Combined with "other marketing strategies", a "prudent farmer-member investment" in an NGC "processing/marketing venture" can provide a hedge against low and fluctuating, farm commodity prices.
Some farmers believe low farm crop and livestock prices present a serious challenge to the survival of family farms and threaten the fabric of rural Minnesota. They feel that if farmers pursue vertical integration they may benefit during periods when the margin for the production of farm commodities is too low to sustain profitable farm operation.
Examples of this concept are thriving in states like North Dakota, South Dakota and Minnesota. These NGC operations include three major sugar beet processors, wheat flour and pasta milling plants, over a dozen wet and dry corn milling plants, egg laying operations, fish farms, and hog breeding and feeding facilities.
Many farmers acknowledge the risk involved in these investments but feel it is riskier to wait for state or federal policy to establish parity prices. They do not trust that agribusiness processors and marketers will offer consistently higher prices in exchange for signed contracts or specific production practices.
Ethanol prices, for instance, generally follow the price of gasoline, not other agricultural commodities. This tends to reduce the negative impact of farm price peaks and valleys.
Co-ops have been successful in raising considerable equity capital for plant financing. Processing initiatives can be a safe and effective investment depending upon the structure of the co-op and the discipline exercised by members.
A prudent investment of cash and crop by NGC members can provide staying power that will help the coop and its members survive fluctuations in commodity and processed product prices.
If a farmer becomes "over invested" in any one market it may become a "speculative" strategy where price fluctuations cause serious financial damage to the farmer and the co-op.
To survive, farmers may have to "diversify their investment portfolio". Selling crops and livestock through a combination of conventional markets and NGC processing/marketing facilities may be the most effective approach.
An ideal design for a NGC project may include:
NGC developers should spread the investment risk and the burden of crop delivery among hundreds (or thousands) of farmers depending on the size of the facility and the financial condition of the members.
Stock splits can be a pleasant result of successful NGC operation but often require the delivery of additional bushels. Unless new members "buy in" a member's entire crop may be committed for delivery to the NGC. Any subsequent increase in crop prices, or decrease in product prices, may expose members and the NGC to serious financial loss.
Strong local leadership (preferably by farmer members) is crucial to sell stock and to hold the program together.
Although a 521 co-op has its advantages, other forms of business structures can be effective. Grower-board members must be knowledgeable, dedicated to serving grower-members and in firm control of management.
Ralph GroschenRalph.Groschen@state.mn.usAgriculture Marketing Specialist651-201-6223
Ag Marketing & Development Division