Hang on to the ranch
Young livestock & poultry co-ops share goal to strengthen producers' role in marketplace
By Dan Campbell
Editor
Once they were "Marlboro Men" (cigarettes optional), riding free and easy in the saddle (or ATV) as they kept watch over their herds and flocks. They were self-reliant loners who stood up to whatever fate dished out. They bounced back up when they got knocked down and they learned to survive in conditions in which most of us would wilt under the strain.
But globalization of agriculture and concentration in them eat packing and food retailing industries has proven to be a bigger challenge than drought, disease or coyotes ever did. As their ranks thinned and their profits plummeted, many livestock and poultry producers have gradually come to the conclusion that --gulp-- maybe that guy over on the next ranch or farm could bean ally rather than a competitor.
Thus, there has been a surge during the past five years of new, producer-owned livestock and poultry cooperatives. They are being formed by ranchers and farmers who see group action as the best way to retain ownership of their livestock and to process and market it themselves.
Representatives of the four major livestock sectors-beef, pork, poultry and lamb-gathered in Washington, D.C., recently for a mini-summit held as part of USDA's annual Agricultural Outlook Forum. They shared their experiences in helping launch a grassroots co-op revolution, the goal of which is to help livestock producers keep more of the dollars traditionally siphoned off by middlemen.
The new beef and poultry co-ops represented at the meeting are already considered to be successes, although their track records are still short. The new pork and lamb cooperatives hope to emulate the success of the beef and turkey co-ops.
"Cooperatives give producers marketing power so that they can compete with the corporate interests that are attempting to dominate agriculture, as well as an opportunity to improve their product quality and consistency to meet the rising demands of consumers," said Randall Torgerson, deputy administrator for USDA's Rural Business-Cooperative Service and the session organizer and moderator. He was one of several speakers to use the "Marlboro man" as a symbol for the stockman of old-producers who now realize that they are "at the 11th hour" to make needed structural changes. Otherwise, most of them could wind up as little more than 44 piece-wage producers" working for huge food corporations, if they survive at all, he warned.
Selling meat & meals, not cattle
Kansas cattleman Steven Hunt said there was no secret about the motivation for forming U.S. Premium Beef. fear! In the mid-1990s, young producers such as himself could see the end of their ranching way of life fast approaching. "A lot of us who had invested a vast amount of capital into our livestock businesses realized that if we didn't make a drastic change, we would have to get out of the business."
The system was broken and had to be fixed, he said. The problem was similar to an industrial model in which General Motors sells Cadillacs and Chevrolets for the same price."If that was true, how much longer do you think General Motors would make Cadillacs?" Hunt asked.
Yet that is the system in which the cattle industry has traditionally operated, he said. "We group our cattle in feedlots and sell them for one price. It's a system that rewards mediocrity. It's a marketing system that led us to a situation where our industry produces too many Chevrolets and not enough Cadillacs."
This realization helped lead to the formation of U.S. Premium Beef, a producer-owned marketing and processing cooperative that has been highly successful so far in implementing its strategy to "sell meat and meals, not cattle."
Membership in the co-op, of which Hunt is now CEO, has grown from 200 producers at inception in 1997 to 1,400 ranchers, backgrounders and feedlot operators in 38 states today. The co-op now holds a 29 percent interest in Farmland National Beef, the nation's fourth largest beef processor and marketer. Its program to pay premiums for high-quality carcasses has helped members earn significantly better payments than the industry average. The co-op's premiums-for-quality program has also stimulated some of the competition to implement a quality-grid payment system.
Hunt listed three principals that have been keys to the co-op's success:
1) Cattle are marketed in a system that pays based on the quality of the carcass, not just the weight;
2) Producers get detailed grading data from the co-op to help them improve the quality of their product;
3) Producer commitment-producers must not only commit to meeting the co-op's quality standards, but invest a significant amount of capital in the co-op. True commitment to a co-op "only comes about through ownership," Hunt said.
When it was being launched, many observers advised the fledgling co-op not to get involved in "brick and mortar" ownership. But the economic analysis performed for the feasibility study said the co-op needed an ownership stake in a processing facility.
