Midwest Grain Products, Inc.

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Midwest Grain Products, Inc.

1300 Main Street
Atchison, Kansas 66002
U.S.A.
Telephone: (913) 367-1480
Fax: (913) 367-0192
Web site: http://www.midwestgrain.com

Public Company
Incorporated: 1957
Employees: 416
Sales: $229.2 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: MWGP
NAIC: 311119 Other Animal Food Manufacturing; 311822 Flour Mixes and Dough Manufacturing from Purchased Flour; 312140 Distilleries

Based in Atchison, Kansas, Midwest Grain Products, Inc. produces a variety of natural ingredients derived from wheat. Taking advantage of its location in the heart of the nation’s farm belt, the company buys wheat from area farms and grain elevators and processes it at facilities located in Atchison as well as in Pekin, Illinois. The wheat is milled into flour, and water is added to extract vital wheat gluten, which is then dried into powder and sold in bulk. It is an important ingredient in bread, improving texture as well as making dough pliable and helping it to rise. Some of the company’s wheat gluten is set aside to produce specialty wheat products. The leftover starch slurry is further processed to extracted premium wheat starch, which also is sold as a bulk powder. What is left of the slurry is then mixed with corn or milo and fermented and distilled into alcohol. The remains of the distilling process are used to produce a high protein additive for animal feed, and even the carbon dioxide emitted during fermentation is tapped and sold. In all, Midwest Wheat makes use of nearly 95 percent of the grain it processes. In recent years the company has aggressively sought niche markets for its wheat products, both food- and nonfood-related. Food products include Wheatex, a meat, fish, and poultry substitute, as well as Pasta Power, an egg replacement that is especially useful in the canning of spaghetti and other pasta products. The company’s wheat proteins also have found applications in cosmetics and personal care products. Its biodegradable gluten/starch resins are an environmentally friendly alternative to plastic and have been used to produce disposable eating utensils, food containers, and even golf tees. Much of Midwest Grain’s value-added ingredients are produced by its wholly owned subsidiary, Kansas City Ingredient Technologies, located in Kansas City, Kansas.

Founding of the Company by Cloud L. Cray, Sr., in 1941

The history of Midwest Grain is very much the legacy of the Cray family. The company’s founder, Cloud L. Cray, Sr., was a Detroit investment banker who had no intentions of going into business in a remote town in Kansas. He traveled to Atchison in September 1941 to look at a non-operational grain-based ethanol plant. After arranging to purchase the facility he planned to dismantle the equipment and build a plant closer to home in Michigan. According to company lore, however, he was won over by local boosters and agreed to keep the operation in Atchison. A seasoned businessman, Cray was further swayed by the proximity of the town to the company’s primary raw ingredient: wheat. The original business was named Midwest Solvents, employed 40, and devoted its initial activities to producing industrial alcohol for wartime use during World War II.

At the conclusion of the war, the company turned its attention to distilling drinking alcohol, in the beginning only selling in bulk to very large customers, but ultimately supplying smaller companies as well. In 1950 the company became directly involved in the spirits industry when it purchased one of the oldest whiskey brewers in the United States, the McCormick Distilling Company of Weston, Missouri, which had been established in 1856 by Ben Halladay, who is better remembered as a part-owner of the Overland Stage and the Pony Express. In addition to whiskey, the distillery also produced popular varieties of rum, gin, and vodka, and perhaps became best known for its commemorative ceramic whiskey decanters that celebrated Revolutionary War heroes, gunslingers, trains, and Elvis Presley. Not only did Midwest Grain find a steady outlet for its beverage alcohol in McCormick Distilling, Atchison and Weston were separated by only 20 miles, which provided a further competitive advantage.

In 1947 Cray’s son, Cloud L. Cray, Jr., better known as ‘Bud,” became an officer and director in the company. During the 1950s he grew increasingly more involved in the running of the business and was named president. It was during this decade that Midwest Grain made a concerted effort to diversify its product mix, broaden its customer base, and make fuller use of the grain it was processing. The expansion of the company began in 1953 when the Atchison plant added the equipment needed to recover vital wheat gluten, which at first was used only in the making of monosodium glutamate. The emphasis soon shifted to the production of vital wheat gluten for use in bakery products. By the end of the decade the demand was so high for vital wheat gluten that more equipment was added and a separate gluten division was formed.

