Cooperative Marketing in Specialty Grains and

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Cooperative Marketing in Specialty Grains
and Identity Preserved Grain Markets
William W. Wilson June 3 2003 University of
Alberta Seminar Edmonton
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Spectrum of Procurement Strategies
Spot Market
Vertical Integration
Contract Production
Identity Preservation Traceability Proc. certif.
Testing Segregation
Targeting
grades protein F.N. T.W.
Origins
Varieties
Prod. Practices
Assets
Grain
By Location
Pre- Shipping
Pre- Processing
Acres
Prod. Practices
Quality Req't.
3
Previous Studies on IP and Segregation Costs
Researcher
Estimated Cost of Segregation
Methodology/Scope of Analysis
Hurburgh 1994
3.7 c/bu
Cost Accounting Model for High Oil Soybeans
McPhee and Bourget 1995
Increasing grades handled increases operating
costs 2.6
Econometric model of costs for terminal elevators
Askin 1989
Increase of 2 grades handled increased costs lt .5
c/bu
Econometric model of costs for primary elevators
Hermann et al.
1.9 to 6.5 c/bu
Stochastic Simulation Model
Maltsbarger and Kalaitzandonakes
1.6 to 3.7 c/bu
Simulation Model for High Oil Corn
Nelson 1999
6 c/bu corn, 18 c/bu soybeans
Survey of Grain Handlers
Bullock 2000
30 to 40 c/bu soybeans
Cost Accounting
USDA-ERS 2000
22 c/bu corn, 54 c/bu soybeans
Cost Accounting adjustments to Survey Results for
Specialty Grain Handlers
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Critic of Prior Studies

• Costs of currently operating IP systems are at
  high end of range or higher than estimates for
  GM/Non-GM systems
• This may be due to a number of factors
• Current IP systems generally designed to retain
  desired characteristics (i.e. CWB Wharburtons,
  High Oil corn and soybeans, etc.), while
  GM/Non-GM systems designed to exclude
• Currently operating IP systems tend to be for low
  volumes with significant fixed costs of
  operation, while a GM/Non-GM system would have to
  handle large volumes

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Segregation/Testing in Practice

• Is component of maturing market system, in spring
  grains
• Elevators in ND have always made extensive
  segregations
• Current 19 segregations for wheat maintained
• Grades
• Protein
• Dockage
• T. Wt
• Falling Number
• Vomitoxin
• Other

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Segregation/Testing in Practice

• Malting Barley
• 100 of malting barley is segregated and marketed
  by varieties
• International
• Canada
• 60 segregations of wheat
• Australia
• 42 segregations

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IP Marketing Organization/Type

• Traditional Cooperatives
• New Generation Cooperatives..
• LLC--members purchase right to supply cooperative
• Section 521 Cooperatives
• requires all member/investors to be producers
  and
• Coop only deals with producers in transactions
• Producer Alliance
• Independents (private and corporate)
• IP Facilitating Functions

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Survey Findings

• Procurement
• Quantity
• Approved seed
• Grower practices
• Inspections
• Documentation
• Pricing
• Delivery

