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Adding value ... and risk

March 1, 2004


Phil Davies Staff Writer
Adding value ... and risk

In the last 15 years another type of food processor has sprung up in the shadow of the mega plants, one that is just as preoccupied with efficiency but has strong local ties.

These smaller producers often concentrate on niche markets overlooked by national food conglomerates, emphasizing quality rather than quantity.

"Value-added agriculture" comprises pasta and bison meat in North Dakota; soy milk and premium vodka in Minnesota; artisan cheeses and organic lamb in Wisconsin; sugar and cowboy-branded breakfast cereal in Montana. New-generation cooperatives are part and parcel of this movement. Weary of feeding the maw of the food industry for scant return, farmers pool their resources to develop and operate their own processing facilities, sharing profits in proportion to how much raw material they deliver to the plant. In the 1990s more than 50 NGCs were established in the Upper Midwest, most in rural communities desperate for jobs and tax base.

"The proliferation of cooperatives has been a concerted effort to bring more value to the local economic activity," said Mark Drabenstott, director of the Fed's Center for the Study of Rural America in Kansas City, Mo. Many co-ops have cropped up in the Dakotas and the Red River Valley of Minnesota, he noted-locales in which farmers receive lower prices for their commodities because they're so far from export gateways.

Farmer co-ops and other value-added enterprises get a lot of media attention; the notion of small, salt-of-the-earth producers bringing diversity and taste to the freezer case has innate appeal. And they receive considerable financial and in-kind support from government. The 2002 Farm Bill established four U.S. Department of Agriculture programs, funded from an annual $40 million pool, intended to help value-added producers develop new products, establish processing facilities and market their output to distributors and consumers. Every state in the district offers at least one value-added ag program that dispenses loans and grants, or technical assistance in such areas as employee training, market research and state promotional campaigns.

But nobody seems to have a handle on the economic impact of value-added food processing in the district, or the country for that matter. Defining and tracking value-added ag is part of the problem. Government data doesn't differentiate between local folks converting the fruit of their labors into food products and International Multifoods doing the same thing; both add value to raw commodities. Small processors can be either cooperatives or private companies, independent entities or subsidiaries of larger, traditional food companies.

A tour of any supermarket in the district suggests that the economic contribution of value-added ag is quite small; down-home processors may be gaining shelf space in the natural foods section, but they can't hold a stick of elk jerky to the name brands that dominate the rest of the store.

But in some food categories, value-added enterprises based in the district have managed to capture substantial chunks of the national market. Dakota Growers Pasta Co., one of five pasta makers in northeastern North Dakota, is the third largest producer in North America, commanding 12 percent of the dry pasta market. At its highly automated plant in Alexandria, Minn., Sunrich Growers produces 40 percent of the organic soy milk and soy base used by other companies to make soy milk—a product that accounts for only 2 percent of U.S. dairy consumption today but is racking up 25 percent annual sales gains in supermarkets.

And there's no question that small, specialty processors can exert a powerful, positive influence on their communities. Dakota Growers, founded in 1991 as a co-op of durum wheat growers (in 2002 it went capitalist, becoming a stock-issuing corporation), employs 390 people at its flagship plant in Carrington, N.D., (pop. 2,268) and at another facility in the Minneapolis area. Growing sales of a variety of pastas—including an organic line—produced with advanced Italian processing equipment have fueled several expansions and earned consistent profits over the years, although the company reported a $429,000 loss in fiscal 2003.

Value-added is by no means a formula for success in food manufacturing, however. Small, rural processors that have gone out of business include Bushel 42, a pasta company in Crosby, N.D., Minnesota Corn Processors in Marshall, Minn., Dakota Beef Cooperative in Mandan, N.D., and Spring Wheat bakers in Fargo, N.D.

Even for capable, aggressive entrepreneurs, access to high-quality local commodities—durum wheat, soybeans, goat's milk—may not provide enough competitive advantage to overcome the drawbacks of processing those raw materials in a rural area.

Sparsely populated Montana, for example, lacks a strong local market for food manufacturing, and independent distributors willing to represent niche food products are scarce. Cream of the West, a small manufacturer of hot cereals much admired for its use of Montana grains and cowboy-themed marketing, was forced to seek new retail outlets in Salt Lake City when it lost its local distributor in Billings. Annual sales had dropped from about $500,000 in the late 1990s to $350,000 by late 2002, when founder and wheat grower Bud Leuthold sold the firm to a group of Montana investors. The new owners, assisted by $63,300 in state grants, plan to relaunch the company in Harlowton, a small town 90 miles away in the Musselshell River basin.

Failures in value-added ag shouldn't be a surprise, said Gary Brester, a professor in the Department of Agricultural Economics at Montana State University in Bozeman. Would-be food entrepreneurs lose sight of the fact that adding value to a commodity involves additional costs, and not just in manufacturing; realizing a profit also requires savvy labor management, packaging, distribution and marketing. Botching any one of these essential business functions can spell doom in an extremely competitive industry.

"I know plenty of producers, the best farmers and the best ranchers in the world, and they would be horrible at managing the risks involved in a food processing company," Brester said.

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