, there will likely be differences in crop vari-eties being produced, yields, grading standards, orother quality related factors. Consequently, the cooper-ative may operate separate pools to capture these dif-ferences among members.

Contract pools are quite different because theproducer retains some control over when and for howmuch his produce is sold. Contract pools can bedefined as either a call or purchase pool. In a call pool,the cooperative serves as a broker. The producer ineffect has final authority for when his produce is soldby setting a minimum or target price level. In the pur-chase pool, the return a producer receives for his cropis determined by when he delivers to the cooperative.Typically, a purchase pool will pay the member theprevailing cash market price on the day the producewas delivered. Producers participating in a contractpool retain some control over the marketing of theirproduce, but do not benefit from the cooperative’smarketing expertise or the risk-sharing aspect foundwith the seasonal pool.

Commodity pools may cover single or multiplecommodities. The single product pool deals with eachcommodity or grade separately such as used in a citrusmarketing cooperative. Participants in this pool arepaid the average price received for their specific com-modity during the marketing period. A multiproductpool uses a single accounting system to manage allcommodities and grades delivered to the cooperative.

In this case, producers are paid the average pricereceived for all products marketed during the poolperiod. Multiproduct pools are more common withcooperatives serving vegetable producers becausethere is a much greater likelihood that the associationwill be handling a mix of products.

Occasionally, a cooperative may be required toestablish a special pool to deal with abnormal market-ing situations. For example, in the case of severe freezeor hail damage, the cooperative may establish a newpool to handle these affected commodities. A specialpool would be necessary if the damage to the producewas significant enough that it would not qualify forinclusion in any existing pool. Consequently, this pro-duce would be commingled and marketed separatelyto avoid reducing the average earnings of the regularpool.

Advantages of Pooling

R/Sk Sh8f\ng: One of the key advantages ofparticipating in a commodity pool is sharing of risk.Fruit and vegetable crops are very weather-sensitivecommodities and prone to wide swings in suppliesand prices. Income from these crops can vary widelyfrom year to year. Producers deliver product over aspecified period of time and receive an average price,so many of the cyclical fluctuations in price or changesin consumer demand will be spread, and thusminimized, among all producers in the pool.

This is especially true for crops destined for thefresh market. Prices for many fresh market commodi-ties tend to be higher during the early and later stagesof the marketing season when product supply is light.With pooling, higher-than-average returns offsetlower-than-average returns. As a result, producerscontributing products to a pool are not necessarilypenalized merely for the timing of their deliveries.Participants in a multiproduct pool are likely toreceive additional risk sharing since although theymay specialize in a particular crop, they benefit fromthe overall diversification of the cooperative’s market-ing plan.

Members who produce high-value crops, or con-sistently deliver product of above average quality, mayfeel that they are subsidizing marginal producers.However, producers must realize that in any givenyear a particular crop could have either a good or badfinancial performance. When costs and returns areallocated over a number of commodities, those per-

2


forming well will support those doing less favorably.Over time, the averaging of costs levelsthe periodicups and downs in the market.

/mpfowed Marketing: In a market pool thecooperative maintains a staff of marketing specialiststo handle the sale of member produce. The primaryobjective of the cooperative’s sales staff is to maximizethe returns to the producer. By having someknowledge of the quantity and timing of memberdeliveries, the cooperative gains considerableflexibility in planning. The cooperative can alsoexercise some control over when harvesting anddelivery occur.

This control enables the cooperative to maintain aconsistent supply. Many produce buyers emphasizethe importance of working with a reliable, consistentsupplier. Having knowledge of the needs of bothbuyer and seller enables the cooperative to coordinatea more orderly flow of product to the market and buildrelationships with buyers. Also, by having the timeand resources to constantly monitor the market, thecooperative can capitalize on any new market oppor-tunities.

increased Market Power: Many fruit andvegetable markets are characterized by a large numberof small (volume) producers selling to a small numberof large buyers. It is unlikely a single producer wouldhave enough volume to take advantage of marketopportunities available to large-scale sellers.

However, by pooling, the volume of producemarketed can be significant enough to enhance bar-gaining position and possibly result in improvedprices. Pooling allows the cooperative to approach themarket as a single seller of a large quantity of product.Buyers are frequently more willing to negotiate with asingle seller than with a large number of relativelysmall sellers, especially when the buyer is seeking aparticular type or quality of product. Commingling acommodity under a single seller may also increasecompetition among buyers needing the raw product ifthe pool can amass enough volume to become a prima-ry supplier.

QU8/iry control: Producing and marketing aquality product is essential to compete in fruit andvegetable markets. Being able to consistently provide aproduct with the size, color, or taste characteristicsdemanded by buyers greatly enhances a seller’s abilityto market a crop. A pooling program enables thecooperative to become involved in the production

process at an early stage and address product qualityissues before they become a problem. Cooperatives canuse marketing agreements to establish qualitystandards.

Typically, a marketing agreement between theproducer and the cooperative will outline specifica-tions for plant varieties, fertilizer and agriculturalchemical applications, irrigation, or other production-related activities. By having some control over the pro-duction, harvesting, and handling of a crop, the coop-erative can minimize costly errors. Further, by havingmembers deliver produce to a central source for grad-ing, sorting, and sizing, the cooperative can developand maintain a standard pack that appeals to prospec-tive buyers. A cooperative pool that outlines andenforces strict quality standards discourages producer-members from delivering inferior quality produce.Establishing a reputation for quality and consistencygreatly enhances the cooperative’s ability to competein the marketplace.

Econom/es Of &&3/e: Frequently, individualgrowers lack sufficient physical volume to efficientlyoperate a grading or packing facility, a processingoperation, or distribution system. Marketing through acooperative pooling program lowers the per-unit costof most post-harvest activities because certainexpenses can be spread out over a greater volume ofproduct. Larger scale operations may also draw morefavorable prices when purchasing supplies ornegotiating harvesting, hauling, or othertransportation rates.

Most individual producers cannot economicallyjustify investing in state-of-the-art technology. Forexample, the cost of controlled atmosphere storage isprohibitive for an individual apple grower, but can beobtained when the investment cost is allocated amongproducer-members of a cooperative. Marketingthrough a cooperative pool may enable producers tobecome involved in certain value-added processingactivities.

Potential Barriers to Successful Pooling

Delayed Payments: By design, members ofa marketing pool do not receive full payment for theircrop until that pool is closed. Depending on the lengthof the pool and the size of the advance and progresspayments, some producers may encounter temporarycash-flow problems. However, pool managers investconsiderable time in establishing a base price andpayment schedule that is sufficient for most producers.

3


LOSS of Individuality: Producersparticipating in a marketing pool must relinquishcontrol over the marketing decisions associated withtheir crop. Producers who enjoy negotiating deals,have good marketing skills, or enjoy taking risks mayfind this component of pooling restrictive. Given thedynamic nature of most produce markets, producersmay at times earn a higher price than the pool price byselling on an individual basis. But, by relinquishingindividual marketing decisions to the cooperative,marketing pools become financially beneficial toproducers over the long term.

L&?S F/eXibi//ty: Most pooling programsfocus on long-term versus short-term marketingstrategies. A cooperative having knowledge of thetiming, quantity, and quality of a crop will likelybenefit from the ability to negotiate early or long-termsales agreements with buyers. Although an earlycommitment will promote stable prices and productmovement, the association may no longer be able toreact to sudden market changes. However, the benefitsto producers from long-term market stability generallyoutweigh any sacrifice of short-term profiteering.

Manager-la/ Expertise: Cooperative poolingis an effective marketing method for manycommodities, but it can also be a complicated programto establish and maintain. A successful poolingprogram requires a knowledgeable and skilledmanagement team as well as the willingness of boththe association and the producer-members to investthe time and money necessary to develop an effectivemarketing plan. Clear communication between thecooperative and its members regarding the marketingphilosophy of the pool must be maintained. Some ofthe elements inherent with pooling such as long-termcommitments, delayed payment schedules, and capitalretains could lead to discontented members. Thecooperative must be ready to address the inevitableconflict between individual members and the long-term stability of the association’s marketing program.The key is a well-conceived cooperative membereducation program.

Marketing AgreementsFor an effective marketing program, the coopera-

tive needs to have long-term support and commitmentfrom the membership. Knowing it has a long-termcommitment from its members to deliver high-qualityproducts, the cooperative realizes a much stronger

sales and bargaining position in the marketplace. Thisimproved marketing position allows the cooperative toprovide a greater degree of market stability.

Consequently, the use of marketing agreementsor contracts becomes a critical component of any effec-tive pooling program. A marketing agreement is awritten, legal document between the cooperative andthe producer-member. The agreement states the rights,duties, and responsibilities of both parties regardingthe sale of produce through the cooperative. Growersagree to deliver all or part of their production to thecooperative. In turn, the cooperative agrees to sell themember’s produce for the best price possible and toreturn payment to the grower. Marketing agreementsare used to ensure that both the member and the coop-erative comply with their obligations.

A marketing agreement is a planning tool thatallows the cooperative to coordinate the activitiesinvolved in producing and marketing a crop. Controlover the quantity and timing of delivery enables thecooperative to precisely schedule processing or mar-keting operations. Further, control over productionand harvesting allows for more efficient use of packingand processing capacity which, in turn, generally low-ers operating costs.

The marketing agreement also provides a legalbasis for penalizing nonperformance. For example, arecurring problem for many marketing associations isthat producers abandon the cooperative during yearswhen production is short and prices are high. If thepercentage of members who bypass the cooperative ishigh enough, the cooperative may have difficultymeeting market commitments or covering operatingcosts. The agreement clearly states contractually thatmembers are expected to abide by terms and condi-tions set forth in the agreement and that disciplinarymeasures (i.e., penalties, such as liquidated damagesor expulsion from the association) will be takenagainst offending parties.

Some of the more common provisions containedin a marketing contract between the grower memberand the cooperative include:

l the amount of product a member must marketthrough the cooperative,

l acknowledgment of the grower-members oblig-ation to deliver to the cooperative and thecooperative’s obligation to market and/orprocess the crop,

l the length of time the contract is in force,l authorizing capital retains (equity capital),l defining the penalties for noncompliance,l quality and quantity standards, and

4


l payment methods including a description ofpool operations.

Pooling IllustrationGiven the variety of commodities produced, their

use, and where they are produced, it is neither possiblenor practical to have one standard pooling policy forevery cooperative. Cooperative pooling programsmeet specific needs of producer-members. However, intheory, and in practice, cooperative pooling programswill share certain common elements, albeit to varyingdegrees. The following section will present a general-ized overview of a cooperative pooling program.

Poo/lng Po//cY: A cooperative’s poolingpolicy is typically outlined in the association’sgoverning documents. In general, the board ofdirectors establishes the pooling period(s) and the typeof pool (duration) appropriate for a particularcommodity. The board also establishes a measure forcrediting deliveries such as the number of units (boxes,bushels, etc.) or weight (physical volume).

In most cases, payment to members is based onthe number of units of like quality produce deliveredto the same pool, less all charges and expenses associ-ated with operating the pool. In the event of a naturaldisaster, the board may authorize closing a pool ofproduct already delivered and establish a new pool forthe remainder of the delivery season. An examplewould be a citrus marketing cooperative having to pre-maturely close a pool due to a major freeze.

Although pool accounting can become quite com-plex, it basically requires that a separate account beestablished for each commodity pool the associationoperates. Records indicate the amount of produce eachmember delivers to the pool. Direct and indirect costsassociated with operating the pool are allocated andthen collected from sale proceeds of that pool. Theboard establishes and approves the charges associatedwith operating the pool. Revenues from the sale ofproduct are credited to a pool as they are received bythe cooperative. After deducting assessments, net poolreturns are credited to each member’s account on thebasis of how many units they delivered to the pool.

Determining Market Value: One of themost important and sometimes difficult aspect ofoperating a commodity pool is determining the valueof the raw products delivered. Establishing a realisticraw product price, or economic value, is importantbecause the initial payments (advances) to growers areoften based on this estimate. Furthermore, if the raw

product is further processed or becomes a componentof a product mix, the cooperative needs to have anaccurate estimate of the raw product’s value relative tothe value of the final product. In this case, having anestimate of the raw product’s final value will enablethe cooperative to maintain an equitable paymentschedule in cases where there are significantdifferences in the quality of products delivered.

The calculation of an economic value for manyfruit and vegetable commodities has become increas-ingly difficult due to the rise in concentration amongbuyers. Establishing an accurate value for memberproduce is an integral component of the cooperative’ssales, pricing, inventory, and accounting programs.Mergers and consolidations among industry partici-pants, particularly in the processed products sector,have resulted in fewer buyers and transactions, and inmany cases, smaller cash markets. Consequently, reli-able market and price information may be scarce ornonexistent.

In cases where a cooperative handles a singlecommodity and no established raw product value (i.e.cash market) is available, proceeds to growers are cal-culated by subtracting marketing and operating costsfrom the gross revenue generated from selling mem-ber’s products. Under these circumstances, the cooper-ative’s costs are the determinant of the value of theraw product. This valuation is sufficient only as longas the value of the raw product is greater than, orequal to, any available alternative. If the cooperative’sprice was consistently lower than a competitor’s, pro-ducer-members may not remain loyal very long.

Consequently, using an established raw productvalue to compare performance relative to alternativemarkets is a common practice. When available, a cashmarket price is often used as the basis for measuring acooperative’s performance. For example, if the returnto growers marketing through the cooperative was$lO/unit, and the cash market price was known to be$9/unit, the cooperative would have returned 111 per-cent of market value (lo/9 x 100) or 11 percent morethan the alternative market. The ability to measureperformance against the market or a competitor ismost beneficial to the cooperative that consistentlyobtains a better-than-average return for its members.

Cooperative pools do not typically pay the entireraw product value to growers at the time of delivery,so having an established value at the time membersdeliver product enables the cooperative to determinean advance payment level that is consistent with theprevailing market conditions. The level of the advancepayment compared with the final price varies among

5


cooperatives. Most try to make an advance paymentsufficiently large enough to help Rroducer-membersavoid cash-flow problems. The amount of the advancepayment is usually set by the board of directors. Thepayment can be either a fixed-dollar amount or a pre-determined percentage of the raw product value.There are a number of ways for the cooperative toestablish a raw product value.

If a cooperative has extensive experience with aparticular crop and market, and has maintaineddetailed records, it may rely on its own historical aver-age for setting the raw product price. An alternativewould be to use commodity exchange prices.

In many case the negotiated prices that resultfrom collective bargaining between producers andprocessors serve as the established market value. Inthe fruit and vegetable industry, a number of coopera-tive bargaining associations represent producer inter-ests during negotiations with processors. Bargainingnegotiations are conducted before the production sea-son begins. Typically, the negotiated contract willdefine the price level for various product grades inaddition to specifying any adjustments for quality-related factors or timing of delivery.

The negotiated price reflects the anticipated sup-ply and demand conditions as well as current invento-ries. When both parties negotiate in good faith, theirefforts generally result in an accurate and equitableraw product price. Consequently, a number of poolingcooperatives use this negotiated price as their base, ormarket value, when determining the level of initialpayments to members.

In markets characterized by the presence of adominant firm, the price it quotes often becomes theindustry price. The dominant firm announces a pricethat it is willing to pay at the beginning of the season,and given its status in the marketplace, the remainingfirms generally accept this price rather than enter apotentially costly bidding war. Although the dominantfirm’s price may be arrived at in less than competitivefashion, it may reflect what the market is willing topay for a particular commodity within the dominantfirm’s area of operation.

The commercial market value (CMV) refers to thebase price used to value commodities delivered byproducer-members. Many cooperatives appoint a com-mittee of either directors or producer-members todetermine the CMV. The commodity committeeattempts to establish a CMV competitive with pricespaid by other commercial processors handling similarcrops in the same production area. Frequently, theCMV is represented as a weighted average. If the

cooperative is handling multiple commodities, it ismost likely that it will establish a separate CMV foreach crop.

In practice, a cooperative using the CMV usuallyadvances 50 percent of the CMV when the raw productis delivered. An interim payment of about 25 percentwill be made some time after delivery, but before theend of the pooling season. The timing and size of theinterim payment will vary and will most likely berelated to the pool’s duration and the cooperative’s liq-uidity. A final payment is made when the pool isclosed or the fiscal year ends.

Determining Costs and Returns:Regardless of the type or duration of commodity poolbeing operated, a cooperative must develop anaccounting system that accurately allocates theexpenses associated with marketing a particular crop.The cooperative must record the direct and indirectcosts of operating the marketing pool and determine ifcosts should be allocated on a flat per-unit basis or inproportion to the crops value or volume. Directexpenses such as labor, materials, transportation,storage, and financing are assigned to each particularpool. Indirect, or overhead, costs typically includegeneral expenses, taxes, insurance, and administrativeexpenses and are similarly allocated. The methods ofdetermining and allocating costs will vary from onecooperative to another and will be heavily influencedby the nature of the commodity being delivered and itsintended final use.

sampie POOi Caicuiations: This exampleshows how a cooperative may operate a poolingprogram. In this case, deliveries of three appleproducers (A, B, and Cl will be used to illustrate howpool payments are calculated and distributed.

