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This annual report contains discussions of some of our expectations regarding CROPP Cooperative’s future performance. These forward-looking statements are based on our current views and assumptions. Actual results could differ materially from these current expectations and projections and from historical performance. For example, our future results could be affected by factors including but not limited to the competitive dynamics in the markets for organic dairy products; the cost and supply of organic milk; the cost of organic farm products and organic feed; the mix of sales of our branded and nonbranded products; the application of, and changes in, the United States Dairy Support and Federal Milk Marketing Order programs; and the adoption of regulations pursuant to the Food Safety Modernization Act. Discussions of these matters and other risks to which CROPP Cooperative is subject can be found in the Offering Circular(s) (and any associated supplements or amendments) we distribute from time to time in connection with the offer and sale of our Class E, Series 1 Preferred Stock. A copy of such Offering Circular and any current supplements or amendments can be obtained for informational purposes by contacting Investor Relations Manager Diane Gloede by mail at Cooperative Regions of Organic Producer Pools, One Organic Way, La Farge, WI 54639, or by telephone at 888-444-6455 extension 3310.

© Organic Valley 2013-55023 CMG-P02360 Printed on paper made from 100% post-consumer recycled fiber.

One Organic Way | La Farge, WI 54639 | 1-888-444-MILK | www.farmers.coop

Jisha Family Farm, Yantis, TX

Annual Report 2013


Board of Directors

2013

Pam Riesgraf

Travis Forgues

Vice President

Director

Full Circle Organic Dairy Edgar, Wisconsin

Forgues Family Farm Alburg, Vermont

Dan Pearson

Steve Pierson Director

Secretary Pearson’s Mann Valley Farm River Falls, Wisconsin

Sar-Ben Farms, Inc. St. Paul, Oregon

Mark Kruse

Keith Wilson

Treasurer

Director

Kruse Family Farm Lansing, Iowa

Wilson Farm Cuba City, Wisconsin

Management Team

George Siemon

Theresa Marquez

Eric Newman

Jim Wedeberg

Lewis Goldstein

CEO

Mission Executive

Vice President of Sales

Dairy Pool Director

Vice President of Brand Marketing

Jerry McGeorge

Cecil Wright

Melissa Hughes

Mike Bedessem

Louise Hemstead

Vice President of Cooperative Affairs

Director of Sustainability, Local Operations

General Counsel and Director of Government Affairs

Chief Financial Officer

Chief Operating Officer


President of the Board Elm Terrace Farm Genoa, Wisconsin

“Thank you for planting a better future. Never discount the power of the life in our soil.”

Letter from the President I believe it helps light our path when we think in simpler terms about this complicated enterprise we call CROPP Cooperative. The way I see it, 26 years ago a handful of gritty family farmers seeded a pasture of very fertile soil. Their stroke of genius was in recognizing and trusting the fertility. Old-timers in rural Wisconsin thought we were a joke. They thought nothing would come of it. It’s easy to understand why they thought that. To the naked eye, the 1980s was a farming landscape that looked about as unfertile as any since the Great Depression. Family farms were going belly-up daily by the hundreds. “Get big, or get out” was looking more and more like a monster no one could fight. Big Ag had swept into the nation’s breadbasket and swept away generations of farmer know-how and care. But the fertility CROPP’s early farmers recognized wasn’t only in their fields, it was in America itself. So many families had been hurt by unhealthy practices in the food system. They were starving in body and spirit. They were calling out for a change. We heard them. We still hear them today, louder than ever— I mean, just look at the vast number of consumers demanding GMO food labels (page 26), and read in this report about America’s hunger to learn about the new science that confirms our pasture-raised organic milk is nutritionally best (page 12). In 2013, more than in any year so far, we reaped the benefits of the insight and determination of CROPP’s founders and today’s leaders. Once again, CROPP Cooperative faced challenges: fire, rising feed prices, an unexpected drop in milk production and so forth. Once again, we carefully managed and came out whole and healthy, working together.

Borges Family Farm, Smith River, CA

That’s what fertile soils do for us. Just as on the farm, where flood, hail, wind, drought and a slew of other hazards are successfully weathered by a foundation of fertile, stable, organic soil, our business owes its stability to our human foundation. Excellent farmers, employees, business partners, customers and investors are the life in our cooperative soil. When fire licked at our headquarters in May, we all felt its breath on our necks. Employees lost a home, and still they took charge at the grassroots. Not an order was missed. Not a shipment put off. Not a beat skipped. They even fed the volunteer firefighters throughout that terrible night. How can we ever value such a crew enough? Year after year I see tireless effort in support of our farms— and in return, hardworking farmers build the soil of tomorrow. We follow wise footsteps when we recognize and nurture this united fertility. It overcomes everything. To those old-timers I respectfully say, “I wish you could see it now—it’s really something! Farmers really can change the world from the ground up.” To CROPP’s farmers I say with deep humility, “Thank you for planting a better future. Never discount the power of the life in our soil.”

Arnie Trussoni President CROPP Cooperative Board of Directors

President of the Board

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Arnie Trussoni


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George Siemon

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Chief Executive Officer

From the CEO 2013 was both a year of celebration and a year of rebirth. The celebration of our 25th year was a wonderful time to recall our history, the lessons we have learned and the values we want to carry forward for our future. As we think about the next 25 years, we share a big responsibility to provide leadership and support for our cooperative so that we can continue to pioneer in serving the organic family farm. Part of celebrating our 25 years is to realize how fortunate we are to have succeeded at the level we are today. Our 25th anniversary history book, CROPP Cooperative ROOTS, was a great way to provide our members and employees with a map of sorts to understand our legacy. The rebirth part of 2013 was to show us all how we must continue to adapt as we mature while safeguarding our mission. What has worked to date always needs to be challenged so that we continue to learn how to become better members and managers. It was a hard year for us—a good, old-fashioned humbling, it seemed, so that celebrating 25 years wouldn’t get us too big headed. Every year’s business plan is built around assumptions about farm supply, consumer demand, price of fuel, price of conventional commodities, ability to raise prices, product mix, etc. Last year, many of our assumptions around supply and demand were not correct. We did not foresee organic fluid sales dropping as they did in the first few months, or that our milk supply would be much higher than budgeted in the first half of the year, or the dramatic drop in milk supply in August, or the

Beidler Family Farm, Randolph Center, VT

significant increase in butter and whole-milk product sales. We did our best with these challenges, but in hindsight, as usual, we see now that we could have managed these in a better way. We have always taken pride in our milk supply management, yet we learned many new lessons from this past year. That’s part of our rebirth—that we have to constantly learn and get smarter. We are now looking at different ways to handle our inventory management, to better understand the effect of forage quality on milk supply and to refine these critical skills. In addition to the supply and demand challenges, we also faced significant challenges from our May Headquarters fire, and from a plant fire at one of our key processor partners. While our response to the HQ fire was impressive, there is no doubt that having staff scattered across nearly 20 locations has affected our management ability. Again, with every problem we need to assess what went wrong, how we could have managed these situations better and how we can prevent them in the future. The year once again showed the human resilience and dedication that our cooperative has been built on. Despite the many challenges, we were able to serve 145 new farm families, grow sales by $72.6 million (8.5 percent growth), update our warehouse system, bring innovative products to market, provide a critical service with feed to overcome the 2012 drought, and achieve many other accomplishments you will read about in this report.


“The cooperative is in solid financial shape and has an expanding base of customers. Our brands are respected as providing the highest integrity and highest quality in the industry.”