In 1965 Midwest Grains added a wheat starch division. The initial product was to serve as an ingredient for wallpaper paste, which was produced by separating wheat paste from wheat slurry and then drying it into a powder form. In addition to other industrial applications, the company also found a wide variety of uses in baking and other food needs. Wheat starch could act as a baking agent similar to corn starch and found uses in pastries as well as glazes, soups, and sauces. In the 1970s, as Americans began looking for alternative fuels, Midwest Grain found a new market for its industrial alcohol and began producing ethanol.

New Leadership Beginning in 1980

Cloud L. Cray, Sr., died in 1979. A year later Bud Cray became chief executive officer and chairman of the board. He was replaced as president by his son-in-law, Ladd Seaberg, who earned a degree in chemical engineering from Texas Tech University in 1969 and began his tenure with the company in the same year. After a brief stint as distillery production manager, he became vice-president and manager of the starch division, then became plant manager in 1972, and served as general manager in the year prior to becoming president of the company. By 1988 he would rise to the CEO position, although Bud Cray remained a very active chairman of the board. Also in 1980 the company took an important step when it purchased the Pekin, Illinois facility, a gamble that revealed how optimistic management felt about the company’s prospects. Looking back a dozen years later, Bud Cray noted to a reporter that for a while the Pekin plant “looked like a millstone around our necks that might indeed drag us under water.”

During this period of expansion the company was organized as a network of strategic business units, in essence mini-companies. The system was more a matter of convenience than a thought-out plan, and although it was an efficient way to integrate new activities, there were long-term drawbacks in not fully integrating all of the company’s operations. A seamless approach to doing business clearly made sense because a waste product of one unit became the raw material of another.

Much of the growth potential in the 1980s involved food-related products, which led the company to change its name to Midwest Grain Products in 1985. To maintain a steady supply of wheat flour to feed its operations, the company purchased an Atchison flour mill in 1987 from The Pillsbury Company. Vital wheat gluten looked especially promising for the company, with few competitors in North America. European Union suppliers accounted for just 2 percent of gluten imports to the United States in 1985, according to statistics from Kansas State University. That amount would soon show a dramatic increase that severely impacted Midwest Grain. Because of Europe’s government-supported starch industry, gluten became a cheap byproduct that was dumped in the U.S. market. This situation was not anticipated by Midwest Grain when it acquired the Pekin plant in the beginning of the decade, nor when the company went public in October 1988. In fact, earlier in the year European suppliers, backed by an export subsidy from the European Community, were unable to make a serious dent in the U.S. market. Midwest Grain was believed to hold a strong advantage over imports because it could provide a steady supply of gluten to its customers as well as consistent quality. Investors concurred with management’s thinking. The initial public offering was priced at $14 a share, with 1.1 million shares sold, half by stockholders and the rest by the company. A major portion of the money raised was then used to upgrade facilities. The price of Midwest Grain stock then rose steadily over its offering price, and judging from the company’s financial results, investor confidence appeared well placed. For fiscal 1988 the company reported net income of $10.1 million, or $1.73 per share, on sales of $164.1 million. The following year saw revenues grow to $191.7 million and net income improve by 30 percent, topping $13.1 million, or $2.09 per share.

In the early 1990s Midwest Grain continued to be undaunted by European competition in the wheat gluten business. Both of its plants were operating at full capacity, the investment in the Pekin plant now seemingly justified. In 1991 the company invested $6 million to expand its production capacity to keep pace with an anticipated increase in demand for its gluten. In addition, the market for ethanol also appeared to be improving. Management was dissatisfied, however, with the loose organization of the company. There was too much duplication of effort between the business units, and as a result Midwest Grain underwent a major restructuring in 1992, becoming organized in a more traditional manner. The company was now divided into three marketing divisions, headed by three managers responsible for distillery, starch, and gluten products. Because of this shift, the McCormick Distilling Company no longer fit in. It was involved in selling spirits at the wholesale and retail level, whereas its parent company was more interested in serving major customers in bulk. In late 1992 McCormick Distilling was sold to a group of private investors, but Midwest Grain continued to supply the operation with beverage alcohol.

Company Perspectives

In business for more than half a century, Midwest Grain Products, Inc., is a recognized leader in the production of natural ingredients derived from wheat.

