1997 AURI Annual Report

Where is Minnesota headed in value-added agriculture?
AURI staff speak out on what they've seen and experienced.

By Cindy Green

AURI's journey into ag-based product development has spanned almost a decade. In that time, the staff has seen product uses run the gamut -- food, cosmetics, building materials, pharmaceuticals, energy. Some trendy products come and go like lava lamps; others have potential, but marketing costs and economic realities hinder commercialization.

Veteran AURI staff have seen just about every new use for a farm crop attempted -- from corn starch plastic bags to soy-based decorative panels. They will tell you that successful products make all the inevitable failed attempts worth the effort. When raw commodities are processed and packaged in Minnesota, we keep more of the value here. When farmers form cooperatives, they capture even more value-added revenue.

Ag Innovation News interviewed several AURI staff and board members to gain their perspective on the current state and the potential of value-added agriculture in Minnesota. The interview team includes staff and board members who have been with AURI since the beginning; others recently joined the Institute. And just as their experience runs the gamut, so do some of their opinions. It makes for lively discussion.

What are the most exciting developments in value-added agriculture that you've seen over the past year?

KOSBAU: Production is changing to fit consumer needs and demands -- that's why we're seeing fish and wild game farming, cranberry development and hybrid poplar plantings on erodable land.

STOLL: The homeopathic industry is growing and these are high-value materials. The medical industry is already looking at plants engineered to produce specific benefits. It's amazing that you can put an animal gene in a plant and it can function.

THOMPSON: There's been an explosion of organic and natural product markets. There are so many people looking for something value-added; everybody wants to get into the ballgame.

SETHER: We're making ag processing byproducts into true profit centers, like road de-icer made from waste byproducts of ethanol plants. New technologies are making it possible for us to separate out substrates from ag products for various applications.

KOUBSKY: Agriculture is moving to produce commodities with an end use in mind. Corn isn't just corn anymore. It's high lysene corn or high starch corn.

BARTHOLOMEW: I see major strides in food safety, as effective HACCP systems are implemented and devices like the turkey vent plug (made from starch and gum products) and other types of antimicrobial interventions are developed.

CONWAY: The most exciting developments in agriculture I have seen are in the biotechnology area. Technology will help farmers decrease losses and increase production.

What's ahead for agriculture, from your perspective?

GJERSVIK: There are two developments that stand out: one is identity-preserved grain. As genetics get better and better, different types of plants will have attributes that are demanded in the marketplace. Bottom line, that puts more money in the grower's pocket. Using ag fibers for paper making or other uses is another opportunity, because of the global implications of wood depletion.

STOLL: Our understanding of what makes plants grow is developing rapidly and ag production is going to boom. An expanding population will increase demand for food, but not as fast as production is increasing. We'll have to balance the increased output of agriculture with new utilization. We still need to figure out a way to substitute petroleum with ag-produced energy or some type of energy derived from the sun.

THOMPSON: At the National Marketplace for the Environment in Washington, D.C., I saw one cleaning product after another made from a variety of commodities. In Mississippi, there's a product like our Agrisorb (an oil-absorbing corn stalk board), using a plant they grow. Everybody is getting into this game, taking whatever is in front of them -- corn, cotton, trees, fruit -- and saying 'what can I do to this?' The questions are: Is this marketplace big enough to hold us all? Who is going to come out on top?

KOSBAU: There are new opportunities in poorer countries where there is a shortage of food production and with nations that are just opening up to imports from the United States, like China and Russia. Also, the health market is demanding food that is better for human nutrition.

Do producers and rural communities stand to gain from these developments?

KOEHNTOP: Everyone stands to gain from successful value-added ventures that generate profits, jobs and tax revenue by keeping dollars in the community.

STOLL: Agriculture is the only true source of new wealth; everything else is based on mining existing resources.

OLSON: Once you put a commodity on the rail or the barge, somebody else is going to reap the gains. Let's do as much as we can here so we capture the jobs, infrastructure improvements, and keep people in our rural communities and farms.

THOMPSON: As long as the producer gets involved in the value-added portion, they will gain. Unless demand increases greatly, we won't see a big impact on commodity prices, however.

BARTHOLOMEW: In the case of ground beef safety, the survival of this whole industry is at stake ... meat and poultry is a $3 billion industry in this state.

Will farmers and farm communities rely less on production agriculture and more on value-added ventures in the future?

KOSBAU: No. However, value-added will increase the demand for products on a local level, decrease shipping costs and possibly allow vertical sharing in profits through cooperative ownership.

SETHER: I'm sure that to get in on the potential for profit, we must be involved from raw commodity to the finished product in the future.

