Unflappable

Plant closure forces Virginia poultry
cooperative launch onto fast-track

By Paul Darby, Southern States
Cooperative Development Foundation

Editor’s note: Bill Brockhouse, a co-op development specialist with
USDA Rural Development in Washington, D.C., also contributed
to this article.

etermination is “the act of deciding definitely or firmly,” according to Webster’s Dictionary. In the world of cooperative development, determination can be defined as having “fire in the belly.” The Shenandoah Valley-area poultry growers who formed the Virginia Poultry Growers Cooperative (VPGC) possess plenty of each attribute; otherwise, they could never have launched their business under such intense pressure and in such a time frame.

In the Harrisonburg, Va.-area, if you mention the names of Sonny Meyerhoeffer Jr., the co-op’s first president, Steve Long, its vice chairman, or those of a half-dozen other turkey growers who helped lead the co-op’s organizational drive, people will tell you these individuals refused to buckle in the face of unbelievable obstacles and challenges. They stood tall when the heat was on. As a result of their determination, the co-op is now processing and marketing members’ birds at their own business — one that embodies the hope for the future of the Valley’s poultry industry.

“I’ve rarely seen people so driven to succeed in the face of adversity,” says Peter Thomas, business and cooperative programs administrator for USDA Rural Development. “I’m glad USDA was able to lend its support to help keep this vital industry alive in the Shenandoah Valley. This project shows how much can be achieved when you have a total commitment by producers and their communities.”

Plant closure stuns Valley
This story begins when Pilgrim’s Pride — one of the nation’s major poultry companies — announced that it was exiting the Shenandoah Valley turkey industry and would be closing its processing plant near Harrisonburg by Sept. 1, 2004. That news sent a shock wave throughout the Valley and into neighboring West Virginia. The region was looking at the loss of $200 million to the local economy, the loss of 900 plant-related jobs and more than 130 farmers would not have a contract to grow turkeys. These growers quickly came to grips with the fact that they were likely to lose their farms if they didn’t act quickly.

Turkey producers (grow-out, breeders and egg producers) almost immediately hit on the idea of forming a grower co-op that could take over the processing plant operation in Hinton, Va., as occurred in recent years in Iowa and Michigan. They had an unwavering faith (personal and professional) that they could develop a successful business, even though circumstances made it impossible for them to follow the standard cooperative development format. What they didn’t have was time, and they knew that a business plan rushed has been the doom of many an otherwise sound business.

But the producers believed from Day One that they could, and would, succeed in spite of the conventional wisdom that says it takes 12-18 months to plan, determine the feasibility and develop a business plan for a new value-added processing business. Due to the short window of opportunity, poultry growers had to move toward implementation before completing these steps.

The perennial problem of capitalization of a value-added venture was solved through a package of resources that included producer capital, commercial financing from the Farm Credit System, funding from USDA Rural Development and funding from both Virginia and West Virginia state governments.

All of this happened after the April 26, 2004, announcement by Pilgrim’s Pride that it was closing its turkey-processing plant at Hinton, Va., and canceling grower contracts. Pilgrim’s Pride said the closure was brought on by major changes in the turkey industry and by its desire to focus operations on other plants that produced value-added turkey products (such as sliced deli meats), as opposed to the bird parts produced in the Hinton plant.

Not just Pilgrim’s Pride, but the entire turkey industry is undergoing major changes. Many major players are changing their marketing strategies and focus. While on-farm and wholesale turkey prices have been above average in the past six months, the five-year average is far lower. Outbreaks of avian influenza in early 2004 in the Valley and in the adjacent states of Delaware, Maryland, New Jersey and Pennsylvania, as well as in Texas, hit the industry hard. But these facts did not deter the producers.

The likely impact of all those lost jobs, farms and related revenue soon attracted the attention of local, state, and federal government officials, who began offering technical and financial help.

How they did it
So how did the turkey producers manage to make the transition from contract growers to owners and operators of a major turkey processing business and feed mill in just 181 days? Here are the major steps:

(All dates in 2004)

