Business Article - Chad Hart, Center for Agricultural and Rural Development (CARD), Iowa State University
Updates to www.AgMRC.org
State Profile - New York
Business Profile - Maize Valley Farm
AgMRC Highlight - Floriculture
Upcoming Events
The AgMRC Action is the official bi-monthly publication of the Agricultural Marketing Resource Center - your source for value-added ag information. The AgMRC is a dynamic collaboration of university research and outreach specialists focused on collecting and interpreting information and creating new research to support value-added agricultural activities. All information contained in this newsletter can be found on the site, www.agmrc.org.
This newsletter features new updates, information and resources available at the Agricultural Marketing Resource Center (AgMRC) to assist producers, service providers, rural development specialists and others with value-added agriculture resources. AgMRC was formed as a national virtual resource center for value-added agricultural groups. AgMRC exists to provide producers and processors with critical information in a one-stop-shop to build successful value-added agricultural enterprises.
The Center's Web site, www.AgMRC.org, contains information on various commodities and products, including many market niches farmers can pursue. There is also information on how to start a business and selecting a business structure. Other topics include how to write feasibility, marketing and business plans.
The site contains links and AgMRC-developed pieces on everything from networks of ethanol cooperatives to organic beef producers to a value-added worm business. Directories list value-added consultants, value-added agriculture businesses and applicable laws specific to each state.
I encourage you to visit the AgMRC web site at www.agmrc.org and take a few minutes to learn some new facts about a commodity, do some research on developing a food business plan or see what is happening in your individual state.
Please let us know your thoughts and suggestions for the newsletter. The center's email is agmrc@iastate.edu or call us toll-free at 866-277-5567.
Sincerely,
Christa Hartsook,
Communications specialist, AgMRC
By Chad E. Hart, Center for Agricultural and Rural Development (CARD), Iowa State University
The ethanol industry continues to evolve. When we last checked in on the industry (Spring 2004 Iowa Ag Review), ethanol prices tracked with unleaded gasoline prices; production capacity was expanding; and Congress was considering an energy bill targeting higher usage of renewable fuels. The future looked good for ethanol as we computed a positive ethanol profitability index for the foreseeable future. Since then, ethanol and unleaded gasoline prices have diverged; the production expansion has continued; Congress is still considering the energy bill; and the industry has gone through some growing pains.
The Ethanol and Gas Continuum
The connection between ethanol and unleaded gasoline prices had been a strong one. Looking at monthly rack (wholesale) price data for Omaha between 1982 and 2004, the ethanol price maintained a consistent positive gap over unleaded gasoline prices, usually between 30¢ to 50¢ per gallon. In 2005, the pricing relationship changed dramatically. Ethanol prices fell even though unleaded gasoline prices rose with crude oil prices. By March, ethanol was priced under unleaded gasoline. As Figure 1 shows, ethanol prices fell from a high of nearly $2.00 per gallon in November 2004 to $1.20 per gallon in April and May 2005. Meanwhile, unleaded gas prices rose from $1.20 per gallon in December 2004 to over $1.60 per gallon in April 2005. More recent monthly statistics are not yet available, but daily prices show that ethanol prices have recovered to be on par with unleaded gasoline prices; both are around $1.80 per gallon on the Omaha wholesale market.
To look at what caused the divergence, we have to look at the relationship between ethanol and unleaded gasoline and the growth of the ethanol industry. Ethanol is both a complement to and a substitute for unleaded gasoline. Most ethanol consumers use ethanol through blended mixtures of unleaded gasoline and ethanol, with ethanol making up only a small percentage of the product. In this capacity, ethanol serves as a complementary product to unleaded gas and ethanol usage increases with unleaded gas usage. But over the last several years, ethanol's ability to compete with unleaded gasoline as automotive fuel, through the promotion of E-85 and flexible fuel vehicles, has grown. This change is one factor breaking the link between unleaded gas and ethanol prices.
