Tuesday, May 24, 2005

Value Added Ag

I often wake up early to explore the town that I’m staying in. I’ve found that I often stumble upon some interesting things in the early morning hours. Last week I was in Alva, OK (population 5,288) and as I drove around I was impressed with what a neat, clean town it was. There were a number of murals on billboards and walls in the downtown area.

On the north end of the downtown area there were a number of big grain elevators, more than I’ve seen in any town this size. There also was an abandoned flour mill. With all of the wheat that I saw as I had driven into town I could understand why someone had built a flour mill in Alva, but was saddened to see that it was no longer in operation, adding value to the locally produced primary agricultural product.

I later found a very interesting company called Value Added Products (VAC) on the south end of town, in what looked like an abandoned strip mall. I parked my car and walked in the door. Even though there were several cars in the parking lot, I couldn’t find anyone in the plant. I walked thru the entire plant shouting out, “Anyone here!” I was more amazed at the amount of equipment that was in this relatively new plant, than I was that the front door was wide open for visitors such as me to wander around. This is, after all, small town America where most people never lock their cars or houses. I wanted to learn more.

I told of my experience at my talk that day and asked if anyone knew anything about Value Added Products. Several raised their hands and I asked them to pull me aside at a break and explain to me what this company did and how did it happened to be located in Alva.

Mike Payne and Dwight Hughes of the Northwest Technology Center; Gary Bledsoe and Rick Maloney of the Oklahoma Department of Agriculture; Terry Ross of Community National Bank and Consultant Neil C. Doty sat down with me over lunch and explained how VAC (www.vapcoop.com) was started. Terry Ross, “We did a 2 day strategic planning session about six years ago with 35 or 40 area people. We wanted to do something in the value added area and elected a nine person board to push an idea of developing some core competencies in the area. We found that the gluten level of the wheat grown in this area is some of the best for making frozen dough for pizzas.”

Terry Ross, “We developed a plan, raised $20,000 locally and with help from the Department of Ag set out to raise $20 million for this project. We went out to 40 different groups all over the region doing “dog and pony” shows from August 31, 1999 to January 10, 2000. We raised $9 million in equity from 900 different people. They came in increments as low as $5,000 and to as much as $750,000.”

They combined those equity funds with IRB funds and the 3 local banks combining to do a USDA Rural Development 70% guaranteed loan. Payne said, “We’ve got 3 banks in Alva and all three worked together on this project. It was the first time that they have ever worked together. Ever!” They bought an old Wal-Mart anchored strip center for $850,000 and adapted it compared to the $5 million building they had in their original projections.

They are doing $9 million in sales and taking almost 10% to the bottom line. Most importantly they have created 70 new manufacturing jobs, a major employer in a rural community like Alva. They are currently studying doing a “topping facility” which would add the ingredients to the frozen pizza. Doty told me, “The crust is only 1/5 to 1/3 of the total cost of a frozen pizza. We could expand our sales to $25 million if we could start doing that. And, we raise virtually all of the topping components here in Oklahoma.” He didn’t say all toppings. In my 1000 mile journey I didn’t see any pineapples or anchovies.

They explained how they raised $9 million in equity, quite an accomplishment in rural America. “At the time wheat was only $2/bushel compared to $3/bushel now. The farmers had their backs up against the wall and this was a way for them to look at how they might be able to add value to their wheat production,” Maloney said. Payne added, “The other factor that really helped was that the State of Oklahoma offers a 30% tax credit for value added ag investments for farmers. We couldn’t have raised that much money without that tax credit.”

The ag tax credit is one that other states have used to their benefit. It is very similar to one in ND that helped to fund a pasta plant that wasn’t as successful. However, a success like VAP is encouraging other producers in OK to look at similar endeavors. Already there are plans being developed for ethanol, biodiesel and even canola processing. I was surprised to learn that OK has 17,000 acres of canola planted, a crop normally grown in Canada. It works as a wonderful rotation away from a continuous wheat crop, helping to alleviate some grasses out of the wheat.

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