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SF Special: How Premium Standard Farms Transformed the Pig Business
Tad Gordon was 33 years old and Wall Street was wearing him out. The New Jersey native was looking for something else to do.
The year was 1986. Agriculture was in the throes of a debt crisis and many Midwest farmers were losing their land to lenders. The news reports piqued Gordon’s interest. He saw opportunities. Banks and insurance companies were accumulating hundreds of thousands of acres of land and hiring farm management firms to handle the assets.
Gordon noted that most states had strict corporate farming laws limiting corporate ownership to a few thousand acres. There were exemptions for lenders, giving them a few years to divest themselves of these assets, but that time was running out.
He started investigating ways he could help insurance companies divest of the land. As he researched the assets of farms, he saw an interesting trend.
“Most of the high-producing farms had hogs on them,” says Gordon, now 64. “They were generating a higher rate of return. So, I became very interested in the hog business.”
Gordon knew nothing about the swine industry, but he was familiar with the Maryland chicken company Perdue Farms. As he studied hog production, he noticed telling differences.
“I’m thinking, this isn't the way Perdue raises chickens,” says Gordon. “At Perdue, every chicken is exactly the same. They are very consistent. I’m watching hog farmers throwing feed on the ground. How could they be making money with all these inefficiencies?”
Finding a hog guru
After months of research, Gordon was ready to take the next step. “I knew just enough to be dangerous, so I had to go out and find an expert in the hog business,” he explains. “The closest thing I could find, which was a really good find, was Dennis Harms.”
Harms was a feed sales manager for Central Soya Company, based in Indiana, with a long history in hog production. “He really knew his stuff,” says Gordon. “His vision for the hog industry matched my vision.”
The two new partners traveled to North Carolina. “Those farms were cutting their teeth on new technology,” says Gordon. “I got to see how the best hog farmers were doing it, compared with the Midwest, which was really how the worst hog farmers were doing it. I got even more excited about the potential.”
When he looked at pork consumption trends, he didn’t like what he saw. “As a protein source, pork was stagnating,” says Gordon. “It scared the heck out of me. There was no growth.” At the time, the U.S. was a net importer of pork. “I was worried about getting into an industry with no growth potential.”
Gordon blamed pork’s problems on inconsistency, and knew he and Harms could do something about it. “Pork had no consistent product. This really drove us as we put our business plan together in 1988.”
After analyzing every aspect of the daunting project, he and Harms decided to go all in. “Dennis was really the driving force,” says Gordon. “He said, ‘Hey, we are going to put inefficient pork producers out of business. They are either going to get efficient or they are going to go away. That is what’s going to happen.’
“That got my comfort level way up. That’s when we decided this is a huge opportunity. We can do this.”
Starting to build
In July 1988, Gordon filed papers in Ames, Iowa, to incorporate Premium Standard Farms, LLC (PSF). “We decided Iowa was the hog capital of the world; Iowa likes hogs, so this is where we will build.”
Gordon quickly raised $5 million in a limited partnership deal from contacts he had in the investment world. He and Harms went looking for land in Iowa.
“I’m relying on Dennis’s expertise,” says Gordon. “This is the first time I have stepped foot in Iowa, so I have no idea what I’m doing. We are marching around and I’m learning about how much land we will need, and how many barns we will need on each site.”
They settled on 1,100-sow units with finishing off-site. The construction was going to be the best in the business. “Dennis was a real stickler for quality,” says Gordon. “We were accused of building a Cadillac when a Chevrolet would do the job. And that’s probably the truth. But we wanted to be on the cutting edge of technology and do it better than anyone else.”
Pretty soon, the swine industry took notice. “Everybody was watching what we were doing very closely, because we were trying new things,” says Gordon. “Every step of the way, from waste management to construction, we were challenging ourselves to see if there was a better way to do things.
“That’s when the trouble began.”
Kicked out of Iowa
The permitting process for PSF was public record and became a focus for activists. “For whatever reason, we got labeled a corporate farm,” says Gordon. “It was the kiss of death.”
