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Jeff Katz: Hello, my name is Jeff Katz. I am a Professor of Strategic Management here at Kansas State University.
What you are about to watch was made possible by funding from the United States Department of Agriculture and the colleges of Business Administration and the College of Agriculture here at Kansas State.
An important part of learning about business, particularly agri-business, is to study what real life businesses are doing, what kinds of decisions real life managers are making, and of course, how those decisions affect the success of that business. Minnesota Corn Processors is a real life business. It is a cooperative formed by corn growers to add value to their crop by being involved in the processing of corn. Minnesota Corn Processors operates a large processing facility in Columbus, Nebraska, where the manager, Mr. Tim Morris, makes decisions affecting the success of the plant, the company, and ultimately the corn producer.
What you are about to see is an interview with Tim Morris discussing the options he has to control one of the plants' most critical expenses, power. You see the plant in Columbus, Nebraska is one of the largest users in the State of Nebraska and Tim, as a good manager, is investigating ways to lower the cost of power, in anticipation of deregulation of electrical power throughout the US.
Please join me in visiting with Tim Morris as he shares with us his thoughts about the management of an agri-business cooperative.
Jeff Katz: Let’s talk about the corn industry this morning. Tell us a little bit about the industry you’re involved with and some of the facts that affect that particular industry?
Tim Morris: Minnesota Corn Processors is a part of the Corn Wet Milling Industry. It’s dominated by a number of large multinational companies and we’re one of the smaller players in that industry and probably number four today.
Jeff Katz: What kind of other firms are involved in this industry that you compete against, what kind of firms that we have heard about?
Tim Morris: We compete primarily against companies like Archer Daniels Midland, Cargill Incorporated, AE Staley, which is a division of Tate & Lyle, Rowecat which is a single plant processor out of Keocut Iowa, and some of the other ones would be National Starch and CPC Incorporated.
Jeff Katz: Tell me a little bit about the competitive structure of this industry and what kind of products actually come out the other end, and what I would be using on a daily basis that has come out through your plant?
Tim Morris: There is a series of products that come out of the Corn Wet Milling Industry and that number is get larger all the time. Food starches, similar to the argo starch you might see in your kitchen, which you would use for gravy. There is a number of corn syrups - Dextrose Corn Syrup, which would be the equivalent of kayro syrup in your kitchen. We make the high fructose corn syrup that would sweeten products like Coca-cola and Pepsi-Cola. We make the 42-fructose product, which is used as a sweetener in colored flavored drinks, sometimes known as belly wash by the folks in our industry. And there is a number of other things, we are starting to move into fermentation products as an industry, where we will take the corn starch and use it as the basis or the food for the yeast and fermentation. Fermentation products could be vitamins, amino acids, those types of things. And now we are even getting into things like bio-degradable plastics, which I think that’s in its infancy today. That’s an exciting potential for us and our industry.
Jeff Katz: What kind of economic factors, world economic factors or those in the US affect the approach you take in competing in this industry?
Tim Morris: Well, there is a number of fundamental things. We are in the commodity-based business, we are buying corn as a commodity. Most of the products we sell anymore today are commodities. The high fructose corn syrups, the other syrups, they are basically considered commodities. There is a set spec for those products and really you sell at the market price. So those are factors in our business because we are buying corn and it’s a commodity-based product, we’re susceptible to changes in farm programs, federal farm programs here in the US, we're also susceptible to significant weather changes which might affect the size of the corn crop. We are always going to be concerned because a lot of players in our industry produce fuel ethanol, about the impact of federal endorsed or state programs that might change the size of the ethanol market substantially, either make it much larger or much smaller. Energy is our second largest cost, and so we are very concerned about anything that would affect coal, natural gas or electrical supplies. And currently, one of our concerns would be impact of electrical deregulation throughout the US.
Jeff Katz: What is the mission of your firm and tell us a little bit about how it's structured and maybe some of the specific strategies or initiatives that your firm has carved out for it's future?