The cooperative is in solid financial shape and has an expanding base of customers. Our brands are respected as providing the highest integrity and highest quality in the industry. Our support services to the farmers are the best in the world and are helping our farmers in many different ways. CROPP employees are dedicated to our cooperative and take seriously the fact that we work for farmers who have a high work ethic. The cooperative Board of Directors continues to contribute a serious effort and commitment. The Board meets two days every month in addition to attending committee meetings, participating in membership calls and attending regional meetings to responsibly represent the members. They are very thorough in their deliberations to manage the business and serve CROPP’s members. Since membership has nearly doubled in the last 5 years alone, we have placed special focus on connecting with all members to maintain the familiarity we treasure. With great success, we held the third annual Farmer Leadership Symposium in 2013, with more than 100 farmers in attendance. It is amazing to see how beneficial it is for members to come to our home region, tour our facilities and interact with employees and farmers. We have made a strong effort, through our Generation Organic (Gen-O) program, to include our younger members at that event as well as at our Annual Meeting. We are thankful to the Farmers Advocating for Organics (FAFO) fund, which contributed to getting our Gen-O farmers to those events.

In 2013 we executed a pilot program using interns, mostly youth from member farms, to visit most of our farms. This was very successful, both in getting direct feedback from our members and training the interns. We have hired several of the interns from that program—another benefit of utilizing our cooperative’s youth. We will not repeat that program in 2014 due to our conservative budgeting, but we hope to implement it again in the future. In addition to all these efforts to build our cooperative culture, we offered our second Regional Understanding Tour, which traveled from Maine to Pennsylvania. This tour has really been successful and has educated our farmers about the many different ways of farming organically. Today, more than 15 percent of our employees are either members, family of members or former members, representing a great way to safeguard the cooperative and to be true to our mission. Just as our growth presents a challenge to stay connected to our expanding farmer base, we face a similar challenge with our employees. As we look forward to our future, the issue of staff succession is a big, looming challenge. We are increasing our training budget so we can ensure that our future leaders come from within. We have historically been too dependent on a few employees to carry our mission forward. Our goal now is to have a deep bench of leaders so we can face our future with deep, shared experience.

Choiniere Family Farm, Highgate Center, VT

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“We are overjoyed with the number of families’ livelihoods for which CROPP has made such a big difference.”

Learning from the challenges of 2013, we have mapped out a conservative year for 2014 in growth and programs. Having had a profit of less than half a percent in 2013, we must have better performance in 2014. We have started several processes internally to achieve better efficiencies, reduce costs and better manage our diverse product mix. After doubling our business in the past five years, it is necessary to review all our business processes and programs to become smarter. That’s a big part of rebirth. Celebrating 25 years was very rewarding; our success has gone far beyond our expectations. We are overjoyed with the number of families’ livelihoods for which CROPP has made such a difference. We are a hard working and critical group,

$30 $29 $28 $27 $26 $25 $24

so it is good to recognize our gains in 2013. Going through rebirth in that same year has been hard but necessary, as a business never pauses and one can never rest on the past. We are always striving as a cooperative to maintain our strong foundation in order to continue our great collective work.

George Siemon CEIEIO CROPP Cooperative

DAIRY PAY PRICE COMPARISON $29.59

ORGANIC VALLEY Midwest Mailbox Pay Price - CWT

26.47

(Midwest mailbox price at 12.2% solids, with no component or quality premiums)

Conventional Mailbox Pay Price - CWT

25.81

(Based on annual FFMO average blend price and 2012 estimate)

23.64

$23 $22 $21

19.88

$20 $19 $18

16.52

$17 $16 $15

16.34 15.27

14.43

$14

12.85

$13

13.03

$12 $11

$19.76

19.05

18.16

11.87

12.95

11.55

$10 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


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(clockwise from top) Knapp Family Farm, Preston, ID; Postmus Family Farm, Dublin, TX; Jisha Family Farm, Yantis, TX; Hardy Family Farm, Mohawk, NY


Pools

6

Pools CROPP Pools had plenty to feel good about in spite of 2013’s challenges. Farmers stood their ground in the face of record high feed prices, difficult weather and poor forage quality, and Pools staff matched the farmers’ dedication stride for stride in difficult working conditions. When fire devoured nearly half of CROPP’s La Farge headquarters, Pools staff worked to make sure farmer services, such as the Farmer Hotline and farmer food orders, experienced as little disruption as possible. The Dairy Pool started the year with a surplus of milk even after record high feed costs, shortage of forages and the worst drought in 70 years. The year brought a late, wet spring, but by August, the milk supply forecast that is normally correct within one percent hit a big bump when the expected supply, which is typically flat that time of year, dropped by eight percent—not much milk on the surface, but this is significant considering the size of the membership. Unprecedented events of the past two years—extreme weather, high feed costs, poor feed quality and a shift to fall milk production—combined forces to throw a wrench in the works. Attrition was clearly a factor as well. While historically CROPP loses less than two percent of production to member attrition, it was more than three percent in 2013. Sales in the Produce Pool were 50 percent higher than projected for 2013. This was no small miracle considering two years of poor weather. Produce Pool staff painstakingly relocated

Borges Family Farm, Smith River, CA

all produce to its new Hillsboro Consolidation Point building near Hillsboro, Wisconsin, in order to streamline distribution through its critical high season. As a result of their heroic efforts, the pool lost very little product and limited its interruption of service. The Produce Pool will grow more than ever in upcoming years because of that success and is looking to expand into other areas so that farmers can access the broader marketplace. Building the new Hillsboro Consolidation Point was a risk, but it more than paid off in 2013. The big news in the Egg Pool was the launch of a new regional pool in Colorado to fulfill the largest area of our egg demand. The region started with two producers and will gain three more in 2014. Nationally, Egg Pool producers had a demanding year, starting with high feed costs that led some producers to leave the pool and resulted in less growth than targeted overall. Additionally, farmers have had to embrace a number of extra audits from the Food and Drug Administration (FDA), along with retailer-driven initiatives that resulted in significant added recordkeeping requirements. The Grower Pool provides organic feed crop growers an opportunity to become members of the cooperative when they contract to sell at least a portion of their harvest to CROPP within a fair price-trading range. CROPP’s Feed Program provides members with a low-cost feed brokerage service that sources


Pools

7

and delivers around $25 million a year in organic grain, hay and other feedstuffs. Roughly one-third of the co-op’s members take advantage of this service. The program is paid for by user fees. After ten years, this year CROPP said a heart-wrenching goodbye to its Juice Pool and the Roper family in Florida, who provided the lion’s share of the fruit for that pool. CROPP is very grateful to the Roper family, whose dedication has helped the co-op through the years. Disease, water availability issues and extreme weather events in Florida have heavily affected the farmers’ ability to supply enough fruit to satisfy our market demand. On the positive side, CROPP hosted a wonderful Annual Meeting in April celebrating its first 25 years, organized another successful Regional Understanding Tour through the Northeast in September, and for the first time in the co-op’s history, hosted a contingent of international farmers at the Farmer Leadership Symposium in October. Farmers from the Netherlands, Germany, France and England came to network with CROPP farmers about organic production, the organic marketplace and the cooperative model—because nothing like CROPP or the idea of a stable pay price exists in Europe. While 2013 was a struggle, times like these only serve to fine-tune the business and strengthen the future. CROPP has a history of resilience. It learns and moves on. All the bumps seem dramatic in the moment, but the co-op works through the rough spots like always.

Hardy Family Farm, Mohawk, NY Generation Organic is a program that spans both Pools and Marketing, providing education about the co-op and leadership opportunities to young CROPP farmers ages 16 through 35—our next generation of organic farmers and co-op leaders. In the summer of 2013, the co-op undertook a Farmer Support Tour. Eighteen enthusiastic interns selected primarily from CROPP farmer-owner families visited 1,208 farms in 10 weeks to gather farm data and collect feedback from farmerowners about membership services, governance, policies, the future of the cooperative and more. Using this feedback, the co-op will respond to farmers’ requests for information, assess how we are doing and consider areas for improvement.

