Finding a processor that does what you need, when you need it, can be challenging. Building a new facility to meet that need might seem like a good idea. Sometimes it is, but often it isn't. For many reasons, start-up processing facilities have a high failure rate. On this webinar, we discuss what works -- and what doesn't work -- when building new facilities. Our speakers share lessons learned, with real examples from the field
Welcome to today's webinar: To Build Or Not To Build: Exploring when new processing is really needed and lessons learned from past efforts to build new facilities.
Keith DeHaan manages the overall technical, financial, and personal resources for Food and Livestock Planning. Raised on a family cattle feeding and ranching business in South Dakota, he has founded or led companies across most parts of the livestock and meat business, from production to processing to retail. He received his Ph.D. in Nutrition with minors in Biochemistry and Meat Science from the University of Nebraska.
Keith: Thank you, Arion and Lauren. It's a pleasure to be here today. Good morning to those in the west and good afternoon to those in the east and midwest. It's good seeing all of you.
We've been in business now for 13 years and my comments today spans that timeframe as well as maybe a few years before that. It's just a collection of our experiences. Now all of you on this call bring similar experiences to the table. I wish I had time to interview all of you. I'm sure your information and experiences would be valuable to this webinar as well. I'll go ahead and proceed. Some of my comments will be quite "vanilla". Some of them will be eye-opening. But hopefully they will generate some thought and generate some questions.
Assuming those making the decision to build or not to build are one of two categories. The first category are livestock producers who currently are having difficulty finding or working with existing processors. That group would represent most of my comments today. The second group are existing small processors who need to expand. That's an area that we will talk about towards the end of this webinar and one of which we as a firm are working pretty diligently in.
Let's go to the first group. Existing custom plants have a "case of the too's". The typical complaints from customers are they're too small, they're too far away, they're too costly, they're too antiquated, they're too busy. I think we've all heard a plethora of those excuses. There is a dichotomy here, there is a national trend of increasing number of producers desiring to market meat from their own livestock and that is really not argued. We all know that that is the case and for a variety of reasons that goes beyond the scope of this webinar.
But at the same time, there's a decreasing number of USDA inspected plants offering custom processing services to producers. Now we all know the argument that there's plenty of processing capacity in the United States, and that's probably true. But there's not plenty of custom processing available to small producers and we all know that as well. That's probably a large reason many of you are on this call today.
I want to reiterate a couple of points. Why do producers express a need to own or control a processing plant? The first one we talked about and that's the closest custom plant is just too far away, it's just too inconvenient, too costly to get there. Or, the closest plant doesn't have the right processes, or services, or certifications.
A third one that is commonly used is that they tend to be wait-listed. The plant is too busy at the desired time of the year, especially as we're starting about now as we're getting into hunting season. We all know that game is a very profitable service that a lot of these plants do. That does interrupt services to livestock producers. Consequently this is kind of a bad time of the year, starting quite soon until the first part of next year when the plant gets a little bit more freedom to work through all the animals that need to be processed.
Another complaint: custom processing fees are too expensive. And then there's just kind of a general attitude: producers think they will have better product control if they have their own plant.
Producer Owned or Controlled Meat and Poultry Plant Projects in 18 States
This slide is entitled Producer Owned or Controlled Meat and Poultry Plant Projects in 18 States. Let me kind of explain it. It could be kind of confusing if you were just to look at it. Now, we've been in business for 13 years. What I did is I just sat down with a legal pad, and I listed all of the projects that fit into that Producer Owned or Controlled category. And then in those projects, I counted up 35 of them, that we were either a) involved in, or b) we were not involved in but we knew some of the project principals or we had carefully read the case study on the project. So that kind of qualifies those 35 projects in those 18 states.
Some of them that it does not include: Katherine Harris' project, the Northeast Livestock Processing Service is not part of that because it didn't really quite fit under that criteria. We are launching two projects now that are just start-ups. There's not enough time in here to see how they fit. They're not included.
