Horizon Milling turns 10
Aug. 29, 2012
by Josh Sosland
It was 10 years ago that Horizon Milling LLC was created as a joint venture combining the flour milling assets of Cargill and CHS Inc. to create what has become the largest flour milling company in the United States.
The joint venture originally comprised 16 flour mills owned by Cargill and six owned by CHS, with a combined daily U.S. flour milling capacity of 293,000 cwts. Today, the company has 290,500 cwts of daily capacity with additional capacity in Canada.
When the partnership was created in 2002, Cargill and CHS were relatively new players in U.S. flour milling. Cargill leapt to the top echelon of millers in the early 1980s by acquiring the North American business of Seaboard Corp. CHS in the early 1990s embarked on an aggressive mill building program, constructing large mills in Wisconsin, Texas and Pennsylvania to complement two smaller mills it already owned.
The 10-year anniversary prompted Josh Sosland, editor of Milling & Baking News, World Grain’s sister publication, to sit down with Dan Dye, president of Horizon Milling, and Mark Palmquist, executive vice-president and chief operating officer of Ag Business at CHS.
The interview, conducted in April at Cargill headquarters, explores questions around the origins of Horizon Milling, its current position in the marketplace and the outlook. The interview follows:
Sosland: Tell me about what each company expected with the creation of Horizon Milling and the degree to which it has worked out as expected.
Dye: I’ll start with a quick story. John Johnson recently retired from CHS as the CEO. John was instrumental along with Mark and others in opening the door to this relationship. Once a year, Horizon Milling presents to the CHS board (separate from regular meetings of the Horizon Milling board) a business update on how things are going. So at John’s last meeting before he retired, we were talking a little bit about the history of Horizon Milling. He recalled three key expectations going in. One was building and leveraging the value of the CHS origination base and how that would help growers have a part in this partnership. Second was leveraging what Cargill could bring in terms of interface to the customer, as well as a broader portfolio of offerings. And third was gaining the value of being more efficient, gaining more value from being together versus operating independently. And John’s assessment was that we’ve gone well beyond on all of those goals. And I think that is a good way of looking at it. I think it has gone very, very well.
We have a great team of people and that has been a key to our success. Partnerships don’t always work. You have to have the right partner, and you have to have the right kind of common expectations. I think this is a partnership that has gotten better over time. And I think that’s because it was set up the right way, with the right partners.
Palmquist: What I’d add to these great synergies are the concerns we had going in. The principal concern was how well we would sort through the aspect of being a competitor, a supplier and now a partner and will that work or will it create conflict? And then a second issue we had at CHS was that we were going to be the minority partner. Would Cargill allow us to continue to participate in an active way, or would they start to suffocate the partnership? Rolling fast forward to 10 years, I would say the companies have sorted through very well all the aspects of the competitor-supplier-partner. The role of partner is very well defined and very well protected. And as to the second issue about how we will fare in this relationship by not being an equal owner has worked out very well. Cargill is and has been extremely careful in making sure CHS participates in an active way. They have demonstrated respect for our ownership and respect for what we do. As Dan said, 10 years later, this partnership seems more viable today than it did at its birth. And that’s pretty good testimony to the business plan and also to the relationship between the two of us.
Dye: I’d like to emphasize that all of this is important to Cargill as well. Even though CHS on paper is a minority partner, we view them very much an equal partner in terms of how we operate. It’s clear to us that CHS is not just an investor in Horizon Milling. They’re an active partner. We have an active functioning board, and we have a lot of interaction between our organizations relative to Horizon Milling and the strategy and the capital planning.
Sosland: That sounds like a great marriage, but were there moments over the 10 years when there was a problem between the companies, a bump that tested the relationship?
Palmquist: I would give you one because I do think that if we hadn’t in essence gotten through this that we would never have achieved the value we have in Horizon Milling. It was a year or two into the partnership, really trying to make this wheat origination, supply chain integration work. It was a moment both companies had to sit back and say, “There isn’t a good enough exchange of very clear, pertinent information going on to help that origination process into Horizon Milling.” And both companies had to sit back and agree we’re just going to have to trust each other. We had to agree to get our people who are involved in it to understand that this is important, and that they would see the value if we could get everybody just to kind of release and let it go and trust each other. And I’ll tell you that within three or four months, the people who were involved on both sides, the buying in Horizon Milling, and the people that were handling procurement for CHS really started to see the value of this thing. It just released, and it started flourishing. So that’s about the only bump through the whole process, and it’s a good thing that it was a bump that happened fairly early and was something that we could deal with.
