Livestock Producers Cooperative Association, Odessa, Washington
The Livestock Producers Cooperative Association (LPCA) is a multi-species meat processing plant in Odessa, Washington, located near the center of the state. It was formed primarily by cattle producers involved in the Cattle Producers of Washington (CPoW) but will process sheep, goats, pigs, and bison as well. They are a USDA-inspected slaughter and fabrication facility.
Plant during construction in 2013; Image Courtesy of Sun Tribune
Case Study Written April 2017
This case study is about a USDA-inspected slaughter and processing facility built and operated by a livestock producer cooperative in Washington state. The plant opened in 2013, closed temporarily in 2015, and is back in operation as of this writing but still faces big challenges to profitability and long-term viability.
Therefore, this is a story of a “work in progress.” We appreciate the willingness of project leaders to share their story, including several miscalculations made along the way, to help others avoid the same pitfalls. We will continue to monitor their progress, updating this case study as needed.
Capacity per week: 36 to 40 beeves per week. Not consistently at full capacity yet.
Hours/day of operation: M-F, 9a-5p, limited hours on Fridays, kill 2 to 3 days a week. Processing 5 days a week. USDA on site up to 5 days a week.
Weeks/year: 50 weeks a year. Closed two weeks over Christmas/New Years.
Species: beef, hogs, sheep, goats. Can also do beefalo.
Special Services: deboning, grinding, 1 lb. chubs, and aging up to 14 days (they are considering charging for extra aging time).
Square feet: 7,000 sf on 5 acres, only using 3 acres of the land. Lease-to-own terms from Odessa public development authority; at the end of 20 years, LPCA will own the land.
#/type of employees: 8-12 total, mostly full-time jobs. Cleaning jobs may be part-time.
Annual sales revenues: latest fiscal year (2015): $356,600 gross revenue, trending up (includes a significant pre-payment from one producer to help plant stay afloat).
Price of services: beef- $100, hogs- $65, sheep/goats- $115 (includes cut & wrap fees also); .75/lb. cut & wrap for other species. New prices coming out in April 2017.
Operational costs: did not turn a profit in 2015; operating costs exceeded gross revenue in part due to two month shut-down to reboot operations (see below).
Retail on-site: no retail sales on site, though there is some local interest. There is a spot in the lobby where they could put a reach-in freezer, but that would require staff to manage sales and track whose meat it is, since all the meat is owned by individual producers. However, LPCA does advertise locally about the availability of buying boxed meat directly from producers and picking those up at the plant.
Wholesale Services: occasionally they transport a carcass or transport boxes of meat to a customer. A couple of producers are putting together their own, informal co-op arrangement with one person to provide logistical/wholesale support.
Inspection: USDA-inspected and custom-exempt. Procedures are the same, but custom-exempt slaughter can be scheduled for times when an USDA inspector is not on site. Discontinuing custom-exempt work in April 2017.
Certified organic or other certifications: not yet, because producers haven’t asked for it.
Source verification on label: Yes. They can do generic or custom-branded labels and handle label approvals for the producer.
History & Development:
In the mid 2000s, the Cattle Producers of Washington (CPoW), a non-profit membership organization of cattle ranchers, developed a slaughterhouse committee to look at the issue of meat processing in the eastern part of Washington state. The group, frustrated by low cattle prices and the feeling of being largely price takers instead of price makers, wanted to market their own meat independently. They observed increasing demand for local meat at farmers’ markets, farm to table restaurants, and other similar market channels on the more densely populated west side of the state, and believed consumers in their own region would also desire local meat.
Processing was a concern: there were no USDA-inspected plants willing to process for independent producers in northeast Washington, other than one plant (in Moses Lake, an hour from Odessa) that was already at capacity. Producers had to schedule far in advance with plants located hours away or be limited to selling custom halves and wholes (locker animals). CPoW members assumed there would be many more market opportunities, such as restaurants and retail sales, if they had more USDA inspected processing in their own region. They decided to build, own, and operate their own USDA-inspected plant that would be known for attention to traceability, quality processing, and enhanced food safety.
The processing committee brought the idea to the Lincoln County Economic Development Commission, which identified a loan program that appeared to be a good match. The Odessa Public Development Authority offered a plant location on one of their two properties. Committee members connected with the Whitworth University MBA program to assist in writing a business plan, which they needed in just 30 days in order to meet the loan deadline. The loan was financed through Washington’s Community Economic Revitalization Board (CERB). Based on CPoW’s business plan, CERB offered a $1.2 million loan at 0% interest and 5 years of deferred payments.