Of those 35 projects, over half of them failed to raise the money. And I could almost give a webinar on reasons why they failed to raise the money. Those under the red slice of the pie raised the money but are now shut down for a variety of reasons. If you combine the blue slice with the red slice, you've got a big failure rate, don't you? That would actually be higher than the national average of start-up businesses. In these kinds of scenarios that I've presented here today, not a lot of optimism.
There are five of the 35 that are running today, that are considered successful. Now even those had some start-up problems, but overcame those problems and are running very smoothly today. All of you can bring experiences like this to the table. This represents my experiences over that time frame. And I'll go into each one of these in a little more detail.
Why such a high failure rate?
If you look at these failures, they all have a very unique reason why they failed. Sometimes, two of them aren't even alike. But there are some common themes that run amongst those failures and I want to go into those now.
#1 is they run out of operating capital and have limited opportunities to find more with investors and lenders. They can't weather the storm when the market is upside down. They run into a cash crunch. What are they going to do? They can't run the business without cash, so consequently, they have to fold the tent. An example of that; our firm got involved with Central Dakota Beef in Harvey, North Dakota the second time around. The first time around, it failed. The second time around, they went back to the drawing board and they started operating again. They ran that on very slim operating capital, the market was upside down, they just couldn't weather that very long. They didn't have the where-with-all to maintain any momentum, so consequently they folded the tent the second time.
#2 is huge management mistakes, and that oftentimes results in number one. I have to be very careful on any kind of examples I throw out here, because I might step on some toes. Reviewing those 35 cases, one of which might fall into that category would have been the Pork Cooperative that ran on too little, it might fit that.
#3: marketing and sales weaknesses. Most of these projects are supply driven. They need a market and thought the plant was the market. I'd kind of put that Central Dakota Beef back in that category as that was certainly the case there. And there's many others that fit that category.
#4: Livestock producers do not have the experience to oversee a processing-marketing business. And even though they don't have to run it themselves, they can hire a manager to do that, they still have to provide guidance and leadership. They are the board of directors that guide that business. If they don't understand it completely, it becomes very difficult and they do run into some mistakes, and we get back into number one again.
What did the successful ones do right?
One or more of the following: #1: producers set up a functional board of directors with good business understanding and that's the case in all those five that I mentioned. The board of directors were very good. There's an art to doing that. There's not always finding everybody to agree all the time; sometimes it takes some people with different experiences that bring some diversity to a board, but at the end of the day, they all tend to pull on the same rope and get a lot of very good, functional work completed.
#2: Purchasing a successful processor. This is the case with U.S. Premium Beef and I realize that started a little bit before 13 years ago, but we were involved with that, we're very familiar with that, with those successes and that project and that was certainly the case here. They did purchase a very successful processor.
#3: Hire a good manager with experience. An example of that would be Dakota Provisions. They actually hired the person who was responsible for the success of West Liberty Foods. He had been there before. He had seen and experienced what it would take to get a start up business going and so consequently they brought that to the board with Dakota Provisions in Huron, South Dakota. And I have to think that that's one of the reasons why they are successful today.
#4: Attract investments from successful producers with means. That always helps, when you have producers with means. And they started out with plentiful equity. I think U.S. Premium Beef is another example of that. Although, there are others as well. The producer investors were dedicated. They were quality conscious and that's the case in all of those successes. They all develop good lender relationships.
I can't emphasize this enough. If you look at the lender relationships of those five, and even others that we've worked with, it's so critically important. Oftentimes the lender has had to take the lead role in applying for USDA loan guarantees. One particular case we're involved with, the lender had a borrowing base that was dependent on accounts receivables, and in the business, the accounts receivables got kind of thin. The lender just rolled up his sleeves and went to work helping the business collect on some aging accounts receivables. I tell you what, that's going above and beyond the call of duty. It takes those kind of lender relationships to really make these things successful.
We've seen it work against a company as well, where the lender and the borrower got into a very difficult, precarious situation and they didn't even speak. Well, you know, the handwriting was on the wall. You know that that business was just not going to succeed without a good lender relationship.
