MAY 1996
Establishing a Value-Added Wheat Business
Reasons why the timing is right for farmers
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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.
- Studies have identified a number of factors that are causing a strong surge of demand for wheat-based products. Among them, the new USDA food guide pyramid recommendations that favor grain-based foods; health-conscious consumers rediscovering the nutritional benefits of wheat-based foods; a consumer trend favoring convenient, freshly-prepared foods, including "just out of the oven" baked goods; and new technical efficiencies in the baking process that demands high quality, spring wheat-based flours.
- There are opportunities in what is a very diverse, fractionalized wheat foods industry. Major segments of wheat food products include flour and semolina, ready to eat cereals, wholesale bakery products, vital wheat gluten and starch products, pasta products, retail bakeries, crackers, bakery mixes, snack foods, frozen bakery products, refrigerated dough and tortillas.
- Who's making money in the current system? The chart above illustrates that as food sales have risen dramatically since 1970, the farm value of the consumer dollar has been relatively stable, barely keeping up with inflation. Instead of struggling along the low road, why can't farmers climb the higher road in food sales?
- The farm value of every consumer dollar spent on food is roughly 22 percent. Processing takes 26 percent; transportation, 4 percent; wholesaling, 9 percent; and retailing, about 39 percent. The goal of a value-added co-op such as USWP is to have farmers own three or four of those segments, creating a more efficient process that may also reduce the cost of the product to the consumer.
- Historically, the return-on-equity for the production side of U.S. agriculture has averaged about 2.2 percent. That compares with a return-on-equity for food companies which averages about 13.5 percent.
- The food industry is more profitable in comparison to other manufacturing segments of our economy. Food companies have outperformed the manufacturing segment of our economy by a substantial margin.
- The financial performance of individual food companies has been impressive. For example, International Multifoods had a return-on-equity (ROE) of 10 percent in 1995. ADM had an ROE of 13.5 percent; Sara Lee, 19.4 percent; Kellogg, 26.3 percent; Quaker Oats, 62.6 percent; General Mills, 96.6 percent. Recall that the traditional ROE for production agriculture averages about 2.2 percent.
- The estimated annual growth rates for several categories of processed wheat products: frozen bakery products, 5 to 10 percent; pretzels, 14 to 18 percent; shelf-stable pasta, 7 to 10 percent; tortillas, 5 to 8 percent; frozen bagels, 4 to 6 percent; fresh bagels, 25 to 30 percent; par-baked pizza crust, 30 percent.
- A farmer-owned wheat processing cooperative such as USWP can be valuable to the consumer; by collapsing the food chain, the opportunity exists to deliver a better quality product at less cost.
- A partnership or joint venture with an established firm is also a real possibility for USWP. An established company could benefit for several reasons through such an arrangement: it could concentrate on rapid growth or its core strength, such as marketing; more efficiency and better quality assurance; the ability to reallocate capital; and the potential marketing advantage of an alliance with a large farmer-owned cooperative.
(Sources: USWP Executive Committee members Allan Skogen, Valley City, ND, Noel Kjesbo, Wendell, MN and Roger Gussiaas, Carrington, ND; Donald Senechal, food industry consultant with Senechal, Jorgenson, Hale and Co., Danvers, Mass.)