NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
April 13, 2000
A number of North Dakota wheat producers in the Williston area have made a commitment to become part of a pilot project involving NorthernStar Company, a subsidiary of a Michigan-based agricultural supply company. Implementation of the project is dependent upon securing grant funding to help with first-year development costs. What the 10 farmers and NorthernStar propose to do is this: form an alliance that provides end users with a consistent supply of superior-quality hard red spring wheat.
By planting cultivars that possess specific processing characteristics, the farmers and Northern Star intend to create an identity-preserved system that controls wheat quality from the field to the factory, explains Randy Mehlhoff, a value-added specialist at North Dakota State University's Williston Research Extension Center.
"With this identity-preserved system, there would be no blending of varieties at the elevator," Mehlhoff stresses. "The goal is to give the end users of hard red spring wheat precisely what they want, in terms of quality specs."
NorthernStar selected the Williston area to launch the pilot project in this region because the climate is drier than other parts of the state and therefore offers less potential for disease in wheat, especially Fusarium head blight (scab). Also, the amount of irrigation in the area was a factor, Mehlhoff says. Last year Northern Star contracted 20,000 acres with Michigan wheat producers.
Potential Buyers, Acreage Potential
Who might be the end users of Great Plains wheat? Firms such as Nabisco Company and General Mills Inc., Mehlhoff says. The NDSU Extension Service has become involved in this project to help test the region's ability to develop this type of production system, which may position NorthernStar as a preferred supplier and help the state's wheat producers take advantage of a value-added opportunity.
"Processors are currently paying a 20- to 30-cent premium for wheat that meets their specs," Mehlhoff says. "By helping NorthernStar discover additional quality traits for the end user, they could become a preferred supplier, and the premium for our producers would grow to reflect the superior quality."
Because this is the pilot project's first year in this region, NorthernStar is contracting production on only about 2,000 acres, all of which will be under irrigation. If the project succeeds, Mehlhoff expects that perhaps as many as 20,000 acres will be under contract next year, and in future years perhaps as many as 50,000 acres. He says that while NorthernStar is initially looking only at irrigated acres, the company will also be considering dryland production depending on the success of the pilot year.
"A critical component of this project is that producers must be willing to form a production alliance with NorthernStar," Mehlhoff stresses. "That means entering into a production contract, and each producer will need to negotiate an individual contract, the terms of which will be based on the average production history (APH) for the past several years."
Who Pays for What?
An innovative feature of this production and marketing alliance is centered on input costs. NorthernStar will pay for variable costs including seed, fertilizer, chemicals, crop insurance and others. As part of this arrangement, NorthernStar works with producers to select which hard red spring wheat cultivars they will plant along with the chemicals they will use. For their part, the farmers must prepare the seedbed, plant the seed, irrigate the crop, co-manage the crop with NorthernStar, and harvest and deliver the grain to a designated facility. In addition, farmers must pay all the expenses related to their responsibilities, such as diesel fuel.
"Because producers have to come up with significantly less money to cover their input costs, they benefit from a cash flow standpoint," Mehlhoff says.
Under the terms of their contract, producers are guaranteed an acreage payment that is the difference between their APH times the contract price minus the input costs covered by NorthernStar, Mehlhoff says. For example, assume a producer contracts with an APH of 60 bushels per acre at a price of $2.75 per bushel for a projected total revenue of $165 per acre. Assume further that input costs covered by NorthernStar total $85 per acre. The producer, then, receives a per-acre payment of $80.
"The producer must decide if the payment is enough to cover costs of seeding, watering and harvesting," Mehlhoff says. "Any premiums received for high yields and crop quality will be shared by NorthernStar and the producer. The alternative is to continue producing and marketing wheat as the producer has done in the past."
Since NorthernStar bases each contract on field-specific data, one producer may contract for 50 bushels an acre while another may contract for 65 bushels an acre, Mehlhoff explains. In the case of a total crop failure due to hail or some other natural phenomenon, NorthernStar will guarantee a per-acre payment based on 75 percent of the APH. In the event of a total crop loss, a producer with an APH of 60 bushels per acre who contracted for $2.75 a bushel would receive $38.75 (60 bushels per acre X 0.75 = 45 bushels per acre X $2.75 = $123.75 - $85 = $38.75).
"This alliance represents a new type of opportunity for producers," Mehlhoff concludes. "Producers won't get rich through a program like this, but they'll be able to make a profit, and do so on a consistent basis."
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Source: Randy Mehlhoff, (701) 774-4315
Editor: Dean Hulse, (701) 231-6136