Updated Sept. 2013

A cautionary tale, this is a three part story about one slaughter & processing plant, first conceived in 1999, opened in 2001, failed & reborn twice, and closed for good in August 2008. The equipment was auctioned off on September 18, 2008. But rumor has it the plant may reopen again. As of September 2013, we have learned that this plant is permanently closed.  There is no meat processing equipment left in the plant, and it is now just an empty building, owned by the city.  

The plant’s three lives – so far:

• Dakota Halal Processing Company: vertically integrated, niche product
• Central Dakota Beef & Sheyenne Valley: source verified for local market plus custom processing
• North Dakota Branded Beef & Pack: dedicated processing for independent retail outlet (note: data are limited for this incarnation)

“It wasn’t for lack of trying.” — Paul Kallenbach

 

Basic information

Capacity per week: 5000-10,000 head/year (but mostly never exceeded 5000)
Hours/day of operation: 7am-5pm, 5 days/week (slaughter 2-3 d/wk)
Weeks/year: 52
Species: cattle, sheep, goats, bison; NDBBP added pigs
Services: DHPC: slaughter, processing, & limited value-added, no custom; CDB added custom slaughter & processing
Square feet: 20,000 sf
#/type of employees: 20-30 at its peak, FT & PT
Annual sales revenues: should have been ~ $2.5 million (40 head/wk), but never exceeded $1 million.
Price of services: custom pricing was competitive with other processors, plus freight
Operational costs: $50,000/month (not including livestock)
Retail on-site: small meat case, no meat counter
Wholesale: yes
Inspection: USDA
Certified organic: yes
Certification agency: International Certification Services, Madina, ND
Custom work: under Central Dakota Beef
Source verification on label: Yes, source & age (and for in-house cattle, also labeled as grain-fed, no hormones for last 120 days, and no animal byproducts)

 

The market opportunity

Two opportunities found each other: ND ranchers were tired of selling calves to, and buying meat from, other states. They wanted to finish, process, and sell their own cattle. At the same time, a local entrepreneur saw potential in a niche market: halal meats, the Muslim equivalent of kosher. He needed a supply of cattle, and the ranchers needed a plant and marketer.

The specific processing problem

There was no USDA-inspected slaughter and processing plant in ND that did strict halal slaughter or that was large enough to handle the size of business envisioned by the ranchers and this entrepreneur, upwards of 5000 head/year.

The people/organizations involved

Many people and organizations were involved, but the primary ones were:

• Central Dakota Cattle Association, Central Dakota Beef
• North Dakota State University Extension: Karl Hoppe, Beef Specialist
• Adnan Aldayel, the entrepreneur
• City of Harvey Economic Development Corporation

Basic history/development

North Dakota ranchers have tried many times to get more for their cattle than selling calves at commodity prices. In the mid-1990s, a rancher-led effort to establish a vertically integrated premium beef company – Northern Plains Premium Beef – never materialized, mostly due to lack of capital. (See http://www.umanitoba.ca/afs/agric_economics/ardi/nppb.html for the story.)

Some ranchers who had invested in that project decided to try again. In 1999, members of the Central Dakota Cattle Association (a cooperative of 67 ranchers and farmers, founded in 1991 as a cattle financing operation) decided to process and sell their own beef, and went to Karl Hoppe, NDSU Extension Beef Specialist, for assistance. At the same time, Adnan Aldayel, a Saudi Arabia native who married into a ND ranching family, asked Hoppe to review a business plan for a halal meat processing plant. Hoppe introduced him to CDCA, and together they created the Dakota Halal Processing Company, to sell source-verified halal meat to Muslim ethnic markets.

With Hoppe’s help, they got a North Dakota Agricultural Products Utilization Commission (APUC) grant to plan and start the company. CDCA raised $560,000 from its members and others and created Central Dakota Beef LLC (CDB) as the investment vehicle; the board of directors of CDCA became the board of CDB. CDB then invested the funds in DHPC and became majority (60%) owner. CDB – that is, its rancher-owners – was to be the sole source of slaughter cattle. The company completed its equity drive on June 1, 2000.

The plant, with 5000 head/yr capacity, was built in the city of Harvey by the Harvey Economic Development Corporation, which financed it – plus sewer and water for the surrounding industrial park – with a USDA guaranteed loan of $3-4 million. The EDC then owned the building.

