Business Article - Mike Boland, AgMRC, Kansas State University
Updates to www.AgMRC.org
State Profile - Ohio
Business Profile - Cheesemaking
News Bytes
AgMRC Highlight - Ethanol
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 Mike Boland, AgMRC, Kansas State University
There has been a lot of interest in recent years trying to quantify whether good companies remain good companies over time. Another way of saying this is whether well managed companies remain well managed companies or can they improve their performance over time. Generally speaking, more profitable businesses tend to be better managed companies. The popularity of books such as “Good to Great” by Jim Collins are evidence that this topic is of interest to many people.
Many newly created value-added businesses are producer-owned in some way or another as evidenced by a governance structure that is composed of producers and, in some cases, outside investors. Most producers have little experience with hiring a CEO and even less experience in participating in the strategy formation process.
This makes it even more important for directors (and producer-owners who elect the directors) to understand why some firms are able to repeat or improve their performance (good or bad) each year and others may not be able to repeat their performance.
Researchers in the Agricultural Marketing Resource Center (AgMRC) have been studying a database of more than 1,400 food and agribusiness companies (e.g., food economy) in an effort to learn more about why some firms are able to repeat or improve their performance over time. This data includes input supply agribusinesses, food processors, wholesale grocery firms, food retailers and supermarkets. Figure 1 shows average return on assets for these four sectors over the 1981 to 2002 time period. Return on assets is net income divided by total assets and is a common measure of profitability. Note that each sector had a decline in average return on assets. Retail supermarkets had the greatest stability in return on assets.
Thus far, we have learned several things from this research. First, almost 50 percent of the variation in return on assets in these food economy firms is due to competitive positioning and about 20 percent is due to industry factors. This means that there is more variation in return on assets within an industry (e.g., the ethanol industry) and less variability across industries in a sector (e.g., food processing sector). In laymen’s terms, this says that economic factors that affect all firms in the economy such as interest rate fluctuations, changes in exchange rates, changes in the price of energy and similar macroeconomic factors affect return on assets in all firms in about the same way. However, factors that are internal to a firm have greater effects on the differences in return on assets for firms within the same industry.
For example, consider the ethanol industry. Looking at return on assets among a group of ethanol plants at the same point in time show a wide variation in return on assets. Managers in this industry all face similar changes in the price of natural gas, the price of dried distillers grains (DDGs), the rate at which they can borrow money, and similar factors. These factors do not greatly affect the variation we observe in return on assets. Rather, the variation is due to other factors that are internal to the firm such as the relationship between capacity, actual production and the costs of production per unit. These factors are related, in many ways, to management.
Thus, the ability to repeat good performance or improve performance from one year to the next is dependent upon various factors that are all related to management. The outreach program done by Kansas State University as part of its AgMRC activities include teaching basic and advanced strategic thinking, governance, and finance. These sessions are for producers that serve as directors of value-added businesses and agricultural cooperatives and the managers of these businesses. In these programs, we talk about the role of management and the importance of strategy formation in these businesses. Good governance practices should also include evaluation of management and directors.
Finally, financial decisions such as income distribution should be based on a firm's strategy such as managing the balance sheet. Creating a clear mission and objectives is important in strategy formation. And these are linked to the ability to repeat performance.
What other research activities are we doing? Currently, we are looking at the way family-owned food companies evolved over time. Many producer-owned organizations resemble family-owned food companies in the sense that the original equity capital came from family members or in the case of cooperatives, groups of producers with similar interests. As these family-owned companies grew, the original family had to seek outside investors for equity capital. Yet many of these companies retained sophisticated governance structures such that the family of the original founder still maintains control over time. We are identifying variables that contributed to the ability of the family to exert some control over the governance of the company while still having outside equity investors. For example, many of these businesses have a long history of paying cash dividends. We think that knowledge of how these family-owned food companies evolved will be of benefit to producers-owned organizations that are thinking about how to access outside equity capital. We will report on that research in a later column.
The Changing Marketplace for California Crops: Focus on Fruits and Vegetables (pdf) from University of California, Davis. A summary of production and market trends. March 2005.
Consumer Acceptance of Agricultural Biotechnology: A Market Experiment with Conventional and Biotech Sweet Corn. University of California Agricultural Issues Center. An analysis of a consumer survey conducted by Pennsylvania State University. March 2005.
