Value-Added Agriculture and Rural Development

1. Value-Added Agriculture and Rural Development Prof. Maureen Kilkenny Dept. of Economics, Iowa State University for the Council of State Governments 57th Annual Midwestern Legislative Conference August 20, 2002 Fargo, North Dakota

2. outline 1. what we SAY are rural development problems 2. what we DO 3. why value-added agriculture? 4. critique 5. ideas for the future

3. rural housing & infrastructurenon-farm jobs & income reward land stewardship priority issues:

4. USA’s Priority:rural poor and non-farm enterpriseover farmers, consumers, or environmentalists

5. What we Do: only 13% of USDA’s budget is directed to rural poor and rural enterprise:

6. Federal Rural Development agency spending, however, matches priorities:

7. USDA-RD budget: mostly loan guarantees so that private lenders are willing to extend credit:

8. 1. Business and Industry Direct Loans The Business and Industry (B&I) Direct Loan Program provides loans to public entities and private parties who cannot obtain credit from other sources. This type of assistance is available in rural areas (this includes all areas other than cities or unincorporated areas of more than 50,000 people and their immediately adjacent urban or urbanizing areas). Eligible applicants include any legally organized entity, private or public. The maximum aggregate B&I Direct Loan amount to any one borrower is $10 million. 2 Business and Industry Guaranteed Loans The Business and Industry (B&I) Guaranteed Loan Program provides guarantees up to 90 percent of a loan made by a commercial lender to a rural enterprise for working capital, machinery and equipment, buildings and real estate, and certain types of debt refinancing. Assistance under the B&I Guaranteed Loan Program is available to virtually any legally organized entity. The maximum aggregate B&I Guaranteed Loan(s) amount that can be offered to any one borrower under this program is $25 million.

9. What states DO:

10. Midwestern States do more

11. More than a dozen states’ policies are explicitly for rural development

12. ND Ethanol Promotion ND Financial Assistance OR Marketing HI Product Promotion AK Revolving Loan Fund

13. State policies measures tactics goals prices stimulate demand farm income marketing labeling new product development profits reduce costs R&D/extension biz & tech assistance rural employment # jobs increase investment subsidize credit

14. At least 37 States offer financial assistance midwestern states offer more than one program programs not exclusive to value-added agriculture

15. Why target Value-Added Agriculture? What is value-added Where? Who does it? farmers, ranchers farms, ranches BY agriculture? TO agriculture? farmers coops small businesses large factories on-farm small towns urban areas

16. Livestock: traditional value-added BY agriculture

17. Wet Corn Milling: traditional value-added TO agriculture

18. Value added TO agriculture = 80%

19. Farms closer to factories adding value TO agriculture enjoy higher farm-level prices so farmers always want more plants

20. But the sustainable numbers, sizes and locations of processing plants are determined by market forces new mills open near markets e.g.: 10/8/98: Cargill expands capacity at San Bernardino, CA old mills close outdated/costly technology inefficient scale high-cost location industry over-capacity

21. Ultimately, almost EVERY sector adds value to agriculture non-food  non-food  direct link (1) 1sector (2) between 2 sectors (3) between non-food  non-food  non-food  non-food  non-food 

22. Critique of Value-Added Ag Policies: Fair? • subsidy only for a few sectors Unbalanced? • rural employment not rising Effective? • farm prices still low Unnoticed? • ‘State’ label adds little value -VA-Ag isurban -rural multipliers are near zero Unanticipated Side Effects? • grant programs undermine self-sufficiency

23. VA-Ag employment is urban. Are VA-ag capital owners also urban?

24. Total additional rural jobs (‘multipliers’) are low because there’s excess capacity in rural service sectors.

25. Why haven’t programs been more successful at promoting rural development? • rural credit isn’t the problem, • the problem is low demand for food and kindred products • food and kindred processing is urban even if it is materials-oriented • 1 new rural job = 1 new rural job because of rural surplus capacity

26. Ideas for the future: • be inclusive, not exclusive • value is added to agriculture by all kinds of businesses • rural businesses are small • support for rural entertainment and service sector businesses also raises rural quality-of-life and increases place competitiveness • help with critical needs • business planning & marketing skills are competencies that inexperienced entrepreneurs lack • use small, lump sum grants • help defray sunk costs of market research, product development • no sector restrictions • ONE-TIME ONLY

27. end of presentation Thank You for your time and attention Please let me know your research needs

29. Traditional vs modern VA-Ag: 26,401 establishments1.4 million employed33 creamery butter61 wet corn mills 65 cereal mills105 soy mills 393 flour mills 576 milk/dairies4,000 meat packers 10,000 bakeries 247 tortilla mfgs 63,000 nursing & care 67,000 landscaping 192,000 restaurants210,000 fast-food 400,000 estabs 10 million employed

30. Example:E-commerce business directory adds value to the industries that add value to agriculture

31. example 2: alternative agriculture organic agriculture direct marketing buy local ** but need only 5 average-size U.S. counties to grow all the vegetables currently grown in the U.S. today 3.7mil acres = 6,000 mi^2 avg co.=1,150 mi^2

32. Banks are the most important source (63%) of short-term credit : NSSBF data:

33. Loans are denied by banks when the business is unlikely to be viable:

34. Small loans are harder to obtain: