Farmers Seek Bigger Piece of the Pie: Tired of Low Commodity Prices, Producers Branch Out into Processing, Marketing

The twin scourges of many rural areas today are low commodity prices and high unemployment.

The gap between what the farmer is paid for commodities and what the consumer pays for the end product is widening, making farming a difficult business. Unemployment is high in rural areas that have traditionally depended on agriculture.

Is there a silver lining in this dark cloud? Several organizations in Missouri, Kentucky, Illinois, Tennessee and Arkansas think so. These organizations have united in the Delta Enterprise Network (DEN) to add value to existing commodities and to diversify the rural economy of the Delta.

In real dollars, the trend lines for commodity prices have been negative for decades. In recent years, prices of commodities produced by farmers have experienced a free fall. According to the World Bank, agricultural commodity prices fell nearly 32 percent worldwide between 1997 and 2001.

These trends are likely to continue because of large production increases each year in many crops, according to the World Bank. Money is being made in agriculture, but in processing and marketing, not in commodity production. A 1998 study by Richard L. Kohls and Joseph N. Uhl of Purdue University showed that by the late 1990s, the farmer received 22 percent of the consumer dollar, and the remaining 78 percent went to processing and marketing. The return on investment in agricultural processing and marketing is among the highest of any industry, in part because of low commodity prices.

Rise of Producer-Owned Marketing and Processing

The challenge of low commodity prices combined with the opportunity for value-added profits has prompted various state and federal agencies to establish programs to help farmers not only produce commodities but also develop marketing and processing ventures. These ventures allow farmers to capture a larger portion of the price consumers pay for food. Farmers become entrepreneurs instead of relying on decreasing commodity prices and government subsidies.

In some parts of the United States, these programs were implemented more than 10 years ago. The result has been that the number of producer-owned value-added ventures has rapidly increased in the past decade.

Source: C.D. Merrett, M. Holmes, and J. Waner. Directory of New Generation Cooperatives (Macomb: Illinois Institute for Rural Affairs, 1999) Published in A Cooperative Approach to Local Economic Development, ed. C.D. Merrett and N. Walzer, 2001.

Agencies Have United in Delta Enterprise Network

Though most of these new farmer-owned ventures are located in the upper Midwest, many people in the mid-South are eager to create similar opportunities in their region. In the past two years, a number of agencies interested in value-added diversification have joined together to tackle the work. These groups have provided agents to help farmers create dozens of new businesses. DEN participants have visited and analyzed successful value-added diversification programs in North Dakota, Minnesota, New Zealand and Australia and have adapted these programs in Missouri, Illinois, Tennessee and Kentucky.

All of these programs have five common elements. Entrepreneurs who participate must complete each stage before moving to the next tier. DEN's network of agencies provides professional help at each stage.

The sequential steps are:

1. Initial organizing

Each of the aforementioned programs has a variety of web sites, conferences and activities to help educate farmers about opportunities. DEN has worked with institutions in Missouri, Kentucky and Tennessee to establish statewide conferences to promote such opportunities and resources.

After farmers learn about new processing and marketing opportunities, agents from cooperative extensions or other local development agencies help the farmers define a specific product and market they would like to pursue. The foremost example of an organization that provides agents in the Delta states is Missouri's Agricultural Business Counselor program.

2. Competitive grant funds for feasibility analysis

In this stage, farmers seek funding for a feasibility study to ensure they are pursuing a profitable venture. This type of analysis has proved beneficial in programs around the country as long as the feasibility studies are performed by experts in each industry. Sometimes the answer "no" is the best result from a feasibility study.

3. Hiring expertise in the industry

No matter how sophisticated those involved in forming the new enterprise are, they will invariably need the services of someone who works in the industry. For example, funding from North Dakota's successful Agricultural Products Utilization Commission (APUC) enabled Dakota Growers Pasta Co. to attract an experienced general manager for its first pasta plant. In Iowa, the Department of Agriculture's Rural Economic Value-Added Mentoring Program sends mentors experienced in a particular industry to help cooperatives move to the next stage. University of Kentucky Cooperative Extension facilitators operate at this stage to bring in the foremost experts available in marketing and production in the industry.