Each grower produces the same (one) variety ofapples which are then sorted into three separategrades. For this example, the highest quality produceis designated Grade 1. Apples not meeting that specifi-cation are designated either Grade 2 or Grade 3depending on the degree to which they differ from theGrade 1 standard. The cooperative operates a separatepool for each grade delivered by members eventhough only one commodity is being marketed.

Consequently, this case can be viewed as anexample of a multi-product pool because each grade ofapples will be earning proceeds independently. Thisexample also assumes that the cooperative will operatea seasonal pool, and that the entire crop will be sold

6


during the current production season ,fi.e., no invento-ry is carried over to the following year).

Tables 1 and 2 show how the cooperative wouldaccount for raw product deliveries from members inaddition to how returns to growers would be calculat-ed. In this example, the cooperative has establishedseparate accounts for each producer and, after the pro-duce has been sorted and graded, recorded the appro-priate number of bushels of each particular gradedelivered. Next, the cooperative combines or poolsthe individual quantities of like-grade produce. In thiscase, the cooperative’s three commodity pools arecomprised of a total of 17,000 bushels, 14,000 bushels,and 13,000 bushels of Grades 1,2, and 3, respectively(Table 1).

In this example, member produce was marketed(sold) at an average price of !§8/bushel for Grade 1,$7/bushel for Grade 2, and $6/bushel for Grade 3.

Multiplying the average price received by the totalnumber of bushels of each particular grade deliveredyields the cooperative’s gross revenue from apple sales.

Historical data and pre-season evaluations ofmarket conditions by the cooperative’s commoditycommittee resulted in the establishment of raw prod-uct values (costs) of !&BO/bu. for Grade 1, !$4.55/bu.for Grade 2, and !§3.60/bu. for Grade 3 apples. As pre-viously noted, the value or cost of the raw product isan essential component of a pooling program and isfrequently used as the basis for making initial pay-ments to growers for the commodities delivered.

Additionally, the cooperative has determined theper bushel direct costs associated with the specificlabor, handling, and packaging for each grade. In thisexample, per bushel direct costs were established at $1for Grade 1, $0.90 for Grade 2, and $0.75 for Grade 3.Differences in the amount of direct costs being charged

Table I- Example of pool cakuiatlons

Raw Product Receipts From Members (bu.)

Grade 1 Grade 2 Grade 3 Total

Producer A 2,000 4,000 8,000 14,000Producer 6 9,000 3,000 1,000 13,000Producer C 6,000 7,000 4,000 17,000

Total 17,000 14,000 13,000 44,000

Cooperative Sales 17,000@$s

Gross Revenue $136,000

Cost/Value of Raw Product $31,600Per Unit $4.80Direct Costs (labor, packing, etc.) $17,000

Per Unit $1 .oo

Gross Margin $37,400Overhead and Administrative Costs $5,000Pool Proceeds $32,400

Per Unit $1.91

Return to Growers $114,000Per Unit $6.71Percent of Proceeds 140

14,000@$7

$98,000

$63,700

$4.55

$12,600

$0.90

$21,700

$5,000

$16,700

$1.19

$80,400

$5.74

126

13,000@6$78,000$46,800

33.60$9,750

$0.75$21,450

$5,000$16,450

$1.27$63,250

$4.87135

!$312,000$192,100

$39,350

$80,550$15,000$65,550

$257,650

Retain ( $0.2O/bu.) $3,400 $2,800 $2,600 $8,800

Cash DistributionPer Unit

$110,600$6.51

$77,600

$5.54

$60,65034.67

$248,850

7


to the different grades of product reflect the additionalexpenses incurred in preparing higher grade fruit forsale. Subtracting the cost of the raw product anddirect costs from the gross revenue figure yields thegross margin from apple sales.

A fixed overhead and administrative cost of$5,000 is assessed to each of the three pools.Subtracting these cost from the gross revenue figureresults in the proceeds or profit earned by the pool. Inthis example, fruit in the Grade 1 pool earned $32,400($1.91/bu.), Grade 2 fruit earned $16,700 ($l.l9/bu.),and the Grade 3 pool earned $16,450 ($1.27/bu.).

Total returns to growers are calculated by addingpool proceeds and the value of the raw product. Table1 shows returns to growers to be $6.71/bu. for Grade 1fruit, $5.74/bu. for Grade 2, and !$4.87/bu. for Grade 3.A measure of how a cooperative pool participant faredcompared with the market can be determined bydividing the grower return by the value of the rawproduct. Again, this is a reasonable measure of perfor-mance because the value of the raw product shouldreflect what the cash market would have paid for theproduce. In this example, each of the three poolsreturned earnings above the cash market value.Cooperative members received returns that were 40,26, and 35 percent higher for Grade 1,2, and 3 fruit,respectively.

The final stage of the pools accounting process isdeducting retained earnings. Earnings retained fromgrower returns (profits) are used to finance the cooper-ative and ensure its ability to continue to function as aviable market outlet for member-growers. The cooper-ative’s retain policy will be outlined in the associa-tion’s governing documents. The amount of earningsretained by the cooperative is determined by the boardand will vary depending on the size and nature of thecooperative’s business . In this example, the coopera-tive retains SO.20 for each bushel of apples marketed.Subtracting the retain from the grower’s return resultsin the total cash distribution that will be made to thegrower for the product delivered.

Table 2 extends the current example by illustrat-ing a payment schedule the cooperative might use todistribute crop payments and pool earnings to grower-members. Again, individual grower accounts havebeen maintained to accurately record the volume ofeach particular grade delivered by each member.

A cooperative commodity pool typically usessome form of delayed schedule to allocate returns backto growers. Generally, producers receive an advancepayment at the time they deliver their produce to thecooperative. The advance payment is often a percentage

of the raw product value established by the cooperative.In this case, producers receive 50 percent of the rawproduct value for each particular grade they deliver.

As sales of product are completed and manage-ment can better assess market conditions, the coopera-tive generally authorizes an interim payment to pro-ducers. Size of the payment generally reflects thesuccess of sales. In this example, the cooperative paysthe remaining 50 percent of the raw product value.After all produce in the pool has been sold and allcosts have been accounted for and allocated, the poolis considered closed. The cooperative calculates pro-ceeds (profit) earned by each individual pool.

Each of the three pools in this example earnedpositive proceeds. After deducting $0.20/bu. forretained earnings, the cooperative can make a finalpayment to producers. In this example, producersreceived a final payment of $1.71/bu., $0.99/bt.r., and$l.O7/bu. for Grade 1,2, and 3 apples, respectively.

Although in this simplified example, all threepools yielded a profit, a pool could show a loss. Thatpotential reenforces the need for the cooperative toestablish an accurate raw product value. It becomes anintegral component of the pooling program used toaccount for a crop’s percentage (value) of the finishedproduct and to establish the grower payment schedule.Although the cooperative has issued an initial pay-ment at the time of delivery, it retains some discretionon the timing and amount of interim payments. In ayear when market prices do not meet pre-seasonexpectations, the cooperative’s marketing staff mayconsider this when determining the amount of the nextpayment to growers. Interim payment decisions mustconsider the cash-flow needs of the producer-memberas well as the cooperative. Consequently, it may be inthe best interests of both that no, or smaller, interimpayments be made.

Single Pool Versus Multiple Product PoolThe pooling and marketing of a single commodi-

ty is a relatively straight-forward operation. Althoughmany producers and cooperatives specialize in theproduction and marketing of one particular commodi-ty, many other associations handle a variety of differ-ent crops grown by producer-members.

There are obvious economic incentives (scaleeconomies, risk reduction, etc.) for a cooperative tomarket or process an array of crops. This is especiallytrue in California where it is quite common for a farm-ing operation to be producing several fruit and veg-etable crops. However, handling a broad product mix

8


Tab@ 2- ~rowef pSyNWnt schedule

Product Receipts From Members by Quantity (bushels) and Grade

Grade 1 Grade 2 Grade 3 Total

Producer A 2,000 4,000Producer B 9,000 3,000Producer C 8,000 7,000

Total 17,000 14,000

Payment Schedule by GW (per bushel)Advance Paymentinterim PaymentFinal Payment

Average Pool Price

Individual Member PaymentaProducer A Advance Payments

interim Payments

Final Payments

Producer BCapital RetainAdvance Payments

interim Payments

Final Payments

Producer CCapital RetainAdvance Payments

interim Payments

Final Payments

Capital Retain

$2.40 $2.30 $1.80

2.40 2.25 1.80

1.71 .99 1.07

$8.51 $5.54 $4.87

2,000@$2.40 + 4,000@$2.30 + 8,000@$1.80$4,800 + $9,200 + $14,4002,000@$2.40 + 4,000@$2.25 + 8,000@$1.80$4,800 + $9,000 + $14,4002,000@$1.71 + 4,000@$0.99 + 8,008@$1.0793,412 + 93,972 + $8,520

Total Cash Payments

14,000 Q 90.209,000@$2.40 + 3,000@$2.30 + 1 ,000@$1.80$21,800 + 98,900 + $1,8009,000@$2.40 + 3,000@$2.25 + 1 ,000@$1.80$21,800 + $8,750 + $1,8009,000@$1.71 + 3,000@$0.99 + 1 ,000@$1.07$15,354 + 92,979 + $1,085

Total Cash Payments

13,000 Q 80.208,000@$2.40 + 7,000@$2.30 + 4,000@$1.80$14,400 + $18,100 + $7,2008,000@$2.40 + 7,000@!$2.25 + 4,000@$1.80$14,400 + $15,750 + $7,2008,000@$1.71 + 7,000@$0.99 + 4,000@$1.07$10,238 + $8,951 + $4,280

Total Cash Payments

17,000 @ $0.20

8,000 14,0001,000 13,0004,000 17,000

13,000 44,000

$28,400

328,200

$15.904

$72,504

9 2,800

$30,300

$30,150

$19,398

$79,648

$ 2,800

$37,770

337,350

$21,447

$98,497

$3,400

9


raises the question as to whether the cooperativeshould operate a separate pool for each commodity ora pool for diverse products.

One primary benefit from handling a mix of com-modities is that it enables the cooperative to representa greater volume of product, thereby gaining greaterinfluence in the marketplace. Further, diversificationallows the cooperative to minimize the impacts ofcyclical or seasonal fluctuations in price or demand ina single crop. The increased physical volume likely toresult from marketing multiple crops may also lead tomore efficient use of plant facilities and lower per-unitoverhead costs which would be allocated among eithera greater number of producers or different crops.

The synergistic effects from marketing a broadermix of commodities enable the cooperative to offer itsmember-growers a more stable market for their pro-duce because pool proceeds are not limited to the per-formance of a single crop. Pooling multiple cropsenables commodities receiving more favorable returnsto support those confronting poor market conditions.This mutual support of commodities in a pool can ben-efit both the producer and cooperative.

In a multiple pool, each commodity is accountedfor separately and earns proceeds independently.Again, although only one commodity was considered,the example in Table 1 would be considered to be amultiple pool because each of the three grades ofapples earned proceeds independently. General over-head, sales, and administrative costs are shared amongeach commodity. However, direct costs for items suchas labor, processing, and packaging materials areassigned proportionately to each commodity. A multi-ple pool may be appropriate for a cooperative withmembers who produce widely diverse crops. Forexample, a highly seasonal and perishable specialitycommodity that requires specialized handling mayneed separable accounting, especially if the commodi-ty is also considered high risk/high return comparedwith other crops being marketed. A downside to oper-ating separate pools is that the benefits associated withmarket stability through mutual support are lost.

Critical to the success of this type of poolingarrangement will be the cooperative’s ability to accu-rately identify and assign overhead and direct costs toeach commodity. Further complicating the procedureare the potential challenges in identifying raw productvalue. Because variations in volume of a commoditydelivered, the value of finished products, and differ-ences in processing costs each affect-the raw productvalue, the process of valuing each individual commod-ity can become arbitrary. Determining these values

will be less of a challenge to the cooperative’s manage-ment if a cash market or other form of price discoveryexists for the commodity.

Regardless of which source of market informa-tion is used to value raw products, a well-defined anddocumented method for allocating both commodityvalues and costs is essential. Arbitrary assignment ofraw product values and costs must be avoided toensure that no real or perceived issues regarding equi-table treatment arise among pool participants.

In the single pool, commodities are accounted foras a whole and earn proceeds mutually versus inde-pendently in a multiple pool program. Just like themultiple pool example, general overhead, sales, andadministrative costs are shared among each commodi-ty marketed in the single pool structure. Direct costs,although accounted for on an individual crop basis,are aggregated for the group of commodities in thepool.

Pool proceeds are calculated by subtracting totaldirect costs, total overhead costs, and the total cost(value) of the raw products from the revenue generat-ed from the sale of finished products. Proceeds areallocated to grower accounts in proportion to the per-centage of raw product value. A common example of asingle pool would be vegetable producers deliveringcorn, green beans, peas, and carrots that will be com-bined to produce a vegetable blend. Instead of operat-ing four individual pools, it is more efficient for thecooperative to operate one pool and treat each individ-ual crop as an input in the production of the finalproduct.

One advantage of the single versus multiple poolis that difficulty in assigning costs or problems associ-ated with arbitrarily assigning costs are lessened.Further, the single pool allows both the cooperativeand member-grower to capitalize on the efficienciesfrom allocating market risk among multiple commodi-ties.

Table 3 presents a modification of the apple pro-ducer example in Table 1. All product volumes, marketprices, and costs are assumed to remain the same.Direct costs are also calculated and assigned in thesame manner. However, indirect costs are no longerassigned to individual pools but are deducted in totalfrom the gross margin on aggregated sales.

Proceeds are distributed based on the relativevalue of individual commodities in the pool. In thisexample, the value of Grade 1 apples represent 42.5 ofgross revenue ($312,000/$136,000) and Grades 2 and 3represent 33.1 ($312,000/$98,000) and 24.4($312,000/$78,000), respectively. Pool proceeds are cal-

10


Table 3- Example of single pool calculations

Grade 1

Raw Product Receipts From Members (bu.)

Grade 2 Grade 3 Total

Producer A 2,000 4 ,000 8,000 14,000

Producer B 9,000 3 ,000 1,000 13,000

Producer C 6,000 7 ,000 4,000 17,000

Total 17,000 14,000 13,000 44 ,000

Cooperative Sales

Gross Revenue

Cost/Value of Raw Product

Per Unit

Direct Costs (labor, packing, etc.)

Per Unit

Gross Margin

Overhead and Administrative Costs

Pool Proceeds

Return to Growers

Per Unit

Percent of Proceeds

17,000@$8

$136 ,000

$ 8 1 , 6 0 0

$4 .80

$ 1 7 , 0 0 0

$1 .oo

$ 3 7 , 4 0 0

$ 1 5 , 0 0 0

14,000@$7

$98 ,000

$63,700

$4.55

$12,600

$0.90

$21,700

13,000@$6

$78,000

$46,800

$3.60

$9,750

$0.75

$21,450

$312,000

$192,100

$ 3 9 , 3 5 0

$ 8 0 , 5 5 0

$109,459

$ 6 . 4 4

134

$85,397

$6.10

134

$62,794

$4.83

134

$ 6 5 , 5 5 0

$257,650

culated and allocated among each individual grade bymultiplying pool proceeds by the percentage value ofthe crop. In this example, a pool proceeds allocation of$1.64/bu. (e.g. ($65,550 x .425 I/17,000), $1.55/bu., and$1.23/bu. is made to Grade 1,2, and 3 apples, respec-tively. These results differ slightly from the multi-product pool example.

In the single pool case, Grade 1 and Grade 3 fruitearn $0.27/bu. and $O.O4/bu. less and Grade 2 applesearned !$0.36/bu. more. Because pool proceeds are cal-culated on aggregate rather than individual pool sales,the percent of proceeds relative to the value of the rawproduct is also affected. As with the multi-productcase, each crop in the single pool returned earningsabove the cash market value. However, because pro-ceeds are determined collectively rather than individu-ally, the average earnings for each of the three gradesis the same 34.

This result reflects a slight reduction in the per-centage return for Grade 1 and Grade 3 fruit and amoderate improvement in the percentage return forGrade 2 apples. This comparison also illustrates howcommodities marketed through a single pool can sup-port and complement each other. In this example,

although the average prices paid for Grade 1 andGrade 3 fruit were somewhat lower than they were inthe multi-product pool, there was an improvement inaverage price received for Grade 2 apples. Conse-quently, producers delivering Grade 2 apples benefit-ted from pooling their fruit with Grades 1 and 3.