Producer involvement v. total ownership
We believe in producer involvement in processing to some degree, but not necessarily total ownership. If you were to go back 13 years and ask me that question, I would be a strong cheerleader for producers getting involved in that kind of business and making it work, etc.
Today, seeing as many failures as I have, I'm not quite as aggressive on that front anymore. I do believe there should be some involvement, but again, not necessarily total ownership. It's not what producers do. Producers produce. It's a different kind of a business. They often waste valuable time and money learning, and that's the case in many of the projects that we've been involved in. It's not their business and so consequently, they do burn up a lot of that valuable, valuable operating capital in learning about the business, making some rookie mistakes.
Everybody on this call realizes that processing is a skill set with its own unique challenges and problems. And it's extremely difficult, almost impossible, starting two businesses at one time. And what I mean by that is starting a processing business at the same time you're starting a marketing business. Now, I know in the case of Dakota Provisions, that was done. But they had an outstanding manager who understood how to do it, had been through it before, and they managed. Even though they went through some difficult times, they still overcame it. But we all know processing is a money pit. Producer resources are better used in producing or in marketing. It's very difficult to survive getting two difficult processes started at the same time.
Strategies when new processing is essential
If you're in a situation where new processing capacity is the only way you can be in business, what are the most viable strategies to making something like that work? And we have been in situations like that before. I always say, involve an existing processor. Find a regional custom exempt processor or state-inspected processor interested in expansion. And there are some of those, you've just got to find them. Develop a business partnership with them. Maybe they don't even have to be small to growing, maybe they already have a good solid foundation of business and are looking for an equity partner. There's another opportunity.
You need a well-designed marketing plan. That should be the absolute first step in the business planning process. I have read a million, well maybe not a million, but I read many, many business plans written by producers. Producers should have involvement in that business planning process, but most of the business plans talked about how the animal was produced, breeds, husbandry process, husbandry plans, that kind of stuff, and very little about how they're going to get it into the marketplace, what is going to set it apart from competition, who are the likely candidates for selling the product, and so on. You can just tell that those projects that have been so focused on production have really an uphill battle in trying to become successful, mainly because there's such a gap in the marketing plan.
Involve as many producers with common goals as you can find. They don't have to be your best friends, but they have to have some things in common with you. Obviously, you need them for equity. And obviously you need them for raw materials. If you're supplying customers, what you don't want to do is you don't want to short them. You want to make sure that you have enough production around you to meet both current demand and future demands. It does take a lot of producers to get that done. Of course, the more producers you bring in, the more difficult it is to manage but that's just what you have to deal with.
Shore up your equity needs. If you're short on equity, don't start. What oftentimes happens, is that there's enough equity to get a plant built, or there's enough equity to get a plant partnership established, or there's enough equity to get a new piece of equipment bought, but in doing that, they're shorted on operating capital. Most business planners, such as ourselves, will tell you what the minimum amount of operating capital you must have to make this work. Don't short that. If you do, you're going to be in trouble. You're going to run out of cash. Where are you going to find the cash? You're going to go back to your source, or your lender and so on, and that is just very, very, very, very difficult going back to the well.
Expanding existing small processors
Now I want to switch gears here a little bit and talk about small processors and the expansion of those processors. I just read this morning an article written by an ag economist enticing cow/calf producers to start increasing their herd size. It was a pretty compelling argument and it talked about the decreasing, shrinking cow supply in the United States. It talked about increasing demand and exports. Very compelling reasons to go in now and expand your herd.
The same thing can be kind of be said about small processors. It is a good time to do that, it seems like the demand is there, and there's a lot of incentive for getting it done. I bring this slide to your attention, it is a study done by Dave Swenson of Iowa State University. You can find it on the Leopold Center website. It's a good piece of work and it's very complimentary to small processors about the impact they have on the local communities which they serve, including the impact which they might have on their customers. It really is compelling for the value of small processors in this country.
What we would like to do as a firm, we would like to expand on this great foundation and go a little bit further. Our firm would like to go deeper with small plant expansion analysis. We would like to do this in a couple ways.
