VALUE - ADDED CORNER

Amazing Grains!

Montana grain growers use VAPG funds
from USDA to develop gluten-free flour


By William W. Barr
Cooperative Development Specialist
USDA-Rural Development, Montana


ook before you leap. But not too long, because he who hesitates is lost.

Those two somewhat contradictory adages have special meaning to anyone who has ever launched a new business venture. Make sure you test the waters before you jump in, we are advised on one hand. But wait too long for an opportunity in a business market as dynamic as in the United Sates, and you may see opportunity snatched away by someone who was more aggressive and/or better capitalized. The trick, of course, is to find the right balance of caution and courage.

The development of Amazing Grains Grower Cooperative represents such an effort. Its producer members began the journey as a search for a market for processed, millable seed-- a market that would provide the most value-added options for the lowest producer investment. Helping them along on this journey was a Value-Added Producer Grant from USDA Rural Development, which provided working capital for a number of the co-opís efforts.

Amazing Grains is a grower-owned cooperative that produces, processes, packages, markets and distributes a gluten-free flour made from Indian rice grass. The cooperative also supplies state-certified native grass seed for private and federal land reclamation projects. In addition to the USDA funding, a wide range of public and private partners contributed technical and financial assistance to guide this group of growers.

Dietary staple for Native Americans
Indian rice grass is a native grass that served as a dietary staple of Native Americans for many centuries before the introduction of maize. The grass was produced in limited quantity in Montana for land reclamation projects, but volatile price swings and an unreliable market kept the producer base small.

In the 1980s, Dr. David Sands, a research scientist and professor in the Montana State University Department of Agriculture in Bozeman, determined that Indian rice grass had valueadded potential for producers. The flour of the rice grass is gluten free and-- when used to make a variety of bakery products-- it has fine flavor and is high in fiber and protein.

Alternative gluten-free flours-- such as those made from rice, bean, potato and corn-- do not exhibit these combined characteristics. Improved nutrition and better tasting, gluten-free products are marketed under the co-opís trade name: Montina. These products are of interest to those who suffer from gluten intolerance, or Celiac disease.

Celiac disease is a genetic autoimmune disorder which can result in overwhelming fatigue, diarrhea, vomiting, malnutrition and eventual death. While there is no cure, removal of foods from the diet that contain gluten can successfully control the effects.

The challenge for producers of Indian rice grass was to develop a solid, reliable commodity-producer base to process high-quality seed into a nutritious, good tasting, quality product which is reliably gluten free. The assured gluten-free reliability is critical to those inflicted with Celiac, for the market is very purity conscious. The co-op is concentrating on the European and North American markets.

Crop scarce at first
At the start of this project, there was a scarcity of cultivated Indian rice grass and producers willing, and able, to produce it. Project development was initiated under the guidance of the Montana State University (MSU) research team, aided by a small Indian rice grass producer team in the Malta area of Montana.

In 1997, the Montana Department of Agriculture provided a $10,000 Growth Through Agriculture Grant to the MSU research team and the project leaders to investigate developing Indian rice grass into a value-added food product the emerging cooperative could produce and market.

In 1998, USDAís Agricultural Marketing Service, Federal State Market Improvement Program (FSMIP), awarded a grant of $95,000 to MSU to determine market potential of Indian rice grass as a gluten-free, perennial grain crop. Study results suggested that market potential was positive, especially domestically. Product development research was conducted at Southern Labs Inc., resulting in a nutritional profile.

MSUís Central Agricultural Research Station conducted an economic analysis of cultivation, flour production and weed management studies. In addition, studies were conducted addressing market penetration and entry and development of a seed crop, seed cleaning techniques and requirements for a processing facility.

Dr. Duane Johnson, the Research Leader at the MSU Agriculture Research Center at Creston, demonstrated-- through research and test plots production-- that Indian rice grass could be grown as a cultivated crop. He and Dr. Sands developed guidelines for site preparation, planting, weed control and harvesting. A mill for processing the seed was located and made available.

Opportunity vs. risk
During this period, there was widescale regional drought in the Malta area. Indian rice grass production does not reach full potential until two to three years after planting, and cautious producers were hesitant about starting to grow a new crop, especially under these conditions.

While some growers saw the opportunity for added income, they also saw substantial risk. During times of drought and poor crop prices, convincing producers to take additional investment risk is difficult.

Interested producers were unfamiliar with how to start a new value-added cooperative, how to manage the business to produce the value-added product and how to effectively market it.

Underestimating the amount of organizational work required for the cooperative project led to commodity production delays, as well as delays in the establishment of cleaning and milling facilities. The bridge between research and practical commercialized business operations appeared to be a long one.

In spite of the initially discouraging start, there was a high level of interest among producers with strong desire to develop the project into a commercial, cooperative business. Some timely developments designed to reduce the risks occurred in 1999 when the state legislature made changes to the Montana Code covering legal incorporation of cooperatives. These changes clarified legal and regulatory cooperative development issues.

Another key development came with a grant for a Lake County Community Development Corporation project in Ronan, Mont. Called Mission Mountain Market, a state Department of Agriculture grant provided in 1999 assisted in the establishment of a commercial kitchen facility and business incubator. Other funding agencies also contributed grants for the Lake County project.

Lake County received USDA Rural Development funding for a cooperative development specialist. Working for Mission Mountain Market, Jan Tusick has become a key partner with the statewide center. The potential producers of Indian rice grass now had a technically proficient cooperative development specialist able to work with them in their primary planned area of production.

