Prairie Farms Dairy, Inc. Business Information, Profile, and History

Company Perspectives:

Our Mission: To manufacture consumer dairy products of the highest quality. To meet the expectations of our customers. To deliver exceptional patronage to our farmer-owned cooperative members. To provide opportunities for growth and fulfillment throughout the Prairie Farms family. To make a positive difference in our communities.

History of Prairie Farms Dairy, Inc.

Prairie Farms Dairy, Inc. is one of the largest bottlers of fluid milk in the United States and one of the largest dairy cooperatives in the Midwest, with nearly 800 members. In addition to fluid milk products, Prairie Farms produces cottage cheese, butter, yogurt, dips, sherbet, and ice cream, including the North Star brand of novelty ice cream products. The company also processes and distributes orange juice. Prairie Farms operates in 13 states, including the operations of its five joint ventures. A subsidiary, PFD Supply, distributes over 2,400 food and paper products to fast-food restaurants, including McDonald's and Burger King.

Pooling Resources to Form a Dairy Cooperative: 1930s-40s

Prairie Farms Dairy originated in 1932 as one of 12 dairy cooperatives formed under the umbrella of the Illinois Producers Creameries through the encouragement of the Illinois Agricultural Association. At that time small farmers each owned a few cows, using the milk for personal use and selling the excess sour cream butterfat to independent creamers. The cooperatives allowed individual farmers to pool their farm-separated cream and negotiate a better market price through the influence of a group. The cooperative organized three collecting stations, in Carlinville, Palmyra, and Piasa, where farmers took their cream for delivery to a butter-churning plant in Bloomington.

In 1937 the Producers Creamery of Carlinville formed and organized to open a butter-churning plant in Carlinville. The board of directors found a site for the plant and raised capital by selling Class A preferred stock to local farmers for $25 per share. To manage the cooperative the board hired Fletcher A. Gourley, a man whose commitment to the cooperative's farmers and employees created an atmosphere of family loyalty.

Gourley's first responsibilities involved obtaining a $3,000 loan from the Carlinville National Bank and purchasing the building and equipment. In 1938 the Carlinville plant began production. The company traveled to farms to purchase cream, though the collecting stations at Palmyra and Piasa continued to operate. In 1939, its first full year in operation, the Creamery collected seven million pounds of farm-separated cream for processing into butter. Butter was sold under the Prairie Farms name (as it did at all of the cooperatives) for ten cents a pound. That year the cooperative recorded revenues of $84,000 and net income of $3,400. While other cooperatives struggled, Gourley's calm, thoughtful management style helped to guide the Carlinville cooperative along a profitable path. The company recorded steady growth of revenues and earnings, allotting 20 percent to 50 percent of earnings to member patronage.

The advent of World War II changed the public's dairy needs. The Illinois Producers Creameries chose the Carlinville creamery for installation of one of four roller dryers to produce powdered milk. In 1943 the Producers Creamery of Carlinville began to collect whole milk for this purpose and to sell cream and a minor quantity of bulk milk as well. That year sales more than doubled to $537,000. In 1945, the company installed a condenser to make sweetened condensed milk for ice cream manufacturers. To reflect its more diversified product line, the company took the name Prairie Farms Creamery of Carlinville. Prairie Farms processed 24 million pounds of whole milk and nine million pounds of cream in 1945; sales exceeded $1 million.

Prairie Farms continued to diversify its product line in the postwar era. The company reported its first significant sales of bulk milk in 1946 and began to sell packaged milk in 1949.

Construction was completed on a new plant in May 1947 when Prairie Farms purchased a bottling machine for packaging milk in paper cartons. Before production started in June 1949, the company contracted with Dressel-Young Dairy in Granite City to package milk.

