University of Wisconsin Center for Wisconsin
Rural Cooperatives, September/October 1999, p. 14-18.
Published by the Rural Business and Cooperative Development Service
The Price is Right: AGP sets pace for soybean industry with new oil pricing program
By Patrick Duffey
Nearly 16 years ago, agricultural producers from the farm fields of the Midwest bankrolled a new business that would strengthen the nation's then-weak soybean processing industry and give farmers a greater role in determining the future of the market for soybeans. Today, as a more mature "teenager" in terms of operating years, Omaha-based Agricultural Processing Inc. (AGP) is still setting the industry pace as it prepares to enter the new millennium with annual gross sales that will soon top $4 billion. That's a dramatic increase from the $700 million in sales it recorded in 1983.
AGP, owned by 285 local and 10 regional cooperatives, will take on another pioneering role for the industry this fall when it begins paying premium prices at its nine processing plants for soybeans that meet graduated level standards for oil content. The new program took effect Oct. 1.
Jim Lindsay, AGP's chief executive officer, says the cooperative is "excited about the opportunities and benefits our new oil premium program presents to our cooperative members. It represents another avenue to add value to soybeans for farmers tbroughout the cooperative soybean processing system."
While the pricing program is new to the soybean industry, component pricing or value-added marketing is routine to other agricultural industries as both producers and processors try to match commodity traits with the demand of food manufacturers and consumers. In grain, the protein content of wheat has been measured for decades to determine for price. The dairy industry calculates price to producers based on the protein content of milk, which is a critical factor for making cheese. Oil content has been measured in some specialty types of grains used in particular markets.
Lindsay anticipates this type of buying will become a standard practice in the future. "We believe farmers should be rewarded for providing a product of higher value. AGP has made a sizable investment and commitment to launch this oil premium program for their benefit," he says.
Value pricing origins
AGP started building the foundation for the value-pricing system 18 months ago in cooperation with field testing by 14 Iowa local cooperatives, Charles Hurburgh at Iowa State University and the Iowa Soybean Promotion Board.
Research was initially conducted at AGP's processing plant and vegetable oil refinery at Eagle Grove, Iowa. AGP studied ways to obtain an accurate assessment of soybean value prior to processing. Computers were linked with near-infrared transmission (NIT) technology which provides rapid and accurate whole grain analysis of delivered soybeans. The equipment has now been installed at all nine of AGP's soy bean plants.
AGP employees have been trained to use the new equipment. NIT computer data, combined with normal grading procedures, were compiled an, analyzed by AGP. Testing revealed thatthe new system more accurately and efficiently calculates the various oil levels, and computes and prints out settlement forms at the time of delivery. It assesses the soybean value and reflects that in prices paid to producers.
Last year, AGP field tested 240 soybean samples representing 137 varieties in Iowa growing zones. Tests revealed significant oil and protein variances in today's mix of varieties which have been bred and selected for yield.
The highest yielding soybeans can vary by more than three pounds of oil per bushel. The 30 percent variance in oil content equates to more than 150 pounds of oil per acre of soybeans yielding 50 bushels per acre. Larry Burkett, AGP senior vice president for corporate and member relations, says project data convinced AGP that selecting seed varieties with above average oil content—without sacrificing yield—would generate added value. The oil premium would add to the market price, increasing farmers' return per bushel and profit per acre.
Given the new technology, segregated marketing of differentiated commodities is expected to catch on.
Oil content variances in today's seed varieties are not expected to initially translate into sizable value premiums, Burkett indicated. "The real advantage to growers lies in the future, when new varieties will have improved oil content and generate greater value levels than are present today. Premiums will likely increase with that oil content advance in new varieties. "
Oil in advanced varieties
"If a value-added system could be adopted industry-wide, all U.S. soybean farmers would have greater opportunities to add value to their operation," Burkett says. "The system would also create a way to provide incentives for the development of seed varieties that could focus on value components and also benefit soybean farmers and their industry by making soybeans more competitive in world oil and food markets."
Burkett relates, "Our ability to work together as a cooperative soybean system was the key in striving for new heights in the soybean market and strengthening prices for farmers. It proved to be the catalyst for introducing the new program."