First, we have applied for grant funding to help us to do it quicker by doing a large-scale analysis of small processors and looking at barriers to expansion and possible solutions to overcome those barriers and developing models around expansion. If we don't get that, that's fine, we would just keep plugging along with our individual work on our projects with individual plants.
We've completed a couple of these already where we've completed business plans for taking a small custom exempt plant and expanding into USDA inspection. Then we're going to start another one on a very small poultry plant that's doing an exemption route and would like to do it with a USDA inspected route so they can do work for other people. We're just ready to start that and we know that more of those will be coming down the line as well.
Hopefully through that experience base we can expand and hopefully maybe sometime in the future we'll be able to do a webinar on just that. But I think it's important, especially for those that are considering this, to understand what their return on investment would be. If they go ahead and spend capital and equity on expanding their plant, how quickly can they get that returned to them and what is the potential growth opportunity in that type of business? That's one area we'd like to go further in as a firm, and I know maybe many on this call have that same interest as well.
Lauren: Thinking about one of the lessons that you had earlier, about not doing too much, or having the producers focusing on the marketing, you've got a project that you're working on, I won't name any names, but there's one in Northern California, and it seems like they're doing a lot of different things. However, you're feeling pretty sanguine about it.
Keith: Well, I've always, maybe I'm just a conservative kind of guy, and I've been in enough businesses where I've had my money invested, but I've always found that to do things, crawl before you walk, walk before you run, that kind of thing has always been successful for me. With my clients I tend to suggest that as well. In the case of the one in Northern California, they have the financial means to do a lot of things. It's been really kind of fun, because it's like opening a Christmas present. You're excited because you're able to do a lot of things, there's a lot of resources at play in that project. We're going to learn a lot through it, and I'm excited about it. It's a different set of circumstances than one that would typically be in the United States where producers get together and try to do something amongst themselves. This particular producer has means. A lot of means.
Lauren: We'll be optimistic about it, though I remember somebody in the cheese business saying, "The way to make a small fortune in the cheese business is to start with a large fortune."
Q: Can you give us a rough estimate of operating capital reserves needed to start. Should we have two years worth of operating expenses before starting? One year?
Keith: Two years would be nice. You don't need two years, it's closer to one year. In fact, a lot of ours start at even less than a year. That can be done. It kind of depends a lot on individual circumstances and what you're doing. Here's an example of what I mean by that. Some are doing a lot of custom processing for other people as well as processing their own animals for their own markets. The more custom processing that you do, the less operating capital that you need because that's a cash-flow business. That's very helpful in running your business. It's kind of neat because your customers don't pick up their product until they've paid their bill. That's the way it should be and it really benefits your situation. In that particular case, it's certainly less than one year.
Lauren: And then if you have a business that's more reliant on people who want to pay you in a month or in 60 days…
Keith: That's different, you're financing their inventory and receivables and so in that particular case, somebody has got to finance that. If that's you or your lender, you better have the resources for that.
Lauren: Arion, do you have any questions specifically for Keith?
Arion: I just really appreciated your stats that you put out there. I jotted down a list of something like that some time ago myself. It wasn't quite as rigorous as yours but it came to largely similar conclusions, I remember, after just about everyone I could think of just about failed. It's much more complicated than at first might meet the eye. I appreciated those comments.
Lauren: Any other questions for Keith? If you are on the call and you are starting a processing plant or you have a processing plant and you want to share with us some of the reasons, some barriers you found a way to get over, please let us know. Absolutely chime in on this conversation.
When I sent out the announcement for the webinar most recently, I got a response back from a small organic processor in Washington State who said, "Well, you know what it takes to make a plant work is you've got to be a jack of all trades. I've got to do everything around here." It was pretty clear from what he was talking about that yes, access to capital was important, but the fact that he apparently works about 20 hours a day and maybe more than that definitely helps.
Q: another operating capital planning question. Do you have a rough estimate of employees per head? We're planning on four men for slaughter and fabrication, and estimating that those four can process 20 head or cattle per week. Does that sound about target?
