Producer-Owned Co-op Trips in Tough Market

Pork America, a cooperative designed to change pork producer's mindset from marketing hogs to merchandising pork, has fallen on hard times.

In June 2000, Pork America had commitments for over 5 million hogs and set a goal of representing 20-25 million hogs within 3-5 years. Producers paid a $500 non-refundable membership fee, plus a registration fee of $500 for the first 5,000 hogs, $100 for each additional 1,000 hogs.

The ensuing year and a half provided a reality check for the fledgling co-op and their fees paid served as tuition for some real life lessons. Pork America board member and pork producer Linden Olson of Worthington, MN, reviewed some of those hard lessons during a National Pork Board-sponsored Whole Hog Value Conference last November.

Unfortunate Timing

“When you go from production into processing, there's a lot of things you've got to learn awful darn fast,” Olson says.

Starting with the popular premise that “there were significant margins to be captured between the retail and the farm level,” Pork America began meeting with packers in smaller markets — those that the larger packers and processors were not fully servicing, he continues.

Several packers were willing to total process Pork America hogs. “But, when we got the costs figured in, they got all the margin and we didn't get much more than we would have if we had sold the animals directly to them in the first place.”

Next, they explored building or buying a packinghouse. A director of development was hired and charged with finding opportunities and new members. Later, a marketing director was hired to identify opportunities in specific markets.

Many potential markets were identified but all wanted to see the product before committing to purchase. Without a plant, they could not supply product.

They found and purchased a plant in an area where a lot of Pork America hogs were produced. A CEO was hired to manage the operation, put together a marketing agreement for producers, file their HACCP plans and obtain a USDA plant establishment number — all necessary details. The first hogs were delivered to the plant on April 8, 2002 — about nine months after the plant was purchased.

Their startup plan was to move combos of cut pork first, then as workers were trained, they would move into the further processing, starting with deboning hams and loins. Other further processing would follow.

The CEO hired a broker. “They understood what we were trying to do and they knew of establishments that were interested in buying products that were identity preserved and cut to their specifications,” Olson explains. “But, when it got down to contract-signing time, and we wanted to get a little bit extra when the market was low, there wasn't too much interest in paying a little bit extra for a product they wanted. So, we never did receive the premium we were trying to get.”

The spring start-up date was selected to take advantage of the normal upswing in product prices and hog prices. “We all know what happened in 2002; prices of hogs went down instead of up. We were in one of those upside-down price curves which rarely happens in the spring,” he says. “If you remember back in April and May (2002), the price of hams was below the price of hams in the fall of '98 and early '99.

“We lost a fair amount of money fairly quickly, so we made a decision in early June to shut down because we could not continue to expect the farmers to take the loss on their farm production and then continue to take an additional loss in the plant,” he adds.

The Hard Lessons Learned

Olson offers six important lessons for anyone interested in the further processing business:

1. “You have to sell the whole hog. Most groups find that they can have a real good market for one or two products from a hog, but when they try to market the rest of the carcass, they run into trouble. It is really easy to sell ribs and boneless loins. But, when it comes to selling the other cuts and the byproducts, it's a whole different story.”

   It is critical to understand that byproduct sales usually occur by truckloads. “You have to put a heck of a lot of hogs together to get a load of kidneys or tails,” he reminds. “The trade may be there, but most all of these prices are delivered to a certain point in certain quantities. The storage and the transportation costs can kill you.”

2. Have someone that is marketing exclusively for you. “We had a broker that was marketing for other firms, too. I suspect what happens is, you can give all the attributes of this small plant, the traceability and all that, but when they look at the price and find someone else will sell it for 2¢/lb. less, they'll do it.”

3. Make sure you have realistic startup costs and a reserve for those times that the market doesn't act quite the way you think it will. “You'll probably have more tied up in inventory of boxes and things like that than you can imagine,” he adds.

4. Make sure your accounting system gives you the information you need. “An accounting system for a processing plant is different than an accounting system for a farm. On a farm, you take all of the inputs and you've got one product going out — a bushel of corn or a hog. You can tell exactly what the cost of that thing is. In the processing business, you've got one hog coming in and 50 or so products going out.”

5. Cost of freight. “Make sure that when you sell something you understand whether it's FOB or delivered.”

6. People. “For a manager of a small plant, you have to have one person who knows all phases of the operation. And, it's extremely important to have people who can do what they say they can do in an operation the size you have.”

Pork America's Future

“Pork America will continue to look for opportunities for our members to do some processing or marketing in some way, shape or form,” says Olson. “We still think there are a number of smaller, to some extent, niche markets, that are not being served as well as they could be.”

The plant is leased with an option to buy. The new operators will custom process some Pork America hogs.

“We made the best effort to do what the membership asked us to do, but because of the timing and some other factors, we failed. That doesn't mean that the idea was wrong. We hope that the lessons we learned will be helpful to anyone else who intends to try it in the future.

“We still think we've got a very good idea. The timing was terrible. Sometimes, timing is everything,” he adds.