Tim Morris: Okay, Minnesota Corn Processors is a farmer-owned co-op. We’re based in Marshall, Minnesota, that’s where our headquarters is. We have two plants, one in Marshall, Minnesota and one in Columbus, Nebraska. As a closed co-op if you want to buy MCP stock or if you want to sell MCP stock, you need to sell it through MCP so that we can verify that you are a farmer producer and that’s by definition what a closed co-op is.
Jeff Katz: What -- as a farmer -- what would encouraged me to become a stockholder in Minnesota Corn Processors and how does that benefit me in the long run as a corn grower?
Tim Morris: Hopefully, the stockholders for MCP view an investment in MCP as a chance to add value to their corn, as opposed to allowing somebody else to benefit from the processing to a finished product. Really it’s the farmers that are doing the processing in this case and they get to enjoy the benefits.
Jeff Katz: What kind of approaches do you use to be an aggressive competitor in the marketplace?
Tim Morris: Our focus at MCP is going to be to produce the highest quality product at the lowest possible price and we have been fairly successful with that. We have got two of the most modern plants in the industry. They are located farther west than any of the other major corn processors and that positions us for more success in the market since alot of our customers are on the west coast. What we are trying to do today as a company is really emerge from a series of fast track expansions that occurred over the last 5 years, and so instead of expansion mode, we’re really in a managing for profit mode today, established the systems within our company and our business to manage for profit.
Jeff Katz: So in terms of future success factors, what are those that you think will work best for Minnesota Corn Processors?
Tim Morris: We need to continue to establish systems that allow us to manage our business and manage for profit, but we also need to be out seeking the opportunities for the future. And today I don’t think, we know and I am not sure, people in our industry know what those are, but we need to be sorting through the alternatives, weighing the pros and cons of each of those and deciding.
Jeff Katz: In terms of looking at the strengths and weaknesses of the firm, what would you say were the two or three dominant strengths that you have that give good opportunities for the future?
Tim Morris: Again we’re a fairly young company, so our facilities are new, modern. We are probably producing some of the highest quality product in the industry. We’re very competitive from a price standpoint. Being located as far west as we are is an advantage, we're in the western edge of the Corn Belt. Particularly, the Columbus plant where we have access to the two major railroads - which transportation is a key part of our business. We are in the third largest corn growing state in the US, something like 60% to 70% of the corn that is produced in the Nebraska is irrigated. So the supply is steady and the quality is very good typically. We also are located in the heart of the feedlot country in Nebraska. We’re producing 2000-2500 tons of wet feed product per day, which is one of our by-products. It’s important for us to be able to get rid of that, that’s a freight sensitive product and so our location from that standpoint is very good. Also a corn wet milling plants tend to use a lot of water in their process - as much as 20 gallons per bushel processed, and we have access to a lot of good water in the state of Nebraska.
Jeff Katz: What do you think are the weaknesses in terms of future viability or long-term success that you have to deal with as a manager of an MCP plant on a daily basis?
Tim Morris: There are probably two things that I am most acutely aware of. First thing, MCP is one of the smaller players in the industry of titans. We may have not have the staying power to survive the boom and bust cycles that would be typical of our capital intensive industry, so that’s a concern. The other concern would be for us, it’s a lot easier to do what you know how to do very well, than it is to be in our circumstance, where we are still developing the business processes and the systems that are necessary to run your business. It takes some extra thought, resources to develop those systems. So our focuses is maybe somewhat diluted when compared with our competitors.
Jeff Katz: In terms of opportunities for the future, how do you view some long-term opportunities for MCP to achieve this profit orientation after this expansion you had?
Tim Morris: Ideally, what we like to do is get into some products that have a steady demand for corn throughout the year that would be what we would call value-added, at least competitive to the commodity based products we produce today, and use a relatively small amount of manpower, and relatively small amount of capital. But if we could get into those kind of markets early, carve a niche, and be a very aggressive about dominating that niche, we think those products could be the wave of the future for MCP.
Jeff Katz: In terms of some bigger threats, what kind of things do you look at on the horizon and say, gee, here is something we need to be aware of our long-term viability?
