United Spring Wheat Processors
United Spring Wheat Processors (USWP) was formed
in March 1996 by a group of producers who wanted to find a way to add value
to their spring wheat. The experience of USWP is unique because it
was formed before even knowing what line of business it would pursue.
In fact, a successful membership drive was held before the cooperative
had a business plan in place. In its initial stages, the organizers
only knew that they wanted to organize spring wheat growers from across
North Dakota, South Dakota, Minnesota, and Montana to develop a large-scale
value added project. USWP began operations in June 1999, when it
opened a frozen dough and frozen par-baked bread products plant in McDonough,
Georgia. It also changed its name to Spring Wheat Bakers, but for
the purposes of this article the cooperative will be referred to as USWP.
Industry Profile
Formative
Stages of USWP
Operations
Lessons Learned
Industry Profile
The primary wheat grown in North Dakota is
hard red spring wheat; in 1995, North Dakota harvested 8.2 million acres
of hard red spring wheat out of a total wheat harvest of 11.1 million acres.
Along with durum, spring wheat is particularly adaptable to North Dakota's
relatively cool and dry climate. Hard red spring wheat is generally
higher in protein and has greater gluten strength than other classes of
wheat. Hard red spring wheat is used to make high quality bread
products, and it is typically blended with wheat classes that have less
protein content to enhance their quality. Products such as tortillas,
bagels, pizza crust, and specialty breads use higher protein wheat flours.
In recent years the demand for wheat-based
products has increased. A 1995 study done for the North Dakota Agricultural
Products Utilization Commission identified several factors that were helping
to increase the demand for wheat based products. The USDA had
revised its Nutritional Recommendations so that more grain based foods
were included, and consumers were becoming more health-conscious and selective
in their food choices. As well, new baking technologies needed to
use high quality, high gluten spring wheat-based flours. USWP’s choice
of business to pursue as a spring wheat processor included becoming a baker,
food services operator, frozen dough maker, or some sort of grain-based
food products manufacturer.
Formative
Stages of USWP
The initial organizers of USWP were leaders
in the spring wheat industry and value-added cooperative ventures.
Mike Warner, USWP's chairman, has referred to the selection of the steering
committee members as the most important step in the development of the
cooperative. USWP wanted to establish credibility with potential
members. In order to do this they needed a steering committee comprised
of people who were well-reputed and known among spring wheat growers.
The steering committee was comprised of 50 individuals from North Dakota,
South Dakota, Minnesota, and Montana, and included those who had previous
experience in value added cooperative formation. Among them were
Jack Dalrymple and Eugene Nicholas, two of the original organizers of Dakota
Growers Pasta Company; the chairman of ProGold, Pat Benedict; and the vice
chairman of ValAdCo, Francis Buschette. Three former board members
of American Crystal Sugar also joined the group. The committee was
comprised exclusively of farmers. The head of the steering committee
was Mike Warner, who would later become USWP’s chairman of the board of
directors. In 1996 Mr. Warner was already an experienced individual
in value added enterprises. He was involved with both Dakota Growers
and Golden Growers Cooperative (ProGold) during their formative stages,
and served on Dakota Growers’ and American Crystal Sugar Company’s board
of directors. His experience with American Crystal dated back 20
years prior, when he was involved in its merger with the Red River Valley
Sugarbeet Cooperative.
Committee members also included current and
past presidents of the states' wheat promotion commissions and wheat growers
associations, including the past president of the National Association
of Wheat Growers. In a 1996 issue of their official publication Prairie
Grains magazine, the Minnesota Association of Wheat Growers, North Dakota
Grain Growers Association, and South Dakota Wheat, Inc., noted that they
were driving forces behind USWP's formation. Other farm organizations
were also represented on the committee. In order to display their
commitment to the cooperative, steering committee members received no per
diem allowance for their efforts. They wanted to show potential members
that they believed in the project and were not doing it for temporary financial
rewards. USWP used their committee members' reputations as a promotional
tool for the cooperative; their resumes were included in brochures distributed
to spring wheat growers.