It,is important to realize that this example onlyconsiders the marketing and pooling activities for agiven year. Over time it is most likely that each of thethree grades will experience cyclical fluctuations inprices received. Therefore, although Grade 1 andGrade 3 fruit yielded higher returns this year, the con-verse could also occur. Further, if this example werecarried out over a number of years, it is expected thatthe average pool would provide a more stable andconsistent return to the grower.

The Question of SubsidizingThe number of pools a cooperative may operate

can vary considerably. In the most simplistic case, thecooperative wouId operate a single pool for all prod-ucts. On the other hand, the cooperative may choose tooperate separate pools for each variety and/or gradeof product it receives.

11


For a cooperative handling multiple commoditiesor varieties, the effect of not operating separate poolsis an increase in the average number of products, aswell as greater diversity, in the pool or pools operated.Operating fewer, but broader, pools should reduceaccounting costs because there is no longer a need toseparate products or for allocating costs among a larg-er number of pools. Further, averaging the combinedreturns of a number of heterogenous products shouldreduce the yearly variation in grower payments.

One problem with operating a broad productpool is that the potential for some members to subsi-dize others is increased. Subsidization is possiblewhen commodities generating high net returns arecombined with products yielding lower returns andproducers of the higher valued products do not receiveproportionately higher payments. Consequently, pro-ducers who feel they are not receiving adequate com-pensation are likely to be less than enthusiastic aboutpooling to market their produce. Further, given thepotentially complex relationships between commodi-ties in a marketing pool, it can become increasinglydifficult to ensure that equitable payments are beingmade to all producers. Consequently, there is potentialfor dissatisfaction with the pooling program and theaverage price paid.

This situation can also lead to apathy amonggrowers who may feel that there is no incentive to pro-duce and deliver high-value or high-quality crops tothe cooperative. This particular issue is sometimescited as a drawback of a pooling operation. The chal-lenge to the cooperative is to operate a commoditypool that accurately values raw products according totheir future profitability.

Buccola, et al, addressed the issue of subsidiza-tion in their examination of flexible grower paymentformulas. The cooperative principle of service-at-costimplies that producer-members should receive thefinal product value of products delivered less any pro-cessing and handling costs. A cooperative can easilyapply the service-at-cost principle if it separates mem-ber products and maintains individual accounts.However, this is often a highly inefficient and costlymethod of accounting. Pooling can offer greater mar-keting flexibility and an increased ability to diversifyand reduce member income risk. The issue that certainproducts in a pool subsidize others arises from theargument that by returning an average price, the poolviolates the service-at-cost principle.

In their research, they examined alternative poolpayment formulae with an objective to address thesubsidy problem. The study reviewed the structure of

pool payments and alternative ways of valuing rawproducts in addition to outlining conditions underwhich the service-at-cost principle is or is not violated.Through simulations, the research tested several alter-native methods of determining per-unit returns: mov-ing average; exponential smoothing; econometricmodel; and raw product market price.

Results of the simulations indicated that weight-ing raw product deliveries with simple 3-year aver-ages of their previous returns resulted in lower meansubsidies and more equitable income allocation thanany of the other three methods. The simpler methods,moving averages and exponential smoothing, outper-formed the more complicated models as well as thestandard practice of weighting patronage by raw prod-uct market prices.

The research concluded that a product should,over a reasonable period of time, be paid its long-runcontribution to pool net returns. Further, any randomdeviations between payment and contribution must besmall enough to be acceptable. Recognizing that rawproduct weights act as relative forecasts of per unitreturns, if the quantity of products delivered areuncorrelated with per unit returns and all products perunit returns are biased in the same proportion, noproduct can subsidize another in the long run(Buccola).

Competitive market prices provide considerableinformation about future market prices and are fre-quently a good predictor of future net returns.Consequently, the raw product prices obtained in acompetitive market are frequently used as the basis forestablishing patronage weights. However, if a coopera-tive is operating in a market where trading is thin andinformation is either inconsistent or unavailable, esti-mates are likely to be unreliable and the cooperativemust evaluate alternative payment plans to ensureequitable treatment of members.

Cooperative ExamplesSeveral examples of pooling programs are cur-

rently being employed by several different fruit andvegetable cooperatives. This section illustrates how acooperative pooling program is structured in practice.These examples are not a comprehensive summary ofall existing pooling programs, but rather, present actu-al applications of many of the components of a poolingprogram previously discussed.

Ocean Sprsy Cranbetrles, Inc.: It isheadquartered in Lakeville-Middleboro, MA, andoccupies a leadership position in the cranberry

12


industry. Ocean Spray’s marketing of member productaccounts for about 80 to 85 percent ofthe NorthAmerican production of cranberries. The cooperativebuys product from members farming inMassachusetts, Wisconsin, New Jersey, Oregon,Washington, Florida, and Canada. The cooperative’sproduct line includes fresh cranberries, freshgrapefruit, processed products, juices, and dried fruit.Ocean Spray also operates several bottling plantsthroughout the United States.

This centralized cooperative organization forcranberry growers aids in efficient marketing, newproduct development, enhancing demand, and plan-ning the necessary production required to meet thatdemand in a way that is most advantageous to itsmembers. The cooperative provides numerous market-ing and processing alternatives for its members plusmany production-related services. Members share pestmanagement and water nutrient expertise provided bythe cooperative, as well as the use of harvesting con-tainers. Each member bears the shipping costs to thenearest receiving station, but remote shipping is oftensubsidized. Specific regional delivery requirementsand fruit standards are itemized in a grower code bookprovided annually.

Ocean Spray uses marketing contracts with mem-bers. Current marketing agreements are 3-year con-tracts. Production is carefully planned by the member-ship through the cooperative. All bogs are mappedand production is planned well into the future. Thegrower must communicate how delivery will be made,provide a reasonable crop estimate, and report anychanges in Ocean Spray contracted acreage everygrowing season. A pesticide plan and report must alsobe submitted by each grower for review and approvaleach season. Random samples are taken from everydelivery to the receiving station to test for excessivepesticide residues.

Ocean Spray operates a single commodity poolthat includes cranberries for both fresh and processeduse. The board determines how much fruit can be soldfresh and the number of barrels needed to meet thisprojection. There are very different cultural practicesbetween fresh and processed bogs, and fresh fruitmust possess a “keeping” quality. Typically, fresh salesaccount for 10 percent of the crop while processedproducts represent the remaining 90 percent.

Various premiums are offered to growers deliver-ing product that meets certain quality parameters,such as cranberries with high sugar solids that are suit-ed to blending for juices. Discounts are imposed forany trash, defective fruit, and poor color. Incentives

are provided for production and harvesting for thefresh market and for producing for export overseas.Fresh fruit production must be pm-qualified and meetan additional delivery qualification to earn a premium.

All revenues received from the sale of cranberriesthrough the cooperative are pooled. Member growersreceive advances upon crop delivery and final com-pensation shortly after the completion of harvest fromthis pool, based on the quantity and quality of thecranberries they have delivered to the cooperative (Itgenerally takes 18 months to pay out on a particularcrop. The fiscal year is September 1 to August 30.) Thecosts of the marketing services the cooperative pro-vides and the related operating expenses are also takenfrom this pool.

Each grower must obtain common shares of stockin the cooperative. The amount of stock that must beheld depends on the grower’s recent production 1eveIsand the pre-determined common stock equity quota.There is usually a period of time over which the grow-er can accumulate the necessary number of shares, butarrangements with the cooperative to acquire themvary.

This becomes a significant capital expense for thegrower because the shares must be held until termina-tion of the contract, when they are then redeemed ortransferred. Changes in the member firm’s legal struc-ture must be communicated to the cooperative.Transferral of ownership or leasing with controllinginterest in the cooperative must be approved by thecooperative. The agreements between the growers andthe cooperative are renewed every 3 years, but subjectto termination by an advanced written notice.

N8tionai Gr8pe C&opemtiveASsod8tiOn, inc. / Welch Foods inc.: Welch s isthe processing and marketing affiliated cooperative ofNational Grape Co-operative Association, Inc., whose1,500 patrons supply its principal raw products,Concord and Niagara grapes from more than 41,000acres of vineyards in Michigan, New York, Ohio,Pennsylvania, Washington, and Ontario, Canada.Welch’s manufactures and markets fruit juices,blended fruit juice and cocktails, frozen concentratedfruit juices and cocktails, jams, jellies, preserves andspreads, fruit juice bars and fruit-flavored carbonatedbeverages. The cooperative operates plants in Lawton,MI; North East, PA; Grandview, WA; Westfield, NY;and Kennewick, WA.

The cooperative operates two commodity poolsfor members grapes. Deliveries to the Eastern Pool

13


consist of Concord and Niagara grapes produced inNew York, Pennsylvania, Ohio, Michigan, andOntario, Canada. Western Pool deliveries come fromthe State of Washington. Both pools are operated on acrop-year basis, but due to the storability of theprocessed products manufactured, it may actuallytake up to 2 years for the pool to be closed.

Pool payments are structured to emphasizegrapes with higher sugar solids. The economic motiva-tion behind this premium is that deliveries of rawproducts with high sugar content enables the coopera-tive to produce sweetened fruit products without hav-ing to add other sweeteners. Below standard grapesmay either be rejected or received under a low solidsprogram, and at a lower value.

Prior to 1992, National Grape allocated net pro-ceeds from pooling operations on a direct accountingbasis. However, this method was found to produceincreasingly artificial results. Consequently, the coop-erative developed a new method of valuing memberproduce which measured the value of the coopera-tive’s crops relative to cash market purchases in eachlocal production area. These values are weighted bythe respective volumes of each processor to produce acommercial market value (CMV) for the cooperative’scrop in each area. Proceeds are distributed to each poolon a proportionate basis.

Since its inception of the CMV pool program,National Grape has evaluated and assessed whetherthis methodology resulted in improved allocationsbetween the Eastern and Western pools. The coopera-tive’s board of directors began evaluating viableoptions to resolve the allocation issue after a season inwhich the spread in proceeds between the two poolswas significantly larger than normal.

After evaluating the existing method of allocatingproceeds, and the impacts of various options, thecooperative formulated a new method that wouldimprove equitability for all members. The new systemis known as the modified CMV method (MCMV).Under this plan, net proceeds are distributed (andequity inputs required) on the same number of dollarsper ton in both pools. Producers share net proceedsabove CMV on an equal basis regardless of the pool towhich they deliver. Equity requirements are alsorequired on an equal, rather than proportional basis.

MCMV program advantages include: dampensthe volatility of the current CMV method; avoids thecomplications and disadvantages of the former directaccounting method; sends a strong value signal topatrons whenever production falls short of, or exceeds,

market requirements; pool results average out close toboth previous methods used; and is relatively easy toexplain and comprehend.

The change from CMV to MCMV is not dramatic.MCMV should prevent the spread from widening fur-ther when the difference between the CMV in the Eastand West is abnormally large and when Welch s is veryprofitable relative to CMV. Pool program changes willbe reflected in new membership and marketing agree-ments.

Citrus Marketing: Cooperatives havetraditionally played an important role in handling andmarketing fresh and processed citrus products.Further, the marketing method most often used by acitrus packinghouse is pooling. Although eachcooperative is unique in its application of pooling,there are enough similarities to offer a generalizedoverview of how a marketing pool is used in thisindustry.

These cooperatives receive and market memberproduce for either fresh or processed use. Given thenature of the product, the cooperative is typicallyactive in both markets. All like-variety products aregenerally combined in a seasonal pool. Citrus poolsare further separated by grade, variety, and use (freshor processed).

Appearance factors are important in citrus prod-ucts going to the fresh market, and the cooperativewill operate individual pools to reflect differences insize, color, or other physical characteristics. Fresh cit-rus is accounted for on a per-box basis. This unit ofmeasure is a legally defined term indicating the aver-age weight by variety in a given box. Physical appear-ance is not an issue for processed citrus products. Theindustry standard for valuing processed citrus ispounds of solids.

The variety of citrus produced and contracted tothe cooperative generally determines in which pool thegrower will participate (i.e., fresh or processed).However, once the crop has been harvested and deliv-ered to the cooperative for grading, the cooperativemakes the final determination on which pool a grow-er’s fruit will be assigned to. Produce not meetingfresh market standards is sent to processing outletswhere it is graded and allocated to a pool.

Most citrus cooperatives calculate returns tomember-growers on a per-box basis and use somevariation of a delayed payment schedule. Handling,packing, capital retains, and other pool operating costsare deducted from the grower s account.

14


Summary

This report defines and discusses the structuralaspects of commodity pooling programs as used byfruit and vegetable marketing cooperatives. Thehomogenous nature of many fruit and vegetable com-modities has made pooling a common method of mar-keting by agricultural cooperatives. The ability to com-mingle grower-members production gives anassociation considerable influence or control over thetiming, quantity, and quality of produce marketed. Theability to consistently deliver both product volumeand quality will assist a marketing association in estab-lishing itself as a reputable supplier which will in turnenhance its ability to cultivate working relationshipswith other market participants.

The benefits of cooperative pooling of produceinclude risk sharing, improved marketing, increasedmarket power, quality control, and economies of scale.Pooling can also be an effective way to insulate pro-ducers from periodic or seasonal price swings thatcommonly characterize the marketplace. To ensureequitable treatment, responsibilities and benefits areshared proportionally by all pool members.

Marketing agreements are a critical component ina cooperative pooling program because these contractsensure that the association has the long-term supportand commitment of its members. Marketing agree-ments provide the cooperative with information thatwill assist in coordinating supply with demand andprovide an improved sales and bargaining position inthe market.

The objective of a commodity pool is to consis-tently return an average price higher than thatreceived by non-pool producers. Aggregating produc-er-member output gives the cooperative access to alarge quantity of product and enhances the associa-tion’s competitive position in the market. Further, allo-cating operating costs among a greater volume ofproduct generally results in a lower per unit handlingcost and more efficient use of plant or packing shedcapacity. The cooperative pool also benefits from anexperienced management team that generally hasaccess to market information and other expertise notavailable to individual producers.

Successful cooperative pooling programs hingeon their ability to provide excellent service and resultswhile ensuring that all producer-members are treatedequitably. Successful pooling programs require com-mitment from members. It will be difficult to preserveloyalty if there is a perception that high-profit prod-

ucts being delivered to the pool are subsidizing lowermargin products. The cooperative must maintain har-mony between small and large producers. The lattermay be more demanding in what they expect from thecooperative.

A cooperative pooling program that rewards pro-ducers who meet or exceed minimum delivery stan-dards will realize the benefits of greater marketingflexibility while also assuring that all participants aretreated equitably All producer-members must under-stand the philosophy and mechanics of how theircooperative and its pooling program work.

No singular pooling plan applies universally toall fruit and vegetable marketing cooperatives. Toachieve the economic efficiencies and cost savingsassociated with pooled marketing, a program must betailored to meet the individual characteristics of thecommodity being produced, the membership of thecooperative, and the market being served. As the foodindustry continues to become increasingly competi-tive, concentrated, and global, the advantages of com-modity pooling become a more important aspect ofsuccessful produce marketing program.

15


References

Buccola, Steven T., James C. Cornelius, and Ron R.Meyersick, Pool Payment Equity in AgriculturalMarketing Cooperatives, Journal of AgriculturalCoupmtion, Volume 4,1989.

Dunn, John R. And Stanley K. Thurston, and WilliamS. Farris, Some Answers to Questions AboutCommodity Market Pools, United StatesDepartment of Agriculture, Economics, Statistics,and Cooperative Service, EC-509,198O.

Jacobs, James A., Cooperatives in the U.S. CitrusIndustry, United States Department ofAgriculture, Rural Business and CooperativeDevelopment Service, Research Report 137,1994.

Jacobs, James A., Fruit and Vegetable Cooperatives,United States Department of Agriculture,Agricultural Cooperative Service, CooperativeInformation Report 1, Section 13,199O (revised).

Reilley, John D., Cooperative Marketing Agreements,United States Department of Agriculture,Agricultural Cooperative Service, ResearchReport 106,1992.

Stewart, Bob and Michael A. Mazzocco, Investment inPro-Fat Cooperative, The Food and AgribusinessManagement Program, Case Study Series, CaseNo. 931102, University of Illinois.

16


U.S. Department of Agriculture

Rural Business-Cooperative ServiceStop 3260Washington, D.C. 20260-3260

Rural Business-Cooperative Service (RBS) provides research,management, and educational assistance to cooperatives tostrengthen the economic position of farmers and other ruralresidents. It works directly with cooperative leaders andFederal and State agencies to improve organization,leadership, and operation of cooperatives and to give guidanceto further development.