In the fall of 1988, PSF had its first sow farm in Iowa under construction. “We didn’t own a hog yet, but we got press like you could not believe,” says Gordon. “We had the press camped out in front of our offices every day trying to get us on camera. It was unbelievable. I couldn’t go outside the office without someone sticking a camera in my face. I’m the guilty party because I’m representing Wall Street coming to rural America.”
Gordon and Harms had not planned for this conflict in their model. “Dennis and I never thought it was going to be this difficult,” says Gordon. “We thought we would build a few hog units, prove the model, and then we would expand.”
They hired their first employee, Terry Schmidt, as overnight security for their sow farm under construction near Boone, Iowa (which was also near Ledges State Park, something that angered protesters even more). Vandals had been spray painting the barns.
Three weeks away from populating the Boone farm, PSF got a call from Iowa Governor Terry Branstad. “He said, ‘I’m pulling your permit, you are done,’” says Gordon. “He kicked us out of the state.”
Stunned, Gordon and Harms had a big decision to make. “We had millions invested and now we are done in Iowa. Dennis and I looked at each other and said, ‘Well, should we call it quits?’ We decided to give it one more shot and see if we could find somewhere else to go.”
They made inquiries in seven states, but quickly eliminated any place where the cost of production was too high. “We didn’t want to go anywhere that didn’t fit our original model of how we are going to be successful,” says Gordon.
Where is that?
They had just about given up when they got a call from a small town in northern Missouri. “They approached us because we had been in the news,” says Gordon. “They said, ‘Would you consider Princeton, Missouri?’ We said, ‘Where is that?’ We had no idea where that was.”
With nothing to lose, Gordon and Harms drove 8 miles south of the Iowa line to check it out. “This community was really hurting,” says Gordon. “They couldn't afford to keep the courthouse open. The school systems were hurting. The town was going under. There were some very successful farmers with thousands of acres, but other than that, they were out of business. The doors were being closed.”
Extremely sensitive to public opinion at that point, Gordon and Harms told town officials they would only build there if they were welcomed. “We told them to give us a chance to tell our story in front of your community, and then they can vote whether or not they want us,” says Gordon.
One cold, winter evening, with snow covering the rolling hills around Princeton, Gordon and Harms stood up in front of the small community and gave their spiel about what they wanted to do and how they would do it.
“We left the room and they spent a couple hours discussing it,” says Gordon. “Then, the local judge who ran the meeting came out and said, ‘We would love to have you in Princeton, Missouri.’ That’s when we started Premium Standard Farms.”
The next hurdle was altering the corporate farming laws in Missouri that limited PSF to owning 2,500 acres. “We knew we had to change some laws if we wanted to stay there,” says Gordon.
In April 1989, he and Harms went to visit Missouri governor John Ashcroft in Jefferson City. “We said, ‘OK, governor, this is what we’re thinking of doing. Will you support us? We got chopped off at the knees up in Iowa. We need to know that you’re going to support our efforts here.’”
The governor’s response surprised Gordon. “He holds a press conference and throws it right in Iowa’s face. ‘We are welcoming Premium Standard Farms to Missouri. We will support them in any way we can.’ He makes a huge deal out of it. Dennis and I are sort of embarrassed. We don’t even own a hog. It was the old P.T. Barnum saying: ‘There is no such thing as bad press.’ There was so much truth to this at this point.”
Gordon and Harms went back up to Princeton, knowing they had to move fast while they had Ashcroft’s support. They started contacting state representatives, and before most of the press and the public got wind of what was happening, the state corporate farming laws were changed to exempt three counties in northern Missouri: Sullivan, Putnam, and Mercer.
“A couple of local representatives and a senator snuck it in a bill,” explains Gordon. “We got it done under the radar. It didn’t make national news; it didn’t even make the local press.”
The rural electric cooperative in northern Missouri played a big role in getting support for the company, as well, says Gordon. “They wanted us there because they saw a huge power play for them. There is no way we could have done it without them and the local politicians.”