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Survey Findings

• Handling
• Specialized facilities
• Transportation
• Further processing

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Specialty Grain / Identity Preserved Marketing
Producer Owned Entities
Cooperatives - Traditional
Organization
Form of Organization
Year Formed or SP/IP Initiated
Primary Commodities of Interest
Contracts
Approved Seed Required
Production, Storage, Delivery Procedures
Inspections/ Sampling
Grower Obligation to Deliver
CONTRACT Obligation to BUY
Take Owner- ship
AGP Grain Cooperative (div of Ag Processing Inc)
Coop-Trad
NA
Soybeans, wheat, corn
Yes
Aurora Cooperative Elevator Company
Coop-Trad
1992
Corn - white yellow food grade
75 of time
Often
Sometimes
Yes
When contracted
When contracted
Yes
GROWMARK
Coop-Trad
NA
Hi Oil corn, white corn, soybeans
Production Contracts
per contract
per contract
per contract
Yes
Yes
Yes
Harvest States (div of CHS Cooperatives)
Coop-Trad
NA
White corn, food grade soybeans
Production Contracts
per contract
per contract
per contract
Yes
Yes
Yes
Northern FS, Inc (GROWMARK)
Coop-Trad
1996
Food grade soybeans
Production Contracts
Yes
Yes
Yes
Yes
Yes
Yes
Topflight Grain Co-operative
Coop-Trad
1999
Soybeans, non -GMO, Hi oil corn
Production Contracts
Yes
Yes
Yes
Yes
Yes
Yes
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Specialty Grain / Identity Preserved Marketing
Producer Owned Entities cont.
Cooperatives - New Generation / Producer Owned
LLCs
Organization
Form of Organization
Year Formed or SP/IP Initiated
Primary Commodities of Interest
Contracts
Approved Seed Required
Production, Storage, Delivery Procedures
Inspections/ Sampling
Grower Obligation to Deliver
CONTRACT Obligation to BUY
Take Owner- ship
AgraMarke, Inc.
NGC
1997
Corn, soybeans
Production Contracts
Yes
Yes
Yes
Yes
Yes
Yes
AgVantage IP
NGC
1998
Wheat, soybeans, corn
Production Contracts
Yes
Yes
Yes
Yes
Yes
American White Wheat Producers Assn
(Coop-Trad) NGC
(1988) 1999
White wheat
Delivery Agreement
Yes
Yes
Yes
Yes
Yes
Yes
Earthwise Processors, LLC
LLC
2000
Organic IP grains seeds
Production Contracts
Yes
Good mgmt practices
Yes
When contracted
Yes
Yes
Spring Wheat Bakers
NGC
1996
HRS wheat
Uniform Marketing Agreement
Based on Quality Studies
Good mgmt practices
Yes
Yes
Yes
Yes
21st Century Grain Merchandising, LLC
LLC
2000
Food-grade corn, HRW wheat
Production Contracts
per contract
per contract
per contract
Yes
Yes
Yes
21st Century Grain Processing Cooperative
NGC
1997
HRW wheat, corn
Uniform Marketing Agreement
Approved Varieties
Good mgmt practices
Yes
Yes
Yes
Yes
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Specialty Grain / Identity Preserved Marketing
Producer Owned Entities cont.
Producer Alliances (no equity investment)
Organization
Form of Organization
Year Formed or SP/IP Initiated
Primary Commodities of Interest
Contracts
Approved Seed Required
Production, Storage, Delivery Procedures
Inspections/ Sampling
Grower Obligation to Deliver
CONTRACT Obligation to BUY
Take Owner- ship
Ag Guild of Illinois TM
LLC (Alliance)
1999
Soybeans
Production Contracts
Yes
Yes
Yes
Yes
Yes
No
Dakota Pride Co-op
NGC (Alliance)
1998
Spring wheat
Production Contracts
Yes
Good mgmt practices
per contract
Yes
Yes
No
FarmConnect
NGC (Alliance)
2000
Soybeans
Production Contracts
Yes
Yes
As delivered to farm
Yes
Yes
No
Grain Growers Co-op Inc
NGC (Alliance)
2001
Natto soybeans initially
Production Contracts
Yes
Yes
Yes
Yes
Yes, if it can be sold
Only if sold
Innovative Growers LLC
LLC (Alliance)
2000
Corn, soybeans
Production Contracts
Yes
Yes
Yes
Yes
Yes
No
Iowa Quality Producers Alliance
LLC (Alliance)
2000
Corn, soybeans
Production Contracts
Yes
Yes
Yes
Yes
Yes
No
Kearney Area Ag Producers Alliance
NGC (Alliance)
1996
Corn, soybeans
Production Contracts
Yes
per contract
per contract
Yes
Yes
No
Producers Alliance, Inc.
501.c(3) (nonprofit)
1999
Corn, soybeans
Production Contracts
per contract
per contract
per contract
Yes
Yes
No
Pro-Mar Select Wheat of Idaho, Inc
NGC (Alliance)
1996
Hard white wheat
in transition
Yes
Education Trust
As delivered to customer
Yes
Yes
No
Southeast Nebraska Area Producers
NGC (Alliance)
2000
Any grain they can produce with existing equip.
Production Contracts (intent)
per contract
per contract
per contract
Yes
Yes
No
Southwest Ag Producers Alliance
LLC (Alliance)
2000
Corn, wheat, sorghum, other
Production Contracts (intent)
per contract
per contract
per contract
Yes
Yes
No
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Specialty Grain/Identity Preserved Marketing
Corporate and Private Entities
Organization
Form of Organization
Year Formed or SP/IP Initiated
Primary Commodities of Interest
Contracts
Approved Seed Required
Production, Storage, Delivery Procedures
Inspections/ Sampling
Grower Obligation to Deliver
CONTRACT Obligation to BUY
Take Owner- ship
Cargill Dry Corn Ingredients (InnovaSure TM )
Private
2000
Corn
Production Contracts
Yes
Yes
Yes
Yes
Yes
Yes
Clarkson Grain Co., Inc
Private
1989
Corn, soybeans org. non-GMO
Production Contracts
Yes
Yes
Yes
Yes
Yes
Yes
Consolidated Grain and Barge Co. (CBG)
JV Itochu Zen-noh
1990
Corn, soybeans
Production Contracts
Yes
Yes
Yes
When contracted
When contracted
Yes
Dakota Farms Intl, Ltd
Private
1994
Soybeans, wheat, corn, barley, rye
Production Contracts
Yes
Yes
Yes
Yes
Yes
Yes
DuPont Specialty Grains (OPTIMUM)
sub of DuPont
1998
High oil corn
Production Contracts
Yes
Yes
Yes
Yes
Yes
No
Peterson Grain
Private
?
HWS wheat, malt barley, soybeans
Production Contracts
Yes
Yes
Yes
Yes
Yes
Yes
Pioneer Quality Crop Systems
sub of DuPont
2000
Corn, soybeans
Production Contracts
Pioneer Hi-Bred
Yes
Yes
Yes
Yes
No
Quality Traders, Inc
sub of Itochu
1997
Corn, soybeans
Production Contracts
Yes
Yes
Yes
Yes
Yes
Yes
Specialty Grains, Inc
Private
1976
Spec corn, food-grade soybeans
Production Contracts
Fr Spec Grains, Inc
Yes
Yes
Yes
Yes
Yes
Specialty Grains LLC
LLC (LO'L CBI)
2000
IP grains
Production Contracts
Cropland Genetics
Yes
Yes
Yes
Yes
Yes
SunRich, Inc
sub of Stake Tech
1978
Soybeans, corn, cereal grain
Production Contracts
Fr SunRich
Yes
Yes
Yes
Yes
Yes
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Survey Findings

