New kids on the block

Iowa beef co-op sees strategic partnership as best way
to break into highly competitive retail beef market

By Dan Campbell, editor
dan.campbell@usda.gov


hen you’re the new kid on the block and it’s a pretty rough neighborhood you have to grow up quickly. The Iowa Quality Beef Supply Cooperative (Iowa Quality Beef) is attempting to do just that in a business that co-op President and CEO Joel Brinkmeyer describes as “cut throat.” He sees the co-op as the best vehicle for keeping a large number of Iowa family farmers active in beef production during a time of tremendous concentration in the meat industry.

There is little room for error if the co-op is to succeed. But so far the pieces seem to be falling together for the co-op of 875 beef producers, which is set to begin processing beef at a newly retrofitted plant in Tama, Iowa, this summer.

“We want to provide our members with ongoing market access that pays them a competitive price and rewards producers for high quality, consistency and for a safe product that meets our customers’ needs, including the opportunity to brand or private label our products,” says Brinkmeyer.

Speaking at USDA’s Agricultural Outlook Conference in February, Brinkmeyer thanked USDA Rural Development for assisting the cooperative with a Value-Added Market Development Grant, saying that were it not for that help, “we would not have gotten to the level we are at today.” The Iowa Cattlemen’s Association, of which Brinkmeyer has served as executive vice president for the past 17 years, got the ball rolling for the co-op in 1999, leading to incorporation last August.













Adding more value at home
Iowa was the nation’s sixth leading state for beef production in 2002, with 2.3 million head marketed. But 70 percent of the cattle are shipped to out-of-state packers and processors.

“We want to capture a larger share of the packing industry for Iowa to help maintain the state’s independent, family farm operations, to the largest extent possible,” Brinkmeyer says. Nearly 45 percent, or 34,000 Iowa family farms, are in the beef business, be it with seedstock, cow-calf or cattle-feeding operations. Family farms are raising beef in all 99 Iowa counties, and the co-op has members in 96 of them, as well as in Illinois, Minnesota and 9 other states.

While co-op leaders have a strong vision of what they want to accomplish, they could find no exact model to follow. However, Brinkmeyer said Iowa Quality Beef has tried to emulate some of the strategies of the U.S. Premium Beef cooperative. Like it, Iowa Quality Beef based its plan on finding a compatible partner with experience in processing and marketing beef.

The major differences between the two co-ops, he said, is that Iowa Quality Beef owns 100 percent of its land, plant and equipment and will own the brands it is developing. The process of launching the co-op has been “a bit like building an airplane in flight,” Brinkmeyer says. The flight of this co-op, he adds, is “being watched very carefully by beef producers and processors all over the United States.”


Packer partner sought
Because the expertise of the co-op’s members is in raising beef, it was decided early on to forge a strategic partnership with an experienced meat packer/marketer.

“Our cattlemen can compete with the best cattle-production systems in the nation and world,” says Brinkmeyer, who sits on the Iowa State University Animal Science Advisory Committee. “But they are not experienced in managing the day-to-day operations of a packing plant, nor in marketing beef to the retail trade. “We needed a professional to help us in that business.”

The initial vision called for the co-op to build a new, state-of-the-art processing plant from the ground up. That meant finding a community that would welcome a new packing plant and have an adequate labor force and the needed infrastructure in place.

That is a very difficult combination to find these days, Brinkmeyer says. During the search process, a packing facility in Tama, Iowa, became available (it had been closed in 1999 by IBP). Iowa Quality Beef leaders felt that the plant could be retrofitted into a state-of-the-art facility, and proposed a possible partnership with meat-packing heavyweight Excel Corp. to run the plant. While Excel eventually opted not to pursue the project, the co-op still felt it was “too good of an opportunity to pass up.”

So it sought new partners, eventually selecting American Foods Group, the nation’s ninth largest meat processor, with a packing plant in Green Bay, Wis., and two case-ready plants in Ohio and Wisconsin.

The co-op has found “tremendous community support” for reopening the plant, Brinkmeyer says. By using an existing facility, the co-op was able to get its plant for between $12 million and $15 million, a fraction of the $100 million it estimated a brand new plant would have cost.

“That’s a very small investment compared to other beef businesses that have tried to start in the past couple of years,” Brinkmeyer said. “We think it will help keep us very competitive.”