The economic analysis also showed that cattle producers, on average, invest from $2,000 to $3,000 per animal unit (which includes the cost of livestock and all their other overhead expenses). But the overhead investment to process beef is only $100 to $200 per animal unit, Hunt said. "So when you look at the economics of vertical integration, is it more likely that a processor will go out and invest up to $3,000 per animal unit (to produce cattle), or would a producer be more likely to invest $100 to $200 per animal unit (to process it into beef)? This was the point when we in U.S. Premium Beef said not only can we do this [launch a co-op], but we have to."
As a new-generation co-op, the amount of stock the members buy in the co-op establishes their delivery right (and obligation). Producers originally invested $55 per head of cattle. For a producer who bought 1,000 shares in the co-op, the investment would have been $55,000, giving him the right to deliver 1,000 head annually to the co-op.
By the time U.S. Premium Beef closed its membership drive in November 1997, it had raised $38 million from members and secured an additional $ 3 8 million in debt.
Know your limitations
Hunt said a key to success in a value-added venture is to know your limitations. "We were producers-pretty smart producers, we liked to think, and we had varied backgrounds [he, for example, had worked as an ag lender]. But we weren't experienced marketers or processors."
So the co-op leaders felt it was essential to partner with a successful beef processor and marketer.
In this search, they talked with the nation's six largest beef processors. "If you walk into a packer's office with nearly a million cattle to offer, you will get an audience," Hunt said. "But when you start to talk about ownership and governance structure, the crowd thins out pretty fast. But a couple of them stuck around, and we ended up with an agreement with another cooperative: Farmland Industries."
Farmland was not chosen because it is a cooperative, Hunt said, but because Farmland National Beef leads the industry in number of value-added beef products. More than 30 percent of its revenue comes from value-added products, and more than 16 percent of its products are sold overseas, he noted.
"And as the fourth largest beef processor, we also felt it was about the right size-that we could buy a large enough piece of it that we could look our members in the eye and tell them they had some control in this company."
Convincing producers that they would have to give up a little independence at first in order to gain independence for the long-haul was the biggest hurdle U.S. Premium Beef had to clear, Hunt said. "Yes, it was difficult to bring more than $70 million in capital together, and yes, it was hard to negotiate a deal with processors. But the single most difficult thing to do was to bring together independent cattle producers from all over the country."
Hunt advises others to focus on doing what it takes to create a successful business, with consideration of the co-op's impact on local economies being secondary. "What scares me is when economic development goals drive a project-where the motivation is to employ people and increase the tax base. That is not a bad thing, but the priority should be on putting together a project that will generate earnings for the owners. Then the rest [the jobs, increased tax base, etc.] will come."
He noted that an additional 1,000 employees have been hired since the co-op took partial ownership of the meat-packing operation, boosting total employment to 4,500. But that was never a stated goal in the feasibility study.
U.S. Premium Beef closed the deal with Farmland on Dec. 1, 1997, and by the following week it had delivered the first 10,000 cattle to the processing plants in Dodge City and Liberal, Kan. In a little more than three years, U.S. Premium Beef has processed 1.8 million cattle, paid out premiums of $24 million, has $36 million in earnings and more $1.5 billion in sales (that's just its share of the processing operation). Not surprisingly, it is looking to expand, possibly into a multi-species livestock co-op.
Quitting, cold turkeyIf anything, Iowa Turkey Growers Cooperative was formed under even greater duress than U.S. Premium Beef. Ken Rutledge, the co-op's president and CEO, said the alarm sounded in May 1996 when Oscar Mayer (then a division of Kraft Foods, which was in turn a division of General Foods which was in turn a division of Phillip Morris) announced that it would be closing its turkey processing plant in West Liberty, Iowa. That could have spelled the end for the turkey producers who supplied the plant, as there were no other plants in the area that could handle their volume.
By the next month, 47 growers banded together to form a new cooperative under the motto "strive to survive." The task before them was daunting: they had to find another way to continue to produce turkeys, "or else convert their buildings to boat storage, which is not a very attractive option if you know much about central Iowa," Rutledge said. "They found they would have to mortgage all they owned in order to continue to produce turkeys, taking a risk few others would be willing to take."
But they were determined, and got help from USDA Rural Development, the state of Iowa and others to launch their co-op. In December 1997, Krafts facilities in Iowa were transferred to the Iowa Turkey Growers Cooperative.
The co-op processed its first birds in January 1997, but the timing for launching the operation could not have been worse. Turkey production was at a record level and prices soon plunged to the lowest level in the modern history of the U.S. turkey business. The depressed market continued through June of 1998. The normal break-even point for turkey breast meat is about $1.60 a pound, but during this period, the market dropped as low as $1.07.The co-op's management team had been formed in November 1996, which Rutledge said "was much too late. A sales program was non-existent [at the outset]. The only commitment on hand was from Kraft to take a portion of the product."
