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The Pork Empire of Ken Maschhoff
Ken Maschhoff and his team have built a pork dynasty from the family farm headquarters outside Carlyle, Illinois. In the past 20 years, Maschhoff, 57, has grown the operation from 8,000 sows to 218,000, climbing the annual Pork Powerhouses® ranking of largest U.S. producers rapidly. The Maschhoffs, which is owned by Ken, his brother Dave, 59, and their wives, Julie and Karen, is the fourth-largest pork producer in the nation.
On a sunny day in September, Maschhoff, president of the National Pork Producers Council (NPPC), takes a drive around the family’s original sow farm, where his grandfather farmed and where 13,000 sows now live. He talks about why he is excited about the U.S. pork industry and why rapid growth in production is not the smart move for his company right now.
SF: Your sow number has stayed steady for several years after decades of rapid growth. Why?
KM: We have made no secret over the past three years that our focus is on our customers [packers] and making sure we are delivering the attributes they are looking for. Doing that in a cost-effective way is paramount because if costs are higher than returns, it is not sustainable. So, our focus has been on rightsizing. We plan to build two new sow farms in the next year (one has already started), but our overall sow numbers are not growing. We have some older farms that may not be the right geographic fit or the right size unit for our system.
Our focus is getting the right types of farms built to deliver the products customers need. That might be a certain genotype that provides specific attributes, or it might be sow housing as we focus on reducing the use of individual maternity pens. Many times, a geographic fit may not be right for one producer but it is for another producer, based on the packing plant they are supplying, or their growth footprint, or where their feed mills are located. We are focusing on getting our geographies aligned with our customers.
Today, The Maschoffs have determined we have other places to go with capital. That doesn’t mean we are abandoning the pork industry. We are certainly not. I have preached for years that if we have the same profitability from 175,000 sows that are in the right geography and delivering the right return, there is no reason to have 250,000 sows.
SF: Will you invest in the pork packing business, as some other producers have done?
KM: We have said all along it’s not our goal to invest bricks and mortar into packaging, processing, and branding on the pork side. The last couple of years we’ve looked at what’s going on in the pork industry with the announcements of additional packing plants. We are not involved with those. We have looked at that investment and believe it’s time to be very prudent and cautious with capital going into the pork sector.
SF: You invested in the Gold'n Plump chicken business in 2013 and then sold it recently. What is the strategy?
KM: We bought Gold'n Plump (GNP) because we wanted to diversify within protein. We learned a lot about branding. We sold that business earlier this year to Pilgram’s Pride. It was a tremendous offer, and the timing couldn’t have been better. When we purchased the company, our brand, JUSTBare Chicken, had 60% of the antibiotic-free market in the country. By the time we sold it, that was down to 15% market share because everybody was doing it. What was special about the company was being somewhat commoditized. We also felt that Pilgrim’s Pride could take the business further than we could and provide those GNP employees an opportunity to grow in new areas.
We had something we thought was going to be more valuable today than it would be three to five years down the road. We learned a lot by owning the poultry business, and it was a great financial investment for us. The Maschhoffs have always been very opportunistic.
SF: As president of NPPC, what is top of mind for you?
KM: I deal with trade issues every day. Recently, we learned that President Trump was considering terminating the free trade agreement with South Korea (KORUS). Our NPPC staff and pork producers around the country worked all Labor Day weekend to urge the administration to reconsider.
Dermot Hayes [Iowa State economist] says if the agreement is terminated, live hog prices would fall by 3.8%, or $4.71 per animal. That could likely take away all of the profitability of the pork sector in 2018. If that trade deal did not exist, we would lose the South Korean pork market to the Europeans. For now, the administration has pulled back, but we have to stay on it.
SF: Why is trade so important?
KM: It is so imperative that we don’t lose any ground in our current FTAs (free trade agreements). We actually need more FTAs. The U.S. is expanding in new sows and packing plant capacity, so it will need to export about 33% of its pork.
SF: Have you diversified outside of agriculture?
KM: We own an asphalt business in Las Vegas and a fire safety and suppression company in St. Louis. We invested in those businesses in 2007-2009 because they offered better risk-adjusted returns than the pork industry. We have always thought we should be diversified and not have all our eggs in one basket.
Our former CFO operates a hedge fund for us, giving us great flexibility and liquidity.
SF: Why is diversification important for your company?
KM: We love this pork industry – it’s how we grew up, it’s what we do, what we know. But there are always risks you can’t control in any industry, such as geopolitical events, interest rates doubling overnight, or China saying it won’t take ractopamine pork. These are things we can’t control; those are systemic risk. The thing we can control is where our capital flows. When the risk-adjusted rewards in the pork business are great enough, that’s where the capital will flow, and when they are not it will go to other areas.