Keith: Yes, but that's a knee-jerk response, I'd like to look at that a little deeper. If we're talking about some generalities, that probably will work. But again, that kind of depends on what all they're doing, how many different species, are they doing any further processing, that kind of thing. There are some qualifications around that comment.
Lauren: How busy they are, how much hang time there is.
Keith: Yes, exactly. There are a lot of moving parts before you come up with the answer to that.
Arion: If you're fabbing all primals vs. doing all the retail cuts, that's very different work.
Q: can you give examples of some successful marketing plans?
Keith: I'll just bring up some. If I think about it, I can probably talk about quite a few, but one that I've already brought up because I think they're a poster-child is Dakota Provisions in Huron, South Dakota. If you don't know what that is, it's one of the newest turkey processing plants in the United States. It is nice. It's state of the art. It's owned entirely by producers and Hutterite Colonies in that part of the world. I had the opportunity to look at some of their marketing plans and I thought they were just extremely well done, extremely knowledgeable about the industry, knew exactly what kind of customers they were going to pursue, how they were going to pursue them, the budget, what it was going to cost to execute the marketing plan correctly, the kind of sales approach, those kinds of things. It was well thought out, very professionally done and should be congratulated. I think they're following that marketing plan very closely today.
Q: What are some of the new standards beyond organic and grass-fed that can help in the marketing plan?
Keith: Those are good. The other ones are not producing niche so much as just producing high-quality, good eating quality product and out-servicing everybody else. There's a lot to be said by service. You can have a good product, but you're going to get the business by out-servicing everybody else by being able to deliver on time a good product that's consistent. Niche is good because it kind of sets you apart, but it doesn't always have to be. What has to set you apart is your ability to service your customer.
Arion: I just want to add to that, Keith, because I think it's so important. For example, a grass-fed company that we work with extensively, one of the things they pride themselves on is being able to consistently deliver every single week, 52 weeks a year, which is hard in the grass-fed business. I know that on a very consistent basis, they will get last-minute calls from a restaurant or an institution saying that they were going to feature this other local producer's product but they weren't able to deliver at the last minute, so they're calling them looking for a consistent source. Just that consistency, that reliability, is worth so much.
Chris is an assistant professor of Meat Science at Pennsylvania State University with primarily extension duties. He's always moving at the speed of light. Chris works with meat processors and livestock producers across the state and he's worked in the niche meat sector since he's arrived at PSU.
Chris: A lot of my comments are going to echo what Keith mentioned; this is strictly observational in dealing with plants in our state and in our region in terms of getting those small operations up and going. One of the things that it goes back to is that every time, you're dealing with a person operating the plant and their motivations.
I was thinking about what works and I remembered this movie, Whatever Works. It's kind of about this cantankerous guy who's always going through his life ranting all the time about his own ideology and trying to make everything else something it isn't. In my view some of the plants, or most of the plants, that have failed have been because of capital reasons, have been because of those other things, but it's also been because it was just a person bent on letting their philosophy as a leash trump their business sense. So that's why I called my presentation Whatever Works.
We come into some challenges when we deal with whether or not to build a plant or not. Some of us have to deal with sanitation issues and that becomes a challenge when we're operating with mobile units. There are different types of mobile units; some of them are nice, some of them are not. As we work through, what is the capability of that? Here's cousin Eddie's RV from National Lampoons' Christmas Vacation, and if I remember right, he had some plumbing issues on-board, and I know of one mobile processor in our state who is custom-exempt who is having all sorts of issues who ended up buying an existing plant simply because he didn't want to go back and fix his mobile processing ability. He's operating under custom-exempt still, he's not USDA, but that's the reason he ended up building a plant. It's just that he didn't want to go back and invest more in that mobile unit.
Then we've had some other mobile units around that aren't exactly mobile. Sometimes that's for various reasons: they didn't have someone to drive the truck, they didn't figure in the cost of fuel. It's sort of like a stationary plant, it's not a mobile unit, but it's designed that way but it's still stationary in one spot. In some ways I guess it still does qualify as building a plant because you can't move it anywhere.