• IP Services
• Seed distribution
• Technical information services
• Sampling/testing
• Auditing/verification/certification
• Information data bases
• Information exchanges
• E-Commerce

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IP Service/Facilitating Functions

• Seed distribution--use of certified seed
• Production information services
• Testing/certification
• Auditing
• Information data bases and exchange
• E-commerce

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Specialty Grain/Identity Preserved Marketing
Service Entities
Organization
Form of Organization
Year Formed or SP/IP Initiated
Primary Commodities of Interest
Testing/ Certification
Facilitating
Information Exchange
Information Tracking
E-Commerce
AgMotion, Inc.
Private
2001
X
X
X
X
Americrop
NGC-NP
2000
Wheat
X
CGF Brokerage Consulting
Private
NA
X
X
Croplands
Private
1988
X
CropTracer
owned by John Deere
2000
X
X
CropVerifeye.com
Private
1999
X
X
X
CberCrop.com (1)
Private
2000
X
E-Markets
Private
1998
X
X
X
Farmland Dedicated Grains (2)
Coop-Trad
2000
X
X
FarmNet Services, Inc
Private
2000
X
X
Farms.com
JV
1995
X
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Specialty Grain/Identity Preserved Marketing
Service Entities cont.
Organization
Form of Organization
Year Formed or SP/IP Initiated
Primary Commodities of Interest
Testing/ Certification
Facilitating
Information Exchange
Information Tracking
E-Commerce
Genetic ID Inc.
Private
1996
X
Identity Preserved Agricultural Products, LLC
LLC
1999
X
X
Identity Preserved Intl
Private
NA
X
X
X
IdentityPreserved.com
Private
2000
X
X
X
X
Internet Commodity Exchange Corp. (ICECorp.com)
Private
1999
X
Rooster.com (3)
JV
2000
X
Value Enhanced Grains (VEG)
U.S. Grains Council
2001
Corn, Grain, Sorghum
X
Vantage Point Network (4)
owned by John Deere
1999
X
(1) Financially troubled CyberCrop sold the
CyberCrop name to Farms. com in April 2001. (2) A
casualty of the ADM/Farmland joint venture in
Grain Operations. (3) Ceased operations in
December 2001. (4) John Deere announced in
December 2001 that it had made the decision to
"decommission" this website.
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Survey Findings

