State’s Rice Co-ops Feud Over Share of Shrinking Exports : Growers’ Fortunes Hinge on 2 Groups’ Strategies

Gene Harris grows rice on 1,200 acres of land in Richvale, about 60 miles north of California’s capital, and he’ll consider 1985 a good year if he just breaks even on the sale of his 1984 crop. “It’s not a happy situation right now,” Harris said. “I was fairly pleased not to fall farther behind than I did.”

Harris’ experience is fairly typical of the farmers who grow rice on 450,000 acres in California’s flat, rich, river-coursed Sacramento Valley, which produces the world’s highest yields--about double that of the rival and larger Southern rice belt that runs from Texas east to the Arkansas border.

But California’s 1.4-million-metric-ton rice crop--about 23% of the 6.27 million tons grown in the United States last year and the second-largest after Arkansas--depends heavily on export sales, much of them to South Korea in recent years. After peaking at $350 million in 1980-81, California’s export crop has fallen victim to a run of good growing seasons abroad, which decreased foreign demand for U.S. rice.

As more of its former customers became self-sufficient in rice production, thanks to the fortuitous absence of typhoons, competition also increased for the remaining rice exports--and this at a time when a persistently strong dollar and a rigid system of domestic price supports had boosted the U.S. crop’s price above world prices. A greatly improved rice crop from Thailand, currently the leading rice-exporting nation, undersells U.S. rice by $7.25 per 100-pound sack, or about $150 per metric ton. The government supports U.S. rice at $11.40 per sack.

Southern growers, who specialize in the long-grain variety that cooks into the dry and fluffy rice favored by Americans, are less dependent on foreign markets than their counterparts in California, where growing conditions favor the more glutinous short- and medium-grain varieties favored in key markets abroad.

As a result, California growers are contributing a disproportionate share of the nation’s costly surplus rice stocks.

The fortunes of Gene Harris and the 3,000 other California growers now are also tied to distinctly different marketing strategies devised by the state’s two largest milling cooperatives, which between them handle about 75% of the crop. While the two--Rice Growers Assn. of California, the largest, and Farmers’ Rice Cooperative--traditionally worked closely to market the state crop, dealing mostly through a single New Jersey broker, Connell Rice & Sugar Co., they have now gone separate ways--and not without bitterness.

Both say they are responding to the same problem:an increasing inability to compete for foreign sales.

Exports were off 30% last year, said James R. Errecarte, executive vice president of the Rice Growers Assn. of California, the 65-year-old cooperative that mills and markets rice from Harris and 2,000 other growers. “We have to be able to compete in the world market--that’s all there is to it.”

About a mile from RGA’s headquarters on the Sacramento River, Ralph S. Newman Jr., president of Farmers’ Rice Cooperative, the state’s No. 2 grower-owned association with 893 members, said the California rice grower is, in a way, the economic victim of his own agricultural success.

“We can’t sustain our capacity to produce,” Newman said.

Affecting both the marketplace and its ability to weed out uneconomic growers is the federal program to support rice prices, he said. The state’s growers receive far fewer benefits per unit produced than do their less-productive counterparts in Arkansas and Louisiana.

Authorization for the farm program expires this year, and farm legislation will be a major item on the new Congress’ agenda. As the U.S. Department of Agriculture noted in a recent study:”The 1981 farm bill expires at a critical time for the U.S. rice industry. The industry faces rising production capacity, weak foreign demand, hefty supplies and stocks, farm prices below target (support)prices and increasing government costs.”

“It’s a very complex situation,” Newman acknowledged, “and I don’t have any simple answers for it.” Somehow, he said, U.S. prices must be allowed to move more in line with prevailing world prices. Today, many farmers find it more profitable to sell to the government under its price-support program.

Split in Strategies

Faced with an uncertain future, the once closely allied Rice Growers Assn. and Farmers’ Rice Cooperative have embarked upon sharply different marketing strategies.

“We need to position our company to be a survivor,” Newman explained. In an attempt to do so, Farmers’ Rice chose a “different mix” from RGA, he said, “not because we see the future differently, but because we see different ways to get there.”

The different level of exports at each cooperative has a lot to do with the two cooperatives’ separate strategies. While RGA sells about 60%of its rice abroad, Farmers’ Rice only sells 35%overseas.

RGA would like to sell more rice domestically, which means challenging the Southern growers’ traditional hold on the U.S. market. Farmers’ Rice sees little chance of success in displacing Southern rice, but seeks to retain its present domestic base while increasing sales abroad.

RGA is encouraging its members to plant and market newly developed California varieties of the long-grain rice that has been the Southern growers’ specialty and commands a premium price.

Newman of Farmers’ Rice, however, considers California’s presently available long-grain varieties still inferior, and prefers to stick to what grows best in California--the short- and medium-grained varieties--and sell it more effectively abroad by marketing its own crop through a flexible, worldwide network of brokers and distributors, rather than consigning it to a single broker such as Connell Rice & Sugar Co. (Newman developed such an independent marketing system as head of Houston-based American Rice Inc., the nation’s second-largest rice co-op with 1983 sales of $250 million.)

The theories behind the separate strategies, though, fail to convey the bitterness that has grown up between the two cooperatives.

The traditionally cordial relationship ended when Newman decided in August, 1983--within days of taking the helm at Farmers’ Rice--to break with RGA and negotiate a separate rice sale with South Korea. The sale had been blocked for 18 months as RGA and the former Farmers’ Rice management refused to deal with the Koreans except through Connell, with which Korea no longer wished to do business.

Having contacts with a Geneva brokerage acceptable to the South Koreans, Granorice SA, Newman quickly cut a deal for Farmers’ Rice with the Koreans.