Production began in March 2001, ramping up in July. Yet it operated at close to capacity for only 2 to 3 weeks. Then sales began to fall through. DHPC had secured handshake agreements with potential customers, but when the product was ready, those customers backed out, saying the price was too high. With no written contracts, DHPC was stuck. Contracts are rare in the meat business, says Karl. “Millions of beef cattle are shipped, delivered, and sold every year, almost all just on a phone call. It’s amazing.” In addition, the plant couldn’t afford $100,000 to bring a USDA grader in from out of state (ND had none), and many potential customers demanded graded meat.

They also realized they’d overestimated demand, not in the number of customers but portion size: Muslims tended to eat smaller portions than the average non-Muslim American (the GM realized this when 4 Muslim plant employees shared one ribeye among themselves). It got worse: a wholesale customer only paid for one of three semi-loads of meat – an $80,000 order – after it went bad in his own warehouses. He didn’t blame DHPC, but he never paid his bill.

DHPC had essentially failed when September 11 sealed its fate. Markets crashed, the US went to war with Muslims, and it was suddenly a terrible time to be in the halal meat business in the US. Even with more than $500,000 in government grants, and non-halal meat sales increasing, the debt load was too much. In February 2002, less than a year after it opened, CDB parted ways with Adnan and found new management. They continued to operate DHPC until they realized the hole was too deep; they filed for bankruptcy and dissolved. Each CDB investor lost $10-20,000. “We should have closed the plant then,” says Paul Kallenbach, a rancher on the CDCA & CDB boards.

In December 2002, Central Dakota Beef expanded its scope to develop an integrated source verified beef production system. After another equity drive, they reopened the plant for both in-house and custom processing. In November 2003, they bought a home delivery business and began direct sales of boxed meat under the label “Sheyenne Valley.” They started processing their own animals – from CDB members as before – at the Harvey plant a year later.

The Sheyenne Valley brand had five selling points: livestock were born and raised in the Dakotas, grain-finished, with no animal byproducts, given no hormone implants, and raised per national Beef Quality Assurance guidelines.

Sheyenne Valley bought the cattle and sold the meat, so that the plant’s operational and inventory costs were transparent (unlike for DHPC, for which cattle were purchase equity).

They found distributors and marketers to handle their meat but struggled with price and volume. Distributors needed enough meat to supply their large customer base, and they were very price sensitive, often paying less than what it cost CDB to produce it. In addition, CDB couldn’t rely on distributors for marketing and needed to send CDB sales people on the road too. “You have to develop your market before they take you on,” says Paul.

And despite the shiny marketing plan they commissioned from a marketing company, local sales didn’t work out very well. In North Dakota, says Paul, people have their own freezer beef, and they weren’t willing to pay a premium for the Sheyenne Beef, especially in hard economic times.

Plus, the plant still struggled with operations: “so much inexperience or incompetence,” says Paul. “You wouldn’t believe it.” Carcasses were hung too long. A cooler went out over a weekend and for some reason wasn’t checked, and carcasses rotted. Orders weren’t ready on time and/or weren’t packaged correctly.

For several years, CDB/SV processed 40 head of their own, plus 20 custom, per week. But it wasn’t enough – at 150/week, they might have survived. As it was, costs were too high, they weren’t selling enough meat, they could never move enough trim, too many customers never paid up, and so on. By mid-2006, despite a line of credit (backed by letters of credit/certificates of deposit from CDB owners) and large cash infusions from several board members, it ran out of money, and a few weeks of production problems finally closed the plant’s doors.

CDB had been doing custom processing for a company called North Dakota Branded Beef, with a retail store in Bismarck. When the plant closed, NDBB had no other options. So they took over the business. In July 2006, a deal was made to keep the plant open. CDB signed over its assets to the bank, and the newly-formed North Dakota Branded Beef and Pack agreed to take over the lease from the EDC and buy the equipment from CDB. (This kept safe the $90K in letters of credit/certificates of deposit from CDB owners and the $140K in certificates of deposit from the City of Harvey given to the bank for CDB to get a line of equity and borrow against the building. As long as rent was still coming in, the bank wouldn’t foreclose. Now that the plant’s closed again, if it goes into receivership, the bank will take that $230K, and USDA will own the building.)