Gen-O Teach-In For a week during Farm to School Month (October), 15 Gen-O farmers made a big impact on 2,015 students and 96 teachers in 88 classrooms across the country during a “Gen-O Teach-In.” The young farmers visited classrooms in their communities and talked about the connection between their organic family farms and healthy soil, plants, animals, products, people and planet. The students also had a blast shaking jars of cream into their own butter. Read more about the Gen-O Teach-In in the December 2013 CROPP Forum.


Organic Meat Company

8

Organic Meat Company Total 2013 revenue for the Organic Meat Company (OMC) increased 25 percent over 2012 in spite of weather-driven feed cost spikes. Throughout the year, OMC increased its marketing efforts around improving and extending existing product lines. Overall, eight new Organic Prairie products were introduced this year. Capitalizing on the robust market for grassfed beef across the U.S., Organic Prairie introduced Uncured Grassfed Beef Hot Dogs to its grassfed lineup, which proved to be a very successful addition. Promoting the hot dogs in tandem with Organic Prairie Fresh1 Ground Beef using instant redeemable coupons2 (IRCs) rewarded OMC with a case increase of 43 percent in Fresh Ground Beef sales during the promotional period compared to 2012. Also during the promotional period, sales of Grassfed Beef Hot Dogs increased by more than 300 cases a week. Consumers are loving the new Uncured Grassfed Beef Hot Dogs to the tune of more than $530,000 in sales for OMC in 2013, which is almost four times the dollar sales of the previous 1.5 ounce Uncured Beef Hot Dogs. Two new flavors were added to the already successful Organic Prairie Summer Sausage category: Roasted Garlic and JalapeĂąo. Combined sales of all three flavors exceeded $700,000 in 2013. With the new package design of the Original Summer Sausage taking place in the fourth quarter of 2013, pounds sold were up 41 percent over the same period in 2012.

Frantzen Family Farm, New Hampton, IA

Another organic beef product that hit the stores running is Organic Prairie Beef Cocktail Franks. Combined sales of Original and Spicy flavors were more than $75,000 in the fourth quarter, with a projected rate of production in 2014 that could exceed $250,000 in annual sales. Ever on the lookout to pair on-farm utilization and consumer demand, OMC introduced a limited edition Bone-in Skin-on Turkey Breast in the fourth quarter, a nice option for consumers who don’t need or want a full turkey for the holidays. OMC sold out in less than four weeks and expects to triple sales in 2014. For foodservice customers, OMC rolled out Individually Quick Frozen (IQF) Ground Beef Patties and prepared for the launch in first quarter 2014 of two new hot dogs. In 2013, OMC began a packaging redesign that will be completed across all product lines in 2014. New packaging was employed on the new products launched in 2013, starting with Uncured Grassfed Beef Hot Dogs. The new design element is more modern and easier to identify on the shelf. Most crucially, it blends across all products to create a unified look that will make the brand instantly recognizable to consumers. As OMC continues to work toward maximizing on-farm utilization, the regional expansion plan for market cows was focused primarily on the Northeast. However, the majority of market cows were harvested in the Midwest in 2013. The company will continue to review this opportunity in 2014 for viability and possible extension across producing regions.


The OMC team remains committed to giving consumers the best experience possible...while always highlighting what differentiates Organic Prairie...We are farmer-owned!

Lorentz Meats Grows in 2013 Globally, OMC continues to develop the Organic Prairie brand in strategic international markets that are open to organic meat imports. The OMC team remains committed to giving consumers the best experience possible, from first sight of the product to first taste, by providing the highest quality meats in the best-looking packages, while always highlighting what differentiates Organic Prairie products from the competition: We are farmer-owned!

1 2

An industry term for meat that has never been frozen. Coupons affixed to the package that may be removed and used immediately upon purchasing the product.

Rob and Mike Lorentz

In June of 2013, CROPP’s meat processing partner, Lorentz Meats, completed and put into service a 30,000-square-foot expansion that doubles the plant’s processing capacity. This expansion supports the growth of the Organic Meat Company as well as Lorentz Meats’ other customers. The expansion was completed on time and on budget, and provides improved food safety with complete separation between cooked and raw production. Part of the expansion included the addition of 200 cooler and 200 freezer pallet spaces, which have eliminated the need for expensive off-site storage. In 2014, the plant will add a new animal handling area and carcass hanging cooler. These additions will double the plant’s slaughtering capacity, eliminating the current expensive practice of sending overflow work to other facilities. As always, CROPP is delighted to partner with Mike and Rob Lorentz in this family-run enterprise.

Organic Meat Company

9


Operations

10

Operations teams completed the largest, most comprehensive U.S. testing of milk for essential fatty acid composition.

Operations: Managing the Supply Chain The cooperative was faced with multiple disruptions in 2013: slower bulk sales, the headquarters fire, a fire at a major partner processing plant, and an unprecedented weather-generated drop in milk supply. Operations teams are responsible for maximizing the use of the farm supply to maximize fill rates to customers, while using inventory as a tool to balance the variances in both ends of the supply chain. In a normal year, the tool works well. Early in 2013, sales were not as strong as forecasted. Product inventory (skim milk powder, cheese and butter) were at historically high levels, forcing the co-op to sell cream and milk conventionally through the first three quarters. The unprecedented drop in supply in August turned the tables on the business as it shifted from too much milk to dramatic shortfalls. The co-op stopped putting milk into inventory, using that milk instead to bridge the shortfall gap as sales increased beyond expectations. The figure below shows the dramatic changes in 2013 milk supply compared to 2012. At the height of spring flush, the business was challenged by a fire at the La Farge headquarters. Between the Operations team’s resiliency and attention to relationship development with processing partners, the whole department was able to keep

working during this critical period. In the immediate wake of the fire, customer service, production and transportation staff worked without computer systems to schedule trucks, fill customer orders and keep the milk flowing. Partners also supported the co-op when the Wayne Dairy processing plant in Richmond, Indiana, experienced a fire later in the year, causing the co-op to lose production. The Cashton DC provided a haven for employees displaced by the HQ fire, and the redundancy of communications systems there enabled the business to stay up and running. The fact that both the cooperative’s cheese-cutting and butter-making facilities are separate from HQ meant that production could continue without interruption. The DC warehouse addition was completed early in the year. As a result of this expansion, a new warehouse management software system and an upgrade to the automated systems already in place were needed. During the first two weeks of the changeover to the new software, the co-op was unable to service all orders. This issue was compounded by the late summer drop in milk supply, which led to product shortages from September to December.

2013 WEEKLY MILK VOLUME

7,000,000

2013 2012

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000 1,000,000 SPRING

SUMMER

FALL

WINTER


Operations

11

In spite of the year’s challenges, there were plenty of successes up and down the supply chain. Following are a few of the Operations teams’ accomplishments in 2013: • Cheese volume shipped increased a phenomenal 33 percent, resulting in expansion of cheese manufacturing capacities in the Midwest and West. • Production and Quality, Research & Development teams negotiated improvements in production fees equaling an annual savings of $5.5 million. • Dairy Production improved the line losses at dairy bottling facilities from an average of 7.43 percent to 5.06 percent, resulting in the equivalent of 225 more truckloads of farm milk manufactured into finished goods. • Global Food Safety Compliance and Certifications reached a new high, with 90 percent of fluid dairy and 75 percent of all coprocessors in compliance. • Existing products were reformulated to eliminate the use of carrageenan, which will position Organic Valley products well when carrageenan is phased out of organic compliance.

• Ghee production grew almost 50 percent, which meant that ghee sales volume grew more than 50 percent. CROPP’s Chaseburg Creamery facility in Chaseburg, Wisconsin, accommodated that growth. • The Operations teams completed the largest, most comprehensive U.S. testing of milk for essential fatty acid composition, which was a huge success for the team and is a credit to CROPP farmers’ high-quality farming practices. The results were published in December 2013 and have been leveraged into a national campaign called “Grass Up! for Good Health.” Read more below. An old English proverb points out that a smooth sea never made a skilled mariner, and it’s true—CROPP learned lessons because of the trials it endured and overcame. This year contributed to the development of new software, automation upgrades and expanded facilities that will enable the co-op to meet the challenges of the future with resilience, agility and strength.

