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Specialty Crops: Proceed With Care

There's a lot of talk, or some would say hype, about specialty crops. It is generating new interest in specialties, such as high-oil corn and food-grade soybeans, which are garnering attractive premiums for some growers.

However, hype generally does not include drawbacks. So, what are the pros and cons of growing specialty crops?

Terry Schneider, Shirley, IL, sees an advantage to producing specialty corn and soybeans. He has grown specialty crops on contract since 1981. Today, he farms 2,200 acres, 90% of which is contracted. "There is an advantage to it (specialty crop production)," he says. "Year in and year out, I've averaged $30 to 50 per acre more net income from contracted production."

In addition to producing corn and soybean seed for seed companies, Schneider has produced several different types of specialty crops. They've included white dent, hard endo-sperm, yellow waxy and high amylose corn. They also have included clear hilum soybeans for the soy milk market, and other food-grade soybeans for the tofu industry.

Schneider reports that food-grade white corn in his area was bringing premiums as high as $0.50 to 0.60/bu. over yellow corn late last summer. High-oil corn was averaging $0.30/bu. premiums. White waxy corn averaged $0.90 to $1/bu. premiums, while yellow waxy corn averaged $0.25/bu. premiums.

Although most specialties offer price incentives, many do not yield as well as conventional corn. In some cases, there may not be enough motivation to produce certain specialties. A grower needs to calculate both premiums and yields to project net returns for his or her operation.

Know the market. The premiums contractors pay also can vary widely, observes Dan Van Steenhuyse, who has grown specialty crops near Vinton, IA, since the mid '70s. He currently farms about 1,500 acres and has grown a variety of specialty crops, including tofu-type soybeans and waxy corn. His father has produced sweet corn, sunflowers and triticale. "Contracts can vary quite a bit," Van Steenhuyse says. "It's important to shop around." He says, for example, that a few years ago some contractors were paying $0.75/bu. premiums for Vinton 81, a tofu soybean, while others were paying premiums as high as $2.50/bu.

That was one reason Van Steenhuyse and some other innovative growers formed the Iowa Producers Cooperative. The cooperative enabled them to compare notes on contracts, as well as to help each other learn more about specialty crops and take advantage of marketing opportunities. These types of cooperatives also can serve to attract contractors that are considering establishing processing plants in new areas.

Van Steenhuyse advises growers to be aware of the entire market, read industry publications, go to conferences and know their options. Another challenge is learning how to negotiate contracts. "A lot of farmers aren't comfortable with doing this. They're better at production than negotiation skills," Van Steenhuyse says.

He says there is a big advantage to knowing what contractors are paying for grains as well as what livestock feeders are paying for high-oil corn, for example. "It may be an excellent opportunity for you to go to your neighbor who is feeding livestock and contract directly with him. But, you must know what a fair price is for both of you."

Pencil it out. Lynn Clarkson, president of Clarkson Grain Company, Cerro Gordo, IL, notes that organically grown white corn averaged $2/bu. premiums last summer. His company originates and supplies specific corn hybrids and soybean varieties to end users. He adds that organically grown soybeans for the natto (popular Japanese food) market were bringing as much as $22/bu., and their nonorganic counterparts were averaging $18/bu. Nonorganic tofu beans were bringing $8 to 15/bu. premiums.

Ken Dallmier, vice president and research director, Sturdy Grow Hybrids, Arcola, IL, a developer and marketer of white food-grade seed corn, advises gro wers to run the numbers in their farming formulas and make realistic projections about specialty crops. "Leave the marketing brochures on the table," he says.

Premiums that point to a net increase in profits are the main advantage of specialty crops, Dallmier says. But there are other positives to consider. "Some contractors will pay for on-farm storage. That directly benefits the grower," he says. "And some contractors will allow growers to forward market a certain number of bushels, providing some interesting marketing possibilities."

Jerry Walsh, facility manager, Frito-Lay, Sydney, IL, says oversupply can be a problem in a small market like the white corn business even though a significant amount of production is held in check by contracts. World production affects the white corn market more than it affects the market for yellow corn, he says. He explains that when a major producer, such as South Africa, suffers a drought, prices rise. This generally attracts other growers whose noncontracted corn floods the market and drives prices down.

