The idea seemed far-fetched from the start: build a warehouse 1,000 miles from the nearest ocean, heat it to tropical levels and fill it with saltwater tanks to grow shrimp.

But state and local officials bought in to the idea when one of western Minnesota’s largest companies, Marshall-based Ralco, four years ago started a shrimp company called Tru Shrimp. Regulators in St. Paul put together subsidies. And the small town of Luverne readied an industrial park for a $45 million shrimp-growing facility, dubbed a “harbor.”

In early January, however, the company said it would instead build the harbor in Madison, S.D., citing a conflict with Minnesota’s environmental agency. State and local officials were shocked. Luverne Mayor Pat Baustian called it a “gut shot.”

While the move is relatively small in Minnesota’s broader economy, it poured fresh fuel on the perennial, fiery debate about the ease of doing business in the state. Everything was going smoothly until two days before Thanksgiving when the company, state and town met for a technical discussion about minerals in water.

After that, says Michael Ziebell, Tru Shrimp’s chief executive, “Everyone seems to remember the story very differently.”

In interviews with participants, what emerges is a story of a startup company courted by politicians in two states but dogged by worries about raising capital, a town hustling to keep up with a rush of new industry and a state agency without the resources to update old rules fast enough.

All of it led to a critical decision at a moment when state government was least equipped to respond: during the handoff from one administration to another.

Incentives on the hook

Rural America is shaped by constant changes in the business of food.

Luverne, a town of 4,600 that is the seat of the southwestern-most county in the state, last summer appeared ready to capitalize on two areas of rising demand: seafood and natural products. Tru Shrimp had announced its harbor project, and Premium Iowa Pork, a specialist in organic and antibiotic-free meat, agreed to buy and repurpose a former Gold’n Plump poultry plant with an eye on creating 300 jobs.

To help Tru Shrimp, the Minnesota Department of Agriculture was working on a tax credit package worth from $3 million to $5 million annually for up to five years. The state spent nearly $2 million, with the city kicking in about $600,000, to build roads and run electricity and sewer lines to a new industrial park in Luverne. Tru Shrimp invested $800,000 in the site.

Luverne officials were working with the Minnesota Pollution Control Agency (MPCA), with talks accelerating in July, on another infrastructure change that the companies, and the city more broadly, needed: an expansion of the wastewater treatment plant.

From the start, city and agency officials brought in Tru Shrimp engineers, even visiting its R&D facility in Balaton, Minn., to learn how the company’s water treatment processes would affect the city’s system.

In September, Luverne applied for its expansion permit. The city told the MPCA it wanted to start construction in June this year so that Tru Shrimp and Premium Iowa Pork could meet construction schedules. That meant the city needed to bid out the project by March or April.

“That’s a pretty aggressive schedule but is something that is doable,” said Shannon Lotthammer, assistant commissioner at the MPCA who worked on the project.

On Nov. 13, John Call, Luverne’s city administrator, spoke to a member of the MPCA staff with concerns about the effects of more wastewater processing. He worried Luverne’s water might fail a limit in Minnesota’s “specific conductance” regulation.

That standard uses the rate that electricity is conducted through water as an indicator for the amount of salts and minerals — like calcium, magnesium and chloride — in it. Electricity passes more easily through water that’s high in salts and certain minerals. High levels of these elements can kill fish and harm soil and plants downstream.

The next day, Luverne formally asked the MPCA for a variance from the standard.

Turning point

On Nov. 20, city engineers and an engineer from Tru Shrimp met with MPCA staffers at the agency’s field office in Marshall. Agency officials urged Luverne not to seek the variance. The process could take years, they said, and might be unnecessary.

“To this day, we still don’t know if their [specific conductance] levels would have been a problem,” Lotthammer said. “That’s what we were trying to find out.”

The MPCA asked the city to gather more information about the minerals expected in the water discharge from Tru Shrimp’s harbor, Lotthammer said, but the agency was optimistic about a solution.