NDBBP had similar problems: high costs, low production volume, and personnel problems. Yet for a while they made it work. As recently as early 2008, they were planning kosher processing for a large buyer.

But in July, the plant closed again. NDBBP said it was too much to run a farm, a retail store, AND a meat processing plant. They also had the same dilemma as the previous operators: too big for local and too small for national.

The plant now sits vacant. The equipment was auctioned off on September 18, 2008. The Central Dakota Cattle Association was dissolved in 2007.

Funding sources

DHPC and CDB were funded by private investment (CDCA members, Adnan Aldayel, and others), along with many government grants and loans, and a line of credit from the local bank. (North Dakota has many resources to get businesses going, says Karl, but not as many to help turn an unprofitable business around.) Grant sources included:

• ND Agricultural Products Utilization Commission (grant for feasibility study)
• Regional Development Council grants (two) for business development
• Bank of North Dakota (low interest loans to help people invest in CDB)
• Benson County Jobs Development Authority

The plant itself was built and paid for by the Harvey Economic Development Corporation, which got a guaranteed loan from USDA for 85% of the $3-4 million cost. While this freed up owner equity for operating expenses, it also meant these companies couldn’t raise money by borrowing against the building. A higher up front equity cost – for the building, equipment, cash reserves, and cattle – could have extended the life of the business. Instead, they had a $14,000 monthly lease payment. “The shareholders should have owned it all,” Karl says. “They got in at low cost, but in the end they couldn’t afford it.”

After three months of $50K/mo. fixed expenses, the cost of inventory ($100K/week in unsold meat/accounts billable), and no sales revenue coming in, they had to borrow operating capital.

Business plan

Adnan Aldayel wrote the initial business plan. A Saudi oil company retiree, formerly in charge of 2000 people, and with both an MBA and a PhD in finance, he wrote what seemed to be a solid plan. However, the plan didn’t allow for enough start-up cash, to deal with the many unexpected expenses that arose during start-up and after. “We had 10% of the capital we needed,” Paul says. The plan also didn’t address the grading problem: most customers demanded graded beef, but there wasn’t a USDA grader in North Dakota, and it would have cost DHPC $100,000 to bring one in.

The business plan originally included a wide range of value-added products, and the plant was built with a huge kitchen (which had to be modified, per USDA requirements, at considerable cost). However, the kitchen was never fully utilized, as value added wasn’t a priority for the original manager, an expert butcher who made some sausage but had no time for the rest. They made excellent jerky but never had a large enough supply to interest a large buyer. Eventually, they made roast beef for a local sandwich maker delivering to grocery stores, but it was never a large revenue source.

Deciphering regulations and complying

All the permitting and regulations for building and then operating the plant, from city permits for construction to USDA inspection, were handled smoothly by Brad Lodge, from Iowa, who served as the plant manager during planning and start-up. He had previously built the North American Bison Cooperative’s facility.

The only difficulty was getting the product labels approved. They had designed extra labels for different products, and both the artwork and the wording had to be approved by FSIS for each. Even after they hired an expediter, it took a long time.

Plant design

The plant was designed by Brad Lodge (see above).

Big Glitches and how they were solved

There were many: “Just about every nightmare,” Karl says.

As described above, the biggest problem was that costs far outran revenue.

Start-up delays: The plant was to open in August 2002, but excess rain delayed the start of construction until July. The USDA loan guarantee package took longer than expected. The City of Harvey may also have been uneasy with ritual halal slaughter, which may have slowed down the process.

No “packer’s margin”: for large plants, selling the offal, including the hides, often means the difference between profit and loss. This plant never found a market for its offal, in part because the low volume didn’t justify the cost to ship it. They considered composting but never really researched it. Even if they had paid a landfill to take the offal but sold the hides, they might have made a profit (though not all the offal could be landfilled). Instead, they let a rendering company have the hides in exchange for picking up the offal, one hide for every two barrels, and later an additional $10 per barrel. This may have cost them ~$250/head, which meant they could never be competitive.

Price: They struggled to charge even $1/lb extra for their beef’s niche qualities (halal and/or local and hormone-free) beef, but they found the marketplace very resistant. Relatedly, DHPC followed the rules of halal processing to the letter and advertised as such, but they believed they were unfairly undercut by less scrupulous halal meat companies who claimed to be pure but cut corners and charged less.

