Rural Survivors
Can value-added agriculture save struggling rural communities?
Congress hopes USDA grant program will provide needed stimulus
By Dan Campbell, editor
he internal combustion engine improved the
quality of life in rural America, but it also may
have doomed many of America’s rural farming
towns by expanding trading areas beyond the
distance a horse could travel in a day (the basis
on which many rural trading centers were founded). Many of
the farming communities that survived the coming of the automobile
particularly in the Great Plains may not, however,
survive continuation of a farm policy that subsidizes production
of commodity crops, leading to ever fewer, larger farms
producing more and more of the nation’s food and fiber, says
Bruce Babcock, an economist at Iowa State University.
Ironically, the success story of the American farmer his
ability to produce huge volumes of high-quality, low-cost
food has been the downfall of thousands of rural communities,
Babcock said. Speaking as a panelist on a rural development
session at USDA’s 2002 Agricultural Outlook Conference,
he noted that “However much we try to combat rural
stagnation with price supports and commodity production, I
think it will lead to large portions of physical and social infrastructure
leaving vast areas of the Great Plains.”
He cited an article in a recent issue of the “The Economist”
magazine showing that rural counties that have received
the most farm subsidies during the past 20 years have also
suffered the greatest population declines. “I’m not saying
subsidies caused the population to decline,” Babcock said.
“But it is clear that encouraging commodity production with
price subsidies has not kept people in rural areas.”
Babcock said that while Congress (in his view) may be
unintentionally accelerating outward migration from some
rural areas by showering “unprecedented levels of support”
on commodity crops, it is simultaneously seeking another,
more promising path to fighting rural stagnation: encouraging
new value-added agricultural endeavors.
In 2001, USDA launched a new program to spark development
of more value-added agricultural enterprises, as authorized
by the Agricultural Risk Protection Act of 2000.
Though the Rural Business-Cooperative Service, it provided
$20 million in grants for 62 value-added ag projects, ranging
from a joint venture of two Illinois cooperatives studying the
possibility of building their own flour tortilla plant, to a new
market development project launched by the California Wild
Rice Growers Association. (The entire list of grants, as well as
information about upcoming grant rules and deadlines, can be
viewed at www.rurdev.usda.gov/rbs/coops/VADG.htm). Many
of the grants were awarded to cooperatives, but all producers
can apply for them.
However, the 62 projects funded represented just a fraction
of the 509 applicants who sought $136 million in funding,
according to panel moderator Randall Torgerson, deputy
administrator for USDA/RBS Cooperative Services.
New Center to promote value-added ag projects
Congress through the 2002 Farm Bill is doubling
USDA’s annual value-added grant program to $40 million for
each of the next six years. The money will be used both as
grants for more value-added enterprises and to fund (with $2
million per year) an agricultural marketing center. One such
entity, the Agricultural Marketing Resource Center (AgMRC)
at Iowa State University (of which Babcock is a member of
the executive committee), has been formed through a partnership
of Iowa State, Kansas State and Oklahoma State Universities
and the University of California, with financial support
from USDA. Smaller amounts of the appropriation will
also be used to fund several new valueadded
innovation centers and for a research project on value-added agriculture.
The AgMRC’s main objective is to
create an electronic, Web-based library
that producers and producer groups can
access for information that will support
their value-added endeavors. AgMRC
staff will collect and interpret relevant
information and conduct research on
value-added agriculture. The center
will also compile information on business
principles, legal, financial and
logistical issues that producer groups
should consider before investing their
money in a project, and it will coordinate
research and extension programs
with value-added ag groups. The center
is a joint venture of extension, research
and industry, Babcock said, noting that
the center will operate with an industry
advisory council.
And what exactly is “value-added”?
Babcock said there are two basic definitions:
1.) Any activity that increases the
per-unit price received for farm production;
2.) Any activity that transforms a
product into another product that fetches
more revenue on the market.
But will more value-added agriculture
increase rural vitality? “I don’t
know,” Babcock said. Experience to
date, he said, “has shown that largescale,
capital-intensive, value-added
enterprises, such as ethanol, will not
slow down migration from rural
areas.” People are more mobile
today they will live wherever they
think can have the best life, he noted.
“All things being equal, businesses
will locate in areas where workers
want to live.”
Three ways to make money
Babcock said there are three basic
ways for farmers make money. “The
first is to be lucky,” he said. “Most
Iowa corn/soybean farmers made lots
of money in 1997 both yields and
prices were high; But not many will
obtain financing based on luck.”
The second way is to offer a differentiated
product or service that returns
more from the market than it costs to
produce or deliver. This means successfully
duplicating what someone else is
doing or finding a new kind of market.
The third alternative is to produce a
commodity at a lower unit cost than
anyone else can. “This is what drives
market prices down,” he said, adding
that investments in meat packing and
ethanol plants are attempts to make
money by being a low-cost producer of
a commodity. “It moves farmers from
producing one type of commodity to
two commodities.”