“We just asked, ‘Why don’t we quit the fighting?’ ” Newman recalled. “. . . My judgment was that that was a very, very poor posture to have with your largest customer. If you had won, what would you have won?”

The growers’ united front shattered, RGA closed its own deal with the Koreans, but its leadership voiced its unhappiness in a letter to its members. “The antagonistic and aggressive attitude of management at Farmers’ Rice Cooperative seems to be aimed at maximizing publicity while provoking RGA into open conflict,” the letter stated. “As growers, we cannot see how any of this can be beneficial to any grower of rice in California.”

In a recent interview, Errecarte played down the break-up, which he depicted as a “natural moving apart,” though conceding that “it’s just a little farther apart than has historically transpired.” RGA’s policy, he said, is to “cooperate and compete” with Farmers’ Rice.

But the bitterness welled up again as returns to growers from the co-ops’ sales of their members’ 1983 crops were announced last November. They showed that Farmers’ Rice members earned about 50 cents more for every 100 pounds of rice than their RGA counterparts--a difference of $40 to $45 an acre.

Stirred Hornet’s Nest

Asked about that higher return at RGA’s annual meeting, Errecarte stirred a hornet’s nest by attributing the difference to “accounting creativity” on the part of Farmers’ Rice, contending that Farmers’ Rice had allocated 20 cents from 1982 proceeds to the 1983 returns. The next week, when Farmers’ Rice held its annual meeting, Newman presented the co-op’s independent auditor, Touche Ross & Co., to refute Errecarte’s allegation.

“If they had spent more time minding their own business instead of trying to mind ours,” Newman told his growers, “their members could also possibly have had the extra $40 to $45 an acre to put in their pockets at the end of the year, as did ours. And, for their management’s education, our secret is to both sell the product for higher prices and be more efficient.

“It’s amazing how ‘creative’ the total results are when the accounting for a well-executed program is done at the end of the year,” Newman quipped.

He concluded by predicting that Farmers’ Rice would again “outperform” RGA in 1985.

Newman told Farmers’ Rice members that the shift among U.S. growers, including RGA’s, toward growing long-grain varieties constitutes the one “bright spot” in the current rice market. This will leave the traditional markets for short- and medium-grain rices increasingly to Farmers’ Rice which, he predicted, will yield higher prices.

“The domestic market potential does not offer the remotest possibility of being able to support our production base in California at any reasonable level of financial return, with or without long grain,” he said, in questioning the basis of RGA’s marketing strategy. “So you’re going to be forced to sell rice in the export market.”

Americans, he noted, are among the smallest rice-eaters in the world--11 pounds a year per inhabitant, compared to 280 pounds worldwide.

To Errecarte, however, California growers can indeed compete favorably with Southern growers in retail sales in the nearby Western states. One way to do this, he said, is to develop RGA’s own retail brands for marketing, such as its Hinodi label.

To support that effort, RGA last summer bought Pacific International Rice Mills Inc. for more than $12 million. The purchase of PIRMI, the state’s third largest, would boost RGA’s control of the state crop to 63%from less than half, an increase that has attracted the concern of the Justice Department. The government is challenging the purchase in an antitrust action scheduled for trial in Sacramento federal court on Jan. 14.

In contrast to RGA’s 1983 proceeds of $180.4 million, Farmers’ Rice reported proceeds of $98 million, representing about a fourth of the California crop.

Errecarte said RGA bought the labor-efficient PIRMI facility “because it fit the domestic sales plans of the co-op.” With the Justice Department’s challenge, however, RGA has been forced to maintain PIRMI as a separate entity that could be divested if so ordered in federal court.

“If we prevail, we will have a tremendous facility,” Errecarte said. “If we fail, we can divest at no risk, or at profit.” Building such a mill would cost more than $28 million, he added.

Differing View

Newman views the acquisition strategy differently, as motivated less by the desire to acquire an efficient mill than to take over well-established PIRMI retail brands. “Permitting the acquisition to stand would be very adverse to the competitiveness of the industry out here,” he claimed.

An early test of how California’s rice growers view the unfamiliar rancor between RGA and Farmers’ Rice, and their differing marketing strategies, could come as early as next month during the annual two-week period when co-op members are free to renew or change their allegiance. While Errecarte said his membership has been expanding--and presumably would grow more if acquisition of PIRMI is upheld--Farmers’ Rice also added 63 members in the last year, and last month reported “keen and unprecedented interest” by growers in its operation.

As a result, Newman said, Farmers’ Rice has announced that it will accept no more than 2 million hundredweights of additional rice this year from new members. “The limit was adopted,” he explained in a statement, “to protect the marketing base of present members and to insure that Farmers’ Rice can continue to provide high-quality service to all of its current members as well as prospective new members.”

Grower Gene Harris, an RGA member, said he, for one, sees no reason to change membership at this point. “I’d like to have had the extra 50 cents (per 100 pounds of rice),” he acknowledged, “but whether or not that was actual cash in pocket, I don’t know. I do know that both organizations are reasonably equivalent in efficiency, and deal in the same markets and at essentially the same prices.

“I like the marketing program that RGA’s embarked on . . ., “ Harris added, explaining that he plans to increase long-grain production from 33%of his crop to “about half” this year.

“There will always be a difference one way or the other in the cooperatives,” the rice grower said, “but I don’t see a significant difference between the two that would cause me to change membership.”

Rice Production by State (Percentage of U.S. Output, 1984)

Arkansas 38.3% California 22.7% Louisiana 15.9% Texas 14.6% Mississippi 6.0% Missouri 2.5%