Minnesota's Agricultural Utilization Research Institute (AURI) brings another level of mentor to developing enterprises. The institute employs scientists who have considerable experience in selected key industries that are important to Minnesota. These scientists then work with local facilitators and principals in each enterprise to solve problems in new product design or production. Many other regional rural development programs also recruit outside mentors to assist in highly technical aspects of industries new to particular communities. Likewise, when a community is attempting to penetrate a new market, North Dakota's APUC, Minnesota's AURI and Missouri's Department of Agriculture will find someone who is working in the thick of that market to advise the farmers.

There is one lesson all of these new regional development efforts have learned: The entrepreneur, rather than the university, needs to keep control of product development or marketing studies money. The universities can often perform valuable research in these areas, but only if directly controlled by the principal in the business. Other states and regions have heeded the siren call of academe and suffered through marketing studies that were not performed in conjunction with any real business and product development research.

4. Funding for prospectus and equity drive

Some regional development entities, such as Kentucky Highlands Investment Corp., provide initial equity for a company and fund development of a prospectus to attract the additional needed capital.

In other cases, the prospectus is funded by early investors recruited to the project in the first three stages of the process. Other regional development entities, such as 21st Century Alliance in Kansas, require potential participants to provide seed money to cover these early costs. After each project is fully capitalized, the seed money is repaid.

The core funding for the new value-added industries is obtained from local farmers, though loan programs to purchase stock are available from some financial institutions.

Usually, such equity drives try to raise 30 percent to 40 percent of the needed investment.

Many of these new businesses are farmer-owned, limited equity cooperatives that own the processing and marketing concerns. This legal structure requires a sizable up-front investment by farmers. Farmers purchase delivery rights and responsibilities when they purchase their shares. For example, a farmer purchasing $20,000 in shares of a pasta cooperative would be agreeing to deliver 20,000 bushels of wheat of a defined quality to the cooperative at harvest. The cooperative agrees to buy his wheat at market price and return a share of the profits to him and to the other owners when the pasta made from the wheat is sold.

These delivery rights are totally saleable and typically appreciate in value several percent a year. During the last decade, these limited equity, or new generation, cooperatives have spread throughout the United States from their original toehold in the sugar beet country of the Red River Valley between North Dakota and Minnesota.

5. Assisting with access to low-interest capital

The remainder of investment costs are achieved with the fifth component--helping businesses obtain capital with interest rates as low as possible. In Iowa, enterprises that reach this stage are eligible for the Value-added Agricultural Products and Processes Financial Assistance Program. This program provides a combination of loans and forgivable loans to cooperative efforts that accomplish all previous steps of the process. Missouri provides saleable tax credits. Texas has a low-interest bond program. The list of creative financing options is as long as the list of agencies engaged in this sort of work. And that list grows longer every day.

Assessment of Successful Programs

To assess the impact that one such value-added diversification program had on a state's economy, North Dakota State University's Department of Agricultural Economics analyzed 11 projects in 1996 that had been funded with $867,381 from the North Dakota APCU. These 11 projects helped create businesses that directly added $84.5 million to North Dakota's annual economy. Secondary economic benefits amounted to an additional $160 million each year. Thus, the utilization commission asserted that its direct annual return on investment for these 11 projects was $97 for each dollar spent, and its total return (including secondary benefits) was $297 for each dollar spent.

The 1996 study performed by the university concluded by saying, "the projects sponsored by the North Dakota Agricultural Products Utilization Commission are adding value to the state's agricultural commodities and thereby creating new jobs, gross business volume and tax revenues for the state economy. The economic contributions of these projects is substantial on a statewide basis and even more impressive at the local level."