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Published March 19, 2012, 09:59 AM

Paying off its $330,000 debt

It is difficult to say who is most responsible for unsettled debts of North Dakota Natural Beef LLC — whether a legal or moral duty lies with that company’s board, or with the board of the North American Bison Cooperative LLC, which has become its majority owner.

By: Mikkel Pates, Agweek

It is difficult to say who is most responsible for unsettled debts of North Dakota Natural Beef LLC — whether a legal or moral duty lies with that company’s board, or with the board of the North American Bison Cooperative LLC, which has become its majority owner.

Dieter Pape, president and CEO for the two companies, declined comment. Doug Griller of Quill Lake, Saskatchewan, chairman of both the bison kill plant and the beef/meat company, did not respond to phone messages.

After initiating investigations in the fall of 2010, Jade Friesz, Grain Inspection Packers & Stockyards Administration resident agent for North Dakota in Bismarck, declined comment on the case and referred Agweek to his superiors in Des Moines, Iowa. Bruce Gardner, the financial unit supervisor at Des Moines, did not immediately return a phone message.

The beef processing company was ordered to cease and desist in its cattle buying, but shifted to a custom-exempt business.

Doug Goehring, North Dakota’s agriculture commissioner, says his department handed out a $30,000 business bond. The company also complied with a department order that they pay $36,000 on other producer debts. The department has said the company must pay the remaining $330,000 debt to six producers by June 1. The department has levied a fine, but has waived a majority of the fine, pending the payments.

Goehring says he doesn’t know when GIPSA’s final report will come out, or exactly what it will cover. “I have some thoughts, but because of, let’s just say ‘liability issues’ I wouldn’t be able to comment on that until the report comes out,” Goehring says.

Time line

The beef company issue is the latest among financial vagaries of an iconic North Dakota company. Here is a chronology:

1993 — North American Bison Cooperative was formed to provide a consistent supply of bison meat from a single source, and to provide marketing services. The “new generation” cooperative was led by Ken Throlson, a veterinarian from New Rockford, N.D. The plant capacity was 5,000 head a year (100 per week).

1994 — Dennis Sexhus, a Leeds, N.D., native, with an agricultural equipment career, was named chief operating officer.

1999 — Plant increased to 8,000 head a year (160 per week).

2000 — The co-op faced competition and declining demand for bison meat, and the market for some products faltered.

2003 —– NABC sales hit $22 million but the company failed to sell all of its ground meat and trim. The company acquired New West Foods and Great Plains Food Co., to distribute products. The company accumulated $24 million in frozen meat, some three years old, and owed producer-members $20 million. Sexhus stepped down as CEO.

2004 — NABC hired Dieter Pape, a former CEO of Morey’s Seafood International, to take over as president and CEO.

2005 — In October, Pape took the company into Chapter 11 bankruptcy reorganization.

2006 — July, NABC came out of bankruptcy after liquidating inventory, changing debt to equity. New equity shares can be liquidated only if the company hits certain profitability ratios. The New Rockford plant was soliciting custom slaughtering.

2007 — NABC becomes managing partner in a new venture, North Dakota Natural Beef LLC. A key proponent is Ken Odde, then chairman of the North Dakota State University Department of Animal and Range Science. The company initially was supposed to be based outside of the Fargo, N.D., city limits, but eventually was sited in an industrial area in Fargo, near NDSU.

North Dakota Legislature appropriated $800,000 for the Beef System Center of Excellence. State funds were released when the project secured $1 million from the U.S. Department of Agriculture and $1 million from North Dakota Natural Beef. NDSU would occupy part of the structure as a working laboratory for meat science. The board would be based on ownership shares.

Initially, NABC started with a 10 percent ownership in the beef business, then 20 percent, and ultimately 54 percent. Other equity owners included Rick Burgum and family, the North Dakota Farmers Union, the Dakota Growers Pasta Co. and members of the Duane Sather family in South Dakota. Board membership was based on ownership share. The company had 34 investors by the end of July 2006 and raised more than $3.5 million. There were also loans from the Small Business Administration and the Bank of North Dakota.

A ground-breaking was held in August of 2007 in north Fargo.

The bison co-op had rights to two seats on the nine-member board. Other board members were: Roger Stuber, a former president of the North Dakota Stockmen’s Association; Wade Moser, former executive director of the North Dakota Stockmen’s Association; and Jeff Topp of Grace City, a member of the pasta company board, and a beef producer. The beef company board would meet every three weeks, by teleconference or in person, and could have several committees, while the bison co-op board met less often and was a committee of the whole.