Now, it was time to start producing pork. “We disassembled our unit up in Iowa and literally moved it down bolt by bolt, 2×4 by 2×4,” says Gordon. The first unit in Princeton, Missouri, named Wiles 1 for the farmer who sold them the land, went up quickly in summer 1989.
Next up: Expansion.
“At this point, we knew we had to get buy-ins from all the neighbors,” says Gordon. “Our rule of thumb was anybody within a mile of our unit, we had to have a buy-in that it was OK to build. We offered them all the same thing – we will buy your house and let you live there the rest of your life for free. Some took us up on it and others said, ‘No big deal, I’m fine. I support you guys.’”
If they heard of an unhappy neighbor, says Gordon, he and Harms would jump in Harms’s Jeep and drive out to the neighbor’s house. “We would knock on his door, and say, ‘I hear we have a problem; let’s figure this out.’ Everybody soon knew if you’ve got a problem you can call Dennis Harms and he will come to your house.”
In these giddy early days of PSF, “We wanted to be friends with everybody,” says Gordon. “The momentum we had back then was unbelievable. The community hugely supported the original Premium Standard Farms. Not what happened later, but the original game plan was hugely supported.”
Knowing they had to be totally committed to the venture, Gordon sold his apartment in New York City and moved to Princeton. Harms and his wife, Kathi, sold their house in Ames and moved to Princeton. “We became part of that community,” says Gordon. “That was really important for us and it was really important for the community.”
Meanwhile, sow units Wiles 2 and Wiles 3 were built and ready to be stocked with gilts. Straight-line winds came through and flattened them. “It was like the end of the world again,” says Gordon, “but everybody came to the rescue. The subcontractors trusted us to get the money to rebuild and the insurance company came through.”
Now it’s 1990. PSF has spent the $5 million cash it raised initially, plus more it borrowed from Prudential. “We had three units up and everything is running smoothly,” says Gordon. “The cash flow was there, we’ve proven our model, we’re making money, and everything is working out gloriously.
“That’s when I make my first big mistake.”
Having worked on Wall Street for 10 years, Gordon was confident he could get additional funding for the project. “I said, ‘Hey, Dennis, I know all those guys – let’s go to Wall Street and see if we can get them interested in the hog business.’ I wasn’t sure I could do it, but I did know that we had a model that worked. I marched around Wall Street dragging Dennis Harms, my farm buddy, to all these interviews. Then we came back to Princeton and minded our business.”
One morning, Gordon got a phone call. A man from Morgan Stanley in a three-piece suit was calling from the one pay phone in the Princeton square. “How do I find you guys?” he asked.
Gordon picked up the investment banker and took him to PSF’s tiny office in town where they went through the numbers. Then, he took him out in the country and showed him a hog site. “He showers through and tours the unit and then he’s gone,” says Gordon.
A week later, Morgan Stanley asked Gordon and Harms to fly east. “They call us all to New York and say, ‘We’re interested. We want to invest in your business,’” says Gordon. “That was when I made my big mistake.”
Gordon agrees to sell Morgan Stanley majority interest in Premium Standard Farms. “It was my call, not Dennis’s call,” says Gordon. “It was my mistake. I shouldn’t have done it. We sold them 51% of the business. I thought I was cutting a good deal because, originally, they wanted to buy 70%. Still, 51%, 70%, it didn’t matter. They now had control.”
Morgan Stanley made it very clear at first, says Gordon, that, “Hey, you guys are the farmers, this is your business plan, this is your thing. You will not hear from us.
“Unless things go wrong. Then you’re going to hear from us.”
Things went wrong.
“They wanted to grow the business a lot faster than we had ever envisioned,” explains Gordon. “Our goal was to get to 80,000 sows over five to seven years. Morgan Stanley wanted us to get to 80,000 sows in 18 months. Money was not a problem. They said, ‘You tell us how big the check needs to be, we are going to write it.’”
