Why Alliances Fail

Big or small, alliances strumble because of basic business strategies. Find your niche, set your carcass targets and go for it. If it sounds too simple, it probably is. Just ask Chris Youngs, now the contract controller for what once was Rancher's Choice Cooperative, Sanford, CO.In 1994-95, a group of southern Colorado producers grabbed hold of an unusual, but doable, niche: kosher beef. The kosher

Big or small, alliances strumble because of basic business strategies. Find your niche, set your carcass targets and go for it. If it sounds too simple, it probably is. Just ask Chris Youngs, now the contract controller for what once was Rancher's Choice Cooperative, Sanford, CO.

In 1994-95, a group of southern Colorado producers grabbed hold of an unusual, but doable, niche: kosher beef. The kosher beef idea started when an Israeli ambassador visited Colorado and it just grew from there, says Youngs, Alamosa, CO.

After two years of planning, in 1996 a group of 105 ranchers, Youngs included, purchased a small, federally-inspected packing plant. Their plan was to be producer-owned and market their forage-fed cattle as kosher, natural and standard beef. Kosher, though, was the big brainchild. The business plan called for $1.2 million in start-up monies, which came from in-kind Rocky Mountain Farmer's Union money, grants, loans and producer memberships. Only $750,000 had been secured when the group voted to proceed.

In November 1996, Rancher's Choice beef rolled off the line at the Sanford plant. By then, Youngs explains, the group had put 11/43 down on the plant and had buyers for their fresh kosher beef in Denver, San Francisco, New York and Los Angeles.

"We were getting 50 percent more for our kosher beef and 20 percent more for natural over regular beef," Youngs says. "The kosher market was there."

However, the kosher market required special processing practices run by high-priced rabbis to certify beef was kosher.

The goal of Rancher's Choice was to market 100 head of beef and 100 head of lambs every week, with cattle from about 100 producers. That's the point at which the business plan claimed the group would be profitable. At peak, they reached 45 head of cattle a week.

The plan was in place and operating, and it seemed to be on the right track, Youngs says. However, seven months later the project came to a screeching halt.

Problems And More Problems - "Our biggest problem was that we didn't have a mean s.o.b. to watch all the pennies," Youngs recalls. "Even though our producers were like that, we all thought someone else was watching."

Although there was a manager, Youngs says the group needed more management and better financial accounting. "You can't run a business like a farm," he says.

For example, Youngs points to high costs for kosher processing that included hiring two rabbis and paying for their room and board, and weekend travel expenses. "That alone cost us $25,000-30,000 a month," he says. "We chased kosher too hard and didn't develop the natural beef quickly enough, so our product got old and we had to sell it cheap.

"We also had problems with the plant. It wasn't modern and every time we tried to push the system, we had problems," Youngs explains. "One day we had a rail pull out of the ceiling. And, we had a drip cooler that didn't get cold enough to handle higher volumes. We even ran out of water. It was just costly to bring the old plant up to speed."

But the crowning blow, and what shut the plant and Rancher's Choice down, was a fire in the kill floor area on May 27, 1997. Since then, the group has been in a reorganization mode and hopes to recapitalize and reopen sometime this summer.

Regardless of the problems, Youngs is optimistic and convinced kosher is a profitable niche market. But, he advises, "You've got to communicate with members. I think they'll forgive start-up mistakes if they always know what's going on."

For more information on Rancher's Choice, contact Chris Youngs at 719/589-4475.

The seeds to making an alliance functional and grow is to learn from others' mistakes. For example, Ernie Davis, agricultural economist at Texas A&M University, says to be successful you need:

* Commitment from producers

* Trusted leadership

* Financial strength to stay in the market for at least two years, and

* Enough volume to be able to capitalize on more than a single product.

"The attraction of alliances is getting a premium for your cattle," says Davis. "So, make sure you get your genetics where you have higher quality, premium cattle."

The Power Of Supply - "Supply is far more powerful than capitalization in alliances," says Jim Strain, who in the mid-80s joined Mel Potter and others to form the now defunct Better Beef Marketing (BBM). "If you can get your arms around enough supply, you can start doing things."

Strain says BBM's roadmap was fashioned after the successful cranberry cooperative started by Mel Potter's father. Their cooperative, like many today, included producing beef product from conception to consumer. Part of the plan was to align with a packer.

