November 1997
USWP To Enter Frozen Dough Business
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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.
"Our detailed analysis, together with countless industry contacts over the past 18 months, have convinced us that spring wheat growers are uniquely positioned to take advantage of a business opportunity in an industry that is truly in a state of transition," says Gary Lee, president and CEO of the Fargo-based grower cooperative.
USWP intends to begin manufacturing products from the 1998 spring wheat crop. The business plan targets the use of over 5 million bushels of spring wheat. In phase one of its business plan, a yet-to-be-located manufacturing plant will have two production lines; one for frozen dough, the other for partially-baked frozen bread. The plant will be designed for future expansion to include a bagel production line.
Phase two calls for the construction of a second strategically-located frozen dough and frozen par-baked product manufacturing plant, but only after the first plant is fully operational, and its success can be measured.
Using conservative estimates, Lee says that USWP's analysis indicates the potential returns substantially exceed the members' original return-on-investment target. The first full year of operation, the annual return on investment is projected at 6%. Return on investment is projected to climb to an annual rate of 25.17% by 2001, and with additional production from a planned plant expansion by 2003, annual return on investment is projected to escalate to 68.83%. The annual return on investment percentages are based on a full equity subscription and an initial stock value of $6 per share. If start-up on the first plant goes as expected, the co-op plans to build a second plant in another location, as early as 2001.
Why frozen dough and frozen partially-baked products? Several reasons, says Lee.
"First, consumers are demanding a greater variety of food choices. But the lack of skilled bakers, coupled with this demand for more variety, are driving a strong shift in the industry from scratch and mix baking to the use of frozen dough and partially-baked products." He says that this shift is occurring in all bakery customer segments: grocery in-store bakeries; food service; and retail and multi-unit retail bakeries.
"Second," says Lee, "many of the bakery products that are enjoying the strongest growth in these segments are those that are dependent on spring wheat to meet quality specifications."
And third, from a competitive standpoint, Lee says the frozen dough and partially-baked products industry is not dominated by any one large player or groups of large players. USWP's business analysis indicates that the frozen bakery market is very fragmented, with the market leader holding a share of about 6%. The top four frozen bakery manufacturers only hold about 23% of the market. "This provides us with a very unique opportunity where we may create a position in the marketplace that has both cost and quality advantages over the competition," says Lee.
USWP's target customer is in the $4 billion bakery wholesale market for high quality, crusty European and specialty bread products. This market includes companies that serve the retail industry, grocery stores (in-store bakeries), food service operators and distributors, and retail bakeries. It is a market that is expected to grow at a rate of over 5% per year for the next five years.
A large supermarket chain would be an example of a wholesale market outlet. It could purchase USWP frozen dough or par-baked products, and in turn supply them to their local grocery store's bakery. The in-store bakery would finish the products, and then sell them fresh to their grocery customers.
"The plan we have prepared gives us our best opportunity to market a wide variety of our value-added spring wheat products across the whole food chain," says Lee. "Our strategy will integrate activities from the farm gate to the consumer. At the same time, our analysis indicates excellent returns and steady profitable growth."
Simple delivery process
USWP views the wide geographic distribution of its members as an asset that will allow the co-op to access the highest quality wheat for its processing needs. However, a four-state territory also demands a grower-friendly delivery process.
Thus, wheat delivery will be divided into three periods per year- four months each. Members will generally be required to deliver one-third of their obligation within each delivery period. These marketing periods are used to match member deliveries to the cooperative's use.
Members may deliver their wheat to the elevator of their choice, any time within each four-month delivery period. The price members receive for their wheat will be based upon the current price offered by the elevator on the day of delivery. Members will receive payment for their wheat from USWP within 20 days after the co-op receives the elevator's delivery documentation.
In the event that a member's grain does not meet the requirements of the co-op (or if the member is unable to deliver as a result of crop failure) the member can acquire other wheat, or the co-op will help in doing so.
One of two things will happen to the members' wheat after it is delivered to the elevator: either it will be held at the elevator and accumulated for shipment to USWP's processing facilities, or sold by USWP.
USWP equity drive for members, nonmembers
USWP's business plan will require $60 million over several growth phases, and calls for $31 million in grower equity. Lee notes that this level of grower investment will allow them to fully capitalize their first phase of construction with no debt.
The more than 3,200 spring wheat growers who became USWP members will be offered a minimum investment opportunity of $4,800, which represents 800 shares at $6 per share. One share will provide the right and obligation to annually deliver one bushel of spring wheat.
An average investment of $9,600 will be allowed per member. If some choose to take less than the $9,600, other members who want more will have the opportunity to buy those extra shares. In the event existing growers do not purchase all the shares, new members will be considered at a slightly higher share value.
"Spring wheat is the number one crop of this region, and is raised on almost every farm," says Lee. "The innovative farmers that have provided its bounty to our nation for generations have now used that same grit and determination to step beyond their fields and start the business that will provide high quality products from spring wheat."n