Jeff Katz: Hello, my name is Jeff Katz. I’m a Professor of Strategic Management in the College of Business at Kansas State University. What you are about to watch was made possible through funding by the US Department of Agriculture and the KSU colleges of Business Administration and Agriculture.
The 21st Century Alliance is a real life business. It’s a co-operative formed by farmers to add value to their crop by being involved in processing of different commodities, from wheat to pinto beans. The 21st Century Alliance is based in Manhattan, Kansas and operates several processing facilities. It seeks to gain more profit for its owners by including them in the value being added their crops.
Leading the 21st Century Alliance is Mr. Lynn Rundle. It is Mr. Rundle, who must investigate new value creating opportunities for the owners of the alliance, and to ensure the success of the company. What you are about to see is interview with Lynn Rundle, as he begins to assess some of the options he has in acquiring an edible bean processing plant.
You see, with the increased interest in healthy foods and ethnic foods such as Mexican cuisine, Lynn is assessing the profit potential for his owners if they buy a processing plant and begin producing pinto beans.
Please join me in visiting with Lynn Rundle and watch as he tells us about management of a new generation Agricultural Co-operative.
Lynn Rundle: Well, 21st Century Alliance is an organization; really, it’s a business organization of farmers, who are right now from 6 different states across the central plains. It’s made up of 750 farmers and it’s an organization looking for opportunities to add value to farmers’ commodities. And it’s real simple; we are looking at opportunities for our farmers to move up the food chain - to get some of the profits that are associated with food processing. We are looking for opportunities for farmers to move up the chain, be producers, but yet have an impact in the food system and not just be commodity producers.
Jeff Katz: Can you tell us about the agricultural value chain and how it operates and how it can be beneficial to the farmer?
Lynn Rundle: The ag value change is pretty simply, it starts with an end user and you come back, all the way back down to the basic, which is not the producer, the basic guy is really the guy that’s producing the genetics, that’s going to somehow -- that value that’s produced by the genetics in the crop is going to end up in the customers’ hands. And producers are just one link in the chain of processors and in the case of, for example, wheat, bakers and handlers and all those people have to make the whole chain work. 21st Century is figuring out ways to bridge the gap to get our farmers, coupled with those genetics closer to the customer, so that we can take what a farmer produces on the farm and make it.
Jeff Katz: You mentioned that this is a new type of closed cooperative or new generation cooperative; what is it all about and how is that different from the traditional cooperative?
Lynn Rundle: Well, traditional cooperatives that most people in Kansas would recognize are farm supply co-ops. Their mission is to provide a market and access to products. It’s totally different than the new generation cooperative. And the new generation co-ops have been around a long time, but there is not the models in the central plains. If I said names like Ocean Spray Cooperative or Blue Diamond or American Crystal Sugar or Dakota Growers Pasta, those are recognized, successful, closed cooperatives - meaning that the membership is closed to the people who invest in the cooperative and they, in turn by their investment, have an obligation and a right to deliver a specific amount of commodity to the cooperative, and then that’s where the processing takes over. Any returns that come back to the producer come in the form of the cash payment for the commodity at some kind of a market value, plus if there is profits in the company because you have done a good job of processing, you get a value added return, a value added payment from the profits of the company.
Jeff Katz: Well, so how is a new generation co-op financed? How does the finance all fit together to make it work?
Lynn Rundle: The financing is pretty simple. A farmer has to buy an investment and, for example, a farmer in the 21st Century Grain Processing Cooperative, which is the company that owns a flourmill in the Mexico, the way we capitalized that company is a farmer has to buy an investment of minimum of $5000. For a $5000 investment, the farmer has a right and obligation to deliver 2,850 bushels of wheat per year to our system. We take the wheat in 15 different elevators across the State of Kansas and then we move the wheat to the Mexico with the flour mill is and that’s how we capitalize it. So you have a farmer that says, well for $5000 when am I getting my money back? Well they’ve got to get it back in value added returns, they’re are going to spend $5000, they got to see $5000 coming back plus much more to make that a profitable investment.
Jeff Katz: And how then is that group governed, how does the Board of Directors become elected and how they go through the process of determining what strategies are being used?
