Producer Involvement in Value-Added Processing
Ken McEwan and Lynn Marchand, Ridgetown Campus - University of Guelph
Assessing and Comparing the Business Environment for Producer Involvement in Further Value-Added Processing in the U.S. and Ontario
Much has been written about the movement from "traditional" agriculture to the new "agri-food system". At the production level, there is general consensus that farms will move toward one of two production structures. The first type will be similar to many current farms where undifferentiated commodity products will continue to be produced and only low-cost producers will survive. The second category of producers will produce differentiated products that focus on certain product attributes and consumer demands. The ability to negotiate contracts, manage risk, and use information technology will be essential for the production of differentiated products. Given this industry trend towards production units of two sizes, there is a desire by some producers to move up the value chain in order to return more profits to their farm operations. However, in order for producers to do this, they must find a way to add value to their bulk commodity (e.g. processing corn into ethanol) .
The purpose of this study
was to assess and compare the business environment for producer value-adding
in the U.S. and Canada. Specifically, the focus was to: investigate producer-owned
value-adding opportunities for corn; analyze the co-operative and limited liability
company (LLC) structure in the U.s.; catalogue and describe government support
and tax programs for value-adding; and provide recommendations for Ontario.
What exactly is agricultural
value-adding? Stated simply, value-adding occurs when a "processed"
product is worth more than the bulk commodity. There are many ways to add value.
Three of them are:
. Commodity with special
traits i.e. white food grade corn used in tortillas
· Bundling
products together i.e. salad mixture and a dressing
· Changing the state of the product i.e. processing corn into ethanol
Ethanol Production
Ethanol production is a popular way to add value to corn. A study trip to Minnesota
was planned and undertaken to visit with ethanol industry experts. Minnesota
was identified as a key state because Minnesota often has the lowest corn price
in the U.S., the state appears to be supportive of agricultural valueadding,
there are many ethanol plants in Minnesota and the state has an aggressive ethanol
mandate. One key message that was heard repeatedly was that in order for farmers
to benefit from agricultural value-adding such as ethanol production, they must
own the project.
Global ethanol production has increased dramatically in recent years. This is due, in part to countries wanting to decrease their reliance on foreign oil. Because global oil prices are volatile, they want to stabilize their energy costs. There is also a desire to produce a renewable fuel that is viewed as being environmentally friendly. Coupled with these goals, the production of ethanol is reported to stimulate rural economies. Brazil is currently the world leader in ethanol production with the u.s. following close behind. Canada is a small ethanol producer. See Table 1 for details. The U.S. currently has about 90 ethanol plants while Canada has 5 in operation. U.S. ethanol production occurs primarily in major corn producing states i.e. Nebraska, Iowa, and Minnesota.
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Background
on Minnesota and Ontario Minnesota and Ontario are similar in that they grow many of the same crops. Ontario's corn acreage is only 20% of that in Minnesota. Corn utilization is different between the two areas as shown in Figure 1. Minnesota exports about 50% of its production whereas Ontario is a net importer of corn. Figure 2 shows that Ontario's corn production has been relatively constant the last few years but feed and industrial use have increased steadily. Minnesota has the reputation for low corn prices and the availability of this cheap corn fits well with ethanol production. |
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So why has farmer-owned
ethanol production been successful in Minnesota? It appears to be a combination
of factors. They include the following:
| 1) | Minnesota has surplus corn production and low corn prices. |
| 2) | Ethanol mandate - Minnesota requires 10% of all gasoline sold to be ethanol. This created a market for ethanol. |
| 3) | USDA Value-Added Producer Grant program (VAPG) - Up to $250,000 helps fund feasibility studies, business plans and start-up costs.Only producer-owned projects are eligible. |
| 4) | USDA Business &: Industry Guarantee Program (B&:I) - Loan guarantees of up to $40 million for co-ops and up to $25 million for other business structures. |
| 5) | Minnesota production incentive $USO.20/gallon on up to 15 million gallons/plant for ethanol production (i.e. $US3 million). |
| 6) | Business structures - Similar in Minnesota and Ontario. Minnesota ethanol plants are often limited liability companies (LLCs) because it can be difficult to exit from a co-op structure. The LLC provides flexibility for large projects by allowing farmers and non-farmers to participate in a project. |
| 7) | Network of Specialists - A key group of people seem to make it work i.e. producers willing to take the risk and provide raw product and capital, bankers, lawyers and government personnel familiar with ethanol production and government programs. |
Recommendations for
Ontario
While the Ontario government should be recognized for taking a good first step
to nurture ethanol production, more should be done to engage Ontario corn producers,
increase rural jobs and stimulate the rural economy. Specifically, some recommendations
are:
| 1) | Increase funding levels for feasibility studies, business plans and operating grants. Specifically targeting funding to producer-owned value-adding projects at increased levels (i.e. $100,000) would stimulate innovation and entrepreneurial spirit. |
| 2) | Provide long-term consistent production incentives - A stable production incentive provided over the long term will help ethanol plants manage market conditions or repay debt sooner. This would also help secure financing. |
| 3) | Large government loan guarantees - Ethanol plants may cost $40 to $100 million and large loan guarantees would help secure financing. |
| 4) | Flexibility in business structures - For large projects, a flexible business structure such as a LLC may balance the needs of producers and investors. |
| 5) | Network of specialists - A network of experts familiar with producer value-adding and ethanol production is needed to really bring a project together. |
Producers can benefit from value-added activities such as ethanol production but only if they have ownership in the venture and a supportive business environment to operate in.
Many thanks to the OCPA
and Agricultural Adaptation Council for funding this study.