Dye: Mark alluded to the importance of trust even as people have changed. As an example, I came in two and a half years ago. The partnership was well established and the relationship was strong, which was clear to me from the very beginning. Part of that comes from good, open communication. When there are issues, we bring them forward. They’ve tended to be more minor than major. This is about, again, having an active partner versus a passive partner. Open communication, open discussion, go a long way toward assuring we don’t have any derailing or tension points that we can’t work through.
Sosland: Before we get into where the business stands today, let me ask you, Mark, about the decision to join forces with Cargill. CHS and its Harvest States Milling business more than any other company in the 1990s had a very aggressive expansion strategy focused on value-added agriculture in the form of flour milling. It had built new mills, had reached out to its members and said you can even participate in this (through a co-investment). Are there details you can give to explain what led you to recognizing you needed a different approach? The partnership seemed to represent a sudden and radical shift. What happened?
Palmquist: Internally for us, as we went through the milling build out, we were trying to do value added for producers, and we felt very good about what we were doing. But it became obvious after four or five years that one, we can’t build ourselves fast enough given the consolidation we saw in baking. And as important, we started looking at capacity in the industry and realized that for us to go out and build another five or six mills would be pretty negative for the industry for a long period of time. And that would hurt us as much as anyone. So we asked, “Is there another way we can do this instead of trying to expand ourselves organically?” That was a realization that didn’t happen in one meeting, it was a process of deciding we needed to start looking at milling differently. We felt we were at the halfway point, and we either had to bring it all the way or we’d have to say “no, we can’t get there,” and exit. That’s what really led us to look for a partner, and it rapidly became clear to us that Cargill was the right choice.
Sosland: How is Horizon Milling different today from what it was in 2002?
Dye: From a business standpoint, Horizon Milling has evolved from being a flour miller to more of a solutions provider helping our customers in different ways than just selling them flour. Horizon Milling acquired the grain-based assets of Smucker Foods of Canada, and that expanded us into the mix business. And we’ve had more interface with other parts of Cargill to bring solutions combining flour with other products that go beyond just selling flour. We look at our customers a bit differently, bringing more innovative approaches, innovative solutions and products and services that help the customer in an ever changing environment. We really look at ourselves as bringing a whole host of offerings, whether that’s risk management solutions to flours with different application benefits or the combination of flour with other products. To sum it up, we are still growing our core flour business, but we are doing many other things as well to meet the needs of our customers.
Palmquist: The other part that I really notice, it just doesn’t feel like a joint venture. It feels more integrated. So when both companies talk about Horizon Milling and look for things they can do and provide, it’s part of us. It doesn’t have that stand-alone feel to it, which I think quite honestly is providing more value to Horizon Milling because the people who are involved from both sides, being Cargill or CHS, view it as theirs.
Dye: I think Mark hits on a good point, because within Cargill, Horizon Milling operates just like another business in Cargill. And I think within CHS, Horizon Milling operates as another part of CHS. And seamlessness is a great word because within both organizations it’s not a separate deal outside the scope of things. It’s right in the center of what we do and is treated by both partners in that manner. Not all partnerships work out that way.
Sosland: It’s easier for me to understand this point on the Cargill side than on the CHS side. Mark, when you have Cargill as the managing partner, can you elaborate a little more about how that feels seamless? Is it because origination is a really big part of flour milling?
Palmquist: On the front end, I think Cargill has been very sensitive as the managing partner not to come across as suffocating. They have worked very hard at that and made sure that we had structure in place that allowed for it. That opened up the door for both parties to understand that active participation is important for the business. So it went beyond just trying to protect owner’s rights, and went more into the idea that this is great benefit to Horizon Milling. So, yes, origination is a big component, and because of that, there was a great value brought to the equation that Horizon Milling needed to make sure they stayed linked with us. But again, it has gone way beyond that. There’s a mutual respect that grasps best ideas, different ways of looking at things, different ways of performing can come from anywhere, can come out of different organizations. We have very robust board meetings that are not just about going through the financials and satisfying ownership obligations. It goes very much into what can we do to help the organization. The other benefit that I always look at is that Cargill brings an understanding of people selection and people development. They understand the benefits and not because they’ve been told that. It’s because that’s the type of people that Cargill has been very wise to bring in. Dan is a great example. Dan comes in not from a milling side, but from the grain side. He understands the value of origination, understands the importance of what CHS can bring to the table, so he makes sure that it’s not only protected, but can continually evolve into a greater balance. In this particular case, strategy inside Horizon Milling and what it means to both companies is actually clearer today, at least in my mind, than it was 10 years ago.