The original business plan called for a modest 5,400 square feet building with much of the cooling and storage space to take place in modular storage containers outside the building. Despite being a start-up themselves, they tried to partner with another start-up business called Modular Food Systems (based on the Thundering Hooves business/facility) whose concept was to use refrigerated shipping containers to provide modular, flexible cooling and storage space, which would allow them to build a smaller brick and mortar facility. CPoW was very enthusiastic about this concept and thought it could be a model for new plants around the U.S. However, the CERB funding required permanent construction, and the agency did not feel comfortable with the modular component. In addition, the modular company never did get off the ground. The planning team shifted to designing a larger building with cooler space inside, closer to 7,600 sq ft.
Another challenge was that the plant had to be built on the Odessa PDA site that was not as accessible to Interstate 90 and fairly far from any population center. The plant’s business plan called for creating 15 jobs but did not consider where those people were going to come from.
By March of 2013 the group secured core funding, had formed a cooperative on paper (Livestock Producers Cooperative Association or LPCA), had title to the land, site work finished, were in the middle of constructing the plant, hiring the manager, scheduling ranchers, and securing start-up operating capital. Lamentably, due to unforeseen cost overruns, they ended up using that start-up funding to complete build out, thus they started with almost no operating capital. The General Manager they had just hired left only a week later for a job that paid better. They then had to finish build out and equipping the plant without a general manager to guide the process.
The LPCA plant opened in August 2013. By January of 2014 they had to halt production to fix some floor drainage issues. In 2015 they had to scale down labor and do a “reboot” of their operations to better match volume and labor. As of 2016, they now kill on just 2 days instead of all 5. Yet despite all this, they are still operating. By March of 2017 an experienced General Manager was hired.
The LPCA plant build-out financing ended up as 50% CERB loan, 2% cooperative owner dues, 33% in private loans (many from some co-op members, all with interest), lines of credit for equipment and operating expenses (at 8% interest), and they still had about a 2% funding gap going into their first winter of operations. This was a very different picture from where they thought they would be starting out.
Having only 2% of their build out costs met by co-op membership dues was simply not sufficient. Membership dues failed in two ways: (1) didn’t raise enough money, and (2) didn’t keep members committed to using the plant.
With the exception of membership dues, almost all of the plant’s financing is through debt. Whether or not the plant is profitable, the debt must be repaid. Other than the CERB loan due 5 years after opening (2018), the remaining debt requires immediate repayment, with interest. This has been hard on cash flow: interest payments are their 3rd most significant expense (after labor and insurance).
The CPoW slaughterhouse committee worked with the Whitworth College MBA program to develop the business plan. The plan was completed very quickly due to the loan timeline and focused mainly on financial estimates (budgets and projected income statements). It did not cover other crucial aspects of a business plan, such as staffing, operations, marketing, and so on, and was therefore significantly incomplete. After the LPCA cooperative was formed and the plant was up and running, they never completed or revised the plan, and they never validated the original financial assumptions. They also did not have a General Manager until recently (or Finance Manager) who could do that validation and revise the business plan accordingly.
The business plan also did not consider the whole regional value chain for meat. The plant’s target market, according to the plan, was ranchers bringing their animals for fee-for-service processing. During the planning process, discussions with meat brokers, distributors, or retailers were largely superficial, and the group did not adequately consider how the ranchers would market to consumers. A voluntary four-part workshop on marketing was arranged through Washington State University Extension, but only a small number of CPoW members attended.
The business plan called for a producers’ cooperative – separate from the CPoW non-profit itself – to own and manage the plant, but this cooperative was not yet formed at the time CPoW submitted the loan proposal. The CERB loan was supposed to provide 75% of build-out costs and required the other 25% to come from co-op members or other investors. However, with only 6 months before the loan application deadline, CPoW focused on writing bylaws, filing the paperwork, and collecting membership fees. They did not have time to build the culture of the new cooperative, through trainings, trust building, and good communication.
The business plan also predicted that the plant could operate with all debt financing (no equity financing) and would have sound enough financial footing to start to making loan payments by the 5-year mark when repayment of the CERB loan begins. In addition, the CERB loan funding required paying the state’s prevailing wages, which added 12-20% to the plan’s original projections.
Yet as noted above, without senior management doing rigorous and continuous financial monitoring, they have not evaluated the original assumptions. After 5 years in operation, they know that some of those assumptions were wrong and need to be adjusted to reflect operational realities.