Grass Up! for Good Health Bringing the Balance The CROPP Operations team collected whole milk samples over the course of 18 months from 14 coprocessor dairy plants in seven regions, with 384 independent lab tests. The arduous task of collecting and shipping milk and interpreting data paid high dividends: Organic Valley Pasture-Raised™ Whole Milk was found to be nutritionally superior to conventional whole milk. • 62 percent higher levels of omega-3

And it’s not just dairy! The Organic Meat Company conducted their own research to measure the omega-3 levels of Organic Prairie organic beef, with exciting results that confirm that pasture-raised and grassfed meat also has superior levels and more balanced ratios of omega-3 to omega-6: 85/15 Ground Beef

Ratio of Omega-3 per Omega-6 per Omega-6: 4 oz. serving 4 oz. serving Omega-3

• A desirable omega-6 to omega-3 ratio of 2.28 to 1 (in contrast to 5.77 to 1 for conventional whole milk)

Organic Prairie Grassfed*

158 mg

311 mg

2.0 : 1

• 18 percent higher levels of conjugated linoleic acid (CLA), which potentially has anti-carcinogenic properties

Organic Prairie Pasture Raised*

154 mg

365 mg

2.4 : 1

Conventional** (USDA Average)

80 mg

500 mg

6.3 : 1

Why are we seeing these changes? Because organic cows are fed pasture-based diets, and CROPP dairy farmers are leaders in pasture-based dairy. The results of CROPP’s data were confirmed in a study completed by Washington State University and subsequently published in PLOS ONE science journal on December 9, 2013. To learn more and to read the study, visit www.ov.coop/grassup.

* Fatty acid testing conducted by the independent lab, Silliker Solution Center, IL ** USDA Nutrient Database for 23567 Beef, ground, 85/15, raw

The evidence continues to grow. Organic soil and pasture health leads to many nutritional benefits. It’s a simple truth that all farmers can pursue, and everyone will reap the delicious, nutritional rewards.


Operations

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(clockwise from left) Hartkopf Family Farm, Albion, ME; Varney Family Farm, Turner, ME; Parker Family Farm, Viola, WI


Organic Logistics

13

Organic Logistics Organic Logistics (OL) approached 2013 as a milestone year. It was not only CROPP’s 25th anniversary and OL’s 10th, but it was a year of transformation, as growth and complexity took the business to a new dimension. This year OL delivered on its value proposition to achieve profits through third-party-logistics (3PL) sales, while driving efficiency and service performance across CROPP’s distribution network. To do this, investment and effort were necessary because, after only six years, CROPP’s double-digit growth resulted in shipping and receiving demands that exceeded the Cashton Distribution Center’s (DC) capacity. A thoughtful DC expansion added a traditional warehouse structure and a substantially larger dock to the existing building that was completed in April 2013, on time and $1 million under budget. To realize full value from the expanded DC, a new Warehouse Management Software (WMS) called “RedPrairie” was selected not only to optimize DC operations, but to lay the foundation for an integrated supply chain solution. It is a critical element in managing CROPP’s increasingly complex and growing business. The implementation was the result of 19 months of work involving co-op staff, RedPrairie and Westfalia Technologies teams. The WMS and the Warehouse Control Software (WCS) were both

changed in this rollout. During the most intense transition period, staff from across the co-op rallied to help in every way, many of them working in the warehouse before and after their normal work hours and on weekends, doing all they could to ensure Organic Valley and Organic Prairie products were delivered to customers. Dramatic fluctuations in milk supply, especially in the second half of the year, manifested in the distribution channels as a continuous stream of challenges when it came to servicing customers and keeping up with production changes, inventory changes and volume shifts. Working under adverse conditions, OL’s Transportation Management Services team moved more than 1.6 billion pounds of product through the network and maintained the highest level of service in the industry, all while managing to save nearly $4 million in expenses. This amazing feat won the team CROPP’s Penny Pincher Award for its outstanding work. Not unscathed by the challenges of 2013, OL’s 3PL division still managed to meet its budgeted sales plan of $13.5 million and deliver a bottom line contribution to the cooperative of $737,375. This was another hard-earned success that OL 3PL is grateful to contribute.

New trailer wraps were produced and sent out down the road.


Marketing

14

CROPP launched more new Organic Valley products than ever before — 21 in all.

Marketing A fundamental goal of Marketing is to build and maintain Organic Valley and Organic Prairie brand loyalty among consumers, and the team does this by telling the story of the cooperative and its farmer-owners. The Marketing team is so fortunate to have such a real, authentic and emotional story to draw upon as it does its work—and to be reminded of when times get a little tough. The tools used to tell the story that will resonate with consumers include packaging, online media, advertising, in-store promotions, events, sponsorships, retailer trainings, farm tours and the best spokespeople in the world—CROPP’s farmer-owners, who talk to consumers in stores and at many events across the country. Despite multiple business disruptions in 2013, the team worked hard to deliver on the new consumer tagline of “Bringing the Good” as they accomplished the year’s goals.

Brand and Packaging Refresh Marketing must ensure that the product packaging, which is the primary touch-point for consumers, best represents the high-quality products CROPP farmers bring to consumer tables. A complete Organic Valley brand and packaging refresh hadn’t been done in many years, so it was a huge undertaking for 2013 and into 2014. The photos of CROPP farm families on the new milk cartons bring the cooperative to life as they represent the co-op’s core mission, and the settings of the photographs represent the foundational tenet of organic agriculture: pasture.

Farmer-owners received recognition for CROPP’s 25th anniversary at Farm Aid.

New Avenues of Advertising The Sales team does an outstanding job of getting Organic Valley products on the store shelves. It is then Marketing’s job to make sure consumers choose our products in stores. Using targeted marketing campaigns enables Marketing and Sales to see the cumulative return on investment from these efforts and finetune them to continually increase payback. Marketing has worked hard to innovate on the co-op’s different consumer communication vehicles. In a national media push that included six test markets using a mix of print, radio and television advertising, it was apparent that certain markets responded to our advertising more than others, even though all test markets outperformed areas where the co-op did not advertise at all. Future advertising will be focused on those markets in which advertising was most successful. Organic Valley’s first TV commercial was filmed this year, and to honor the brand’s authenticity, the team knew it had to be shot on an OV farm using OV farmer-owners, not actors. It was filmed on Terry and Alyson Ingram’s beautiful farm in Culpepper County, Virginia, and starred the Mahaffy family from Coos County, Oregon. See the commercial and behind-thescenes photos at http://ov.coop/mudpie. Radio spots were also recorded on the farm to be as authentic as possible, and an additional video called Organic Valley: Who We Are was created to bring the co-op and its mission to life online.


Marketing

15

This was shared via social media to a wide audience and is shown to new and prospective employees to engage them in the co-op’s special mission. View the video at http://ov.coop/weare.

Celebrating CROPP’s 25th Anniversary Another 2013 initiative was the promotion of the cooperative’s 25th anniversary. At Natural Products Expo West, the biggest trade show Organic Valley attends annually, CROPP built a fantastic presence with the debut of a new trade show booth and a thank-you party for the co-op’s partners, retailers and everyone who contributed to its success. The co-op’s hometown Kickapoo Country Fair revolved around the anniversary and turned out to be the best fair ever despite the fact that it came hard on the heels of the Headquarters fire. The co-op received a huge outpouring of support from the community, making the event that much better.

