Northern Plains Premium
Beef (NPPB)
Northern Plains Premium Beef represented the
efforts of a group of ranchers to establish a producer-owned, integrated
beef production, processing, and marketing enterprise. The project
was described by some at the time as the largest mobilization of U.S. cattle
producers in the history of the industry. The enterprise was to produce
and process high quality, source-verified beef. Complete vertical
integration had never before been accomplished in the beef industry.
After several attempts to raise sufficient capital, the enterprise failed
to find enough support.
Industry Profile
Formative
Stages of NPPB
Dissolution
of the Cooperative
Lessons Learned
Industry Profile
The demand for beef products has been declining
since the 1970s; although per capita meat consumption has grown, per capita
beef consumption has dropped. Beef has been losing market share to
poultry and pork for several decades; in 1975, beef accounted for roughly
48 percent of meat products consumed, while in 1997 its share had dropped
to 32 percent. Many analysts have attributed the change in market
share to the poultry and pork sectors’ ability to transform into consumer-driven
industries and to achieve significant cost reductions that have translated
into lower retail prices. They have accomplished this by achieving
a high level of vertical coordination. Vertical coordination enables
consumer preferences to be conveyed to every link in the production chain
so that products can be tailored to meet their demands. Information
sharing between production steps becomes key. The beef industry has
lagged behind in this transformation to vertical coordination, and the
result is that beef production is still geared towards a commodity-based
product.
Part of the reason for this lag behind poultry
and pork is the unique structure of the beef industry. The three
primary links in the beef chain: ranchers, feeders, and meatpackers, are
very distinct from each other The cow/calf sector has a large number
of relatively small producers: in 1998, producers with less than 100 head
of cattle produced nearly half of all calves raised in the United States.
More than 900,000 farms reported having some inventories of cattle at the
beginning of 1998. The feedlot sector is also comprised of many players.
Although it has been becoming more concentrated in recent years, about
110,000 were in existence in 1998. With such a large number of cow/calf
operators and feedlots, vertical coordination between the two sectors has
been difficult. The meatpacking sector, in contrast to ranchers and
feeders, is highly concentrated. It is one of the most highly concentrated
industries in the United States. In 1996, four firms accounted for
approximately 80 percent of total fed cattle slaughter. The 1980s
had witnessed a string of mergers that led to larger firms. In 1997
there were 812 federally inspected plants that slaughtered cattle, down
from 1,350 in 1974. Today, three firms dominate the industry: Iowa
Beef Packers (IBP), Monfort/ConAgra, and Excel/Cargill. Farmland
National Beef Packing, which is completely producer-owned, ranks fourth.
The cattle cycle that began in 1991 was perceived
by many producers to be worse than most previous cycles. In 1996,
when the cattle inventory level peaked, several conditions were present
that led to a lot of stress for producers. Peak cattle inventory
levels and low cattle prices coincided with record-high feed grain prices.
For instance, the USDA reported that the U.S. farm price of corn rose to
$5.00 per bushel in July 1996, well above its 1994/95 average of $2.26.
Feeder and fed cattle markets were experiencing negative returns.
The USDA’s Economic Research Service reported that the sell-off of cattle
in 1996 was accompanied by the second-lowest real net receipts above cash
costs since 1913. In North Dakota, net returns per beef cow in 1995
and 1996 were almost a negative $50. Producers also saw reports
of high profits for beefpackers and felt that they were being taken advantage
of. There was concern among some producers and members of Congress
that beef packers were using their concentrated market power to lower bids
for cattle.
Cattle and calves represent North Dakota’s
second largest agricultural commodity. The number of North Dakota
farms reporting an inventory of beef cattle, however, has been decreasing.
The number had declined from 21,891 farms in 1974 to 13,200 in 1993.
Beef farms represented 51 percent of all North Dakota farms in 1974 but
only 41 percent in 1987.
