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New Opportunities for Farmers in Value-added Grains

Roger G. Ginder, Economics Department, Iowa State University

Several forces now at play will create changes in the grain production and marketing system at an accelerating rate over the next decade. The first force is the increasing diversity developing at the farm level itself. The similarity among farming operations of 40 or 50 years ago is rapidly fading. It is widely recognized that huge size differences have developed among farms. But the differences don’t stop there. Big differences now exist in tillage programs, production practices, financial structure, leasing arrangements and a host of other farm characteristics.

Unlike the 1950s, there is no longer a "ONE SIZE FITS ALL" strategy for all (or even most) farmers. Looking over the fence doesn’t guarantee the right answer anymore. As farmers seek the best strategy for their specific situation, the answers that emerge are likely to be different from the ones their neighbors use. A good strategy for success on one farm could be total bust for other farm operations.

Genetics is a second strong force now propelling changes in the grain production and marketing system. While there has been a long and steady stream of significant genetic improvements over the past 50 years, the flow has accelerated during the past decade. As the heavy investments now being made in genetics research begin to pay off , most expect even more sweeping genetic breakthroughs during the next decade. And the focus of genetics programs is becoming much broader. Breeding and genetic engineering programs are looking well beyond the traditional traits (such as yield, dry-down, maturity, and ear drop) into the chemical traits contained in the grain itself.

The third force is the changing demands end users of corn and soybean products are beginning to express. The needs and expectations of intermediate and end users are becoming much more specific. They often focus on the presence or absence of specific physical or chemical traits. Up to now, processors and end users have been willing to accept broadly defined commodity corn and soybeans. They simply adjusted their processes or feed ingredient formulations based on the "average" composition of product received.

Although processors have long recognized the value of specific traits to end users, they have also needed to source large volumes of grain on a continuous basis to keep their plants operating efficiently. Getting the precise traits needed in the proper quantities has proven difficult or impossible in the high volume bulk commodity marketing channel. Without advance planning and coordination in the marketing channel, grain with the desired traits is mixed and remixed as it moves down the channel.

End users in the feed industry also see potential benefits from specialty grains. Like processors, feeders are in the business of converting corn and soybeans into products for end users - in their case, meat, milk, poultry, and eggs. Different nutritional requirements for hogs, cattle and poultry have long been recognized and a great deal of emphasis has been placed on combining ingredients for the specific diets needed by each species. However, the level of precision in animal diets has been blunted by the variability in specific traits contained in commodity grain and meal. Use of "average" values for corn and meal means that some lots may contain somewhat more than the required level of nutrients while others may be slightly deficient. But this is likely to change for both processors and feeders as we move through the next decade.

In fact, it has already begun to change. High oil corn (HOC) production is already gaining widespread acceptance by producers and end users. In 1996, 370,000 acres were planted and some expect up to 1,000,000 acres to be planted in 1997. Livestock feeding will be one of the first beneficiaries. Significantly higher fat content and more of the essential amino acids available in current HOC hybrids already make this product more valuable to livestock and poultry feeders.

But the high oil corn production process is only the beginning. Using high oil corn and similar hybrids with broadly demanded traits can serve as a platform that will permit even more specific traits to be stacked into end products. This will be especially important in livestock feeding. Specific amino acid profiles can be added to high oil corn hybrids to meet the very specific feeding requirements for each livestock species at different points in their life cycle. Beyond that, there is likely to be an opportunity for some large scale feeders to obtain grains that are tailored to their individual nutrition programs and the animal genetics they are using.

Further out on the horizon are possibilities that go beyond meeting the basic nutritional requirements for animal feed and into the characteristics of the final product produced. Combining special trait grains with specialized animal genetics holds the promise of even better livestock products in the future. Meat texture, color, consistency, flavor and nutritional characteristics may ultimately be affected by traits in the grain, meal, and other feed ingredients. Traits are also being developed that will help solve animal waste disposal problems. For example, hybrids are now being developed with low phytate levels which will reduce the pass through phosphates levels in the animal wastes.