USWP’s Unique Approach
From the very beginning, USWP’s organizers
decided that the cooperative would follow a different development sequence
than those that had come before it. As its chairman describes it,
USWP was initially formed as a business whose sole purpose was to find
a business. With a solid capital base in place, the membership would be
able to hire competent personnel to examine the options for adding value
to their spring wheat. By developing a membership and capital base
before choosing a line of business, they also felt that the cooperative
could build greater credibility among potential customers.
USWP’s organizers wanted to secure a potential
customer base prior to establishing a facility. They also felt that
developing its membership was a good first step due to the widespread geographic
dispersion of spring wheat growers in the region. By gathering the
growers together at the very beginning, USWP could build a cohesive membership
that would support the cooperative throughout its development. This
was also important given the potential size of the membership; the organizers
indicated that if only 10 percent of the approximately 30,000 spring wheat
growers in the four states joined, the cooperative’s membership would be
larger than that of its predecessors, including American Crystal Sugar
and Dakota Growers Pasta.
From the outset, USWP's organizers believed
that the formation of a business would be an expensive undertaking; they
estimated that the cost to hire key management and prepare a business plan
would be around $1 million. They made this clear in their informational
meetings held with potential members, so that there would be no surprises
later on. In the beginning they indicated that the scale of business
that the cooperative undertook might reach the $100 million to $300 million
level.
The Membership Drive
Stage One: “Seed Money”
USWP’s organizers scheduled grower informational
meetings to be held in March and April 1996. The cooperative received
a $100,000 marketing grant from the North Dakota Agricultural Products
Utilization Commission (APUC) to help with the sign-up campaign and start-up
legal and accounting fees. Of this amount, $50,000 would have to
be matched by other private groups. If the cooperative did not choose
to establish a plant in North Dakota, then the $50,000 would have to be
refunded to APUC. Prior to the start of the grower meetings, USWP
representatives met with agricultural lenders in the region to make them
aware of the project, so that they were prepared if growers came to them
for assistance with purchasing shares. Approximately 45 grower informational
meetings were to be held in North Dakota and Minnesota, and one was to
be held in South Dakota. Montana was not included at this point because
of delays in getting clearance from the state’s securities regulators.
Potential Canadian members would not be sought because of trade and potential
legal issues. The cooperative set up a 1-800-number phone line to
answer questions and provide information to interested growers.
At the informational meetings, producers were
asked for a $5,000 investment to establish their membership in the cooperative.
The amount would be due in two installments: the producer was only required
to contribute $200 prior to April 30th. This initial installment
would be used as seed money for the cooperative during its organizational
stage. The money would be used to conduct industry analyses and locate
a CEO. The remaining $4,800 was to be collected in the fall of 1997.
In order for the project to move forward, USWP’s organizers estimated that
at least 2,000 producers would need to commit $5,000 each by that time.
By April 18th, Mike Warner reported that the cooperative had distributed
8,500 seed money agreements to interested growers. By April 24th,
it was reported that about 1,250 farmers had each contributed $200 for
a total of at least $250,000. Company literature indicated that a
minimum return on investment of 15 percent would be targeted.
USWP’s organizers hoped to attract 2,000 to
3,000 members. The $200 initial amount represented a right to become
a member once the cooperative was formed; the producer would not become
an active member until the remaining amount was collected in the fall.
The $4,800 investments would be placed in an escrow account, of which the
interest earned would be used to fund the business planning stage and hire
an executive. Mike Warner estimated that a $10 million escrow fund
could generate $750,000 in annual interest that could fund a three-year
planning process. Once the business plan was completed and presented
to the producers, they would be given the chance to approve or reject the
plan. If rejected, the $4,800 investments would be returned to the
producers. If the producers approved of the plan, then they would
be given the opportunity to transform the $4,800 investments into equity
shares.
From the beginning, USWP’s organizers set a
definite deadline of September 30, 1999 to bring a project proposal forward
to the members.