Online Impact The Organic Valley website and social media destinations are important consumer communication vehicles. Notably this year, CROPP had 167,000 web visitors to its back-to-school campaign versus 10,000 in 2012. This dramatic change was due to the Interactive team’s new 30 Days to Cherish email series and partnership with the Rock the Lunchbox brands (see more online activity in Marketing Highlights, page 16).

Debut of the new booth at Natural Products Expo West. Board members Pam Riesgraf (WI) and Arnie Trussoni (WI) and staff member Elizabeth Levendoski helped serve hundreds

of product samples at Natural Products Expo West.

Organic Voices CROPP Vice President of Brand Marketing Lewis Goldstein joined forces with other organic leaders in the industry— Honest Tea, Nature’s Path, Stonyfield, Happy Family, Annie’s, Late July, Earthbound Farm, and others—to create Organic Voices, a campaign for 2014 that aims to educate consumers about the differences between “natural” and USDA Certified Organic products in the marketplace. Their first project, which launched in early 2014, was Only Organic, a website and social media campaign of videos that are both funny and sobering. Learn more at www.onlyorganic.org and www.facebook.com/ onlyorganicguarantees.

Moving On From the Fire Because Marketing is one of the largest teams in the co-op with many balls in the air at all times, keeping the team together and working smoothly after the Headquarters fire was of primary concern. CROPP ended up buying an abandoned bank building in nearby Westby, Wisconsin, which was quickly retrofitted with network capabilities, desks and chairs. The team moved into the building in July. Despite all the disruption, Marketing continued their work without a hitch and have even bigger and better plans for 2014.


Marketing

16

Marketing Highlights The Marketing department is made up of multiple groups that work together to engage consumers with the Organic Valley and Organic Prairie brands. Here are just a few of the many Marketing accomplishments from the past year.

will drive

YOUR ORGANIC VALLEY SALES Color coding of fat level extends from current packaging to make consumer identification simple

Nutritious and delicious milk starts on pasture

2013 Farmers in Marketing Involvement 195

64

Farmer Ambassador Activities

Creative Activities: Photos, video, profiles, packaging

47

Media Interviews

“Never uses” highlights elements critical to consumers

41

OV Farm Tours

Blue background color extends to all products to enhance consumer’s recognition of Organic Valley across categories

New simplified logo for quicker consumer recognition

589 Marketing Events

Organic Valley family featured in full color

238

Own Your Community Activities

An Organic Valley farm featured by name and signature to enhance trust in our products

USDA seal guarantees quality

4

Advanced Messaging & Media Trainings

293 farmer-owners actively

involved in Marketing activities

600 farmer-owners participate in

New premium full-color packaging supports the best organic milk

Farmer Coupon Program

163 packages updated in 2013 144 packages scheduled to be updated in 2014

10 CROPP teams involved 24 months of research, strategy, development and design

John Cleary, one of our New England pool managers, plays the

mandolin while children learn to milk a “cow” at the Common Ground Country Fair in Maine.


Bioneers Radio Network sponsorship reached

10 million listeners

Marketing

17

24 dieticians trained

on benefits of organic dairy at the In-Store Dietician Program launch with Hy-Vee supermarkets

2,500+ Fit4Mom mailings with samples, literature and coupons

Holiday 2013 The Secret Ingredients in Plain View ad campaign declared OV butter and cream as the secret ingredients for the most memorable holiday traditions. The ad focused on a specially developed Caramel Apple Pie recipe aimed at capturing a more epicurean consumer. Total impressions for the campaign totaled more than 190 million, (www.ov.coop/secret).

120K visitors to web page 22K signed up for weekly emails 23K digital coupon prints 52K visits to OV holiday recipes pages 10K views of featured Caramel Apple Pie recipe

American Cheese Singles Tour

1 month 20 stores

5,742 miles 9,000+ interactions

Rock the Lunchbox was an

online back-toschool campaign with Organic Valley, Annie’s, Honest Kids and Stonyfield featuring tips for packing healthy lunches and highlighting each brand’s kidfriendly products. At RockTheLunchbox.com, moms could also submit photos of their own children’s healthy lunchbox.

13 weeks 125K visitors 10K new Farm Friends added 12K digital coupon prints


Sales

18

Sales: A Year to Learn From and Remember To say the least, there is never a dull moment in the dairy industry. From the Sales team’s perspective, 2013 was a year of learning to manage new challenges and realizing how important it is to support each other in difficult times.

CROPP must continue to create awareness of the nutritional superiority of organic dairy milk over plant-based beverages and stress the differences between the Organic Valley brand and its competitors on points like stable farmer pay price, family farms, regional production and distribution model and, most important, the highest quality organic milk.

Sales staked out its budget goals for 2013 based on the previous year’s robust growth and a sense of optimism in the marketplace. The team made great progress developing new business, defending turf and growing sales head-to-head with competitors. What the team did not anticipate was an aggressive low-pricing strategy employed by Organic Valley’s largest competitor, a strategy that successfully locked Organic Valley out of certain market opportunities.

There is good news in spite of the challenges in fluid milk categories. Cheese sales increased 30 percent over 2012, and butter continued strong growth as more and more consumers make the connection between organic milk and the dairy products made with organic milk. Because they are “value added” products, increased sales in these categories are more profitable for the co-op than fluid milk sales and mesh well with the inventory strategy we use to balance supply and demand (see Operations, pg 10).

As noted in last year’s report, the conventional dairy industry saw another year of declines due to the growing category of “plant-based beverages” made from soy, almond and coconut. Promoted as a healthier, low-cost alternative to dairy, this market segment continues to grow rapidly. While organic fluid dairy grew by 5 percent (with the strongest gains in private label, branded lactose free and branded omega-3 milks), combined Organic Valley branded dairy grew by 5.4 percent with the strongest gains in cheese, butter and eggs. Meanwhile, regular organic white milk declined in many markets for both Organic Valley and its competitors.

Produce sales shot out of the gate in 2013 with a 50 percent increase over projections. Export sales grew an impressive 76.5 percent this year. After selling into Asia for many years through “agents” and distributors, the co-op managed its first “direct to customer” shipments of Organic Valley shelf-stable milks into China. Making a direct connection with those retailers was a big step for the cooperative.

2013 CHEESE SALES VS. 2012

$1 Billion

$7,000,000

10-YEAR SALES GROWTH

2013 CHEESE SALES 2012 CHEESE SALES

$6,000,000 $5,000,000 $4,000,000 $3,000,000

$500 Million

$2,000,000 $1,000,000 $0

JAN

FEB

MAR

APRIL

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


The expanded launch of Organic Valley Grassmilk™ into national retail channels was a marketplace phenomenon, garnering attention for the brand with customers and consumers clamoring for more. The Grassmilk pool began in 2012 in California and expanded east in 2013 to include 21 Midwest farmers, allowing wider distribution of the product. Current and prospective farmers work closely with Pools staff to address supply, nutrition and forage quality. The farmers have shown great commitment toward this challenging production model.

Egg growth was strong at 8.9 percent over 2012 and was only limited by supply constraints, while sales of Organic Valley flavored half-and-half and soy creamers grew 35.3 percent. As was the case across the organic dairy industry, CROPP’s Sales team had to put on the brakes in late third quarter when the milk supply plummeted due to extreme weather events. Industry-wide shortages of butterfat depleted our butter inventory, which slowed holiday butter and heavy whipping cream sales in fourth quarter. The supply issue led to widespread shortages of OV products in the peak holiday season. It was a bruising quarter from a customer service perspective as customer orders had to be managed by allocation.

Looking Ahead The organic dairy market continues to fluctuate. Conventional dairy prices are at near record highs, which, based on historical trends, are expected to drive up organic sales as the price gap between conventional and organic narrows, and consumers feel more able to make the small price jump up to Organic Valley. Higher organic sales will enable the co-op to stimulate production. There is strong demand for Organic Valley ingredient and private label products, and CROPP will launch exciting new products in 2014.

