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Business perspectiveA second look at value added

Agriculture.com Staff 01/30/2006 @ 9:00am

North Dakota is one of my favorite states. In the 1990s, I had several chances to visit during its co-op-fever expansion into value-added businesses. I got to return last fall. A lot of vitality and entrepreneurial spirit remains.

But for many, the experiences of the last decade have been sobering. In this issue (page 24), Hatton, North Dakota, farmer Steve Enger describes some of the lessons learned.

Enger and other farmers started growing carrots, hoping to sell into the fresh market. They learned the hard way that well-established California growers wouldn't meekly sit by and lose part of their market. North Dakota can grow sweeter carrots, thanks to cool nights that encourage sugar production. But it can't grow year-round like California.

Enger has adapted and profited. He found like-minded partners at the Hutterite Forest River Colony who have land well-suited for carrots. They sell to a dehydrator, not grocery stores. They've developed their own efficient harvesting system.

They still face challenges; China grows tasty dehydrated carrots for less. But the North Dakotans have a better record-keeping system of chemicals used on the crop.

Most of you will never try commercial carrot production. But some of the lessons learned in North Dakota may apply if you want to plant low-linolenic soybeans or sell grass-fed beef. Here are a few tips that come to mind:

l Don't try to steal the market. The Canadian produce-selling co-op, Peak of the Market, looks for areas that need its vegetables. "If local production comes on strong, we move out," says grower and board chair Dave Jeffries. "We try to cooperate with the growers of the area we're shipping into."

Start small. You won't need to disrupt the market. The inevitable mistakes of a new business will be less costly.

Try selling direct. Knowledge gained by meeting customers in farmer's markets or at the farm beats pricey consumer studies. Unlike the mature grocery industry, farmer's markets seem to be growing. Nebraska beef producer Marvin DeBlauw (described on page 28) is a good example of this.

When you go after bigger markets, hang together so you don't hang separately, as Ben Franklin would say. Right now, you're going to see significant premiums for raising soybeans with oil characteristics that are low in trans fats or saturated fats. I expect that once the food industry shifts to buying only from those varieties and as acreage grows, the premiums will shrink. We've already seen that in other special end-use markets. Farmer-run marketing groups like Iowa's Innovative Growers offer some hope that producers will capture a little more of any extra value in a marketing chain.

Study any market you leap into and keep studying. Fees you spend on the right consultant could save you a lot.

Feasibility studies are an area where one USDA program can help.

The value-added producer grant program (which Congress considered killing in December) makes grants of up to $100,000 for feasibility studies that improve your odds of success. And they've prevented bad investments. For example, in 2001, a $40,000 value-added grant paid for a study for two Illinois co-ops that wanted to make fresh tor-tillas for the Chicago Hispanic market. The study found that the market was mature and not likely to grow, so the co-ops dropped the project.

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