By the April 30th deadline, approximately 4,200
spring wheat growers from North Dakota, South Dakota, and Minnesota had
contributed the initial $200 investment to the cooperative. Roughly the
same amount of producers had attended the informational meetings, and USWP's
organizers noted that many of them were under 50 years of age. The
majority of the producers were from North Dakota (57 percent) and Minnesota
(38 percent). As is typical with most seed money drives, the majority
of the funds did not come in until the week before the deadline; Mike Warner
estimated that approximately two-thirds of funds came in the last week.
As a result of the successful drive, USWP continued to conduct customer-specific
market analysis and moved forward with its plans to hire executive management
and develop a business plan. The cooperative wanted to develop a
plan that would provide its members with a minimum return on investment
of 15 percent.
By November USWP had obtained approval from
Montana’s securities regulators. USWP consequently held informational
meetings in the state. Almost 800 interested producers attended the
meetings. These growers had until mid-December to invest the initial
seed money requirement.
CEO Search
In May 1996, the cooperative hired a Minneapolis-based
executive search firm, Robert Connelly & Associates, to conduct a nationwide
search for a chief executive officer (CEO). This was a critical step
for the cooperative. Although they knew that they wanted to add value
to their spring wheat, USWP’s producers also knew that they did not possess
the required skills and knowledge to start a business. As its chairman
Mike Warner has stated, “The trick to starting any business does not hinge
on what you know, but knowing what you don’t know”. They knew that
they didn’t have the necessary skill set, and sought to hire someone who
did. They were looking for an individual who had experience in the
industry and who was well known by potential customers. The Minnesota
Association of Wheat Growers provided support to the board of USWP until
a CEO was found.
In November 1996, the cooperative announced
that it had hired Gary Lee as its CEO. Mr. Lee’s last position before
joining USWP was as vice president for Cargill’s Dry Milling Worldwide
division, where his responsibilities included business and market planning
and value-added product sales. He had also been involved with Cargill
as an internal marketing consultant and strategic planner, holding such
responsibilities as developing new product lines and market approaches
for Cargill Foods. Mr. Lee was also named president of USWP.
Stage Two: “Credibility Money”
In late January 1997 the cooperative held meetings
in all four states to solicit the remaining $4,800 investment from producers,
so that it could proceed to the business development phase. Mike
Warner has referred to these investments as “credibility money” because
they would signify to outsiders that the cooperative and its members were
serious about becoming a value added processor. At these meetings,
USWP’s leaders, including its newly appointed CEO, discussed the cooperative’s
structure and how the interest earned from the $4,800 investments would
be used. If producers were unable to attend, a disclosure information
package was mailed to them. The deadline to submit the remaining
$4,800 to the cooperative was February 10, 1997. Producers would
have the option to convert their $4,800 investment into equity stock once
the cooperative completed a business plan and presented it to them for
their approval. By the time the February deadline had passed, USWP
reported that over 3,200 spring wheat growers had contributed the $4,800
individual investment, thus raising over $15 million for the cooperative.
The result was more than double what USWP’s organizers had expected.
North Dakota comprised roughly 55 percent of the membership, followed by
Minnesota at 30 percent, Montana at 10 percent, and South Dakota at 5 percent.
USWP consequently moved into its business development phase, and in March
1997 Lee reported that he expected to present a business plan to members
by the end of the year.
Why did USWP conduct a membership drive before knowing its line of
business?
One word to describe why the cooperative decided
to hire a well-known CEO and amass $15 million in funds before knowing
what it would manufacture is: credibility. Mike Warner has described
credibility as "the most precious commodity you will need for success".
USWP wanted people to know that it was serious in its intentions to become
a large scale value added processor, and they felt the best way to accomplish
this was to have a significant amount of money backing their words.
Actions, they believed, could speak louder than words. The cooperative
wanted to develop credibility with three key groups: potential employees,
lenders, and customers. USWP wanted to hire quality personnel, and
they felt that they needed to have a solid capital base in place before
people would be willing to give up their current positions to work for
the cooperative. USWP also wanted lenders to know that they were
serious, not only to obtain financing for the business, but to ensure that
lenders would be willing to help growers purchase stock in the cooperative.