Formative
Stages of NPPB
In 1993, a group of North Dakota producers
and local economic developers began to talk about the need for a producer-owned
beef processing cooperative. Such a business could provide producers
with two streams of income: proceeds from the sale of their cattle to the
plant, and a share in any profits from the sale of meat. They believed
that quality was lacking in the marketplace, and that the northern plains
states could produce superior quality beef. They felt that the lack
of quality was partly attributable to the fact that producers did not retain
ownership of their product throughout the beef system. Without ownership,
the producers were not accountable for quality. They also perceived
better product uniformity and predictable quality in the poultry and pork
industries, whose products were beef’s competition. With a producer
cooperative in place to market cattle, the flow of information back to
ranchers could be enhanced so that products could be tailored to consumer
preferences. Sharing information such as carcass data could
improve quality and profitability, and tighter links between the different
industry sectors could reduce production costs. If a link could
also be made to the retail sector, then branded products could be developed.
As is typical with the farm-value share of most agricultural commodities,
the farm-value share of retail Choice beef prices has been decreasing over
time. This is partly due to the fact that marketing costs have been
keeping pace with inflation while cattle prices have not. Like many
others, these North Dakota producers began to wonder why they did not have
a direct link to the consumer. The producers wanted to venture past
the stage of selling cattle on the hoof and expand into further value added
activities. They formed a steering committee to conduct market research
and to hire a consulting firm to perform a feasibility study.
At this point in time, cattle prices had not
reached their low point in the cycle. NPPB asserted that the plan for the
operation was not a knee-jerk reaction to poor cyclical prices. Rather,
it was a visionary effort to develop a long-term approach in the industry.
NPPB’s initial research efforts included meetings with Midwest and East
Coast foodservice distributors and retailers to determine their needs and
concerns. The results from these talks indicated that high quality and
consistency were areas that needed to be improved within the industry.
In the spring of 1994, the Massachusetts firm
of Senechal, Jorgenson, & Hale conducted a feasibility study.
The study was to determine possible opportunities for a vertically integrated
processing cooperative within the beef industry. The study’s results
were favorable, assuming that the formation of marketing alliances occurred
(p. 10 1997 circular).
In May of 1995, NPPB was successful in its
bid to obtain a $150,000 grant from the North Dakota Agricultural Products
Utilization Commission (APUC). $50,000 of this amount was contingent
on support from the North Dakota Beef Commission. These funds would
be used to develop a business plan and help organize the cooperative.
The cooperative was legally formed in June of 1995.
Seed Money
In February of 1996, twenty-two informational
meetings were held with potential members in order to elicit seed money
for the project. The seed money was raised to help pay for the cooperative’s
organizational costs and to ascertain the level of producer interest in
the project. A deadline of March 1st was set for producers to indicate
their interest by giving $1 per head of cattle, which would be used as
nonrefundable seed money. Interested Canadian farmers were asked
to put up $1.35 CDN. Producers were allowed to contribute past March
1st, but the amount per head was increased to $2 (approximately $2.70 CDN).
The organizers’ goal was to determine whether there was enough interest
to commit 300,000 head of cattle. The feasibility study had indicated equity
shares were estimated to be priced at $47 ($63 CDN) per head of cattle,
with only 300,000 shares to be sold. NPPB’s interim engineer had
come from IBP, where he had most recently served as head of design, construction,
and maintenance of its meat plants. Preliminary estimates indicated
that the capital cost of a plant would be $35 million and that an average
return on equity would be up to 15.9 percent. The site of the proposed
plant would not be determined until after the equity shares were sold.
The board of directors, who would be elected once the equity shares were
sold and the membership established, would select the site.
As of mid-June 1996, seed money representing
over 357,000 cattle from over 3,000 producers had been established.
The majority of cattle represented came from North Dakota (approximately
112,000) and South Dakota (approximately 91,000). Seven states and
two provinces were represented. Besides the Dakotas, Nebraska, Iowa,
Minnesota, Montana, and Wyoming were represented. Manitoba and Saskatchewan
were the two Canadian provinces. As a result of the successful seed
money drive, NPPB established a five-person market opportunity research
team. This group was formed to gather information that would serve
as the foundation for the business plan, including the processing facility
requirements.
On August 30, 1996, American agriculture secretary
Dan Glickman announced that the USDA’s Federal-State Marketing Improvement
Program would provide $75,000 to NPPB to help fund a business plan.
In its press release, the USDA indicated that NPPB would provide about
800 jobs on the northern plains. Senators Tom Daschle, Byron Dorgan,
and Kent Conrad; Congressmen Tim Johnson and Earl Pomeroy; and North Dakota
Commissioner of Agriculture Sarah Vogel were all recognized by the USDA
for their efforts in promoting NPPB.