Tim Morris: Things we would be concerned about, of course we always are going to be watching the weather because we’re a corn based industry. Federal farm programs can be a concern that can change the supply of corn and the quality of corn. We are going to be concerned with federal and/or state programs that might affect ethanol production or production requirements. We are in a big processing industry so we are going to have to be aware and more aware in the future of environmental impacts of a very large facility. We happen to learn in the last year that transportation issues are of concern to us, and that’s not something we had been concerned with in the past.
Jeff Katz: Tim, you have mentioned that quality is an important factor for the success of Minnesota Corn Processors, and certainly having high-quality product is important for your customer, but it is a commodity. What are the other ways you differentiate and what you do for your customer in a quality way?
Tim Morris: I think what we have learned is that as an industry, something like 75 to 80% of the customer complaints we get are not related to the product quality. They’re related to the logistics, the cars, the trucks and those types of things. So, we are starting to work very hard on those types of things. Our fructose cars and one of the complaints that our industry has typically suffered is that the customer can't get the lids opened because of the lid bolts that are used. So we have explored all the different lid bolt options and are putting a new type on our cars in hopes of making it easier for the customer. We have customer complaints, we’ve experienced those kinds of complaints where a truck leaked oil in the parking lot of the customer. We have to be concerned with those details because the customers are concerned with those details. And so we’ve made that a part of our focus on quality. So it’s not just a product quality, it’s the quality of the service that goes along with that - knowing that if we can address that in a collective fashion, we can eliminate may be 80% of the complaints that arise.
Jeff Katz: What kind of level of success has MCP had based on all these initiatives and how do you view the success factors for the future in the next three years?
Tim Morris: I guess it would depend on how you want to judge the success of the MCP. If you look at MCP, it’s being a $650 million company today - 15 years after we started into our capital-intensive, energy-intensive, extremely competitive business, I think the growth and the progress has been spectacular. In 1996, because as an industry we experienced all time record high corn prices - and in fact, on the Chicago Board of Trade, the corn price reached a peak, a little over 30% higher than the previous all time record high - that severly impacted certainly Minnesota Corn Processors and our industry. And that year was followed by a year where over capacity in our industry led to all-time, historical all-time, low product prices for our 42 and 55 fructose products. But I think with the boom and bust cycles typical of our industry, we need to have the ability to ride those things out. So judging the success, I guess I feel pretty good about where Minnesota Corn Processors is today. We have carved out a market share by taking product away from other suppliers and we are proud of that fact.
Jeff Katz: Well, you mentioned earlier in our discussion that electricity, and opportunities in de-regulation of electricity was important to you, why is that?
Tim Morris: Energy would be probably the second largest cost for the typical corn wet miller, after corn. And so electricity is a key part of that energy supply. A typical plant is going to be very intensive, electrically. And so the de-regulation that is starting to occur is of concern. If it would happen uniformly throughout the United States, then it may not change the competitive balance in our industry.
Jeff Katz: But that’s probably not the case as we are seeing now.
Tim Morris: It appears that the electrical de-regulation is going to go state-by-state, and if that’s true since most of our competitors are in Eastern States that are more populated with higher electrical cost today, they might press harder for electrical de-regulation, so it could come to them sooner or they may be able to carve out a better deal.
Jeff Katz: What kind of alternatives do you have besides buying power from the generation kind of set up you have now in Nebraska, what alternatives do you have in terms of controlling that cost?
Tim Morris: Today in Nebraska, state law does not allow us to purchase power from anybody other than our current supplier but we are trying to work with that supplier to develop a rate structure that will suit our business both now and in the future. We are also considering co-generation, which is the process wherein you would generate electricity and then use the waste from that process to generate steam. Our process happens to use large amount of both steam and electricity, so there is a nice blend there of the energy requirements, and it's well suited to co-generation and we could co-generate them in a number of different ways.
Jeff Katz: Sounds like a natural fit.
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 Tim Morris and the Board of Directors and the Senior Management of the Minnesota Corn Processors for allowing us to take a look inside their farmer-owned cooperative.
From the beautiful campus of Kansas State University, this is Jeff Katz saying thanks for joining us.
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