The growth in the ethanol industry has also changed the pricing relationship. Table 1 shows how ethanol production capacity has grown over the past year and the amount of expansion that is currently being undertaken. Last spring, ethanol industry numbers showed a planned expansion of roughly 14 percent of capacity. Figures today show the production capacity actually increased by 22 percent, with plans to add an additional 1.0 billion gallons of ethanol capacity shortly. Almost all of the expansion to date has been in midwestern states. Over the past 15 months, Iowa has led the way, with over 240 million gallons in new ethanol production capacity. Illinois, Minnesota, Nebraska, South Dakota, Wisconsin, Kansas, and Missouri have all added at least 40 million gallons each. Looking forward, Iowa also is leading the way in future expansions. Current plans call for an additional 665 million gallons of production capacity in Iowa alone. New ethanol plants are also planned in southwestern states. California, Colorado, New Mexico, and Texas will each be adding at least 15 million gallons of ethanol production capacity. With these planned expansions, ethanol capacity will soon reach 4.9 billion gallons per year. With Congress considering a renewable fuel standard of 7.5 billion gallons per year by 2012, there is still plenty of room for the ethanol industry to continue to grow. If the energy bill is signed into law, the ethanol industry will need to expand by an additional 53 percent to meet the new standard.
Production Heats Up
The growth in production capacity is matched by the growth in production. Figure 2 shows the average daily production of ethanol per month and the amount of ethanol held in stock each month from August 2004 to April 2005. The ethanol industry set an all-time production record for average daily production in August 2004 and continued to set new records until February 2005. While production has cooled off recently, it is still quite high. Ethanol usage managed to keep pace for awhile, but by March 2005, ethanol stocks started to accumulate. In economic terms, ethanol supply was outstripping demand. This put downward pressure on ethanol prices, regardless of events affecting unleaded gas prices.
As the current daily prices for ethanol are running 60¢ per gallon above the May 2005 monthly levels, it looks as though the ethanol market has worked through the short-term oversupply toward a new equilibrium. The ethanol market is still an emerging market. The industry still has domestic fuel markets with limited ethanol availability and faces significant distributional and marketing issues. An ethanol infrastructure is being developed to produce, ship, and utilize ethanol, but it is not nearly as complete as the infrastructure for unleaded gas. Ethanol demand cannot react as quickly to price signals as can unleaded gasoline demand. Given these issues combined with the large leaps in ethanol production, it is not surprising that the ethanol market went through a price decline with a delayed recovery.
Positive Profitability-for Now
But as the numbers show, even the recent downturn in ethanol prices has done little to slow ethanol's growth. Investors in the industry still see the potential for profit in the ethanol market. In March of this year, the Chicago Board of Trade began trading ethanol futures contracts, providing a financial tool to mitigate risk in the ethanol industry. While the trading volume has been small, the ethanol futures price movements have paralleled the cash price movements. Over the last month, ethanol futures have gone up by 30¢ per gallon. The nearby contracts are now trading in the $1.60 per gallon range, with the end-of-year contracts priced around $1.50 per gallon.
Given the ethanol futures contracts, we have modified our profitability index for ethanol. Our index compares the costs of the inputs into ethanol, corn and natural gas, to the revenues from ethanol and its co-products, such as dried distillers grains and solubles (DDGS). The index can be thought of as a gross margin for ethanol production, the difference between per unit revenues and costs of ethanol production. The index does not imply that all ethanol plants will make a profit, but it does signal the potential for profits within the industry. With current ethanol, corn, and natural gas futures prices, we can calculate the expected values of the profitability index for ethanol production. Based on a dry-mill production technique for ethanol, one bushel of corn and 165 thousand British thermal units of natural gas are needed to create 2.7 gallons of ethanol and 17 pounds of DDGS. Figure 3 shows the historical and projected levels of the profitability index. Given the futures prices on July 14, 2005, the profitability index for ethanol in August 2005 is at 58¢ per gallon of ethanol, meaning the per gallon expected revenues from ethanol and DDGS exceed the per gallon expected costs of corn and natural gas by 58¢. But the futures prices show a downward trend in ethanol prices and upward trends in corn and natural gas prices. For December 2005, the index is down to 33¢ per gallon. It is still positive, reflecting the possibility of profits in the industry, but highlights the expected tightening in the ethanol market.
