Value-Added Producer Grants – A Successful Program

AgMRC Renewable Energy Newsletter
April 2009

Mike Boland  Michael Boland
  agricultural economist
  Kansas State University

John Crespi
agricultural economist
Kansas State University

Dustin Oswald
former graduate
Kansas State University
agricultural economist
Samuel Roberts Noble Foundation in Ardmore, Oklahoma

In 2001, Congress passed legislation authorizing, and later appropriating funds for the Value-Added Producer Grant (VAPG) program. The 2002 Farm Bill authorized the program for five more years with annual appropriations of $40 million. Over the 2001 to 2007 time period, $137.3 million were provided to qualified applicants of value-added agricultural products following announcements in the Federal Register. The value of these grants given to value-added producers ranged from a minimum of $1,250 to a maximum of $500,000. These funds have been used to subsidize the development and marketing of value-added agricultural products, aid in the development of value-added businesses, and augment any other business related expenses including working capital. 

The language in the 2002 Farm Bill authorizing the VAPG program, which was later used to create the Notice of Solicitations for Applications (NOSA) after Congress appropriated funds for the program, stated that the purposes of the program were: “(A) To develop a business plan or perform a feasibility study to establish a viable marketing opportunity for a value-added agricultural product; or (B) To provide capital to establish alliances or business ventures that allow the producer of the value-added agricultural product to better compete in domestic or international markets.”

Furthermore, the NOSA emphasized that a successful VAPG should “expand the customer base for the product or commodity, and result in a greater portion of the revenues derived from the value-added activity that is available to the producer.” To do so, “the product must then meet one of the following criteria to be eligible:”

  1. The changing of the physical state or form of the product (e.g., processing wheat into flour, corn into ethanol, slaughtering livestock or poultry, or slicing tomatoes);
  2. A product produced in a manner that enhances its value, as demonstrated through a business plan (e.g., organically produced products);
  3. The physical segregation of an agricultural commodity or product in a manner  that results in the enhancement of the value of that commodity or product (e.g., identity preservation system for a variety or quality of grain desired by an identified end-user or the traceability of hormone-free livestock to the retailer); or
  4. The term “value-added agricultural product” includes any agricultural commodity or product that is used to produce renewable energy on a farm or ranch (e.g., collecting and converting methane from animal waste to generate energy).

Table 1 shows the number of VAPG recipients by state and the total dollars of funds.  Note that Iowa had the greatest number of grant recipients while Delaware, Nevada, New Hampshire, and West Virginia had the least number of grant recipients. The average grant amount for all recipients was $153,576 and the average grant per recipient per state ranged from Kansas with $23,523 to Texas with $273,184. Grant recipients were clustered in the Midwestern and Great Plains states which have a strong commodity-focused agriculture. In addition, California, Michigan, and Washington, states with a great amount of diversity and value-added agriculture, were ranked in the top 10 as recipients.

Organizations that submitted grants were required to identify the grant in various categories based on language in the Farm Bill authorization. These categories included the organizational type and type of value-added activity. The four organizational types include an agricultural producer group, farmer and rancher cooperatives, independent producers, and majority-controlled producer entity.

Congress defined four types of value-added activity including differentiation, farm- or ranch-based renewable energy, product segregation, and value-added production.  The NOSA defines the steps in business development as:

  1. Creation of an idea,
  2. Formation of the idea into a written form through a feasibility study, business plan, or marketing plan,
  3. Formation of an organizational structure for the idea,
  4. Hiring of a manager or employee for the idea,
  5. Conducting an equity drive to raise capital for the idea,
  6. Formation of a physical structure for the idea,
  7. Creation of the idea into a product in the facility,
  8. Creation of the idea into a product for distribution and sale at retail, and
  9. Whether the idea actually commercialized.

A list of VAPG recipients was compiled from the USDA Rural Development press releases for each year. Each VAPG recipient was contacted to determine the stage of business development that was achieved for their idea (i.e., product or service). Commercialization was defined as whether the idea was being sold in March 2007. Grants awarded in 2006 were not used because the grants were awarded late in the year; hence recipients would not have completed their projects by March 2007. Thus, data for 2001 to 2005 were used in this study. Recipients were contacted by various means including personal interviews, phone calls, and written or electronic surveys. Information was obtained for 739 of the 748 recipients (98%) that received VAPG funds from 2001 to 2005.

Using an econometric model, we found that the success of a VAPG recipient was determined by several factors. Market share was an important determinant to VAPG success.  The positive relation between this variable and a successful VAPG may be related to this dissemination of information. After all, knowledge of the basis for different crops is important information for determining where to consider opportunities for adding value to a commodity. Thus, inexpensive corn in Iowa and southern Minnesota is likely to lead to greater opportunities to add value to corn through corn sweetener plants or ethanol plants. Kansas State University and the Center for Agricultural and Rural Development at Iowa State University report basis map information for major commodities for selected Midwestern states. This information is provided daily and weekly and has been very useful to groups considering adding value to crops in their geographic region. Knowing this may have helped firms become successful but, more importantly, providing this information to potential VAPG recipients may help future businesses be successful, as well.