The most important group to establish credibility with was potential customers.
USWP's success would ultimately be determined by their decisions, so it
needed to prove to them early on that it was a serious contender for their
business.
Business Development Phase
USWP’s goal at this stage was to choose its
core line of business. The cooperative considered the key issues
surrounding the market for spring wheat products, and noted the following:
-
Consumers were beginning to demand a greater variety in their food choices,
and they were increasing their purchases of flour-based foods.
-
There was a shortage of skilled bakers. This shortage was affecting
all bakery segments, including grocery stores' in-store bakeries, food
service, and retail bakeries. As a result, the industry was shifting
away from “scratch and mix” baking towards the use of frozen dough and
partially-baked (par-baked) products. By using frozen products, companies
would not have to worry about finding and retaining skilled labor that
understood baking requirements such as formulations, mixing, and proofing
times.
-
No individual company or group of companies was dominating the frozen dough
and par-baked market. USWP estimated that the top four manufacturers
held about 23% of the market. It also believed that opportunities
existed for a new entrant to gain a quality advantage over competitors.
In September 1997, USWP announced that
its core strategy was to become a leading manufacturer of frozen dough
and frozen par-baked products. Its product line would include high
quality European and artisan-style crusty bread products, and it would
focus its efforts on the $4 billion wholesale bakery market, whose companies
serve the retail bakery market as well as in-store bakeries and food service
operations such as restaurants. USWP believed that this market would
grow by 5 percent annually for the next five years. One of the key
reasons for market growth was that frozen dough products were gaining acceptance
as an alternative to fresh-baked products. In recent years, many
smaller companies have entered the frozen dough market, leading some to
conclude that excess capacity exists in the industry. USWP felt that
basing its decision on total capacity numbers would not be appropriate,
as it perceived that quality was lacking in the industry. It felt
there was an opportunity to provide a level of quality that was lacking
in the market.
The cooperative's plan would be carried out
over several phases and would require approximately $60 million, of which
$31 million would be grower equity. Phase I of the cooperative’s
plan involved the construction of its first plant. If it raised its
targeted level of equity, the cooperative would be able to accomplish the
first phase of construction without using any debt. USWP felt that
starting up the facility without the use of debt would allow the cooperative
to obtain better loan arrangements in the future. If it proved itself
as a viable business early on, it felt that lenders would be willing to
give it better loan rates when the time came for the cooperative to borrow.
The first plant would be designed to handle future expansion, possibly
for a bagel production line. Phase II would involve the construction
of a second plant. This second plant would cost approximately
$30 million, and would be financed with the use of debt. The cooperative
hoped that this second plant would be built as early as 2001, after the
first facility was operational and its performance was evaluated.
Once the two plants were in operation, over 5 million bushels of spring
wheat would be used annually. Until then, USWP hoped that it could
sell some of the excess flour produced from its members’ annual 5 million
bushels of wheat. USWP indicated that it would not own its own mill.
One of the key reasons for this decision was the intense competition found
in the milling industry.
Overall, the cooperative's analysis estimated
that it would exceed its original 15 percent return on investment target.
A return of 6 percent was expected for the first year of operations, climbing
to 25 percent by the year 2001 and 69 percent in 2003, once an expansion
to the first plant had been completed.
The Equity Offering
Once the business plan was established, producers
were asked to review it and decide whether to take an equity position in
the project. The cooperative planned to mail business disclosure
documents to members in October 1997. These documents represented
USWP’s official equity offering. The minimum required investment
was set at $4,800 (the amount held in escrow on behalf of the member),
which was comprised of 800 shares at $6 each. One equity share represented
the right and obligation to annually deliver one bushel of spring wheat.
With 3,200 members, the cooperative needed an average investment of $9,600
per member to achieve its targeted equity level of $31 million. If
the existing members were not able to meet this level, the cooperative
planned to sell shares to new members, but at a slightly higher share price.
Over thirty informational meetings to promote the equity offering in the
four states began at the end of October 1997 and continued throughout November.
Both members and non-members were encouraged to attend. The offering’s
closing date was scheduled for December 8, 1997.