In May, we hit the road for the national expansion of Grassmilk distribution, educating Whole Foods Market staff about this unique and highly popular product. Grassmilk farmers like Jim and Sabrina Langmeier (WI, above) were a critical part of the tour’s success.

98 Whole Foods Market stores visited 36 days 7% sales increase at visited stores 12 OV farmers The educational effort was a great success:

Whole Grassmilk is now the

#1 Organic Valley milk in the

Whole Foods Market stores we visited! The Grassmilk product web page was one of

our most visited pages in Q3 and Q4 even without much web promotion, demonstrating the authentic popularity of this new product.

Sales

19

Grassmilk


Sustainability / Local Ops

20

Sustainability and Local Operations Sustainability In line with the Sustainability team’s mission to stabilize energy costs across the business and CROPP farms, a very important initiative that the team has been working toward for years was realized in 2013: the installation of and supply for CROPP’s own biodiesel fuel. Located behind the CROPP II facility in La Farge is a 5,000-gallon biodiesel tank that supplies the co-op’s fleet of diesel vehicles. The fuel itself is sourced from a processor in northern Wisconsin that grows its own oil crops. Ag plastic recycling continues to be a topic of utmost concern for CROPP farmers and the Sustainability Department. Plastic is ubiquitous on farms today, and its disposal must be managed properly rather than burying or burning it on farm. There are currently recycling options available for 430 CROPP dairy farmers in Wisconsin, Iowa, Indiana, Ohio and New York. There is money available from foundations, the government and other sources for sustainability projects, and grant writing assistance is just one of the many ways the On-Farm Sustainability Program supports members’ sustainability endeavors. In 2013, the Sustainability team successfully secured federal Rural Energy for America Program and Wisconsin Focus on Energy grants totaling more than $112,000 to help fund on-farm renewable energy projects. These six projects produce approximately 236,000 kWh of clean energy annually from solar and wind sources.

Biodiesel fueling station

Our Sustainability team has tracked and gathered metrics on the co-op’s energy use and greenhouse gas emissions throughout the supply chain for several years, so it has been able to respond to customers’ increasing requests for information. Some customers even share their suppliers’ information with their consumers, which gives the co-op greater visibility for this core mission initiative.

Local Operations CROPP’s Local Operations team, which is responsible for all CROPP-owned facilities, equipment and acreage, really had its work cut out for it in 2013. Before the Headquarters fire, the team was finally “right-sized” for its workload and was well on its way to achieving all the facilities goals it had set out to accomplish in 2013. The team had begun work on deferred maintenance and projects aimed at decreasing the potential for costly repairs. The team was well into completing these projects when the fire struck. Before the fire was even out, the team began putting together a plan so that employees could access their workspaces as quickly as possible. ServiceMaster, a national franchise that specializes in disaster remediation, was contracted for the first phase of recovery work, pulling crews from as far away as Minneapolis, Chicago, St. Louis and Ohio.


In 2013, CROPP produced enough renewable energy to offset 69 percent of electricity and 39 percent of all energy used in its owned facilities.

Between CROPP’s Facilities Services team and ServiceMaster’s crew of more than 100 people working 24-hour shifts, the groundwork was laid for local contractor Wieser Brothers to start the demolition, rehab and rebuild of the central and west portions of the building.

that inspires employees, farmers and visitors alike to be innovative, efficient, productive, creative and healthy, all on a very tight budget. Move-in is scheduled to begin February of 2014 for the rehabbed central section and June of 2014 for the rebuilt west section.

Food is not just CROPP’s business; it is also deeply embedded in the co-op’s culture. The Earth Dinner in La Farge that CROPPies look forward to every year was scheduled to occur the evening of the fire. In fact, because of the event, the building was unusually populated when the fire broke out. Fortunately, the food that was prepared did not go to waste. Throughout the night, the café team brought out gourmet food for tired, hungry firefighters, emergency personnel and CROPPie volunteers.

In spite of the unplanned crisis, the Local Operations team can proudly say that it accomplished nearly 80 percent of its planned goals this year, in addition to professionally and efficiently handling one of the most devastating emergencies to befall a business: the loss of its home. To add a little extra icing on the cake, they managed all that without a single injury or lost-time incident.

After the fire, the café team did a brilliant job over the summer of feeding everyone from the Little Dipper mobile food trailer in the Headquarters parking lot; but the first item on everyone’s agenda was getting the Milky Way Café back. The café is not only the food heartbeat of the co-op, it also provides muchneeded meeting space when all conference rooms are booked. In only five months from a complete gutting, the Milky Way Café reopened on time and on budget on November 11. Overall, as the rest of the rehab and rebuild continues, Headquarters will be a tighter, stronger, more efficient building than before. Our rebuilt home will provide an environment

The new café

Sustainability / Local Ops

21


Sustainability / Local Ops

22

From the Ashes: Phoenix 2013 On May 14 around 4:30 p.m., a fire broke out in the far wall of the west wing of the La Farge headquarters building and quickly spread through the walls and attic, destroying one-third of the building and severely damaging another one-third.

118

18 hours

firefighters from 11 area communities

114,000+ gallons of water

2/3 of the building destroyed or severely damaged

Hundreds of social media well-wishes within 24 hours

Most viewed OV Facebook post of all time (274k impressions)

Facebook posts reached 700k people in the week following the fire (up from 100k).

Marketing’s Interactive team filmed two videos after the fire that received a great response: one of George communicating about the fire and thanking everyone for their support, and another that told stories from CROPPies about their experiences during the recovery effort. View them at www.youtube.com/organicvalley.


233

employees displaced

157 laptops rebuilt in 5 days

10

new locations connected to the network in 2 months

0

missed customer orders or farm pick-ups injuries

Sustainability / Local Ops

0

23


Cooperative Affairs

24

(top) Goede Family Farm, Genoa, WI; (bottom left) Benson Family Farm, Lansing, NY


The Employee Values Statement provides a clear, concise way to communicate what the co-op values in its employees.

Cooperative Affairs Cooperative Affairs consists of teams that keep the co-op running smoothly and act as liaisons to the larger industry. But it is also involved in developing long-term goals and plans for a more intangible aspect of the business: keeping the culture alive as the pioneers move on.

Employees Values Statement

As it turns out, all the various leadership development initiatives in the world could not do what one disaster managed to do: transform the intellectual concept of the co-op’s mission into feet-in-the-fire reality. On Tuesday, May 14, 2013, CROPPies new and old walked into the fire as individuals and came out the other side to rise from the ashes as one. It was a catalyzing moment that could not have occurred in any conference room or at any symposium or meeting. Afterward, Co-op Affairs set about keeping alive that spirit, while tending to the immediate workspace needs of displaced employees and supporting all the teams involved in that endeavor. In 2013, the Human Relations team (HR) spearheaded an initiative to create the CROPPies’ Employee Values Statement. While the mission declares what the co-op aims to accomplish, the Employee Values Statement provides a clear, concise way to communicate what the co-op values in its employees and outlines how employees go about fulfilling that mission. As some of our founders and pioneers move on, it is critically important to pass on the values and culture that have allowed the co-op to succeed, and the Employee Values Statement aims to do just that.

CROPP Walking Program donated to the La Farge Food Pantry.