AGP builds market
This type of attention to the needs of both producers and customers has helped AGP emerge as the world's I largest cooperative soybean processor, and the fourth largest overall soybean processor in the United States. Since its formation in 1983, AGP has been
committed to being a successful value-added company that returns its profits to the local and regional cooperatives that represent 300,000 farmers from 16 states in the United States and three Canadian provinces. AGP annually purchases and processes more than 5.5 million acres of members' soybeans at its plants in Iowa, Missouri, Nebraska and Minnesota. As the nation's third largest vegetable oil refiner, AGP ships products by truck and rail to food service companies for use as ingredients in nationally recognized food products or for specialty processing.
At the end of fiscal 1998, the co-op's pre-tax return on investment was 17.6 percent. AGP spent a record of more than $1.3 billion to purchase corn, soybeans and milo for processing. AGP also retired $10.7 million in allocated equities, making it current with the 1991 allocated equities balance. Members have $298.3 million in allocated equities invested in AGP. By adding in retained earnings and capital stock, the total is actually $354 million.
Midwest ties to soybeans
In the 1930s, the Midwest became the hub of U.S. soybean production. Cooperatives began building soybean processing plants in the 1940s, recalls Burkett.
"These plants evolved into a highly efficient system. And with all the investment in new uses, the potential in future diets and possibilities with biotechnology, we believe soybeans have just started their climb. Soybeans offer a continuous, bright future for farmers," Burkett says.
AGP entered the processing scene in 1983. "At that time, the soybean industry was plagued by weak margins and considerable inefficiency. It was a case of something good evolving out of a very bad condition at the time," Burkett says.
"Jim Lindsay, our first and only CEO, compiled a staff that attacked costs with a vengeance. They built the cooperative into today's very diversified company that operates many businesses. AGP has kept per-bushel costs at the same level or lower, in some cases, even with years of inflation."
New technology was introduced into its multiple-plant system and crush capacity was expanded from 300,000 bushels per day to more than 630,000, thanks to new facilities at Emmetsburg, Iowa, and Hastings, Neb. In vegetable oil refining, AGP climbed from zero to third largest in the nation. Through refining, AGP now markets multiple food-grade oil products, lecithin and feed fat.
Industrial uses for soybeans
Further value-added processing is underway at the methyl ester plant at Sergeant Bluff, Iowa, where AGP pioneered new industrial uses for soybeans. Soy diesel, spray adjuvants and solvents and cleaners have been developed as environmentally friendly replacements for petroleum-based counterparts, Burkett explained.
"Corn processing added another dimension to AGP," indicated Cal Meyer, vice president, soybean/corn marketing. "Our AGP Grain Cooperative, owned by AGP and 200 local cooperatives, markets more than 300 million bushels of grain annually and assists several member cooperatives under a marketing agreement."
Expansion at Hastings, on the western edge of the corn-production belt, boosted processing capacity to 45,000 bushels per day. AGP began ethanol production there in 1996 and was subsequently expanded.
"With the corn and soybean plants at Hastings, AGP has the capacity to ship trains containing DDGS (distiller's dried grain solubles, a high-protein ingredient used in livestock feeds), pelleted soyhulls and soybean meal to the West coast dairy and poultry markets," Meyer says.
AGP's diversification into the feed business has also paid dividends. Many of Consolidated Nutrition's feed plants owned jointly by AGP and Archer Daniels-Midland are located near AGP's soybean plants, and represent a valuable market for soybean meal.
The building of a new soybean oil refinery at St. .Joseph, Mo., in 1985 marked AGP's entry into value-added refining. Since then, AGP has both expanded its refining capacity and formulation capability due to increased demand from food companies. Today, AGP invoices nearly 600 specific formulations of vegetable oils appearing as ingredients in food products that consumers use on a daily basis.
"All of AGP's business groups are positioned for continued growth," Burkett noted, "and enable us to better serve more local cooperatives and their farmer-owners. The next dimension is the new soybean oil pricing program."
Looking ahead, AGP expects to remain competitive in a global marketplace.
"In the coming millennium, world . economic conditions will continue to be of concern not only to AGP but to everyone in agriculture," Lindsay says. "International markets are critical to the success of our industry. During challenging financial times on the farm, the mission of AGP to add value beyond the farmgate by returning earnings to farmers through their local cooperatives becomes even more crystal clear."