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Agricultural processing, as a tool for revitalizing North Dakota's economy, was a key issue in that state's 1992 gubernatorial election campaign. "Diversify the ag economy with special emphasis on food processing and value-added products" was the first goal winning candidate Ed Schafer articulated in his agriculture position statement. He asserted: "North Dakota must, over time, move into a position where at least 40 percent of its agricultural commodity production is processed in-state." His opponent, Nicholas Spaeth, also called for increased emphasis on developing processing industries and argued that his service on the state's Industrial Commission had given him special expertise.
In South Dakota, Paul Knecht, director of agricultural development for that state's Department of Agriculture, argues that ethanol plants such as the new Heartland Fuels facility in Aberdeen will both provide jobs and improve markets for the state's farmers.
"In terms of looking at future offerings that will have significant economic impact, value-added food processing is very high on the list," says E. Peter Gillette, commissioner of Minnesota's Department of Trade and Economic Development. Su Yi, a market researcher in the Minnesota Department of Agriculture, says, "Value-added processing has been our main emphasis."
Jim Petry, in the Department of Agricultural Economics at North Dakota State University, lists a new cooperative-run pasta plant at Carrington, an existing noodle factory in Cando [see story below], a processing plant proposed to handle the increasing potato production between Oaks and Jamestown, as well as ethanol facilities in Walhalla and Grafton as examples of his state's initiatives in agricultural processing.
Transforming agricultural commodities into food and other products is an important manufacturing activity in Ninth District states and has been for a long time. Many see it as a promising avenue for economic development, for increasing employment as well as for increasing prices received by farmers and ranchers.
But even though agricultural processing is an important part of the district economy, other analysts are not as optimistic about the future. They point out that overall demand in the food sector grows very slowly and that wage rates are stagnant. And census figures show that food sector employment is stable or even falling in most district states.
The case for growth
Economic development specialists note that there are two general areas of potential growth in the ag processing sector. The first is innovative specialty or high value-added food products that offer greater quality, better nutrition or increased convenience. Microwave-packaged rather than ordinary popcorn, breaded chicken breasts instead of whole chickens, vegetables mixed with a sauce and sealed in a microwaveable or boilable plastic pouch rather than simply frozen are all examples of innovations in this area.
The second area of promise is industrial non-food products derived from oilseeds or other grains. "Our focus is on value-added products such as soy ink, ethanol and corn starch-based plastics," says Minnesota's Yi. Ralph Groschen, director of agricultural marketing and promotion for the Minnesota Department of Agriculture, agrees: "We have to take seriously the concept of alternative markets and products."
Each alternative—high value-added foods and industrial products—will have markedly different economic impacts. Innovative value-added specialty products tend to be relatively labor-intensive. They require skilled employees, not only in production but especially in product development and marketing. They tend to have higher values relative to transportation costs and may be less affected by locational disadvantages than lower-value bulk products. But they also tend to use relatively small quantities of agricultural products as inputs and may have limited impact on general agricultural prices or profitability. And their production is part of an intensely competitive subsector where firms have to continuously innovate and market to stay alive.
Facilities that transform oilseeds or feed and food grains into non- food products generally use far larger quantities of agricultural commodities. A wet corn milling plant, for example, may easily process some 30 million bushels per year. Thus such plants may increase commodity prices over an appreciable radius. But they are extremely capital-intensive facilities and tend to employ few workers relative to the investment needed or to the value of output.
The high value-added option
"A quiet revolution in the U.S. food market is under way that may change the way farmers and food processors deliver food to consumers. ... The revolution will significantly alter the way producers and processors do business." So argues a 1991 Kansas City Fed study of changes in the U.S. food sector. "Advances in production and processing technology are enabling farmers and food processors to target specific consumer niches more precisely than ever before," the report continues. "The U.S. food market is changing from a mass market to many niche or specialty markets."
