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Thursday, May 9, 2013

Northern Beef Packers starts packing

It is a story that any community that promotes economic development should know and understand.  It is not an uplifting story.

In January, Northern Beef Packers announced that it had its financing in order and was set to increase production in its new Aberdeen plant.  In late April it announced it was laying off 108 employees because it did not have the finances to purchase enough beef to continue production.

That contradiction in statements of financial condition belies a deep problem.  Northern Beef Packers had shaky origins. The original idea for the beef plant surfaced when Huron was attempting to regain some of the meat processing business that was closed out in 1997 when a pork processing plant was suddenly shut down.  The important background, which illustrates the current nature of the meat processing industry is summarized in Sen. Tim Johnson's testimony before the Senate Judicial Committee on the matter:

On August 8 of 1997, Smithfield [Foods] purchased the Dakota pork-processing facility in Huron, South Dakota [Dakota Pork Industries]. The plant employed 750 people, slaughtered around 7,000 hogs daily. It was Huron’s largest employer and one of two South Dakota markets for slaughter-ready hogs. One day later, on August 9th, Smithfield shut down the Dakota pork plant, laid off the 750 South Dakotans who were employed there.
In 2005 Huron was chosen as the site for a turkey processing plant that was implemented through the efforts of Hutterite turkey producers.  At the same time, Ridgefield Farms, a Connecticut-based company, proposed setting up a beef processing plant to take advantage of the infrastructure being put in place to accommodate the turkey plant.  Plans for the beef plant, which was supported by the state economic development office, faltered.  Ridgefield announced plans that it was moving its proposed operation to Flandreau.  After getting $850,000 in local economic development money and support from Farmers Union Industries, it canceled all plans in Flandreau.

In September 2005, incorporation papers for Northern Beef Packers were processed for an Aberdeen-based corporation led by a local sales barn owner, who is no longer associated with the scheme.  The proposal survived zoning disputes, constant financial problems, some very bad planning and execution, and opposition from a group that did not want people of different races coming into the community to work.  As construction progressed,   lt had millions of dollars of mechanics' liens lodged against it for unpaid construction bills. 

The proposal found some financial backing from Chinese and Korean investors under a government program, the EB-5 Program.  Through this program, foreign nationals can obtain a green card to reside in the U.S. by investing a half million or more dollars in a U.S. economic development project.   The company also had some unsold Tax Increment Financing bonds that it eventually sold.  

In January, NBP seemed to think its financial difficulties were over.  Its press release stated: "The company has hired over 350 employees to date, and will continue to grow its skilled workforce to over 500 employees in the weeks ahead as production continues to increase. At full capacity, the processing plant is capable of harvesting 1500 head of cattle per shift, resulting in more than one million pounds of boxed beef and offal products produced every day at the facility."

In late April, it announced its latest financial difficulties and the layoff of 108 workers.  A local press account says it had 420 employees before the layoff.  The company says it needs to raise  $20 million to resume its production.

Northern Beef Packers is trying start up a business in which 80 percent of beef production is controlled by four huge packers.  What the company has going for it is that it is located in the center of a high beef raising area.  Huge confinement feeding operations are coming under public scrutiny because of the use of anti-biotics and other chemical agents in the production of beef.  The demand for beef that is grown in a natural, healthier setting, and that can be tracked from birth to prime cuts is increasing.  At some points in its development, NBP has included these considerations in its planning.  From that standpoint and the fact that it can save money for regional producers on the cost of shipping cattle to market, it had an attractive, feasible plan.

With the competition of the nature it is, a major factor is marketing.  To get the company up and running, it has to have stores who want to buy and sell its product.  That means either having a strong in-house marketing force or being part of a marketing program to which it can supply a steady and growing supply of beef. You can't run a beef processing plant unless you have some place to sell your beef. Over the years, NBP has announced a number of plans and alliances with marketing groups.  Its latest scheme is to  serve the Asian export market.

A fact of business is that if you have a market to sell your product, getting the financing to buy the  raw materials is seldom a problem.  Lenders are eager to provide loans to businesses that have a market for their products.  The big question for NBP is, who will buy its beef?

As the editor of the business section for a newspaper, there is something I and other business reporters know that the news media never talks about.  That is that many, many businesses are badly run.  And there is a lot of voodoo business theories coming out of MBA programs that promote entrepreneurship as the practice of cutting costs and complaining about taxes and regulations that keep business honest and the environment clean.  Business is not rocket science.  Or any  science.  A person who can develop a competitive product or service and deliver it is a business person.  Yes, they have to learn to manage costs, but their main task is to serve a market, if there is one.  The worship of anyone who comes up with some kind of business scheme as an entrepreneur is a corporate-induced bit of foolery that the media has helped to spread.

State and local economic development organizations tend to welcome anyone who claims an interest in starting a business as a potential savior.  They do this without knowledge of the personnel involved, the business plan, or whether the business has a viable market for what it produces.  

In the case of Northern Beef Packers, it had some strengths.  It offered an alternative to the trend of consolidation that is affecting agriculture and the entire food business.  It has the potential to be part of a local economy.  Mergers and acquisitions into huge companies nearly always mean reduced quality of product or service, monopoly markets, and reduced consumer choice.  

Northern Beef Packers also had some deficiencies.  The floundering company indicates the lack of coherent and well-articulated business plan.  The fact that after announcing it had its financing in order it then announces it doesn't have enough money to buy beef is an indication of a company that simply does not know what it is doing.  And yet it has had the backing and promotion by state and local agencies.  And that is cause to question if those agencies know a good business proposition from a bad one.

NBP has to sell beef. 35 million cattle are slaughtered in the U.S. annually by 60 major beef-packing operations processing around 26 billion pounds of beef. Four firms control over 80 percent of all the beef slaughtered. Here is the top beef competition NBP faces:  

1. Tyson Fresh Meats  $12,7  billion  annual sales
2. Cargill Meat Solutions  No disclosure.  Parent company $88.3 billion
3. JBS USA  $9.4 billion
4. National Beef Packing Co.$5.4 billion
 5. Smithfield Foods $1.22 billion
6. Greater Omaha Packing Co. $830 million
7. American Foods Group $650 million
8T. Omaha Steaks International $100 million
8T. Sam Kane Beef Processors Inc. $100 million
8T. Harris Ranch Beef Co. $100 million

For Aberdeen, the question is whether NBP can sell beef or if there will be another empty plant sitting for sale to join a number of other empty buildings throughout the town. 

For sale?

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Aberdeen, South Dakota, United States