The cooperative segment of RBS (1) helps farmers and otherrural residents develop cooperatives to obtain supplies andservices at lower cost and to get better prices for products theysell; (21 advises rural residents on developing existingresources through cooperative action to enhance rural living;(3) helps cooperatives improve services and operatingefficiency; (41 informs members, directors, employees, and thepublic on how cooperatives work and benefit their membersand their communities; and (6) encourages internationalcooperative programs. RBS also publishes research andeducational materials and issues Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits

discrimination in all its programs and activities on the basis ofrace, color, national origin, gender, religion, age, disability,political beliefs, sexual orientation, and marital or familystatus. (Not all prohibited bases apply to all programs.)Persons with disabilities who require alternative means forcommunication of program information (braille, large print,audiotape, etc.) should contact USDA’s TARGET Center at(202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director,office of Civil Rights, Room 326-W, Whitten Building, 14th andIndependence Avenue, SW, Washington, D.C. 20260-9410 orcall (202) 7206964 (voice or TDD). USDA is an equalopportunity provider and employer.


EXHIBIT B


Geographic Territory Served Cooperatives can differ in structure, depending on the size of the area served: local or regional.

Local cooperatives typically operate in a single State, often within one or two coun-ties. Individuals are the members of these local cooperatives.

Regional cooperatives usually serve an entire State or a number of States. They can have operations that are nationwide or that cover major portions of the United States. Some regional cooperatives also have international operations with sales and members in more than one country.

Governance or Control StructuresBased on membership structure, coopera-tives can be classified as centralized, fed-erated, or mixed.

A local cooperative is a centralized cooperative — individual producers make up the membership. A centralized regional may serve members in a large geographi-cal area, and have one central office, one board of directors, and a manager (chief executive officer) who supervises the entire operation. Business may be conducted through several branch offices.

A federated cooperative is a cooperative of cooperatives. The members of a feder-ated cooperative are local cooperatives, each operated by a manager responsible to a board of directors. Each local associa-tion in a federated cooperative is a sepa-rate business entity that owns a membership share entitling it to voting rights in the affairs of the regional.

Cooperative structure can be classified into five types as follows: geographic, gover-nance, functions, financial, and other arrangements. Each will be defined and discussed in this circular.

1

Understanding Cooperatives:

The Structure ofCooperativesCooperative Information Report 45, Section 3

Cooperatives exist in nearly every business sector and are organized in a variety of ways. Like other busi-nesses in our economy, they range in size from organizations with only a few member-owners to large and complex organizations with thou-sands of member-owners. The way a cooperative is organized determines how it is operated, managed, and controlled by its members, and the types of benefits offered.

United StatesDepartment ofAgricultureRural Development

CooperativePrograms

October 1994ReprintedApril 2011

Regional Cooperative


The federated cooperative has its own hired management and staff, and a board of directors elected by and representing the local associations.

A mixed cooperative is a combination of the two — their members may be individual producers as well as local cooperatives.

Functions PerformedCooperatives may perform one or more of these functions for members:u Marketing products;u Purchasing supplies; andu Providing services.

Marketing The need to meet consumer demands and expand markets for products presents an

2

increasing problem for farmers acting inde-pendently. Few farmers produce in quanti-ties needed to deal directly with large wholesalers or retailers. Marketing coop-eratives provide an increasing variety of off-farm processing and marketing services for about one-fourth of all products that farmers produce.

Marketing cooperatives help farmers produce and process quality products to market specification. Cooperative market-ing includes the operation of grain eleva-tors, milk plants, wool pools, cotton gins, livestock markets, vegetable markets, and nut- and fruit-packing plants. Some market-ing cooperatives include the coordination of processing, canning, drying, blending, concentrating, extracting, freezing, or con-sumer packaging of animal and animal products, such as dairy, fish, meat, and poultry and the same for fruit, nut, and veg-etable products, and many other products in integrated organizations.

Marketing cooperatives enable farmer-members to extend control of their prod-ucts as long as the cooperative retains physical or legal title to a commodity han-dled through processing, distribution, and sale.

Some marketing cooperatives also can be called bargaining associations, which may not handle the actual product but rath-er act as the selling agent on behalf of the member.

Purchasing Farmers first turned to cooperatives as economic tools to gain advantage of qual-ity and quantity of farm production supplies such as feed, fuel, fertilizer, and seed. These early efforts often became business-es having full-time managers and ware-houses to handle other production supplies and services such as farm chemicals, ani-

Based on member-ship structure, cooperatives can be classified as cen-tralized, federated, or mixed.

FARMER FARMER FARMER

COOPERATIVE

FARMER FARMER FARMER FARMER

LOCALCOOPERATIVE

LOCALCOOPERATIVE

COOPERATIVE

FARMER FARMER

FARMERLOCALCOOPERATIVE

COOPERATIVE

Centralized

Federated

Mixed


mal health products, fencing, building sup-plies, construction contracting, automotive accessories, etc.

Most purchasing cooperatives have affil-iated with other cooperatives, often through regional and interregional cooperatives. These efforts reduce farmer costs and strengthen purchasing power through own-ing large-scale facilities, such as petroleum refineries and feed mills.

One of a purchasing cooperative’s objectives is to reduce production costs for members through quantity purchasing, manufacturing, and distributing, procuring quality products, and providing related ser-vices as needed. Distribution to producer members is a major concern at the local level because added services are needed. Another objective is to provide a depend-able supply of quality products for mem-bers.

Many cooperatives now perform both marketing and purchasing functions, although they started as single-function organizations.

Service Some agricultural service cooperatives pro-vide services related to the production and marketing of farm commodities. Others provide general services.

Related service cooperatives offer unlim-ited possibilities and are used in ever-wid-ening circles to solve mutual problems and provide specialized services that affect the location, form, or quality of farm products or supplies for members. Services may be part of the operation, or they may be per-formed by separate cooperatives.

Examples of services offered by farm supply co-ops include: recommending and applying fertilizer, lime, or pesticides; cot-ton ginning; animal feed processing; and crop harvesting. General service coopera-

3

tives provide a number of specialized ser-vices assisting farmers in their business such as credit, electricity, and telephone service.

Financial Cooperatives are incorporated as either stock or nonstock organizations. The type of capital structure is specified in the arti-cles of incorporation.

If the association is a capital stock orga-nization, members receive stock certificates as evidence of their ownership interest. More than one type of stock may be issued, but usually no more than two types are nec-essary. Most stock cooperatives issue one share of common stock per member to show membership. Preferred stock is issued to show additional capital contribu-tions. (Common stock is usually the voting stock; preferred stock is generally nonvot-ing.)

If the association is a nonstock organiza-tion, it issues some kind of certificate to show capital contributions of members. Two types are usually used — a membership certificate as written proof of the right to vote and capital certificates in a manner similar to the way stock cooperatives use preferred stock.

Other Structural Arrangements

Subsidiary A corporation organized, owned, and con-trolled either totally or partially by a parent cooperative. Its purpose is to assume cer-tain duties and functions of the parent cooperative.

Marketing Agency-in-Common Organized by two or more marketing coop-eratives to market products or provide ser-vices for member cooperatives. It does not

The cooperative can be most effective by serving its members' needs.


This circular is one of a continuing series that provides training information and presentations for education resource persons who may or may not be familiar with the cooperative form of business. This series provides the basic background material they need and in a form that can be readily adapted, with limited preparation time, to a lecture or other presentation.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all of its programs and activities on the basis of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental status, religion, sexual orientation, political beliefs, genetic information, reprisal, or because all or part of an indi-vidual's income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (Braille, large print, audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write to USDA, Assistant Secretary for Civil Rights, Office of the Assistant Sec-retary for Civil Rights, 1400 Independence Avenue, S.W., Stop 9410, Washington, DC 20250-9410, or call toll-free at (866) 632-9992 (English) or (800) 877-8339 (TDD) or (866) 377-8642 (English Federal-relay) or (800) 845-6136 (Spanish Federal-relay). USDA is an equal opportunity provider and employer.

records. The cooperative then pays patron-age refunds on the basis of the agent’s records.

Private DealersThe dealer, as a franchise, keeps records. If the franchiser cooperative makes money and pays patronage refunds, these go to the dealer’s customers and the dealer is paid a commission on sales.

ConclusionCooperatives are classified as a way to easily identify the nature of the business. The classifications do not mean that one type may necessarily be better or worse than another. It simply means that there are distinguishing differences among the types, and shows the wide variety of cooperatives and the differences in their operations, management, control, etc.

What is important for cooperative mem-bers to understand about cooperative structure and their own organization is:u What type of cooperative it is;u How it is structured; andu How the cooperative, whatever its clas-sification, can be most effectively used by its members for serving their needs and achieving objectives. n

physically handle products, and it generally does not take title to them. Its sole respon-sibility is to arrange for the sale of its mem-bers’ products.

Joint Venture An association of two or more participants, persons, partnerships, corporations, or cooperatives to carry on a specific econom-ic operation, enterprise, or venture. The identities of these participants remain sepa-rate from their ownership or participation in the venture.

Holding Company A corporate entity with a controlling owner-ship in one or more operating companies. The degree of ownership can vary widely, as long as the holding company can exer-cise control through the operating compa-ny’s board of directors. Usually the holding company generates no revenues from operations; income is limited to returns from investments in the operating compa-nies.

Contract Agent A county or community cooperative may organize, owning nothing but contracts and paying only the money to hire an agent to handle the goods and keep patronage

4

To see this and other USDA coop-erative publica-tions online, visit: http://www.rurdev.usda.gov/rbs/pub/cooprpts.htm To order hard cop-ies, e-mail: [email protected] telephone:1-800-670-6553.


EXHIBIT C


2009 Annual Report

Building on our core strengths

national grape cooperative association, inc. & welch foods inc., a cooperative

COR3-51


The core of a company is defined as the part that

is central to its existence or character. At Welch’s,

we have considerable core strengths– from core

products to our unique, authentic brand to our

committed colleagues. These strengths keep

us thriving, year after year, through all kinds of

weather and economic conditions. The end of

the 2009 fiscal year gives us a chance to explore

our core strengths, to reflect on their ongoing

importance to the company, and to envision how

we can build on them in the future.

Strong at the Core –and Beyond


Our core products are the key to our success

Our core products have the highest patron Concord and Niagara grape content, such as 100% Juice, Sparkling, and Spreads. These products make up a significant part of our current sales and profitability, and define Welch’s to consumers throughout the world. Nurturing sales of these core products is vital to boosting profitability–now and for years to come. And as we launch in new countries, we continue to stay close to the core–no matter how far away these new markets are.

Our people make Welch’s what it is today…

Behind our core products, you’ll find our passionate family-farmer owners, who grow more than 300,000 tons of grapes in their vineyards each year. You’ll find hundreds of hard-working people at our processing plants, who turn these grapes into nutritious, delicious juice and other fruit-based products. And you’ll find hundreds of dedicated Welch’s colleagues, who help bring these products to market. Ultimately, all of this hard work finds its way into the households of today’s consumers, who appreciate the taste and quality of our products–as well as the significant health and nutrition benefits associated with our 100% grape juice made from Concord grapes.

And what it can be tomorrow

As a family of growers and Welch’s colleagues, we’re continuing to work together to make Welch’s more relevant to consumers, more responsive to our customers, more efficient at all levels, and more profitable. Our core strengths give us the solid foundation necessary for future growth, and for the ongoing transformation of our company.

Inside, we highlight FY ’09, a year of progress under challenging conditions. We showcase the positive results and important changes of the year. And we focus on our core strengths, which served us well during this year–and will continue to fuel our progress far into the future.

—The Welch’s and National Grape Team

1


an enduring, evolving brand

Since 1869, Welch’s has grown to become an American icon, known for the quality of our products, which combine great taste with significant nutrition and health benefits. But our long history is just the beginning of the Welch’s story. We became one of the best-known and respected brands in the world by constantly evolving to meet the changing needs of consumers, as well as the ever-shifting marketplace.

We’re a leading manufacturer and marketer of Concord and Niagara grape-based consumer products–including grape juice, jelly, and other fruit-based offerings. We’re the processing and marketing affiliate of the National Grape Cooperative Association– a group of approximately 1,200 family-

farmer owners. You’ll find our Concord and Niagara grapes in vineyards stretching across Pennsylvania, Michigan, New York, Ohio, Washington State and Ontario, Canada. And you’ll find Welch’s products on store shelves across the U.S. and in nearly 50 countries around the world.

Our mission is simple – to maximize the value of the enterprise from the crop to the consumer. But achieving it requires hard work and smart decisions about all aspects of our business. And it means growing, changing, and managing our business to meet new challenges. We’re proud of our progress in FY ‘09, and looking forward to fulfilling the significant promise that the future holds for Welch’s.

WELCH’S AT A GLANCE

Headquarters: Concord, Massachusetts

Founded in: 1869

Key products: Juice, jelly, and other fruit-

based offerings

Employees: 1,134

Net sales (in millions): $673.1

Family-farmers: 1,176

Vineyard locations: Pennsylvania; Michigan;

New York; Ohio; Washington State and Ontario, Canada

2


a year full of historic challenges and opportunities

The 2009 fiscal year–our 140th year as

a company–was marked by substantial

progress, significant transitions, and

important planning for a New Welch’s. We

made substantial progress in 2009 in the face

of significant economic pressure, which

affected high-quality, premium brands like

Welch’s. In a year where many companies took a step backward, we took

several steps forward, making progress in critical areas:

• We delivered a 30% increase in Distributable Proceeds per ton

• Net Proceeds increased by 13%, to the highest level since 2003

• Net Income rose by $21 million, as both Patron and Non-Patron profitability improved dramatically

• We refocused our business around winning in the core grape product categories

A year of transition and transformation

2009 was marked by significant transition in the leadership team and focus on the future transformation of the company. Brad Irwin took over as CEO in February, after a four-month period under the leadership of CFO and Interim CEO, Mike Perda. Mike successfully navigated the Company through a very challenging internal and external environment. He helped the organization put together a plan to take advantage of a window of opportunity in 2009 where: • We made significant progress in our net income and profit margin by aggressively pricing our core products

• We controlled spending during a challenging economic environment

• We made key changes to create a more profitable portfolio

• We used new insights from the ERP system to understand and control our costs

The path to profitability

The most important step we made in 2009 was to chart a new path to a more profitable future. It starts in 2010 with an aggressive plan to get “More from the Core” as we focus our energy on winning in our core patron product categories, like 100% grape juice. This effort will be supported by a marketing effort celebrating our health and nutrition benefits and the advantage of being family-farmer owned.

But, the more significant transformation will come with our Strategic Plan, which we will begin to implement in 2010. While we have made progress since our challenging 2005 – 2006 period, we are not satisfied with our current performance versus our peers, and we recognize that our family-farmer owners need a better return on investment.

3

bradley c. irwin

President and Chief Executive Officer Welch Foods Inc., A Cooperative

joseph c. falcone

Chairman of the Board, Welch Foods Inc., A Cooperative President, National Grape Cooperative Association, Inc.


Joseph C. Falcone Chairman of the Board, Welch Foods Inc., A Cooperative President, National Grape Cooperative Association, Inc.

•

Images Left to Right 1–Brad Irwin, Mary Ann and John Sceiford (Pennsylvania) 2–Joel Rammelt and Brad Irwin (New York)

3–Richard Brown, Brad Irwin and Nicholas Welburn (Michigan) 4–Paul Kilian, Larry Marchant, Gerald Dixon, Brad Irwin and

John Dixon (Washington State)

This year, the Board recognized the significant

accomplishments of Charlie Chapman who retired

in February. We thank Charlie for his invaluable

contributions during 29 years on the Board.

Since July, we have been working with an outside consultant to benchmark our performance versus best-in-class consumer products companies, identify gaps and opportunities, and develop a 3 - 5 year game plan to become the kind of company that we all want Welch’s to be. We will use this plan to guide our efforts in 2010 and beyond. Together, we will create a New Welch’s that will deliver outstanding returns to our family-farmer owners, set the pace for innovation in our core categories, and help us attract and retain the very best colleagues.

Proud of the past, confident for the future

We are already focused on creating the New Welch’s –building on the best of the past, recognizing the challenges and opportunities of the future, and proceeding ahead with a sense of urgency and commitment to deliver the full potential of Welch’s. As leaders of this great company, we are ready to make this bright future a reality for our family-farmer owners.

Bradley C. Irwin President and Chief Executive Officer Welch Foods Inc., A Cooperative

a visit to the vineyards

Shortly after joining Welch’s as the company’s 14th president and CEO, Brad Irwin visited plants and farms in North East, Westfield, and Lawton as well as Washington State–meeting with the family-farmer owners who grow our Concord and Niagara grapes and the skilled teams that process them. Here are some highlights:

4


FY ’09 was a major transition year

at Welch’s–with a new CEO, new

products, new strategies, and more.

Here are just some of the key events

that made this year important for

our Company.

Improved Profitability, Higher Net Proceeds

An effective price increase brought our products up to their true market value and helped raise profitability. This increase–coupled with vigilant cost control, a strong brand, and extremely effective advertising–helped shift our organization toward improved profitability. Concerted sales efforts and strategic trade spending helped deliver the sales volumes necessary to hit net income and proceeds targets. Looking ahead, we will continue to focus on our core products and seek a strong return on investment and profitable growth.