The Plan
In September 1996 the cooperative hired an
executive search firm, Robert Connelly & Associates of Minneapolis,
to find a permanent chief executive officer to replace its interim officer,
Bill Patrie. Mr. Patrie had significant experience in cooperative
formation through his role as director of the North Dakota Association
of Rural Electric Cooperatives’ Rural Economic Development program.
The search firm initially reviewed over 100 candidates, and by the time
the equity drive began in January 1997, it had narrowed down its list of
finalists to 11 candidates. A chief executive officer would not be
chosen until after the equity drive (p. 31 circular).
In November of 1996, NPPB issued a media release
to announce that, after studying existing plants, the cooperative had decided
to build two processing plants. (In its early planning stages, NPPB
had examined an existing plant in Brandon, Manitoba as a possible location.)
It felt that two plants would be better from a transportation point of
view, so that producers from a broad area would not be disadvantaged because
of their location. By this time, the cooperative reported that it
had received total seed money contributions of approximately $488,000 from
over 3,260 producers. The seed money represented approximately 431,000
head of cattle. NPPB had also received about $468,000 in various
grants, including those from APUC and the USDA mentioned above. In
total, therefore, NPPB had received about $956,000 from producer contributions
and grants prior to conducting its first equity drive.
NPPB’s facilities would be designed like New
Zealand processing plants. Two characteristics of these types of plants
were chain speeds slower than those found in more traditional operations,
and a teamwork approach to carcass fabrication rather than having individual
workers perform single repetitive tasks. The cooperative’s plants
were expected to process 25 to 30 head per hour, compared to 300 head per
hour in for high-speed lines in certain conventional U.S. plants.
NPPB wanted slower chain speeds to ensure greater quality control and that
carcass data could be collected. This information would serve as
valuable feedback to producers about the quality of their beef. Slower
speeds would also help to improve worker safety, and the emphasis on quality
rather than speed and the use of a team-based approach would reduce the
rate of worker turnover. The cooperative also believed that slower
speeds and the teamwork approach would lead to greater worker productivity.
Smaller plants located in two different communities would also raise less
environmental issues than one larger plant. Although the initial
costs of building two plants would be greater than if only one larger plant
was built, the cooperative felt that the benefits derived from the slower
chain speeds and teamwork approach of the smaller plants outweigh the additional
costs. NPPB hired a New Zealand consulting firm to help with the
facilities’ design. Several of the cooperative’s board members and
its engineer also went to New Zealand to tour some of the existing facilities.
Niche Market Focus
Rather than compete with the three giant firms
in the general beef commodity industry, NPPB wanted to capture a niche
market. It wanted to differentiate its products based on quality
and consistency, and focus on the hotel and restaurant markets that were
looking for higher quality cuts of meat . NPPB believed that there
was a genuine demand from this sector that was going unfilled. At
one point, the head chef of Marriott Hotels told NPPB’ CEO that thirty
percent of customers complain about the quality of their steaks.
The National Beef Quality Audit of 1995 that
was conducted for the National Cattlemen’s Association echoed many of the
concerns about quality that were expressed by NPPB. The Audit reported
that many of the purveyors, retailers, and restaurateurs surveyed had said
that the beef industry was producing products with insufficient uniformity
and consistency, and inadequate tenderness. They also felt
that beef’s price was too high for the value received.
The 1997 Equity Drive
NPPB indicated that its proposed plants would
each have a normal processing capacity of between 220,000 and 240,000 head
per year. Accordingly, the cooperative was prepared to offer a maximum
of 475,000 equity shares for sale. Each equity share represented
the right and obligation to deliver one fed steer/heifer to the cooperative
each year. NPPB planned to have seventeen equity drive meetings in
January 1997, and a stock-offering circular was distributed at that time.
The circular indicated that the obligation to deliver cattle was anticipated
to begin in 1998. NPPB estimated that it would begin construction
on the first facility in July 1997 and would be finished June 1998.
The cooperative estimated that the second plant would be constructed beginning
in July 1998 and completed June 1999. NPPB forecast that it could
be profitable by the year 2000.
