East Carolina Soy Processors
October 2008
Sometimes opportunity is where you find it; especially if you are paying attention. Eastern North Carolina is home to a group of farmers who were paying attention. A large egg operation was locating in the area. The operation would need feed. This new business opened the possibility of creating a soy processing business, where the meal would go to the chickens and the oil would be used in biodiesel production. The capital investment needed to create a soy processing facility was too large for individual farmers, but pooling their resources, they could collectively build the facility. The original concept was to sell the meal to the egg firm and sell the other co-products. The business would create a local market for the soybeans in the area. So, by processing locally, soybean producers and the egg-laying operation could benefit from reduced transportation costs. Not only would this obviously benefit the local economy but the transportation benefit would offer a clear comparative advantage for the proposed processing business.
That was the rather simple idea and as Buster Manning, one of the initial organizers of what is now East Carolina Soy Processors (ECSP) said, “we got everyone together who we thought might have an interest and talked about the idea. The next step was to conduct a feasibility study to determine if there was a projected profit in our idea.” USDA worked with the firm to conduct the feasibility study. The study validated the concept and offered some proof this plant could be built to turn a profit. The group held meetings with producers in a four-county area and eventually formed a limited liability company (LLC) with 39 farmer investors. The original idea in 2002 was to have both a soybean crushing and biodiesel plant, but since then the opportunity for profit producing soy-based biodiesel went away. The group is planning to do soy crushing at this time. The crush plant was the core of the original business concept; thus the group is able to retain the key comparative advantages of transportation in and out.
After the initial idea in 2002 and honing the feasibility study in 2003, the group began in earnest to learn more about their proposed venture. They visited soy extrusion plants in Pennsylvania and Kansas. As Manning put it, “By visiting plants farther away from home, we were not perceived as competitors and the firms were quite open to sharing with us.” Clearly, the group was already thinking and acting strategically.
After intensive investigation and analysis, the LLC decided to begin to put together a business plan and determine what their specific capital outlays and return on their investment could be. They worked North Carolina State to help them put together their business plan.
Once this plan was in place, they could start working through the elements and activities lined out in the plan. The first order of business was to determine where the soy crushing facility should be located. The group debated if they needed rail siting, but the rail location was going to force the soybean producers to haul their product further. That reality neutralized a needed competitive advantage for originating soybeans. The next hurdle the firm faced was finding a site well suited for industrial development. Requirements included necessary infrastructure (road, electricity, gas and zoning). The group went into full “scrounge” mode to keep costs down on the equipment although they agreed they would build a quality plant they could count on. Here again, opportunity is where you find it and they were able to locate good used equipment from a facility in Kansas. They recruited a general contractor with credentials for building similar processing plants. Permitting is always a necessary hurdle so members of the group were tasked to ‘birddog” that activity. Through it all, the financing had to be coming together. It was important that a banking partner was established early in the process. The group was able to raise money, putting them in a strong position as a startup business. North Carolina State’s help on the business plan showed cash flows and other financial analysis that gave the group a solid view of what they needed to manage on the financial side. The group began the process of constructing the facility and ensuring all the permits were in place, etc.
“In hindsight, we probably should have hired an engineer at the very beginning of the project,” lamented some of the farmers on the board of directors. “It would have saved us money in the long run, because they would have been aware of all the siting and permitting, code requirements and other issues that have given us a headache.” Many startup groups offer this sort of advice. They correctly understand that they need to be very hands-on in order to learn the business as they form it. And they are trying to economize. But, getting qualified legal and professional counsel early on, can actually facilitate both outcomes.
The firm has worked through those various issues and hopes to be open for business in October 2008.
The five-member farmer board has been managing many of the day-to-day details of constructing the facilities and getting the plant ready to begin crushing, as well as buying soybeans and securing customers. However, recently the ECSP hired a qualified manager. The new manager is a local person who had moved away after college. He is excited to bring his expertise back to the community where he grew up. Roots can be a key motivator bringing people together in an entrepreneurial venture. This project shows that spirit of local people taking a vision and working together.
Once the firm opens its doors, it hopes to crush xxx tons of soybeans in a year’s time. They also are looking to develop organic markets for the several organic soybean producers in the area. Rapid cleanout capability in the plant is a must if this market is to be viable. Also, the company will have to have great procedures and management to control product to this level.
Manning noted, “The hardest thing about creating a business is to get people together and agree upon a decision. Most of us are farmers, we have to make decisions quickly, but setting up a business where consensus and group decisions are necessary takes a lot of patience and perseverance.” Manning reflected on the thousands of hours it takes to get a business going and the extreme capital requirements necessary for the machinery, equipment, labor and inputs.
Entrepreneurs always invest untold hours not reflected in the financials of a company such as this. That is a necessary part of this type of business development. One outcome is how it changes the people involved. They must move from a sole proprietor mode to a “people person” mode. They discover the compromise between making your own rapid-fire decisions and the slower, more modulated decisions of a group. Then they must be able to trust their hired management to handle the business and the board must step back.
The timing of this project bridges an historic period. When the firm first started to think about soy crushing, the price of soybeans was around $5.00 per bushel. The price for soybeans at Raleigh or Fayetteville, North Carolina was $13.84 on August 29, 2008. This price change dramatically alters the amount of money needed to carry necessary inventories through to finished products.
On the product side, soy oil had bumped along for years at or below $0.22 per pound as it was when the group first formed. Since those early conversations, the soy oil market has exploded to over $0.70. It is now trading in the mid $0.50 range. Nearly all of this increase is due to global demand for biodiesel. The group can now change strategic focus and sell oil into this exceedingly strong market. Oil can lead within their business model as a margin maker.
A similar pattern emerged on the soy meal side of the equation. When the group formed, the meal price was around $150 per ton. Today it trades between $350 and $400. The volatility of the bean and product market has dramatically increased, which creates additional layers of risk for the fledgling company to deal with.
Input energy costs have also increased dramatically in the past six years. The challenge today for this startup business is to factor a host of structural changes to markets into the current business model. The rapid changes this company now deals with reflect energy policy, globalization, farm policy and currency relationships. ECSP started as a simple concept to originate beans and produce products for local markets but quickly accumulated great complexity. Success will undoubtedly be based upon this company’s ability to continue to see opportunity and act on it.
East Carolina Soy Processors