Our legacy pork business and our other businesses are synergistic. If you want to preserve a legacy business, you better put it in a position where it can sustain something catastrophic, such as foot-and-mouth disease (FMD). Most people who have all their money in pork could never sustain that kind of dangerous situation. We have tried to position our company so if there is an FMD outbreak or the U.S. loses a trade agreement, we know what that means to our pork business, but it isn’t going to affect our asphalt business or our fire safety sprinkler business or any of the rest of our diversified portfolio. They can coexist.
SF: Why is foot-and-mouth disease a concern?
KM: It would be catastrophic for the whole industry. Foot-and-mouth is a trade-restricting disease, unlike PEDv in 2014 where buildings sat empty but people made money because prices went high. With FMD, we can’t export pork or beef. It would cost agriculture $200 billion over 10 years, including the impact to the corn and soybean markets. We would downsize all those industries, including packing. If you can’t export, the industry has to downsize.
SF: Has your thinking changed over the years about risk?
KM: Absolutely! I really don’t think most pork producers look at risk and evaluate it thoroughly. I used to be that way 20 years ago. We looked at our taxes and said we can either give 45% of this to the government or we can reinvest in our business. Equipment dealers love farmers at the end of the year; even though the combine is only three years old and doesn’t need replaced, farmers buy a new combine instead of giving it to Uncle Sam. They don’t think about doing something else with that money, like investing in another business or the stock market.
SF: Do you see The Maschhoffs adding sows in the future?
KM: If we wanted to go that route, we certainly could, but that probably isn’t the right move today, so we are sitting on the sidelines. We don’t like a lot of debt. Our business operates with a very, very strong balance sheet.
Maybe it’s just my age. When I was 30, I was just like, ‘Go, go, go, nothing’s going to stop us, we are going to grow.’ I’m more patient now.
I do think that there is going to be some opportunity on the pork side in the next few years. I’m bullish protein worldwide. But I’m scared as hell about the growth we’ve had in the industry knowing that one stumble with Mexico on a trade deal, the wrong play on KORUS, and we could see prices in the tank a year or two from now.
SF: Is this a good year for every pork producer to take a hard look at the balance sheet?
KM: The industry is in the exact situation where people need to analyze and think about their next investment. We have never exported a greater percentage of our product than we are today. In a year or two, that number is going to be significantly more. Keep in mind that in 1991 we imported pork to this country. Today, we export 27%, and we are going to need to grow it to 33%. Countries that have been in this situation before, like Denmark and Canada, have, at times, suffered because they are so reliant on exports.
SF: Do U.S. producers realize how risky the pork industry is right now?
KM: Most producers are starting to understand and realize that. At NPPC, we are getting much feedback from people concerned with trade issues. They understand that if Korea goes away, they could lose all their profit next year. This industry is reliant on NAFTA. Mexico is our number one market in terms of volume of pork. Producers understand that trade is huge for agriculture. Without TPP we desperately need to negotiate a bilateral trade agreement with Japan. Beginning in 2019, the EU producers will have a definite advantage due to their trade agreement with Japan.
SF: You are the largest nonintegrated pork producer in the U.S., maybe the world. Does that worry you?
KM: No. The fact that there is new capacity in packing is good for producers. But packing and production have to be in balance. As we add plant capacity, we are inherently going to add production capacity. Producers may have a great 18-month or two-year run out of the deal if we get those two out of balance, but those runs are short-lived because, ultimately, they have to match. Packers have had a great run the last few years and currently still do.
Everybody is doing what they think they need to do. I know all the producers who are investing in new packing plants. We have had lots of discussions. I know why individuals are doing it and it’s the right move for them, but when you combine everything, what it’s doing to the entire industry is it’s making us more reliant on trade.
SF: Do you see growth in pork consumption?
KM: Domestically, the U.S. is adding a couple of million people a year to the country but eating no more pork per capita than we did 30 years ago. We are not going to change our domestic consumption. Our goal is to sustain consumption, not lose it. We have to increase exports.
SF: Do you think differently about sow expansion today?
KM: When you expand, you are ratcheting up the risk to your whole industry. Twenty-five years ago, I said I can grow our business and here is going to be our return and this is why we are making that investment. It’s very different 25 years ago than it is today. I don’t think I was looking at it right. Today, we need a lot higher return because of the systemic risk we face.
SF: What else keeps you up at night?
KM: We have slipped as a country closer and closer to more of a socialistic society. In the next 10 years, we will have socialized medicine similar to Europe or Canada. We are moving from a purely capitalistic society where people are used to certain returns. I believe the success of American business is largely a result of the entrepreneurial liberties that our constitution and capitalistic system allows. That belief has eroded over recent decades.