STOLL: Production agriculture is moving towards factory production, which has to be hard on the rural community. But I think there's opportunities in integrating more, adding value-added processing on site. For instance, in the dairy industry it's more efficient to go to one farm and get a tank load of milk than going to a couple dozen farms for the same amount.

Do co-ops still have the potential to raise farm income?

GJERSVIK: Yes. Through a ready market for their production, on top of the return on investment from a vertically integrated arrangement. So they get it on two sides -- money for the raw material and money from value-added processing of the material. Many have been successful ... Minnesota Corn Processors, the Southern Minnesota Sugarbeet Cooperative ... others, like the Minnesota Valley Alfalfa Producers, may be on their way. The ones that have been successful have worked hard on the front end. Producers organized, analyzed the market opportunities and then exploited the opportunity. The most important question is "is there a market out there?" The most successful ones have done their homework to answer that question correctly.

OLSON: Another good example is American Crystal Sugar; it's done wonders for the sugar beet industry. Farmers refurbished a dilapidated plant and made a closed co-op. Where would the beet growers be without it? Sunkist and Ocean Spray are other good examples; you can do the value-added while controlling your own destiny. Still, you have to crawl before you walk and walk before you run. Sometimes we do get a few scrapes and burns in the lessons learned.

What challenges do co-ops face?

OLSON: Risk management -- the market can go up and down. Some get caught in a down market with high-priced commodities and storage. When farmers get into a closed processing co-op that competes with existing businesses, they must have experts in risk management. If you have $5 corn in the bin and all of a sudden the only thing you can make money on needs $2.50 corn, you can get in trouble. It's no different than farming; you don't lose risk because you get into a value-added cooperative.

THOMPSON: Like any business, a co-op's success depends on their product, the market and management. Co-ops have to follow the same basic business practices as any startup: find a need in the marketplace, then fill it, versus a group of farmers getting together and saying we need to find a way to get more money for our commodity. Think like the consumer -- what will make you buy the product versus others like it?

BARTHOLOMEW: A big risk is the effects of weather on raw commodity prices, like the high corn prices that have affected ethanol processors. Producers must commit to weathering the good and bad times over the long haul.

GJERSVIK: The biggest danger is not getting an objective viewpoint on what the market wants. There needs to be a "real" market. And co-ops need to surround themselves with experienced advisors on legalities, developing the business and marketing plan, contracts, etc.

When determining if a new ag-based product is worth putting AURI dollars into, what criteria do you look at?

STOLL: Market, market, market.

SANNES: Yes, the person who's driving that business has to have a good connection with and understanding of the marketplace -- that's the single most important criteria. If that company isn't connected and getting feedback from customers, they'll fail. They might have a lucky product that will have hot sales for awhile, but if they're not in touch when the marketplace changes, they won't know what hit them and won't last very long.

GJERSVIK: There are about three criteria we look at: how does it benefit Minnesota producers (i.e. commodity utilization), how does it benefit Minnesota, and does it appear to have a real market. That's the bottom line -- our programs are market driven.

THOMPSON: We also look at the experience of the project leaders and their commitment, whether their financials are realistic, and the amount of commodity used.

Let's assume that one end of the ag product spectrum represents high-risk, innovative ventures that could have big gains but have difficulty getting private financing. On the other end are low-risk ventures likely to be successful, but also able to get private financing. Where on the spectrum do most AURI projects sit?

THOMPSON: We lean toward high risk -- definitely high risk.

STOLL: I think AURI should be involved across the spectrum -- all the way from high risk to easy payback. We put smaller amounts of money -- Initial Product Assessments -- into high risk projects and more funds into Partnerships, which we're pretty sure will have a payback. Our funds alone will not get a company up and going; it's got to be used to leverage other monies.

SANNES: I think we have a fairly decent blend -- some low risk and others that are risky, long-range projects. Some of the more risky projects -- like barley plastic lumber -- will have the best payback if they work. In general, nonfood projects are riskier and you're usually dealing with a complex process, technical needs, higher marketing costs, and you have to have deep pockets. The number of people who can pull off a food product are much higher than those who can handle the industrials.

Is it still AURI's goal to use up surplus ag commodities to increase demand, or has the market direction changed over the past eight years?

KOUBSKY: Many of our projects don't use a significant amount of ag commodity -- not enough to impact the market. Agriculture is so global. Bean prices do not depend on how many beans were produced in Minnesota and how many processors are buying beans. It depends on the westher in South America and how many beans China is importing. AURI's goal is to help specialty commodoties, research uses and create jobs in rural Minnesota.