In order to have an efficient processing operation,
NPPB determined that the equity drive needed to raise a minimum of 250,000
shares. The price of an individual share was $100 for those producers
who had previously contributed funds to the cooperative (referred to as
“Identified Producers”). For other qualified agricultural producers,
the price per equity share was $110. Each individual also had to
purchase a membership share for $200. The price of the membership
had to be paid in full at the time the offering ended, which was scheduled
for February 1, 1997. The price of the equity shares, however, was
to be paid in two installments: For Identified Producers, $60 had to be
paid on or before March 1, 1997, and the remainder was due on or before
March 1, 1998. For other producers, the amounts due on these dates
were $70 and $40, respectively. It was reported that NPPB sought
to raise $60 million in total, 40 or 50 percent of which would come from
the stock offering. The rest would be arranged from lenders.
The minimum investment required from each member was set at 25 equity shares.
Although NPPB’s primary goal was to construct
two processing plants, its offering circular indicated three possible plans,
depending on the number of shares sold:
-
If the cooperative sold a minimum of 250,000 equity shares but not more
than 325,000 shares, then it would construct only one facility.
-
If the cooperative sold more than 325,000 equity shares but less than 440,000
shares, then it would construct one facility and pursue a joint venture,
contract processing, or some other sort of arrangement to ensure that the
amount of member cattle in excess of NPPB’s production capacity are processed
elsewhere.
-
If the cooperative sold more than 440,000 equity shares, then it would
pursue its primary plan of constructing two facilities.
The cooperative estimated that the cost
to construct one plant, including provisions for working capital
would be $56.2 million, and the cost to construct two facilities would
be $109 million. Accordingly, if NPPB only raised the minimum amount
of shares, then it would be required to seek approximately $31 million
in debt financing to cover the remaining cost of constructing one facility.
If NPPB raised the maximum amount of shares and built two facilities, then
it would be required to raise $62 million in debt financing.
NPPB gained national attention when it was
featured as a front-page article in The Wall Street Journal in March
1997. The article described the situation of ranchers in southwest
North Dakota at the time, noting that cattle prices were so low that 85
percent of the ranchers qualified for food stamps, and that as many as
half of them were behind on loan payments.
By March of 1997, NPPB reported that only 113,000
equity shares were raised from 1,055 members. This amounted to approximately
$11 million. NPPB attributed this 137,000 share (approximately $14
million) shortfall to the harsh winter weather that was occurring on the
northern plains. The cooperative had to reschedule twelve of its
seventeen meetings because of blizzards (source: Patrie’s booklet).
Producers were too busy just trying to keep their herds alive to attend
meetings. Total cattle and calf death losses of 135,000 in 1997 were
the second highest on record for North Dakota. Cattle losses of 45,000
head were the highest on record. The cooperative decided to continue
with its equity drive until June 1, 1997, hoping that producers might be
willing to commit more of their spring calf crop. NPPB also wanted
to use the extra time to seek out strategic alliances or partners who would
help to reach the needed 250,000 head count, and to work with lenders to
ensure that potential members had access to share purchase loans.
NPPB received an additional $47,000 from APUC to help pay for the equity
drive extension.
On the day that the cooperative announced the
equity drive extension to June 1st, NPPB also announced that it had hired
a permanent CEO, Earl Peterson. Mr. Peterson had forty years of experience
in the beef industry. He had recently retired from his senior vice
president for administration position with the National Cattlemen’s Beef
Association. The cooperative had finally found a permanent replacement
for its interim CEO Bill Patrie, who had served in the position for the
past year. Mr. Petersen felt that one of the possible reasons for
the equity drive shortfall was that NPPB’s organizers might have been overly
optimistic when deciding to build two plants.
USDA Loan Guarantees
On May 1, 1997, U.S. agriculture secretary
Dan Glickman announced that the USDA would offer loan guarantees to help
ranchers invest in NPPB. Canadian ranchers would not be eligible
for this assistance. Through its Business and Industry Guarantee
Loan program, the USDA would help secure loans made by banks to ranchers
for the purchase of cooperative shares. This Business and Industry
Guarantee Loan program was given expanded lending authority through provisions
set forth in the 1996 FAIR Act. The purpose was to give the USDA
authority to back loans to farmers and ranchers who wish to invest in new
value added cooperatives. The USDA also reported that paperwork requirements
for the Business and Industry Guarantee Loan program were slashed by fifty
percent, part of the Clinton administration’s ongoing efforts to streamline
the USDA Rural Development’s application and regulation procedures.