But then there's a lot of hesitation as to wanting to build an existing facility. People are very intimidated. They think it's going to be this massively huge undertaking to build a plant. It's not always the case. There's ways that they can get around it: existing options to purchase into. I think many people have been discouraged because of all the regulations and everything else and they don't want to build anything too overwhelming. But it doesn't have to be.
This is a very small print chart here to look at but it's total plant numbers, this is slaughter plant numbers, between 2008 and 2009 by state. I'm going to just let you know quickly though that my view is a little skewed just because we have so many existing plants. We have 91 slaughtering under federal inspection and 154 operating custom-exempt operations slaughtering livestock in our state. A lot of what this deals with is producers or whomever getting involved with buying existing facilities. And going about it that way and not having to start exactly from the ground up. But still we do have a lot of custom-exempt plants.
Some of those custom-exempt plants are slowly getting into USDA inspection, but they're doing it step-wise and it's working well for them. We have two processors last year who were operating custom-exempt, decided that they needed to go to USDA just for one market purpose. They were doing roasting hogs for barbecues. They just strictly did pork slaughter under USDA and that was it. That's how they got started dealing with that and now they're getting into doing other species and other products.
What hasn't worked?
These are all strictly just observations on a case-by-case basis. It's anecdotal. What hasn't worked? We've had issues with too large of a group all with competing interests or ideas. Here's an example of one. They had producers who wanted to do halal services. Another one wanted to focus on the beef side of the business. Others that wanted to focus on goats. Then they wanted to bring in pigs. Then they didn't know how to handle poultry with an inspection. They never got anywhere because they couldn't focus on anything. They just had so many different interests and ideas that that inhibited them.
There have been some examples where people would get operations lined up and they had these cooperatives of all these folks who said that they would get involved with the business, they would help put up capital, and then they do all this background work to get everything lined up, but then all of a sudden nobody has any money. So, going with those promises to build something that never materialized.
Some of them have just tried to do too much too fast. They wanted to make every product under the sun, every type of service available; they wanted to do ritual slaughter, they wanted to do ready-to-eat products, all of this by buying an existing facility that obviously couldn't handle any of that. And then they didn't have the resources to retro-fit that plant. That was a challenge for them.
Some of these folks, I'll just call them food reformers. They go into this and they have this mindset that the government is out to get them, they're anti-USDA from the beginning. That's never going to work for them. They just didn't want to deal with it, they didn't want to accept that there were rules that they had to follow. That did not work well for that plant.
Probably not the case in many other places in the country, but they tried to already enter a saturated market. They just had this thought that, "Here was a plant for sale." or "We're 10 producers wanting to market something." But they didn't take into account that they're going to have to get other livestock in too. They didn't have the option of getting those things taken care of.
If the market is saturated and there is a plant operating, there may simply not be enough market share, whether it be the customers you have coming in to sell products or getting enough livestock in yourself. We've had issues with this and this brings in some legal matters. But some plants who are operating under USDA, they're expected to match prices of area custom-exempt plants. When you try to talk to the producer and tell him the difference here, well they obviously kept going back to the cheaper guy. They wanted to do this from a quality standpoint and all that good fluff so they can sell it on certain menus but they almost always ended up going back to the custom plant. Now, whether or not they were selling their product legally, I don't know, but that did divert business away from a USDA plant.
They didn't have enough livestock to supply them. Another plant was built and they had very seasonal swings, and they weren't going to do game harvesting. Everywhere you go in Pennsylvania, almost every small plant will close down and process deer for a couple months. Well these folks didn't want to do that. It turns out in winter they couldn't find all the livestock they needed anyway so they had no operating capital. Simply they didn't do any market research. It was a very "I will build it, they will come" mentality. That simply did not work for that.
In some cases, the plant had been built, at least the facility, and they totally underestimated the expenses for equipment. One plant budgeted $5000 for a new smokehouse, which for them was not nearly enough for the type of smokehouse that they wanted to do. They should have been up in the $50,000-60,000 range. And then, they weren't able to produce those products which totally messed up their business plan.