Costs and Benefits of Marketing Differentiated Beef through Process Verified Systems (pdf) University of California Agricultural Issues Center. This reports on analysis conducted at Kansas State University on the costs of developing and implementing a process verified program. Extensive producer interviews provided input. February 2005.
Identity Preservation and Labeling of Genetically Modified Products: System Design and Enforcement Issues. Center for Agricultural and Rural Development (CARD) October 2004.
Labeling Regulations and Segregation of First- and Second-Generation Genetically Modified Products: Innovation Incentives and Welfare Effects. Center for Agricultural and Rural Development (CARD) April 2005.
Pharmaceuticals and Industrial Products in Crops: Economic Prospects and Impacts on Agriculture. Center for Agricultural and Rural Development (CARD) November 2004.
For more information, please contact the Center at www.AgMRC.org, toll free at 866-277-5567 or email at agmrc@iastate.edu.
State Profile - Ohio
Value-Added agriculture in Ohio is enhanced by the Ohio Cooperative Development Center (OCDC) by fostering new cooperatives and strengthening existing cooperatives. OCDC provides various technical assistance and education services including: exploration of various business structures, co-ops 101, business plans, feasibility studies, market analyses, surveys, education for employees, directors and managers and training for economic development professionals. The Center also administers a small grant program that provides seed money for emerging cooperatives or expanding existing cooperatives.
Producers in Ohio are fortunate to have other resources for value-added assistance, as well.
The Ohio Department of Agriculture provides regulatory protection to producers, agribusinesses and the consuming public; promotes Ohio agricultural products in domestic and international markets; and educates the citizens of Ohio about the agricultural industry.
The charge of the Southern Ohio Agricultural and Community Development Foundation is to endeavor to replace the production of tobacco in southern Ohio with the production of other agricultural products and to mitigate the adverse economic impact of reduced tobacco production in the region by preparing, implementing and keeping current a plan to develop means for tobacco growers to grow other products.
Heartland Agdeavor Assn. assists in the development of value-added ideas to become viable businesses and helps farmers invest in the value-added businesses of others.
Agricultural Innovation Counselors provide services that include technical, business, marketing and organizational assistance to value-added clients, producers and groups.
Ohio State University (OSU) Farm Income Enhancement develops concepts to enhance and promote long-term stability in Ohio agriculture. Much of the focus has been on evaluating value-added alternatives in marketing and the use of cooperatives as a way to involve farmers in the market chain beyond the farm gate.
“We are seeing an increase in the number of groups interested in marketing to the diverse ethnic populations we have in Ohio,” said Travis West of the OCDC. “Many efforts are taking place in livestock and produce marketing to the large ethnic populations. Ohio is unique in that there are five metropolitan areas that are easily accessible from most cities in the state. These metro areas provide an invaluable marketing opportunity to not only the ethnic population, but also just the large number of consumers that can be served in a close area.”
According to West, the majority of producers or groups initially contact the Center for money. “This is what they think that they need, but many are in need of market research or feasibility work to determine if a market really exists,” West said. The Center assists with those actual needs.
West estimates that OCDC maintains about 20 technical assistance projects every year.
For more information on OCDC, visit their Web site at http://ocdc.osu.edu/.
Farmstead Cheese Making - Is It For You?
Cheese making offers producers an opportunity to capture demand in the cheese market. Farmstead cheese is cheese processed from milk produced at the farm. The United States produces approximately 600 tons of goat cheese annually. Yet, the United States imports more than 50 percent of the dairy goat cheese products consumed.
Two farmstead cheese producers from New England shared ideas on how to enter the cheese making business during the 20th annual North American Farmers' Direct Marketing Association conference held in Boston this past February.
Ann Starbard of Crystal Brook Farm is in her seventh season of making fresh cheese. She milks 45 goats on her farm at Sterling, Mass., located 50 miles west of Boston.
She purchased the business from someone who was retiring from the cheese business. The animals and equipment were moved to Starbard’s established dairy cow farm where they began operating two dairy businesses. The cheese business was changed from mostly wholesale sales to more direct retail sales. Starbard regards cheese making as rewarding and challenging. She suggests the following questions be answered by someone considering the artisan cheese business.
How much time and energy do you have to devote to the operation? “Farmers work 24/7 our whole lives,” she says. Cheese making requires doing the jobs of three people: milking the goats, making the cheese, then selling the cheese.
