Hormel’s sale of its Fremont plant to WholeStone Farms will cost $30 million, including a multi-year agreement for WholeStone to sell 100 percent of its pork and raw materials to Hormel, the companies said on Thursday.
The transaction is not completed yet and is expected to close in December.
During its Q3 conference call with investors on Thursday, Hormel also said its decision to sell the Fremont facility was based on a reluctance to invest in modernizing the facility so that it could accommodate a double shift, which the company concluded was necessary for it to effectively compete amid a changing pork industry and volatile hog markets.
“We concluded that running Fremont as a single-shift operation was not a viable option and we would have to either spend the capital to modernize the facility, find a long-term supply partner, or close the facility over time,” said James N. Sheehan, senior vice president and chief financial officer.
“For example, we recently invested $80 million to modernize the Austin [Minnesota] facility. A similar investment would be required for Fremont, in addition to investments to double shift the facility.”
WholeStone, on the other hand saw a need for a plant like Hormel’s and was willing to invest the capital in the necessary renovations.
The company is owned by 220 independent pork producers who are also associated with the greater Pipestone System, which provides pig production management and veterinary services to a larger number of independent producers. WholeStone, which began in 2017, aims to “capture more value in the chain,” by using the Fremont plant to provide its farmer-owners with a “way of selling meat instead of selling hogs,” said interim CEO Luke Minion in a Thursday interview in Fremont.
“The plant is working today, there’s no doubt about that, but to compete long term, it needs significant capital and renovations,” Minion said. “And so that’s why it worked for both Hormel and us. We want to put the capital in and make those renovations, we’re excited about harvest business, and we operate in the commodity business today.”
The plant will undergo two phases of renovations—with WholeStone investing nearly $150 million—and ultimately work up to a double-shift.
Minion also reaffirmed the company’s previously published intentions to retain the entire team currently in place at the Hormel factory, claiming that the “world-class” workforce there had played a role in WholeStone’s decision to purchase the plant—along with a convenient geographical location for its farmers and the potential of a relationship with Hormel.
Minion didn’t detail what the company is doing to try and incentivize workers to stay, or how the transaction could affect pensions or benefits—”we’re working through those things with the team, and I think it should stay that way for now,” he said, also adding that they are going to “change as little as we can.”
Minion, however, acknowledged that there would be some necessary changes because some of the activities that previously took place at the plant—like producing Hormel’s signature canned ham product, SPAM—will be phased out over several years. That means that, over time, some employees will need to be transitioned into other work at the plant.
“That’s been the most difficult thing for the team, it’s the most difficult thing for us, because our intention is to find and offer an opportunity for all of the team, but it’s gonna be a process that’s going to take up to three years,” Minion said. “And so we just ask for people to be patient and understand that we’re being very open, we’re telling the story about what our plans are.”
Phasing out those activities is part of the two-phase renovations.
Phase I of those renovations deals with improving the ways the plant currently harvests pigs. That will require added capacity with regard to wastewater treatment, which WholeStone has already begun discussing with the city.
“I met and saw the mayor last week, and we had worked closely with Hormel in advance of making our purchase,” Minion said.
Other Phase I improvements include renovating office space, cafeteria space, conference rooms and other such amenities so that WholeStone can use the Fremont facility as its corporate headquarters.
All of those renovations will be either in process or completed by the end of 2019.
Phase II involves renovating and remodeling the harvest floor of the plant: phasing out Hormel’s “value-added” production activities—like those that produced SPAM—and replacing them with WholeStone’s harvesting activities.
“In contrast to thinking about making SPAM, what the end product for us will be is a porkchop in a box, or a pork loin in a box,” Minion said.
For the first three years, however, 100 percent of those products will be sold to Hormel. After that time, the two companies may or may not decide to continue that relationship.
The second phase of renovations will take between one and three years, Minion said, and will be coordinated with Hormel. In the long-run, the renovations and the eventual double-shift aim to help the facility better compete with other regional plants, recently built in places like Sioux City.
The double shift will also require additional employees in the future, on top of the team currently in place at the plant. Minion acknowledges that area labor shortages could pose challenges at that time, but he added that “that risk is anywhere in the United States.”
“First job is to create a culture and an environment that the people that are here right now want to stay with us,” he said. “Long-term, when we want to grow the employee base, it does start with culture, and we need to make sure that the community of Fremont, that we’re participating in ways that help attract people to Fremont, help them want to live here.”
As for the 220 farmers who will be providing hogs to the plant, Minion reiterated that it’s possible that at least some of those farmers might relocate their sites to be closer to Fremont. But he says he doesn’t expect any major influx overnight.
And once the deal closes in December, WholeStone will be communicating with producers who were previously selling pigs to the plant under Hormel.
“The agreement is that those folks that are selling pigs to Fremont now, we’re going to keep buying those pigs and honor the agreements that were in place,” Minion said.
Minion said that anybody with questions about the new operation should call WholeStone Farms at 507-825-7098.