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Value-added agriculture: opportunities and challenges facing three Montana businesses. (Agriculture).

Montana farms produce more than $2 billion worth of food and fiber each year. But far too few of those commodities have value added to them before they leave the state.

The food and fiber sector represented 5 percent of Montana's Gross State Product in 1999, dominated by agricultural production--rather than food processing or manufacturing. For example: In 1997, the value of Montana's farm production was just over $2 billion, while the value of food manufactured in the state was $466 million.

In fact, Montana's food manufacturing sector, whether measured by total employment or value of production, is 49th in the United States based on 1997 data. Only Wyoming is ranked lower.

The major constraints to increasing Montana's food processing and manufacturing are its relatively low population density, as well as the geographical distance to populated markets. In general, regions with high population densities have commensurately more food and fiber processing activity. In addition, Montana's major agricultural products of feeder cattle and wheat are primary commodities requiring further production or processing before they can be used as consumer products.

But there are value-added success stories in Montana, A few firms have found ways to add value to farm products and compete in regional, national, and even global marketplaces. Their success came because they developed a strategic competitive advantage in one of three areas:

(1) Low Cost--producing a product at the lowest cost relative to competitors.

(2) Differentiation--producing a product that is truly different from other products and serving a broad base of customers.

(3) Niche--producing a product for a small market that is under-served.

Of course, even when a company adopts one of the proven strategies, there is no guarantee of success. Strong entrepreneurial skills and the ability to limit potential competitors are also important factors for business success. At the same time, while low cost may seem like the key to success, it is possible to have strengths in other areas and still be successful. Indeed, many value-added agricultural firms in Montana are not low-cost producers.

Let's look at three in-state firms that successfully add value to agricultural commodities.

Wheat Montana Farms & Bakery

Wheat Montana Farms & Bakery evolved from a traditional farm into a vertically integrated bakery and delicatessen. The transformation, though, was incremental.

Until the late 1980s, Dean (the son) and Dale (father) Folkvord were traditional, Montana dryland wheat producers. In 1988, the Folkvords entered the identity-preserved specialty wheat market, producing high-quality hard red spring wheat and a high-quality hard white spring wheat, both with superior baking qualities.

The Folkvords wanted to market these wheat products directly to milling and baking companies. Although initial sales were slow, the niche marketing of specialty wheats sparked their interest in the baking industry. In 1989, they purchased a small bakery in Bozeman (about 30 miles east of their farm) and became bakers. In 1993, they closed the Bozeman bakery and built a wheat cleaning, bakery, and deli facility about five miles south of their farm--adjacent to the Interstate 90 and U.S. Highway 287 interchange.

Wheat Montana Farms & Bakery produces about 70 percent of the wheat used by their bakery. Additional wheat is obtained from contracts with local producers. Once harvested, some wheat is shipped to the cleaning and packaging facility for delivery to more than 130 specialty wheat users. Some wheat is shipped to a commercial flour milling facility. In 1998, Wheat Montana installed a small flour mill which produces whole wheat flour. Flour is packaged for bakeries and retail distribution, or is baked into bread, bagels, buns, and rolls and distributed in a five-state area. Average daily bread production exceeds 10,000 loaves per day; the operation employs 80 full-time workers.

How They Succeed

(1) Niche marketing of specialty flour and bread products. Wheat Montana Farms & Bakery's core customer base is southwestern Montana. Dramatic increases in the region's population base, along with increased per-capita incomes, fueled local demand for specialty flour and bread products. In addition, increased tourism made hotels and restaurants key markets for their products. Most importantly, Dean Folkvord's drive, ambition, and entrepreneurial skill solidified Wheat Montana's success.

(2) Brand-name recognition and promotion.

The bread and flour markets are extremely competitive, with many products considered homogenous by most consumers. Wheat Montana Farms & Bakery built brand-name recognition and attracted consumers with a "Buy Local" and "No Additives" marketing campaign.

(3) Low-cost sourcing of wheat and wheat flour.

