Co-Op’s Proposal to Go Public Splits State’s Walnut Growers

Farmers at the nation’s largest walnut producer are debating whether to break out of the shell of their 93-year-old cooperative and create a corporation to aggressively sell their Diamond of California brand.

The proposed conversion of Stockton-based Diamond Walnut Growers into a public, for-profit company is generating much soul searching among the group’s 1,735 members. Some of the growers come from third- and fourth-generation farm families that have been members since the early 1900s of the cooperative, which had $360 million in sales last year.

Under the plan, an initial public stock offering would raise capital to develop new products, upgrade processing plants and pay for national advertising such as a $2.4-million, 30-second spot during this year’s Super Bowl. Opponents of the plan, concerned that a public company may not act in their best interests, have been airing their complaints at a series of grower meetings up and down the Central Valley in recent months.

Diamond buys nuts from about 45% of California’s walnut growers and markets raw and processed products to major food companies and retailers across the country. Members help pay for advertising campaigns and other marketing initiatives.

The walnut growers’ decision poses “a significant strategic question that members of cooperatives need to address: What do you want your co-op to do? Be a home for your product or try to maximize returns?” said Shermain D. Hardesty, director of the UC Davis Rural Cooperatives Center.

Co-op conversions are rare, and the Diamond voting -- scheduled to conclude today -- is being closely followed by cooperatives and other agribusinesses in farm states.

The proposed restructuring comes as growers are looking for new ways to absorb the expanding California harvest. Walnut production in California, the only state with a commercial crop, was 325,000 tons in 2004, up 39% from a decade ago, according to the state Department of Food and Agriculture. Although prices have remained mostly steady for the last decade, grower profits have jumped more than 50% because of increased yields and production.

The Diamond co-op’s board wants to raise as much as $60 million in capital to diversify beyond producing packaged and bulk walnuts for cooking and baking. In the last year, the co-op began marketing a new line of Emerald snack nuts to take advantage of nutritional studies that found walnuts to be low in cholesterol and high in healthful omega-3 fatty acids.

Diamond executives also want to be in a position to cut more mega-deals such as an exclusive contract the co-op inked to supply Diamond-branded walnuts for a Fruit & Walnut Salad launched nationally by McDonald’s Corp. in May. McDonald’s expects to buy 4 million pounds of glazed nuts by the end of this year.

“The best thing for Diamond and the industry is to drive consumer demand for walnuts, and driving consumer demand takes capital,” said Chief Financial Officer Seth Halio. “As a cooperative, we’re very limited in our ability to access capital.”

But for Mike Machado, a medium-sized grower from Linden in San Joaquin County and a Democratic member of the state Senate, the answer lies with modernizing the existing co-op organization, not junking it in favor of a corporation, whose primary goal is profit.

“When it becomes a public company, the orientation flips 180 degrees,” Machado said. “Now, it no longer will be grower-focused and becomes shareholder focused.”

As a corporate entity, the newly renamed Diamond Foods Inc. would have an incentive to keep walnut prices low, boosting shareholder returns but possibly hurting growers, Machado predicted.

Other opponents worry that taking Diamond public would loosen the growers’ hold over the organization.

Under the plan devised by the co-op board, growers would hold only three of the nine directors’ seats in the new company. Current co-op members could wind up owning 47.7% to 61.2% of the new company, depending on how many of their shares are exchanged for cash and how many management stock options are exercised, according to an analysis by Hardesty, the UC Davis economist.

Jay Colombini, another Linden grower, fears that Diamond, which already buys hazelnuts from Turkey, pecans from Mexico and pine nuts from China, could turn to China for its core crop so it could keep down production costs and increase profit. He notes that China is already flooding the United States with low-cost apple juice and tomato paste. China produced 350,000 metric tons of walnuts in 2003, of which 22,000 metric tons were exported.

“I’m afraid if there’s not any allegiance to the growers anymore, the next step will be walnuts from China,” Colombini said. “If they can get them more cheaply, it’s more money in the pockets of shareholders.”

A corporate Diamond would be dedicated to boosting consumer demand and holding up prices, stressed CFO Halio. “We have no intention of creating a successful public company on the backs of our growers,” he said. “We don’t think that’s a good business model.”

Indeed, the conversion of an avocado cooperative into a publicly traded company has been a boon to 1,600 members of the Calavo Growers of California, said President Lee Cole, a Santa Paula farmer.

The Santa Ana-based company, which went public in July 2002, has a market capitalization of about $140 million. Members were issued shares valued at $1 a piece, Cole said, and the stock closed Thursday at $10.50, up 44 cents.

Walnut producers should learn from their avocado brethren by taking risks to keep growing and profiting, said Gary Hester, a walnut co-op board member with 500 acres near Farmersville in Tulare County.

“We can’t plant more acreage unless we aggressively expand the market base,” he said. “We need capital and flexibility to do that.”