Number Crunching Pork Producer
BY KERRY ANDERSON
When a small group of pork producers was faced with an increase in freight costs for the cost of purchasing feed, Aeger Kingma, an enterprising pig grower with a passion for ‘crunching numbers’ was motivated to take action. Five growers subsequently established Pentagon Feeds at Cohuna, in northern Victoria, in 2010. Six years on and it has significantly reduced costs for its members and is turning over $20 million per annum.
Comprising a green site development of a purpose built feed processing mill with capacity to store 3,000 tonnes of grain, Pentagon Feeds is a substantial addition to Cohuna’s industrial district. The mill produces 1,000 tonnes of pig feed a week to meet the needs of its five shareholders and other local pork producers as customers. By controlling their own grain procurement and utilising modern technology to achieve efficiencies, this privately owned company is producing quality feed at a reduced cost.
Creating much interest at the time it opened, and since confirming its viability as a business, Aeger is happy to share why he believes Pentagon has been a success.
In his view, it all comes down to ‘a bit of lateral thinking and ability to crunch the numbers.’ As is often the case in agriculture, he also agrees that adversity is a good catalyst for change, enabled through a spirit of co-operation.
‘For a couple of years, the pig industry wasn’t so good and there wasn’t a lot of money in it,’ explains Aeger. Given his long involvement in the industry as a current director of Australian Pork and former representative of the Victorian Farmers Federation Pig Group, he is well placed to comment.
‘Changes to the pork industry import regulations in the early 2000s allowed importation of pork into Australia which ultimately decreased pork prices and resulted in an excess of pigs being produced. A number of pork producers exited the market until the national herd was decreased and a balanced industry and pricing was restored in economic terms.’
Then, just as balance was being restored, along came the drought. ‘This increased our feed costs and impacted severely on our bottom line,’ says Aeger.
Normally 50–60 percent of total costs, in the drought feed costs rose as high as 75 percent. When their local feed mill closed down in 2007 an additional freight impost was introduced to transport feed from St Arnaud.
As a producer who runs 1,400 sows and cares for a total of 14,000 pigs at any one time, Aeger had very good reason to be concerned. ‘We had no control and were fed up with being dictated to.’
Using his accounting skills, Aeger wrestled with the issue and came up with a business proposal based on a similar model already operating in South Australia.
Operating for about a decade, the Murray Bridge Abattoir, led by Ian Parish, had successfully brought together a group of farmers and processors to control the quality of slaughtering for the export and domestic markets.
‘It was initially Ian’s suggestion that we look at this model,’ says Aeger. ‘A proposal was prepared but none of us had a lot of spare cash at that point in time so we parked the idea for a couple of years.’
Two years later in 2009, when the timing was right, Aeger updated the figures and put the proposal to five local pork growers. Most of the group had already formed a relationship for joint negotiations to purchase feed at the best price.
In fact, with this existing spirit of co-operation, Pentagon Feeds Pty. Ltd. only took 17 months from the initial concept to turning out the first run of feed pellets.
‘We worked out that we could build a pretty fancy mill for the cost of freight savings and produce at least 600 tonnes of feed per week for ourselves and other customers.’
Initially each partner signed an Expression of Interest and contributed $2,000 to fund a feasibility study to ensure the proposal was sound.
Discussion then turned to operating budgets and the legal side of the business, with agreements drawn up on how profits would be distributed and shares could be traded or sold.
Because the amount of feed required for each partner varied, shares issued was proportional to the amount of feed consumed. This was an important part of the company structure, therefore it was considered fair that the shared risk also be proportional according to the shareholding.
‘We each put in some cash to underwrite a loan for the business. All up we borrowed $3.2 million. The bank co-operated with us to establish proportional guarantees.’
Aeger stresses the importance of having a champion who will drive the process.
‘You need to recognise the points at which you are competitors and where you are not. It’s then easy to create a desire to achieve as long as someone is prepared to lead it.’ Aeger took the time to make a personal approach to each grower, explaining the figures and assisting them to understand the required investment versus anticipated return.