With the USDA guarantee program in place, Bill
Patrie saw no reason that money should be an issue for potential NPPB investors.
The potential problem was that ranchers were not well aware of the program.
Confusion over the programs available to ranchers might have been another
reason for NPPB’s equity shortfall. NPPB’s board directed their
efforts toward educating lenders and potential investors about the USDA
guarantee program.
Equity Drive Fails
The June 1, 1997 equity drive deadline passed,
and NPPB reported that it had not met its goal. Investors’ $100 share
investments were refunded. A total of 119,000 equity shares
had been sold, still far below the 250,000 minimum. The average investment
per rancher had been about 110 shares. NPPB cited the terrible winter
weather, tough financial conditions in the region, and a general resistance
to change among producers as three key reasons for the equity drive failure.
Still, the effort represented what NPPB called “the largest, single mobilization
of cattle producers in the history of the industry.”
Member survey
But the cooperative was not ready to give up.
In September 1997 NPPB conducted a poll of its members to determine the
next step that the cooperative should take. Half the cost of the
survey was covered by the Dakotas Cooperative Business Development Center.
In this poll, several options were presented to the members:
-
Dissolve the cooperative.
-
Change the cooperative to a supply organization that would form an alliance
with an existing beef processor and supply cattle to its operations.
-
Go forward as a vertically integrated beef processing cooperative, but
on a smaller scale than previously planned.
The poll’s results indicated that most
members preferred the cooperative to move ahead as a vertically-integrated
operation on a smaller scale. In December 1997, nearly 300 members
gathered in Bismarck. At this meeting they voted in favor of making
changes to the cooperative’s by-laws and reducing the size of the board
from twenty-one members to eleven. They elected eight directors from
four districts. Four of these directors were from North Dakota, three
were from South Dakota, and the other was from Manitoba. The three
remaining members were to be appointed by the board. Among the appointed
was a new chairman, John Lee Njos, who replaced Dean Meyer. Mr. Meyer
had served as chairman for the previous three years. Both of these
chairmen were from North Dakota. The members in attendance also voted
in favor of holding another equity drive after a revised business plan
was completed. The new plan was to involve a smaller number of cattle
than previously, and it would also select a site location before an equity
drive was held. They hoped that this would be accomplished in early
1998.
The Revised Plan
NPPB decided to change its approach regarding
facility requirements. Instead of building two plants, the cooperative
was now looking to build one smaller facility. Once again, the facility
was to be designed according to procedures followed in New Zealand plants.
Early in 1998 NPPB’s chairman reported that, based on information from
these New Zealand facilities, a plant processing as little as 100,000 head
could be viable. The cooperative had not yet determined its production
or carcass specifications. Potential plant sites in North and South
Dakota were announced. Eight locations were invited to submit proposals
to the cooperative: Dickinson, Bismarck-Mandan, McLean County, and Ellendale
in North Dakota, and Aberdeen, Huron, Pierre, and Rapid City in South Dakota.
By December1997, the cooperative had narrowed down the potential site to
McLean County, Rapid City, and the two-city area of Ellendale and Aberdeen.
Two other cooperatives that would complement
NPPB were also in their formative stages. In January 1998 the North
Dakota Farmers Union announced its plan to build an $8.1 million backgrounding
feedlot that would handle 30,000 head. The group, named the Farmers
Union Feedlot Association, planned to eventually operate two feedlots and
expand into a finishing feedlot. The idea was that these cattle would
be slaughtered by NPPB, in which the Association had become a member.
Informational meetings about the cooperative were held throughout the winter,
and a business plan was expected to be completed in the spring. In
July the cooperative was working with consultants to plan an equity drive
for the fall.
Another cooperative that was in the formative
stages, Dakota Prairie Beef, might have been a source of cattle for NPPB.
Dakota Prairie’s objective was to establish a feedlot with a capacity to
finish 10,000 cattle twice a year near Gascoyne, North Dakota. The
finishing lot would feed cattle to their slaughter weight (approximately
1,200 pounds). It began its equity drive in January, and by the beginning
of March the cooperative had over 7,000 cattle committed from 128 members.