These were difficult years and Prairie Farms reported the only loss of its history in 1947, at $10,574 on $1.85 million in sales. By 1950 company operations solidified with continued sales of butter, cream, bulk milk, condensed milk, milk powder, and the first significant sales in packaged milk, cottage cheese, ice cream, and ice cream mix. New operations required the company to expand its facility with a cooler and ice cream hardening room in 1949 and a general storage room in 1951. Sales fluctuated, but in 1952 Prairie Farms commenced a steady pace of increasing revenues, rooted in mergers, acquisitions, and consolidations, as well as internal growth.

1954 to 1977: Mergers and Acquisitions Supporting Steady Growth

Between 1954 and 1962, Prairie Farms expanded through five mergers and five acquisitions, involving dairies in middle and southern Illinois and one in Lafayette, Indiana. In addition to expanding Prairie Farms market area, mergers and acquisitions facilitated the shift from production of non-grade milk toward Grade A milk, a process which began in 1948.

Changes in the dairy industry prompted consolidation as well. New technology for homogenization, sanitation, and other functions required small dairies to consolidate in order to compete. Also, home milk delivery faded in favor of supermarket-based sales, changing the dynamic of competition. Acquisition gave the small dairies a market for valuable assets that might have little worth otherwise. Gourley's method of acquisition involved letting a seller approach him and convince him of the merits of a partnership. He assisted sellers in improving the operations at their dairies. This stance earned Gourley a reputation as a fair negotiator.

One of the most significant transactions concerned a 1957 merger with Prairie Farms Dairy of Carbondale, an operation with $3.3 million in annual sales. The merger created a new entity, Prairie Farms of Southern Illinois. Prairie Farms then merged with Prairie Farms of Olney; that dairy reported $2.5 million in sales the previous year. In 1962 Prairie Farms of Southern Illinois merged with Prairie Farms of Western Illinois and Danville Producers Creamery and incorporated as Prairie Farms Dairy, Inc. In 1963 Prairie Farms recorded revenues of approximately $16 million.

During the 1960s Prairie Farms discontinued certain operations, eventually becoming a processing-only cooperative. In 1963 the company halted the purchase of farm-separated cream and discontinued production of condensed milk and milk powder. The company began to purchase milk by the tank-load from cooperatives in Wisconsin and Minnesota. As the company raised its standards of quality, Prairie Farms halted the purchase of non-grade milk by 1970.

With the acquisition of Aro-Dressel Foods in 1967 Prairie Farms made a noteworthy entrance into the St. Louis market as 60 percent of that company's bottled milk sales were based in St. Louis. The acquisition involved a significant ice cream mix operation and a fast-food supply operation in Granite City, Illinois. Prairie Farms formed a new subsidiary in 1969, PFD Supply, to separate the fast-food supply business from other operations at Granite City. PFD customers included McDonald's, Burger King, Wendy's, Ponderosa, and Bonanza restaurants.

From 1964 to 1977 Prairie Farms completed 33 acquisitions and three mergers. While most of the dairies were located in Illinois, Prairie Farms purchased two dairies each in Iowa, Indiana, and Nebraska, and three in St. Louis. Many of the acquisitions were attractive for their customer accounts. Acquisitions included a distribution company, a Dairy Queen ice cream mix operation, and five ice cream companies. Prairie Farms formed its Ice Cream Specialties subsidiary with the acquisition of three ice cream companies in St. Louis and Lafayette, Indiana, with aggregate sales of $5 million and covering markets in 13 states. A key merger involved the Peoria Producers Dairy in 1972, adding $4 million in sales. That year sales reached $78.2 million. By 1978 Prairie Farms reported sales of $206 million, after processing 913.5 million pounds of milk into dairy products.

Joint Ventures, Major Strategy for Growth During the 1980s

Between 1978 and 1989 Prairie Farms slowed its acquisition pace and changed to a strategy of growth through joint ventures. In October 1978 Dairymen and Prairie Farms each paid half of the acquisition costs for Ideal Dairy and American Dairy in Evansville, Indiana, and combined the two companies under the name Ideal American. Prairie Farms transferred a recent acquisition, Owensboro Ice Cream & Milk in Owensboro, Kentucky, to the joint venture for its distribution capabilities. Dairymen supplied milk to the operation and Prairie Farms provided management.