Current research is also in progress which is now bringing improved high protein corn hybrids onto the market with both higher oil and protein. End users in both the food and the livestock feeding segments of the market will be better able to select hybrids with an overall high protein content as well as higher levels of specific amino acids.

Waxy maize and other hybrids (with more specialized starch characteristics are already being produced and marketed in many parts of the corn belt. Research currently under way will make even more specific starch traits available over the next decade. End users who desire specific cooking characteristics for processed foods or reduced calorie content in processed food products will be better able to select corn hybrids that provide them in the next few years.

These changes and new opportunities are by no means limited to corn. Producers and end users of soybeans will also be able to choose from a wider selection of varieties and traits. While many producers are aware of opportunities to produce food grade (clear hilum) soybeans for tofu and fermentable varieties for miso production, there are a number of new approaches now available for other more specialized versions of soybean production. Soybeans with high oleic acid traits are being developed for their stability in food and industrial uses. Other soybeans will yield oils lower in saturated fats which are more desirable for persons on fat restricted diets. At the other end of the spectrum, some seed companies have developed varieties that produce oils that are naturally more saturated. Such oil does not require hydrogenation which lowers end user costs and reduces the level of undesirable byproducts of hydrogenation (e.g., trans-fatty acids).

Still other soybean varieties that have lower levels of the sugars (stachyose and raffinose) which can lead to flatulence in humans, livestock, and pets are now under development. Intermediate and end users prefer these traits because they reduce processing time and promote better feed efficiency in poultry, swine, and fish.


DIFFERENT MARKETING PROCEDURES

Producing and marketing specialty grains is likely to involve several changes in marketing system will affect both the producer and elevators or first handlers. First and most obvious is the need to keep specialty grains separate in order to preserve the desired traits. For some specialty products (such as high oil corn) larger volumes of the grain will permit handling the product as a "super commodity" with a greater degree of commingling and bulk handling possible. But for more specialized products or products with very specific stacked traits, strict segregation and identity preserved handling practices will be necessary.

Purchasing is another area where significant change is likely to occur at the elevator level. Special trait grain and soybeans generally require more planning and coordination as they move through the channel. For very specialized grains, lower volumes will be produced and the flow of product will need to be matched with the users ability to use it. Elevators will need to offer marketing contracts to farmers for these products well before the seed is purchased and the crop is planted. They may also need to use "buyers call" provisions to properly regulate the flow of product tot he user.

Finally, elevators will need to do more sophisticated testing of the grain. For commodity grain, sampling and testing has routinely been done to determine moisture, condition, and foreign material. Specialty grains typically require additional tests for proteins, oils, and starch content. for the most specialized products, amino, fatty acid and starch profiles will need to be identified and measured. In most cases, these tests will have to be done by the elevator [at delivery] and will require more technical skills and equipment.


DIFFERENT ECONOMICS FOR PRODUCERS

The economics of producing and marketing specialty grains differ from the economics for undifferentiated bulk commodity grains. While the most obvious economic advantage of producing specialty grain production is usually a premium price for the special trait grain, some specialty products (and the various contract arrangements to produce them) may carry additional advantages for farmers. For example, some types of contractual arrangements can provide for reduction in marketing risks and greater diversification of production risks. In other cases, financial risks may be reduced through specialized production arrangements between the farmer and the seed company or the end user. These arrangements may involve risk sharing for yields and profits.

But there may also be different costs and management requirements for farmers entering these specialty markets. Depending on the type of grain produced, there may be added seed costs, and/or differences in fertility, tillage, spraying, cleaning, or conditioning involved. In nearly all cases, harvesting (and handling) equipment will need to be cleaned before special quality grain is handled and special traits must be preserved through the storage period in a separate bin. Successful producers of specialty grains will need to be fully aware of the costs and returns (profit per acre) for the specialty products they are producing in order to make this new enterprise fit into their overall farm production and risk management strategies.

Taken together, these developments are likely to propel significant increases in the production and use of specialty grains over the next decade. Producers will have unprecedented opportunity to produce value added or specialty grains in addition to (or instead of) the standard commodity products - and to share in the higher value these specialty trait grains carry.