Hassle factors. There are other drawbacks. Schneider calls these "hassle factors." For example, drying requirements for some specialty corns are more sensitive compared to their conventional counterparts. Growers must consider moisture levels of crops coming out of the field and whether they will tolerate special drying requirements, Schneider explains. Dallmier adds that food-grade corn with kernel cracks is rejected.

"We require our growers to dry corn at moderately low temperatures because high temperatures can damage the starch," says Dennis Penland, supervisor of specialty corn, Cerestar USA, Chicago, IL, a corn wet miller. The company manufactures corn syrups and more than 300 types of corn starches. This requirement can disrupt the grower's system flow.

Most specialties also must be "identity preserved," or kept separate from other grains. This requires isolating fields, as well as careful cleaning of combines, augers, storing facilities and trucks. Growers also must plan specialty acres according to their storage capabilities. Some growers, says Schneider, do not have multiple bins that allow them to separate specialties from other grain they produce. They must not overlook logistics or recordkeeping.

Another drawback, Schneider says, is dealing with buyer-called delivery. Sometimes a grower could be storing grain for as many as 10 to 11 months, then the buyer might call and want delivery within just a few hours. This can be inconvenient. "However, if one is set up to produce quality grains, extra premiums may be had," he says.

Clarkson agrees that specialty grains can reduce a grower's marketing flexibility. "Specialty growers can't just decide to sell their corn today. They generally must deliver on the buyer's call." But, like Schneider, Clarkson says growers will be compensated accordingly.

Grow where processors buy. Then there's the case of growers who want to grow specialty crops but can't do so economically due to "regionality" of markets. "Unless you're strategically located where white corn is contracted, I wouldn't grow it," Walsh says. "I wouldn't plant white corn for the open market." He adds that the best way to find out if there's a market (and to cut through hype) is to talk to people who are buying specialty grains. "Ask them if they have contracts and what they're paying."

Dallmier says only certain pockets of the country specialize in white corn production (for example, areas close to Champaign, IL, and Cedar Rapids, IA; northwest Missouri; southwest Iowa; areas along Interstate 80 in Nebraska; the Texas Panhandle and tip; and pockets in the Southeastern states). Opportunities exist in these areas because of the proximity of buyers and processors. "If you're not close to a processor, your profitability can be quickly eaten by trucking costs," says Dallmier.

By the same token, processors need substantial, nearby supplies of grain that they can get on short notice. Penland points out that wet millers grind corn 24 hours a day. Cerestar's plant in Hammond, IN, for example, processes 100,000 bu./day. Of that total, 20,000 bu. are waxy or high amylose corn, as well as smaller amounts of specialty corn it has developed in-house.

Biotech to boost industry. The contract business also will likely expand because of biotechnological advances. Companies will develop new kinds of grains that can be produced in various areas, and there will be more contractors, Walsh suggests. Who will these contractors be? He thinks the poultry industry may get more involved in the future by specifying "designer hybrids" with specific traits.

Van Steenhuyse sees more new transgenics being developed to meet "line-item specs" in the future. But he suggests end users, while they recognize the significance of new genetics, must still develop markets for specialized traits. It will take some time before the ultimate user's interest translates into increased contract acres, he says.

Lack of adapted hybrids currently prevents growers from participating in certain specialty markets. Dallmier relates how some South Dakota growers recently told him of their interest in producing white corn. He had to explain there are really no white corn hybrids adapted for that maturity zone. "Hybrid selection dictates where the market is," Dallmier says, adding that Frito-Lay "stretched the envelope" when it placed a buying facility at Gothenburg, NE. This has required seed companies to speed the release of hybrids suited for that maturity zone.

Although there are currently no hybrids adapted for South Dakota, it would be a good place to grow food-grade corn because there are fewer diseases and insects, thinks Dallmier. The conditions for aflatoxin also are not as great, he says.

Clarkson adds there is a lack of yellow dent food-grade hybrids for northern latitudes; the shortest-maturing product which he is aware of is a 108-day hybrid. Schneider says there are few white dent and white waxy hybrids in the 108- to 112-day maturities. That's a disadvantage to growers in those maturity zones, he says. High-oil corn hybrids, on the other hand, are more widely adapted.

Penland suggests that if additional early maturing, elite waxy hybrids were developed, wet millers would likely contract with more farmers in northern states.