But then, the worm turned.
"Sometimes it's good to be in the right spot at the right time-and we happened to be there" when supply and demand came back into balance, Rutledge said. Two of the co-op's major competitors either closed their plants or converted to chicken. And, after a year and a half of struggling to survive, the co-op's sales and marketing programs began to bear fruit.
Strategic alliances were put into place, including a deal that saw the co-op become the supplier for a private label line of deli products with the largest retailer in the United States. A similar deal was sealed with a mid-size retailer. A large-volume co-manufacturing agreement was also concluded with one of largest food companies in the world and a program with Oscar Mayer was strengthened and continued beyond an initial two-year period. The West Liberty plant also began production of beef, pork and chicken products.
Today, the co-op's plant is the largest producer of deli items for two of the larges sandwich shop chains in the nation: Subway Sandwich Shops and Schlotzsky's. The co-op has received numerous awards for product excellence and the Iowa Governor's Award of Excellence for 2000 for being an innovative producer of value-added food products.
Rutledge noted that in 1998 the co-op ranked 157th among the nation's meat processors, and estimated that the co-op will climb to 75th by 2000, a year in which it reported $135 million in sales.
Bringing home the bacon
Jim Lewis, a hog producer from Welcome, Minn., and vice chairman of Pork America, said his co-op was also born in a time of crisis. With hog numbers building and processing capacity falling, the pork market plunged in 1994. That turned out to "be a shot over the bow," Lewis said. The real crunch came in 1998, brought on by the closure of a major pork processor and increased imports from Canada, which caused the hog supply to exceed U.S. processing capacity on some days.
"Actual prices fell lower than in the Great Depression - it was devastating," Lewis said. Hog producers lost between $4 and $5 billion in equity.
Producers knew they had to go after the pork business beyond the sale of live hogs, he said. "Some producers may still be under the delusion that they can produce their way to profits - but we don't think they can." Those producers who hope to survive on the profits from production alone are in a "death spiral," Lewis said.
"We must unify with others and move up through the marketing chain. Pork America is not out to fix the entire industry, but we can help our shareholders," he said, thanking USDA (as did the other speakers) for its assistance in establishing their cooperative.
Another concern of producers is the dramatic increase in hogs being produced under contract to meat processors. In 1994, Lewis said about 71 percent of hogs were sold on the open market, but by January 2001, that shared had declined to only 17.3 percent.
"So the question is: do we really have an open market?" Ag lenders are a major force driving this trend, he said. "With huge losses in equity and capital, lenders are pushing growers to sign contracts." But with plants running at near capacity, some growers are also worried about finding a home for their hogs.
There is also good news: demand for pork is climbing. New retail price records were set in each of the first seven months of 2000, and the United States has been a net exporter of pork for the past five years, a situation that last occurred in the 1950s.
"Producers are more efficient than ever; but they face bigger risks and smaller rewards than ever. We do not want to continue on this road," Lewis said. For those who want to reduce their risk, Lewis said there is nothing wrong with entering into contracts. But many others still want the chance for greater rewards and are willing to take some risk.
To help these producers, the National Pork Producers Council formed a task force in 1999 to look into new opportunities for producers. Taking inspiration from U.S. Premium Beef, the council appointed a task force of producers to research these opportunities. The task force gave its report to a group of 53 producers, who represented 20 million hogs, who voted unanimously to form a steering committee to pursue a national pork co-op. By the end of 1999, Pork America was incorporated.
"Through funds from USDA Rural Business-Cooperative Service and an agreement with the National Pork Producers Council, a major feasibility study was performed which noted that many old packing plants will soon have to be replaced, creating an opportunity for the new cooperative," Lewis said. The study found that the cooperative could not succeed on a small scale, and that supporters of the concept would have to think big, with the goal of becoming one of the top three processors within five years.Members include producers, co-ops and groups of producers; all must bear the risk of producing their own pigs. Pork America will be an umbrella organization that will help members share information, coordinate marketing and provide other services. It also plans to invest in a processing facility.