What are your goals? Make goals with your enterprise partners. What do you want to accomplish this week and this year? Do you have a plan B? If the enterprise does not work, is there something else to fall back on?
What are your resources? How much start-up money are you going to need? Where will it come from? Cash flow is important. Have goals and a business plan. She sells a fresh cheese product that can be sold following the fourth day. An aged cheese product takes more time.
Who has the expertise? Cheese making is an art and a science.
Who is going to run the business? If you are going to hire help, have a job description. With hired help or family members, make sure everyone knows what each other is doing.
What is your marketing plan? Does your location make direct marketing feasible? Options for cheese sales include wholesale, private label and internet sales. She suggests taking a marketing class if you are just getting started. She markets at seven farmers’ markets. She has an employee sell at three of the seven locations.
What about your family and social life? Cheese making involves more than one person. Discuss the venture with everybody. Sacrifices have to be made. Starbard suggests keeping the big picture in mind. “The cheese business is going to affect your family and social life.”
Valerie Davies of Gilmanton Iron Works, N.H., is proprietor of Heart Song Farm
www.heart-song-farm.com/. The Davies' family moved to the farm in 1994. The business is relocating to a farm in Scarborough, Maine, where it will be closer to its largest sales market, that being restaurants in Portland, Maine.
Milk from the Davies' 40-goat herd is processed into fresh and aged cheese from her USDA licensed Grade A dairy and cheese facility. She offered the following keys to success in farmstead cheese making.
Get to know a lot of people in the cheese making and dairy businesses. Find out what they would do differently. A lot of cheese makers offer how-to classes to learn from. Get to know your local dairy inspectors. Have a good working relationship with them. They have good ideas and can be a wealth of information. By working with the inspectors, they can help you avoid pitfalls.
Start talking to equipment dealers, even one to two years in advance of starting the business. Look for bargains on used equipment, even in another food production market. Maybe the cider folks have bulk tanks that work for cheese. Baker's racks work to age the cheese. Equipment sources include restaurant supply places and auctions.
When planning your cheese making facility, keep it simple, yet think far enough ahead. Davies suggests starting with as big a space as you can afford. Plan for a wet area and a dry, packing area. In her situation, she didn't account for the hot and cool areas that would be needed. Good building ventilation is also important. She says a dairy inspector can help with that.
Think about traffic patterns. If more than one person is working in an area, walkways need to be wide enough. Also consider storage and utility space such as counters, shelves, cleaning supply storage, refrigeration, labels and packaging. Davies says it helps to visit other cheese makers for ideas. Know the FDA rules regarding food labels and promotional materials. In addition, Davies says, “Print up a simple story about your operation.” Find packaging that works for you.
Expect some failures. It’s not always going to work. Keep good records. She suggests writing everything down.
Superior product deserves superior prices. Stores have to make a certain price. “It’s very important to have a quality, consistent product,” according to Davies. Anybody can sell anything once. It is
quality that sells a product “again and again.”
Wholesome Harvest, a farmer owned marketing coalition that markets nationally and internationally using its own brand name, is adding organic certified pork to its line of organic beef, lamb, chicken, and turkey. The farmer-owners enjoy receiving a premium for the product, a rising stock value, and dividends from company profits. Co-ops and farmer groups interested in joining Wholesome Harvest's marketing coalition should contact Wende Elliott at 641-377-7777 x106 immediately to take advantage of possible contracts that need to be filled. Farmers who haven't grown organically in the past are able to start now and would need to be able to commit to pursing organic certification from the first delivery and non-confined production with pasture elements.
The Citizens Network for Foreign Affairs (CNFA) is looking for people with a sense of adventure for overseas volunteer work. The group is seeking farmers and agribusiness people who want to volunteer their time and knowledge to help farmers in other countries. CNFA is part of the US Government-funded Farmer-to-Farmer program. The goal is to help farmers in Ukraine, Belarus and Moldova increase their incomes by increasing their access to markets.
Right now, people with experience in the fruits and vegetables processing industry are needed. CNFA is working with a cannery in Ukraine that makes canned vegetables, mushrooms and fruit juices to help them improve their operations. The group is looking for people to work with the cannery on a business plan and on marketing their products. CNFA is also working with a cold storage facility in Ukraine to help them decrease waste. If you have experience cold storing grapes and vegetables, they'd like to hear from you. By working with the cannery and cold storage facility, you can help create market opportunities for small farmers in a place that really needs them.
