Jeff Katz:   Hello, my name is Jeff Katz. I am a Professor of Strategic Management in the college of Business Administration 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.

An important part of learning about business, particularly agri-business, is to study what real life businesses are doing, the decisions real life managers are making, and how those decisions affect the success of the business. Dakota Growers Pasta is a real life business. It is an agricultural cooperative in Carrington, North Dakota that has seen dramatic growth since its inception in 1991. Tim Dodd, General Manager of Dakota Growers Pasta, must continue to strategically position the company within it’s changing environment.

What you are about to see is an interview with Tim Dodd discussing the factors affecting Dakota Growers Pasta and how the opportunity to acquire two additional plants would double its capacity. Please join me in visiting with Tim as he shares his thoughts with us about management of an agri-business cooperative.

Jeff Katz:  Well, Hi! We are here with Tim Dodd, who is President and General Manager of Dakota Growers Pasta from Carrington, North Dakota, talking about the pasta industry and the value added that their firm provides for producers. Welcome Tim.

Tim Dodd:  Thank you.

Jeff Katz:  Can you tell me about how you got involved in the pasta industry and how that all came together in terms of your background and where the company is going from here?

Tim Dodd:  Well, I started out in the grain milling industry with international malted food groups after graduating from Kansas State back in 1977. Really, developed a passion for durum milling and then I had the opportunity in 1980 to build the first integrated durum mill and pasta manufacturing facility in North America at Carrington, North Dakota for Noodles by Leonardo, who was an entrepreneur. And that’s really what’s revolutionized the industry, as far as I am concerned. That’s really showed that you could build a vertically integrated plant out in rural North Dakota and run it profitably.

Jeff Katz:  Could you describe how Dakota Growers Pasta was formed and what’s the impetus behind that all coming together?

Tim Dodd:  Well, it started with US grain growers. Obviously this Noodles by Leonardo pasta plant was in their backyard, and they had a great interest that they felt that if an entrepreneur could build a plant out in North Dakota and make it work, that they could too. Of course, I developed a real close relationship with the growers that time because again, as far as that plant goes, it worked direct with the growers and not through the grain merchandisers and elevators. But this relationship turned into where they had an interest in building their own plants and grow with their own plants and it took several years. I had actually left that project to build a plant down in Texas and then I went on board with an entrepreneur in a joint venture with Italians - American Italian Pasta Company in Kansas City. And by the time the growers were able to get the feasibility study completed and the results of it it came back very positive, they contacted me and asked me if I would be interested in coming back to North Dakota and building the plant and then managing it, and of course, again, I loved the rural areas as I grew up in a small town in Kansas. My family likes it up there, so I took them up on the challenge and the opportunity and headed back to North Dakota, back in 1992.

Jeff Katz:  Tim, why Carrington, North Dakota?

Tim Dodd:  Well, when we really discussed the project with the farmers back in 1992, it was obvious they wanted the facility constructed where they could deliver the durum directly to the plant without going through a third party. That’s one reason Carrington was selected because it’s in the middle of the state, is centrally located and every member of ours can deliver his durum directly if he wishes to do so. But also, it’s on two class one-way roads which made the transportation a great advantage for us in shipping our finished products and our by-products, because a lot of our products that shipped out of Carrington were in box cars on the railroad to our forward warehouses and from the forward warehouses, where we delivered to our customers. Then the same thing with the by-products, being in that part of the country, we definitely have to stay competitive with forward mills that are closer to the by-product markets.

Jeff Katz:  So a part of this whole process is a logistics issue? Finally where farmers can deliver their wheat and then finding a way to ship that milled wheat to the pasta plants for production.

Tim Dodd:  Right.

Jeff Katz:  And that’s what you went and did.

Tim Dodd:  Exactly.

Jeff Katz:  Can you talk a little bit about the ownership structure and the return to the members? In other words, if I was to buy a share stock, what kind of investment would I make in Dakota Growers Pasta, and what kind of promise have I made to deliver product, and what kind of return would I receive from my investment?

Tim Dodd:  Well to become a member you first have to qualify, you have to be a producer of small grains. Then you would have to buy a membership share at $125 and at the same time, unless we had a stock offering, you would have to go out and purchase those shares from an existing member because it is a closed co-op.

Jeff Katz:  Okay.

Tim Dodd:  If you are successful in doing that, obviously that’s a transaction between the farmer.  As far as the price and the amount of shares you want to buy, that transition has to be approved by the board of directors, and once it’s approved you become a member, then you have an obligation to deliver the number of bushels per crop year for the amount of shares you own in the co-p. And of course those bushels of durum have to meet our quality standards.