“As (Pape) reflected on the start of this venture, he wondered how the relationship between an LLC and a cooperative, linked through a contractual alliance, would affect the profitability of the cooperative,” wrote Gregory McKee, in a case study of the company. McKee is an NDSU assistant professor of agricultural economics and director of the Quentin Burdick Center for cooperatives. There is no discussion in McKee’s paper about how the beef/meat business would be protected in disputes with the bison kill plant.

“The alliance required little formal interaction between the two companies, except to schedule the use of physical facilities,” McKee wrote. “The fact that the two companies operate under different business principles does not contribute to this complexity.”

2008 — In March, NDNB missed a construction deadline. Undisclosed disputes with construction contractors were mediated. Beef processing started. The 41,000 square-foot plant required an extra $700,000 to build. The facility was larger than initially expected.

Animals would be killed in New Rockford, split into halves and trucked to Fargo for breaking down and fabricating, Pape said. The beef company reported sales of $2.7 million from April 2007 through September 2008, sourcing cattle from three to five North Dakota feedlots, McKee said.

In an Agweek interview in 2008, Pape said the New Rockford plant initially was designed to kill and process 350 animals a week. Now, in a kill-only mode, it could handle 800 animals a week and was being remodeled to handle 1,400 a week (70,000 a year). At a cost of $200,000, the plant would increase to 300 cattle a week (12,000 a year) by late summer.

2009 — Woody Barth, of the North Dakota Farmers Union, became chairman of the beef processing company board. On Dec. 29, the bison cooperative formed a separate, limited liability company under the NABC name — a first step in converting from the co-op form of governance.

2010 — Early in the year, for undisclosed reasons, NABC became 54 percent owner of the beef business.

Dakota Beef of Howard, S.D. (near Madison) moved its organic production to New Rockford on a toll basis. The beef company became a “doing business as” entity of the bison cooperative. The beef/meat company continued with a smaller board.

The beef company changed from nine seats, including two from the bison co-op, to five members. It was headed by Griller, Duane and Rod Sather, Sioux Falls, S.D., Dave Lautt, Harvey, N.D., and Barth, then vice president of the North Dakota Farmers Union. The bison company continued with nine members.

Pape would continue as CEO of both companies, he told Agweek. The bison and beef companies are technically separate, Pape said, although the two entities have contractual relationships.

In March, NDNB announced it had started marketing products through Whole Foods Midwest and had landed a separate contract with Chipotle Mexican Grill Inc. Bison products are sold as TenderBison and beef under Dakota Farms. “Whole Foods buys the ‘middles’ and Chipotle buys the ‘ends,’ Pape said. “It works out well.”

In May, the beef company started using contracts to secure beef animals — up to a year in advance. Beef is “much more capital-intensive” than bison, Pape explained. Beef purchases are governed by the Packers & Stockyards Act, and must be paid for within 48 hours of killing and grading, while bison are not. It is simply “standard practice” to pay producers within 14 working days. In May, the company’s beef numbers exceeded its bison kill for the first time.

The Fargo processing plant has “plenty of capacity,” Pape said in July. It operated on a single shift, five or six days a week, with only the grinding area running seven days. The Fargo facility could handle 400 per day.

“The contractual alliance between NDNB and NABC created a clear transfer of property-based resources between the firms,” McKee wrote, quoting Pape. The interdependence would “increase the ability of each firm to obtain a comparative advantage in their respective product markets,” Pape told McKee.

In October 2010, GIPSA officials sent a letter to producers who sold animals to the beef company informing them that the agency was stepping in because some producers had not been paid in a timely manner. In mid-October, Goehring announced that the plant had voluntarily stopped buying beef on Oct. 1. He encouraged producers to attend the GIPSA meeting in Fargo, Oct. 27.

Pape explained to Agweek the beef plant in Fargo had temporarily cut back hours after the company “resigned” a large customer because it imposed a new audit program — computerized record-keeping for 85 suppliers — that would have cost $200,000 up-front and was not economically feasible for the beef company. Pape later declined to name the single customer but acknowledged it had been added in the second quarter of 2010 (Whole Foods had been added in March.) and accounted for two-thirds of the company’s harvest per week — 120 out of 180 animals.

The company expected to replace the customer, Pape said, perhaps with a larger customer. The Fargo plant wouldn’t have to lay off any of its 85 employees, he said.

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