The plant is operated as a member-owned cooperative (LPCA), but it is no longer selling new memberships. Although they will stick with their business model, they have not found the cooperative model to be entirely functional. They don’t have great buy-in from the majority of members, just a select few. There has not been a strong understanding of cooperative principles by the members, many of which are used to operating as independent ranchers.
The cooperative model, in retrospect, may not have been the best model to operate the Odessa plant for a few reasons. First, as stated previously, the members don’t have experience participating in a cooperative and are not really that invested (both mentally and financially). That perhaps could be different if they asked for a higher level buy in than $600.
Second, the cooperative was organized quickly and somewhat hastily. To build trust, good communication, and create a strong cooperative structure usually takes a great deal of time. Some cooperatives take 1-2 years before they even get off the ground.
Third, the cooperative model makes it hard to sell equity shares to non-members. Thus, most of their funding is debt funding, which negatively affects cash flow. They have some investors, but they are all private loans and not structured as equity. If they could sell some equity shares, then those owners would not be paid back until (or unless) the plant became profitable. That would free up cash flow to pay for some of the things on their wish list such as an experienced General Manager and specific equipment. If they had formed as an LLC or a C corporation, they could have some producer-owners and also some investor-owners. That model provides more flexibility.
The LPCA cooperative holds an annual membership meeting to discuss the general health of the plant and field questions. Other than that, there is not much involvement by the members, other than those dedicated members who are on the board of directors. Until March of 2017 when a GM was hired, the board was providing the general oversight of the plant. This was both a recruitment issue and a financial one.
Deciphering Regulations & Complying:
Developing their HAACP plan went smoothly, as did getting their stamp of approval. They worked with a consultant to gain their grant of inspection. The LPCA had some challenges obtaining their wastewater permit as their engineering plan included a major error in the calculations. They ended up paying more than they should for water and wastewater because they are actually producing less effluent and contributing less BODs than calculated. Fortunately, they caught this error and are now paying the appropriate rate.
The floor plan includes a knock area, evisceration area, then pre-chill cooler, holding cooler, then into one of two different processing rooms. There is a small loin aging room, another fresh cooler for aging, a freezer, a breakroom, office areas, and lobby/retail space. See the floor plan in Appendix A. Slaughter methods include captive bolt, electric stunner, or a .22 rifle depending on the animal and situation.
To come up with general design ideas, the LPCA board members visited several other plants and used Iowa State University’s Guide to Designing a Red Meat Plant (2009). In hindsight, they know they should have had a General Manager on board during the design phase to put more thought into the layout and equipment selection from an operational perspective. They had to rely on equipment salesmen to provide that sort of advice, which is not always ideal (some are more interested in making a sale than improving product flow and reducing inefficiencies).
A design-build RFP was issued and three proposals received. None of the bidders had recent experience in building a small-scale slaughterhouse. The group chose a regionally recognized design-build company that had never built a slaughterhouse before but came with good references and bid closest to their budget. To get closer to budget, they pared down the building size to just over 7,000 sq ft., yet they still were 30% over budget by time build out was complete. Unfortunately, the reduced size meant they had to nix the smokehouse and value-added sections of the building. As a result, fewer pig farmers use the plant and there are fewer processing options for all producers. However, they hope to add a cooler and smokehouse in the future if and when cash flow improves.
● Organize the cooperative before you build a plant. The cooperative should be a well-oiled machine before you take on construction of a facility. This requires developing a culture for a cooperative, such as good communication, by-laws, a board of directors, voting procedures, membership dues that reflect appropriate buy-in, a dividends policy, etc. However, it can be hard to attract and retain the interest of cooperative members if the build out process takes a long time. In addition, make sure a cooperative is in fact the best model for participants and their goals. As discussed earlier, an LLC would likely have been a better path in this case.
● In the planning phase, involve the other stakeholders in your regional meat value chain, such as meat distributors, retailers, and other middlemen in your region, starting with the market. If you aren’t going to work with distributors, then you have to plan for doing that role yourself (or assist the farmers in creating their own distribution system). The LPCA plant is currently building a relationship with two distributors which is beginning to improve cash flow.
● Make sure the business plan is thorough and vetted by outside experts, such as other plant owners as well as lenders. It should contain sections on demand (for processing services and for the product to be processed), ownership and management structure, staffing, throughput projections, costs of operation, marketing, branding, competition, layout and equipment, and more. (see NMPAN’s Small Meat Processors Business Planning Guidebook for ideas)
● A start-up plant should not work with another start-up (Modular Food Systems) for the design and operation of the plant. Work with established concepts and partners.
