Business Strategies / Capital Spending / Economic Development

Scheduled Downtime: Agricultural Subsidies Spur Pork Supply Chain Growth in Michigan

Farmers drive plan to create more favorable hog and bean pricing and to weaken processors’ grip on the market.

By Kevin T. Higgins, Managing Editor

It’s generally assumed that increased demand drives capacity growth, though over-capacity in U.S. food production can put a damper on new plant projects.

Business decisions are more complex, of course, and another consideration in greenfield projects is economic development incentives. A case in point is the hog processing facility being built in Coldwater, Mich.

Clemens Food Group heads the $255.7 million project, with plenty of involvement from hog farmers in Ohio, Indiana and southwestern Michigan. The Michigan contingent laid the groundwork several years ago, aided by state economic development authorities who underwrote a feasibility study. Their involvement helps explain the $33.8 million incentive package that the Michigan Economic Development Corp. (MEDC) says state and local governments have committed to the project (Good Jobs First pegs the value at $80.2 million).

Realizing a return on such a sizable subsidy from a mid-sized packinghouse is tough to compute until the total supply chain is considered. A network of hog growers is required to keep production humming, and those hogs need lots of feed to reach market weight in a matter of months. Throw in the farmers who raise the feed crops, and the financial impact on Michigan agribusiness runs well into nine figures.

The Clemens project also highlights the impact a small group of food industry players can have. Ground never would have been broken in Coldwater without such a group. A key mover and shaker was Harley Sietsema.

The patriarch of Allendale, Mich.-based Sietsema Farms brings 750,000 hogs and 1.4 million turkeys to market each year. As recently as 1998, the continued viability of livestock production in western Michigan looked shaky. First, Sara Lee shuttered its Bil-Mar turkey plant, then Thornapple Valley pulled the plug on what was the state’s last remaining fresh pork plant.

Transporting live birds to plants in Indiana and Iowa would erode margins, and consolidation in the turkey segment relegated independent growers to the spot market and uncertain demand, so Sietsema and other farmers formed the Michigan Turkey Processors Cooperative. Backed by $30 million in capital, most of it from the co-op members, they acquired a shuttered Simplot potato processing facility in Wyoming, Mich., gutted and rebuilt it for USDA slaughter operations in 2000.

One plant innovation was its carbon dioxide stunning system, a first for U.S. turkey slaughter. Engineered in-house, the system now is used at several other turkey facilities. Michigan Turkey Producers has since added a further processing plant that’s helping generate more than $200 million in annual sales.

“It was either do or die with turkeys,” recalls Sietsema, “but in the pork industry, there still are a lot of independent producers.” An effort to organize hog producers along the lines of the turkey co-op floundered, but a decade later, consolidation had reshaped the processing landscape.

“By 2010-2012, the processors were able to establish the market value,” he continues. Sietsema and a handful of other hog farmers lobbied the state for $100,000 to conduct a feasibility study on building a Michigan packinghouse. Armed with a favorable economic conclusion, they began knocking on doors, looking for someone with an established brand to take on the role of processing partner. The search ended in Hatfield, Pa., where Clemens goes to market with multiple brands.

Michigan hog farmers are clear beneficiaries of the project, which will temper rising freight costs and provide more favorable hog prices, but the bigger picture intrigued state officials. The Coldwater plant, expected to start production in autumn, will process roughly 1.6 million hogs a year, calculates Jamie Clover Adams, director of the Michigan Dept. of Agriculture and Rural Development, more than existing hog operations can supply. She expects 100-140 new Michigan hog farms to commence operations in the coming years.

She fixed “the break-even point” for hog farming at 5,000 head, a level sufficient to trigger odor complaints from neighbors. But “Michigan has a very strong Right to Farm law,” she added. “If you site the facility correctly, it can’t be labeled a nuisance.”

Already, hogs consume 8.8 percent of the state’s soybean crop and 6.8 percent of corn, figures expected to grow significantly. But 90 percent of soybeans are shipped out of state for processing, at a cost of 25-40 cents per bushel. “Twenty-five cents might be the farmers’ profit margin for the foreseeable future,” grimaces Clover Adams. To change the equation, state and local governments are providing $27.3 million in assistance for a new bean processing facility in Ithaca, Mich. The plant will have enough capacity to process half the state’s bean crop.

The soybean subsidy would not have happened without Clemens, which Clover Adams called “a transformative project for our state.” Intrastate trucking, veterinary services and feed mill operations are some of the other supply-chain activities that the pork project will stimulate.

"Our partnership with Clemens Food Group embodies how Michigan’s food processing and agriculture industries can collaborate to drive innovative business opportunities and economic growth,” noted Steve Arwood CEO, Michigan Economic Development Corporation.  “Clemens Food Group is a great addition to the state’s thriving food-processing industry and the benefits are proving to be exponential for those immediately impacted. The collaboration between Michigan’s agricultural leaders, Coldwater and Coldwater Township represents the entrepreneurial spirit and vision necessary to position the state to compete in the global market. ”

The Coldwater site initially will process 10,000 hogs a day, with potential for 20,000 if a second shift is added.

That puts it in the same league as Prestage Farms and Seaboard Triumph Foods, two Iowa pork plants coming on line this year. That’s a lot of added capacity, but given Americans’ insatiable taste for pork products (bacon-infused vodka, anyone?), demand exists. Barring a trade war that could choke off U.S. food exports, the state of Michigan just might get a return on its largesse.