Cooperative development legal counsel was provided by Steve Noack of the Gunhus Law Firm in North Dakota. He was contracted to assist with bylaw development and capitalization plans.

The cooperative was legally incorporated in 2000 and its first organizational meeting was held in January 2001.

Producer champion sought
Mission Mountain felt that a producer champion with credibility among growers needed to be found to assist Amazing Grains Grower Cooperative-- someone with business experience other than just commodity production.

John Sheldon, who lived, farmed and owned Crestin Seeds in Kalispell, Mont., had over 20 yearsí experience producing Indian rice grass seed for mine site reclamation projects and in applying direct seeding systems. The co-op was progressing towards its goal of stepping forward from commodity production to value-added processing and marketing. Using a 1999 USDA Risk Management Grant, a series of membership and production education drives were held. In 2001, the co-op held its first stock offering.

In 2001, the Montana Board of Research and Commercialization Technology awarded a $205,000 grant to Montana State University, with Dr. Sands as principal investigator, to facilitate transfer of Indian rice grass technology to the co-op and to support development of their Montina products. While producers continued to be highly interested in the project, when it came to investing in a new business, they were still reluctant to put in more than a toe. A number of them adopted a position of phasing their delivery right payments over a period of time, or purchasing fewer delivery rights than they could have in order to see how the business was developing.

The business needed more working capital in 2002 than it was generating to enter markets in a timely manner. Controlled growth is important, but being overly cautious can result in under-capitalization and the loss of opportunity. Thatís when it applied for a working capital Value-Added Producer Grant (VAPG) from USDA Rural Development to expand processing capacity. Grant funds were used for business operations, inventory development and market development.

A feasibility study and business plan were reviewed and approved by the Montana USDA Rural Development state office in March 2003. The grant was designed to provide assistance for the cooperative as it progressed toward becoming a commercially viable entity.

The VAPG helped Amazing Grains Grower Cooperative hire key staff; to provide cash for inventory and other start-up costs; to provide financial resources for market identification, development and expansion; and to accelerate business growth and commitment by the producers to their value-added venture.

Expert management hired
Producers realized they did not have all the necessary business management skills themselves, so they hired those skills via the management team. Two key management staff were retained by the co-opís board: General Manager Bob Warren and Doug Martin, who provides financial management expertise. For 12 years, Warren had been owner and operator of Cream of the West, a Montana multi-grain, hot cereal processing company. Martin had financial experience and planning responsibilities with a background in operations.

Each does what he does well, says Warren. The board doesnít negotiate broker-distributor contracts, and I donít tell them the proper ground temperature for seed germination.

Warren knows that the market will not commit to large, new product purchases until customer reaction to the product is known. The market must also feel certain that a consistent, highquality and predictable volume of product is available. On the other hand, the board and co-op members want to be sure there is a guaranteed market for their value-added product before they invest in increased production.

Mission Mountain Market-- the in-house incubator that has enabled the cooperative to maintain low overhead and start-up costs-- is not a full-scale, commercial production facility. But it enabled the Amazing Grains to: get started, to enjoy a copack arrangement, to get sales under its belt, to get a marketing program in place, to generate cash flow and to use offices and amenities without creating big overhead expenses. While Mission Mountain can support the business-production needs of Amazing Grains to a point, at some juncture the co-op will need to develop its own facility.

The co-op employs three staff at this point, but when it moves into its own facility, four more jobs will be created. Four jobs at Mission Mountain will then be available to assist another venture.

Timing significant moves
When is the best time for that transition? What is the right timing for marketing efforts? How big should the business try to become? What level of dependency is Amazing Grains willing to accept? What level of sales will enable the co-op to move into its own facilities, use its own equipment and labor?

In the first 18 months, Amazing Grains has about reached break-even, with $222,000 in gross sales as of March 2004. For 2004, thanks to assistance from the VAPG, the co-op expects gross sales of $500,000. By the end the year, it plans to be marketed in 30 states and two countries.

Tim Anderson, Amazing Grainsí board president, says that being committed to a value-added business does not lessen the production of risks associated with growing a new crop. The producers were very cautious about purchasing delivery rights and paying for them in a timely manner. This caused an adverse cash-flow problem.

The VAPG assistance from USDA softened the investment risk by providing leveraged cash to allow the purchase of seed inventory to accelerate the growth of the business so that there was adequate commodity product to meet processed-flour demand. The cooperative must ultimately produce its own commodity and at a stable price. There is no guaranteed backup market supply.

Warren and the board understand the need to balance its supply with market demands. In its attempt to increase membership and commodity supplies, if too much money is paid up front to the producers for millable seed, then the price for finished Montina valueadded products may exceed what the market will bear.

Since the board sets the price for delivery rights for Amazing Grains members, continuous dialogue and market evaluation are vital. The co-op continuously monitors and evaluates changes in markets.

VAPG funds bolster
co-op marketing efforts

VAPG money was used for an advertising program to develop a close relationship with customers suffering from Celiac. Warren has asked what they look for in products and how the co-op can gain their confidence in Montina products. New product ideas have come from these talks.

The VAPG has supported marketing trips to Celiac conferences to learn more about people afflicted with the condition and to familiarize these people with Amazing Grains. Amazing Grains will ensure that there will be no question of whether its products are truly glutenfree. The standard it uses for gluten testing is 10 times more stringent than the FDA standard.

The co-op is assessing how to grow and in what direction. It has come a long way from the initial exposure to academic and scientific research and it has taken many committed public and private partners to make this business what it is today. USDAís Value-Added Producer Grant was the right tool at the right time for this business. It provided a resource to fill in gaps existing in the business development process.




















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