“Morgan Stanley literally threw $800 million at us,” says Gordon. “That’s a big number. It’s hard to turn something like that down. It allowed us to live out our dream. It was too much too fast. We just went crazy.”
The big problem off the bat was land, he explains. “Right out of the chute we needed 35,000 acres to spread the waste. We didn’t want environmental problems. How do we find 35,000 acres and not drive prices through the roof?”
His research showed that the average farm in northern Missouri was 250 acres. PSF was going to have to patch together dozens of farms. “We did not use a real estate agent,” says Gordon. “We did everything on the lowdown. We went around and talked to farmers because we had to piece properties together. We managed to do it. We built these very large clusters of land. It was amazing.”
Gordon calls the years from 1990 to 1994 magical. “It was absolutely amazing. Everything was going our way. We were the largest employer in northern Missouri. We got the community to buy in on everything we were doing. Everything was top quality. We’re making sure we had odor control. We were doing everything right and taking no shortcuts.”
Harms hired the most talented people in the hog business, says Gordon, including Rick Anderson, head of construction; Gregg BeVier, head of production; Don Skadburg, head of grow-finish; Marsha Webster, accountant; Mark Warren, head of feed mills; Charlie Arnot, head of communications; and John Stadler, who built the packing plant.
“It was a huge team effort,” says Gordon. “They had unbelievable drive and dedication.”
Gordon got married in 1992 and convinced his new wife to move from New Jersey. “How I got my wife to move out there, I have no idea,” he says with a laugh. “I had to build her a really nice house and buy her whatever car she wanted.
“She would jog through the streets of Princeton in a bright blue outfit. Nobody jogs in Missouri, so she became quite the talk. She was very approachable.”
Their large house became a center of entertainment. “We had great friends there,” he says. “My wife, Ellen, loves to have parties, so we would invite the town. We had Christmas parties and theme parties, all sorts of parties. We really got to know everybody.”
Gordon and Harms even started a company radio station, and hired Cliff Gauldin as the DJ. “We decided that we had to communicate with all our units,” says Gordon. “We had a team of people spread out over 30,000 acres in three counties, so, we decided to put in our own radio station. Every unit could get Premium Standard Farms radio. Two or three times a week, I would talk to Cliff about what was going on. Dennis would do the same. It was human interest stuff about what was going on in the community so we could stay connected. It was a lot of fun.”
Farm to fork
By 1993, it was time for PSF’s biggest venture yet. The master plan was to control the animal genetics all the way through to the grocery shelf. “Every time somebody bought a Premium Standard Farms pork chop, it would be exactly the same specs,” says Gordon. The plan always included a packing plant, but now that timeline was sped up, too.
Milan, Missouri, was chosen as the plant site, and PSF aimed for another groundbreaking goal. “We wanted to export to Japan, which had the strictest food controls in the world,” says Gordon. “Nobody had ever been able to export pork to Japan because they were too picky. Our goal was to do that.”
Before starting construction on the plant, PSF flew buyers in from Japan, toured them through hog units, and showed them blueprints for the new packing plant.
“We wanted to make sure it met their specs because we were not going to build that packing plant unless they signed off on the specs,” says Gordon. “They saw the production facilities and said, ‘OK, if you build a packing plant, we will buy from you.’ We were the first packing plant approved to export to Japan. We were doing everything the right way.
“But we got ahead of ourselves.”
U.S. pork consumption was still flat. “Sure enough, we were our own worst enemy,” says Gordon. “We went to 80,000 sows pretty much overnight. Now you’re looking at dumping a million excess pigs on the market.”
Hog futures prices, which had been averaging $.50 per pound, dropped down to under $.10 a pound.
“We expected it to drop,” says Gordon. “We had a pool in our office that it was going to go down to 28¢. We thought maybe we would see a 50% retracement, but we were way off. We had been telling Morgan Stanley, ‘Be ready, prices are going to come down to 30¢. Don’t get scared.’ They were OK with that, but when prices went down to 10¢, they flipped. They didn’t know the hog business. The mistake I made was giving them control.”