In December 1997 USWP announced that the offering
had raised approximately $25 million in equity from over 2,800 members.
Although this amount was short of its $31 million target, it was still
considered to be a successful outcome. In fact, USWP’s CEO indicated
that the cooperative could have moved forward with an equity amount as
low as $10 million. The successful equity drive was the result of
a strategic planning process that had lasted for 21 months. With
this amount of equity, the cooperative reported that it could build its
first production plant without the use of debt. The estimated cost
of building its first plant was $20 million. The remaining $5 million
in equity would be used for working capital. The planned expansion
for the plant, expected to occur within the first few years, was estimated
to cost $6 million.
In January 1998 USWP continued with its implementation phase and focused
on five key areas:
-
Hiring senior management. Positions such as vice president of operations,
vice president of sales, and chief financial officer needed to be filled.
By December 1997 the cooperative had contacted over 150 candidates for
both the vice presidents of operations and sales positions.
-
Selecting the geographic market to enter first. USWP hoped that they
could select the region by the end of January and choose a plant site shortly
thereafter.
-
Continuing its discussions with customers and distributors about possible
strategic alliances. Once a vice president of sales and a geographic
market were selected, these talks would become more focused.
-
Establishing a toll-milling relationship with one or two milling companies.
-
The cooperative also began to work on the plant and equipment design for
its first facility.
Location
Throughout the site selection process, USWP
wanted to make sure that their decision was based on the objective of maximizing
member returns rather than on economic development. They did not
want to choose a location merely because it would provide jobs and benefits
for the local community. The decision had to be made based on customer
needs. They wanted to maximize their members’ returns, and in doing
so they did not limit their location choice to the Dakotas, Minnesota,
or Montana.
By September 1997, the cooperative had divided
the United States into 11 different market segments and had examined 26
possible sites. By December, the cooperative had narrowed down the
selection to three regions. In February 1998 USWP announced that
it had selected the Southeast region of the U.S. for the location of its
first facility. Among its reasons for choosing this region were a
growing population and demand for bread products; competitive transportation
rates; and an insufficient level of frozen dough and par-baked manufacturing
capacity. The cooperative believed that it was the largest U.S. market
for in-store baked goods. The decision to locate a plant nearer to
customers rather than to growers was primarily based on transportation
costs; it was too expensive to ship finished products from the growing
region to the Southeast customer market. USWP’s CEO indicated that it is
six times more expensive to ship par-baked products than it is to ship
flour. Shipping frozen dough is three times as expensive. A
specific site for the facility had not yet been selected, but the cooperative
did indicate that they hoped to have a 75,000 to 100,000 square foot plant
operational by the spring of 1999. USWP also announced that the West
Coast region would be the location of its second facility.
In August 1998, the cooperative decided to
purchase a vacant plant located in McDonough, Georgia. The facility
had been built in 1994 and was previously used to make Chinese-style noodles.
It was located in an industrial park that had access to major railway and
interstate routes that would allow for product distribution throughout
the Southeast. The cooperative’s headquarters would be based in Fargo,
but its sales and operations personnel would be relocated to the Southeast
region. McDonough, located about 20 miles away from Atlanta, was
a distribution center for several prominent companies, including Nestles
Foods and Ford. The location was ideal for several reasons, including
its proximity to a large potential customer base: approximately 23 percent
of the U.S. population lives within a 500 mile radius of Atlanta.
The cooperative’s board approved a $20 million capital and operating budget
for 1999, which was to be used for the following purposes:
-
$2.35 million for the purchase of land and buildings
-
$3.15 million for retrofitting of the plant
-
$11.7 million for plant equipment
-
$3.11 million for miscellaneous systems and professional fees.
By purchasing an existing plant rather
than constructing a new one, USWP indicated that it would achieve significant
cost savings. It would also be able to start up a facility more quickly;
the cooperative estimated that the facility would be operational in 1999.
The plant was designed to have a capacity to produce approximately 60 million
pounds of finished product per year, using 1.2 million bushels of wheat
in the process. USWP used a five-year average price of $3.91 per
bushel of spring wheat in its cost projections, and estimated that it could
be profitable by fiscal 2000.