In March the cooperative elected a board of directors and the membership
voted in favor of continuing the equity drive. In June, it was reported
that Stark Development Corporation of Dickinson, North Dakota had agreed
to purchase $20,000 worth of preferred stock. A local feedlot would
make it easier for producers to maintain control throughout the beef system.
A survey conducted by NPPB in late 1997 indicated that producers wanted
to be involved in all aspects of delivering an animal to a processing plant.
Controlling a feedlot operation would help to achieve that end. It
was expected that many producers who planned to invest in the feedlot cooperative
would also invest in NPPB.
A New CEO
The cooperative also had to begin looking for
a new CEO. Earl Peterson, the previous CEO who was hired in March
1997, decided not to continue in this role because of family commitments.
In April 1998 NPPB announced that it had hired Keith DeHaan as its new
CEO. Mr. DeHaan came from Beef America, a packing and processing
plant in Omaha, where he had been the vice president of technical operations
for the past two years. Prior to that he had been with Farmland Industries
for over twelve years. His last position with Farmland involved developing
cow/calf to packing plant alliances. Based on conversations with
several of his contacts in the marketplace, DeHaan believed that NPPB’s
high quality products could be easily marketed.
NPPB felt that having a permanent CEO on board
prior to the equity drive was a good move. In the first equity drive,
a permanent CEO was not hired until the drive was well underway.
With a CEO in place prior to the second drive, the cooperative felt that
more credibility and leadership could be attributed to the project.
South Dakota Plant Site Selected
In April 1998 NPPB announced that the site
of its proposed plant would be Belle Fourche, South Dakota. Belle
Fourche was chosen in part because it was an accessible location to most
producers in the region. Advantages such as access to prospective
members with outstanding genetics and existing water storage capacity were
some of the reasons given for the site selection. The location was
considered to have one of lowest utility costs in the country. There
was an adequate cattle feeding infrastructure within a 200 mile radius
of the plant, and the feedlots in the area would also facilitate NPPB’s
hygiene standards, as they experienced less mud than others in the region.
The choice of Belle Fourche was also well-suited to Dakota Prairie Beef’s
proposed location. A finishing lot located in Gascoyne would be close
to a slaughtering plant in Belle Fourche.
NPPB’s chairman indicated that producers had
asked the cooperative to select a site prior to conducting an equity drive.
Not having any site locations selected during the first equity drive might
have been part of the reason for its failure; with a plant site selected,
producers could have a clearer picture of where the facility was going
to be in relation to their own operations. Selecting a site removed
some uncertainty, and NPPB felt that producers would now be more willing
to contribute to the project. Northern Plains received help from
Northern Hills Community Development Inc. of Sturgis, South Dakota in selecting
a site.
The cooperative also felt that the business
plan used in the first equity drive was not as specific as it should have
been. This second plan was more specific, and NPPB felt that this
gave the project a more focused approach.
In order for the plant to be built, the cooperative
reported that it needed to sell between 101,000 and 130,000 shares to producers
based on its preliminary cost estimates.
By the second equity drive, NPPB made it clear
that their objective was to focus on high quality, source-verified beef
products for the hotel, restaurant, export, and gourmet retail market.
Food safety would also be a fundamental part of their market focus.
The cooperative believed that its direct producer connection and commitment
to optimum hygiene and safety would help to make its products easily marketable.
Food safety in the beef industry has always been a key public concern.
The matter wasn’t helped much in the fall of 1997, when 25 million pounds
of frozen hamburger from a Nebraska plant had to be recalled because of
E. coli contamination. In 1997 NPPB worked with a firm that was trying
to develop a technology that could identify tainted meat. Through
a grant from Technology Transfer Inc. (an agency of the North Dakota Department
of Economic Development & Finance) and contributions from NDSU and
Dakota Technologies Inc., Massachusetts-based SatCon Technology worked
with NPPB to develop its biological laser sensors. These sensors
were being developed to detect contaminated meat in slaughterhouses.