Our New Products Appealed to More Consumers

In FY ’09, Welch’s products evolved to meet the needs of today’s consumers, further strengthening our organization’s commitment to health and nutrition. Black Cherry Concord Grape Juice–a critical patron product–continued to be a big hit with consumers. FY ’09 also saw the successful introduction of Welch’s SuperJuice to selected Club customers, including BJ’s Wholesale Club and Costco. Premium-priced Welch’s SuperJuice combines polyphenol-packed Concord grapes with the taste of superfruits from all over the world–including açaí and mangosteen. SuperJuice brings a great-tasting, affordable combination of these fruit flavors to today’s consumers.

Welch’s Connects with Key Customers in FY ’09

Walmart and Welch’s teamed up to create a highly successful 2009 holiday promotion on Welch’s Sparkling. A Walmart-specific Sparkling bottle and heavy in-store support–including Walmart TV, their holiday circular, and three separate display support events–resulted in a sales increase of 20% over last year.

2009: Profitability, Progress–and Even More Potential

08

08

08

07

08

09

09

09

09

685.0

71.6

(3.9)

673.1

81.0

17.4

Net Sales (in millions)

Net Proceeds (in millions)

Net Income (Loss) (in millions)

Distributable Patron Proceeds (in millions)

07

07

07

653.6

59.5

(11.6)

65.2

70.1

76.7

5


Alton Brown Joins Welch’s –Stands Up to Free Radicals

Alton Brown, food scientist and TV personality, served as the new face of Welch’s in an innovative, highly successful FY ’09 ad campaign for our 100% grape juice made from Concord grapes. In print, television, and online ads, Brown used his trademark style to blend wit, wisdom, and science to explain what makes Concord grapes so healthy and special.

And the people responded, particularly health-conscious Gen-X moms, our critical target audience. These ads were among Welch’s most successful ever, contributing to a household penetration rate of 14%, and a significant increase in our brand value.

USDA Grant Explores the Potential of Grape Pomace

Processing grapes results in more than delicious, nutritious grape juice. It creates tons of grape pomace, a large, antioxidant-rich waste stream. In FY ’09, United States Department of Agriculture (USDA) awarded Welch’s a $100,000 grant to evaluate the potential value and market opportunities of grape pomace. Initial testing shows that a significant amount of valuable, antioxidant-functioning polyphenols are left in grape pomace after processing–signaling possible value of pomace extract as an ingredient or additive. The grant enabled Welch’s to develop new, innovative ways to boost the antioxidant content of current products and explore new product opportunities using extract from grape pomace.

Direct-to-Concentrate Innovation Saves $1+ Million Annually

Innovative thinking and the tenacity of Technology Center engineers and the Grandview team resulted in successful testing of a new direct-to-concentrate process that improves finished concentrate color by 50%. Grape concentrate provides the high color level that consumers prefer, and ensures high quality from year to year, despite crop variation. By extracting the high-color components from Concord grapes, this in-house process eliminates the need for purchasing high-cost outside concentrate–projecting cost savings of more than $1 million a year.

Late-harvest Niagaras Maximize Flavor and Savings

Our Washington State growers are maximizingNiagara sugar solids by delivering their Niagaracrop after the conclusion of the Concord harvest.Because of the higher sugar solids afforded byadditional ripening time, we can use our own Niagara juice instead of white Californiaconcentrate–delivering an expected annual savings of more than $1 million. Plus, we can use more of the sweeter Niagara juice in our products because consumers prefer its taste. By harvesting Niagara grapes with higher sugar solids, we can ensure that our white grape juice is relevant in the marketplace.

Welchito Expands in the Caribbean

In FY ’09, Welchito Pouches strengthened the success of the popular Welchito sub-brand, which has achieved 13% compounded annual growth over the past decade in Puerto Rico alone. Production began with Grape, Fruit Punch, and Strawberry Kiwi flavored drinks, but this new packaging opens the door for use with 100% grape juice.

Chilled Juice Sales Grow in the UK

Now a top-ten brand in the UK, Welch’s was one of the only brands showing volume and value growth in the UK in 2009–a year marked by a declining juice category and a depressed overall market. In particular, our Welch’s chilled offering delivered excellent performance, with a 13% increase that outperformed the market, which declined by 9%.

6


Grapevines have deep roots – the older

the vine, the deeper the taproot goes.

Like the vineyards that are at the heart of

our Company, Welch’s has deep roots and

core strengths that help us thrive under all

kinds of conditions. They give us the strong

foundation that enables us to continue

to innovate and grow. And they fuel the

ongoing transformation of our Company.

Here we explore some of our core strengths

and how they grew even stronger this year.

Our Core Strengths

7


Josh

ua H

ofst

ein

200

9

Committed People Go the Distance

Committed, hard-working people provide

the passion and innovation that are at

the core of our company. FY ’09 was a

year when people rose to meet major

challenges, and came through with

exceptional results.

Our People:

8


Our people represent a diverse group–from family-farmer owners who work in the vineyards to processing plant teams to marketing, sales, and other employees at Welch’s headquarters. They provide the specialized expertise that stretches from the vineyards to the supermarket shelves. But beyond all job titles and responsibilities, all members of the Welch’s team are people –people who are willing to step up and make a major commitment to the ongoing success of our company.

What makes our people different?

What makes our people different? They’re passionate about their work, hard-working, collaborative, and creative. They care about their community. They’re the kind of people you want for neighbors, as well as colleagues. And they stick with Welch’s–helping us achieve a remarkable 92% retention rate in FY ’09.

A culture starts with people

Our culture isn’t based on catchy slogans. It’s about the people who make up our company, and who contribute their unique talents. In FY ’09, all kinds of people stepped forward with great ideas and smart thinking. From implementing core teams at our North East, Pa., facility to creating and launching a breakthrough advertising campaign, FY ’09 was a year of people thinking creatively about how to make Welch’s a company we can all be very proud of –now and far into the future.

9

“As a grower, you look at a glass of Welch’s Grape Juice differently than everyone else. While kids see a delicious juice, I see years of hard work, sunshine and a whole lot of love.”

— Jim Corell, family-farmer owner Portland, New York


Our Products:

Health and Nutrition Resonate with Consumers

This year’s expanded health and nutrition

message played well with consumers,

who are increasingly aware of what’s in

their food, where it comes from, and how

it helps them stay healthy.

10


11

In 1869, no one had heard of polyphenol antioxidants. They just knew that grape juice tasted great. Now consumers are more health-conscious than ever. They want to be sure that they make healthy choices and maximize nutrition. They want to know where their food comes from and who grows it. They want to fuel their bodies with healthy food and juices. Which is very good news for Welch’s.

Inherently healthy products from real grapes

Welch’s is in a unique position to deliver products that combine health and nutrition and great taste. The strong health credentials of grape juice have been a recurrent theme in Welch’s history, marketing strategy, and advertising. But we amplified and strengthened our health message in recent years, focusing on the polyphenol antioxi-dant-packed Concord grape and the health benefits of our 100% grape juice. This mes-sage resonated with consumers in the U.S., as well as in international markets–such as Puerto Rico, the UK, Canada, Japan, and China–where health and nutrition have been a key part of the Welch’s message for several years.

Deepening our commitment to health and nutrition

Our health and nutrition communications of FY ’08 highlighted the antioxidant power of Welch’s 100% grape juice, as well as its role in maintaining a healthy immune system. In FY ’09, we continued to expand and elevate the company’s health message by focusing on how Welch’s 100% grape juice helps support a healthy heart and immune system. We also educated consumers on polyphenol antioxidants, including their ability to protect healthy cells against the damaging effects of unstable molecules– free radicals.

Taking the message to the masses

In our FY ’09 ads, Food Network personality and Welch’s spokesperson Alton Brown (see page 6) provided straight-talking insights and chalkboard lessons that educated consumers about polyphenols and helped demystify the science behind Concord grapes. A FY ’09 study led by Dr. Richard Mattes, a professor in the Department of Foods and Nutrition at Purdue University, showed that Concord grape juice isn’t associated with significant weight gain or changes in appetite, and may actually reduce waist circumfer-ence. And Welch’s continued to invest in studies to define the health benefits of Concord grape juice –the core of our patron-based products–even further.

“Not sure people know, but we press the whole Concord grape – skins and seeds included. That’s important for two reasons. One, that’s where the healthy stuff is – and two, farmers hate to see good things go to waste.”

— Stella Grabelsek, family-farmer owner Geneva, Ohio


peopleIdentifying the Essence of Welch’s

This year, we began exploring our brand

essence to identify what Welch’s means

to consumers–and how we can leverage

our powerful brand to grow our business.

Our Brand:

12


Welch’s has an iconic brand recognized throughout the world. But what does Welch’s really mean to consumers? What is the true essence of our brand? And how can we use this brand essence to differentiate our unique company and drive growth of our products–now and in the future?

Inherently authentic products in tune with today’s consumers

This important work, initiated in FY ’09, draws upon extensive data mining, consumer interaction, competitive benchmarking, macro trend analysis, and more. From this data, the brand essence team identified the deep, rich experience associated with our core products. Early results focused on the authenticity and realness of Welch’s products, which resonates with today’s consumers, who want to know that their food is healthy, wholesome, safe, and real. We want to connect consumers with the vineyards where our grapes are grown–and with our family-farmer owners.

Sending a unique message to the marketplace

The ultimate result of the team’s efforts is a compelling, powerful brand story that is reflected in our packaging, advertising, marketing, and more –and that will drive growth of our products. As consumers take a closer look at where their food comes from, Welch’s already has an exceptionally strong story. Our products come from real grapes, from real vineyards, owned and operated by family farmers–some for generations.

13

“I was 5 when I started learning the family business. To get me out on the farm, my Dad would bribe me with the first taste of our juice. Now I’ve got my own kids, and that bribe still works like a charm.”

— Dave Schultz, family-farmer owner

Niles, Michigan


peopleGreater Efficiency Means New Profitability

Welch’s hasn’t survived and thrived for

140 years by staying the same. The Welch’s

story is one of continuous transformation

and change–and FY ’09 marks a year of

major advances in efficiency.

Our Organization:

14


Efficiency starts in the vineyards, where our family-farmer owners work to grow the highest-quality grapes possible, drawing from the latest advances in viticulture. At the processing level, our plants seek new ways to capture the flavor and essence of these grapes, as efficiently as possible. And the Welch’s team consistently looks for new management practices, cross-functional collaboration, and innovative practices that streamline the process of getting our products to customers–and creating value for consumers.

A year of working efficiently

In short, an unwavering focus on efficiency at all levels is vital to the ongo-ing success of Welch’s. FY ’09 saw major advances in our implementation of Lean manufacturing, which strives to improve efficiency by eliminating waste. This year saw significant training of Lean Leads, who will apply their training to all aspects of our operations.

Lean is already generating significant cost savings. Thanks to this critical effort as well as many other operational excellence, technology, and purchasing-driven initiatives, the Welch’s Value Chain delivered more than $20 million in cost savings projects in FY ’09. Critical efforts included reformulations, packaging redesign and consolidation, process improvements, plant improvements, new supply contracts and logistics improvements.

Implementation of our new ERP system, another major efficiency-enhancing project, also brought tangible changes in FY ’09, facilitating improvements in freight and distribution as well as inventory management.

Initiating a new Strategic Plan

Development of a new Strategic Plan, which began in FY ’09, will continue to align and optimize our organization for greater efficiency–and even more success in the marketplace. The search for new ways to achieve innovative efficiency continues at Welch’s–from growers to processing plant teams to Welch’s colleagues.

15

“Eight hours. That’s how long it takes for our Concord grapes to be pressed into juice after they’re picked off the vine. This means your family gets the highest quality juice from our farms.”

— Bill Beckman, family-farmer owner North East, Pennsylvania


1816


National Grape Cooperative Association, Inc. and Welch Foods Inc., A Cooperative 17

2009 Fiscal Year Financial Reports

2007 Crop Proceeds Earned in Fiscal Years 2008 and 2009

The Company is a marketing cooperative operating on an open pool basis. Pursuant to the terms of the marketing agreements with its patrons in the Eastern and Western Pools, net proceeds from the sale of its patron grapes, as defined by the Crop Purchase Agreement, are distributed to the patrons in proportion to their deliveries to the pool. The distributions are made in cash, allocation credits and permanent equity credits. The charts below illustrate the Distributable Patron Proceeds earned on the calendar year 2007 crop (harvested in fiscal 2008) in the Eastern and Western Pools during the two fiscal years in which it was sold. In the top chart, for example, 190,584 tons of the Eastern 2007 crop were sold in fiscal 2008, earning an average of $204 per ton or $38.9 million. The balance of the crop, 42,555 tons, was sold in fiscal 2009 earning an average of $256 per ton or $10.9 million. Therefore, the total 2007 crop in the Eastern Pool earned $49.8 million over the two fiscal years or an average crop earnings of $214 per ton. Based on the same methodology, the total 2007 crop in the Western Pool earned $28.4 million or $186 per ton.

East 2009 2008 Total

233,139 Tons at $214 Per Ton Tons Sold 42,555 190,584 233,139 Distributable Patron Proceeds Per Ton $ 256 $ 204 2007 Crop Proceeds (in millions) $10.9 $38.9 $49.8 2007 Crop Proceeds Per Ton $ 214

West 2009 2008 Total

153,021 Tons at $186 Per Ton Tons Sold 26,800 126,221 153,021 Distributable Patron Proceeds Per Ton $ 239 $ 174 2007 Crop Proceeds (in millions) $ 6.4 $22.0 $28.4 2007 Crop Proceeds Per Ton $ 186

Sold in FiScal ’09

42,555 Tons @ $256


26,800 Tons @ $239


190,584 Tons @ $204


126,221 Tons @ $174



Total distributions for 2007 cropBased on average Sugar Solids ofconcord Grapes

Schedule of Distributions to Patrons – 2007 Crop

Eastern Pool

Final 233,139 Tons

Cash:

Fiscal 2008 $138

Fiscal 2009 20

September, 2009 3

January, 2010 (to be paid) 4

Total Cash 165

Allocation Credits:

January, 2009 30

January, 2010 (to be issued) 10

Total Allocation Credits 40

Permanent Equity Credits: January, 2009 5

Total Distributions $210

Average Per Ton Distribution

in the Eastern Pool* $214

*Reflects 9% premium on Niagara Grapes

Western Pool

Final 153,021 Tons

Cash:

Fiscal 2008 $119

Fiscal 2009 18

September, 2009 4

January, 2010 (to be paid) 6

Total Cash 147

Allocation Credits:

January, 2009 26

January, 2010 (to be issued) 9

Total Allocation Credits 35

Permanent Equity Credits: January, 2009 4

Total Distributions $186



Five-Year Summary – Fiscal Years

Years Ended August 31, 2009 2008 2007 2006 2005

Equivalent Case Sales (in thousands) 60,744 70,757 69,659 66,354 64,821

Net Sales (in thousands) $ 673,111 $ 685,001 $ 653,614 $ 599,574 $ 577,781

Net Proceeds (in thousands) $ 80,999 $ 71,640 $ 59,484 $ 30,8601 $ 58,522

Distributable Patron Proceeds (in thousands) $ 76,735 $ 70,127 $ 65,229 $ 46,513 $ 54,861

Patron Tons Sold 307,024 364,772 343,304 347,648 279,415

Net Proceeds Per Ton $ 264 $ 196 $ 173 $ 89 $ 209

Distributable Patron Proceeds Per Ton $ 250 $ 192 $ 190 $ 134 $ 196

Distributable Patron Proceeds Per Bearing Acre $ 1,657 $ 1,451 $ 1,330 $ 948 $ 1,106

Concord Grape Payments (Average By Crop – Fiscal Years)

**2008 Crop Not Completely Sold

East $ ** $ 214 $ 204 $ 164 $ 189 West $ ** $ 186 $ 173 $ 135 $ 161

Number of Patrons 1,176 1,243 1,281 1,295 1,309

Patron Acreage 46,489 48,508 49,254 49,351 49,893 (Bearing and Nonbearing)

Average Acres Per Patron 39.5 39.0 38.4 38.1 38.1

Patron Tons Received 319,418 386,160 258,554 414,099 257,517 (2008 – 2004 Harvests)

Average Tons Per Acre Received Concords – Eastern Pool 6.0 6.5 4.2 7.1 5.0 (NY, PA, OH, MI, ONT. CAN) Concords – Western Pool (WA) 8.0 10.5 7.6 10.9 5.5 Concords – Corporate 6.6 7.8 5.3 8.4 5.2

Capital Expenditures (in thousands) $ 18,432 $ 12,525 $ 22,992 $ 25,187 $ 28,569

Long-Term Debt, Trust Preferred Securities and Allocation Credits (in thousands) $ 191,006 $ 191,556 $ 162,730 $ 193,165 $ 200,961

Total Assets (in thousands) $ 389,421 $ 409,849 $399,713 $ 411,242 $ 386,470

Number of Employees 1,134 1,170 1,228 1,223 1,382

1 Net proceeds before the restructuring charge to close the Kennewick facility, net of related tax benefit, is $40.2 million.