Size variables including greater sales and increased grant dollars as well as a lower number of producers were also determinants of business success. Congress has capped the amount of grant dollars to be awarded. Larger VAPG recipients as measured by sales volume are likely to have been in business for a longer period of time and thus when considering adding a new value added product to their portfolio have greater market intelligence for the potential demand for that product. Some states such as Iowa have made business development part of the job description for selected county extension agents. Some of these agents have entered into subcontracts for VAPG recipients and helped many VAPG recipients. Group action is easier when there are smaller numbers of producers and a county agent or other service provider is likely to have greater impact with a smaller number of producers.

Every state has at least one USDA Rural Business and Cooperatives employee. Because these employees are points of contact for producers interested in value-added activities and because they are information providers for the VAPG program, networking with these individuals is important for departments of agricultural economics. There may be opportunities to undertake research on behalf of these VAPG recipients.

Grants that added value to fluid milk, cut flowers, tree fruit, tree nuts, specialty meats, wheat and wine were found to result in a greater likelihood of VAPG success. Crops such as nuts, fruits, and flowers are grown in a much smaller geographic region relative to other crops. Thus, market share is likely to be higher in these regions. Furthermore, many of the producers in these industries are vertically integrated through cooperatives or warehouses and have significant market share at retail increasing the likelihood that these organizations have greater access to market intelligence and are more likely to achieve business success.

One of the four business organizational forms, agricultural producers, did not result in greater success of business development. These are trade associations composed of producers or cooperatives. These organizations tend to have a membership that is very broad and diverse. Furthermore, these variables do not undertake business development but rather make the results of their VAPG grant available to all their members to consider developing a business for the opportunity identified by the study. Many of these activities are market studies. Thus, this result may not be that surprising. It should be noted that the number of VAPG grants awarded to this category declined in every year from 2002 (91 grants) to 36 in 2005 which would suggest that these entities were not as successful in receiving VAPG grants or that they did not submit as many grant proposals in later years.

The states of Illinois, Kansas, Minnesota, Missouri, and Wisconsin were found to have the greatest amount of success in VAPG business development with Missouri having the greatest success. Missouri has probably the most extensive set of resources available for value-added business development.

The VAPG program has proven to be a successful program that has enabled thousands of producers to consider investments in value-added agriculture. An announcement is expected from USDA in the spring of 2009 for another round of VAPG funding.

Table 1. Number of VAPG Recipients and Total Dollar Amount by State, 2001 to 2007

State Number of Recipients Total Dollars Awarded (a) Average Dollars per Recipient
Alabama  2  102,500 51,250
Alaska  4  225,327  56,332
Arizona  6  392,750  65,458
Arkansas  5  919,900  183,980
California  49  10,408,392  212,416
Colorado  18 2,319,711  128,873
Connecticut  3  212,500  70,833
 Delaware  3  575,000  191,667
 Florida  11  1,263,180  114,835
 Georgia  15  1,987,235  132,482
 Hawaii  10  896,735  89,674
 Idaho  18  3,156,402  175,356
 Illinois  23  3,393,963  147,564
 Indiana  12  1,192,250  99,354
 Iowa  95  16,876,121  177,643
 Kansas  22  517,500 23,523
 Kentucky  20  2,031,927  101,596
 Louisiana  4  150,632  37,658
 Maine  6  580,777  96,796
 Maryland  10  149,262  14,926
 Massachusetts  16  3,142,453  196,403
 Michigan  32  4,275,220  133,601
 Minnesota  43  8,771,566  203,990
Mississippi 11 927,911 84,356
Missouri 61 9,195,520 150,746
 Montana  9  1,592,557  176,951
 Nebraska  62  8,717,832  140,610
 Nevada  1  57,312  57,312
 New Hampshire  1  40,362  40,362
 New Jersey  15  780,700  52,047
 New Mexico  3  136,510  45,503
 New York  22  1,888,181  85,826
 North Carolina  13  2,044,823  157,294
 North Dakota  21  5,475,225  260,725
 Ohio  12  1,534,200  127,850
 Oklahoma  7  1,208,780  172,683
 Oregon  35  3,014,435  86,127
 Pennsylvania  13  1,914,656  147,281
 Rhode Island  2  72,500  36,250
 South Carolina  4  799,000  199,750
 South Dakota  12  2,234,454  186,205
 Tennessee  5  671,544  134,309
 Texas  39  10,654,174  273,184
 Utah  6  1,452,200  242,033
 Vermont  11  1,105,981  100,544
 Virginia  14  1,418,360  101,311
 Washington  34  4,123,696  121,285
 West Virginia  1  74,075  74,075
 Wisconsin  42  6,551,784  155,995
 Wyoming  5  523,000  104,600

(a)  Numbers are shown in millions of dollars.