Jeff Katz:  Okay. In terms of payback over the past few years, what type of return would I receive?

Tim Dodd:  Well, over the last five years, we’ve gone anywhere from about a 14% return on investment to as high as almost over 27% return on investment.

Jeff Katz:  Since you got involved in 1992, has there been a difference in the number of farmers exiting the reproduction side of the equation verses now?  How has Dakota Growers Pasta affected the stability of the farmers in your part of the country?

Tim Dodd:  Well, I think we have done a good job in protecting the stability of our members and of course our grind is just now up to about 15% of the durum grown in North Dakota.  Back in the days when we were having a lot of trouble with disease, obviously, we didn’t have the volume to be able to make a difference. We still see farmers continuing with problems and exiting the market.  On the wheat side, its just a low price form right now in the overall market. We are getting value added in our processing, but again our growers grow a lot of durum we basically only use less than 30% of what they grow.

Jeff Katz:  So the durum producers got together and formed Dakota Growers Pasta, hired you, and built a plant. What kind of products do you market from there? What’s the output?

Steven Hunt:  Well, the plant currently at Carrington produces over 900,000 pounds of dry pasta per day. We also have acquired two plants in Minneapolis area at New Hope and downtown Minneapolis from a Primo Piatto, which was past employees of Borden Pasta. So our total capacity right now of all three facilities is right at one and half million pounds per day. And we produce only dry pasta. We market in the three different segments - the retail segment, which just consists primarily of store branded pasta. We don’t really have a strong branded program.  We have introduced three labels into the branded arena but, again it takes a lot of capital so we’ve just slowly started to pursue that. We also market pasta in the food service sector to large food service companies. Most of them are the major private level food service distributors - which creates a lot of high volume for those interested in very high-quality pastas at very reasonable price.  Our third market of pasta is into the ingredient sector, which is the food processors who use our product as an ingredient in their process, very similar to the value-added products like a Hamburger Helper, Healthy Choice, and Nickling and Sundry.

Jeff Katz:  What kind of products would we be familiar with that Borden produced when they decided to ixit the market?

Tim Dodd:  Well most of it would be the private label brands, like the Kroger brands as one of we’d sell in Super Value, and on the east cost, ones like Stop ‘N Shop and Shop Rite.

Jeff Katz:  And these are retail markets?

Tim Dodd:  These are your store brands, yeah.

Jeff Katz:  Very good.

Tim Dodd:  Also Safeway, which is one of the larger ones.

Jeff Katz:  What’s the rest of the industry like, how would you characterize the competitive force that’s affecting the pasta industry?

Tim Dodd:  Well, when we entered in the market, it really wasn’t that competitive because that’s what the feasibility showed. It was a good time to build the plant and get started. Today, because of all the expansion that's being going on, we are more or less in an over-capacity market. So, as far as competition goes, it’s highly competitive.

Jeff Katz:  In terms of your company’s comparative advantage with others, what makes Dakota Growers Pasta different, more competitive?

Tim Dodd:  Well, we are the only grower-owned pasta company in the world. What makes us different is that we’re producer based, and we have the ability to control the quality and production in the field to the consumer’s favor. That’s really what differentiates us from our competition. And really it’s the quality aspect that has been our success.

Jeff Katz:  So, in terms of perhaps the strengths and weaknesses of your firm and future opportunities and threats, how would you lay those out for us?

Tim Dodd:  Well, our strength is obviously that we are producer-based company. Again having the ability to have direct delivery through our agreements from the farmers gives us the distinct advantage in the marketplace - and it’s our major strength. Then of course, having the vertically integrated process makes us a low-cost producer. Weaknesses - I guess only the thing I can say right now is that we are not a strong branded company. So in the markets that we are in now, there is always a risk of price variability and price fluctuation, according to the commodity price.

Jeff Katz:  Does that unbranded nature have you rely more heavily on industrial buyers versus retail buyers?

Tim Dodd:  Well, 60% of our current business is in the store brands, what we call primary label.  Over 20% of it’s in the food service sector and about 20% in the industrial sector.

Jeff Katz:  Okay, that’s a nice break down that provides the versification of your markets.

Tim Dodd:  We have in our customer portfolio over a 130 customers. We manufacture over 75 different shapes of pasta in over 1500 skews.