Over the last 15 months the ethanol industry has gone through a volatile period. The industry has experienced significant growth and dramatic price swings. Given the planned expansions in ethanol plant capacities and a renewed effort by Congress to pass an energy bill, the ethanol industry is looking to continue its growth, but until the demand and infrastructure for ethanol mature, we can expect to see more dramatic price swings in ethanol's future that are not necessarily related to events in oil markets.
This article was published in the Summer 2005 Iowa Ag Review. The full article and supporting materials can be found online at http://www.card.iastate.edu/iowa_ag_review/summer_05/article3.aspx.
Commodities & Products
The following pages were updated: agri tourism, alligator, all aquaculture, anaerobic digesters, apples, avocado, azuki beans, bio reactors, biodiesel, bioprocessing, black walnut, blackberries, blueberries, celery, chestnuts, Christmas trees, chufa, cranberries, equine agri tourism, floriculture, general biomass, hay, meadowfoam, mushrooms, nursery trees, onions, pears, pecans, peppers, pumpkins, raspberries, solar power, strawberries u-pick, sweet potatoes, switchgrass, watermelons, wind energy and Midwestern wine.
The following new materials were added: a profile on Maize Farm, an agri tourism operation in Ohio. Maize Valley is a diversified direct farm market enterprise in Hartville, Ohio. Bill Baken and his wife, Michelle, joined the family farm business following college in 1985. The farm market includes a bakery, deli, and the sale of fresh produce.
http://www.agmrc.org/agmrc/valueaddedbusinessprofile.htm
Business Development
During the last quarter, the amount of information available on the Web site that focuses on business development has expanded greatly.
The major sections for Business Development are:
- Getting Started
- Starting a Business
- Operating a Business
- Strategy and Analysis
Currently there are more than 100 categories (separate subject matter sections) of business development information spread across these major sections. Each category is further divided into sub-categories. There are 320 sub-categories.
Located in these categories are 170 specific information files posted on the site that contain business development educational information.
The business development section contains 1,800 links to specific business development articles located on other Web sites. All of these links are organized into the 300 sub-categories listed above for easy reference.
State Profile - New York
New York Innovation Center
The NY Ag Innovation Center Value-Added Dairy Project is helping farmers interested in adding cheesemaking to their on-farm enterprises and, according to a survey by Center consultants, the state’s winery owners, chefs and food sellers cannot wait to start selling the new products.
To help those interested in buying local cheeses connect to regional cheesemakers and to help cheesemakers find those buyers, NY Ag Innovation Center consultants Mark Stephenson and Angela Gloy of Cornell University are building databases of cheese producers, food distributors, food buyers and retailers. The databases are the result of a statewide survey of winery owners, and a survey of specialty and food shop owners, restaurant owners and chefs in New York City.
Farmers interested in cheesemaking work with NY Ag Innovation Center’s business planning consultants to develop a business plan for the types of cheese best suited to their dairy and suited to their targeted market audiences. The NY Ag Innovation Center also provides farmers with help to perfect the producer’s recipe to meet consumer demands for specialty, organic, raw milk and other styles of cheeses. The Center is developing financial benchmarks to help producers understand the pitfalls that can affect small-scale cheesemaking.
With help from the Center, Western New York fruit grower Jim Bittner and baker Michael Di Camillo are selling fancy-packed peaches to upscale markets nationwide. Peaches Niagara, packed in designer jars, are found nationally at Neiman-Marcus and in Manhattan at such retailers as Whole Foods and Bergdorf-Goodman’s.
Bittner, principal partner in Singer Farms, Appleton, NY, and DiCamillo, vice president of Di Camillo’s Bakery, a family-run bakery established in 1920 in Niagara Falls, NY, worked with NY Ag Innovation Center food processing consultants to translate Anita Vespa Di Camillo’s recipe for canned peaches from the family kitchen to fit the bakery’s commercial production equipment.