SF: Are you amazed when you look back at your rapid growth in pork?
KM: From 2002 to 2014, we had a 22% annual compounded growth rate. Based on the Pork Powerhouses list, we grew our sow numbers eight times faster than the rest of the list. We had that rapid buildup until we got to a point where we said, how many eggs do we want in this basket? So we went out and bought a business that had eggs [Gold'n Plump]. It was a great company, great cultural fit, great people.
SF: You have mentored other producers about growing a family farm business. Any tips?
KM: It’s not the multimillion decisions that break up families, it’s little things like who got gas from the farm pump, who got to hunt on the back-40 this year, or which grandchild does Grandma love best. You need to create a governance and culture that constantly focuses on profit. Run the business to be profitable, let that be the reward, and don’t let the little stuff distract you. That’s tough to do because the little stuff does distract us.
Most people in agriculture are trying to build a legacy business for their kids. If you want a legacy business that’s going to endure, you have to structure it so your kids think about it like shareholders. They are caretakers of something bigger.
On the other hand, if passing the business to your kids is your priority, you might not always maximize returns. If that is your goal, you cannot be faulted. To be honest with you, I struggle with that some days. I wonder if I created something my kids will feel part of or feel like they own.
SF: Why stay in the pork business, given the risks?
KM: People ask me why we do it. The pork industry is not sexy. We have had opportunities to buy golf courses and wineries. They are sexy, but the returns stink. If you want to be in a business that isn’t sexy, the profits are generally there.
SF: Why have you been successful?
KM: First, I thank God for blessing us. Second, Dave and I have a lot of trust and respect, and he has always supported my decisions. Finally, we have had loyal and committed employees through the years. They work as hard as family members to make sure this business is successful.
Our core value number one is training, communicating, and empowering people for success. That’s what our parents did for us when we were very young. Dad empowered Dave and I to make the decisions. I still think that’s why the business was a success.
SF: Tell me a bit about your family history.
KM: Our parents had a small farm with 135 sows. When I was 15, Dave and I each borrowed $3,500 from our grandparents to help us buy 40 acres of ground for $586 an acre. Two years later, we used that ground to finance another 120 acres, and then we sold that a year and a half later for $1,500 an acre. We then bought half interest in our parents’ 135 sows and expanded that to 700 sows.
We hired a high school friend as our first employee, and he still works for us today. At 17, I was hiring employees, working with packers, and buying corn from the neighbors.
A decade later, Dave and I bought full interest from our parents. At that time, we had 10 or 15 employees and were expanding from 700 to 1,200 sows. That was about 1988.
SF: What advice do you give companies about hiring?
KM: We have empowered young people through the years to take ownership in ideas. The best way for people to be successful is to experience the pain of a wrong decision. That pain will teach them, I don’t ever want to feel that again. You have to let them taste the sweet rewards of their success and relish it, because they will want more.
Sometimes it burns you when young people make decisions. To be honest, we have needed more gray hair in this company. We may not have always brought in enough experience, but we always brought in passion and energy.
We’ve focused so much on youth, because young people are great to train and work with. Ten years ago, I realized out of the 170 people in this office, there was only one person older than me, and I was 47. That’s how much youth was involved in the management of the company.
SF: What is the advantage to aging?
KM: Not much! Seriously, I think it is perspective. You are born young and dumb, and you end up old and wise. Wouldn’t it be neat if those were reversed? It’s our job to instill that perspective on younger people. About the time I was pushing to diversify the company, the younger people were saying, ‘Let’s go, go, go.’ I was happy beyond what I ever thought we could do as a company and wanted to look at some other things by that point, but I understand their enthusiasm.
Back in the early 2000s, I have to admit it, I thought, man, I want to climb on that Pork Powerhouses list. Call it vain or egotistical if you want. We had 22% annual growth rate while others were growing 3% to 5%. A decade later you get to a point where you just wanted to be damn good at what you do.
SF: Have you thought about getting involved in the packing side?
KM: We haven’t ruled that out. Right now, we are happy producing 5 million hogs a year for our customers.
SF: What do you see down the road?
KM: If the rest of the industry struggles and there is an opportunity, we are going to be opportunistic. This company is still 100% family owned. We have not looked to outside capital, although we have had opportunities. We had opportunities to own even more sows. We would have had to go get private equity, take a minority partner on. I’m sure glad we didn’t do that. That would have been doubling down on the pork side.
SF: What do you like best about your industry?
KM: People in agriculture are genuine, good-hearted people. It’s something special. I want my kids, even if they are not involved in this business, in some way, shape, or form to gravitate to their roots. I can honestly say, today, I love this business, I love this industry.
SF: You are president of NPPC at an interesting time.
KM: You said that right!