Spring 1995
Value-Added Processing:
Getting Into The Zone
By Kris Versdahl, Assistant Director ; Minnesota Wheat Council and Wheat Growers Association
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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.
"Farmers are fed up with the mixed market signals they're getting, and they want to get into the value-added zone, because that's where the money is," says Dawson.
The money, however, isn't in the form of higher prices for raw commodities. Dawson says the business of value-added processing is like any other -- you have to be low-cost, quality conscious, and have market savvy to compete.
Dawson, who formerly headed up Cargill-Canada, is now a private consultant on issues such as agricultural trade and processing. He spoke to growers at a series of Grain Marketing Institutes recently co-sponsored by the MAWG.
TRENDS IN VALUE-ADDED
A bushel of wheat is currently valued at about $150 per ton, and in general, the market for processed products on the grocery shelf is about $2,000-$3,000 a ton. Dawson says it's that difference between raw and processed products that's drawing so much grower attention to adding value.
Current trends in demographics also appear to support the need for rural economic strength that ag processing could provide.
Dawson says we are beginning to see some end to the rural drift to urban areas, and in some cases, such as in Ontario, the movement has reversed. "People are leaving Toronto and going to the country," said Dawson. "They're fed up with the two and a half hour commutes. Anybody who can move their business is getting out."
He says the same trend is taking place in eastern U.S. cities, like New York. "The idea of getting out of the city is not a joke; this whole business of adding value in the country is real," says Dawson. "Where you live doesn't matter that much any more."
SMALL IS BETTER
Another trend that supports local value-added processing is that small is better. "American democracy was built on the strength of individuals and small business," said Dawson. "Four out of every five jobs in North America created in the last 10 years were created by small companies employing less than 50 people."
In fact, Dawson says a lot of large corporations are down sizing like crazy to try to get to a more manageable size. To understand why, he says one has to understand economies of scale: the first 80% gain in a business usually requires 20% of the resources. But to get another 20% gain typically takes another 80% investment in resources.
What you want, says Dawson, is to get to the top of that first 80% gain. "A lot of big companies are fighting to reverse their growth and get back there." He says companies like General Motors and AT&T can suffocate because of size, inertia, and lethargy. "It takes them three years to get permission from their finance committee to build something," says Dawson. "Small companies can make those decisions in three weeks."
GETTING INTO THE ZONE
Dawson has lots of advice for growers interested in getting into the value-added zone.
The first step, he says, is to develop a strategic plan. "Think about what you want to do, and where you want to be," says Dawson. "Think about what you're really good at, and what you like to do."
Then he says to take a look at the internal influences -- things you have control over like finance, labor, research and development. Understand your strengths and weaknesses in those areas and develop a plan that fits.
Afterwhich, look at external influences -- things you don't have much control over like global trends and economics. Understand the opportunities and threats and how they affect your plan. "After you've done that," says Dawson, "the hard part is over. Then you can focus on operational planning, which is deciding how you're going to get to where you want to be."
Dawson also challenges growers to view their potential markets for processed products in new ways. "Look at your half-day and full-day truck circle," says Dawson. "You can go 250 to 500 miles from Thief River Falls, Minnesota in that circle and have about one to two million people in your first market. Go another 250 miles farther out and you've got seven to eight million people, and another 250 miles out and you've got 25 million people." Dawson says that is one of the ways we should think about our marketplaces.
In Winnipeg, they're thinking even broader than one-day truck circles. Currently under construction is a massive, world-scale, international freight airport. Dawson says when completed, chilled finished products like pork and beef will be shipped out over night on jumbo jet freighters to markets around the world.
"At London's Heathrow airport there are hundreds of aircraft coming in each night from the California desert with fresh flowers and lettuce and tomatoes," says Dawson. "There's a huge global market crossing the Atlantic every night with products. That's the way we have to start thinking," he says, "instead of sitting here wondering 'what kind of wheat shall I grow?'"
RESEARCH AND DEVELOPMENT
Dawson says one of the reasons North Americans are behind in the business of value added is our lack of product research and development. "Only four to eight tenths of one percent of our sales dollar is put into research and development of processed products," says Dawson. "The numbers are an absolute disgrace. Japan and Germany are investing between six and seven percent in research and development."
Production research also needs reform, according to Dawson. "Researchers should have a sign on their wall saying, 'The ultimate criteria of research: Raise the number of dollars per acre.'" He says it shouldn't matter what that might be. "Maybe we need the biggest kernel of wheat you've ever seen with the lousiest protein, and make ethanol out of it."
GET RID OF THE BORDER
"The U.S./Canadian border is a complete nonsensical piece of interruption to tourists on weekends," says Dawson. "It's a piece of the 19th and 20th centuries and we should get rid of it as soon as possible."
Dawson says the sooner we can change the grain market and get into one basic North American domestic market, the better off we'll be. "We'll be better able to compete. The European Common market -- all 18 countries, with 390 million people have a bigger grain production than North America does. We've got to watch out what that competitor is doing, and they're leaving us behind," says Dawson.
"Everywhere you look, every time trade is increased, so has mankind's well-being," says Dawson. "Nothing stimulates the end of poverty quicker than good trade relationships."
NICHE MARKETING -- FINDING A SPECIALTY
Dawson advises growers to seek out niche markets. "Don't try to teach Kraft how to make a macaroni dinner. You need to differentiate your market. You don't have to have the highest quality, just be quality different. If you can make indoor/outdoor carpeting really well, make indoor/outdoor carpeting. You don't put a Persian carpet on the patio. Just be the best at what you do," says Dawson.