Kevin Paulson seemed dwarfed by the diesel locomotives, half-million bushel storage bin and four-story grain-handling complex, as he explained why the co-op decided to make its most recent capital investment. During the next 12 hours, the $5 million facility at Eastern Farmers Cooperative in Jasper, MN, would load a 110-car unit train with corn headed for a western or southern export terminal.

“If you're not set up to load 100- or 110-car unit trains, and load them fast, you can't get the freight rates it takes to stay competitive out here,” says Paulson, the co-op's grain originator for four counties in southeastern South Dakota and western Minnesota “It's the biggest industry change we've had to deal with in several years,” he says. The company markets 40 million bushels annually through 12 elevators and two unit train loading points.

Just having the loading facility doesn't guarantee a grain supply. Paulson competes with other aggressive local grain buyers, including Cargill, other multinationals and a growing number of ethanol plants. The ethanol facility at nearby Wentworth, SD, gobbles up 15 million bushels of commodity corn annually. Nearly 120 million bushels of corn will be converted to ethanol at 14 Minnesota plants this year.

“The need for efficient competitive operations is essential,” Paulson says. “You're no different than farmers. Working on a margin as slim, or slimmer, as they do doesn't leave room for error. You have to pay attention to everything that affects the market and pass that information along to your customers.”

“Our growers are probably not much different than those in other areas, in that they would rather grow their crop than sell it,” Paulson adds. “The result is that not many have very sophisticated marketing skills, and they really need our help. While we try to offer them any type of edge we can, we have to be very careful that when they agree to sign up for a particular marketing program they understand exactly what is involved.”

Last year, he introduced a group of customers to E-Market's DRC pricing tool and found it to be an easy-to-use and effective marketing aid. “In the past, we used a couple different programs but farmers left the office shaking their heads. We needed something that was basic, low-maintenance, but very effective. DRC filled the bill,” says Paulson. “We had a number of growers last year on DRC who realized a net gain of 20 to 40 cents a bushel on grain sold through the program. This year, even with lower prices, they were about 10 cents ahead of the market by May 15.”

Basically, the DRC pricing tool secures access to the grain for the elevator, while providing an automated selling strategy, based on a grower's ability or desire to take risks. Virtually no day-to-day grower input is required. “We're pretty conservative with our farmers' money because we don't want to risk their LDPs. So we've set up the DRC program to sell only when the market goes above loan prices,” he explains.

Paulson has learned that “getting the grower's bushel” depends on communicating at the most basic levels of marketing savvy, without applying too much pressure. Eastern Farmers Cooperative sponsors several area marketing meetings where attendance can be held to a workable 30 to 40 participants. “We try to connect what's happening globally to their planting and marketing plans. What effects do new South American soybean acres have on South Dakota prices? What will happen if China takes over the Korean corn market?” Last year, they topped off the meeting season with a one-day marketing seminar featuring a nationally recognized corn/soybean market adviser.

Paulson expects to see opportunities in specialty grains, but worries about the logistics. “We seem to have the cart in front of the horse. We know that down the road we'll have to get more involved with identity preservation. But how do you change a system that is based on our ability to move large volumes of grain quickly?”

Two sides of grain merchandising: The specialty side
No unit trains, no megabushel bins, no grain legs. In contrast to the major capital investments landlocked Great Plains grain buyer Kevin Paulson (see page 4) needs to reach distant terminals via rail, northern Illinois dealer Jim Jones faces much simpler logistics.

Jones manages the grain department for Northern FS, the largest specialty grains handler in the FS/GROWMARK system. Northern, headquartered at Sycamore, IL, serves farmers through 14 country locations in DeKalb, Kane and McHenry Counties in northeast Illinois and Walworth County, WI. The grain merchandiser contracts over a million bushels of value-enhanced soybeans and corn. Harvested product is delivered by truck directly from the field or from on-farm storage to barge-loading terminals on the Illinois and Mississippi rivers and to Chicago food processors.

High-protein beans

Jones' department doubled the co-op's contract grain business during the past three years. “We attribute our growth to searching out new markets. We find many growers aren't aware of the opportunities in contracted grains,” he explains.

About 25% of Northern FS contracts are for shipment to Japan, including dark-eyed, high-protein soybeans that go into food paste. Non-GMO corn is sold to South Korea. High-oil and hard-endosperm corn are grown for domestic feed and food markets. New markets include soy products for Caribbean school lunch programs.

Hot new corn

This year will see a major shift to contracted high-energy and low-phytate NutriDense hybrids, Jones adds. “We expect these new types of corn to make up about 40 percent of our total contracts by next year,” he says.

A University of Illinois survey indicated that 7,000 farmers in the state have started producing value-enhanced crops since 1998, bringing the total number of producers to 16,800. Average acreage per farmer has expanded from 200 to 400 acres. Two-thirds reported farm income increased by an average of 12.5%. Crops included high-oil corn, non-GMO corn, white and yellow food-grade corn, waxy corn, high-extractable starch corn, non-GMO soybeans, STS and clear-hilum, food-grade soybeans.

Team approach

A nine-member Northern FS team makes initial customer contact. “We work closely with our herbicide and fertilizer divisions to set up the best agronomic program for the farmer. We often wind up getting new business for the company by providing all the seed and production inputs needed for the contracted crop. While a typical elevator might be working off the income of a straight grain contract, we're working off the margin of a whole package of income-generating services,” he says.

Who makes a good specialty grains grower? Jones' team looks for the smaller, 1,200- to 1,500-acre farmer who is more likely to have the extra time required to follow stiff protocols demanded for IP grains. In addition to a long list of handling procedures, fields must be inspected twice during the season, providing another new income source for the co-op.

High quality is a must. You want the farmer, as well as the end user, to return as a customer, Jones says, and so far, they have a good track record. Recently a cargo of non-GMO corn was loaded on a ship bound for South Korea, when the crew discovered they had received outdated certification forms. “The grain checked out ok, but they held the ship in port until we got them the required paper. It was a good reminder the end users are monitoring the system very closely,” he recalls.

More income

Jones says prospective contract farmers usually have two arguments regarding value-enhanced grains: Roundup Ready beans are less expensive to grow, and tough weeds will be harder to control. But his records show growers make between $20 and $25 more per acre with contracted beans than with lower-cost Roundup Ready beans.

He thinks genetics are the single biggest drawback to value-added products. “Understandably, many seed companies lean toward Roundup Ready technology for their primary variety development. We need some new specialty grain numbers to work with,” Jones comments.

Timing of decision making can also be a problem. “Farmers seem to do their farm plans earlier every year and are eager to order seed almost as soon as the new crop is planted. Unfortunately, many specialty grains end users wait until after the first of the year to announce new contracts. It's something we need to work at overcoming.”

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