"We didn't intend to get into ownership of bricks and mortar at the start," Lewis said. "But it looks like our best option at this point. We think we can buy one of these plants at a discount." Indeed, the co-op hopes to sign a contract for a plant that will enable it to recoup its investment in only one year. It is also looking into possible partnerships and co-marketing ventures.
Many pork processors, he said, are in a similar situation as producers. "They are very successful, family-owned businesses, but are also being squeezed by consolidation," he said, adding that such a processor could make a good partner for the co-op."We don't think anything on the scale of Pork America has ever been tried before coming out of the blocks," Lewis said.
Guarding their flocks
Patrick O'Toole, co-chairman of the new Mountain States Lamb Cooperative, said lamb producers hope to rally their sagging industry with a venture similar to U.S. Premium Beef and the Iowa Turkey Growers Co-op. There is no time to waste. The U.S. sheep population has plunged to 8.5 million head, the lowest level since USDA began keeping records in 1867. The industry peaked at 56 million head in 1947.
Carbon County, Wyo., where O'Toole ranches, once had more sheep than any other county in the nation -- 360,000 in the early 1950s. Today, he is one of the last full-time sheep ranchers in the county. Where sheep once grazed the mountain valleys in this region, today the land sprouts expensive subdivisions and "trophy homes" of the nouveau-rich. As ranch land is moved out of livestock production and into residential and resort development, it has a big impact on open spaces and wildlife, he noted. "We lose much more than farms when we lose family farms," O'Toole said.
Things started to get extremely hairy for wool producers about a decade ago, when congress eliminated the support programs for wool and honey. "The buzz word then was deficit reduction," O'Toole said, and these two industries became sacrificial lambs. He recalls a visit to then --Senator Alan Simpson of Wyoming, who told him the industry would suffer severely as a result of the action. His blunt warning proved prophetic. Since that day, Wyoming's sheep population has plunged by half.
The industry has also been shrinking under pressure from an onslaught of imported lamb from Australia and New Zealand. This trend has been accelerated in recent years by the strong U.S. dollar, which makes imports much cheaper.
"The mission of our cooperative is to find a way to stabilize a very good industry," O'Toole said. Like the other successful cooperatives, they hope to manage this by uniting producers who will invest in their own processing and marketing ventures.
The co-op includes predominantly sheep ranchers from six western states: Wyoming, Colorado, Utah, Idaho, Montana and South Dakota. Part of the initial strategy is to market a superior product which he said is already widely perceived to be "the best lamb in the world." The fact that nearly half of the co-op's lambs can be raised mostly on grass and without antibiotics "is a definite selling point."
Co-op officials have visited virtually every major sheep marketer in the nation. They have formed a genetic/technical committee which is working with experts from major universities to help focus the cooperative on uniform health, carcass standards and market strategies. The co-op is also considering a partnership with an existing packer, or buying its own plant.
While other meat industries have made progress in moving to a system of paying producers for high quality carcasses, O'Toole said the sheep industry has not kept pace. However, he said this provides a void for the cooperative to fill, and the co-op members hope to emulate the role U.S. Premium Beef is playing in this area for its members. The co-op is also interested in producing for the kosher market. O'Toole's own lambs kosher at more than 90 percent, an indication of the quality and health of co-op lambs.
The co-op has tentatively scheduled an equity drive which will charge members $10 a head. It has held 25 meetings so far, and has signed up more than 100 members in all six states it plans to operate in. "This task would have been much easier a decade ago, but since then, the depressed market has eaten up the equity in their operations," O'Toole said. The co-op is well on its way to signing up producers with 350,0000 lambs as an initial base.
USDA's roleUSDA's value-added cooperatives such as these, and is supporting them through various technical assistance, loan and grant programs offered through the Rural Business-Cooperative Service (RBS) of USDA Rural Development. The 1996 Farm Bill extended USDA's Business and Industry (B&I) Loan Guarantee program to include producer loan guarantees for stock purchase in new, value-added cooperatives. USDA/RBS has also established a set aside in the B&I program, reserving $100 million to $200 million annually for use by farmer-owned cooperatives.
USDA is also supporting Cooperative Development Centers to provide another source of technical assistance for co-op startups throughout Rural America. As part of the Agricultural Risk Protection Act of 2000, Congress established a value-added product marketing grant program to further promote this type of business activity.
The cooperatives that participated in the forum all benefitted in one way or another from these USDA programs. Torgerson noted: "These new initiatives represent examples of proactive efforts to fight concentration in their industries and to provide members with continued market access." [end]
