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

Information Specialist
USDA Rural Development



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.

Feed diversification

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."

AGP’s Lindsay Discusses Co-op’s Growth Management

Patrick Duffoy,
Information Specialist
USDA Rural Development

James Lindsay has been the first and only chief executive officer and general manager in the nearly 16-year history of Ag Processing Inc. He had prior business experience with corn and soybean processing as an executive with Archer-Daniels-Midland. For four years he was chairman of the National Oilseeds Processing Association. The Omaha-based cooperative he heads has become the world's largest cooperative soybean processor and an aggressive player in the U.S. market In this interview, he discusses the cooperative's progress .and aspects of his management philosophy.

Question-: What is AGP's mission?

Answer: AGP serves local cooperatives and their agricultural producer owners by performing the primary business functions of acquisition, processing and marketing of agricultural products. It adds value to farm commodities and flows its earnings to producers through member cooperatives.

Q: How did AGP bui1d its financial standing in its short 16-year-history?

Answer: When the company first. started, its aim was to survive. It had a high debt-to-equity ratio, prompting the bank to keep a close eye on it. We reduced expenses and-hired the right people, which helped the company turn the corner. When you reduce costs, you add to production and improve your plants.

A commodity-based business can operate on small margins with a high volume. It took-two to three years to reach our competitive goals. After that, AGP learned it could survive. The company needed to produce.$115 million income in gross margins per year before expenses. More capacity was necessary to compete with major soybean processing companies. As our concerns turned to being competitive, our competitors were also expanding. We always had a watchful eye for potential disasters that we couldn't work through.

AGP's board and management developed a strategic plan for the company to invest its resources and expand the business. Three considerations were necessary for us to achieve 15- and 20-year goals: 1) To get attention, a project must produce three times the annual interest rates Irate of return). Any project at two times or less is- not realistic unless it takes time to grow. 2) What will a project do to the company if it fails? Does it threaten-the destiny of the company? AGP avoids big-risk projects. 3) Debt-to-equity considerations. In a depression, a company works more carefully. It's reasonable to work from a 20-30 percent position. In some cases, you can even stretch to 60 percent, but it's good to build back to 30 percent.

Rail transportation is vital to AGP's operation, so it leases rail cars to ship products to-its customers. From a financial point of view, leasing is the same as going into debt, even though it doesn't show on the balance sheet. We report both the actual debt to equity and debt to lease and equity combined. We tell our members the real rate so they don't get the wrong impression.

Q: What has prompted AGP's extensive expansion in recent years?

Answer: Much of the expansion has been defensive, keeping pace with the industry. AGP has built two new soybean processing plants and a new corn processing plant. The new plant at Hastings is the first cooperative soybean processing plant in Nebraska. Also, most free standing soybean oil refineries have been going out of business.

To survive, most processors have their own refineries. AGP expanded its refining capacity with a new plant at Eagle Grove, Iowa, and is now building a new refinery at Hastings. Refined oil has become a high-quality, commodity-priced product that's sold on the basis of price and service. The business goes-to those who provide the best service. AGP builds its business around quality and service.

Q Where is-the future in soybean exports?

Answer: Farm programs always held an umbrella over soybean prices. Argentina and Brazil, our major soybean producing competitors, continued to-build infrastructure. To stay competitive, AGP now wants to process beans into exportable products instead of merely-bulk beans. We can produce corn and soybeans cheaper than any country in the world.

We should grow hogs and chickens here. Whole grains face stiff tariffs in some countries. You add more jobs in the United States through processing. In trade, it's best to keep everybody interdependent. You're less likely to get belligerent with them. It's nice to have balanced trade.

Q: What is AGP's future direction?

Answer: Diversity is critical to the company's future. AS we add new businesses to diversify, our objective-is to become a low-cost producer in that new business. AGP has expanded into the feed, hog and grain businesses.

We're constantly in a see-saw state in the hog business—production is low and processing high or vise versa. Farmers need to expand more -into value-added processing such as Farmland Industries has done and share in the good and bad times with one another.

Hog processors had to get prices to the point where producers stopped shipping to them as supplies outstripped the processing capacity. This resulted in heightened interest in value-added swine processing cooperatives. We congratulate Farmland Industries for setting a base price it paid for hogs. As a farmer-owned company, we need to keep producers in mind.

AGP is basically a processor and wholesaler. It would be wise to continue-to follow that-pattern. We don't envision getting into a business in which we have-little knowledge, such as farm production supplies. Our real success may he judged in another 50 years because we're a youngster in the market.

We're currently doing what our stockholders want, adding value to soybeans and their investment. We have an extremely active membership. We meet with them twice yearly at regional meetings and at the annual meeting to apprise them of finances, the grain situation and technical subject areas ranging from transportation to marketing.

We encourage producers to do business with their local cooperatives. But there is a tendency from farmer-members to put too much pressure on locals for-services at less than cost. If farmers insist on a lot of free services, it erodes the profits flowing back to them. Nothing is free.

This is a time of high consolidation 'in agribusiness with movement toward some form of integrated food product systems. In the future, AGP may be processing-different commodities, perhaps in concert with an allied company. If alignment becomes important in the farm-food sector, AGP will find an alliance.

Some members are already aligning in pork and wheat. We anticipate more shrinking of the number of locals into larger operations, much as has occurred with farms. We also envision more centralization in marketing. The regionals will become grain partners with locals. AGP is positioning-itself with locals seeking an alignment.

We're prepared to step in rather than let a local be sold to a competitor, particularly in the areas surrounding our plants. Part of AGP'S challenge is to help farmers identify with value-added products. We see ourselves as a catalyst in the food-farm sector, working in alliances.

 

AGP expands global presence

Given its strong financial base, AGP is emerging from a period of unprecedented expansion which exemplifies food integration that enhances returns to AGP members. These expansions enabled AGP to effectively compete in the global economy. Shipping soybean meal to 20 countries helped push international exports up 198 percent in fiscal 1998. To fortify market presence, AGP has:

  • Diversified into corn processing in 1996 with a new plant at Hastings, Neb. Capacity was recently expanded by 50 percent.
  • Entered soybean processing operations with new plants at Emmetsburg, Iowa and Hastings, Neb. Created a soybean market at Hastings for more than 36 million bushels of farmer-produced grains per year in central Nebraska.
  • Opened a new vegetable oil refinery in 1998 at Eagle Grove, Iowa, and broke ground for a new refinery in 1999 at Hastings.
  • Added a new methyl ester plant at Sergeant Bluff, Iowa. Soy methyl ester is used in solvents, cleaners, agricultural spray adjuvants, cosmetics and soydiesel. It is exploring new uses, such as explosives.
  • Upgraded existing plants such as at Mason City, Iowa, where storage has been boosted 150 percent.
  • Began manufacturing Amino Plus, a high-bypass soybean meal shown by AGP research to increase milk production by as much as 10 percent in lactating dairy cattle.
  • Purchased interest in Protinal/Proagro, a broiler production, processing and marketing company that also markets livestock feed and seed in Venezuela.
  • Opened AGP Hungary, a premix and feed company owned by AGP and 12 farmer cooperatives in Hungary.

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