Lynn Rundle: It’s very similar to a supply co-op. It’s a farmer elected Board of Directors. The investors elect their own board, we have a staggered term, we have five-members on our board, a grain Processing co-op and right now seven in the bean processing, five in the dairy. So, it’s just like a traditional co-op in one member gets one vote regardless how much stock you own, and that’s how we do it.
Jeff Katz: You’ve mentioned several different enterprises that 21st Century Alliance is involved with. Tell us a little more about those if you would?
Lynn Rundle: Well, the flourmill is our first company we formed in -- we started selling stock May the 23rd of 1997. The next company we started is called 21st Century Dairy's Cooperative and it’s a 1400 cow comercial dairy in Linn, Kansas. And we are right in the middle of stock sale on that. The next company, which will be announced here on Monday, will be the 21st Century Bean Processing Cooperative and it’s a Dry Edible Bean Company that will be located in North-West Kansas, based in Sharon Springs and we will be gathering in about 250,000 bags of beans every year from our farmers and the minimum investment is $4500. We’ll be selling about a million dollars with the stock to capitalize that company, the purchase of the mill, the bean processing plant and then the renovation to get in a position where it’s a little better system.
Jeff Katz: Let’s talk a little bit about your most recent diversification method and this is dry edible beans. First of all what are dry edible beans, and then my second question is why dry edible beans?
Lynn Rundle: We have basically got in the dry edible bean business because as we were talking to one of our potential flour customers, they said to us, we are interested in you guys producing a better quality flour for us but, you know, what we are really interested in is we have a big burrito plant and we use a lot of pinto beans. Do you growers grow pinto beans? Yes, we grow some pinto beans. Well, is there anyway you could bring some kind of a better quality product at a more consistent price to us? And here we're sitting at a meeting talking about flour and they are talking about pinto beans. It's truly what happens when growers talk to end users, that’s how the system is made. So we went back to our farmers and said what does the bean business look like? What could benefit you as a producer? Well, the bean business is highly price volatile. It's the curve on price looks like this, it doesn’t look like a wheat price curve, it's very volatile due to -- it's a totally different kind of a business. A lot less supply, not near as big a industry. And in Kansas it’s only 350,000 bags. I mean produced inside of Kansas, but our next-door neighbor in Colorado produces a ton of beans, Nebraska produces a lot of beans. So in that area we will put in the dry edible bean-processing plant, there is a real opportunity for some producers to, through this close co-op method, guarantee a supply of beans to plant.
Jeff Katz: I look at things that have low fat, low cholesterol, high fiber and it seems to me that beans are perfect for that fit.
Lynn Rundle: Well beans, if you look at the market trend for beans or the amount of pinto bean per person that’s eaten, continues to grow and has been growing since 1965. So we are definitely entering a growth market for a protein source. It's kind of like tortillas in the flour milling business.
Jeff Katz: What type of processing do you actually do to the beans when farmer brings them in, and what happens to them, and also let’s talk about or explain to me a little bit about that value chain for dry edible bean, where does value get created?
Lynn Rundle: Okay. In the dry bean business what we are going to be starting with, with the bean processing cooperative is simply a cleaning and bagging operation. It's not rocket science, it's something that’s has to happen in the bean business. And once we do that and do it successfully, we think there is enough money in that business to make 25% – 30% return on investment for our members, above the price of beans. But beyond that, we have started talking to people that are in adding value further up to chain, dehydrated beans, those kind of things that may be a part of where the cooperative could go, but what we have got to do as a company, as a group of farmers is prove our credibility in the most basic step which is processing our members beans and developing a system where they are vertical integrated. So there is incentives for quality all the way along the road and then we move up the chain and further process those beans.
Jeff Katz: What would you say would be a reasonable investment that would be needed to start an edible bean processing operation?
Lynn Rundle: Well, we have kind of taken the philosophy that if you can buy existing facilities that are out there, that you can update instead of building new, it's probably a better deal for everyone. We feel like if there is existing capacity, that’s the place to start. I'd rather buy something for 50 cents on the dollar and make it work, than spend a lot of money to build something new and then have to make it work. If you look at the economics of it and that’s the key, you have got to really spend a lot of time looking at the specific economics of how a plant works and how you are going to have to make investments in efficiency to make your business work.