That’s not what the company took away from the meeting. In an interview, Ziebell, the chief executive, said, “They told us emphatically it had to be enforced and a waiver wasn’t possible. Everybody is disputing that, saying, ‘Oh, it’s not going to be one to three years,’ but we can only go based on what we are given.”

He also worried that regulatory uncertainty would cause another problem. While Ralco was its main backer, Tru Shrimp, like many startup firms, needed to attract a diverse base of investors. “We cannot raise capital with an open regulation,” Ziebell said.

Almost immediately after discussing the Nov. 20 meeting with his engineer, Ziebell says he decided to change course. “Plan B was South Dakota,” he said.

For years, South Dakota officials had been recruiting Tru Shrimp to build a harbor there, and the company was making plans to do so after getting the Luverne plant up and running. In the last weeks of 2018, South Dakota reportedly put together $6.5 million in incentives for Tru Shrimp.

For South Dakota Gov. Dennis Daugaard, a Republican whose two terms overlapped with Minnesota’s Democratic Gov. Mark Dayton, the deal represented a final skirmish in a broader competition for investment and workers that both South Dakota and North Dakota have waged with Minnesota this decade.

On Jan. 4, Tru Shrimp sent out a news release and held an event with Daugaard to announce that it would build the shrimp-growing plant in Madison, S.D.

It was Daugaard’s last day in office. He touted the state’s “low-cost, reasonable regulatory environment,” the Sioux Falls Argus Leader reported. “If you don’t think those things make a difference,” he said, “then ask anybody at Tru Shrimp.”

The news came in the final days of the Dayton administration, too. “All of us who have been working on this were surprised when this fell apart and a little sick because we really thought there were solutions there,” Lotthammer said.

Over the next few weeks, agency officials also confronted their own history. Nine years ago, the MPCA commissioned the University of Minnesota to review the rule that relies on electrical conductance to determine water quality. It had been set in the 1960s, before the federal government created a conductance rule in the 1970s and before other innovations in measuring water quality.

In 2016, the MPCA proposed updating the rule and requested public comment. But the proposal was too broad and the public feedback overwhelmingly negative, Lotthammer said. The agency needed to put forward a more detailed proposal, backed by science, to show it could update the rule and maintain the same level of environmental protection.

“We certainly recognize we need to modernize those standards … but there were competing priorities,” Lotthammer said. Instead, the agency prioritized updates to other standards, such as sulfate levels in wild rice.

An outdated test?

John Nieber, co-author of the U’s 2010 review, said the Tru Shrimp situation raises the question of whether specific conductance should be relied on as a catchall test for water quality.

“It should be the first diagnosis of the water,” Nieber said. But if the result is close to or over the regulatory limit, he said, more tests should be conducted to determine what is causing higher levels of certain minerals and whether the levels are actually harmful.

Laura Bishop, a former Best Buy executive who became the MPCA’s commissioner as Gov. Tim Walz took office, said her review found that the agency wasn’t worried about Tru Shrimp’s salt levels. “I know Tru Shrimp is concerned now that they are getting cast as a potential polluter,” Bishop said. “We never thought that.”

She said she fears the conflict underscores a narrative that state government too often gets in the way of business. “We have a large charter … to protect the air, water and our land, and we will do that,” Bishop said. “At the same time, I know business and industry can thrive in Minnesota.”

In recent weeks, the MPCA has coordinated meetings and phone calls with Tru Shrimp to clear the air. Both sides say they want to work together on future harbor sites in Minnesota, especially in Luverne.

“We need Minnesota. We are a Minnesota company and we are going to work with them,” Ziebell said. “We just didn’t have time to fight this particular issue and raise the capital. … The objective was to build the harbor, and there was no other nefarious perspective to it at all.”

The MPCA and Luverne officials are meeting regularly to reach the city’s goal of expanding its wastewater facility this summer. Premium Iowa Pork plans to break ground this month in Luverne.