The plant includes 280 acres, including about 60 acres of updated, environmentally sound lagoons and 120 acres of prime real estate for future expansion.

Shared vision
For its part, American Foods wanted to find a second plant to help increase its efficiency and to expand from the Holstein cow business into high-quality fed cattle (which most of the co-op’s animals will be), says Brinkmeyer, who worked for the Farm Credit System in Nebraska and Iowa for 10 years earlier in his career.

American Foods did not want to build a plant from the ground up or to enter a location where it would have to come in from scratch to compete with existing packers to procure cattle. So the vision of both partners meshed nicely at Tama.

The plant purchase was finalized in April 2002, and the letter of intent with American Foods was signed last July.

The co-op structure and business model were formalized on Aug. 5, after several years of discussion. “All we needed was the money, equity and financing to get the job done.”

The equity drive included the sale of Class A shares, costing $50 to $60 per head (depending on delivery date) committed to the co-op. This stock represents both a right and an obligation to deliver cattle. Class B stock was sold for $7 per share, and provides a right (but not an obligation) to deliver cattle to Excel in Nebraska, where they are to be paid on a special Iowa Quality Beef Supply Co-op dedicated, value-based marketing grid. Class C stock has also been sold, accounting for about 10 percent of total equity.

Quality to be rewarded
The new plant is scheduled to initially process 1,200 cattle per day, but it can easily expand to 1,600 head per day. The co-op is closely tied to the Iowa Cattlemen’s Association (ICA). All co-op members are also members of ICA, and “for the past three years, they have learned about selling cattle on ICA’s quality grid, which has helped them improve their management expertise to produce the right kind of product to earn quality bonuses,” Brinkmeyer says.

“Our member cattle will be priced off an individualized marketing system, based on week of, or week prior to, delivery retail beef prices. That is quite different than what you find in most of the cattle business today, where cattlemen price their product based on live cattle prices and where packers pay them as little as possible.”

Members have currently made an annual commitment of 100,000 head of fed-beef cattle, 22,000 fed Holstein steers (dairy beef), and a small number of dairy or beef cows.

“Just 18 months ago, I didn’t believe it was possible, but we intend to process all three types of cattle at this plant,” Brinkmeyer says. “This mix of three species creates wonderful synergies” for the co-op’s customer base.













A future for $10,000 per beef producer
The co-op’s equity drive has raised a little more than $8 million, or about $10,000 per member. “$10,000 is about half the price of a good used pickup truck not much for the opportunity to participate in a project this exciting that could potentially change the future of the cattle business,” Brinkmeyer says. While the co-op will own 100 percent of the land, plant and equipment, it will lease these assets to a joint venture which is 75 percent owned by the co-op and 25 percent by American Foods Group.

The co-op will make sure cattle get to the plant and is responsible for overall marketing and brand development. The annual, ongoing capital need for the operation is $30 million. The business should produce $350 million in annual sales.

The business has been structured so that “if it does not make money, the producers don’t make money, but neither does American Foods Group,” says Brinkmeyer. “They have made a commitment of equity and management expertise to manage the plant and sell the product. If it does not work, they aren’t rewarded.

“On the flip side, the more money they make, the more money the co-op makes. We think it is a sound business arrangement that provides risk and reward to both parties. Reward will go to 875 cattlemen who have put their money on the line and to members of Iowa Cattlemen’s Association,” whose 10,000 members will benefit from a more balanced beef supply created by the co-op’s operation.

Further, the overall beef industry in and around Iowa will have a more competitive edge thanks to the co-op. Most important, he said, “consumers will benefit from a new source of a high-quality, consistent product, backed by the commitment and integrity of our co-op.”




Natural beef anchors product line for co-op of Kansas family farms

By Dan Campbell, editor, and
Renee Hawkins, Kansas Sate University
Extension

A group of small family farms in eastern Kansas and western Missouri including the All-Natural Beef Producers Cooperative have joined forces, embraced technology and formed partnerships to create a market niche for their Good Natured Family Farms brand line of food products. Their marketing effort also relies heavily on educating consumers about the health and other quality attributes of their products, which include natural and certified-organic beef the “anchor product” of the line plus natural poultry, free-range eggs, naturalbeef hot dogs and glass-bottled milk, among others.