Jeff Katz: Well, you mentioned that the price of dry edible beans is pretty variable and I know there is not much traded on in open market. How does that process actually occur, and how can you use smoothing that to the benefit of the farmer?
Lynn Rundle: I think every farmer that’s in the bean business, they are probably the same people that really like to see home runs hit in a baseball game. And they are generally bean producers who are more risk takers, but if you talk to them and said what if over the next two years we could guarantee a portion of your beans are going to be sold at $22 a bag. Would you buy-in to that and would you put a portion of your beans in that kind of a pool to be sold to a customer in a long-term contract, regardless of what the market price of beans does in the next two years. I think you would see a lot of producers being willing to buy into that idea. If they are pooling their beans and make some kind of a more leveled market. And in the bean business, we see such volatility and it's based on supply and demand, but there is no futures market to lay off risk. The bean producer really doesn’t have anyway to manage risk except by contracting and most bean processing facilities, they don’t want to buy more than 20% of their beans because they have got a lot of risk, and if they are buying for $15 or if they are buying for $25 and price goes to $15, they are in a world of hurt. So there is a lot of opportunity through the closed co-up to create a more stable market and still give producers an opportunity to make money, which is return per acre.
Jeff Katz: Well Lynn, what types of competitors are there in the dry edible bean industry? I know that there are a few big competitors, how do you hope to compete and how is that whole competitive network structured?
Lynn Rundle: Well the competitive network, it's similar to most commodity businesses. I think that 60% of flour millings are owned buy three companies. In the bean business, you have got ADM, which now is Moorman and you got Corn Agro, which is Clienburger. You have got some giants in the bean business, but they have probably locked up a very good market for their product. I think what we have an opportunity to do, as a smaller company, is to go after niched markets and to differentiate our product, compared to the giants and get into some markets that they don’t want. And we have got to create some value by our product if we are going to actually get some market share. The biggest thing we have going for us, compared to the giant manufacturers in bean processing is, well we talked about from the beginning, ‘guaranteed supply’, whether I am Jack’s Bean or 21st Century Bean or somebody else, you have got to give the beans in the building if you are going to be able to market them.
Jeff Katz: Well Lynn, if I am a grower and I have to make a choice to grow wheat or grow beans and I have different choices on how they’re processed and ultimately the return. How would I approach that, what risk do you think the average farmer was going to make between wheat and beans?
Lynn Rundle: Well, the average producer in the 21st Century Grain Processing co-op has about 7% of their wheat crop committed to the flour mill, which is really not a very big risk - it's kind of a throw away deal. But those farmers have, again it's not a big percent, 93% of their crop is marketed to other channels and the commodity system. The bean producer on the other hand, it's a lot different equation. The bean producer may be marketing 50-75% of their crop through the Bean Processing co-op, so they are going to be much more committed and the value of a truck load of beans is a lot more than a truck load of wheat. So they’re going to be a lot more committed, I think, to making this thing work, even than a farmer who put 7% of their wheat.
Jeff Katz: What kind of strategies and vision do you think you will see with 21st Century Alliance? What’s going to happen next?
Lynn Rundle: It’s really difficult to predict where 21st Century Alliance is going. I think the most important thing is, it’s kind of a rhetorical question - if you automatically woke up tomorrow and you had 2000 farmers in an organization that were committed to providing the best quality product to end users. And they were committed to working together, to put capital together with their powerful production experience. What could you do with 2000 farmers? And so where are we going, I don’t know. I know when we started this thing with 35 farmers on June 1st of 1995, 35 farmers said here is $600 - just go and look at value added and now we have got 750, and have started three businesses and will probably start another three in the next year. Where is it going, I don’t know, all I know is that we are doing the right thing.
Jeff Katz: Well, managing a business sounds easy until you realize that while managers plan for the future, there are many things that need to be accomplished each day. We would like to thank Mr. Lynn Rundle for allowing us to take a look inside 21 Century Alliance. From the beautiful campus of Kansas State University, this is Jeff Katz saying thanks for joining us.