STOLL: Using up enough commodity to affect price is a nice goal, but it's a rare home run. Occasionally an opportunity will come along that will impact commodities, but we have a greater ability to impact the economic well being of rural Minnesota. We used to have a localized industry concept where the local creamery butter was sold in local markets. It kept money revolving in the local market place. Now we buy our wheaties from Cedar Rapids and corn syrup from Indiana, and we lose the turnover of money in the state. But if we keep the processing here, we keep the revenues here.

SANNES: It's still the goal -- in the long haul we want something so successful that it increases demand. In the smaller picture, a value-added project will have a positive impact. If we process a commodity right in the area it's grown, we save freight costs.

In the 1980s, corn starch plastic bags captured attention nationwide, but lately we haven't heard much about them. Why not?

GJERSVIK: Petroleum-based is still cheaper. Until there's either legislation to force people to switch or efficiencies get better for starch-based plastic, it will be a slow growth industry.

SANNES: They were approaching it incorrectly. Researchers have spent 50 to 60 years developing polymers with special attributes (strength, pliability, heat and moisture resistance) for specific uses. You can't expect to take plastics, blend in five percent starch, and hope it will all work. What you have to do is ferment starch or sugar to lactic acid, then turn it into a polymer. From the poly lactic acid you make polyester with special breakdown characteristics, a polymer that will biodegrade in water. Then you fit it with needs in the marketplace.

We've been hearing about nutraceuticals. What are they and how do they relate to agriculture?

THOMPSON: They're called functional foods that you add to food for specific health needs. Like fructooligosaccharides (derived from artichokes or chicory) that in theory makes the bacteria in your intestines healthier; and gingko that you drink to make you smarter. People are becoming more health conscious, but we're basically lazy, so if you can improve your health with eating, who is going to argue with that?

WADHAWAN: Lycopene in tomato products is one example; it's a carotenoid that may help prevent prostrate cancer. Oat bran has been approved by FDA as heart healthy. Soy is next in line for FDA approval. Most of the healthy food product development action during the next few years will likely focus on enhancing or boosting key nutraceuticals or "bioactive ingredients."

What about aquaculture? Is the fish and seafood industry still growing in this country?

SISSON: Aquaculture is the fastest growing segment of agriculture and has been for a few years. We still import vast amounts of fish, and the wild catches are decreasing while human populations are increasing. The need to culture fish is obvious.

Currently, there are a number of fish species raised in the state -- trout, tilapia, walleye, yellow perch to name a few -- and the farmers don't have much difficulty selling their products. But Minnesota fish farmers need to implement energy saving practices, utilize local commodities for feed production and become more vertically integrated. Cooperation among producers in marketing, improving production and incorporating new technologies will help the industry grow further. There are research activities going on nationwide that are providing, almost weekly, new technologies that will help our fish farmers become more profitable.

Alternative crops like comfrey, garlic and mint, or alternative livestock like deer and buffalo, have been tried here. Are they plausible for Minnesota?

SANNES: I think there's a number of new crops we can look at -- canola, chicory, Belgian endive, carrots. We just need to get all the interested groups working together -- AURI, the University, Department of Agriculture, commodity groups. Working as a team we can select maybe three commodities out of 12, then do a better job of opening opportunities to growers ... how to grow the crop, process it, market it, get it into the commercial world.

OLSON: Alternative crops is a whole different ballgame, and we still feel the sting of ventures farmers lost lots of money on. We have to work with the universities to determine which crops have market potential. We do need to look at alternative crops, not just for diversifying income but to add to our crop rotations. We're seeing a build-up of diseases and herbicide failures from planting the same crops year after year.

THOMPSON: There is a profit potential in raising deer, buffalo, other nontraditional livestock, but they have to develop the market and educate the consumer.

BARTHOLOMEW: Yes, bison is now successful, but the jury is still out on deer, ostrich and emu.

Could hybrid poplars move in on the list of Minnesota ag commodities? What are the uses and markets for this fast growing tree crop?

WENE: Hybrid poplar will be utilized in the fiber market. Some will go for paper and some for oriented strand board. There is some potential for veneer for the plywood market, these would be older larger trees. I estimate about 10,000 acres have been planted to date, with several thousand planted each year. It will be awhile before it will be considered a commodity.

What are the best opportunities for value-added ag products in the global marketplace?

CONWAY: China and Russia have huge markets. As their disposable incomes increase so will their desire for increasing the protein in their diets. I see the potential in ag technologies (equipment for processing, etc.) rather than shipping processed meat there.

STOLL: I've got mixed feelings about overseas markets. Generally small businesses don't have an understanding of all the cultural and economic differences of foreign markets. However, we've had a couple of projects that successfully went overseas -- edamame beans and organic grains come to mind.

THOMPSON: Around the world, U.S. products carry certain significance and weight. In some areas, the United States has a mystique, and that can be taken advantage of. If you talk to most companies, that's where their growth has occurred in the last five years.