Jeff Katz:  In terms of opportunities and threats, how do you see the pasta industry and the future for your firm?

Tim Dodd:  Well, I see a lot of opportunity, and again I think assumptions can tend to go up, which is going to obviously give us an opportunity to grow our business.  We have been very successful in aligning ourselves with major supermarkets and food service companies that have a very aggressive growth strategy. Of course, as they are growing, we grow because if we have a supply agreement with them, we can take advantage of their growth. Actually this year we are anticipating as much as a 10% growth just within our core customer base.

Jeff Katz:  Your firm is what is referred to as a closed capitalized cooperative and that means that the farmers are owners, but they also provide a certain amount of product to your plant every season. Can you tell us a little bit about how that makes it a competitive advantage for your firm and why then acquiring additional plants was necessary to expand to new markets?

Tim Dodd:  Well, we just acquired the pasta plant, so we’ve expanded the mill in Carrington. So all of the growing that the producers, the members, deliver to the plant is actually passed through Carrington. Then we use some in the plant at Carrington internally and then shift the remainder down the rail to the mill facility at the Minneapolis plant.

Jeff Katz:  And that’s where they produce the pasta.

Tim Dodd:  Right, so we’re just a pasta plant.  We are not fully integrated facilities, but again because of our correct growings, we still operate under the integrated concept.

Jeff Katz:  All right. Now I understand that Hershey has decided to exit this market, is that correct?

Tim Dodd:  Well, they have been sold to a new company called Newro Pasta.  But they are taking about being more aggressive and getting back in.

Jeff Katz:  How does that change in the industry and market affect your firm?

Tim Dodd:  It really doesn’t change our strategy because the management team who’s running the company is exact the same management team that ran it before.  So as far as we are concerned, it’s pretty much business as usual.

Jeff Katz:  You know what they are going to do and you know their approach?

Tim Dodd:  Right.

Jeff Katz:  Excellent. Well, in terms of the future of your firm, could you share with us some ideas about what happens now? This phenomenal growth that you have encountered since 1992 until now has been very impressive. What is the year 2000 going to look like?

Tim Dodd:  Well, going forward, our strategy is to increase our brands. Again we have three brands in the market now.  We are marketing Zebrials in the pasta stores. And a possible level up in US and is targeting more towards Minnesota and North Dakota and South Dakota. Then also in the discount stores, we have a private label.  So we release our strategy to increase our brand presence. Of course it takes a lot of capital and if you are going to go out and actually buy those markets, we have to deal with the markets to continue to be successful.

Jeff Katz:  Given farmers that had never been directly involved with processing before, when they contacted you and started in this process of looking to new opportunities, how did you view this?  And finally to make the move back to Carrington, what were your thoughts about the do-ability of this project?

Tim Dodd:  As far as the farmers go, they did come to me for the expertise side of it.  Really what I had to do was to assemble a management team that had the expertise in all aspects of the business. This just wasn’t me that made this project successful. We brought on board, even during before the original equity drive, the sales and marketing manager, the vice-president of sales and marketing.  And really he was responsible to go out and convince the growers that he could sell, at that time would have been 120 million pounds of pasta, into the three different segments of the market.  And of course, my side was the operation side.  Then we also brought on board a very experienced engineer.  And the three of us were the original management team that convinced the growers that we could construct and operate a plant profitably.

Jeff Katz:  So before the first shovel went into the ground, to break ground for the plant, at least three people and more were involved with the full-time endeavor of planning this and looking at the capability of this.

Tim Dodd:  It was a fast track project.  While we were selling this stock to the growers, we were designing the plant.  And you have got to remember that while we started selling the stock - the original equity drive started in January of 1992 - we started the facility up in November 1993.

Jeff Katz:  And when was the first product shipped to market?

Tim Dodd:  Actually November 1993.

Jeff Katz:  That’s amazing.

Tim Dodd:  So, it’s a very first track, and of course that was very important because of cash management. The quicker we can get the revenue coming back in and the cash flowing in, the less money we needed  to use up from the equity of the farmers.

Jeff Katz:  It's a fantastic start of success.

Jeff Katz:  Managing a business sounds easy until you realize managers deal with demand, supply, trade and technology issues, while still accomplishing everyday tasks. We’d like to thank Mr. Tim Dodd and Dakota Growers Pasta for allowing us to take a look inside their cooperative.

From the beautiful campus of Kansas State University in the heart of WildCat Country, this is Jeff Katz saying thank you for joining us.