Management’s Discussion and Analysis

The following discussion and analysis is intended to provide a summary of significant factors relevant to the Company’s financial performance and condition. The discussion should be read together with the financial statements and related notes beginning on page 25.

overview

National Grape Cooperative Association, Inc. (National) and Welch Foods Inc., A Cooperative (Welch’s)(collectively, the Company) are agricultural marketing cooperatives organized for the benefit of National’sConcord and Niagara 1,176 grape-growing patrons. Our Mission is to maximize the value of the enterprisefrom the crop to the consumer. Welch’s is a leading manufacturer and marketer of Concord and Niagaragrape-based consumer products including grape juice, jelly and other fruit-based offerings. The products are sold primarily through grocery stores, mass merchandisers, club discount stores and other consumer outlets. Our market environment is highly competitive with both global and local competitors. Our products com-pete with other branded products as well as retailer and private-label products.

Results of operations

Net sales for 2009 were $673.1 million, $11.9 million or 1.7% less than 2008 net sales of $685.0 million.The decrease was due to a combination of lower unit volume and investments made in trade promotional activity to protect distribution, partially offset by higher pricing. Unit volume decreases were driven by de-creases in the Bottled Category (primarily 100% purple grape juice) and Refrigerated Cocktails. Net sales for 2008 were $685.0 million, $31.4 million or 4.8% more than 2007 net sales of $653.6million. The increase was due to higher pricing, increased unit volume and favorable changes in sales mix. Cost of sales for 2009 decreased $47.9 million, or 9.9%, from $483.1 million in 2008 to $435.2million. For purposes of determining net proceeds, cost of sales excludes the cost of patron grapes. As apercentage of net sales, cost of sales decreased from 70.5% in 2008 to 64.6% in 2009. The decrease in costof sales in 2009 was primarily due to decreases in commodities, transportation costs, lower unitvolume sold and productivity improvements, partially offset by unfavorable changes in sales mix. Cost of sales for 2008 increased $27.9 million, or 6.1%, from $455.2 million in 2007 to $483.1million. As a percentage of net sales, cost of sales increased from 69.6% in 2007 to 70.5% in 2008. The in-crease in cost of sales in 2008 was primarily due to increases in commodities, transportation costs and higher unit volume sold, partially offset by productivity improvements and favorable changes in sales mix. Gross margin was 35.3% in 2009, an increase of 5.8 points versus 2008. Effective pricing along with savings associated with commodities and transportation costs were partially offset by investments made in trade promotional activity. Gross margin was 29.5% in 2008 compared to 30.4% in 2007. The decrease in 2008 was driven by increases in commodities and transportation costs partially offset by favorable changes in sales mix and productivity improvements. Selling and administrative expense was $149.8 million, $130.4 million and $135.6 million in 2009,2008 and 2007, respectively. The increase in 2009 of $19.4 million, or 14.9%, was attributable to increases in direct marketing activities and administrative expenses. The increase in marketing expense was largely driven by an increase in media advertising associated with our core products. The increase in administrative expense was largely driven by higher employee-related costs including higher incentive compensation. The decrease in 2008 of $5.2 million, or (3.8%), was attributable to a $9.3 million reduction in administrative spending driven by decreases in the incentive compensation pool and nonrecurring costs associated with changes made in senior management in 2007, partially offset by higher levels of direct marketing activities. Interest expense was $9.1 million, $10.7 million and $10.2 million in 2009, 2008 and 2007,respectively. The decrease in 2009 was due to lower average debt levels driven by strong company perfor-mance and lower interest rates. Other income includes royalty income, patronage distributions from CoBank and miscellaneousincome and expense items. Other income, net of other expense, was $4.9 million, $8.9 million and $4.8million in 2009, 2008 and 2007, respectively. The decrease in 2009 was primarily driven by a one-time insurance settlement in the prior year along with an increase in company reserves in 2009, partially offset by higher royalties.



Proceeds before federal income taxes were $83.9 million, $69.6 million and $57.5 million in 2009, 2008 and 2007, respectively. The increase in 2009 of $14.3 million was attributable to improved profit margins primarily due to commodity deflation, lower distribution costs and productivity improvements. The in-crease in 2008 of $12.1 million was primarily attributable to increased sales volume and lower administra-tive expense. Federal income taxes (benefit) for 2009, 2008 and 2007 was $2.9 million, ($2.0) million and ($2.0) million, respectively. The change in taxes in 2009 was primarily due to nonpatron income. The change in taxes in 2008 was due to nonpatron losses and the reversal of certain tax reserves. Nonpatron income (loss) for 2009, 2008 and 2007 was $2.3 million, ($0.4) million and ($7.7) million, respectively. Nonpatron income in 2009 was driven by improved profit margins primarily due to decreases in commod-ity and transportation costs along with a shift in advertising and promotional activities with a focus on our core products. The nonpatron loss in 2008 was primarily driven by significant increases in commodity and transportation costs. Net proceeds for 2009, 2008 and 2007 were $81.0 million, $71.6 million and $59.5 million, respectively. Distributable patron proceeds (patron proceeds adjusted for the restructuring charge adjustment,Note B) were $76.7 million, $70.1 million and $65.2 million in 2009, 2008 and 2007, respectively. Net proceeds per ton were $264 in 2009, $196 in 2008 and $173 in 2007. Distributable patronproceeds per ton were $250 in 2009, $192 in 2008 and $190 in 2007. Patron tons sold were 307.0 thousand, 364.8 thousand and 343.3 thousand in 2009, 2008 and 2007, respectively.

Financial condition

Cash provided by operations and selected borrowings are the Company’s primary sources of funds to finance operating needs and capital investments and to pay our grower-owners. $104.9 million of cash was provided by operations before payments to patrons in 2009, compared to $82.6 million in 2008 and $97.7 million in 2007. The increase in cash from operations in 2009 was primarily driven by an increase in net proceeds and a decrease in working capital requirements attributable to a decrease in accounts receivable, due to improved collection efforts, and the smaller 2008 crop size. The decrease in cash from operations in 2008 was largely driven by an increase in working capital requirements attributable to an increase in inventory as a result of the large 2007 crop size and an increase in accounts receivable as a result of higher sales volume. Cash invested in property, plant and equipment was $18.4 million in 2009 compared to $12.5 million in 2008 and $23.0 million in 2007. We expect capital expenditures in 2010 to be approximately $21.0 million. During 2009, $15.4 million of patron investments were redeemed, $160 thousand more than 2008. On February 1, 2009, the Company called for redemption of the entire $14.8 million of its Series 2002 Allocation Credits, which were due in 2022, at a redemption price of 100% of their principal amount. At August 31, 2009, the Company had $118.8 million of outstanding debt compared to $129.4 million at August 31, 2008. At the end of fiscal 2009, $83.4 million of the debt was long-term. The Companyuses debt when necessary as a means for providing working capital and term financing for capital expenditures, new product introductions and other business investments. The patron retention rate (the percent of patron proceeds distributable in allocation credits andpermanent equity credits) was 21% in 2009, 2008 and 2007. Patron retention provides working capital andhelps maintain a prudent capital structure. To meet seasonal and operating cash requirements, the Company has various sources of financingavailable to supplement internally generated funds, including bank loans and other forms of financing indomestic financial markets. On August 31, 2009, the Company had $79.6 million of available borrowingunder its $115.0 million line of credit. Management believes that internally generated funds, existing working capital and available credit facilities are adequate to meet normal operating requirements, to fund capital expenditures, to meet current debt service requirements and to provide for the redemption of allocation credits in 2010. As the need for external financing arises, the Company expects to have continued access to short-term credit markets to fund seasonal working capital requirements and to have the ability to raise additional funds in long-term debt markets.



commitments

The Company has contractual obligations at August 31, 2009, payable or maturing in the following years:

Less Than 2 – 3 4 – 5 After (in thousands) Total 1 Year Years Years 5 Years

Short-Term Debt $ 35,400 $ 35,400 $ – $ – $ –

Long-Term Debt 83,400 – 30,000 – 53,400

Notes Payable to Patrons 2,144 2,144 – – –

Operating Leases 12,139 3,452 5,486 1,484 1,717

Retirement Plans (1) 46,665 8,820 19,473 18,372 –

Trust Preferred Securities 23,500 – – – 23,500

Total $ 203,248 $ 49,816 $ 54,959 $ 19,856 $ 78,617

(1) Estimated future funding requirements related to pension and postretirement benefit plans. The projected payments after 5 years are not

currently determinable.

The Company has purchase commitments for materials, supplies, services and property, plant and equipment as part of the ordinary course of business. Some of these commitments are long-term and contain penalty provisions for early termination. The Company does not believe that a material amount of penalties is likely to be incurred under these contracts based upon historical experience and current expectations. The Company does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity.

off-Balance Sheet arrangements

The Company does not have off-balance sheet arrangements, financings or other relationships with uncon-solidated entities or other persons, also known as “variable interest entities.” In addition, the Company does not have any related party transactions that materially affect the results of operations, cash flow or financial condition other than the marketing agreements with National’s member and non-member patrons (Note A).

critical accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions about the effect of matters that are inherentlyuncertain. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. Actual results may differ from those estimates under different assumptions and conditions. The selection of significant accounting policies, discussed in Note A of the Consolidated Financial Statements beginning on page 29, and the effect of the estimates have been discussed with the Audit Committee of Welch’s Board of Directors.



Revenue Recognition – Most of our revenue transactions represent the sale of inventory. Revenue is recognized from product sales when goods are shipped and title and risk of loss passes to the customer. A provision for payment discounts and product returns are recorded as a reduction of sales within the same period that the revenue is recognized. We offer sales incentives to our customers through various programs to encour-age them to offer temporary price reductions of the Company’s products to consumers, to obtain favorable display positions in stores or to obtain shelf space for new products. Trade promotions are recorded as a reduction of sales at the time of sale of product to the customer based on expected levels of performance. We offer sales incentives to consumers in the form of coupons and rebates. Consumer promotions are recorded as a reduction of sales at the time of the offer based on estimated redemption cost. Actual cost of trade and consumer promotions may differ if factors such as level and success of the programs or other con-ditions differ from expectations.

Employee Benefits – The Company sponsors various pension plans and other postretirement benefit plans such as healthcare for retirees. For accounting purposes, these plans require assumptions to estimate the projected and accumulated benefit obligations and related current year expense. These assumptions, based on the most reasonable information available, include discount rates, expected investment returns, expected salary increases and health care trends, mortality and employee turnover. The Company uses third-party actuaries to assist management in reviewing the assumptions and in measuring the expense and related liabilities associated with these benefits. Different assumptions, primarily actual versus expected investment returns and determination of discount rate, may result in a significant impact to the amount of benefit expense and related liability recorded in the financial statements.

new accounting Pronouncements adopted

In fiscal 2009, the Company adopted Financial Accounting Standards Board Statement No. 157, Fair Value Measurements (SFAS No. 157). The new guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Refer to Note L for additional information regarding the Company’s fair value measurements for financial as-sets and liabilities. FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP SFAS 157-2) amends SFAS No. 157 to delay the effective date of the standard, as it relates to non financial assets and non financial liabilities to fiscal years beginning after November 15, 2008 (fiscal 2010, for the Company). No other new accounting pronouncements issued or effective during fiscal 2009 has had oris expected to have, a material impact on the consolidated financial statements.

Forward-looking Statements

This annual report includes statements regarding future performance, events and outcomes that have not yet occurred. These “forward-looking statements” are based on financial data, business plans and expectations only as of the time the statements are made, which may become out-of-date or incomplete. Forward-looking statements are inherently uncertain and subject to risks including, but not limited to, those associated with (1) development, market share growth and continued consumer acceptance of the Company’s products; (2) competitive activity in the marketplace; (3) cost trends particularly due to changes in commodity prices, energy costs and benefit costs; and (4) agricultural factors affecting the crop delivered to the Company. Readers should consider these risks and uncertainties when evaluating these forward-looking statements and recognize that events could be significantly different than our expectations. The Company assumes no obligation to update these statements as a result of new information, future events or other factors.



Management’s Responsibility for Financial Statements

Company management is responsible for the accuracy and completeness of the information andrepresentations presented in the accompanying consolidated financial statements and in other sections ofthis Annual Report. The financial statements have been prepared in conformity with accounting principlesgenerally accepted in the United States of America and necessarily include amounts that are based onestimates and judgments of management. The financial information throughout this report is consistent withour consolidated financial statements. We believe these financial statements and disclosures fairly present, inall material respects, the operations and financial condition of the Company.

Management is responsible for establishing and maintaining an adequate internal control systemdesigned to provide reasonable assurance that assets are properly safeguarded and that accounting recordsprovide a reliable basis for the preparation of financial statements. Such controls, in the broader sense,also encompass the organizational arrangements and personnel selection and evaluation criteria designedto provide reasonable assurances that the financial and other functions of the Company are performedby competent personnel, under adequate checks and balances. The effectiveness of the various internalaccounting controls is tested by the Company’s internal auditors.

The Audit Committee has engaged independent auditors, KPMG LLP, to audit our consolidatedfinancial statements. Their audits were conducted in accordance with auditing standards generally acceptedin the United States of America, which include the consideration of the Company’s internal controls to theextent necessary to determine the nature, timing and extent of their year-end audit procedures. We havemade available to KPMG LLP all financial records and related data. Their report is on page 38 of this report.

The Audit Committee exercises an oversight role on the Company’s financial reporting and systemof internal controls. The Committee consists of two grower-directors and three independent outsidedirectors. The Committee meets periodically with management, the internal auditors and the independentauditors to review matters relating to financial reporting, the internal control system, and the nature, extentand results of audit efforts. Both the internal and independent auditors have direct access to the AuditCommittee and meet with the Committee periodically, both with and without management present.

Bradley C. Irwin Michael J. Perda President and CEO Vice President and CFO Welch Foods Inc., A Cooperative Welch Foods Inc., A Cooperative



Consolidated Statements of Operations and Distributions of Net Proceeds

(in thousands)

Years Ended August 31, 2009 2008 2007

Net sales (Note A) $673,111 $685,001 $ 653,614

Cost of sales 435,233 483,118 455,231

Selling and administrative expense 149,833 130,396 135,569

Interest expense 9,115 10,749 10,174

Other income – net (4,924) (8,861) (4,844)

589,257 615,402 596,130

Proceeds before federal income taxes 83,854 69,599 57,484

Federal income taxes (benefit) (Note F) 2,855 (2,041) (2,000)

Net proceeds $ 80,999 $ 71,640 $ 59,484

Patron distributions:

Cash: East $ 40,043 $ 35,053 $ 31,329

West 20,578 20,347 20,202

Total 60,621 55,400 51,531

Allocation credits:

East 9,640 8,393 7,553

West 4,974 4,884 4,845

Total 14,614 13,277 12,398

Permanent equity credits:

East 1,004 925 775

West 496 525 525

Total 1,500 1,450 1,300

Total patron distributions 76,735 70,127 65,229

Distributed restructuring charge (Note B) 1,960 1,960 1,960

Nonpatron net income (loss) 2,304 (447) (7,705)

Net proceeds $ 80,999 $ 71,640 $ 59,484

See accompanying notes to consolidated financial statements.



