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Congressional Testimony

Statement of W. Bruce Crain
Former Executive Director, Alternative Agricultural Research and Commercialization Corporation

Before the Senate Subcommittee on Agriculture, Rural Development and Related Agencies
April 15, 1997

Mr. Chairman and members of the Subcommittee, I am pleased to testify today on the President's Fiscal Year 1998 budget proposal of the Alternative Agricultural Research and Commercialization (AARC) Corporation. It is a pleasure to provide you with an update of the Corporation's investment successes and its real and potential impact on rural communities.

With the enactment of the 1996 Farm Bill, Congress set in motion transformational changes in agricultural policy in this country. The gradual phaseout of commodity support payments means farming must become more market-driven. To compete in the global marketplace, America must produce value-added products; we cannot prosper with raw commodities alone.

In short, American agriculture must be innovative to remain strong in the 21st century. The AARC Corporation is a catalyst for innovation. It is a vital link between the development of high value-added agricultural products and their successful commercialization. It is the only agency in the Federal government making equity investments in new, rural business ventures.

Commercializing new products can be an expensive and difficult process, especially in a rural locale. It can be difficult because rural areas often lack the financial and other entrepreneurial support systems concentrated in urban areas.

The AARC Corporation makes what are known as "seed capital" and "early- stage" investments. It provides the capital resources that agricultural innovators cannot get from the private sector because of their high risk. Like private venture capital firms, the AARC Corporation conducts extensive due diligence on prospective investment opportunities. Private investors respect the AARC Corporation's expertise and track record. The 66 companies AARC has funded during its brief existence will tell you that when they obtain a "USDA stamp of approval" from AARC, it opens the doors to additional financial resources from the private sector, such as later-stage investments and debt financing, that are essential to success.

The typical cycle of venture capital investments lasts approximately 8 years. We do not expect companies we fund to generate positive cash flow until their fifth or sixth year. The AARC Corporation, currently in its fifth year of operation, has invested $28.1 million in 66 projects in 32 states. To date, these investments have attracted $112 million in additional private financing to projects in rural communities such as Fontana, California; Ashburn, Georgia; and Wahpeton, North Dakota -- places that do not show up on the radar screens of money center banks and most venture capitalists. AARC produces a substantial multiplier effect. Every dollar invested by AARC has leveraged into $5, money that puts people to work in permanent, manufacturing jobs in rural communities.

Despite its short history and the time needed for investments to come to fruition, seven companies have already made partial repayments to the AARC Corporation. These partial repayments are testament to the due diligence and investment decisions of the AARC Board of Directors and their wide array of private sector expertise.

Once an investment is made, the AARC Corporation assists these companies by marketing their products to the banking and venture capital communities and to potential buyers of such products, such as the Federal government. The AARC staff and Board of Directors have worked diligently to educate members of the banking community through speeches, publications, and even satellite feeds to bank officers. In addition, AARC has visited with the venture capital communities in New York, Chicago, Los Angeles, and Houston. The responses from these potential sources of funds have been extremely positive. In fact, several of the AARC companies have already received follow-on investments from these contacts that have had a tremendous impact on the profit potential of these companies. For example, Ariboard Industries of Texas used the AARC investment to attract $2 million in equity from Raytheon Engineering. Gridcore International of California has received follow-on investments totaling $17 million from firms including Nihon Cement, the largest cement manufacturing company in Japan. Earthgro of Connecticut was successful in attracting $15 million in investments from Warberg-Pincus, an investment banking firm. These and other AARC-invested companies have confirmed that AARC's initial investment was key to attracting these and other additional investors into these small, mostly rural-based companies.

AARC works closely with the Small Business Administration (SBA) to open additional doors for its value-added agriculture manufacturers to private financing. Through a new arrangement, AARC companies have access to SBA's new Angel Capital Electronic, or "ACE" network, a certified investor network of individuals with net worth of at least $1 million. This new alliance with SBA will further leverage AARC's investment funds by opening the door to an important source of potential investment dollars that previously has been difficult for AARC companies to access.

Section 729 of the 1996 Farm Bill included a provision that allows Federal agencies to establish set-asides and preferences for products commercialized with the assistance of AARC. The AARC staff is working to educate Federal procurement officials about AARC-funded products, which are all environmentally friendly, and about the authority that allows them to establish procedures for the purchase of these products. Access to this huge Federal Government market can greatly enhance the financial success of AARC-funded companies and their ability to repay their investments, and the earnings on these investments to the AARC Corporation.

Based on an analysis of the AARC portfolio prepared by the Agricultural Utilization Research Institute and the Kansas Technology Enterprise Corporation in 1996, AARC investments have added on the average 13 times more value to the agricultural raw products and forestry materials. In addition, AARC investments have created 5,000 new jobs, mostly in rural areas of the country. Therefore, based on AARC's current leverage ratio, one job is created for every $5,000 invested by the AARC Corporation.

To place a more human face on these numbers, I want to briefly describe one AARC-funded company and the difference we are together making in its community.

Indian Creek Mesquite of Brownwood, Texas, is manufacturing and selling a mesquite wood product that serves as an alternative to charcoal. The mesquite is paraffin-coated and packaged in a paraffin-coated bag which can be ignited without the use of lighter fluid or other added materials. Mesquite wood carries a negative value due to the cost associated with removing the trees from pasture land. This cost averages about $150 per acre. Because of the added value generated by Indian Creek Mesquite, the value of mesquite has gone from a negative $150 per acre to over $5,000 per acre. In addition, Indian Creek Mesquite has created 14 new jobs in the Brownwood area that otherwise would not exist.

With the necessary resources, the AARC Corporation can continue and even expand its role in creating value-added products and jobs that benefit rural America. With AARC serving in the capacity of facilitator, new private sector investment dollars will reach entrepreneurs that otherwise would not be available. The AARC Corporation requests $10 million to continue its mission. The AARC Corporation pledges to work diligently to invest its funds in projects that add the most value to commodities and rural communities, and work to locate and expand markets for these new bio-based industrial products. Based on the Corporation's track record during this short time, we feel confident in assuring the Subcommittee that these resources will be used wisely and effectively.

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