Cooperative Affairs

25


Cooperative Affairs

26

“So happy to see the quick action to turn around the disaster of the fire. The cooperative spirit at work is really impressive and it’s great to see it as such a foundational role in the co-op afer 25 years!” ~ Mary Stirling CROPP investor

As part of CROPP’s mission regarding healthy livelihoods and nutritious foods, the co-op’s wellness programs have been a mainstay of our culture since 2005. Every year, the Wellness Council of America (WELCOA) recognizes organizations for their commitment to the health and well-being of their employees. Hundreds of organizations compete to be recognized as one of America’s Healthiest Companies and receive national validation and recognition. CROPP was proud to be awarded the 2013 WELCOA Gold-level Well Workplace Award. Co-op Affairs also interacts with the shareholders, giving them the opportunity to keep a finger on the cooperative pulse. As always, CROPP is grateful to these folks, who came out in droves for the annual investor reception at the Kickapoo Country Fair in July. It was a heartening show of support to the co-op farmers and staff coming so soon after the fire in May. While the co-op has enough equity for its current needs and is only selling Class E stock to farmer-owners and employees, CROPP’s many citizeninvestors continue to wow us with their belief in the co-op. Their financial commitment has truly strengthened CROPP’s financial position, something for which we are all grateful.

Government Affairs In 2013, the good food movement reached into consumers’ awareness more than ever before. Although the year started with regrouping from the defeat of Proposition 37 in California, which sought mandatory GMO labeling in the state, the effort was spurred on by more than

six million voters who voted in favor of the measure. Across the nation, 26 states have taken up the cause, considering legislation, ballot initiatives and other means of achieving transparency in food labeling. Whole Foods Market stepped up the game by declaring that all foods containing GMOs sold in their stores must be labeled by 2018. This entire conversation was jump-started by CROPP farmers through the Farmers Advocating for Organics (FAFO) fund which demanded to be at the table to ensure that organic farmers and consumers have a voice in discussions about the future of our food. CROPP has always supported transparency of information about all foods, even conventional, with the intention that consumers’ awareness of what they eat will ultimately lead them to choose organic. That’s long-term thinking; but in the short term, we continue to educate consumers about the meaning of organic, the differences between organic and “natural” foods, and how their choices impact the environment, farmers and their communities’ health. In Washington, D.C., the organic industry’s conversation was and continues to be focused on the idea of pooling funds to create an organic research and promotion program. Although not without controversy, this conversation has spurred excellent, thoughtful discussions about cooperation and the need to invest in a brand we all share: the USDA Organic seal. The research and promotion program is by no means a done deal, and with legislative language in the new Farm Bill passed in early 2014 that allows the organic industry to establish its

“George’s comments about everyone in the cooperative truly coming together -finding, making and bringing good out of it -brought tears to our eyes.” ~ Judy and Emil Skroch, CROPP investors,

after George’s presentation at the 2013 investor’s reception.

Donegan Family Farm, Charlotte, VT


Cooperative Affairs

27

own research and promotion program, the door is open for the organic community to pursue this option. (See the April 2014 CROPP Forum to learn more about the new Farm Bill’s impact on organics.) In May, New York Organic Valley farmer Maureen Knapp and employees Jake Schmitz, Lisa Carnahan and Melissa Hughes were in Washington, D.C., attending the annual Organic Trade Association (OTA) Policy Conference and Hill Visit Days. CROPP farmers participating in these types of events—not only in Washington, D.C., but also in their home districts—are critical to our success and impact on organic policy. Through the Cooperative Action Network, we continued to focus on educating legislators about organic farming through farmer visits to D.C., farm tours and district meetings. CROPP farmers participate in their home states’ agricultural boards, OTA’s Farmer Advisory Council and various legislators’ agricultural advisory committees. The most impactful discussions happen directly between policymakers and farmers, and the co-op welcomes and encourages anyone who wants to be a part of advocating for organic food and farming.

Wisconsin farmer-owner JAKE WEDEBERG on Capitol Hill.

Vermont farmer Abbie Corse (and her son, Eli) and Virginia farmer Terry Ingram deliver a petition with 58,849 signatures to Rep. Earl Blumenauer (D-OR) on May 22, 2013. The petition encouraged legislators to enact a Farm Bill that fully funds conservation programs.


Mission & Messaging

28

What was the greatest lesson the M&M team gleaned from the WomenShare experience? If we want to change the world, we need to be able to communicate the vision clearly and inclusively.

Mission & Messaging The World’s Best Food comes from the World’s Best Farming. CROPP farmers know this. Now there is proof. Mission & Messaging (M&M) led the effort to promote the fatty acid profile study published in the prestigious science journal PLOS ONE and integrate it into co-op-wide messaging. Read more about the study results on page 11. With the study’s publication in December 2013, M&M launched a campaign called “Grass Up! for Good Health,” which will run through 2014 and includes many activities. Planning for and launching the campaign required intensive “in-reach” efforts across the cooperative in order to educate all CROPP stakeholders—farmers, employees and partners—on the results of this groundbreaking research and its implications for the cooperative and for agriculture in general. These in-reach efforts resulted in the formation of the CROPP Ambassador Program, an integrated team of farmers and employees. It’s a terrific communication model that encourages all departments to participate in mission education efforts. Similarly, M&M developed a co-op-wide, interdepartmental communication task force to deal with postfire recovery efforts. The team was extremely effective and has continued as the co-op’s primary communication tool. The M&M team further refined the cooperative’s strategic philanthropy process in 2013. CROPP’s donations, sponsorships and partnerships operate across multiple departments and programs throughout the co-op that together comprise the Strategic Philanthropy and Partnerships Program (SP3). Each of the programs within SP3 has a specific philanthropic focus that

Launched in 2013, the Rootstock blog is cooperatively authored by more than 50 CROPP farmers, employees and guest bloggers (www.rootstock.coop).

Rachel Bagby,

WomenShare cofacilitator

supports tenets of CROPP’s mission. CROPP and FAFO donated more than $2 million in 2013 in cash, product and other in-kind support to around 1,000 projects and organizations across the nation. These organizations—which we call our “change the world” partners—collectively reach millions of people and help spread the word about CROPP’s mission, the Organic Valley and Organic Prairie brands and the organic food and farming movement. As partners, we inspire each other to continue working for the common good. Knowing that we give back to nonprofit organizations who are growing the good food movement gives consumers one more reason to choose Organic Valley and Organic Prairie products. So this year M&M, Marketing and the Strategic Philanthropy and Partnerships team developed an initiative to spread the word about our cooperative giving. We call it “Power of We.”

Media Relations This year, CROPP’s PR team racked up the numbers thanks to the PLOS ONE study, high-quality new products that the media loved, a successful farm tour for media, and other media outreach. All this hard work earned the Organic Valley and Organic Prairie brands a record reach of 2 billion in print circulation and unique online visitors! Some of the most exciting media outlets that carried news of CROPP’s brands included The New York Times, National Public Radio, The Wall Street Journal, TODAY Show, The Huffington Post, Women’s Health, Men’s Health, and so many more. (See the opposite page for CROPP’s top five media events of 2013.)

Earth Dinner celebrated its 10th anniversary with national events celebrating local, seasonal and organic food. A redesigned card deck of conversation questions inspired thousands of participants to learn about where food comes from.


The M&M team brought together more than 120 women food and farming changemakers to La Crosse, Wisconsin, for the three-day WomenShare conference to discuss issues facing the food and farming world today. Read more about WomenShare at www.rootstock.coop/womenshare.

Mission & Messaging Team Core Principles: 1.) In December 2013, Organic Valley was inundated with quality national and regional media coverage regarding the study that was conducted by Washington State University and peer reviewed by the prestigious scientific journal PLOS ONE. Key coverage ran in the New York Times, the Los Angeles Times, Prevention, Mother Jones, on the TODAY Show and on National Public Radio. Circulation and online unique visitors for these and all other study-related media coverage resulted in a reach of nearly 400 million—almost one quarter of the co-op’s total 2013 media coverage in just one month! 2.) November-December: Organic Valley Eggnog was widely recognized this holiday season with mentions in key outlets like the TODAY Show, Bay Area Bites blog, The Huffington Post, the San Francisco Examiner and by influential bloggers, resulting in a total reach of more than 57 million.

