The Maschhoffs, Inc.

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The Maschhoffs, Inc.

7475 State Route 127
Carlyle, Illinois 62231-3103
U.S.A.
Telephone: (618) 594-2125
Web site: http://www.themaschhoffs.com

Private Company
Incorporated: 1991
Employees: 525
Sales: $3 billion (2005)
NAIC: 112210 Hog and Pig Farming

Based in Carlyle, Illinois, The Maschhoffs, Inc., is one of the largest family-owned pork production companies in the United States. The company maintains a herd of about 110,000 sows, a large number of which are raised by contract growers, small Midwest farmers located in seven states that Maschhoffs calls its "production partners." The state-of-the-art operation raises hogs from weaning to finishing, prepared for sale to meat packers.

The Maschhoffs use a closed-herd system that produces its own replacement females rather than bringing them in from the outside. In this way, the risk of disease is reduced, the health of the herd is optimized, and the mortality rate is lowered. Moreover, a closed-herd enjoys higher feed efficiency, a greater growth rate, and a lower cost of production, resulting in more consistent cash flow and greater profitability. Maschhoffs has also been in the forefront of the pork industry in the use of artificial insemination, the latest in feed technology, improved environmental safeguards, and better confinement configurations that improve the well-being of the herd and also result in more efficient pork production. Each year Maschhoffs sends well over two million finished hogs to market, delivering them to packing plants owned by Cargill in Beardstown, Illinois, and Ottumwa, Iowa. The company is run by brothers Ken Maschhoff and Dave Maschhoff, the former serving as chief executive officer and the latter as chief operating officer.

FOUNDING FAMILY: FARMING SINCE THE 1800S

The Maschhoff family has been farming in the Carlyle area since the mid-1800s. Raising hogs was a normal practice for all family farms at the time and a profitable sideline. In 1956 Wayne Maschhoff, the father of Ken and Dave, began farming with his father, Ben, who kept ten hogs. According to a company profile in Top Producer, Ben told the youngster, "I don't know if you want to raise hogs, but we've been keeping records and we make most of our money on hogs." Wayne took the advice and bought five sows. He was not alone among farmers raising hogs, however. Illinois and neighboring states like Iowa became major hog producers, but unlike many family farmers, he was quick to adopt new rearing methods, whether they were developed by others or invented by himself. At the same time, he continued to grow grain.

Wayne Maschhoff was also keen on carrying on the family farm tradition and groomed his sons from an early age to learn the life and love it. They were not only given plenty of chores but also responsibilities at an early age. "I was running a tractor in the field 1-2 miles away from home when I was 7 years old," Ken Maschhoff recounted for trade publication National Hog Master. "Dad put seatbelts on the tractor and bolted a block of wood on the clutch so I could push the clutch in." The brothers also learned how to give shots to baby pigs and to dock their tails. The area of hog production that especially appealed to Ken were the buildings, the hog barns, and machine shops. As a youngster he helped his father construct new hog buildings by hauling off concrete forms in his Radio Flyer wagon. When he became a teenager he and his friends—including Steve Quick, who would one day become the production coordinator at Maschhoffs—helped local farmers construct barns and other facilities. He then enrolled at Southern Illinois University at Carbondale to study animal industries, and during his freshman year designed an 857-foot-long hog barn that he would later erect on the Maschhoff family farm. New barn designs were important, as well as fascinating to him, because of new feeding systems and waste disposal methods. "I think hogs were almost the by-product of wanting to build—you had to put hogs in there to make it pay for itself," he told National Hog Master.

Dave Maschhoff and Steve Quick also graduated from Southern Illinois University at Carbondale. After college the brothers went to work on the family farm and were still in their 20s in 1979 when they made 50-50 partners with their parents and began to essentially run the operation. In that year Quick joined the operation as well, initially helping them with construction and the running of the farm's hog and grain operations. The brothers' wives at this stage handled the bookkeeping chores. Wayne Maschhoff explained to Top Producer why he was so willing to step aside: "I saw too many farm boys stifled by their fathers. I wanted my boys to keep growing."

The Maschhoff family farming business soon reached a crossroads. It had to expand to survive, but the price of land was escalating, making grain production quite expensive. The brothers decided that the only option, if they were going to remain on the farm, was to abandon grain cultivation and focus on their hog operation, which at this stage numbered 150 sows. It was no given that they would survive as hog producers, however, because according to Top Producer, 90 percent of the farmers raising hogs in 1977 would be out of the business 25 years later.

HERD OF 2,400 BY 1996

Following in the footsteps of their father, the Maschhoff brothers used the latest production methods to grow their herd and maximize their profits, and they were not afraid to bring in consultants to help them with herd and health nutrition management. They also incorporated financial and management planning into the business. In 1991 the herd numbered 700 sows and the brothers bought out their parents. Like other Illinois producers, they were independent operators with no contracts with packers. The Maschhoffs grew the herd to about 2,400 sows by 1996, when they faced another watershed moment. At the time, according to National Hog Farmer, "Contract hog production was concentrated in the Southeast. Midwestern producers didn't favor the idea, because it was viewed as a sign of failure that you couldn't make it on your own." Nevertheless, the Maschhoffs decided to pursue contract production, reaching its first deal in December 1996 with a neighbor to finish some hogs. It proved to be a wise decision. Because the contractor provided the equipment, the use of production contracts reduced capital requirements and produced a higher return on investment. As a result Maschhoffs were able to make better use of the company's financial resources and grow the business at a faster clip than before, as the size of their herd began to double every 18 months.