Consolidated Balance Sheets

(in thousands)

August 31, 2009 2008

assets

Current assets:

Cash and cash equivalents $ 6,503 $ 5,055

Accounts receivable 62,346 76,863

Inventories (Note C) 94,456 93,286

Other 5,141 2,973

Total current assets 168,446 178,177

Property, plant and equipment:

Land and improvements 12,198 11,410

Buildings and improvements 87,948 84,726

Machinery and equipment 297,014 287,077

397,160 383,213

Less accumulated depreciation 294,725 277,933

Net property, plant and equipment 102,435 105,280

Goodwill (Note A) 18,868 19,119

Other assets (Note D) 99,672 107,273

$ 389,421 $409,849

liabilities, Patrons’ investments, accumulated deficit and accumulated other comprehensive loss

Current liabilities:

Accounts payable $ 40,510 $ 56,711

Accrued liabilities 42,026 35,982

Accounts payable to patrons 16,852 11,414

Notes payable to patrons 2,144 3,339

Short-term debt (Note E) 35,400 46,000

Current maturities of patrons’ investments 720 644

Total current liabilities 137,652 154,090

Long-term debt (Note E) 83,400 83,400

Other liabilities (Note G) 119,389 94,435

Trust preferred securities (Note H) 23,500 23,500

Patrons’ investments (Note I):

Allocation credits 84,106 84,656

Permanent equity credits 15,197 14,035

Accumulated deficit (20,562) (24,826)

Accumulated other comprehensive loss (Note A) (53,261) (19,441)

Commitments and contingencies (Notes K and M)

$ 389,421 $ 409,849




Consolidated Statements of Cash Flows

(in thousands)


cash flows from operating activities:

Net proceeds $80,999 $71,640 $59,484

Adjustments to reconcile net proceeds to

net cash provided by operating activities:

Depreciation and amortization 26,112 25,043 21,391

Deferred income taxes 3,069 (1,885) (2,272)

Loss on impairment of equipment 1,335 150 173

Cash provided (used) by changes in:

Accounts receivable 14,517 (8,386) (8,277)

Inventories (1,170) (11,129) 17,921

Other current assets (4,103) (1,569) 2,013

Accounts payable (16,201) 16,171 6,073

Accrued liabilities 6,044 (11,413) 8,242

Accounts payable to patrons 2,030 4,317 (13,611)

Other operating activities (7,715) (290) 6,561

Total adjustments 23,918 11,009 38,214

Cash provided by operations 104,917 82,649 97,698

Cash payments to patrons (57,213) (60,161) (37,737)

Net cash provided by operating activities 47,704 22,488 59,961

cash flows from investing activities:

Property, plant and equipment acquisitions (18,432) (12,525) (22,992)

Sale of property, plant and equipment – – 3,299

Purchase of investments (1,402) (1,968) (1,701)

Sale of investments 801 1,448 1,126

Net cash used by investing activities (19,033) (13,045) (20,268)

cash flows from financing activities:

Increase (decrease) in short-term debt (10,600) 3,500 (13,600)

Proceeds from long-term debt – 30,000 –

Repayment of long-term debt – (26,000) (13,000)

Proceeds from patron notes issued 4,935 6,992 5,376

Repayment of patron notes (6,131) (7,077) (4,540)

Redemption of patrons’ investments (15,427) (15,267) (17,391)

Net cash used by financing activities (27,223) (7,852) (43,155)

Net increase (decrease) in cash and cash equivalents 1,448 1,591 (3,462)

Cash and cash equivalents at beginning of year 5,055 3,464 6,926

Cash and cash equivalents at end of year $ 6,503 $ 5,055 $ 3,464

Supplemental cash flow information:

Interest paid $ 8,995 $ 10,843 $ 10,496

Income taxes paid $ – $ – $ –

See accompanying notes to consolidated financial statements



Consolidated Statements of Changes in Patrons’ Investments, Accumulated Deficit and Accumulated Other Comprehensive Loss

Allocation Permanent Accumulated Accumulated Other (in thousands) Credits Equity Credits Deficit Comprehensive Loss

Balance, August 31, 2006 $90,265 $12,887 $ (20,594) $ (73)

Adjustment for actual distribution of 2006 allocation credits and permanent equity credits 162 (164) – –

2000 allocation credits called for redemption (16,995) – – –

Permanent equity credits estimated to be redeemed – (565) – –

Permanent equity credits paid below prior year’s estimate – 40 – –

2007 allocation credits and permanent equity credits estimated to be distributed 12,398 1,300 – –

Distributed restructuring charge (Note B) – – 1,960 –

Nonpatron net loss – – (7,705) –

Net change of unrealized losses on hedge instruments – – – (234)

Impact of adoption of FASB Statement No. 158, net of tax of $2,020 – – – (14,955)

Balance, August 31, 2007 85,830 13,498 (26,339) (15,262)

Adjustment for actual distribution of 2007 allocation credits and permanent equity credits 108 (110) – –






Nonpatron net loss – – (447) –

Net change of unrealized losses on hedge instruments – – – (13)

Pensions and other post retirement benefits, net of tax of $563 (Note J) – – – (4,166)

Balance, August 31, 2008 84,656 14,035 (24,826) (19,441)

Adjustment for actual distribution of 2008 allocation credits and permanent equity credits (361) 359 – –






Nonpatron net income – – 2,304 –

Net change of unrealized losses on hedge instruments – – – (580) Pensions and other post retirement benefits, net of tax of $4,489 (Note J) – – – (33,240)

Balance, August 31, 2009 $ 84,106 $ 15,197 $ (20,562) $ (53,261)




Notes to Consolidated Financial Statements (Dollars in thousands)

note a Summary of Significant accounting Policies

Operations – National Grape Cooperative Association, Inc. (National) and Welch Foods Inc., A Cooperative(Welch’s) (collectively, the Company) are agricultural marketing cooperatives organized for the benefit ofNational’s member and non-member patrons (growers). Welch’s processes growers’ grapes and is a leadingmarketer of Concord and Niagara grape-based consumer products, including grape juice, jelly and otherfruit-based products. The Company’s primary markets are in the United States and accounted for approxi-mately 89% of net sales in 2009. Products are also sold internationally, either directly or by licensees,principally in Japan, the United Kingdom and Canada. The Company’s customers are primarily retailers anddistributors, a number of which are significant. The Company’s largest customer, Wal-Mart Stores, Inc. andaffiliates, accounted for approximately 30% of net sales in 2009. The Company operates on an open pool basis. Pursuant to the terms of marketing agreements with its growers, the net proceeds earned from the sale of patron grapes, as defined by the Crop Purchase Agree-ment, are distributed to patrons, based on patronage, in cash, allocation credits and permanent equity cred-its on a crop year per ton basis. Net proceeds from nonpatronage sources, if any, are retained in the business.

Basis of presentation – The consolidated financial statements include the accounts of National, Welch’s andsubsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of estimates – The preparation of financial statements in conformity with U.S. generally accepted account-ing principles, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates include accruals for marketing and merchandising programs, determination of discount rate and other assumptions for defined benefit pension and other postretirement benefit expenses and liabilities, allowances for doubtful accounts, net realizable value of inventories and asset impairment. Actual results could differ from those estimates.

Revenue recognition – Revenue from sales of inventory is recognized when products are shipped and titleand risk of loss passes to the customer. Sales are recorded net of payment discounts, product returns, tradepromotions and consumer coupons. Shipping and handling costs invoiced to customers are included in netsales and related costs are included in cost of sales. Trade promotions, consisting principally of customerpricing allowances and merchandising funds are recognized as incurred, generally at the time of sale.Consumer coupons and rebates are recognized at the time of offer at estimated redemption cost. Accruals forexpected payouts under these programs are included in accrued liabilities. Revenue for upfront fees receivedfrom long-term contracts is deferred and recognized systematically over the periods that the fees are earned.Deferred revenue is included in other liabilities.

Cost of sales – Cost of sales includes direct materials and supplies consumed in the manufacture of the prod-uct, manufacturing labor and overhead expense necessary to convert purchased materials and supplies into finished product, and the cost to warehouse and distribute products to customers. Cost of sales excludes the cost of patron grapes for the purpose of determining net proceeds earned by the Company’s patrons. Selling and administrative expense – Selling and administrative expense includes advertising and other market-ing costs, selling expenses and administrative expenses. Advertising costs are expensed in the year in which the advertising first takes place and were $32,084 in 2009, $22,016 in 2008 and $17,323 in 2007. Cash and cash equivalents – Cash equivalents include highly liquid investments with a maturity date of 90 days or less from date of purchase. Accounts receivable – In the normal course of business, the Company extends credit to customers based on anevaluation of a customer’s financial condition. The Company’s top five customers, collectively, accounted for37.6% and 34.7% of accounts receivable as of August 31, 2009 and 2008, respectively. The Company evalu-ates its exposure for credit losses and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances, credit conditions, and historical write-offs and collections. The allow-ance for doubtful accounts at August 31, 2009 and 2008 was $350 and $477, respectively.

Inventories – Inventories include the estimated cost of patron grapes and are stated at the lower of cost (first in, first-out) or market. Cost of patron grapes is based on estimated value at the time of harvest. Net proceeds are not impacted by the valuation of patron grapes.



Property, plant and equipment – Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line or sum-of-the-years digits methods over the estimated useful lives of the assets (5 to 20 years for land improvements; 10 to 33 years for buildings; 3 to 12 years for machinery and equipment; and 5 to 10 years for furniture and fixtures).

Long-lived assets – Long-lived assets and certain identifiable intangibles are reviewed for impairment when-ever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. When an impairment occurs, the asset is written down to its fair value and an impairment loss is recog-nized. Assets to be sold are recorded at the lower of carrying value or net realizable value at the time assets are being actively marketed for sale and disposal is expected to occur within one year.

Goodwill – Goodwill is shown net of accumulated amortization of $8,143 and $7,892 as of August 31, 2009and 2008, respectively. Pursuant to limited exceptions under Financial Accounting Standards BoardStatement No. 142, “Goodwill and Other Intangible Assets,” goodwill from business combinations betweenmutual enterprises including cooperatives of $2,724 at August 31, 2009 is amortized over periods notexceeding 40 years. Remaining goodwill is not amortized but is evaluated annually for impairment. To date,there has been no impairment of goodwill.

Software costs – Computer software and software development costs incurred in connection with developing or obtaining computer software for internal use are capitalized. Capitalized computer software costs are includ-ed in other assets and are amortized on a straight-line basis over the estimated useful lives of the software. Federal income taxes – The Company is not subject to Federal income taxes on net patron proceeds distributed or allocated to patrons in qualified form. The Company is subject to Federal income taxes on nonpatronage net proceeds. The Company utilizes the asset and liability method of accounting for income taxes. Financial instruments – The Company’s financial instruments consist primarily of cash and cash equivalents,accounts receivable, short-term and long-term investments, short-term and long-term debt, and derivativeinstruments. Unless otherwise specified, the Company believes the carrying values of financial instrumentsapproximate their fair value. The Company uses derivative instruments for the purpose of hedging commodity price and interest rate exposures which exist as part of ongoing business operations. The Company carries derivative instruments on the balance sheet at fair value as determined by reference to quoted market prices. Changes in the fair value of non-qualifying derivative instruments and any ineffectiveness associated with cash flow hedges are recog-nized immediately in net proceeds. For derivative instruments designated as cash flow hedges, changes in fair value are deferred within accumulated other comprehensive loss to the extent the hedge is effective and then recognized in net proceeds in the period during which the related hedged transaction affects earnings. The Company does not hold or issue derivative instruments for speculative trading purposes. Employee related benefits – Pension and postretirement benefits such as healthcare costs are expensed as such benefits are earned by employees. The recognition of expense is significantly impacted by estimates such as discount rates used to value certain liabilities and future health care costs and actual return on plan assets. The Company uses independent third-party specialists to assist management in appropriately measuring the expense and liabilities associated with pension and postretirement benefits. Accumulated other comprehensive loss – Accumulated other comprehensive loss includes (a) the net change inunrealized income (loss) on hedge instruments and (b) gains (losses) and prior service costs associated withpension and postretirement benefit plans that arise during the period but not included as components of netperiodic benefit cost, net of tax. New accounting pronouncements – In fiscal 2009, the Company adopted Financial Accounting Standards Board Statement No. 157, Fair Value Measurements (SFAS No. 157). The new guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Refer to Note L for additional information regarding the Company’s fair value measurements for financial assets and liabilities. FASB Staff Position No. 157-2, Effective Date of FASB Statement No.157 (FSP SFAS 157-2) amends SFAS No. 157 to delay the effective date of the standard, as it relates to non financial assets and non financial liabilities to fiscal years beginning after November 15, 2008 (fiscal 2010, for the Company). The Company has not yet completed its adoption assessment of FSP SFAS 157-2.



Recent accounting pronouncements – In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Account-ing for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109. FIN 48 addresses the account-ing and disclosure of uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 will be effective for periods beginning after December 15, 2008, (fiscal year 2010 for the Company) with any cumulative effect of the change in accounting principle recorded as an adjustment to accumulated deficit. The Company has not yet completed its assessment of the adoption of FIN 48. In December 2008, the FASB issued FSP SFAS 132 (R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP SFAS 132 (R)-1). FSP SFAS 132 (R)-1 provides guidance on employers’ disclosures about plan assets of a defined benefit pension plan or other postretirement plan. This FSP is effective for fiscal years ending after December 15, 2009, (fiscal 2010 for the Company). The Company has not yet completed its adoption assessment of FSP SFAS 132 (R)-1.

Reclassification of prior years’ statements – Certain reclassifications have been made to the 2008 and 2007 consolidated financial statements to conform with the 2009 presentation.

note B Restructuring charge

During 2006, the Company closed its production facilities in Kennewick, Washington to improve its overallcost base. Production was transferred to plants in Lawton, Michigan and North East, Pennsylvania. Inconjunction with the restructuring, the Company recorded a pre-tax charge of $14,144 related primarilyto employee separation costs and an impairment loss on the write-down of the assets held for sale to theestimated net realizable value of $3,178. These assets were subsequently sold in 2007. Cash payments relatedto the restructuring were approximately $2,890. Pursuant to the Crop Purchase Agreement and the approvalof the Boards of Directors of National and Welch’s, approximately $9,759 (patron portion) of the abovecharge will be deducted over a 60-month period for purposes of determining patron distributions. As a result, approximately $1,960 of the restructuring charge reduced 2009, 2008 and 2007 distributable patron proceeds, respectively, and the remaining $3,066, included in accumulated deficit, will reduce patron distributions in future years as the expected savings are realized.

note c inventories

Inventories are classified as follows:August 31, 2009 2008

Raw materials $ 29,216 $ 24,814

Supplies and ingredients 20,883 29,361

Finished product 44,357 39,111

$ 94,456 $ 93,286

The cost of patron grapes in inventory as of August 31, 2009 and 2008 was $16,922 and $14,366, respectively.

note d other assets

Other assets consist of the following:August 31, 2009 2008

Cash value of company-owned

life insurance policies (Note J) $ 29,121 $ 30,498

Investment in CoBank, ACB (Note E) 11,505 11,331

Notes receivable and other investments 11,248 13,784

Computer software cost 25,709 28,240

Deferred income taxes 20,734 20,355

Other 1,355 3,065

$ 99,672 $ 107,273



note E Short-Term and long-Term debt

The Company has a short-term line of credit of $115,000 with CoBank, ACB (the Bank), which expires inDecember 2009. The Company intends to extend this line of credit upon its maturity. Short-term debt atAugust 31, 2009 and 2008 was $35,400 and $46,000, respectively. The weighted average interest rate atAugust 31, 2009 and 2008 was 1.62% and 3.14%, respectively.

Long-term debt consists of the following:

August 31, 2009 2008

CoBank, ACB

Term loans, due 2011 to 2020, 5.40% weighted

average rate at August 31, 2009 $ 80,000 $ 80,000

Industrial development revenue bonds, 5.60%, due 2018 3,400 3,400

Total outstanding 83,400 83,400

Current maturities – –

Noncurrent $ 83,400 $ 83,400

As of August 31, 2009, long-term debt maturities for the next five fiscal years are as follows:2010 – $0; 2011 – $30,000; 2012 – $0; 2013 – $0; and 2014 – $0. The Company is required to maintain an investment in CoBank under its borrowing arrangements.The Class E stock of the Bank owned by the Company (Note D) is pledged as security for the Company’sCoBank loans. At the Company’s option, it may periodically elect either fixed or variable rates of interest forspecified periods of time on its short-term line of credit and its term loans with CoBank. The Company mayprepay any of its variable-rate debt at any time without penalty. Various debt agreements contain covenants which require the Company to, among other things,achieve certain financial ratios and a specified level of net worth as of each fiscal year-end. The Companywas not in compliance with one covenant (minimum adjusted net worth) at August 31, 2009 and received a waiver subsequent to year end from the financial institution. The fair value of the Company’s fixed-rate long-term debt, estimated using current market ratesand a discounted cash flow analysis, was approximately $81,086 at August 31, 2009. The Company does notanticipate any significant refinancing activities that would settle long-term debt at fair value.

note F Federal income Taxes

Income taxes are recognized for (a) amount of taxes receivable (payable) for the current year and (b) deferred tax liabilities and assets for future tax consequences of events that have been recognized differently in the financial statements and for tax purposes.

The provision (benefit) for income taxes consists of the following:


Current $ (214) $ (156) $ 272

Deferred 3,069 (1,885) (2,272)

$ 2,855 $ (2,041) $ (2,000) The difference between Federal income taxes and the amount computed by applying the statutory tax rate to proceeds before Federal income taxes results principally from the distributions to patrons.