Because of on-farm production of wheat and contracts with local producers, Wheat Montana has a competitive advantage over most bakeries in acquiring high-quality wheat at relatively low costs. However, because less than 5 percent of the cost of bread consists of the cost of wheat, this competitive advantage is small relative to other cost factors.

Limitations and Constraints to Future Success

(1) Reaching economies of scale and outgrowing a niche market.

Even with its growth in recent years, Wheat Montana remains a relatively small-sized bakery. As a result, unit costs of production remain relatively high. To expand production and take advantage of economies of scale, Wheat Montana must move beyond its niche specialty flour and bread markets and compete in the low-margin white bread market with larger bakeries. As such, the ability to expand and reap economies of scale in their operation means outgrowing the specialty market.

(2) Human resource issues.

Acquiring, training, and retaining employees is an enormous undertaking. Because of its small size, Wheat Montana has not hired professional management personnel. More importantly, it is difficult to attract and retain skilled employees in small rural communities.

Cream of the West

Cream of the West, located in Billings, was established in the 1920s as a producer of hot breakfast cereals. Because of combination of financial difficulties and interpersonal relationships, the company changed hands on at least four occasions. In 1987, it was purchased by Bud Leuthold, who also has a commercial wheat farm and cattle ranching operation.

Bud has a business degree from The University of Montana and an honorary doctorate from Montana State University. Throughout his career, Bud has been active in producer organizations, serving as president of the Montana Grain Growers Association and the National Association of Wheat Growers, and as chairman of the Agricultural Council of America. Through these leadership roles, he became convinced that wheat producers needed to add value to the grain they produced.

Cream of the West primarily produces whole grain hot breakfast cereals. The mainstay product has been Roasted Wheat cereal. The cereal is made by roasting high-protein, hard red Montana spring wheat purchased and milled in Billings. Cream of the West also offers Roasted 7-Grain cereal that consists of seven Montana grown grains: high protein hard red spring wheat, soft red wheat, soft white wheat, oats, barley, rye, triticale, and extra wheat bran. Roasted 7-Grain cereal represents 35 percent of the company's sales.

Cream of the West Roasted Ranch Oats is made using plump whole oats and competes with other oatmeal-based cereals. Several other products account for the remaining 20 percent of sales. For example, Cream of the West recently developed a new product--Montana Crunch. This hearty "granola" snack can be used as a trail mix or as cold cereal. Montana Crunch contains rolled oats, barley flakes, dried cranberries, flaked coconut, slivered almonds, and nonfat sweetened condensed milk.

For many years, Cream of the West has marketed its products in unique packaging. The company employed an artist to design packaging that shows a rugged Montana cowboy. Sales volumes have fluctuated recently. A few years ago, annual sales of $500,000 were typical. However, in recent years, retail, wholesale, and distribution consolidation has limited market access. Sales have dropped to about $350,000 per year. In addition, responsibility for unsold goods is increasingly being transferred to food manufacturers.

How They Succeed

(1) Niche marketing.

Cream of the West breakfast cereals appeal to a narrow group of consumers. In general, their success has been based on larger companies ignoring this market.

Limitations and Constraints to Future Success

(1) Consolidation in the food marketing sector.

Retail food stores continue to consolidate in number while also growing in size. As a result, food distributors have also consolidated to provide large-volume sales to retailers. Thus, small food manufacturers like Cream of the West are left with fewer marketing alternatives.

(2) Reductions in the number of independent food distributors in Montana.

As a result of consolidation in the retail food industry, few independent food distributors remain in Montana. Cream of the West used to market its products through a food distributor in Billings. Now most of their product is now distributed through Salt Lake City, where market access is limited.

Leachman Cattle Company

The Leachman Cattle Company, located in Billings, supplies genetics to commercial cow/calf producers. The Leachman family has been developing its business of selling breeder cattle, semen, and embryos since the late 1940s. Although the company is the largest beef seed-stock producer in the United States, it supplies less than 1 percent of that stock.