Good Natured Family Farms (GNFF) marketing director Diana Endicott refers to the marketing strategy as “horizontal product diversification,” which she said creates economies of scope rather than economies of size. Her family’s Rainbow Organic Farm in Bronson, Kan., is also a member of the beef co-op and processes the co-op’s cattle.

GNFF has formed a marketing alliance with Balls Food Stores, which is selling the co-op’s beef and other products through its 15 up-scale Hen House supermarkets and two Price Choppers supermarkets (the number of Price Choppers outlets is set to increase) in the metro Kansas City area. GNFF also recently began selling through the Community Mercantile health food co-op in Lawrence, Kan. The co-op has successfully employed in-store product sampling in these stores to broaden its reach to more consumers.

To further differentiate its products in the market, GNFF has applied for process-verified label certification through USDA’s Agricultural Marketing Service. This quality system, based on ISO 9000 principles, allows groups to write their own manuals for production, complete with paper trails to provide source and process verification. A program of this sort benefits producers and processors alike in that it helps them monitor production and identify places where improvements in efficiency can be made. Retailers appreciate the program because the source of beef can be linked back to the original production operation.

In order to help develop the manual and the process-verified program, Endicott decided to take advantage of assistance available through the Agricultural Marketing Research Center (AgMRC) (see related article, page 15). Michael Boland, an agricultural economist at Kansas State University and a member of the AgMRC management team, was able to hire an Extension assistant, Renee Hawkins, to help with the effort.

Hawkins’ primary responsibilities include helping to develop the process-verified manual and training the producers on their roles in the process-verification system. She also studied the feasibility of small groups, such as the Good Natured Family Farms All Natural Beef program, becoming process verified.

Currently, the All Natural Beef Co-op supplies 20 head of beef per week, a number that is expected to rise in the near future. The cooperative was recently audited for verification and is fine-tuning its program in some areas to meet the USDA criteria. The process-verified points the co-op is seeking confirmation on include the following: “Through certification and consumer education, we anticipate gaining a stronger presence in the grocery stores where we now market our products,” says Endicott, “and we expect additional marketing opportunities to present themselves in the future.”

Some of the farms are also seeking certification under USDA’s organic label program.

The 24 producer-members of the All-Natural Beef Producers Cooperative are committed to the concept that “there is a way to raise food that is good for both consumers and the environment, and that they can make a living doing it,” Endicott said at a panel discussion of new meat-producer cooperative representatives held during USDA’s Agricultural Outlook Forum. Partnerships that have supported the co-op in its efforts to date include USDA Small Business Innovative Research program, Kansas State University and the Arthur Capper Co-op Center, Kansas Agriculture Products Development Division and USDA Rural Development.

Since the majority of the co-op members have no off-farm income, the success of this business is critical to each producer, says co-op President Eugene Edelman, who farms in Sabetha, Kan.

Members of the beef co-op have seen a dramatic increase in their ability to earn a premium for their product in just the past couple of years. In 2000, the average price paid for a dressed beef carcass in Dodge City, Kan., was $1.11 per pound, Endicott says, while co-op members earned $1.12. That equaled a premium of just $7.50 for a 750-pound carcass.

But in 2002, co-op members averaged $1.27 per pound vs. the Dodge City average of $1.07 a pound, equaling a premium of $150 per head. (Conventional prices used for comparison are based on live steer and heifer prices from Dodge City, Kan. A 63 percent yield was used to convert to dressed price. Reported live steer and heifer prices were based on 1,100-1,300 pound choice yield grade 2.)

Endicott credits much of that increase to a pricing system based on the actual wholesale primal cutout value of each carcass. That information, in turn, helps them fine-tune their production systems. Using a Kansas Sate University Office of Local Government-calculated multiplier factor of 1.8 on the extra profits generated by the co-op, Endicott estimates these premiums have helped to pump an additional $350,000 annually back into the rural communities where the producers live.

“Limited product shelf space, slotting fees and advertising costs will continue to present obstacles for small producers,” she says. “However, horizontal product diversification and development of micro-brands can help generate higher returns.”




Low-overhead approach taken by Dakota Lamb Growers Co-op
Dakota Lamb Growers Cooperative is seeking to earn greater returns for its members by marketing high-quality, natural lamb to up-scale retail grocery stores, natural food stores and white-tablecloth restaurants. It’s primary marketing strategy is based on convenience, consistent highquality meat and safety through source-verified lambs.

