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At a premium

EACH WEEK, L&R Rusch Farm in Vincennes, IN, delivers food-grade white and yellow corn directly to a tortilla factory in Atlanta, GA. A restaurant owner who was dissatisfied with the quality of tortillas started the factory and sought superior-quality corn for production. A friend put the restaurant owner in touch with another friend, corn producer Louis Rusch Jr., and the rest is history.

In the beginning, Rusch delivered the cleaned food-grade corn in 50-lb. bags; now it's delivered in 2,000-lb. bags and accounts for half of the farm's corn acreage. Rusch earns a premium of $0.35 to $0.50/bu. for the food-grade corn that he cleans with equipment that he previously used to clean wheat and soybean seed. Rusch is also president of Premium Producers Co-op, a group of Knox County, IN, farmers who attempted to put together a new-generation co-op to build a corn masa plant. They were unable to raise the $7.2 million needed to launch the $14 million project, but may move forward with a smaller project.

Increase in production

Each year there are a few more opportunities for farmers to earn small premiums for producing specific hybrids and varieties for specific end uses. The growth in value-added grains has been spurred by overseas demand for grain that has not been genetically modified (GM), domestic growth in the snack food and tortilla industry, and the growth of soy food sales both here and abroad.

Production of value-added grains has grown incrementally, not explosively as first predicted with the advent of biotechnology. Value-added grains still account for less than 4% of the U.S. corn and soybean crops. Most in the industry expect the market will continue to grow slowly as new value-added traits arise and as processors realize greater value from preferred varieties. A spokesperson for the National Corn Growers Association says it's possible that hybrid-specific production could eventually account for 25 to 30% of the U.S. corn crop.

Several country elevators confirm the trend toward more specialty grains. The Farmers Co-op Elevator in Ruthven, IA, has seen its specialty grain acreage increase from 1,800 to 15,000 acres in the last five years. “We've seen tremendous growth in recent years, and I expect that growth to continue,” says Jim Sampson, grain department manager. The co-op contracts with growers to produce non-GM soybeans, variety-specific soybeans for processing, food-grade soybeans for export, and Nutridense corn for poultry. The elevator pays premiums ranging from $0.05 to $1.25/bu. for various types of soybeans. The premium for Nutridense corn, exported for poultry feed, is about $0.23/bu.

Similarly, Doug Johns, regional manager with ADM in Evansville, IN, says, “We're seeing more and more specialty grains every year. Even though it's a small percentage, the grain business is becoming more specialized.”

Cargill Ag Horizons also has increased the amount of specialty grain it contracts with growers. It offers contracts for non-GM corn and soybeans, hard endosperm corn, white corn, waxy corn, high-oil corn, high-extractable-starch corn and food-grade soybeans. In March, Cargill created a new group called Specialty Solutions that will help create more opportunities for alignment between processors and growers.

Rob O'Malley, O'Malley Grain, supplies the snack food and tortilla industry with white corn and non-GM corn grown in Illinois and Nebraska. O'Malley Grain has seen its business triple in the last five years. Growers receive a $0.30/bu. premium for white corn and get the CBOT price for yellow food-grade corn.

Are premiums high enough?

Purdue ag economist Corinne Alexander notes that premiums for non-GM corn have remained between a nickel and a dime per bushel. Premiums for non-GM soybeans have increased steadily from $0.10 or less in 2000 to $0.35 to $0.50/bu. this past year. Still, it's questionable whether growers will make money after accounting for their costs to preserve the identity of their grain.

“These contracts hold growers to a 99% non-GM purity standard and often have stricter standards for foreign matter such as weed seeds,” Alexander says. “It's important that growers ask what the contractor's rejection rate is. The grower should factor the rejection rate into the expected premium. A 10% rejection rate means your 35-cent premium is really 31.5 cents.”

Growers also need to take into account their production costs. Roundup Ready soybeans have become less expensive to grow than conventional soybeans on fields with heavy weed pressure. Additionally, the performance of conventional soybean varieties may fall behind as companies focus most of their breeding efforts on Roundup Ready varieties.

Varieties classified for end uses

Growth of value-added grain has been slow because no blockbuster value-added end-use trait has been brought to market yet. Changes to make a healthier oil profile in soybeans and to significantly improve corn's feed energy or ethanol output are years away. The first significant improvements will likely come in the ethanol area. In 2006, Syngenta Seeds plans to introduce, through its NK Brand seed business, hybrids that are genetically engineered with a thermal-tolerant enzyme that could have a real impact on the economics of ethanol production. Through conventional breeding, Monsanto expects to have a soybean low in linolenic acid by 2006 as well.

In the meantime, many seed companies have made a major effort to evaluate current hybrids and varieties for specific end uses. The result has been new classification systems for products that might earn farmers an additional nickel or dime per bushel.

