Wilson, Annie

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A Business Newsletter for AgricultureAg Decision Maker is compiled by:Don Hofstrand, ISU Extension farmmanagement specialist, 641-423-0844,dhof@iastate.eduVol. 6, No. 4 February 2002continued on page 2Handbook UpdatesFor those of you subscribing tothe Ag Decision Maker Hand-book, the following updates areincluded.Historic Cash Corn andSoybean Prices—File A2-11(2 pages)2002 Iowa Farm CustomRate Survey—File A3-10 (4pages)Historic Hog and LambPrices—File B2-10 (2 pages)Historic Cattle Prices—File B2-12 (2 pages)Please add these files to yourhandbook and remove the out-of-date material.Romance vs. reality: Hard lessons learned in grass-fedbeef marketing cooperative—Part oneby Annie Wilson, member and former business manager, Tallgrass Prairie Producers Co-op,Rural Papers Newsletter, Kansas Rural Center, October 2001Editor’s Note: Tallgrass Prairie Producers Co-op operated from 1995 to2000, raising and marketing grass-fed beef from ten Kansas ranches. Itceased active operation in 2000. Below is the story of why and how.While the cluster continues to explore ways to work together, formerbusiness manager Annie Wilson offers the following as their lessonslearned in the hopes that others will benefit from what they’ve learned.The purpose of this article is not to discourage other producersfrom niche marketing, but to share our experiences in our fiveyears of marketing grass-fed beef. The variables in any businesseffort are so endless that we cannot conclusively pronounce what will orwon’t work for others. Times change and undoubtedly some of theproduction and marketing reali-ties we faced are different now. Anew and different formula maywork today. We only know whathappened to us, and will try tocommunicate our perspectivehere.First we will give a generaloverview of our history, followedby what we see as the criticalelements of success, (some ofwhich we unfortunately lacked).Business historyTallgrass Beef is a product pro-duced by ten ranch families in amarketing cooperative calledTallgrass Prairie Producers Co-op.Our original mission was “toproduce and market meat prod-ucts from livestock raised in a wayto maximize conservation ofnatural resources and minimizeuse of fossil fuels and farm chemi-cals.” We decided to raise cattlethat spent their entire lives on thepasture, never in the feedlot,avoiding the grain and feedlotproduction model and producing aunique lean, grass-fed beef prod-uct raised without hormones orsub-therapeutic antibiotics.To do this, we organized ourselvesinto a formal marketing coopera-tive in 1995 to develop our prod-uct, market, and distributionstrategies. We received somegrant assistance. But all ouroperating capital was generatedFebruary 2002Inside . . .Final regulations on incomeaveraging for farmers .... Page 4Are we courtingdisaster? ........................... Page 5Handling gains and losses oncooperative stock ............ Page 52                     February 2002Romance vs. reality: Hard lessons learned in grass-fed beef marketing cooperative, continued from page 1from investment in co-op stock by the ten ranchfamilies.The organizational structure was member-based,with someone from each ranch serving either indi-vidually or as husband-wife teams on our Board ofDirectors which met monthly. All ranches also had toserve on either our Marketing or Production Com-mittees which also met monthly, and our officers hadan additional monthly meeting as our ExecutiveCommittee.We had one non-member employee who providedpart-time marketing and operations managementservices; and one member who served as businessmanager, taking orders, doing billing, handlingcommunications; and another member who workedpart-time at our storage unit assembling large ordersfor out-of-state shipment. All other jobs were per-formed by co-op members on a volunteer basis.Early on we did nutritional testing on our grass-fedbeef, discovering that it had an extraordinary nutri-tional profile, even better than we had thought, witha very low fat content and high nutrient content. Wewent through the onerous process of obtaining USDAapproval for Nutrition Facts labels for all our prod-ucts, as well as unique special label claims includingnatural, free range, grassfed, (to our knowledge, thefirst beef product in the nation to obtain this desig-nation), raised without hormones, etc. We main-tained intricate documentation on every animalprocessed, and recorded carcass data for all beefprocessed. (The advantages of CLA and Omega-3fatty acids were an area we had only begun toexplore toward the end of our production.)Market successesOne of our great market successes was the effective-ness with which our members could personallymarket our beef. We attended promotions and tradeshows in which our passionate, western-clad ranch-ers were popular attractions and generated greatconsumer enthusiasm. People loved to meet and visitwith the actual producers. The only problem was thiswas time-consuming and expensive.At first we assembled our own promotional material,but later hired professional graphic designers whoproduced award-winning labels and promotionalmaterials. We were fortunate to receive attentionfrom local and national media, and won Best of Showawards in our state food exhibition. It is our strongopinion that we had one of the most healthy, deli-cious and environmentally sustainable food productsever offered to the American consumer.At our peak, we were marketing our beef in 23 statesthrough three large natural food distributors. Fromthe beginning, we also direct marketed some beef inour local area. However, our local markets were solow in volume and high cost in service that they werenever profitable. The markets that worked besteconomically were the large distributor markets.Catch-22 or barriersBarriers we encountered were numerous. Many wewere able to overcome through hard work