The only assets the co-op holds are its reputation and brand name. It has no physical assets, and has only two staff members, both of whom work out of home offices.

All lambs sold through the co-op must be less than one year old and must have been raised without growth hormones and not fed any animal byproducts. Each producer signs an affidavit vowing to have met the coop’s standards, as does the processor, who warrants that the co-op’s lambs have not been co-mingled with others. This constitutes a double-verification safety system to ensure customers of the highest product quality standards, according to coop CEO David Merwin.

Dakota Lamb Growers is a closed co-op through which only grower-investors can market their lambs. The co-op was incorporated in 1999 and held its first equity drive in the fall of 2000. This drive attracted 104 producers who invested a total of $160,000 and committed 8,000 lambs to the co-op. A second equity drive ended in March 2002, which generated an additional 12,000 head of lambs and $240,000 in additional equity. There are currently 184 members (located in North and South Dakota, Montana and Minnesota) who have committed 20,273 head to Dakota Lamb.

The co-op expects to attain “break-even” status this spring while paying producers an over-market premium.

Growers are responsible to deliver their lambs to a combination feedlot/receiving station in Emery, S. D. Lambs stay there from three days to three weeks, until they meet the co-op’s specifications. In addition to being raised without antibiotics and being less than one year old, the lambs must weigh between 120 and 130 pounds, have been fed grain for the final 60 days and have no more than seven months of wool growth when shipped for processing. Those animals which cannot be brought up to the co-op specifications in a timely way are sold into the commodity market.

Because lambs are hauled only five miles from the feedlot to the processing plant, they suffer low stress levels, which helps to improve meat quality. Highest sanitary conditions are maintained in the plant and duplicate bar-codes allow each individual animal to be identified at any time during processing or marketing.

As a secondary market, the co-op can process for the kosher market. This market uses only the front half of the lamb, which tends to be the most difficult part to sell in the traditional lamb market.




Great Lakes Pork Co-op adjusts plan to seek alternative packing plant

One fish just slipped off the hook, but the Ohio-based Great Lakes Pork Cooperatives is still fishing. The co-op, which was formed last year by pork producers in three states, recently bid to purchase a veal processing plant in South Bend, Ind., out of bankruptcy. But the co-op was unable to raise the approximate $7 million it needed (about half the plant’s cost) from its members in the relatively short time frame required by the court.

The funding effort was hampered by a generally bad year for farmers in the eastern Cornbelt, where Ohio had “an especially lousy crop year,” says co-op Vice President Brian Watkins.

“So we’re basically going back to the drawing board now, but are still actively searching for other opportunities,” says Watkins. This could involve finding a processing partner.

The co-op’s membership drive last year netted 108 members in Ohio, Michigan and Indiana. Each paid $1,000 to join the co-op. “We got at least half of the commercial pork producers in the region, including almost all of the ones we felt we really had to have,” Watkins says.

Great Lakes Pork then secured some grants to do a feasibility study. This resulted in a plan for an operation that would produce 600,000 hogs per year and sell primarily into the Chicago market.

This effort involves bringing about a change in the mind set of the region’s pork producers. Watkins says too many producers still see their future tied to a cost-control strategy via greater production efficiency or control of input costs. “This is not irrational it is what has made them money in the past,” Watkins says. “But now we are really challenging them to do something different.” This means re-focusing away from a production-driven, supply- push system (in which farmers produce first, then figure out a way to sell it) to a demand-pull system (in which they find markets first, then produce for it).

Many of the co-op’s large swine producers have production contracts with large packers. While these contracts limit some of their risk, they have posed an obstacle for the co-op because they reduce the availability of hogs for Great Lakes Pork.

Watkins says these contracts may help producers feel secure in the short term, but they need to be thinking about a much longer timeframe than most contracts provide for. “You need to be thinking about the next contract, and the next contract beyond that.” With the coop, the outlook is for the long-term future of producers.

“We are not against contracts everyone of our members will still maintain relationships with other purchasers. But we as producers will be better suppliers to our customers if we are also involved in a process where we are in closer touch with the consumer. The more we understand the supply chain what we can do at farm level to differentiate our product will make us better pork suppliers.”


May/June Table of Contents