Ready to Make Dough with Dough

After a startup phase that cost more than anticipated, Spring Wheat Bakers looks to turn the corner with a major new customer in place

By Tracy Sayler

It was Mark Twain who said: “the reports of my death have been greatly exaggerated.”  That quote might be appropriate in describing the current health of Spring Wheat Bakers as well.

Organized in 1997 by 2,800 members in Minnesota, Montana, South Dakota and North Dakota who invested close to $22 million, SWB (initially called United Spring Wheat Processors) became the largest closed cooperative in the nation to be organized around the value-added production of a single major commodity—spring wheat. The company began producing partially-baked (“par-baked”) breads and frozen dough at its plant near McDonough, Georgia, in August, 1999.  It is the largest bakery of its kind in the world.

However, CEO Gary Lee left the company earlier this year, about the same time that SWB quietly suspended its grain origination program, and let go employees in that division. Plans to put up a second plant in the West Coast were also put on hold. Ag circles began buzzing—is SWB failing?

Because of its size and specific product focus, the plant startup did take more time and cost more than anticipated to reach acceptable commercial production volumes, says SWB Chairman Mike Warner, Hillsboro, ND.

“We underestimated the degree of difficulty to get to full commercial operation,” he says. Still, the baking industry estimates that it usually takes 18 to 30 months for a new industrial baking facility to become fully operational, and he points out that SWB is tracking close to that timeline.  The company invested $18.5 million into its Georgia facility, and another $1.5 million since the startup.

Warner explains that baking is an intricate process, and there are myriad variables to work out before products can be commercially produced reliably, and at full capacity.  Oven temperature, the hardness or softness of water, mixing time, dough elasticity, even barometric pressure can affect one of the many complex processes involved, which includes dough mixing, forming, proofing (letting yeast raise), baking, cooling and freezing. Furthermore, different bread products require different formulas and baking processes, and getting it all down to a “T” comes with a certain amount of trial and error, says Warner.

He says a bread factory is much more complex than say, a shoe factory. “If a shoe factory breaks down, your assembly line stops and what you’ve lost is that you didn’t get shoes made, but all the components you need to make shoes from the leather, soles and laces are still good.  In our factory, it can take about three hours from the time you mix the flour to when it is a finished, frozen product. If you break down for more than two minutes, everything inside the oven will have to be thrown away.  If you break down for more than 20 minutes, everything from the oven back to the mixer will have to be thrown away, and that’s about $5,000 worth of product.  If you break down for more than 35 minutes, everything in that production period will be thrown away. You’re dealing with a living organism called yeast, and if the baking process doesn’t stay continuous, the product can be ruined.”

The company’s startup is now complete, and September marked the first time that the plant in Georgia produced par-baked and frozen products at the same time, which is a significant step to full plant production and thus, profitability. The company’s par-bake line alone makes 610 pounds of dough every 10 minutes using 400 pounds of flour. This produces approximately 520 dinner rolls a minute. Running the frozen dough line at the same time allows SWB to roughly double these numbers, depending upon the specific product being made.

Plant production in September was 95,000 cases (an industry standard of volume, with one case about 25 pounds), or about 2.5 million pounds of product. The plant intends to step up production and produce 140,000 cases per month by next June.

 SWB plans to expand production from five to seven days a week, and increase production capacity, which was about 50% during the startup phase. “Now we are able to produce confidently.  Before we were reluctant to pursue customers, but now, all the stars are aligning,” says Warner.

Turning the Corner
The market for par-baked and frozen dough products remains strong, with an annual growth rate of about 15%.  “There is no overcapacity in this market,” says Warner.  He credits Rich Products Company for working patiently with SWB during its startup period. Rich Products is a worldwide bakery leader and a key customer for SWB. 