Human Resources/Management Team
● Recruit your General Manager at the beginning, and definitely before the plant design phase, to provide more experienced feedback to designers and the construction team.
● Skilled craftspeople are very hard to find, and the Odessa plant has struggled with finding experienced meat cutters. In the long term, they have considered working with the local community college to start a meat cutting apprenticeship program. They also might have located the plant a bit closer to a more populous region where there would be more people seeking employment, although the labor problem is not unusual for skilled crafts of all types in most labor markets.
● If you don’t have a Financial Manager on staff, consider working with an outside consultant, such as an accountant or business finance advisor to help monitor and interpret financial performance.
● Have someone on the team with expertise in human resources management: such a person could have prevented the significant underestimate of labor costs.
● Small animal processing (goats, sheep) is more labor-intensive. LPCA may begin coordinating with small animal producers to schedule them into specific days, rather than having a mix of species in the same day.
● The LPCA plant started completely staffed up for full capacity, 5 days a week slaughter, but on a “wait for people to call” basis. As a result, they didn’t have the throughput they anticipated and had to shut down for two months in 2015 while the board figured out how they were going to manage operating expenses. They then came back on-line with fewer employees to better match the actual processing volume with the labor.
● Plan for cyclical cattle prices: when prices are high, cattlemen will sell cattle (at auction, to brokers, to branded programs, and so on). When prices are low, everyone wants to get into direct marketing meat. This will dramatically affect your throughput. Timing is everything: interest rates, the economy, international trade, and cattle prices are all factors. The plant opened during a period of record high cattle prices.
● Make sure you have an efficient way to schedule slaughter dates (e.g., the Island Grown Farmers’ Cooperative has slots for members). The LPCA plant was set-up to wait for people to call them, rather than going out and getting commitments.
● Make sure the business plan is based on real commitments from producers about how many animals they will bring. The LPCA plan significantly overestimated throughput, and actuals were much lower. In part, this was because a couple of producers had much higher expectations of their own sales that did not come through. A small handful of farmers generate most of the volume.
● Not having room for a smokehouse or other value-added processing has limited their ability to process pigs, meaning pig farmers are looking elsewhere for processing.
● Undercapitalization can kill you, a classic start-up challenge. This greatly limits your flexibility. Have sufficient cash on hand to pay for operations for the first couple years while you are building up your volumes.
● Plan for higher build-out costs than predicted. Have some contingency funds (in addition to cash for operations), because you can’t always predict what may happen during construction. You start with a lot of assumptions that may not be true.
● Financial monitoring is key. LPCA needs to compare financials from their business plan to what they actually discovered in reality. Then ask why some assumptions were wrong and what that means for the business, and update the business plan accordingly.
● Interest expenses on their private loans are quite high, more than they budgeted for. Other costs that have been higher than predicted are energy and water costs.
● All debt financing can be challenging for cash flow (both in terms of interest costs and repayment whether a business is profitable or not). Solutions include: 1) the co-op could have charged higher membership dues to raise more funds to open, or 2) they also could have considered a different business model, such as an LLC, so they could have sold some equity stakes in the company as part of their financing package. Equity does not have to be repaid until a company is profitable.
The Road Ahead:
The LPCA plant needs more committed producers and more consistent throughput to become financial sustainable. The plant is only at one-third to one-half of capacity. They planned for the volumes that producers said they thought they would bring. It turns out they are not bringing anywhere near those numbers of animals. Additionally, the plant should have been a bit larger to incorporate the value-added processing pieces such as smoking. It has also been challenging to incorporate small animals on a regular basis, because slaughter fees don’t adequately cover the labor costs. This means they are mostly a beef plant.
As for the mix of farmers, LPCA doesn’t want a small number of very large customers nor do they want a ton of very small customers. They need a better mix. Right now, they mainly have one large customer and lots of very small ones. They would like some more mid-scale producers to balance this out and make the plant more resilient. This is often a problem for plants all over the country: the lack of mid-scale producers.
The LPCA plant does not provide marketing services for producers. (They were working with a start-up marketing and distribution company that did not get off the ground at first and went through its own re-boot.) Consequently, each producer is expected to market independently. This has made it hard to attract producers to use the plant. Many don’t have a lot of experience or aptitude to do their own marketing. There was a bit of a false expectation that somebody else would do the marketing for them, which did not pan out.
Going forward, the LPCA may have to take on more of the distribution and marketing of farmers’ meat if they want those producers to be able to scale up. Some of this has been occurring with two larger producer members who have been working on relationships to market for a few other members, but this not directly an LPCA operation.
Appendix A: Plant Design