anddetermination. Others had become insurmountableby the time we perceived them clearly, and we foundourselves caught in a vicious cycle.Our volume was too low to obtain processing of ourproduct at an economically viable, competitive rate(our costs were triple those of other high volumesuppliers). Yet even managing the volume of orderswe had was exhausting our members and employees.We lacked adequate supply to access the markets weneeded to reach the volume we needed to obtainaffordable processing and transportation. Addition-ally, we did not have the capital to acquire profes-sional management to guide our company in thesedirections.Despite painstaking monthly analysis of our grossmargin and exploring every cost-cutting measure wecould think of, including heroic subsidization of ourbusiness with free labor from our members, we wereconsistently losing equity. We could not see anyimprovement in sight within the economic structurein which we were trapped. At that point, we used ournow considerable experience to produce a thoroughbusiness plan.Using this plan, we looked for outside help includingprivate investors, financial institutions, governmentagencies, foundations, and other rancher alliances.However, we could not find the help we needed.Ultimately, we lacked the capital to escape ourquandary. Our members, who had already madesignificant financial investments in the co-op, facedthe prospect of mortgaging their family ranches toback what we knew was a worthy but risky enter-prise, to compete in a cut-throat and volatile com-mercial arena.In 2000, after five years of intense struggle, we madethe painful decision to terminate our sales and stemour loss of equity, so that we would be able to pay allof our co-op’s bills and would not cause financialinjury to others. In hindsight, we realize that weshould have initially leveraged our investments andborrowed heavily from a financial institution, basedon a sound business plan developed by professionalscontinued on page 33           February 2002that would have established a larger, viable scale,professionally managed operation.Instead we tried to avoid co-op debt and do it allourselves, learning as we went. In retrospect, we alsolearned that even larger specialty meat companieswe had thought were very successful also are strug-gling. The phenomena of concentration both withinthe processing industry and retail arena is so intensethat the profit margins are slim for everyone. Thereare fewer and fewer processors available for mid-sizecompanies. The expense and burden of service andpromotion are almost entirely passed on to thesupplier by retailers. We wonder now if it would evenbe possible to survive as a “mid-size” company, withvolume of around 30,000 head a year, which waswhat we were considering as our expansion levelgoal, an astronomical increase from our peak of 400head a year.Our co-op is made up of committed, active members.We feel the co-op model is an excellent one, except aprofessional manager should run the business andnot the Board of Directors. We attribute our remark-able level of progress on so little capital and withoutprofessional guidance to the sheer commitment of ourmember families.As we see itThe fundamentals of success profitability depends onthree elements:• Professional management of operations andmarketing to establish and manage legal, safeoperations, to penetrate the market and tonavigate the complex food distribution system.This is essential for the business to succeed andto allow producers the time to do what theyknow how to do, which is to produce highquality products.• A successful business needs access to volumemarkets to reach breakeven (when gross profiton sales exceeds overheads). A business may beable to break the paradigm of huge scaleproduction and survive on lower volume, but inso doing it must practice honest accounting forpersonal time and must reach a volume thatcovers these overheads.• Cost-effective operations are necessary torealistically price the product and reach thevolume needed to be profitable.The two keys to acquiring the above three elementsare a critical mass of supply and capital.Supply• An adequate supply is critical to access cost-efficient processing. The smaller the volume,the more expensive the processing. Only highvolume, highly-efficient processing operationscan turn commodity into a safe product andkeep direct costs within reason. Unless abusiness can offer a significant supply on aregular basis, these operations will not botherwith it.• The ability to access volume markets dependson an adequate supply. Buyers won’t even talkto a business unless it can consistently delivera quality product with no interruptions insupply.• On a related note: adequate supply is aprerequisite to offering fresh product, whichhas significant market advantages over frozenbeef. We found consumers really wanted freshbeef, and that frozen product severely limitedour marketability, except in very low volume,tiny outlets. But since a fresh product has sucha short shelf life, it requires a steady,consistent volume of product turnover.Capital• Adequate capital is necessary to acquireexpertise and information to develop a feasiblebusiness plan, to acquire competentmanagement to run the business, and to cashflow the operation. The basic formula summaryfor economic sustainability: supply + capital =Lower-cost processing + volume markets +professional management.Next month—further lessons learned by TallgrassPrairie Producers Coop.Romance vs. reality: Hard lessons learned in grass-fed beef marketing cooperative, continued from page 2

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Romance vs. reality: Hard lessons learned in grass-fed beef marketing cooperative—Part one

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Romance vs. reality: Hard lessons learned in grass-fed beef marketing cooperative—Part one

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