VALUE - ADDED CORNER
“No go” can be a good show
Feasibility study advises co-ops not to pursue tortilla project
By Michael Doherty
Editor’s note: Doherty is a cooperative business specialist with
USDA Rural Development’s state office for Illinois. He acted as
USDA’s consultant for the project described below.
good feasibility study that accurately gauges the
odds of success is essential for any co-ops considering
a value-added project. Two central Illinois
grain cooperatives recently contracted for
an independent feasibility study, which ultimately
determined that there was little chance for success for
their proposal to process specialty tortillas for the Hispanic
market in Chicago, despite growth of that market and
increasing demand.
While there was undoubtedly some disappointment about
that outcome, those feelings would pale compared to what
co-op members would have felt had they pursued the project,
only to have it end in
failure. Sometimes
the best feasibility
study is the one that
urges a “no go,” as
this case shows.
Co-ops form
joint venture
The Morrisonville
Farmers Cooperative
and Assumption Coop
Grain Co. formed
ILLI MEX Alliance
LLC in June 2001 as a joint venture to explore new, valueadded
markets and new sources of income for their 2,000
members. The goal of the alliance was two-fold: 1) to develop
a premium-based contract market for white corn that
would add income to the members’ farming operations, and
2) to eventually own a piece of the tortilla manufacturing
business in Chicago.
The cooperatives have export market access through St.
Louis and sell into the domestic processor market in
Decatur, Ill., through ADM. They are experienced in grain
handling, identify preservation of grain and in merchandising
high-oil corn, non-GMO corn and food-grade corn.
Tom Bressner, general manager of Assumption Co-op,
became interested in the tortilla market while seeking new
markets and customers on trade missions to Mexico in 1997,
1999 and 2000.
To help pay for a feasibility study, the alliance applied for
a USDA Value-Added Producer Grant (VAPG) of $40,000
during the summer of 2001, which was matched by ILLIMEX
(with funds contributed by the two cooperatives).
USDA awarded the grant in October 2001.
Focus on Chicago market
The immediate objective was to determine the feasibility
of developing a fresh masa tortilla manufacturing business in
the heavily Hispanic areas of Chicago.
Masa is flour, or dough, made of ground corn and used for
tortillas. This fresh masa tortilla business would use white
food-grade corn, which would be produced through premium
based contracts with the Assumption
and Morrisonville co-ops.
According to the 2000 census, 1
million residents of Cook County are
Hispanic, of whom 72 percent are of
Mexican heritage. They, along with
490 Mexican restaurants in the Chicago
area, were the primary consumer
targets of the proposal.
Impetus for the co-op alliance resulted from discussions
with representatives of the Independent Tortilla Manufacturers
(ITM) Association, an industry group that controls more
than 50 percent of the tortilla market in Mexico. Meetings
took place in May 2001 with Burt Swanson, a University of
Illinois extension specialist, and the potential Mexican partners,
which were to be offered a chance to buy an interest in
the venture.
Swanson had studied the tortilla market in Mexico extensively
and felt there was potential to increase the tortilla market with
Chicago Hispanics. Swanson contacted USDA Rural Development
in Illinois to assess the possibility of the cooperatives
applying for a VADG grant. He held discussions in May 2001
with a USDA Rural Development cooperative specialist regarding
the structure of the proposed venture, ownership by farmers
of a tortilla business and location of manufacturing facilities.
Letters of support for the USDA assistance were written
by the Illinois Corn Growers Association, Illinois Department
of Agriculture, Senator Dick Durbin, Governor
George Ryan and several local congressmen.
Most tortillas manufactured and sold in Chicago are prepared
from rehydrated corn flour mixed with food preservatives
to increase shelf life. The ITM group believed that Hispanic
consumers and restaurants in Chicago would
prefer and be willing to pay a higher price for tortillas that
were made on-site daily from whole grain masa and produced
without the use of preservatives.
This process would allow the tortillas to be made with
more traditional Mexican flavors and textures than the
“American version” of tortillas, which would be more appealing
to Hispanic consumers. Tortillas made “in-store” from
fresh masa dough would cost more than competing tortilla
products, but initial discussion indicated that designing a new
and efficient system for delivering the masa to stores could
offer a significant market advantage over the existing systems.
If the results of the feasibility study were positive, it was
envisioned that eventually ILLI-MEX LLC would own a
small production plant in the Chicago area.
The Alliance hired SJH and Co. of Danvers, Mass., to conduct
the feasibility study for the project. Information from the
Mexican ITM group was also considered, along with agricultural
research results from the University of Illinois.
Phase I of the feasibility study was to run from Nov. 1,
2001 to Jan. 31, 2002, and was to focus on market dynamics
in Chicago, pricing, marketing and industry structure. If
those results were positive, the study would advance to a
more in-depth technical assessment and financial analysis, to
be conducted in May of 2002.
Study recommendation: “No Go”
The findings and recommendations of SJH and Co. were
submitted to the ILLI-MEX Alliance on March 13, 2002.
The overall outlook was negative, showing inadequate
growth in market demand for fresh vs. pre-packaged corn
tortillas. The study found that there was a dwindling reliance
on small-scale local shops, excessive costs for making and
selling tortillas in stores, dwindling demand for fresh masa
dough and a maturing market headed toward overcapacity.
The feasibility study results were clear, comprehensible and
offered ILLI-MEX a valuable education about a topical market.
It also saved the two cooperatives from investing further effort
and money toward a project that carried high risk of failure.
Assumption Co-op Grain’s Bressner says the outcome may
not have been what the co-ops were hoping for, but it gave
them the information they had to have to make an informed
decision.
“You have a big idea and a dream, and some people want
to go out and spend big bucks to make it happen,” Bressner
says. But that dream could turn into a nightmare without a
good study. “That’s why you do a feasibility study to find
out if the dream is likely to become reality.
“The study gave us the answers we were looking for,”
Bressner continues. “We look at the whole process very
favorably. And it opened up a dialog between us and Morrisonville
that is ongoing. We’ve kept the joint venture intact
and are now looking at other possible projects. So even
though the decision was made not to pursue this project, it
has been of great benefit to both of our co-ops.” 