In October, SWB began producing for another major customer: the Denver-based Quizno’s, which sells sub sandwiches in 40 states, Puerto Rico, Canada, Japan, the United Kingdom, Australia and Central America.  “One additional Quizno’s shop is opened every 24 hours,” says Warner.  “Our plant is particularly suited to making their product, which is a long french loaf, or baguette, as they’re sometimes called.”  SWB is supplying Quizno’s under a contract manufacturing arrangement that SWB has with another farmer-owned cooperative, the 227-member Mountain View Harvest cooperative, which operates Ger-ard’s Bakery in Colorado.

Along with contract manufacturing, SWB plans to pursue more national chain accounts —customers with high volume and limited product needs, and label direct wholesale marketing to grocery chains and regional distributors for resale. Warner notes that SWB has been securing business even though the company has no formal marketing department, which is an indication of product demand.  The company plans to step up its marketing efforts in part through market brokers.

SWB’s operational expenses now run $35,000 per day, and at full capacity, these costs will exceed $50,000 per day. With most of SWB’s venture capital invested in its facility, operating funds have been run low. That’s one of the reasons why former CEO Gary Lee voluntarily resigned from the company. 

“Gary’s talents were very much needed in the beginning, as he devised our business plan, hired the operations people, managed our plant design and installation into its startup phase. But Gary realized that those talents were not needed today, and that he was an expense we no longer could afford. He pointed it out himself, offered to resign his position, and handed the reins over to a person with more operational experience, our current president, Mark Krivoruchka.” Krivoruchka previously was the company’s senior vice president.  Lee now heads Rahr Malting Company in Shakopee, Minn.

The need to cut costs was also the reason why SWB suspended its grain origination program, a separate business division that was costing about $50,000 a month to establish. “We did design a highly sophisticated system, which tested and cataloged the quality and location of our wheat supply. To our knowledge, there is probably no other business in the country which has developed and implemented a better system of identity preservation for a single commodity over a large geographical area,” says Warner.

However, SWB’s bakery alone could not use enough wheat to justify having the grain procurement business, and the company needed to be able to sell identity-preserved wheat shipments to other customers to make the division a viable business unit. The current marketplace, though, is not willing to pay the premiums required to sustain the costs of identity preservation. “For now, it has been put quietly away in our safe, and when the market is ready to pay the prices that are needed to sustain it as a business, we will bring it back out,” says Warner. SWB has also moved many of its employees from Fargo to its plant in Georgia, although the company will continue to have a satellite office in Fargo.

SWB is turning the corner from a startup period where the company was spending money to gear up for production.  Now the pieces are in place for the company to start making money, says Warner, which is expected by mid-2002 when the plant is running at full capacity with new customers in place. The company currently projects it will finish 2001 with a loss, but turn a profit of $1.7 million in 2002, and $3.45 million in 2003. A need for operating capital to help the company cash flow in the meantime prompted SWB to initiate an equity drive, in which the company hopes to raise between $1.5 and $4 million in new capital from its members. The minimum amount any member can purchase during the new equity offering is 600 shares or $1,200 dollars worth.  SWB’s new equity drive will close December 11.

“We’re so close. We hope our members agree that it’s worth the fractional amount of extra equity to get this thing to shore,” says Warner. “I still believe we can achieve what we set out to do, and once we do, it will provide the basis to add value to wheat in many ways, beyond what we’re doing today.”

SWB Equity Drive Meetings

Spring Wheat Bakers has been holding equity-drive meetings since the end of October in the Northern Plains. The remaining meeting schedule:

Nov 13 Tue. 9:30 AM  Ada, MN, VFW

Nov 14 Wed. 9:30 AM  Wahpeton, ND, Eagles

Nov 19 Mon. 9:30 AM  Mayville, ND, VFW

Nov 19 Mon. 2:30 PM  Langdon, ND, American Legion

Nov 20 Tue. 9:00 AM  Williston, ND, Airport International Inn

Nov 20 Tue. 3:00 PM  Regent, ND, Regent Cafe

Nov 28 Wed. 8:00 AM  Great Falls, MT, Heritage Inn

Dec  3  Mon.  9:30 AM Edgeley, ND, Big John’s

Dec  3  Mon.  3:00 PM Redfield, SD, VFW