Distribution: distributors wouldn’t pick them up without a guarantee of enough regular volume to supply the distributors’ customers. Jockeying for shelf space was a huge challenge.

Personnel: All three entities that operated this plant had personnel problems, from incompetent/overwhelmed managers to unmotivated sales people to outright deception and theft of meat and money. “When you’re an unknown entity,” asks Karl, “how do you find a good person to manage your business?” For example, one manager didn’t pay workman’s comp & withholding, because he knew the board would eventually have to pay it, and instead applied that money to fixed costs; the board didn’t know until it was too late. One of the final blows under CDB management was a 2000 lb combo pack shipment that was rotten at the center when delivered to the customer. It was likely shipped before it was cool; a little dry ice in the shipment could have prevented the loss, but precautions weren’t taken.

They also had floor-level problems with the quality of cutting and packaging, which damaged their reputation with potential customers.

Not enough oversight: the board of directors looked at the financials every month, but a one month delay is too long to catch a problem. By the time a board of investor-owners realizes there’s a problem and tries to head it off, it’s too late. Especially if the manager is either overwhelmed or untrustworthy or both. For a packing plant of this size, with this much money involved, the board needed to check the books weekly at least.

No retail: Many local folks visited the plant but couldn’t easily buy something. Sales volumes would likely have been low, but it could have helped with brand recognition and marketing

Lost tools: They bought but never used the accounting/pricing/inventory management software. On the first day, the through chute wasn’t working correctly, so they didn’t get the software going, and then once they were behind, with rolling inventory they couldn’t track, they never caught up. “By the time you knew where you were, you were dead in the water financially.”

Plant flaws: the plant was only designed for 5000 head/year; to do 10,000, they had to make expensive changes (shift from cradle kill to rail kill, add hydraulic lifts, a hide puller, etc.). Some equipment didn’t work very well. They bought a used roll-stock machine, but no one could fix it, so they eventually had to buy a new one. Also, USDA required costly modifications to the value-added kitchen, but it was never fully utilized.

The biggest glitch: they built a great processing facility without effective sales and marketing staff. “They thought they had it covered,” says Karl. “These sales & marketing people cost a lot of money, but without the right one, you’re dead in the water.” Really good sales people, he believes, can make much better money in other businesses, so they are hard to hire away.

Staff needed and how they were found/trained, what they cost

The plant required 10-20 staff, depending on business volume. GM made ~$40-50K/yr, and the rest ~$8-12/hr, with health care and paid vacations/holidays.

They advertised locally, hired inexperienced people, and the original manager trained them, which worked well. Their first hires were from the local community; after they quit (meatpacking is hard work), the next hires were from a little farther away. The last group came from a closed plant in MN.

But it was very hard to find and keep good staff in an area with 1% unemployment, especially as the ethanol industry began to boom. The plant had to settle for whomever they could get.

Financial sustainability plan

They thought sales revenues would cover costs. That never happened.

Markets accessed

DHPC shipped products to California, Seattle, Minneapolis and a wholesaler in Cedar Rapids, Iowa, who was the largest U.S. exporter of halal meat. However, the relationship with that wholesaler fell apart, perhaps due to competition.

Sheyenne Valley did direct sales around the state with a fleet of trucks with cooler boxes. They delivered to restaurants (both sit-down and fast-food), grocery stores, institutional trade, and distributors. They did custom processing for several natural and organic meat companies.

Current status

The plant is currently idle, the equipment auctioned off on Sept. 18, 2008. Paul has heard that a new meat company with sales contracts in Asian markets might buy it.

Processing capacity in the region is getting worse: small plants, both custom-exempt and state inspected, can’t make a go of it and are shutting their doors. Producers must travel 80-100 miles one-way and have to book 6 months out. Paul speculates that the shrinking US cattle herd, and a smaller influx of Canadian cattle, may be the reason; even the big plants are operating at reduced capacity. So why build a new plant?

A better approach?

After this difficult, expensive experience, Paul believes they never should have tried to do their own slaughtering. They should have first bought beef for value-added processing, to build market share. Then they could have started custom slaughtering at a larger plant, shipping needed cuts back to their own plant for further processing and selling the excess to a custom facility. If they had done all that before they slaughtered one animal themselves, “we would have had a graded product, market share, marketing experience, quality control, and no inventory to support or monitor,” he says, “and we wouldn’t have lost so much money.”