To support its continued growth, Midwest Grain launched a $75 million expansion program in 1993 to double its production capacity over the course of the next three years. Much of this increase was in anticipation of a growing demand for ethanol, which appeared likely to become an approved gasoline additive. It was a calculated risk for the company, but one with which investors agreed. In the first few months of 1993 the price of Midwest Grain stock rose 24 percent, more than four times higher than the Dow Jones industrial average. Although the gamble on ethanol would pay off, cheap European wheat gluten finally had an adverse impact on Midwest Grains in the mid-1990s.

Cheap European Wheat Gluten Adversely Affecting Sales in the Mid-1990s

European wheat gluten imports tripled from 1994 to 1996, resulting in Midwest Grain’s sale of the commodity falling from $70.1 million to $39.5 million. As a consequence, the company’s net income fell from $15.8 million in 1994 to a loss of $3.4 million in 1996. A drop in gluten sales also had a ripple effect on Midwest Grain, its product lines so interconnected that cutting back on the manufacture of gluten forced a reduction in other commodities that depended on gluten byproducts. Much of the added capacity gained in the expansion launched earlier in the decade remained unused. Also during this period, Bud Cray, at the age of 73, retired from active management of the company, although he retained his title as chairman of the board.

Midwest Grains and its chief competitor, the U.S. division of Australian giant Manildra Group, lobbied Washington for relief on cheap European wheat gluten and were successful in achieving a three-year quota on the imports, beginning June 1, 1998. In the interim, Midwest Grain launched an effort to develop value-added products, through the application of wheat chemistry, to replace the eroding revenue stream of vital wheat gluten. Moreover, investors had begun to view the company as subject to the vagaries of commodity price swings, with the result that the price of Midwest Grain stock suffered. By adding specialty wheat protein products that exploited niche opportunities the company hoped to change that perception and improve its position in equity markets.

Much of Midwest Grain’s specialty products remained food-related. The company developed Wheatex, a solid food product that served as a replacement for meat, poultry, and fish, either for vegetarian applications or to simply extend meat. It was also pliable and could be made into patties, links, or whatever shape a customer might require. Wheatex also featured a neutral taste that did not contend with added flavors, and because of its water-binding properties it was able to retain natural meat juices. Midwest Grains also developed an egg replacement product it called Pasta Power, which was especially useful in enhancing pasta products, thereby making them more suitable for canning.

Midwest Grains also sought nontraditional uses for wheat protein, amino acids, and starch, in particular cosmetics and personal care products, for which it served as an excellent alternative to animal proteins and other vegetable-based proteins. Product applications included mascara, body washes, facial cleansers, skin creams, hair sprays, and shampoos. Midwest Grains also developed biodegradable wheat gluten and starch resins that could be molded like plastic to make environmentally friendly items. They also could be used to make pet treats and chews. Management was aggressive in pursuing these new opportunities. In 1997 specialty products replaced just 1 percent of the company’s gluten sales, a number that increased to 5 percent a year later. For fiscal 2001 these products accounted for 23 percent of Midwest Grain’s total revenues.

In February 2001, Midwest Grain purchased a facility in Kansas City, Kansas, to produce Wheatex. The company also received financial help in the form of a $26 million federal grant as part of an effort to help the gluten industry cope with the effects of subsidized European imports. To support the growth of specialty products, the company’s board in October 2001 approved an expansion project for the Atchison plant, taking advantage of an $8.3 million grant from the U.S. Department of Agriculture. Midwest Grains’ researchers continued to develop new applications for wheat starch and wheat protein. In 2002 the company introduced Arise, a wheat protein product for use in frozen dough and fresh baked goods. Whatever short-term harm Midwest Grains may have suffered from the dumping of cheap European white gluten, it was becoming increasingly more evident that the company, by making a virtue out of necessity, was now much better positioned for future growth.

Principal Subsidiaries

Midwest Grain Pipeline, Inc., Midwest Grain Products of Illinois, Inc.; Kansas City Ingredient Technologies, Inc.

Principal Competitors

Archer-Daniels-Midland Co.; Cargill, Incorporated; High Plains.

Key Dates

1941:: Cloud L. Cray, Sr., founds the business after buying Atchison, Kansas, ethanol plant.
1947:: Cloud L. Cray, Jr., becomes a company officer.
1950:: McCormick Distilling Company is acquired.
1953:: The company begins to produce wheat gluten.
1957:: The business is incorporated in Kansas.
1965:: The wheat starch division is launched.
1979:: Cloud L. Cray, Sr., dies.
1988:: The company goes public.
1998:: Quotas on subsidized European imports of gluten are imposed.