The NY Ag Innovation Center, an initiative of the New York Farm Viability Institute, Inc., is interested in growing New York's agricultural sector and increasing sales of New York farm products.
“The critical components we learned in the test kitchens were important when we returned to the real world,” said Rick Field, a pickle maker in Brooklyn. “We returned numerous times to refine our recipes for quality and for formulation acceptable to the food industry regulators."
Field says the NYAIC team of food processing and packaging specialists helped him address the many issues that come with transitioning a home canning recipe into commercial production.
For more information on the New York Ag Innovation Center, visit their Web site at http://nyaic.cornell.edu.
Maize Valley is a diversified direct farm market enterprise in Hartville, Ohio. Bill Baken and his wife, Michelle, joined the family farm business following college in 1985. The farm market includes a bakery, deli, and the sale of fresh produce. They sell gift baskets in their market and also on their Web site (www.maizevalley.com). In addition, the enterprise has a greenhouse business. Maize Valley has a remote site located four miles away from the home farm at an upscale Flea Market.
During seasonal times of the year, Maize Valley operates an agri-tourism business which includes, but is not limited to, an 11-acre corn maze, wagon rides, petting pasture, concessions, kids play area, and more. New for 2005 was the addition of a winery to complement the farm market. The farm consists of approximately 700 acres. A variety of vegetable and fruit crops make up the crop mix. About half of the acres, approximately 350 acres, is comprised of row crops (corn, soybeans, wheat, oats) and hay.
Business Motivation
The shift from a custom crop production farm to a diverse, value-added business in 2001 was motivated by a desire to preserve the family farm, according to Baken.
“The commodity agriculture industry is pretty much toast in our area,” he says. Hartville is located 20 minutes north of Canton and 20 minutes southeast of Akron, Ohio. There is a population of more than one million people to draw from, depending on the activity. By 2001, land in their area was going into development, selling for $15,000 to $20,000 an acre.
Developing the Business
The farm business has been flexible and transitioned over the years to meet the needs of the family. “Over the years, the family has operated a 150-head registered Holstein dairy, 500,000 bu. capacity grain elevator, custom ag supply business, as well as farmed up to 6,000 acres,” says Baken. “Most recent changes have been in the direction of direct marketing due mostly to competitive advantage issues and other market factors.”
In 2001, the farm remodeled a 140-year-old barn and expanded to a full-service farm market. The greenhouse, which sells perennials, bedding plants, hanging baskets, and custom planters, was added in 2002.
The farm’s management team of Maize Valley Farm Market LTD is comprised of two generations. Bill and Michelle are joined by Michelle’s parents, Kay and Donna Vaughan who established the farm in the 1960s. Michelle’s brother, Todd Vaughan, manages the greenhouse operations and winery. Michelle manages the farm market. Bill works with his in-laws on the farm and oversees the corn maze, tours and education components and most marketing aspects. The family hires 15 to 18 employees to help during the year.
The addition of the winery required a highly detailed business plan which helped the family with its implementation. The winery uses their homegrown strawberries, raspberries, blueberries and grapes to produce the wine. (www.maizevalleywinery.com) The winery offers the business an opportunity to generate greater value out of their fruit products, draws visitors and buyers to the farm market, and allows Maize Valley to promote wine/farm tours and wine tasting events.
“Basically we are able to vertically integrate more of our business. Now in April 2005 we are selling last year’s strawberries in a bottle. We extended our season and spread out income versus fresh berries alone. With wine it has a market segment that is very loyal and motivated and will travel to try different wines and experiences versus say just jams or jellies that have more alternatives. With the wine there is a romance and texture that can only be found in the winery experience. This compliments our current agri-tourism efforts and allows us to extend them to a different market segment and demographic. The two worlds are merging. The wine crowd is a demographic that rewards personal service and experience based venues. This plays well with our offerings and allows us to make better use of existing infrastructure.
Key Steps Along the Way
While developing the business, Baken says, the willingness to try new things and take risk when faced with challenges related to their business was advantageous. “Most recently with the addition of our winery, hiring an architect whom created a detailed business plan for us really made our decision-making process easier and clear,” Baken says.
