Growing value-added crops poses additional risks and requires special handling, but it’s the wave of the future—and premiums should compensate for the extra work.
Look for more demand for crops with specific attributes in 2012
For centuries, corn, soybeans and other crops have been produced and marketed for commodity channels. In the future, the focus will shift to growing varieties with attributes for specific markets. Actually, the future is now.
This past month, Pioneer Hi-Bred and Bunge North America announced a plan for Ohio growers of Plenish high-oleic soybeans. In 2012, they will be paid a base premium of 50¢ per bushel plus an additional 40¢ stewardship premium to compensate for strict delivery procedures at designated times.
Because Plenish has no trans fat, 20% less saturated fat than commod-ity oil and increases the stability of the oil, it might allow the industry to reclaim millions of acres that were lost for food processing when the trans fat issue emerged in 2006, says Russ Sanders, director of Pioneer enhanced oils.
"We have other products long-term in the pipeline, such as products to increase the meal and oil content," he adds.
The push for crops with specific attributes started with low-linoleic soybeans, says Ray Loucks, president of IOM Grain LLC. "Now corn has come a long way with increases in protein, oil content and digestibility. There is more of that to come, but there will always be a No. 2 market," he adds.
Loucks contracts with farmers to grow varieties with specific traits for the food industry at a premium. Today it is all GMO-free, although he sees that possibly changing in the future once the food industry relaxes its concerns. At that point, it will be far easier to develop varieties with additional traits for the industry, he says.
New Markets. "The value-added grain industry now might be coming of age," says Jonathan Bryant, BASF Plant Science vice president of business management. The primary reason, he says, is high commodity prices. With livestock, for example, feed comprises as much as 70% of production costs, which has spurred producers to look into buying based on quality, not just on price per bushel of corn and soybean meal.
Bryant is seeing more interest in value-added markets from larger-acreage farmers because they are big enough to segregate products.
In addition, large hog and poultry operations are looking at contracting with grain producers.
New hedging tools also might be coming as markets change. Just this year, CME Group—the holding company for the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange and the Commodity Exchange—introduced weekly options for corn, soybeans, wheat, live cattle and soybean oil. The company will continue to explore new products, says Fred Seamon, associate director of commodity research and product development.
As new niche markets are developed, however, one important question is whether they need futures contracts. "Corn high in starch is a niche product, but I don’t know that we need a futures contract. People typically prefer our corn contract," Seamon says.
Marketing products are also being developed for the cash market. Farms Technology LLC and Pioneer, which has taken an equity position in the company, have created what they call the Dynamic Pricing Platform. This marketing tool allows grain buyers and farmers to electronically make offers and bids for specific prices 24 hours a day; these are automatically executed when the posted price requests are met.
|Plenish high-oleic soybeans, which have no trans fat and 20% less saturated fat than commodity oil, might help reclaim acres lost for food processing.
A Road Map. Frayne Olson, an ag economist at North Dakota State University, looks to smaller market crops, such as sunflowers, malting barley, peas and dry edible beans, to provide a road map for how specialty, value-added corn and soybean marketing systems could work.
In these smaller markets, the pricing structure includes a contract that calls for certain quality attributes.
If producers exceed those, they are paid an additional premium; if the load falls short of what the contract calls for, there’s a deduction.
While Olson expects farmers to be paid premiums for value-added crops to offset additional risk and handling costs, he still looks for farmers to use traditional marketing tools to hedge their production.
Another issue, Olson says, is that new ways of storing and processing grain will have to be developed to handle value-added grain. "For example, elevators have been designed to handle a lot of grain in a hurry," he notes.
"As we look at characteristics such as soybean crush and oil, I see us backing away from commodity pricing to attract value-added crops," says Chad Hart, an ag economist at Iowa State University. Even though he looks for fewer crops to be marketed as commodities, he expects half of the grain trade to remain a commodity business.
In the next five to 10 years, Hart sees a push for crops with more specialized attributes. One ethanol plant, for example, has explored paying farmers a premium for high-lysine corn so the dried distillers’ grains would have more value for pork production.
According to Mark Scholl, president and owner of J&M Scholl, "we’ll be looking at components more in the future—starch, oil, fiber, protein and amino acids. Corn is a great transport agent for these components."
We might see farmers producing grain for a component value instead of a flat dollars-and-cents amount per bushel, he adds.
For an example of how corn and soybeans could change, look at the cotton industry, Scholl says. Cotton used to be a commodity industry, but it has transformed into an industry in which producers are paid based on variability and quality for a specific price.
Scholl sees more contracting in the years ahead between grain and livestock producers to increase transparency. He also sees more contracting with export markets and individual farmers or a group of farmers for a certain number of acres. "The benefit under such schemes is the opportunity to increase profitability," he adds.
- Mid-November 2011