fedgazette

Red with envy

Minnesota/Wisconsin State Roundup

Published October 1, 1999  |  October 1999 issue

This month, the water in a few parts of north-central Minnesota will turn the color of money. In this case, that color is the fire-engine red of a cranberry harvest, as a small group of farmers and investors are getting their feet wet in an ag niche that is familiar to few, but over the last few decades has been one of agriculture's most profitable crops.

The state's current presence in this industry-about a half-dozen growers-amounts to little less than a cranberry-drop in the bucket. Widely dispersed from Aitkin County in the middle part of the state all the way up to the Red Lake Indian Reservation in northern Minnesota, the farms range in size from just a few acres to about 100 acres. Because cranberries take three to five years to reach yield maturity, few of these marshes are producing much of a crop. But Minnesota offers some intriguing possibilities for expansion.

There are only about 1,100 cranberry farmers nationwide, who farm about 37,000 acres-puny compared with corn or wheat operations, where two dozen operations might farm the same acreage in a single county or two. This is due mainly to topographic and climatic idiosyncrasies of the tart fruit. Cranberries thrive in conditions that are otherwise unfriendly to most crops-sandy, acidic soil and cold temperatures-and are grown in only 10 states nationwide, with the large majority of production in Wisconsin and Massachusetts.

Some believe Minnesota could make a sizable entry into the cranberry industry. While the sand base necessary to establish new cranberry plantings is spotty, the state has an abundance of water, which is critical for cold-climate frost and winter protection as well as fall harvests. Several new marshes have been started in former wild rice fields, which are ripe for transition to cranberry farming because they include existing riparian rights. Such land also can be comparatively easy to convert to cranberries.

The first conversions occurred several years ago, when the wild rice market "was in the dumps," according to Michael Sparby, general manager of the Agricultural Utilization and Research Institute branch in Morris, Minn. With "well over" 20,000 acres of wild rice, the state has the potential to be a leading producer of cranberries, Sparby said.

But what many new growers are finding out is that getting established in the cranberry industry-particularly now-can be difficult and expensive. Newcomers have to deal with high capital start-up costs, unique growing challenges and tightening access to markets-all compounded by the fact that the strong prices that attracted them in the first place have gone in the tank.

Starting in the early 1970s, cranberry prices increased dramatically for about a decade, and held strong until only very recently. From 1974 to 1997, inflation-adjusted cranberry prices more than doubled, rising in actual dollars from an average of about $11 a barrel (100 lbs.) to a high of about $66 in 1996 (and for some growers, as high as $100 a barrel). But three consecutive bumper crops have induced the industry's first inventory surplus in two and a half decades, and prices have plummeted below $40 per barrel, with some estimates in the $30 to $35 range as of mid-September-prices last seen about two decades ago.

A lot of "jack"

If properly maintained, the perennial cranberry vine will produce a crop for decades. But Minnesota growers face multiple battles in getting their cranberry operations both in the ground and off the ground, so to speak. For starters, the purchase and preparation of land, and the planting of cranberry vines is far from cheap, ranging from about $10,000 to $30,000 per acre.

"You've got to have serious jack to get into this business," said Greg Kennedy, owner of a Minneapolis design and manufacturing firm, who decided several years ago to try his hand in cranberry farming. Despite the past profitability of the cranberry industry, most new growers are finding that getting a bank loan is all but impossible. Just ask Doug DuSold.

Like many others getting into cranberries, DuSold previously had a "nice long career in the corporate world" and decided it was time for a change. After exhaustive research, he found cranberry farming "to be a good way of life with good income associated with it." DuSold eventually bought land in Waskish, Minn., located just east of Upper Red Lake, and assumed he could get financing to put in 20 acres of cranberries, which at the time were fetching good prices.

He was wrong. DuSold said he approached virtually every type of lending institution and was turned away by them all. He said banks were nervous about funding a new agricultural venture, particularly one that demanded a six-figure loan that would see no crop income for at least three years. The Farm Service Agency-an agricultural lender of last resort-even turned DuSold away, intimating to him that "anybody well enough heeled to put in cranberries does not fit the need [criteria] of FSA."

Steven Bell, president of Wood County National Bank in Wisconsin Rapids, Wis., knows all about cranberry financing. The bank's holding company, WNC Bancorp, won the top spot this year in the annual US Banker rankings for mid-size banks, and Bell credited the bank's loan portfolio to cranberry growers as one of the main reasons for its success.

Bell said the bank, which is located near the heart of cranberry growers in central Wisconsin, has been linked to the industry "for a long, long time." But his bank has been "very selective in lending to growers," and has strict guidelines for loans to cranberry growers that map out the expected production costs per acre against expected yields. Given current prices, "the economics of putting a [new] marsh in don't make any sense," Bell said, but added that the bank has recently funded expansion projects for existing marshes. Most lenders have little knowledge of this niche industry, which can translate into significant risk if new growers don't know what they're doing, he said.

Kennedy has been through the financing wringer as well. Similar to DuSold, Kennedy was "just looking to get out [of the city] and move to the country." He researched different agriculture options, and came across the cranberry industry by chance. A quick study, he immediately saw the economic and lifestyle opportunity in cranberries, and bought more than 1,200 acres of land in Aitkin County, Minn., hoping to eventually put in dozens if not hundreds of acres of cranberries.