Sosland: So how would you describe other differences today from 2002, including broad comments on the milling industry today, your customer base, your product mix?
Dye: There have been many changes over time. The industry has changed, so the partnership has adapted. Our customers have consolidated, and we’ve tried to become a lot more strategic in serving customers. So rather than just having a product to sell to whomever wants to buy it, we’ve tried to be more innovative and help customers in the marketplace in product development. We’re continually looking to partner with the customer, to leverage the food science knowledge and expertise within Cargill and to take those applications directly to the customer. As an example, we’ve been able to combine our flour with other Cargill ingredients to meet a nutritional or health specification or benefit for a customer. Those are the things we weren’t even thinking about 10 years ago when the joint venture was formed.
Sosland: Are there metrics you could offer in terms of how much cross selling there is in 2012 versus 2002?
Dye: Unfortunately, we don’t have those metrics, but what I can tell you is that our approach to the market has changed significantly since the partnership was formed. So when we go to the customer today, with more of an enterprise approach, we are bringing multiple Cargill products and services in a coordinated effort. Today, we have a part of our Horizon Milling sales team as members of a cross selling team, that is selling not only flour but other products and services to our customers. It meets the need of the customer who said, “Hey, you know what, we’ve bought flour from you forever, and now we’re buying oils or cocoa or other ingredients.” It’s a lot more efficient in terms of everything from price risk management to applications. That’s a big change over the last 10 years.
Sosland: Mark, I’m sure you’ve also seen change.
Palmquist: On a market basis, there is just more volatility today than there was 10 years ago. Part of that relates to ingredient prices but part of that is the change in consumer eating habits, which brings the ball back once again to providing solutions for customers. They don’t just need flour. They may need help managing their price risk. Food safety is becoming a much bigger issue. It’s dealing with the changing mix in the products, be it whole wheat, whole grain type or a shift into noodles. All of these things going on have really created some nice advantages for Horizon Milling because it’s well equipped with the base at Cargill, added in with the support of CHS to really help that customer through this whole process. It’s a very difficult environment for a lot of the food companies out there, what they must post on the outside of the package in terms of nutrition and dealing with inventories and very volatile pricing. Being able to help them manage through that creates opportunities, and Horizon Milling has responded very well.
Sosland: How would you sum up where this relationship stands today?
Dye: The relationship is on really solid ground. I’d say that the business has performed well by multiple measures. But it’s much more than financially delivering returns. Those are critical with the big investment in this business. There’s a lot of capital in terms of our mills. But it’s also looking at making sure that we are satisfying our customers, making sure that our employees are engaged in the business, and they really want to have a positive impact. Horizon Milling has put a lot of focus on having a positive influence on the communities where we work and live, and then again all of that came naturally and easy because both of our companies have similar values.
Sosland: How are your parent companies different today from 2002?
Palmquist: Ten years is a long time in the history of any company. I’d say the fundamental difference is understanding just how integrated we are in this global market. It’s something that our producers are understanding, that they just can’t be looking in their own backyard. We have expanded tremendously internationally. The supply chains are becoming so integrated, customers are becoming so consolidated. We’re not a U.S.-centric farmer-owned organization anymore. We are an international organization that is still very proud of its ownership being with farmers.
Sosland: So before Dan responds to that question, let me ask you, does this collaboration make as much sense for CHS today as it did in 2002?
Palmquist: I think it makes more sense today than it did in 2002. What happened in 2002 was about satisfying a very specific issue we had in how we were going to tactically go forward on a strategy. Today, Horizon Milling is more about this platform of expertise that is grabbing value and collaboration in a lot of different ways. And it has gone way beyond the partnership into other areas.
Dye: From Cargill’s perspective, definitely, the company has also changed significantly from 2002. I think we’ve gone through a transformation of sorts with much more of a customer focus, much more of a solutions focus, much more of an innovations focus. And I think it’s also pertinent to this discussion that we’ve really expanded and grown in the food space overall. We’ve grown in the food ingredient space through acquisitions and other changes, broadening the portfolio we can bring to our customers. I think today the focus is much more about how do we become, our phrase is the ”partner of choice” for our customers where they’re choosing Horizon Milling and Cargill to do business because of what we can offer, because of the value we can bring to that customer. And that focus and emphasis today is much stronger than 10 years ago. Our collaborative approach is much different today than it was then, even within Cargill. There is a more integrated recognition of the different parts of Cargill working together to help the customer.