The 1998 Equity Drive
NPPB’s second offering circular was dated May
26, 1998. The cooperative was offering a minimum 101,000 shares of
equity stock and a maximum of 130,000. The cooperative scheduled
ten equity drive meetings in North Dakota, South Dakota, Montana, and Wyoming
to be held in June. The per share price of equity stock was $100
and a minimum individual investment of 40 shares was required. The
stock offering circular indicated that NPPB’s system was capable of producing
a 38 percent return on investment. The entire project would cost
about $24 million, of which $17 million would be for the plant and $7 million
would be for working capital. The cooperative estimated that it would
need to obtain $14 million in debt financing. In order to accommodate
producers’ cash flow situation, NPPB allowed the shares to be paid for
in two stages: $50 to be paid during the summer equity drive, and the remaining
$50 to be due January 1, 1999. Instead of paying the remaining $50
at that time, the member could choose to pay only $25 on January 1, 1999
and then pay $10 per share per year in 2000, 2001, and 2002. Once
again, each equity share represented the right and obligation to deliver
one fed steer or heifer to the plant annually. If the equity drive
was successful, the cooperative estimated that it could begin construction
in October 1998 and be completed September 1999. NPPB forecast that
it could be profitable by the year 2000.
NPPB was very encouraged by the attendance
at the informational meetings, but by the time the equity drive reached
its July 15, 1998 deadline, only 30,000 shares had been raised from 300
producers, far below the minimum requirement of 101,000 shares. Both
the chairman and CEO of NPPB were perplexed by the lack of support.
NPPB’s board decided to extend the drive for sixty days, to September 15th.
Among those who had invested, there were some that were extremely enthusiastic
about the project. The cooperative hoped that they could garner support
from others during the prolonged sixty days. The board also scheduled
a meeting to be held shortly after the September deadline to dissolve the
cooperative if it had not reached its needed share level.
Dissolution
of the Cooperative
NPPB did not meet its minimum equity requirement
by the September deadline, and in early October 1998 a membership meeting
was held to dissolve the cooperative. The members voted in favor
of dissolution, and the articles of dissolution were filed with the North
Dakota Secretary of State.
The cooperative’s intellectual assets were
to be given to a committee of trustees so that new ways to start up a similar
project could be explored. A new group called the Dakotas Beef Marketing
Project was formed to develop a venture that combined NPPB’s ideas with
another previous study. The project was looking to form a partnership
between producers and Cloverdale Foods. At the end of October 1998
the group went before APUC to request an $84,000 grant to help the venture
develop a business plan and determine the size of the project. Bismarck’s
Lewis and Clark Regional Council was helping with the APUC request.
Unfortunately, APUC rejected their request. The Dakotas Beef Marketing
Project became known as a non-profit North Dakota corporation called the
Dakota Beef Development Corp. A group comprising its board of directors
was established by the end of December 1998. The seven directors
came from North and South Dakota. Among the board members were the
presidents of the North Dakota and South Dakota Farmers Unions and the
chairman of the former NPPB, John Lee Njos. Keith DeHaan, the CEO
of NPPB, was acting as a consultant to the group.
Dakota Beef Development Corporation
In January 1999 the organization reported that
they were working with a beef processor to develop a joint marketing plan.
They wanted to market cattle through the existing processor. The
group was to go before APUC again to request funds, but this time Dakota
Beef had a strategic plan and felt they were more organized. The
group requested $134,350 from APUC to help develop a marketing plan.
In February APUC awarded $20,000 to the organization, well below the requested
amount. Dakota Beef requested proposals from four different market
research groups and chose Livestock Planning Associates, which is headed
by Keith DeHaan. In May 1999 the Dakotas Cooperative Business Development
Center, which is providing technical support to the project, reported
that Dakota Beef was working with Rosen’s Diversified Meat Group to conduct
a joint marketing plan. Rosen’s is an established packer-processor
that is headquartered in Long Prairie, Minnesota. Dakota Beef is
based out of Mandan, North Dakota. The marketing study was to determine
the potential demand for high quality, producer-owned source-identified
beef to high end users such as gourmet retail and food service purveyors.
In July of 1999, Keith DeHaan indicated that the results of the study had
been completed and were very positive. He has been hired to start
on the business planning phase.