PSF was highly leveraged. “We were $7 in debt to $1 in equity. Interest rates were over 10%. We were paying huge money on this money,” says Gordon.
The investment bank brought in consultants who said hog prices would never go back above $.30 per pound, he says. “Morgan Stanley panicked. We couldn’t talk them out of it. We said the markets will rebound; this is temporary. We have to hang in there. But Morgan Stanley decided they were going to listen to their experts and not us.”
The decision was made to put Premium Standard Farms in a prepackaged bankruptcy, known as a prepack. “This means we’re going to set a date in the future (July 1996) when you’re going to go bankrupt,” explains Gordon. “We’re going to refinance, and we’re going to change the debt structure and the equity structure of the business.“
Timing was not on Gordon and Harms’s side. “By the time the prepack came around, the market had shot back up and we were doing pretty well,” says Gordon, “but everyone had signed off on the prepack, so we went into bankruptcy anyway, even though we had a bunch of cash.”
Morgan Stanley came out “smelling like a rose,” he says. “They gobbled up a lot of the debt really cheap from their investors. Morgan Stanley did not lose any money on this deal at all. The equity holders all got screwed, including me and Dennis. We all got screwed.”
After the bankruptcy, Continental Grain Company approached Morgan Stanley to purchase the company.
“Continental Grain had piggybacked on us in northern Missouri,” says Gordon. “They started to build units there because we had been successful in that area. They did not do it the way we did it. They put units in people’s backyards. They did shoddy construction. It was junk.”
Morgan Stanley matched asset to asset, sow for sow, with Continental Grain in the negotiations, and that infuriated Gordon. “We had a much more valuable asset base. They were involved in nuisance lawsuits and had crappy construction.”
It was time to move on. “I got out,” says Gordon. “I had already lost all my money.”
The name Premium Standard Farms stayed. “They wanted to piggyback our name because we had the reputation and they didn’t,” says Gordon. “After that it was just Continental Grain with a PSF logo.”
(For the rest of the history of PSF, read How Smithfield Saved the Worst Hog Farm in America.)
“Up until then it was a good story,” says Gordon. “It’s just too bad the way it ended up.”
He continued to live in Princeton, raising three children with Ellen. He built a movie theater in the area and was involved with a software company in Kansas City.
“My wife and I decided to raise the kids to a certain age there because it was a pretty protective environment. We had a lot of friends.” In 2008, they moved back to Mendham, New Jersey. He stayed in the software business until 2012 and is getting ready to open up a new restaurant. He hasn’t been involved in agriculture since leaving PSF. “That was my one and only.”
Dennis Harms stayed in the hog business, working for a couple of companies after leaving PSF, says Gordon. Harms died of a heart attack in March 2008 at age 56.
PSF was his dream, says Gordon of Harms. “It consumed his life more than mine. He was the hog guy. He was the front man. I’m sure the stress affected him pretty dramatically.”
Gordon wants the hog industry to remember Harms fondly. “He did an incredible job. Dennis pulled together the crème de la crème in the pork business. He was unbelievable. He could talk people into doing anything for him. He was amazing and really dedicated. Everybody trusted him. I couldn’t have found a better person.”
The friendship stood through all the trials, he says. “Dennis and I bonded pretty close in 1988 when we were getting hounded by the press and bad-mouthed by everybody. Hanging in there and getting through that brought us close. We became family.”
As a total outsider to farming, Gordon has a certain take on it after spending a furious few years in the business.
“Agriculture is a very interesting beast in that it’s a way of life,” says Gordon. “I never really understood it until I went out there. If you become successful, you also become disliked. You are expected to literally work your fingers to the bone on 300 acres your whole life and be happy.”
The hog industry learned from the Premium Standard Farms adventure, he says. “We woke up the industry to better ways to do things. We had a huge impact. They couldn’t believe what we did. They all wanted us to fail. We were a self-fulfilling prophecy. We were an easy target.”
The real story of the original Premium Standard Farms, from 1988 to 1995, never got told, says Gordon. “Those were the good years, the important years.”