Kennedy put together an elaborate business plan in 1997 to attract a few select investors to help finance the capital-intensive endeavor, and managed to get his picture on a front-page Wall Street Journal story on the high-flying cranberry industry.

"I thought to myself, 'This can't fail,'" Kennedy said. But after countless meetings and a significant amount of business development money, "Nobody bit into it. ... I didn't raise a dime." Part of the problem was that new cranberry farms come under "family farm" laws that limit the number of shareholders in a farm-based operation, and preclude corporations or limited liability companies from becoming shareholders.

Added up, the current economic crisis in traditional crop farming, combined with the low visibility and unique financing demands of the cranberry industry was just too much to overcome. "Everyone here is too worried about ag and nobody understands [cranberries]," Kennedy said.

Given the financing environment, Kennedy said new growers "have to partner with someone who knows what they're doing, because you're spending money like it's going out of style. If you don't, you're just wasting your money."

That experience is critical once a new grower has found a way to get vines in the ground. Minnesota growers face different pests and weeds than those in Wisconsin and Massachusetts, according to Sparby. This means they cannot always fall back on existing weed and pest control practices, and have to develop new ones on their own-a potentially time- and resource-intensive endeavor for a new cranberry farmer.

Higher production, lower prices

Now a bigger problem—albeit it a familiar one in agriculture—is facing the cranberry industry: falling prices due to overproduction. With new and existing growers putting in a few acres here, a couple of hundred there, the number of harvested acres increased by more than 50 percent from 1983 to 1998, according to the Cranberry Marketing Board. As with other crops, cranberry farmers used increased mechanization, innovative techniques for fertilizing, and weed and pest control to push per-acre yields consistently up as well.

The combination of more acres and better yields helped cranberry production more than double from the early 1970s to about 4.5 million barrels in 1996. During this time prices remained high because consumer demand was growing as well. But growers produced cup-runneth-over crops the following two years, and demand did not keep pace, resulting in a 70 percent increase in surplus inventory by 1998.

That glut is expected to deepen. This fall's crop is expected to be 6 percent larger than the previous record crop, jumping to 5.8 million barrels, meaning that the lowest prices in almost 20 years are likely to hang around.

The price plunge caught many new growers off guard. DuSold said the price drop was "absolutely unexpected," but added that "it does not offer a significant problem as far as financial viability" of his marsh. Kennedy said he was told in 1997 that he could expect a price of $60, with a $1 increase every year for a decade.

New growers also face the added difficulty of having access to markets. The vast majority of growers have crop contracts with either the Ocean Spray cooperative (Lakeville, Mass.) or Northland Cranberries (Wisconsin Rapids, Wis.), both of which are scrambling in light of surplus inventories. Ocean Spray, for instance, has cut about 500 jobs in the last two years, and three top executives have departed this year, including CEO Thomas Bullock. [Mid-September news reports suggested that Ocean Spray, the nation's largest cranberry juice maker, is considering the sale of its operations to a large beverage company or a possible merger with No. 2 Northland.]

With a glut of fruit, neither company is opening its arms to new growers. Those without contracts are forced to find their own buyers for fresh berries, something most farmers are unequipped and uninterested in doing.

"I don't see Ocean Spray or Northland admitting new growers in the near future," said DuSold, himself a member of Ocean Spray. After dramatically scaling back his plans, Kennedy put in a single acre two years ago to secure a contract with Ocean Spray, which he said would have been virtually impossible today given the crop surplus.

But some growers see demand and prices bouncing back, pointing to the fact that 90 percent of all cranberries are consumed domestically. For the first time ever, the Cranberry Marketing Committee has applied for and received federal funding through the Market Access Program to promote cranberries in foreign markets.

Both DuSold and Kennedy remain upbeat about their long-term outlook. Even at the lower prices, "I can make money at this price range," DuSold said. "I can make a heck of a lot more money than growing rice or corn."

A Minnesota cranberry task force has been created to help nurture the fledgling industry and provide farmers with needed advice and support, according to Ervin Oelke, director of the Center for Alternative Plant and Animal Products at the University of Minnesota. But due to the big upfront investment, dropping prices and the three- to five-year wait for crop production, "I don't think there is going to be a big explosion" of cranberries in Minnesota, Oelke said. "People are sort of waiting to see what happens [to prices]."

Kennedy, for one, believed the price drop was "good for the industry. It will stop this mentality of guys not in the industry getting into it. It was really getting out of hand. ... This makes it a lot less attractive."

Kennedy acknowledged that just two years ago he was the one knocking on the cranberry door. But like any other business endeavor, persistence pays off. "I wanted to be a grower, and so I found a way."

After finding growing conditions less than ideal in Aitkin County, Kennedy said he plans to plant nine more acres and then sell the marsh to devote more time and attention to a marsh in Bancroft, Wis., where he has partnered with an experienced grower on a new marsh.

"Any business can go in the tank. Cranberries are no different," Kennedy said. "I'm in it for the long haul. You have to be."

Ronald A. Wirtz

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