In regions where adapted hybrids and processors exist, there is profit potential. Certainly, the profits will vary from year to year. One year, more growers might hear hype about a certain crop and jump in, only to drive down premiums. But the ones who stay in it for the long-term will "catch the highs," Dallmier says. He also thinks that because domestic demand for white corn is increasing, future price cycles will not be as extreme. Even so, it is a safe bet to have one's crop contracted.

Schneider is not overly concerned about oversupplies. "In ten years, this may be a different case. Specialties may become more like commodities." But growers will still want to avoid having bins only half full, he adds. He also believes few people will grow specialties without a contract and contractors will keep supplies in check.

Before signing on the dotted line. Before signing a contract, growers need to do their homework, Schneider advises. "You need to analyze if what the contractor is telling you is the true story. You hear the advantages. But you need to probe the disadvantages." He recommends asking the contractor to provide names of growers. "If he is reluctant to give them to you, be wary. Good contractors will be up front about grower names and yield drag."

For example, this fall 20 growers in west-central Ohio reported significant yield losses in TopCross high-oil corn when planted in fields previously planted to corn. The farmers planting the same high-oil hybrids experienced normal yield following soybeans. Severe weather and insect pressures resulted in poor pollination and reduced kernel set on 2,000 acres of high-oil corn. (See sidebar.)

Crystal ball predictions. The industry, in general, also is trying to get a feel for the future. Most agree high-oil corn acreage will continue to grow in the near term. Dupont Quality Grains notes the western Ohio experience is an isolated event primarily attributable to unusual growing conditions. Growers continue to choose to plant more high corn acreage each year because they are happy with its performance," says Dan Hammes, corn manager, Dupont Quality Grains. In a U.S. Feed Grains Council (USFGC) paper "1996/1997 Value-Enhanced Corn Quality Report," it projects that one million acres would be planted to high-oil corn in 1997/1998, and the association rated its future growth as "high."

In the next 10 years, high-oil corn could even command from 40 to 60% of the total corn market, Clarkson suggests. He says this is because 70 to 80% of this country's grains are produced for livestock feed, and feeders want high oil. However, as high-oil corn becomes more of a commodity, margins will drop. "It could become the new standard corn," he says.

Other industry participants would agree, suggesting that what we call "specialty grains" today may be the norm 10 years from now. "Number two corn may even be considered a specialty," Walsh says.

Dallmier notes there also may be new opportunities in crops used to produce raw materials for pharmaceuticals. Even though acreage of these crops would probably be limited, they'd likely generate high income for growers.

It is still too early to predict the future of these and other specialty crops. But the USFGC report does forecast stable growth for waxy, hard endosperm/food grade and high amylose corn. It forecasts moderate growth for food-grade white corn.

However, Clarkson feels if certain governments (such as Mexico and China) establish more stable footing and encourage fairer business relationships in the future, there could be "a significant boost in white corn production."

Orville Fisher, a white corn industry consultant from Topeka, KS, also sees growth ahead. He notes the United States currently plants an average of 555,000 acres to white corn, but he predicts contract acreage will increase as white corn yields become increasing comparable to yields of yellow dent corn.

Van Steenhuyse thinks in five years, 40% of all U.S. crop acres could be contracted. Why? "Companies will need guaranteed supplies. Consumers and companies will dictate demand for crops and crops will be more specialized," he says.

He also points to new investments in specialty crops, including the recent commitment by DuPont and Pioneer Hi-Bred International to develop genetics with specialty traits. The interest pharmaceutical and cosmetic industries have shown in crops as raw materials is another sign that specialty contracts could grow, he says.

A change in thinking. Clarkson sees the marketplace becoming increasingly segmented as both suppliers and end users become more sophisticated about value-enhanced grain and oilseeds. "Increased segmentation increases the opportunities for growers to increase their incomes," he says.

Segmentation may also encourage growers, like Van Steenhuyse, to think of their businesses in totally new ways. Van Steenhuyse says, "I'm not a corn and soybean grower. I'm a producer of proteins, oils, starch and sugar."

As markets become more segmented, we may see more players vying for business, Clarkson says. But, due to the specialty nature of a given product, the end user may only need or want to buy from a couple of sources. Therefore, there will be increased emphasis on relationships and the package of qualities carried by a particular crop, he suggests. And, he predicts end users will focus on more than price in the future.

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