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Congressional Testimony

Statement of Jeffrey W. Gain, Former Chairman
Alternative Agricultural Research and Commercialization Corporation

Before the Senate Subcommittee on Agriculture, Rural Development and Related Agencies
March 3, 1998


Mr. Chairman and members of the Subcommittee, I am pleased to testify today on the President's Fiscal Year 1999 budget proposal of the Alternative Agricultural Research and Commercialization Corporation (AARCC). It is a pleasure to provide you with an update on the Corporation's investment successes and the impact the AARC Corporation is having on the economy of rural communities.

I am not a Federal employee and am not here to support the growth of another Federal bureaucracy. I do, however, own and operate a diversified farming operation near Hardin, Illinois, producing grain, orchard crops, and livestock. I also serve as Chair of the Corporation's Board of Directors. I am here today on behalf of the mostly private sector members of the AARCC Board of Directors to testify to the unique opportunity the AARC Corporation offers to add value to agricultural raw materials and create economic opportunities in rural communities.

The committee has copies of the latest Source Book which lists many of the AARCC-supported companies and the products now being produced and sold. The committee also has a copy of our first annual report as a corporation. You will notice such industrial products as absorbents, building materials, lubricants, cleaners, and others. Many of these products are made from what was considered agricultural waste.

As an aside, I would be remiss if I did not point out that because of their very nature, these products may be environmentally friendly. In many instances, they replace finite or polluting raw materials such as petroleum. Certainly, using renewable, sustainable raw materials from agriculture can be viewed as having a positive impact on the environment.

I would like to offer the committee a short background on how we got to where we are today. Congress created the AARC Center in the 1990 Farm Bill and reauthorized it in the 1996 Farm Bill as a wholly-owned corporation of the U.S. Department of Agriculture (USDA). AARCC's creation followed a 1987 report of the New Farm and Forest Products Task Force. I served on that task force which met for 2 years. The task force recommended developing and commercializing a wide array of new farm and forest products utilizing the excess productive capacity of American agriculture as a way to revitalize ailing segments of rural America.

When we downsize agricultural production through set-aside or other non-production incentives, we also downsize rural communities and the infrastructure which supports agricultural production. Rural America must harness the productive capacity of idled acres by producing crops for value-added industrial use, or by growing new unsubsidized industrial crops. The U.S. "farm plant" is running under capacity. The National Agricultural Statistics Service reports that in 1996, only 336 million out of a possible 430 million acres of cropland were cultivated in the United States. Approximately 94 million acres of cropland, or 22 percent of our total productive capacity, lay idle. Companies in the U.S. must create and sell bio-based, value-added industrial products from agricultural and forestry materials and animal by-products if we hope to restore productivity and economic vitality to Rural America and expand world markets for U.S. agricultural products.

It is true that many of the things we make today from petroleum can, in fact, be made using biodegradable materials. This is not a new idea. USDA's four regional research laboratories were built in 1938-41 to find new uses for farm products. A national Presidential Commission on Increased Industrial Uses of Farm Products studied new uses in 1956-57. I have already mentioned the work of the 1985-87 USDA Task Force. Predating all these activities was the formation of the "Chemurgic Council" in 1935 under the leadership of Wheeler McMillen with financial support from Henry Ford. Other notables on the council included Thomas Edison, Irenee du Pont, MIT President Karl Compton, Nobel Prize winning physicist Robert Milliken, General Motors Vice President Charles Kettering, and Sears, Roebuck & Company Board Chairman Robert E. Wood. George Washington Carver was also a leader in the work of finding new uses for agricultural materials. Henry Ford even built a car body from vegetable plastic and plant fibers. He felt we could "grow our cars." Today we are beginning to see a move in Europe to a car which can be totally recycled. Increased use of vegetable fibers is part of that effort. Here in the U.S. a number of car manufacturers are also moving toward a "green" automobile.

The AARC Corporation, a unique venture capital entity, is attempting to restart the bio-based economy by investing in small businesses that are using agricultural materials to produce environmentally-friendly industrial products. The decision as to which companies and industrial sectors should receive AARC Corporation investments is made by a largely private sector board. Eight of the 11 members of the AARCC Board are from the private sector representing processing, financial, producer, and scientific interests.

It is important to recognize the AARC Corporation intends to make a profit for the Federal government from these investments and reinvest those repayments in other companies. But AARCC has a larger mandate. Unlike private sector venture capital firms, the AARC Corporation's investment strategy considers much more than profit, also referred to as return on investment (ROI). In pursuing AARCC's investment strategy, no one variable -- ROI, jobs creation, or agricultural material used has priority. Investment decisions are made after weighing these three factors in order to maintain a balance in our portfolio. To date the AARC Corporation has invested $33 million in Federal funds, leveraging an initial $105 million in initial private investments creating more than 5,000 new jobs in rural communities. AARCC continues to be an engine for rural development by investing in technologies that create real jobs and increase the use of agricultural materials or agricultural wastes.

AARCC's first investments were made in 1993. We know that not all the companies in which the AARC Corporation invests will be successful. However, many will. The venture capital industry norm for portfolio performance is that companies do not begin to break even until 75 months after the initial investment, somewhere between the sixth and seventh year. Even so, some 15 companies have already repaid the AARC Corporation over $200,000 in royalties. The business plan anticipates a continued and steady increase in repayments over the next 5 years.

We are constantly working with those companies in which we have invested to help them secure additional outside financing. Because the AARCC partnership places the USDA "stamp of approval" on these companies, it gives private investors a better "comfort level" and many partners have been able to attract significant follow-on financing from private sources. The AARC Corporation has secured an additional $3 dollars in private follow-on financing for each $1 it has invested.

Many AARCC companies have succeeded in penetrating difficult to access retail distribution channels for consumer products. Those marketing efforts are continuing. Perhaps the biggest near-term market for AARCC-supported companies, however, is government. To help jump-start these companies, as part of the 1996 Farm Bill, Congress included language which gives Federal procurement preference to products produced by AARCC partners. The preference language is part of the new Agricultural Acquisition Regulations (AGAR), which govern USDA purchases, recently published in the Federal Register. This year, similar information will be included in the Federal Acquisition Regulations (FAR), which govern all Federal purchases. As part of on-going marketing efforts to the Federal government this past fall, AARCC and 30 of its partners participated in the National Marketplace for the Environment here in Washington attended by Federal procurement officials, private buyers, and environmental organizations.

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 the AARC Corporation investment serving as a catalyst, private sector funds, which otherwise would not be available, will be committed to these companies. The AARC Corporation respectfully requests $10 million in 1999 to continue its mission. An appropriation at this level would enable the AARC Corporation to fund approximately 20 new investments. In addition, these funds would make it possible for AARCC to provide follow-on financing to some of its existing portfolio companies which have begun to transition from the start-up stage of their development to intermediate stage in which they are beginning to penetrate markets and make sales. At the requested funding level of $10 million, AARCC can attract some $30 million in private capital investment in its portfolio companies, thereby creating hundreds of new jobs in rural communities.

In conclusion, AARCC's venture capital approach is quite different from that of traditional government loan or grant programs. Indeed, AARCC may be seen as a model for public/private cooperative developments and several other Federal departments are investigating the possibility of establishing AARCC-like programs. The AARCC model of eventual self-sufficiency, coupled with the program's role as an engine for economic development, makes it an attractive option for a new way of doing the government's business.

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