The experiences of the last 20 years
of farmer-owned enterprises “suggests
that groups of farmers can be the lowcost
provider of a value-added commodity
if they hire high-quality external
management and relinquish day-to-day
control to management,” he said.
“Farmers face a different set of challenges
when they want to produce a differentiated
product,” Babcock said. He
noted that a member of his advisory
council says “the three biggest challenges
farmers face in this arena are:
marketing, marketing and marketing
meaning that most good ideas fail
because farmers do not realize how difficult
it is to create a market for a new
product. A mentality of ‘I will produce
it, and a market will be created’ just does
not work,” Babcock said. That’s why
large food companies spend millions of
dollars on test-marketing and advertising.
Even for good new products that do
make it to the market, getting shelf
space in retail stores is becoming
increasingly difficult, he noted.
Farmers can instead concentrate on
what they do best: production, and leave
the marketing to others, Babcock said.
“This can work if you are producing a
product that is difficult to procure elsewhere,
such as the 75 Iowa hog producers
who sell pasture-raised hogs to
Niman Ranch for a premium over commodity
price for a unique product: natural
pork.” If consumers continue to
demand more information about the
way food is produced, this type of valueadded
agriculture may become a major
influence, as it has in Europe, he noted.
Soybean co-op seeks
new marketing avenues
Also participating on the same panel
with Babcock were two value-added
practitioners one representing a medium-
sized processing co-op, the other a
small marketing co-op (see sidebar).
The medium-size co-op, South Dakota
Soybean Processors (SDSP), was founded
in 1996 as a new-generation co-op in
Volga, S.D. That co-op has completed a
fifth consecutive successful year transforming
soybeans supplied by 2,100
members into soy oil, meal and hulls.
Rodney Christianson, CEO of the
co-op since its founding, said that
SDSP’s primary reason for existing is
to generate value-added patronage
checks every year for his members.
“And they will let me know if they
don’t get it,” he said.
In SDSP’s first five years of operation,
it has crushed 112 million bushels
of soybeans, earned $25 million in
profits and members have received
$15.5 million in cash patronage. Share
values in the co-op have more than
doubled, from $10,000 to $21,000.
Farmers’ initial investment in the coop
was $21 million.
“When I first joined the co-op, one
of the first things I tried to assess was
whether they were willing to make
investments needed to stay competitive,”
Christianson said. He hoped to
invest $500,000 to $1 million per year
back into operations. But SDSP has
reinvested $11 million in the first five
years, “which certainly exceeds my
expectation.”
Had the co-op stayed with its original
plan to only crush 50,000 bushels
each day into oil, its earnings would
likely have been closer to $9 million
than $25 million, Christianson said.
Instead, it expanded capacity to 80,000
bushels per day and has made investments
to move further up the valueadded
chain.
“Vision is important, but it is the execution
of that vision which is most crucial,”
Christianson said. “My farmers
chose to be in businesses that was a commodity
to be a low-cost producer in an
industry where the top four companies
crush 75 percent of the crop. It’s a very
consolidated industry. So it would be
foolish to come back three or four years
later and cry about how hard it is to compete
with big companies.” But Christianson
said he has heard other new-generation
co-op leaders say they are upset that
the large companies “are coming after us.
If you don’t want to play with them,
don’t put your business plan there.”
The SDSP board passed a resolution
that the co-op have no more than
a 104 percent ratio of debt to equity. At
that time, the ratio was 114 percent,
but it has since been lowered to 35 percent.
Another target was to pay 70 percent
of value-added patronage in cash.
None was paid in the first year, but in
the next four years the payment was 80
percent in cash, dropping to 70 percent
last year a record profit year.
Christianson said SDSP has studied
its industry carefully to determine the
best course for the future. The fiveyear
vision included boosting capacity
to 100,000 bushels per day, to generate
60 percent of revenue from valueadded
activity, to vertically integrate
toward end customers and to create
partnerships and strategic alliances that
“forge win-win relationships with other
producer groups.”
A major result of the direction is a
new strategic alliance with Urethane Soy
Systems of Dover, Ill. which Christianson
described as a small, private company,
trying to substitute soy oil for petroleum-
based oils in the manufacture of
polyurethane. The goal will be to make
SDSP a major supplier of soy derived
polyurethane for carpet padding, furniture
upholstery, car bumpers, etc.
It’s a 4.6-billion-pound market, he
said, and by 2007 SDSP hopes to have
an 850-million pound share of it. Soy
oil saves 5 to 30 percent of the cost of
petroleum-based polyurethane, he said.
The co-op has filed for a patent on a
process it will use to process crude soybean
oil into poly-oil.
SDSP is also working with Minnesota
Soybean Processors a 2,330-member
co-op to build a new soybean processing
plant in Brewster, Minn., which
they hope to have operating in 2003.
SDSP will provide management and
marketing for that operation.
SDSP is considering converting to a
limited liability corporation, but will
continue to operate “with the same
operating principles as a co-op,” he said.
Christianson, quoting business consultant
Danny Cox, summarized the
process of launching successful valueadded
enterprises: “dream, study, plan,
take action.”