Early on the shareholders decided on a few basic principles.
‘We agreed that we were sharing the mill and that we would be as efficient as we could which meant some compromise. Efficiency depends on long production runs with similar rations, not lots of different varieties.’
Six years down the track and Aeger, who was appointed non-voting part-time executive director, is clearly delighted with the results.
‘It’s gone significantly better than expected. We bought into the concept based on savings on freight but didn’t understand the savings generated by being involved in our own procurement of raw materials which were obtained at a cheaper price than by the previous supplier.’
The mill was designed to be run with low labour input and, with the unanticipated savings on procurement, Pentagon has been able to weather the storm of increased energy costs. Aeger proudly claims that they get 33 percent throughput above the average of other mills out of their presses and can recite a range of statistics and figures to back it up.
Strategy is an important part of each board meeting held every two months, especially when it comes to purchasing their main raw ingredient of grain.
‘If commodity prices are at a high point we buy short, and if they are at a low point we buy long,’ says Aeger. ‘We are lucky to have the funds behind us to buy six months’ worth of grain.’
The company has just invested in additional grain storage to maximise buying capacity. They now have eight silos with capacity to store a total of 3,000 tonnes of grain for processing.
As a director of Pork Australia, Aeger also follows with interest the results of any research.
Specialised equipment from Germany is currently being installed to enable Pentagon to precisely measure and add protein to food pellets, once again maximising available raw materials for the cheapest possible ration cost.
‘Fat is a good source of digestible energy,’ explains Aeger. ‘Every percentage point of energy is worth about $28 to us per tonne.’
$70,000 has been invested in an infra-red machine, the size of a little computer, which gives Pentagon the ability to scan incoming samples of grain, and translate the imagery into data that is then emailed to their nutritionist for analysis. Another piece of technology then accurately sprays up to an additional 4 percent of fat coating around the food pellets. A nutritionist uses the information from this equipment to formulate appropriate rations for each class of pig.
Six years since being established, and with all this additional investment, there is no doubt that the benefits have been significant for Pentagon Feeds’ shareholders.
‘From a company point of view, over $1 million per year finds its way either back to shareholders or into assets,’ says Aeger. His accounting background compels him to also measure and track his own savings. ‘I personally save $5,000 each week on supplying feed to our farm.’
He is acutely aware that the longer they are removed from purchasing through a feed supplier, the more difficult it will be to calculate an accurate return. ‘It’s not just the freight savings, it is the increased ability to control the quality of feed going to your animals.’
Their next challenge as directors is to manage a new, and most welcome, scenario as the company transitions from one that has a big debt to service to one that doesn’t.
Without doubt, Pentagon Feeds is a great success story. As long as there is a viable pork industry, Aeger does not foresee any changes in his lifetime to the company structure or its shareholders, despite an exit strategy being clearly outlined at the very beginning of its formation.
‘All five shareholders are well into succession planning,’ says Aeger. ‘My son is well entrenched in our piggery and while it exists, the need for the mill exists.’ Even if there is a downturn, he says the mill infrastructure can be adapted to process feed for another species if required.
In Aeger’s words, backed up by his number crunching abilities, Pentagon Feeds has ‘turned into quite a useful business!’
Aeger’s top business tips:
Understand where control can bring added profit to your business.
Think strategy before structure.
Commit the necessary number of people to make it viable.
Recognise the points at which you are competitors and where you are not.
Take the personal approach when bringing people on board a business idea. Explain the vision backed up by the figures and how they work.
The simpler you can keep the entity, the easier it is to get off the ground.
Be clear on your exit strategy before agreeing to entry.
KERRY ANDERSON: A businesswoman, author, and community advocate from Central Victoria, Kerry is passionate about rural and regional Australia. She works with small businesses and rural communities to help them embrace new opportunities. READ MORE
This story is featured in Kerry's book: Entrepreneurship It’s everybody’s business