Another business plus includes “always being on the lookout for new ideas and networking with those who have tried things before.” The Bakens are members of the North American Farmers’ Direct Marketing Association. Bill also serves on the local township’s zoning commission. He is active in the local community by serving on a variety of local tourism and community committees.
Barriers to Success
The biggest challenges for Maize Valley to address include location, marketing and promotion. “When you encounter a problem or barrier, you just need to turn it ‘till an opportunity presents itself,” Baken says.
Unexpected problems along the way have included cost overruns on projects. “Before we developed a detailed business plan, we had overruns on almost any project we undertook,” Baken says. Defining their customers’ wants and needs is an ongoing and ever changing process, too.
New Demographic = New Market Share
“Right now the winery project has opened up a whole new demographic,” says Baken. “We hope this helps other companion products in our market.” Sales of meat and cheese products such as cheese plates, wrapped cheese, and other food related products are up. Plus, Maize Valley can take excess inventory and turn it into value-added items. “Our sales of upscale gift items are up, jarred items, and just about everything compared to a year ago,” he says. It is a function of more traffic as well as different demographic coming to the farm. The winery gives Baken a reason to send out press releases and promote other events that “just make noise and keep our profile up.” It has also provided an opportunity for wholesale distribution.
Reflecting on the accomplishments and learning experiences, Baken says planning is essential. “We did not plan enough at the start. If you are not good at planning, hire someone who is. It will pay you back ten-fold.”
Greenhouse and nursery crops are the fourth largest crop group based on farm cash receipts. Leading floriculture states in value are California, Florida, Michigan, Texas and Ohio.
Greenhouse and nursery crops make up one third of the total farm cash receipts from all horticultural crops, where USDA defines and tracks greenhouse and nursery crops. Horticulture crops include vegetables, fruits and tree nuts. In 2004, wholesale receipts totaled $15.7 billion.
The floriculture portion of this industry includes crops such as cut flowers, cut cultivated greens, potted flowering plants and potted foliage plants, as well as bedding and garden plants. Grower cash receipts for the floriculture production section were $6 billion in 2004.
Supply
The top three producing states of ornamental crops are California, Florida and Texas, with sales well over $1 billion annually. North Carolina and Oregon are close to reaching $1 billion in annual green sales, producing $900 million worth of nursery and greenhouse crops.
Top states with the most acreage under greenhouse cover include California, Florida, Michigan, Texas and Ohio. Glass is the traditional greenhouse cover. Other products used include fiberglass and plastic film. Greenhouses are still expensive to build and maintain. States with the most open ground in acres include Florida, California, Michigan and New Jersey. These open field growers averaged more than $1 million in flower sales for 2003, up from $980,000 in 2002.
Large U.S. floriculture growers (with more than $100,000 in annual sales) averaged $96,400 per acre in 2004. Open field production and greenhouse acres decreased in size. However, sales expanded. Average sales per grower were estimated at $1.1 million.
Floriculture sales per grower increased in all four regions of the United States, growing the fastest in the Midwest as sales of bedding and garden annual flowering plants led growth. The average size of operations in the West is $1.5 million in sales per grower, Southern operations average $2 million in sales per grower. Operations in the Midwest average $1 million and those in the Northeast average nearly $716,000 per grower.
Demand
The 1998 Census of Horticultural Specialties breaks down where the U.S. horticultural crop is marketed. Re-wholesalers account for 25.3 percent; retail garden centers and nurseries, 17.9; landscape contractors, 13.9; other mass marketers, 13.4; direct sales, 13.0; supermarkets and groceries, 7.6, retail florists, 2.5; and others at 6.4.
Per-household spending on floriculture was $54. Of that, $10 was spent for cut flowers and $44 for flowering and foliage plants. Spending averaged $98 per household in 2004.
For more information on floriculture, visit http://www.agmrc.org/agmrc/commodity/specialitycrops/floriculture/floricultureprofile.htm