"We weren't interested in bricks and mortar," Strain says. "There was plenty of processing capacity around when we were doing this. Since we could get custom processing for about $18 a head at the time, we just wanted to strategically align ourselves with somebody."

After spending a year trying to persuade cattlemen to do business differently, BBM and Strain, who runs a yearling operation in southwest South Dakota, gave up.

"We were under the assumption that when we got the thing fully conceptualized and put together, we'd go back to the producers we'd originally contacted to join up," Strain recalls. "But, they didn't. So, we were left high and dry."

Strain is convinced the industry needs to become vertically integrated, but has advice to those leading the pack.

1. Identify and analyze what's wrong with your current marketing situation, then devise a plan with solutions.

2. Hire corporate-style professionals and give one guy the clout.

3. Keep cowboys out of management. "The only thing cattlemen should do is be on a board of directors," Strain advises. "No one can get the slightest advantage or it starts to come apart because of resentment."

As of the June 1, 1997, deadline, well-known Northern Plains Premium Beef (NPPB) alliance fell short of garnering the 250,000 share minimum ($100/share) required by it's equity offering.

The enthusiastic Mandan, ND, cooperative started with plans to build a packing plant somewhere in the Northern Great Plains to process 300,000 head of members' finished cattle annually. Beef from the venture would be sold to upscale retailers, including grocery chains and restaurants.

Even though the cooperative received $11 million in commitments from nearly 1,100 producers for 113,000 equity shares, it wasn't enough to meet the minimums of the security offering. So, plans have been on hold until recently.

They're now jump-starting the process and are again pursuing a new equity drive and looking to build a plant with a 140,000 head/year capacity. So, what went wrong with the NPPB venture?

Dean Meyer, first chairman of the board, says three things caused NPPB to come up short:

1. Last winter's severe weather. "It caused producers, especially in March and April, to spend money on feed rather than commit to more NPPB shares," Meyer says.

2. Making the commitment to support a value-added systems approach through a fully integrated, producer-owned cooperative was too big a step for producers to take at that time, he says.

3. Producers wanted to know where they were going to finish cattle and where the cattle would be processed. "Until we knew where the packing plant was going to be built, we didn't know where cattle were going to be fed," Meyer explains.

In the new equity drive, cost per share will be reduced from $100 to approximately $60, Meyer points out. That, along with specifics on where a new plant will be located, is pumping new life into the NPPB plan.

"There's still a lot of interest and we plan to move forward," Meyer says.

For more information on NPPB, call John Lee Njos, new CEO, at 701/663-1116.

The tail wagging the dog, is how Tom Hogan characterizes beef alliances. The operational efficiency and financial management consultant has no disagreement with the intent of alliances - to address the quality and consistency shortcomings of beef products and a weakening profitability situation for cattlemen.

But, Hogan sees alliances as akin to just another single trait selection fad, much like the rush in the 1970s that resulted in cows of inefficient frame size.

"The bottom line is that there is 10 times more money laying out there for producers through improved feed conversion than there ever will be with carcass premiums," Hogan believes. "The concept of concentrating on quality and consistency is great but it can't be our single focus. Marketing is just one part of a strategic plan. There's not enough money in it to disregard all the other factors in management."

Hogan says few cattle producers really have a grasp on their costs of production. Without that, it's easy for a producer to lose his shirt to rising production costs while chasing a marketing premium.

Hogan recommends that producers first find out the carcass quality of their cattle.

"Retain a set of cattle, run them through to the rail and see how they do," Hogan suggests. "Once you've figured out where you are and where you want to be, pencil out what it will cost you to get there. For instance, how much will it cost you to move from a low Choice Yield Grade 3 to a high Choice Yield Grade 2? Is it worth it?"

Hogan is convinced a well-informed producer can do just as well as an alliance in marketing cattle if there's a total business management approach in the operation.

"The key is to avoid discounts. If that means a rancher has to participate in an alliance to learn how to do it, then join one. But in chasing a premium, don't lose sight of all the other efficiencies. That premium won't cover what you lose," Hogan says.

"Whether marketing through an alliance or outside of one, you're still a price taker and the only way you can be profitable is for production costs to be lower than your receipts," Hogan says.