Lessons Learned
One of the key reasons frequently mentioned
for the equity drive failure was that ranchers’ financial situation was
just too strained to allow for investment. Many ranchers believed
that they did not have $4,000 (the minimum required investment in the second
equity drive) available to invest, and that borrowing and paying interest
on the required amount for a project that might not make it was just too
risky at that time. Producers could not afford to invest in a project
that might take years to show any positive results, if any. The low
point in the cattle cycle had lasted longer than anticipated, and producers
were too busy with their own operations to focus on the equity drive.
Even NPPB’s former chairman, Dean Meyer, expressed his lack of confidence
in the second equity drive. He also felt that the people who had
been working on the project for the past four or five years might have
been losing their energy and momentum. Disapproval with the choice
of a South Dakota plant location might have been another reason for the
lack of support.
According to NPPB’s CEO Keith DeHaan, a survey
was conducted after the second equity drive to determine the key reasons
why the cooperative failed. The survey results indicated five key
reasons:
-
The cost of retained ownership every year would have been too much for
producers. DeHaan estimates that the cost from weaning to finish
are on average $300 per head annually.
-
Producers could not afford to let their debt to equity ratios get any higher
at a time when income generation was so low.
-
Although a return on investment of 27% over seven years was estimated,
this return would not begin until three years after the cooperative began.
Producers did not have the financial durability to wait that long to see
a return on their investment.
-
Many of the producers were older and planned to retire within the next
ten years. They felt the project was a good idea, but just too late
to help them.
-
There was just too much overt cynicism. Instead of taking a proactive
approach, many producers would rather complain about their situation or
support a program like R-CALF instead.
Based on the number of producers who showed
their support during the seed money drive and the attendance at informational
meetings, there is no doubt that the concept of a producer-owned beef processing
and marketing cooperative on the northern plains was perceived as a good
idea. The failure of Northern Plains Premium Beef to generate enough
equity capital does not necessarily imply that producers disagreed with
the general concept. Although it is difficult to pinpoint the exact
cause for NPPB’s failure, several reasons are possible.
Producers’ financial situation has been repeatedly
expressed as a primary reason for the failure to generate enough equity
capital. Although the cooperative’s plans forecast positive returns
several years after start-up, producers were not willing to strain their
current financial positions more than they were already. As one writer
has indicated, many producers were finding it difficult to see themselves
surviving in the industry long-term. If these producers already thought
they would only survive the agriculture business for a short while longer,
they certainly wouldn’t invest in a long-term project. It has already
been noted that many producers were nearing retirement. For them,
investing in a project that would not provide benefits until later on was
not worthwhile.
NPPB’s business plans might have been another
reason for failure. Many producers did not like the fact that the
cooperative had not selected its plant locations prior to the first equity
drive. Producers wanted to know how their individual operations would
fit in relative to NPPB’s locations. Without knowing the plants’
locations, key logistics could not be determined. Even though a plant
site was chosen for the second drive, its South Dakota location might have
been another reason for the lack of interest among producers. It
is a natural tendency for producers (or investors in other industries,
for that matter) to favor an operation that is located in their own state.
People want to see the indirect economic benefits that accompany a business
flow into their own communities. For this reason, North Dakota producers
may have felt that a South Dakota plant site was not advantageous.
In addition to plant location, proposing to
build two facilities might have appeared overly optimistic to producers.
Switching to a plan that proposed a single, smaller plant in the second
equity drive might have caused producers to wonder if the cooperative was
carefully planning its strategic approach, or just going from one idea
to another. Building any plant at all might have also deterred some
producers from investing; they might have preferred that the cooperative
team up with an established processor who could provide the facilities
and the processing expertise.
Changes in leadership might have also caused
some consternation for producers. The cooperative did not have a
permanent CEO in place when it began its first equity drive. In fact,
Earl Peterson was not hired until the first deadline had passed.
Although Bill Patrie had ample experience in cooperative formation, he
would only be with NPPB temporarily. The cooperative also saw a change
in its CEO position between the two equity drives. This lack of continuity
in leadership might have led some to perceive a lack of clear direction
and vision for the project.
Finally, the nature of ranchers themselves
might have hindered the cooperative’s efforts. Ranchers are known
for their independence. As well, there has always been a level of
distrust among the different players in the beef industry. Asking
them to work together on the project was a whole different way of doing
business.
Although NPPB never became operational, the
project brought together northern plains ranchers to discuss their future
on a scale that had not been done before.
Sources
Next
Back to Case Studies
Home