• Market Development
• Customer needs/desires
• Contracting
• Time to develop
• Approaches

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Contracting

• Essential with growers and customers
• Uniform marketing agreement--standardized
  contract form for all members Contracting
• Quality control/incidence when subject to
  uncertainties--eg weather etc
• Risk sharing

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Time to Develop

• New entrant problems
• Extensive meetings/visits to establish trust
• Competition with prospective incumbent's current
  supplier and ingredient mix

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Market Development

• Customer needs/demands
• Traits, varieties, organic, agronomic practices
• "Tell us what you want and we will grow it for
  you"
• Big challenges
• Buyers do not always know what they want
• New-entrant disadvantage inexperience

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Market Pull

• Identify demand and pull through system
• AB/BARI in malting barley
• Defined varieties
• Certified seed
• Premiums
• Designated delivery elevators
• Selection criteria
• Warburtons

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Market Pull (continued)

• General Mills
• IP
• Production contracts
• Approved seed
• Field scouting
• Own breeding

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Survey Findings

• Market Development
• Branded product
• InnovaSure
• a new "brand" and system of identity preserved
  corn products
• Cargill Dry Corn Ingredients
• OPTIMUM
• high oil corn
• DuPont Specialty Grains
• Naturals'Wheat
• American White Wheat Producers Association

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Survey Findings (cont.)

• Approaches
• Developing markets for IP grains by investing in
  further processing ventures
• AgraMarke's LifeLine Foods
• Spring Wheat Bakers' frozen dough plant
• 21st Century Alliance's 21st Century Grain
  Processing Cooperative
• FarmConnect

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Success Factors

• Infrastructure
• Greater handling/transport and segregation costs
• Battle with commodity handler incumbents--that
  control facilities
• Dedicate facilities--underutilized

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Lack of success

• Many failures
• Factors contributing
• inability to realize a premium sufficient to
  cover costs
• Customers claim to want specific traits and/or
  protocols, but are unwilling to pay added costs
  (e.g., Brazil and EU SWB)
• IP requires aggressive/active and overt buyers

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Challenges and Issues

• Cost vs. premiums
• Distribution of benefits in the supply chain
• Food safety and traceability
• Managing risk of climatic induced quality losses
• Infrastructure and current environment

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Challenge I

• Cost and premiums
• Many buyers claim to want specific traits, but
• Have difficulty articulating them
• Are unwilling/incapable of paying full cost of IP
  type fun
• Most analysts will severely overestimate "value
  of IP"...versus
• measurable/tested traits and greater specificity
  which can be attained without IP mechanisms

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Challenge 2

• Distribution of benefits in supply chain
• Supply chain input suppliers, growers,
  facilitators, IP marketers and customers
• Presumably value exists of IP to customer and,
  exceeds costs throughout system
• How to allocate this value throughout system!

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Challenge 3

• Food safety and traceability
• Much of current motivation for IP type systems
• EU and others developing traceability
• once back, once forward
• US Process verification
• Other factors
• GM vs. non-GM regulations
• Bioterrorism

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Challenge 4

• Organics--major opportunity
• One of fastest growing sectors in NA
  agriculture/food
• ND..largest area and fastest growing sector
• Organic Standards..2002 to facilitate labeling
• Major food processors acquiring to enter fast
  growing sector
• A form of IP marketing

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Challenge 5

• Managing risks of climatic induced quality losses
• Major challenge
• Buyers want assurances in their purchases
• Sellers have some uncertainties that cannot be
  controlled resulting in prospect of not
  conforming to desired quality/traits
• Sellers
• Produce in excess of requirements (problem of
  disposing of surplus as specialty)
• Produce expected requirements, risk of under
  producing

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Challenge 6

• Infrastructure
• Specialized assets--likely underutilized and
  higher in cost
• Throughput type agreements with commodity
  incumbents
• Increased segregations increase costs
• SKU problem
• Incumbent handlers may/will be also developing
  competing IP type business

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Questions, comments and discussion