In the Hiland Dairy joint venture with Mid-America, formed in October 1979, Mid-America supplied milk and other ingredients and Prairie Farms supplied management to handle operations. The venture combined Mid-America's milk processing expertise and Prairie Farms' bottling expertise. Hiland operated dairy processing facilities in Oklahoma, Missouri, Kansas, and Arkansas. In 1985 Mid-America Dairymen and Prairie Farms purchased two Arkansas dairies, College Club Dairy in Fayetteville and ACEE Dairy in Fort Smith for the Hiland venture.

Prairie Farms formed two joint ventures in 1981. Muller-Pinehurst, formed with Midwest Dairymen, served dairies in Illinois. Roberts Dairy, formed with Mid-America, served markets in Iowa, Nebraska, Kansas, and Missouri. Prairie Farms transferred its holdings in Iowa and Nebraska to Roberts Dairy. In both ventures Prairie Farms provided management while the partner supplied milk.

Prairie Farms purchased only six dairies between 1981 and 1989. Notable among them was the Pevely Dairy Company, the oldest and largest independent dairy in the St. Louis area, purchased in June 1989. Pevely processed and distributed milk, ice cream, cottage cheese, and yogurt to markets in southeastern Missouri, southern Illinois, and areas of Kentucky and Tennessee. The acquisition included five milk-processing plants. Family owned and operated since the company's founding in 1887, Pevely continued to be led by members of the Kerckhoff family, who decided to sell the company to remain competitive. The Pevely acquisition added approximately $60 million in annual sales to revenues at Prairie Farms.

PDF Supply grew as an important source of revenues, serving independent restaurants as well as fast-food chains. By 1989 PFD Supply recorded $218 million in sales delivering over 1,200 items, including fresh and frozen meat, dairy products, frozen fish and seafood, produce, carbonated beverages, cleaning supplies, plastic cutlery, and paper products. Two warehouses, one in Granite City, Illinois, and a new warehouse in Lebanon, Indiana, served over 800 chain restaurant locations, with deliveries being made within a 400-mile radius of each warehouse. The Lebanon warehouse supplied only McDonald's restaurants, however. PFD Supply's customers were located in Illinois, Missouri, Indiana, Kentucky, Tennessee, and parts of Mississippi, Arkansas, and Kansas. The subsidiary made deliveries of at least 100 cases to each location three times per week, with larger and more frequent deliveries being made to McDonald's locations.

New leadership took the helm at Prairie Farms in 1988 when Gourley stepped down as CEO and general manager after 50 years at the helm. During that time Gourley oversaw the growth of Prairie Farms from a small cooperative to a large, multi-state operation with $165 million in assets and over $500 million in annual revenues. He wrote the Prairie Farm News (originally Co-op Producer), the cooperative's newsletter, since its inception in 1943. Gourley took the positions of senior vice-president and COO until his death in 1991. Leonard J. Southwell replaced Gourley as CEO. Southwell joined Prairie Farms in 1964 through the acquisition of Equity Union Creamery, where he served as general manager.

1990s: Prairie Farms Among Top Fluid Milk Bottlers

Prairie Farms expanded through merger, acquisition, and joint venture during the 1990s, though many of the acquisitions were transacted for joint ventures. The Steffens Dairy in Wichita, the Gold Spot Dairy in Enid, Oklahoma, and the Gilt Edge Dairy in Norman, Oklahoma, became part of Hiland Dairy, while Fairmont-Zarda in Kansas City, Missouri, became part of Roberts Dairy. Madison Dairy Butter, a joint venture formed in July 1993, operated a butter plant in St. Louis. Prairie Farms purchased Food Service Systems to expand operations at the PFD Supply subsidiary. The company acquired three distribution centers in 1994 to support general operations in Illinois and Kentucky. In addition to expanding the company's reach to Galesburg, Michigan, and Lima, Ohio, Prairie Farms strengthened its presence in Indiana through four acquisitions and a merger with Allen Dairy Products.