USWP decided to position itself as a co-manufacturer.
Essentially, this means that it would be producing finished products for
companies that had previously produced the product themselves or had other
manufacturers do it for them. As its CEO describes it, companies
that would otherwise be USWP’s competitors would now be its customers.
Under such an arrangement, USWP would manufacture products to conform to
its customers’ specifications, and the customers would then market and
distribute the products themselves. By letting others handle the
marketing and distribution steps, the cooperative hoped to focus its efforts
on manufacturing, as well as grain origination and supply management leading
up to the manufacturing stage. It planned to promote itself as the
first nationwide co-manufacturer of par-baked products.
Personnel
Early in 1998, the cooperative’s members elected
the first permanent board of directors. Of the nine directors, five
were from North Dakota, two from Minnesota, and one each from Montana and
South Dakota. In March 1998, USWP hired its vice president of operations,
whose previous experience included heading the operations of a Pillsbury
plant in Indiana. By the fall of 1998 USWP had other senior management
personnel in place, including a plant engineer and director of grain origination
and merchandising.
Operations
By June 1999, USWP’s 100,000 square foot Georgia-based
plant was ready to begin operations. The plant includes three 22-foot
tall baking towers that sit in the world's largest vertical oven.
In January 2000, the cooperative was ready to load its first 26-car unit
train of wheat in Valley City, North Dakota. The train was to load
members' grain from an AGP grain elevator and ship it to its four partner,
a Cargill mill in Chattanooga, Tennessee. TheAGP elevator was chosen
because it is capable of computer-assisted segregation of wheat varieties.
Once processed, the flour would then be trucked to the Georgia plant.
In December 1999, the cooperative also announced the formation of an alliance
with Rich Products Corp., an international food marketing company.
As part of the alliance, dinner roles made by USWP will be sold in Perkins
restaurants. USWP plans on opening its next plant on the West Coast,
and hopes to have four facilities operating within the next five years.
The cost of the second plant is estimated to be approximately $20 million.
The cooperative plans to build its facilities near major customer bases.
USWP's President and CEO, Gary Lee, has noted
that the cooperative's two core competencies are its integrated supply
chain management system and strategic alliances with customers and suppliers.
Lessons Learned
Although USWP has only recently begun operations,
it is notable for three main reasons:
-
It was able to raise $15 million in member funds before it had chosen what
line of business to pursue.
-
The cooperative decided to locate its manufacturing facility outside of
its member region.
-
It was able to open its first facility without the use of debt.
According to USWP’s chairman Mike Warner,
a cooperative needs to answer two primary questions in order to successfully
begin operations. USWP was successful in becoming an operational
business because it answered these two key questions for potential members:
Who am I doing business with?
The cooperative was able to convince potential
members that they would be doing business with a trustworthy group of people.
It had established a leadership group that was credible and well-reputed
among growers.
Does the idea make sense?
In addition to a establishing a credible leadership
group, the cooperative also needed to convince potential members that their
ideas made sense. In this respect, it maintained open communication
with spring wheat growers throughout the development process. They
made it clear that their business plan would be driven by customer needs
and that they needed to hire people with business expertise. From
the outset the cooperative made it clear that they intended to hire a group
of experts to do the necessary analyses and planning for the company, and
that in order to do so a sufficient capital base needed to be established.
In other words, they believed in the saying that “it takes money to make
money” and let their potential members know that. Mike Warner has
indicated that the business planning process cost $1 million. The
cooperative's organizers also believed that a sufficient capital base was
needed in order to begin operations at a critical mass in terms of size.
If it started out small with the intention of growing to this critical
mass, USWP believed it would fail.
The cooperative was also successful in helping
growers to understand that they could not wait to invest until a plan was
in place; rather, a plan would not materialize if they did not commit their
capital up front. USWP underwent an expensive effort to ensure that
its ideas were sound and that it could clearly communicate these ideas
to spring wheat growers.
Sources
Back to Case Studies
Home