The significant components of the deferred tax assets and liabilities are as follows:

August 31, 2009 2008

Deferred tax assets related to: Employee benefits $27,242 $ 26,226 Tax credits 4,468 4,633 Net operating losses 7,873 6,935 Other 3,382 3,070

Total gross deferred tax assets $42,965 $40,864

Valuation allowance (1,049) (1,144)

Total deferred tax assets, net of valuation allowance $ 41,916 $ 39,720

Deferred tax liabilities related to: Property, plant and equipment $13,431 $12,538 Intangibles 4,231 4,231 Other 589 786

Total deferred tax liabilities $ 18,251 $17,555

Net deferred tax assets $ 23,665 $22,165

At August 31, 2009, the Company has unused tax net operating losses of $21,969 that expire in fiscalyears 2026 through 2029. In addition, the Company has Alternative Minimum Tax credit carryforwards of $3,329 which have no expiration date and other tax credit carryforwards of $1,139 which expire between 2010 and 2022. The realization of certain deferred tax assets is dependent upon generating taxable income prior to expiration of the carryforward periods. Although realization is not assured, management believes it is more likely than not the net deferred tax assets, net of applicable valuation allowances, will be realized. Valuation allowance relates primarily to tax credits which the Company believes there is an uncertainty of realizing.

note G other liabilities

Other liabilities consist of the following:

August 31, 2009 2008

Deferred compensation $ 15,951 $22,533

Pension and postretirement benefits 96,055 64,357

Other 7,383 7,545

$119,389 $94,435

note H Trust Preferred Securities

In May 1998, the Welch Foods Preferred Capital Trust I (Trust), a wholly owned subsidiary of Welch’s,issued $25 million of 7.41% Series A Cumulative Guaranteed Preferred Securities (Trust Preferred Securi-ties), of which $1,500 was subsequently purchased by Welch’s, at par, from a third party holder. The entire proceeds from the sale of the Trust Preferred Securities were loaned to Welch’s under the terms of a Subor-dinated Loan Agreement (Loan). The Loan, guaranteed by National, is unsecured and ranks subordinate to all other Welch’s indebtedness except for certain obligations of Welch’s regarding the redemption of alloca-tion credits and certificates and permanent equity credits. Interest on the Trust Preferred Securities is payable quarterly, but can be deferred for up to ten consecutive quarters plus penalty, if Welch’s so elects. The Loan is to be repaid beginning May 1, 2023, in six equal annual installments of approximately $4,167, each with a matching scheduled redemption of Trust Preferred Securities. Welch’s has the right at any time to prepay the Loan, in whole or part, subject to a penalty that may be excludable under certain circumstances. The Sub-ordinated Loan Agreement contains various covenants, both financial and other, with which Welch’s is in compliance at August 31, 2009. The fair value of Trust Preferred Securities, estimated using current market rates and a discounted cash flow analysis, was approximately $24,501 at August 31, 2009.

note i Patrons’ investments

The noncash portion of distributable patron proceeds is distributed in the form of allocation credits and permanent equity credits.



The outstanding allocation credits and certificates consist of the following:

August 31, 2009 2008

Series 2002, due 2022 (redeemed in 2009) $ – $14,803

Series 2003, due 2023 13,074 13,074

Series 2004, due 2024 12,397 12,397

Series 2005, due 2025 10,169 10,169

Series 2006, due 2026 8,430 8,430

Series 2007, due 2027 12,506 12,506

Series 2008, due 2028 12,916 13,277

Series 2009, due 2029 (to be distributed) 14,614 –

Unpresented allocation certificates previously called for redemption 45 69

Total outstanding 84,151 84,725

Current maturities 45 69

Noncurrent $84,106 $84,656

It has been National’s practice to call each series for redemption, at a price equal to 100% of its aggregate principal amount, approximately six years after the date of issue. The decision to continue this practice is reviewed annually by National’s Board of Directors. Permanent equity credits are redeemable only in limited circumstances.

note J Employee Benefit Plans

The Company has noncontributory defined benefit pension plans covering substantially all employees notcovered by union-sponsored plans. The plans generally provide pension benefits that are based on theemployee’s years of service and compensation prior to retirement. The Company funds these plans inaccordance with the minimum and maximum limits required by law. The Company also sponsors unfundedpostretirement medical and life insurance benefit plans that cover certain salaried and nonsalaried employees. Employees at some locations are required to contribute a portion of the premium. The following provides a reconciliation of benefit obligations, plan assets and funded status of these plans. Postretirement Pension Plans Benefit Plans

Years Ended August 31, 2009 2008 2009 2008

Change in benefit obligation:

Benefit obligation at beginning of year $ 78,388 $ 78,531 $ 34,146 $ 32,536

Service cost 2,824 2,851 826 768

Interest cost 5,360 4,886 2,323 2,117

Actuarial (gain) loss 16,608 (4,035) 13,710 1,062

Benefits paid (4,006) (3,845) (2,367) (2,337)

Benefit obligation at end of year $ 99,174 $ 78,388 $ 48,638 $ 34,146

Change in plan assets:

Fair value of plan assets at beginning of year $ 59,650 $ 64,491 $ – $ –

Actual return on plan assets (2,535) (3,262) – –

Employer contributions 10,339 2,266 2,367 2,337

Benefits paid (4,006) (3,845) (2,367) (2,337)

Fair value of plan assets at end of year $ 63,448 $ 59,650 $ – $ –

Funded Status $ (35,726) $ (18,738) $ (48,638) $(34,146)



Postretirement Pension Plans Benefit Plans


Classification of net amount recognized:

Current liabilities $ – $ – $ (2,120) $ (1,923)

Noncurrent liabilities (35,726) (18,738) (46,518) (32,223)

Net amount recognized $ (35,726) $(18,738) $ (48,638) $ (34,146)

Amounts recognized in accumulated other comprehensive loss (AOCL) consists of:

Postretirement Pension Plans Benefit Plans Total

2009 2008 2009 2008 2009 2008

Net actuarial loss $35,438 $10,491 $22,882 $9,567 $58,320 $20,058

Prior service cost 524 626 3 4 527 630

Transition obligation – – 585 1,016 585 1,016

Deferred tax benefit (4,279) (1,323) (2,793) (1,260) (7,072) (2,583)

Net amounts recognized in AOCL $31,683 $ 9,794 $20,677 $9,327 $ 52,360 $19,121

Changes in plan assets and benefit obligations, net of tax, recognized in accumulated other comprehensive loss (AOCL) consist of: Postretirement Pension Plans Benefit Plans Total

2009 2008 2009 2008 2009 2008

Net actuarial loss-current year $24,947 $ 4,662 $13,315 $ 601 $38,262 $ 5,263

Amortization of prior service cost (102) (102) – – (102) (102)

Amortization of transition obligation – – (431) (432) (431) (432)

Deferred tax benefit (2,956) (543) (1,533) (20) (4,489) (563)

$21,889 $ 4,017 $11,351 $ 149 $ 33,240 $ 4,166

The accumulated benefit obligation for all defined benefit retirement pension plans was $85,129 and$68,767 at August 31, 2009 and 2008, respectively. Pension plans with accumulated benefit obligations inexcess of plan assets consist of the following:

August 31, 2009 2008

Projected benefit obligation $99,174 $ 78,388

Accumulated benefit obligation $85,129 $ 68,767

Fair value of plan assets $63,448 $ 59,650

Components of net periodic benefit cost were as follows: Postretirement Pension Plans Benefit Plans


Service cost $ 2,824 $ 2,851 $ 826 $ 768

Interest cost 5,360 4,886 2,323 2,117

Expected return on plan assets (5,805) (5,486) – –

Amortization of deferred amounts 103 154 432 432

Recognized net actuarial loss – – 395 461

Net periodic benefit cost $ 2,482 $ 2,405 $ 3,976 $ 3,778

The prior service cost for the defined benefit pension plans that will be amortized from accumulated othercomprehensive loss into net periodic benefit cost over the next fiscal year is $102. The net loss and transitionobligation for the defined postretirement benefit plans that will be amortized from accumulated othercomprehensive loss into net periodic benefit cost over the next fiscal year are $1,189 and $432, respectively.



The Company expects to contribute approximately $6,700 to its qualified defined benefit plans in fiscal year end-ing August 31, 2010. Pension benefits expected to be paid in each year 2010 – 2014 are $4,043, $4,346, $4,707, $5,135 and $5,479, respectively. The aggregated expected pension benefits expected to be paid in the five years from 2015 – 2019 are $33,375. The expected benefit payments are based on the same assumptions used to mea-sure the Company’s benefit obligation at August 31 and include estimated future employee service. The Company expects to contribute approximately $2,120 to the postretirement medical and lifeinsurance plans in fiscal year ending August 31, 2010. Postretirement benefits expected to be paid in eachyear 2010 – 2014 are $2,120, $2,296, $2,477, $2,650 and $2,722, respectively. The aggregate expected ben-efits expected to be paid in the five years from 2015 – 2019 are $15,755. The expected return on pension plan assets is based on historical experience, pension plan invest-ment guidelines, and expectations for long-term rates of return. The pension plan investment guidelines are established based upon an evaluation of market conditions, tolerance for risk, and cash requirements for benefit payments. The Company’s pension plans’ asset target and actual allocations are as follows: Target Allocation Actual Allocation

Asset Category 2009 2008

Equity securities 55% 59% 68%

Debt securities 30% 28% 32%

Other 15% 13% –

Total 100% 100% 100%

The weighted-average assumptions used to determine benefit obligations were as follows: Postretirement Pension Plans Benefit Plans

August 31, 2009 2008 2009 2008

Discount rate 5.75% 7.00% 5.75% 7.00%

Compensation increase rate 3.80% 3.80% – –

Measurement date 8/31/2009 8/31/2008 8/31/2009 8/31/2008

The weighted-average assumptions used to determine net benefit cost were as follows: Postretirement Pension Plans Benefit Plans


Discount rate 7.00% 6.375% 7.00% 6.375%

Expected long-term rate of

return on assets 8.50% 9.00% – –

Compensation rate increase 4.00% 3.80% – –

The assumed healthcare cost trend rates used in determining the accumulated postretirement benefit obligation for participants was 8.0% for fiscal 2009, scaled down to 4.0% over the next three years. Assumed healthcare trend rates have a significant effect on the amounts reported for postretirement medical plans. A one percentage point change in the assumed healthcare cost trend rate would have the following effect:

One Percentage One Percentage Point Increase Point Decrease

Effect on postretirement benefit obligation $ 7,459 $ (6,122)

Effect on net postretirement benefit cost $ 552 $ (445)

For the years ended August 31, 2009, 2008 and 2007, multi-employer pension expense for contributions tounion-sponsored plans was $2,235, $1,791 and $1,419, respectively. The Company has a qualified 401(k) plan and a nonqualified pension restoration plan (PRP). Forthe years ended August 31, 2009, 2008 and 2007, net expenses for these plans were $5,554, $2,862 and



$4,964, respectively. At August 31, 2009, $29,121 of investments represented principally by Company-ownedlife insurance policies was restricted to fund the expected benefits under the PRP (Note D). The Companyhas agreements with certain officers which would require the payment of additional compensation in theevent of a change in control as defined. Participants in certain Company incentive plans may elect to defer all or part of their incentivecompensation until retirement in a nonqualified deferred compensation plan. Deferred incentive compensa-tion as of August 31, 2009 and 2008, was $20,168 and $27,116, respectively.

note K leases

The Company leases certain equipment and buildings under operating leases. Rental expenses related tothese leases amounted to $4,391 in 2009, $4,723 in 2008 and $4,483 in 2007. As of August 31, 2009, futureminimum lease payments under these operating leases for the next five years are as follows: 2010 – $3,452;2011 – $3,024; 2012 – $2,462; 2013 – $1,216; and 2014 – $268.

note l Fair Value Measurements

Effective August 31, 2009, the Company adopted the provisions FASB Statement No. 157, Fair Value Measurements (SFAS No. 157). The new guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements. SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1 Inputs — Quoted prices in active markets for identical assets or liabilities.Level 2 Inputs — Observable market-based inputs or unobservable inputs that are corroborated by market data.Level 3 Inputs — Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.

The following table presents the Company’s financial assets and liabilities as of August 31, 2009 that are measured at fair value on a recurring basis, segregated by level within the fair value hierarchy:

August 31, Level 1 Level 2 Level 3 2009

Assets at fair value:

Investment securities $ 3,239 26,859 – $ 30,098

Total assets at fair value ¹ $ 3,239 26,859 – $ 30,098

Liabilities at fair value:

Derivatives relating to:

Interest rate $ – 654 – $ 654

Commodities – 371 – 371

Total liabilities at fair value ² $ – 1,025 – $ 1,025

¹ All assets are presented in other noncurrent assets. ² All liabilities are presented in accrued liabilities.

note M commitments and contingencies

The Company has purchase commitments for materials, supplies, services and property, plant andequipment as part of the normal course of business. Certain supply contracts contain penalty provisionsfor early termination. The Company does not expect potential payments under these provisions to have amaterial adverse effect on the financial condition of the Company. The Company has standby letters of credit in the amount of $1,597 primarily for the benefit of itsworkers’ compensation insurance providers. The Company is involved in certain litigation, both insured and uninsured, which is beingdefended and handled in the ordinary course of business. In the opinion of management, the outcome ofsuch litigation will not have a material adverse effect on the financial condition of the Company.



Report of Independent Auditors

Board of directors and Patrons national Grape cooperative association, inc.:

We have audited the accompanying consolidated balance sheets of National Grape Cooperative Association, Inc. and Welch Foods Inc., A Cooperative, as of August 31, 2009 and 2008, and the related consolidated statements of operations and distributions of net proceeds, changes in patrons’ investments, accumulated deficit and accumulated other comprehensive loss, and cash flows for each of the years in the three-year period ended August 31, 2009. These consolidated financial statements are the responsibility of the Cooperatives’ management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for purposes of expressing an opinion on the effectiveness of the Cooperatives’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, and assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Grape Cooperative Association, Inc. and Welch Foods Inc., A Cooperative, as of August 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 2009, in conformity with U.S. generally accepted accounting principles.

Boston, MassachusettsOctober 14, 2009



Directory

national Grape cooperative association, inc. Westfield, New York

officers

directors

*Richard A. Boushey Grandview, Washington

Jerry A. Czebotar Pasco, Washington

Anthony J. Falcone, Jr. Silver Creek, New York

*Joseph C. Falcone Silver Creek, New York

Douglas R. Forraht Sodus, Michigan

Randolph H. Graham North East, Pennsylvania

Timothy E. Grow Grandview, Washington

Jon B. Hinkelman Watervliet, Michigan

David P. Mobilia North East, Pennsylvania

*Ned R. Totzke Baroda, Michigan

*Thomas G. Wilkinson North East, Pennsylvania

*Dennis C. Vacco Boston, New York

Marvin D. Vining Grandview, Washington

All National Directors are growers of Concord and/or Niagara grapes and may grow other agricultural products.

*Members of the Executive Committee

Joseph C. FalconePresident

Timothy E. GrowFirstVice President

Anthony J. Falcone, Jr.SecondVice President

Jon B. HinkelmanThirdVice President

Brent J. RoggieGeneral Manager,Chief Operating Officerand Treasurer

Timothy A. BussSecretary and Assistant Treasurer

Michael J. PerdaFinancial and Accounting Officer

Vivian S.Y. Tseng, Esq.Chief Legal OfficerAssistant Secretary

Matthew A. AufmanAssistant Secretary

Thomas A. BockhorstAssistant Treasurer



Directory (continued)

Welch Foods inc., a cooperative Concord, Massachusetts

officers

directors

Joseph C. Falcone (1, 4)

Chairman of the BoardPresidentFalcone Farms, Inc.Silver Creek, New York

Jerry A. Czebotar (3, 5)

Owner-OperatorZeb’s VineyardPasco, Washington

Douglas R. Forraht (3, 5)

PartnerForraht FarmsBerrien Springs, Michigan

Timothy E. Grow (2, 4)

OwnerGrow FruitGrandview, Washington

Bradley C. Irwin (1, 4)

President andChief Executive OfficerWelch’sConcord, Massachusetts

Stephen B. Morris (2, 3, 4, 5)

Chairman, President andChief Executive Officer (Retired)Arbitron, Inc.New York, New York Joseph J. Schena (2, 3, 5)

PartnerCenterview Partners CapitalNew York, New York

Stephen H. Warhover (1, 3, 4)

President andChief Executive Officer (Retired)Gorton’s SeafoodsGloucester, Massachusetts

Thomas G. Wilkinson (1, 2)

OwnerThomas Wilkinson FarmsNorth East, Pennsylvania

James T. Winton (1, 2, 4, 5)

Executive Vice President (Retired)Clarion Marketing and CommunicationsGreenwich, Connecticut committees of the Board

(1) Acquisition(2) Audit(3) Compensation(4) Nominating & Governance(5) Pension Investment

Bradley C. IrwinPresident andChief Executive Officer

Judy B. CarrVice PresidentCorporate Planning

David F. EngelkemeyerVice PresidentOperations and Technology

Lisa D. FlynnVice PresidentHuman Resources

Damon G. HartVice PresidentSales and International

William C. HewinsVice PresidentInternational

Christopher D. HeyeVice PresidentMarketing

Michael J. PerdaVice Presidentand Chief Financial Officer

Vivian S.Y. Tseng, Esq.Vice President, Legal,General Counsel and Secretary


2009 Annual Report

Building on our core strengths

national grape cooperative association, inc. & welch foods inc., a cooperative

COR3-51


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