We've had some that have had problems with zoning. They underestimated all of their water/sewer costs. They had all of this stuff planned but then realized that tapping into all that was going to be cost prohibitive to them. They didn't get that business going at least in the location that they wanted to. That delayed progress on their plant. They underestimated some transportation costs. This is for one that was dealing with slaughter only and taking it to an existing cut and wrap facility. They failed to take into account the need for buying a truck and running that truck back and forth. They didn't build that into their pricing system and that did not help them.
I call them non-cooperative producers. Sometimes we have issues with producers who do not come pick up their meat. Or we have producers that show up late and don't bring what they say they're going to bring and this is something you can't really plan for. But they've had to pay for extended inspection hours because they didn't have that communicated to their customers. And then they also just had to basically eat some product. Now they were operating the USDA plant, this happened to be something they produced on a custom-exempt day, but they were just stuck eating that whole processing cost. It was custom-exempt meat and then they couldn't do anything with it. So they lose money both dealing with the non-cooperative producers.
I'm just simply going to call it a cowboy mindset. They're going to go in there, they're going to take charge, they know exactly what's going on and they can do the job better than anybody else, which usually they can't. Being a little too gung-ho or over-zealous simply hasn't helped. And I don't understand how people think, but that just seems it was kind of a command and conquer deal.
They did not understand (this is an example from multiple) the time commitment. Running a small plant with a small staff and making it a family business is simply huge. Whether it be marketing or processing or anything like that, it's not going to be a 9-5 job. There's just a lot more and then they get totally wrung out. They didn't have any experience with it and they didn't understand how much time it was going to take them.
It's always a challenge to find qualified labor. Yes, we have students who know how to cut meat, but they're not going to work for a local slaughterhouse when they can make twice as much money doing something else. We have had, in order to find qualified labor, I know of some processors who are doing a sort of labor exchange with a penitentiary in the area and dealing with things like that. But they're unable to find qualified cutters, slaughtermen, processors who know how to do the work. They're out there, but they can be a challenge to find. They couldn't really go anywhere with their business because they didn't have the right people involved.
What saturates all of this is that they've had no industry experience at all. The balances, the timing, making these ends meet, and understanding the time commitments, almost always comes from experience. Having at least one or two people involved with businesses is very important.
What has worked?
What has worked, observationally, dealing with new start-ups in the region is expanding an existing business. For example, out of their own retail store. Or they added processing. Some of them operate their own regional butcher shops. But then they wanted to make some other products so then they got into processing. All of that work goes back and forth.
Another example would be one plant family who went ahead and bought another existing plant. They go back and forth like that and it simply was an expansion off an already existing successful business. Nearly all of the successful operations, whether it be new or something like that, have been multigenerational. I don't know what it is, but it's something to do with families in the meat business being able then to make it work. I think it's just a matter of understanding the time commitments and balancing acts that it takes.
The ones that I've seen and worked with have been very methodical in planning everything. They've been very well managed, they're going point by point, they're addressing all of the different thoughts and concepts that they need to take in. By the time all of it comes together, they've done all of their research and did it in a very professional way.
Some of the plants that have been able to survive are those that get creative. They understand how to fill gaps with drop values, by-product use and other contracts. They're able to find producers who are capable of bringing in 50 head a year, for example. That makes their business run more efficiently because they know that they can do all 50 cattle the same way. Another one about those contract relationships would be a cooperative I'm working with now who, they had the cattle; they didn't necessarily want to buy a slaughter plant. But what they can do is they can provide a small plant with 100 head a year, get it cut the way they wanted and then they can have their own processing plant built separately and then not deal with slaughter. They know how to deal with all these other products and being able to pick up on some of these other values other than just the meat product.
They take into consideration and they budget for this. They budget for dealing with regulations. They understand that they're going to have to go through that training, deal with these other issues, and they've taken all of that stuff into account ahead of time. It doesn't come in to some sort of shock or frustration when they have to then figure out how to pay for some of these other things. They simply just recognize that complying with regulations is simply a cost of doing business.