One of the attractions of a merger or acquisition involved the availability of capital to upgrade equipment and make processing plants more efficient. This was the case for Allen Dairy Products, a cooperative of 95 milk producers in northeast Indiana and northwest Ohio. After acquisition by Prairie Farms in January 1994, Prairie Farms added new equipment and began expansion of the Fort Wayne facility. The facility was expanded by 12,000 square feet to double the size of the storage cooler where the installation of conveyer belts improved order fulfillment functions. The cooler packed 110,000 gallons of milk daily for distribution.

Prairie Farms' investment in facilities and infrastructure increased considerably during the late 1990s. In 1997 the company invested $11.6 million on plant equipment, including silos, blow molding, case packer and stacker equipment, and plastic milk bottle filling lines for 8-ounce, 12-ounce, and half-gallon containers. Capital investment of $17 million in 1998 included $8 million for an ultrahigh temperature processing plant in Granite City. The plant processed soft-serve ice cream mix, half-pints of milk for vending machines, half-and-half cream, and five-gallon bags of milk. Prairie Farms spent $14 million on similar projects in 1999.

In the late 1990s Prairie Farms became one of the top five fluid milk bottlers in the country. In 1994 Prairie Farms recorded $800 million in revenues, but surpassed the $1 billion mark when revenues from joint ventures were counted. Prairie Farms' operations alone passed the $1 billion mark in 1999, with $1.05 billion in revenues; joint ventures added $685 million in revenues.

In the fall of 2000 Southwell retired as CEO, being replaced by Roger Capps, a 23-year veteran of Prairie Farms. Capps inherited leadership of a cooperative in a strong financial position, carrying small amounts of long-term debt. Prairie Farms placed 15th among the 150 largest privately held companies in the St. Louis area, based on its fiscal 2000 revenues. Operating income of $52.1 million yielded net income of $43.1 million. Net income from joint ventures reached $25.9 million. Prairie Farms paid $28.5 million in patronage to cooperative members, the equivalent of $1.93 per hundredweight of milk.

While Prairie Farms did not omit the possibility of future growth through mergers or acquisitions, the company engaged in only one transaction at this time. The Prairie Farms joint venture Hiland Dairy purchased Farm Fresh Dairy Division of Farm Fresh, Inc. in April 2001. The acquisition included a state-of-the-art plant in Chandler, Oklahoma, one of the newest dairy processing facilities in the country. The facility handled the processing of milk, cottage cheese, yogurts, and manufactured ice cream and frozen desserts in bulk or in packages. The facility also bottled fruit juices and spring water.

Principal Subsidiaries: PFD Supply, Inc.; Ice Cream Specialties, Inc.; Pevely Dairy Company; Hiland Dairy Foods (50%); Roberts Dairy (50%); Muller Pinehurst (50%); Ideal American (50%).

Principal Competitors: Associated Milk Producers, Inc.; Dairy Farmers of America; Land O'Lakes, Inc.

Chronology

• Key Dates:
• 1932: Local farmers form cooperative to negotiate price received for cream.
• 1938: Producers Creamery of Carlinville opens butter manufacturing plant.
• 1943: The company begins to produce powdered milk for wartime uses.
• 1945: Cooperative is renamed Prairie Farms Creamery; sales exceed $1 million.
• 1949: Prairie Farms opens its first milk bottling plant.
• 1962: Growth through mergers and acquisitions leads to incorporation as Prairie Farms Dairy.
• 1970: Transfer to Grade A milk processing concludes as company halts purchase of non-grade milk.
• 1978: Prairie Farms forms the first of several joint ventures.
• 1989: The company acquires Pevely Dairy, the largest and oldest independent dairy in St. Louis.
• 1999: Prairie Farms reports $1.1 billion in revenues and net income of $50.2 million.
• 2001: Cooperative members receive total patronage of $28.5 million.