In all we do together, we endeavor to: • Create conditions for inclusive contribution. • Honor the heart’s instinctive and intuitive wisdom. • Cultivate an environment that unleashes and connects our creativity. • Grow trust-based relationships that allow us to shine in our roles.

5.) November 23: The Minneapolis Star Tribune’s “Wisconsin Has Grown into a Hotbed of Organic Farming” recounted the history of organic farming in Wisconsin and the role that Organic Valley played in making it the number one state in the nation for organic dairy farming. Print circulation and unique online visitors totaled two million.

3.) October 16: TODAY Show Food Editor Phil Lempert reviewed new Organic Valley Lactose Free Whole Milk and rated it a 92 out of 100 on his “hits of the week” video series, which receives an online viewership of nine million.

4.) June: A Grassmilk™ media tour at the Regli Farm in Humboldt County generated widespread national and regional media coverage, including Epicurious, the San Francisco Examiner, Bay Area Bites and the San Francisco Chronicle. Print circulation and unique online visitors for these and other tour-related media coverage totaled nearly 4 million.

BONUS: May 19: Days after the Headquarters fire, the La Crosse Tribune published a lovely business and economic profile called “Organic Valley: Big Business in tiny towns,” examining Organic Valley’s presence in La Farge and Cashton, Wisconsin, and the ways that the cooperative contributes to rural growth and prosperity. Print circulation and unique online visitors were relatively small at 154,770, but it was a very meaningful gesture from the local area’s largest newspaper. Total fire-related circulation from all media outlets made up a noticeable portion of the year’s 2 billion hits.

Mission & Messaging

29


Financial

30

Financial In spite of a difficult ride this year, CROPP achieved solid 9 percent growth in 2013. 2013 sales increased to $929.5 million from $856.9 million in 2012. Considering the tough year, the increase in sales was an outstanding accomplishment for the cooperative. These were strong sales given supply constraints in the second half of the year. Our 2013 profit of $4.9 million or 0.5% was certainly not what the co-op had hoped to achieve and less than the board-approved profit goal of 2.4 percent for 2013. But no apologies are necessary for bringing home a profit in a year that threw the business a “perfect storm” of challenges, as detailed in this report. Many a business has crumbled under pressure from just one of these setbacks. While the perfect storm contributed somewhat to profit margins that were less than expected, there were other factors at play. Branded profits in 2013 were challenged as the co-op tried to make up for lost ground from underinvesting in the brand in 2012. This year we reinvested in the marketplace to regain sales momentum. It was mentioned here last year that “The brand pays for our ability to talk to consumers about organic. That’s why we must continue to invest in the brand.” Investment in the marketing of CROPP’s branded products is critical. The continued success of the co-op’s branded products is the foundation of a sustainable pay price to farmers.

Unlike 2012, which finished with very high levels of inventory, end-of-year 2013 levels were strong, but still a fraction below the year’s goal. This was due to the supply drop in third quarter, forcing the use of more inventory for sales in fourth quarter than happens under normal conditions. The national average dairy farmer pay price in 2013 set a new record at $30.96 per hundredweight3 (cwt), up from $30.71/cwt in 2012. CROPP members collectively received an organic pay premium of $168 million over the conventional pay price during 2013, truly a significant accomplishment in such a year. In 2013 CROPP completed a syndicated $100 million loan agreement with JP Morgan Chase and Rabobank. This five-year agreement comes with a variable interest rate structure. Currently, the co-op is borrowing money at about 1.75 percent. Overall, the balance sheet continues to be strong. Accounts receivable are well controlled and in very good condition. Now that the lessons have been gleaned from this challenging year, CROPP is looking forward to a new year and new opportunities. To close on a note of gratitude, there are three reasons why CROPP did not falter. First, profound gratitude goes to CROPP’s employees and our vital community of friends. The stories of their heroics, tenacity and generosity are legion by now, and they will go down in CROPP history.

3

Bingham Family Farm, Weston, ID

Hundred pounds of milk.


CROPP achieved solid 9 percent growth in 2013.

Second, heartfelt thanks go out to CROPP’s Class E shareholders. Their support of the cooperative’s mission is a strong leg of the co-op’s equity program. CROPP farmers invested an additional $3.5 million in 2013, which is another essential footing beneath our equity program. While equity overall did not increase in 2013 because profits did not increase, the cooperative is committed to a much stronger profit picture in 2014. Finally, the co-op was overwhelmed by the unstinting support of its many strong business partners, from processing plants to

the financial institutions that keep CROPP’s financing strong. Only 48 hours after the Headquarters fire, with no idea exactly how much damage the building sustained, JP Morgan Chase approved a $20 million increase to CROPP’s line of credit. In the immediate wake of a disaster, the business’s ability to meet its financial commitments is critical—vendors are watching and waiting for payment. In that case, cash is oxygen. The bank’s vote of confidence in the cooperative was significant.

Information Resources Steps Up Information Resources’ (IR) investments in CROPP’s data center and network in 2011 and 2012 more than paid off for the co-op in 2013 when they contributed significantly to the cooperative’s ability to quickly recover after the fire. They also enabled the team to finish rolling out the new Microsoft Lync communication system, something that normally would have taken three additional months, but that was completed in only two days after the fire. This, along with the network upgrade, was critical to the staff’s ability to continue working when they were displaced from Headquarters. When the Marketing team relocated to nearby Westby, when office trailers were installed on the Headquarters grounds to house other staff, and when many people had to work from home, IR had the network capability to handle the traffic from these numerous off-site locations. As part of their continual improvement initiative, perhaps the most critical investment the IR Management team made was in its human resources. They have focused on developing the staff’s ability to handle the daily information needs of the co-op and developing clear processes across the team. The teamwork, efficiency and technical expertise this group was capable of was phenomenal. The team had a “war plan” in place, and it worked. Because of the business’s rural location, building strategic partnerships with external technology vendors is a challenge for the IR team. But the fire proved just what great partners we do have in the area: Vernon Telephone, Five Star Telecom and Net-Tech were on site quickly and ready to help.

While IR was ready, willing and able to facilitate the co-op’s business-critical needs in its greatest time of need, the team efficiently managed its normal daily operations. Throughout the year, it also supported long-term goals of other teams across the business, like the ongoing Prism initiative led by Operations that will streamline the co-op’s supply chain and make it scalable for the future. All that while managing their financial resources carefully: spending was 11 percent under their projected budget.

Financial

31


Thank You

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Bringing the Good

Knapp Family Farm, Preston, ID


Beidler Family Farm, Randolph Center, VT


This annual report contains discussions of some of our expectations regarding CROPP Cooperative’s future performance. These forward-looking statements are based on our current views and assumptions. Actual results could differ materially from these current expectations and projections and from historical performance. For example, our future results could be affected by factors including but not limited to the competitive dynamics in the markets for organic dairy products; the cost and supply of organic milk; the cost of organic farm products and organic feed; the mix of sales of our branded and nonbranded products; the application of, and changes in, the United States Dairy Support and Federal Milk Marketing Order programs; and the adoption of regulations pursuant to the Food Safety Modernization Act. Discussions of these matters and other risks to which CROPP Cooperative is subject can be found in the Offering Circular(s) (and any associated supplements or amendments) we distribute from time to time in connection with the offer and sale of our Class E, Series 1 Preferred Stock. A copy of such Offering Circular and any current supplements or amendments can be obtained for informational purposes by contacting Investor Relations Manager Diane Gloede by mail at Cooperative Regions of Organic Producer Pools, One Organic Way, La Farge, WI 54639, or by telephone at 888-444-6455 extension 3310.

© Organic Valley 2013-55023 CMG-P02360 Printed on paper made from 100% post-consumer recycled fiber.

One Organic Way | La Farge, WI 54639 | 1-888-444-MILK | www.farmers.coop

Jisha Family Farm, Yantis, TX

Annual Report 2013


Cropp Cooperative 2013 Annual Report