May 21 — growers met and voiced support to determine whether they could buy the Pilgrim’s Pride plant in Hinton.
May 26 — growers file articles of incorporation for the Virginia Poultry Growers Cooperative; charter issued.
May 31 – co-op steering committee/ board sends letter to turkey growers requesting growers contribute 15 cents per-square-foot of housing. Within two weeks, more than 90 growers had contributed $994,000 for the feasibility effort.
June — Pilgrim’s Pride stops placing poults (young turkeys) with members.
June — Southern States Cooperative Foundation becomes involved in helping the new cooperative on legal and feasibility issues, agreeing to develop an integrated financial model to capture and test assumptions.
June — board begins purchasing eggs to place poults in growers’ poultry houses.
June - Pilgrim’s Pride announces plans to sell its hatchery, but not to the co-op. This creates additional issues, because 20 percent of the growers are breeder-producers, who would have to switch to grow-out operations.
June 26 — co-op holds second grower meeting.
July 12 — co-op converts to a stock corporation, enabling it to raise capital through the issuance of preferred and common stock.
July 14 — co-op holds third grower meeting and announces that it has signed a non-binding letter of intent with Pilgrim’s to purchase the Hinton plant, the Broadway, Va., feed mill and inventory of supplies and birds on or before Aug. 31, 2004.
July 16 — co-op files an application with the Internal Revenue Service (IRS) for recognition as a tax-exempt cooperative under Section 521 of the Internal Revenue Code.
July 22 — IRS approves the 521 application, meaning that the co-op can have members in both Virginia and West Virginia, without the expensive and time-consuming process of SEC registration.
July — co-op finalizes agreement with a national premium deli meat processing company on products to be produced; the company also agrees to invest in the plant.
July — co-op meets with CoBank and other Farm Credit System lenders to secure financing.
August — negotiations with Pilgrim’s Pride continue.
September 15 — co-op signs purchase agreement with Pilgrim’s Pride.
September-October — co-op begins to hire management staff and announces plans to begin processing of turkeys after Thanksgiving.
October — co-op begins interviewing and taking applications for processing staff.
October 13 — co-op receives $8 million loan under USDA Rural Development’s Rural Economic Development Grant (REDLG) program (through Shenandoah Valley Electric Co-op).
November 28 — co-op begins processing members’ turkeys.

Thus, in just six months, did VPGC go from having an idea to implementing that idea.

Today, the co-op has 136 members in a 10-county area of Virginia and West Virginia. It owns a multi-milliondollar turkey processing plant, a feed mill and associated equipment to pick up turkeys from members’ farms. Its members currently have plans to grow more than 6 million turkeys annually. It has significant, sustainable contracts with customers throughout the eastern United States.

Factors for successful
co-op development
But the question remains, why has this group of producers been able to advance its co-op far more rapidly than so many others?

When the Southern States Cooperative Foundation conducts an initial evaluation with a new group of producers — as it did with these poultry growers — it shares with them the keys to success that any business project must have. These include:

a good idea;
a clear vision;
committed leadership;
producer support (putting their dollars at risk);
government support (local, state, federal);
access to commercial credit;
focused planning and analysis;
good communication with members;
perseverance.

Here’s the Foundation’s perspective on how well Virginia Poultry Growers Cooperative met these criteria:

VPGC had a good idea — though execution was a challenge, especially due to the time constraints;
Members absolutely had a clear vision and could articulate it with passion;
Leadership was absolutely committed to the co-op, even to the extent that their farms and families took a back seat for at least six days a week for virtually the entire six months. $250,000 to growers on its side of the state border to invest in the cooperative. Support from the USDA Rural Development was critical to the project’s success. It provided assistance on two levels. First, it provided significant financial assistance in the form of the $8 million REDLG and a still-pending $5 million Business & Industry loan guarantee. The other level of help was in technical assistance from Rural Development’s Cooperative Services office, which helped with organizational outstanding cooperation in the development of the financial feasibility analysis and modeling. SSCF’s legal counsel worked closely with the coop’s local counsel.
At every step of the process, good communication with growers and perseverance of the steering committee and the board kept this cooperative focused and on-plan.

Grower contracts
reflect member input
Another element leading to the cooperative’s success was the foresight of the steering committee to involve growers in the design of grower contracts. This created trust and cooperation, and removed any hint of “us vs. them,” which so often occurs in the poultry industry between integrators and contract growers.

The board also made a commitment to hire quality, professional management to oversee operations. Early on, the board identified a well-qualified manager for the cooperative, a seasoned veteran in the processing industry, skilled marketers, and food safety staff to train processing staff and monitor and test product quality.

Is the future success of the cooperative assured? Of course not, but it has a strong game plan for success. Are there bumps in the road ahead? Absolutely. No business has ever gone through start-up without encountering the “hidden bummer factor.”

That this development project succeeded in a co-op launch can clearly be attributed to a number of important factors, mainly: unwavering dedication and the hard work of the coop leaders and members; the cooperation and coordination of many producers and professionals and a dose of luck.

VPGC can stand as a model for producers on how to create “co-op development fever,” and for professional development practitioners, private businesses and government economic- development staff on how to coordinate and work together to make a cooperative vision a reality.

March/April Table of Contents