Failure of Genius

 

Then the September 11 terrorist attacks sent an already faltering cattle market into a downward spiral from which Future Beef Operations would never recover.

Rod Bowling knew that things had not gone perfectly up to that point. The start-up had cost more -- by some accounts, $20 million more on equipment costs alone -- than the company had originally intended. There had been minor hiccups, like malfunctioning equipment, and major hiccups, like the lawsuits and the strain caused by the internal data system. Nothing, however, had Bowling so down as the look of the financial reports after the terrorist attacks sent the beef market to the swamp.

"Fall apart isn't the right way to say it, although that's what happened," says Bowling. "It wasn't apparent on any one day. It was more like death by a million cuts." The cattle market had gone from highs the summer before to lows in October and November, by which time most cattle-buying operations were losing up to $100 per head on steers. And unlike other outfits, Future Beef had a long list of extra costs to account for. Because the Arkansas City plant was located at least 180 miles, and sometimes up to 275 miles, away from its high-tech feedyards, inbound freight costs were between $17 and $18 per head, compared with an industry standard of between $8 and $10 a head. Dehairing increased production costs by $3 a head. The tannery, pet treats, and deli meats areas had all been running in the red.

Worse, Bowling knew Future Beef hadn't really hedged its cattle investments. Besides having bought cattle when the market was at a record high, Future Beef had bought animals at lower weights than normal and had kept them in growyards and feedyards longer than the normal period of approximately 150 days. This gave the company ultimate control over their nutrition and health regimens, but it also ratcheted up Future Beef's risk. "Feeding a bull for 200 days is risky," says Bowling. "We knew we had a tremendous risk on the cattle, but then again, we thought we were changing the business."

The company had only one form of protection, a risk collar clause in its contract with Safeway. If Future Beef lost more than $50 per head on the cattle, the clause called for Safeway to step in and pay the difference. For three months, as Future Beef's losses mounted, Safeway paid up. By December 2001, however, Safeway was refusing to pay. According to court documents, by the time Future Beef liquidated in August 2002, Safeway owed the company more than $13 million in collar money.

A Safeway spokesman refused to comment for this story, and referred Inc. to Safeway's 2001 annual report, in which it stated only, "[Future Beef's] processing plant began operations in August 2001 and failed to meet performance expectations."

Bowling says Future Beef probably could have sustained a $50-per-head loss, but it couldn't withstand losses of up to $240 a head. "It was $80 million and that was all we had," he says, passionately. "Safeway could have taken that hit, but we couldn't. The big brother in the partnership has to carry the water."

In December, just five months after the plant opened, Russell Cross stepped down as CEO, and Thad York, a Future Beef board member and former TCI cable executive, was given control. York, whom many in the company regarded as an outsider, began cutting costs, which meant he fired the company's legal counsel and financial officers, and later he turned off the cash-intensive dehairing machines. Priorities shifted. Ronnie Green, a beef cattle geneticist who had been reporting to Darrell Wilkes, said, "I had to stop concentrating on genetics and worry about how to pay the bills."

Future Beef declared Chapter 11 bankruptcy in March 2002, and in July it made a last effort to repair its relationship with Safeway. That same month, another major beef producer, ConAgra Beef Co. in Greeley, Colo., recalled 18.6 million pounds of beef it suspected was tainted with a deadly strain of E. coli bacteria. It was the nation's second-largest meat recall ever. Green says Future Beef went to Safeway touting Future Beef's impeccable safety record, to no avail. "We went to them and said 'Look what's happening at ConAgra -- we need this many more pennies per pound to make a safe product,' and their response was, 'We can't really do that."

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