Of course, they've done thorough market investigation and explored all of their options in the area. I kind of talked about two different business models to where‚ it's funny, I have two plants in this state and they're about five miles from each other. They're both very small plants. One guy, he likes to do only highly specialized orders of dealing with someone who is going to bring in two goats, one sheep, and a cow and then they've got to do it their way, and then they've got to do it somebody else's way. That's what they do. But then the small plant just up the road is like, "Alright, I've got six farmers. They're going to bring me 50 head a year. That makes my job easier as I operate." It's just interesting how it got almost two different models of how they're dealing with customers. But both of them have been successful for them.
Slow but steady expansion has worked out well. I kind of alluded to that in the beginning of the guys who went from custom-exempt to USDA. They started with just pork slaughter and they moved their way up slowly. They've always had people in there who do have some experience with the meat industry. That's just a common characteristic for all of them.
Lauren: Great, thank you so much, Chris. That was really interesting. Do folks have questions specifically for Chris about what he's talked about? There's a clarification here that came up in the chat box: What is the drop value? Arion answered that, the drop value of the hide and offal.
Another longer comment came in from John saying there's a need for a lot of this information to create a business plan. And if you're going to start from scratch, you shouldn't have to go reinvent the business model wheel, but find the tools. Where are the business plans from those who have succeeded? Where is the information on these different kinds of costs?
I will say that NMPAN tries to answer this question with our business planning guide for small meat processors by giving folks an example of a plan of a successfully expanded business, a successful business plan and show the different parts of it. But one of the things we heard from a lot of different business plan advisors when we got started with that project was, "You have to be really careful giving people a framework because you have to make sure it's just a framework." You really have to adjust it to your own business. You can give categories but they really have to go out and ground truth their own dollar amount. Keith or Chris, do you want to speak to that?
Keith: I totally agree with that. Although, you've got to keep in mind, everybody, that this is my business so how I put braces in my kids' mouths is by doing business plans for individual processors. But I can concur with that. I think there's wonderful resources out there that Iowa State has put together and this group that we're talking about here has put together, here are good benchmark resources for somebody that wanted to take a look at this.
Chris: There comes a point from the ones that I've dealt with that they had everything spelled out in almost too much detail and they didn't have contingency plans for things. As they plan and go through, if something goes wrong, what do you do with this? Say you get something that's adulterated, how are you going to cope with that? Those are some alternatives that people need to think about. If Murphy's Law were to happen, what are you going to do?
Lauren: Right. Those might be things that you have in a plan, it may not necessarily be a business plan. That's a good question: how much of the "what could go wrong" pieces do you put in a business plan? You do have to explain some of that to people who might be investing in your plan and in your project. Any other questions? We've got these folks now for a couple more minutes so it would be great to pry any more information out of them that we can.
Arion: I think there's a good point that Chris made about the contingencies and all the bazillion things that come up from personnel issues to this piece of equipment breaks down and it sort of seems like everything always happens all at once. That's one of those things where having some folks with experience and who have weathered the storm before is really important. Either you get really lucky or you somebody with some real experience to go in there instead of trying to take on the world all at once, as Keith mentioned. For the amount of money you could lose on a meat plant learning about it, you could afford an Ivy League education. It depends where you want to get your educational dollars.
Lauren: Do you get a nice certificate at the end?
Arion: I think you just get a foreclosure notice.
Lauren: Keith, after hearing Chris' presentation, anything come to mind for you?
Keith: Not really. It is difficult to try to paint everything with the same paintbrush. There are a lot of individual situations that are unique. The last thing I want to do is to discourage somebody from trying. But if they're going to try, make sure that they're intelligent about it. My experience has been that oftentimes producers get involved in the emotion of it rather than the business. Emotion can sometimes lead you down too far to a point where it does wreck you financially. We don't want that to happen. We want to make sure that you think it through very clearly, but certainly don't want to discourage anybody. This is an interesting wonderful business but it needs to be managed correctly.
Lauren: That is a great way to round out this webinar. I really want to thank Chris and Keith for their excellent presentations and really thought-provoking perspectives.