Sosland: So does the joint venture continue to make sense for Cargill?
Dye: I’d characterize it very similarly to the way Mark did. I think it makes more sense today. We can bring more to our customers as Horizon Milling than we could if we were just running our Cargill flour milling operations as they were before. Our ability to leverage the origination base of CHS seems better today than before. As the integration of the process of the buy chain continues to evolve and we see more value creation opportunity today in terms of what we can bring to the customer and to the partners. I’d say definitely it’s a stronger case.
Sosland: So let’s jump to 2022, and I will visit with both of you again at that time about Horizon Milling. So how will Horizon Milling and the industries you all serve differ from today? And how are you positioning yourselves for that time 10 years from now?
Dye: From my view as we look forward, we can never predict the future in the agricultural world. But what we can do is prepare for a changing future, knowing that we want to continue to grow and that we want to continue to create value for our customers. I believe 10 years from now we’ll have an even more differentiated product and service offering with new and innovative products, things we can’t even imagine today. We’ll be able to present choices to our customers to help them meet the needs of the consumer as those needs change over that period of time. I think we’ll have an expanded mix of facilities with different abilities, to service different geographies and different customer bases that continue to shift and consolidate. I can’t predict exactly in which ways we’ll grow and what products those will be, but I can be sure it will be relevant to the customer. I predict we’ll be able to adapt and change knowing that the world around us is going to change. And I think as we look forward, what we can hang our hats on is that we’ll stay true to our values, true to our vision. The strategies will change and adapt to meet the changes that are happening around us. I think we have to be an adaptable and agile organization that is committed to building on trust and nourishing potential as we move through this next decade. The way the partnership is structured, it allows us to do that. So that’s going to help us to meet the needs of 10 years from now and we’ll continue to grow and add value.
Sosland: How will the joint venture allow you to adapt your facility mix to changing customer needs?
Dye: I believe it’s more about how do we meet the needs of the customer and do we have the right asset base to do that? We recently announced a land acquisition in Ontario with the intention of building a mill there, because we see an opportunity to service the customer better than what we can today. We are also expanding our whole wheat capabilities and focusing on developing solutions in the area of improved nutrition. It’s more around those kinds of opportunities to look to where we invest. I’d also say as the marketplace changes in terms of wheat varieties that are grown, we need to ask how to bring GMO application into wheat. What does that do to our ability to service the customer in new and different ways? Some of that may have some asset implications. So it’s more optimizing assets to meet your customer needs.
Sosland: Mark, what does 2022 look like to you?
Palmquist: It’s so interesting to look at Horizon Milling and how successful it is, and today how it’s just absolutely so relevant to the customers out here, that the only thing I can predict 10 years from now, I think Horizon Milling will look different in a lot of ways. It will evolve to continue to remain relevant to customers. If that brings in more functional aspects in terms of products we’re providing, that’s very possible, in terms of process efficiencies, different nutritional mixes that need to go on, that will happen. Horizon Milling is structured in a manner in which it has tremendous flexibility to be able to adapt and change to the customer. Food safety, I think will be a bigger issue, food traceability will be an issue as we go forward and some of those will be in a very positive manner. I feel great confidence that both partners have that commitment to Horizon Milling. And I believe it will look successful as measured by market share, and it will be viewed by customers as being the first place to go for solutions.
Sosland: Let me ask about one specific change over the last 10 years that invariably will change over the next 10 — the market for whole wheat flour? One of your competitors is predicting whole wheat will eclipse white flour in the next 20 years. It was a pretty dramatic statement since right now, whole wheat has 5% market share. What’s your perception of that market, how it’s changing and how it will continue to change?
Dye: It has clearly grown, and it’s continuing to grow. There will be more new products, more new ideas. Rather than trying to predict what percentage of the market that will take, I think again, for us, it’s recognizing where our customers are seeing their demand shift and change, and in some cases, that’s going to be whole wheat driven and in other cases there may be other applications for them. But we’re clearly looking to grow in whole wheat with our customers, expect that to continue.
Josh Sosland is editor of Milling & Baking News, sister publication of World Grain. He can be reached a email@example.com.