The study singles out three forces behind the shift to smaller food market niches: a new emphasis on nutrition, and changes in both lifestyles and demographics. The study concludes that these trends will lead to a substantial reorganization of the U.S. food industry and that successful firms will be those that are most innovative in designing new products or using new technology. For new products to be successful, they will have to offer something extra in the way of taste, nutrition, health or convenience to set them apart from their competitors. But competition will be fierce, and increasing vertical integration from the farm to retail level will squeeze small, non-innovative or undercapitalized firms out of the market.
Bruce Marion, professor of agricultural economics at the University of Wisconsin-Madison, thinks that small and new firms will have a chance in this arena. "More frequently, it is small, innovative firms that do it. If they are successful, the big firms buy them out. ... The smaller entrepreneur is much more fertile ground for new developments than the big bureaucracies in large firms."
Exporting high-value food products may be another option for firms to increase sales. Minnesota's Gillette cites the example of edamame beans, specially processed soybeans eaten in Japan as a salted snack similar to popcorn or peanuts. With production dropping on Taiwan, Japan's historic source, the beans are grown in Jackson and Martin counties in Minnesota on an experimental basis, processed locally and shipped to Japan. The Pillsbury Co. is reportedly investigating the possibility of processing this bean for export on a large scale.
Gillette also notes that "the export potential for further-processed turkey products, especially in Asia, is tremendous."
The industrial product option
Transforming crops into industrial inputs in the Ninth District is rooted in oilseeds. For many years, the district was a major producer of flax, which was processed into linseed oil, a major component of paint and other organic chemical products. As soybean acreages grew in the decades after World War II, soy oil and other soybean derivatives largely supplanted flax-based products.
The market for industrial inputs derived from soybeans is large, well- established and growing. Soybean crushing plants and those that process soy derivatives constitute a large portion of the non-food agricultural processing sector in the Ninth District. Products with some soy-based input number in the thousands and research is devoted to finding additional uses. Growth in this industry may occur in soybean-growing areas of Minnesota and Wisconsin, but the technology is mature and the industry is dominated by large, well-established firms.
Compared to soybean processing, wet milling of corn and wheat is the new kid on the block. Ethanol is the most prominent—and controversial—of the wet milling products.
One of Groschen's responsibilities is to promote ethanol production. "Ethanol is the tip of the iceberg for products now supplied by the petroleum industry," he says. He also notes that Minnesota lags nearby states in this technology. "We have missed the boat; Illinois grinds one third of its corn production in wet or dry mills." For Minnesota the figure is only 5 percent.
Some critics say that the market for ethanol is overly dependent on tax exemptions and regulations that encourage the blending of ethanol with gasoline for use as a motor fuel. Willis Anthony, a farmer who currently serves on the Minnesota Corn Research and Promotion Council and the Minneapolis Fed's Advisory Committee on Small Business, Agriculture and Labor argues: "It is possible with existing technology, prices and interest rates for people to invest in corn processing facilities with very positive returns." But according to Anthony, "It is important to stress that this is within the current set of public policies. ... It is a somewhat risky investment in that such programs are not necessarily long term."
But Anthony and Groschen both agree that there is more to corn milling than ethanol. "One ought not to be referring to these plants as ethanol plants," Anthony says, noting that modern wet-milling plants also produce starch, corn gluten and a variety of other industrial and feed outputs. Minnesota Corn Processors in Marshall, Minn., is one example of such a corn facility. The AmericanEthanolCorp facility under construction in Great Falls, Mont., and the Heartland Fuels plant nearing completion near Aberdeen, S.D., will use wheat and barley as inputs. But both plants will employ technology similar to corn plants and will produce a similarly wide range of products. Groschen adds that a corn starch-based packaging product—in the form of the foam peanuts used to cushion items shipped in cartons—now commands 20 percent of the market. He also says that the plastic and polymer market is a tremendous opportunity, although such products have not been perfected yet.
Such developments need not depend on elaborate research. A recent article in Agweek reports on two North Dakota farmer-inventors who developed and patented a process for making biodegradable packing materials from pulped flax straw. The material might be used to replace polystyrene meat trays and "clamshell" packages for hamburgers sold in fast food outlets. While a lengthy FDA approval process will be required before this new product can be used with food, the two inventors have already licensed their patents to a German firm and plan to begin construction of a plant in North Dakota for non-food grade products in 1993.