CNFA assignments are 16-19 days long. CNFA pays all expenses related to the assignment, from plane tickets, to full-time translators to room and board while you're overseas. The dates of these assignments are flexible, but they'd like to do them before the end of the summer. If you'd like to learn more about these volunteer opportunities, please contact Eric Wallace at 202-296-3920 or by e-mail at ewallace@cnfa.org. You can also read about the agribusiness volunteer program at www.cnfa.org/volunt.htm.
A Professional Study Tour to Holland Harvest Travel International of Oakland, California, producers of Farmer-to-Farmer Tours, in partnership with Ag Ventures Alliance, Outstanding Farmers of America, the Agricultural Marketing Resource Center and the Dutch Farmers Union, announces a Professional Study Tour to Holland for North American growers and marketers.
The nine-day tour, September 11-19, 2005, features the bi-annual AGF TOTAAL Fruit and Vegetable Trade Fair in Rotterdam, and meetings and discussions with U.S. and Dutch Agricultural Officials. Agricultural inspections throughout the itinerary include a large variety of agricultural commodities: dairy, nursery, strawberries, tomatoes, mushrooms, aquaculture, pork and eggs, to name a few. A selection of Holland’s value-added agriculture and agri-businesses are also on the schedule.
An added attraction is a visit to the world famous Aalsmeer Flower Auction.
For more information, contact Carol Bauer at Harvest Travel International at 800-227-0464, or email harvestt@sbcglobal.net.
Consumer demand for ethanol continues to help the industry set production records on a regular basis. In 2004 domestic production soared to 3.4 billion gallons, shattering the previous year's total production by more than 20 percent.
Although ethanol has been around for hundreds of years and used in automobiles dating back to Henry Ford’s Model A, it has never generated as much attention as it has during the past decade.
During the past several years, historically low corn prices coupled with relatively high gasoline prices have provided an environment that has been favorable for rapid growth of the ethanol industry. These pricing dynamics, along with favorable margins in the industry, have attracted considerable investor interest resulting in a surge of plant development.
There are now more than 83 ethanol plants in production in the United States with at least 16 more under construction or in the planning stages. Several existing plants are also undergoing expansion projects. Collectively these plants, located in 20 different states, will process over one billion bushels of corn and have a collective capacity to produce in excess of 4.7 billion gallons of ethanol. As a result of the record-setting production levels in 2004, the domestic demand for ethanol now utilizes more than 10 percent of the domestic corn crop.
Rapid growth and expansion of ethanol plants triggered by low grain prices and high fuel prices evolved quickly, despite that even as recently as the mid 1990s, a considerably different economic situation existed. During the mid 1990s, corn shortages and lower gasoline prices placed substantial pressure on the growing ethanol industry. Significant swings in market conditions can and do occur. However, the most critical variable for the industry continues to be the pending Renewable Fuels Standards (RFS). Although any national renewable fuel standard will likely be favorable for the industry, the final wording will significantly impact the future rate of expansion. Ethanol proponents anticipate legislative action that will require at least eight billion gallons of renewable fuels be used by the year 2012.
The majority of the growth in the domestic ethanol industry has been a result of farmer ownership and investment in dry mill ethanol facilities. These highly efficient dry-mill plants typically go from the drawing board to production in less than two years. Today, farmer-owned production facilities account for nearly half of all the U.S. fuel ethanol production. Although ethanol can be produced from a variety of feedstock, the majority is made from corn and 75 percent of that production is now done in dry mill plants. The remainder is processed by wet mill facilities.
Rapid expansion can also be attributed to MTBE bans in states such as California, New York and Connecticut and has often resulted in a complete transition from MTBE to ethanol. Currently 20 states have some form of legislation limiting or banning MTBE. As a result of a MTBE ban in California, the state quickly became the largest consumers of ethanol in the country. As a result of this and similar MTBE bans the Renewable Fuels Association estimated that 30 percent of all motor fuel sold in 2004 was an ethanol blend. Nationally, ethanol can be readily purchased in at least 30 states. Following California, the next largest consumers of ethanol are Illinois, Minnesota, Ohio, Michigan and Indiana.
For more information on ethanal, visit http://www.agmrc.org/agmrc/commodity/ grainsoilseeds/corn/ethanolprofile.htm.