Pioneer Hi-Bred International recently created an Industry Select brand designation for its hybrids. There are four market categories within Industry Select: corn with high extractable starch and waxy corn for wet milling (HES), high total fermentables for dry-grind ethanol (HTF), high available energy for monogastric animals (HAE), and white and yellow food-grade corn. Pioneer now designates 200 of its corn hybrids as Industry Select. It has identified 61 HTF hybrids, 25 HES hybrids, 60 HAE hybrids, 12 waxy hybrids, 33 food-grade yellow corn hybrids and eight food-grade white corn hybrids. Pioneer claims its HTF hybrids can offer as much as a 4% increase in dry-grind ethanol production compared with commodity corn and that the HES hybrids provide a 2% higher starch yield. It is making its near-infrared predictive model available to the industry so processors can identify HTF grain at the plant.

Monsanto has created a Processor Preferred designation for corn and soybean varieties. More than 50 companies are offering seed identified as Processor Preferred using Monsanto's proprietary analytical tools. In corn there are two categories: high fermentable corn (HFC), and corn with high extractable starch (HES). The HFC hybrids offer a 2 to 4% increase in ethanol yield. As part of its Fuel Your Profits campaign, Monsanto is working with 24 dry mill ethanol plants that will source Processor Preferred hybrids. Farmers supplying the varieties will earn credits toward the purchase of General Motors E85 vehicles, and participating processors will earn credits toward installation of an E85 fuel pump in their community. Grower investors in farmer-owned plants will benefit from higher returns on their investments as well.

On the soybean side, Monsanto has worked with six major soybean processors to identify varieties that bring the oil and protein profiles they desire. Each processor develops its own local list of Processor Preferred varieties. Premiums range from $0.04 to $0.07/bu.

Syngenta Seeds also has characterized its soybean varieties for protein and oil content and its corn hybrids for ethanol output, although it doesn't group them under a marketing label. “While we characterize our NK Brand hybrids for differences in ethanol output, our initial trials show that hybrid differences are consistently overshadowed by variations caused by growing conditions, environment and different ethanol plant production processes,” says Jim Graeber, manager of market development. “Syngenta Seeds is convinced that its thermal-tolerant enzyme will offer the first real significant value-added hybrids in the marketplace.”

Early test results

Although a few industry observers see these new designations as simply a marketing tool with little real value in the way of premiums to growers and very small value to end users, others are eager to capitalize on any small advantage.

Last year, Heartland Grain Fuels, Aberdeen, SD, participated in trials with Monsanto using its Processor Preferred HFC hybrids. Growers were offered a $0.05/bu. premium to grow the varieties for the test. “We saw favorable results with the HFC hybrids. The ethanol yield was 3 to 4% higher than from the standard corn,” says Bill Paulsen, general manager. Heartland Grain Fuels is running the trials again in both its Aberdeen and Huron facilities. Twelve elevators in South Dakota are signed up to deliver the HFC hybrids. No contracts are being offered, but growers who supply the hybrids will earn credits toward E85 vehicles through the Monsanto Fuel Your Profits program. “My vision is that several years from now we'll be able to pay farmers for the fermentable starch that is available in their grain,” Paulsen adds. “If we continue to see these kind of results, we'll want as much HFC corn as possible.”

South Dakota Soybean Processors (SDSP), Volga, SD, is continuing to test Monsanto's Processor Preferred varieties. “Our goal is to select higher-quality soybeans with higher protein and oil production from each bushel,” says commercial manager Tom Kersting. “This will be our second year evaluating Processor Preferred varieties. We need more time to see if the averages come up over several years.” SDSP offers growers premiums of up to $0.07/bu. for protein and $0.07/bu. for oil. Farmers supplying the Volga plant with guaranteed varieties are assured a premium of $0.04/bu. and still have the opportunity to earn additional premiums based on soybean oil and protein levels. “The premiums won't offset any yield loss, so it's up to the farmer to select the best varieties for their farm,” Kersting says.

DFS, an independent regional feed manufacturer in Newell, IA, tested HAE corn from Pioneer last year. “We're always looking at ways to improve quality and efficiency,” says manager Dave Kier. “Corn is our main ingredient and it comes from many farmers and many seed companies. We have to manage that variation in our formulations, so if we can minimize variations, we can be more efficient. We're also seeing small differences in metabolized energy for pigs and poultry, which gives us a formulation advantage as well.” DFS contracted two million bushels of HAE hybrids last year and plans to contract four million bushels for the 2004 growing season. Farmers receive a premium, but it's much less than the $0.20 premium DFS used to offer for high-oil corn.

Amy Rutherford, Processor Preferred business manager for Monsanto, concludes, “Seed and technology companies have learned that we have to build relationships in the industry and with growers at the same time. We are doing a better job of learning what the industry is truly looking for, and we are seeking to establish our credibility by meeting their needs. There's been a lot of learning going on. All people in the value chain have to feel like they are gaining.”

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