But the sector is not growing rapidly
Minnesota's Groschen aptly characterizes the most important constraint on the agricultural processing industry: "People only eat so much, and the population is growing very slowly." The U.S. population grew by an average of 1 percent or less per year over the last three decades. Thus the food industry as a whole is a mature one with sluggish growth. People eat more expensive foods with higher levels of processing, but their total food consumption changes little.
From 1947 to 1987, value-added, or the value of final products sold less the cost of raw materials, grew at about 2.5 percent per year after adjustment for inflation. This was somewhat less than the rate of growth of all output. But such growth in value-added compared to stable employment means that labor productivity increased steadily over the period.
Over the same period, employment in U.S. food processing essentially did not grow; in contrast, total manufacturing employment grew at nearly 2 percent per year.
The dollar value of all payrolls in food manufacturing, adjusted for inflation, grew slightly better at just over 2 percent per year. Since the number of employees was stable this implies that real, per worker earnings in the food sector grew at the same pace.
The picture was not any better in the Ninth District, where food processing employment dropped in Minnesota, Montana and Wisconsin. It grew slightly in the Dakotas, but much slower than the total labor force or other manufacturing employment. Payrolls and value-added did rise in all district states, but the average rate of annual increase in food sector payrolls was only half that of all manufacturing.
Looking at a more recent period, food manufacturing in all district states was lower in 1990 than in 1977. The total dollar value of food sector payrolls had also fallen over this period. Value-added grew slightly in the 1980s for Minnesota and Wisconsin, but it fell in each of the three western states.
Wisconsin's Marion sums up the situation: "Within the United States, opportunities for growth of food processing are very pocketed. It keeps changing but we see some new opportunities." But he adds that such opportunities are often fleeting: "In these sorts of things the market tends to get saturated early."
Nor is it still a high-wage industry
Another important change that has taken place in recent decades is the decline of food manufacturing wages relative to those in other sectors. In the heyday of flour milling and meat packing, workers in those industries constituted an envied industrial elite earning high wages. And the average wage for the food sector was substantially above that for all manufacturing. But this premium disappeared by the late 1960s. Average earnings in most food processing jobs in the Ninth District, on a state-by-state basis, are lower than earnings in all manufacturing and much lower than the average for all private-sector employment, according to 1990 U.S. Department of Labor data.
However, according to Alan Barkema, Mark Drabenstott and Julie Stanley, authors of a 1990 Kansas City Fed report on ag processing development, wages in the sector are still very attractive outside major metropolitan areas. The economic development programs of Ninth District states generally are targeted at towns and smaller regional cities where ag processing wages may compare favorably to those in alternative employment, according to the Fed report.
Are growth and development possible?
Given slow growth, declining relative economic importance and declining relative wages, is it reasonable to expect significant economic gains from agricultural processing in the foreseeable future? Can fostering ag processing contribute to the success of economic development efforts in the Ninth District?
Some believe the answer to these questions is a qualified yes. In their 1990 article, the Kansas City Fed researchers argued that two factors were important in determining potential for food processing expansion. "The first is the distance from the state to major population centers. ... The second is the presence of a viable food processing base from which to grow. States that have little or no food processing already established probably have little likelihood of successfully entering the competitive, capital- intensive industry."
Based on these criteria, the Kansas City authors conclude that Minnesota and Wisconsin rank high among seven high-potential states. The three low-potential states they identify—South Dakota, Montana and North Dakota—are all western Ninth District states.
While some economic development advocates in these three states may recoil at this conclusion, other officials point out that while Montana and the Dakotas may not become major ag processing states relative to the rest of the country, this does not imply that ag processing will not grow at all in these states. Nor does the low ranking mean that growth of ag processing will not make a positive economic impact, as reflected in the number of new and existing ag processing plants noted in this article.