Pork prices fell in 1998, creating difficult conditions for hog producers, especially those who had expanded too quickly. A large number of producers, as a result, were forced out of business. The Maschhoffs responded to the situation by price hedging and adhering to a strict budget. Having weathered the storm, the company was able to resume its growth, spurred by the addition of scores of new production partners. The company was also able to successfully negotiate another price dip in 2002.

The Maschhoffs' sow herd totaled 8,000 in 1998, a number that would grow to more than 50,000 in five years, more than half of which were company owned. The number of production partners, who were located throughout Illinois, Iowa, Indiana, and Kentucky, reached 125.

COMPANY PERSPECTIVES

We believe in Progressive Farming … Family Style.

To accommodate the rapid growth of its herd, the Maschhoffs built a new 10,000—sow pod in 2002. A year later it bought 43,000 finishing spaces from Alden, Iowa-based Heartland Pork Enterprises and another 23,000 finishing spaces from Chandlerville, Illinois-based Triple Edge Pork. These facilities were then converted to accommodate the Maschhoffs' wean-to-finish system.

To remain competitive, the company also invested $2.5 million in 2003 to retrofit two of its barns, each capable of holding 3,600 hogs, to serve as a research farm, where the company could perform realistic on-farm production research. For example, the farm had 120 specialized pens that featured a computerized feed delivery system, allowing researchers to determine exactly how much of a feed formulation was delivered to a particular pen on any given day. In this way, the hogs could be weighed and optimum feed formulations developed. Other areas of interest included pig stocking density, feeder types, meat quality, and the DNA typing of sires and dams. In general the research resulted in small tweaks to the Maschhoffs' hog production system, but those changes in relationship to a large production system resulted in major cost savings. In addition, the company took a long-range approach, exploring questions that might not pay practical dividends for several years.

Another sign that the Maschhoffs had reached a new level in scale was the 2003 opening of its new 20,000—square-foot office complex located outside of Carlyle, which replaced the company's overcrowded headquarters. More than just a place to house administrative functions, the new building served a public relations function. It included a 140-seat conference center where not only employees could meet but also contract growers, agricultural groups, and state officials.

LAND O'LAKES ACQUISITION: 2005

The Maschhoffs' growth had been accomplished incrementally, depending on the addition of production partners and a few acquisitions of production facilities, but in early 2005 the company doubled in size overnight when it bought the swine production assets of Land O'Lakes Inc., Minnesota's highly successful dairy cooperative. The Maschhoffs herd numbered 55,000 sows while Land O'Lakes managed 60,000 sows on farms in Illinois, Missouri, Iowa, and Oklahoma. Over the years Land O'Lakes had become involved in the grain business to produce cattle feed, and it was a natural extension for the company to also begin selling feed for hogs as well as poultry. To increase profits from its grain, Land O'Lakes turned to hog production, which in theory could convert a low-margin commodity like grain into higher-margin meat.

The cooperative was not as adept at the swine business as it was in dairy and it began losing money on hogs in the late 1990s. The co-op's membership, especially dairy farmers on both coasts, grew increasingly disgruntled about covering the losses of a hog production operation in the middle of the country. By the start of the new century Land O'Lakes began looking to reduce its exposure to hogs, and finally in the spring of 2004 the pressure from membership was strong enough that management promised to exit the hog business, as well as the egg business, as soon as possible in order to focus on core operations. In June 2004 Land O'Lakes hired an investment banking firm to help in divesting the swine unit.

The Maschhoffs bided their time when the Land O'Lakes swine business came onto the market, waiting patiently while other producers made their bids, eventually had second thoughts and backed off. By the time Maschhoffs became involved, Land O'Lakes had lost its bargaining leverage. Needing to make a deal quickly, the company came to a reasonable accommodation with the Maschhoffs in 2005, although the terms of the transaction were not made public. By joining forces with the 12th largest hog-producing operation (Land O'Lakes), Maschhoffs, which had ranked No. 13, now became the seventh largest hog producer in the United States. Maschhoffs also picked up modern facilities and experienced employees and contractors.

KEY DATES

1979:: Ken and Dave Maschhoff become partners in their parents' farm.
1991:: The Maschhoff brothers buy out their parents.
1996:: The Maschhoffs begin contract production.
2003:: New corporate headquarters opens.
2005:: The Maschhoffs acquire the Land O'Lakes swine unit.

In a matter of ten years, Maschhoffs had enjoyed extraordinary change, the operation growing from 2,400 sows and a handful of employees to a herd of 110,000 and hundreds of employees. While the meat industry was rapidly consolidating, with meat packers like Smith-field Foods and Cargill launching their own brands to challenge their own customers, such as Sara Lee and Kraft, Maschhoffs had no plans for vertical integration. "We have a niche. We know how to raise hogs and we've done that very well," Julie Maschhoff, Ken's wife and head of public relations, told AgriNews. Her husband added, "The thing about a packing house is, you've got to develop a brand, and that isn't something easily done." In the near-term, at least, the company was likely to pursue opportunities to grow its herd through acquisitions, explore international growth, and perhaps seek ways to diversify the business beyond hogs.