Beef plant plight
November 26, 2013
The financing methods of the non-operating and bankrupt Northern Beef Packers are under federal investigation according to the Associated Press.
News reports indicate that over $5 million in state grants, loans and tax breaks were utilized in various stages of building the facility, hiring and training employees and operating the plant.
Some ranchers, including Kenny Fox of Belvidere, S.D., are not surprised that the state-of-the art plant could not generate enough profit to stay afloat. He remembers expressing concern to then-governor candidate when Mike Rounds pitched the idea.
"I guess we never did get our point across. Building a packing plant to sell our own beef sounded like a great idea but if you jump over a cliff you'd better have a parachute."
Fox said he believes the state and foreign- financed plant started with too much debt, leaving too much ground to make up in a business of narrow profit margins and the stranglehold the larger plants have on the industry. "My concern was that they would be building a packing plant that was too expensive and wouldn't be able to compete with the major packers and they'd end up giving away the plant for ten cents on the dollar." Fox said he voiced this concern to Rounds as he was campaigning for governor the first time, and Rounds responded that the finished product, the meat, was already sold, leaving nothing to worry about.
"My thought was to start small and then grow. It would be kind of like me going out and buying a 30,000 acre ranch when I'm starting out. It just doesn't work. You buy what you can afford and then you grow," Fox explained, going on to say that another rancher had suggested that the state distribute their allocated funds between the currently operating packing plants in the state, giving them some help to grow or renovate. "If they'd have had the opportunity to use that money they would have expanded, then they could come to our local auction barns to compete for more cattle."
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Fox said his hope at this point is that a smaller, independent packer buys the plant and is able to make it work financially. The plant never came close to operating at capacity which was estimated at 1,500 head per day. The most cattle processed in a day was 500, with usual numbers running closer to 200.
Quinn, S.D., rancher Larry Gabriel who served as the secretary of agriculture during the era that the beef plant was conceived and financed by the state believes the Rounds administration was wise to proceed with the subsidization of the plant. "I think we need a packing plant in the region if we are going to keep our young people in ranching," he said. The only way to compete against the big multinational packing companies that basically run the industry is a localized plant, he said. Gabriel said the market for fat cattle in the Aberdeen area jumped a dollar or two immediately after the plant entered the scene.
The debt load on the plant was workable, Gabriel believed, and if federal banking regulations were relaxed to allow for more liberal operating loans, the plant would have likely survived. "I think that plant can compete if they can get the kind of capital so they can compete at or near capacity," he said.
The plant won't sit idle for long, Gabriel predicts, and hopes it is picked up by a small group of feeders or some other independent and relatively small entity rather than "JBS or one of the other big packers."
Cattle producer Robert Thullner from Herried believes the plant is an economic benefit to the state's cattle industry and that the recent "bad publicity" will drag out recovery efforts. The efficiency and technology of the plant should help it succeed eventually, he said, and also expressed concern over one of the "big packers" stepping in to purchase the plant at a drastically reduced rate. This would do nothing to increase competition in the market, he said. Selling finished cattle to the plant provided significant transportation savings for Aberdeen-area cattle feeders, he said. "You put the money in those feeders' pockets… then it is taken back to Main Street. It makes a difference," he said.
Besides the challenge of establishing a foothold in the elusive meat-selling industry, concerns regarding foreign investments have now sparked a federal investigation.
"There were some discrepancies in the way the EB-5 program was being handled," former engineer Bob Breukelman told the AP, regarding one of the major funding sources for the Aberdeen, S.D., plant. The EB-5 program allows foreign investors to pony up $500,000 each in exchange for permanent legal residency in the United States.
Once locally owned, Northern Beef Packers is 41 percent owned by businessman Oshik Song with 69 other South Korean investors who each gave at least $500,000 under the federal EB-5 program. The plant used the funds to spur the start of construction. The plant will sell at auction Dec. 5, according to the AP story. The minimum bid of $12.75 million is less than 10 percent of the plant's stated liabilities of $138.8 million. Court documents indicate $79.3 million in assets. The plant was pitched in 2006 in conjunction with Rounds' South Dakota Certified Beef initiative.
News of the probes comes soon after Richard Benda, who headed up the Governor's Office of Economic Development while the plant was being funded and built, was found dead with a gunshot wound. According to news reports he made multiple trips overseas to recruit foreign investors.
According to the Center for Immigration Studies, one of the state's biggest dairies, Veblen Dairies, which accounted for fully 15 percent of the state's milk production and was also EB-5 funded, collapsed recently.