The Leachman cattle herd is comprised of 2,000 breeding age females. These females are all used for seed-stock production. In addition to the base herd, Leachman also has 75 cooperator (multiplier) herds. These herds cumulatively represent another 13,000 cows. Cooperators utilize Leachman genetics and raise seed-stock for the company.

Leachman's primary genetic product is embodied in the 2,500 bulls sold each year. In 1999, bull sales accounted for nearly one-half of Leachman Cattle Company revenues. The company's bull customer base is primarily located in the High Plains region of the United States. However, each year the company sells bulls to ranchers in more than 40 states, with one-third of all customers purchasing bulls "sight unseen"--a strong indicator of customer confidence in Leachman's products and integrity.

Leachman Cattle Company also sells genetics in the form of frozen semen. Semen is either marketed directly to cow/calf producers or through distributors. Leachman also markets semen internationally through its franchise systems.

The third major product for Leachman Cattle Company is frozen embryos--which are much easier and cheaper to transport than live animals, making embryos preferable to many international customers. Leachman exports embryos to Australia, Brazil, Bolivia, the United Kingdom, and Venezuela.

International markets for beef seed-stock represent enormous growth potential because of low productivity and large markets. In 1992, Leachman Cattle Company began exploring possibilities for marketing products, services, and genetic systems to ranchers in South America. In 1994, the company formed its first franchise system in Brazil.

Operating in international beef markets poses significant risks for any company. The process of understanding the best genetics by region requires intimate knowledge of current genetics, consumer demands, and rancher needs. In addition, transportation, exchange rates, and political instability combine to make such ventures precarious.

How They Succeed

(1) Quality control and brand-name recognition.

With 40 years of experience, Leachman has been able to build brand-name recognition for their genetics in an industry consisting of numerous but smaller competitors. Their genetic expertise and product development provides significant entry-barriers to would-be competitors.

(2) Risk-sharing and asset leveraging through cooperator and franchise agreements.

Cooperator herd arrangements allow Leachman to leverage their assets and develop high-quality bulls for domestic (and some international) sales. In addition, Leachman's international franchise system provides an avenue for Leachman to develop market and business opportunities in foreign countries. Franchise arrangements differ among countries based on each region's needs and infrastructure, and are developed by identifying qualified local breeders in foreign countries. Leachman controls all mating and selection decisions, and provides the brand name, logos, and national advertising. Franchisees provide land, cattle, and day-to-day management. Although on a much smaller scale, the integration of Leachman's genetics and technological expertise into franchise/cooperator agreements are similar to the trends in pork and poultry production where processors control production schedules and genetics of the animals they process through production contracts with growers.

Limitations and Constraints to Future Success

(1) Changing structure of the beef industry.

Although Leachman supplies genetics for cow/calf producers, their core business is still influenced by trends in beef consumption and industry-wide forces. Thus, increasing demands for convenient, safe, and consistently high-quality beef products represent a significant challenge to seed-stock producers.

Lessons Learned ton the Future of Montana's Value-Added Agriculture

Business success often hinges on the development and implementation of one of three competitive strategies: low-cost production, differentiation, or niche markets. Strong entrepreneurial skills and the ability to block would-be competitors are also important factors. Because many large food manufacturing and processing companies are low-cost producers, competing in a cost-only environment will prove futile for most firms entering this industry.

Wheat Montana Farms & Bakery competes in the highly competitive bread and flour industry where it is not a low-cost producer. Their success relies on strong entrepreneurial skills and product differentiation. Cream of the West serves a niche market which is generally ignored by traditional cereal manufacturers. Leachman Cattle Company has developed superior cattle genetics and technical expertise, which pose significant entry barriers to potential competitors.

These firms are successful not because they are low-cost producers in their market segment. Rather, each has pursued other avenues to success.

Gary Brester is a professor in the Department of Agricultural Economics and Economics at Montana State University-Bozeman.

Kevin Mcnew is an associate professor in the department.
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Article Details
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Title Annotation:Leachman Cattle Co., Cream of the West, Montana Farms & Bakery
Author:Brester, Gary; McNew, Kevin
Publication:Montana Business Quarterly
Article Type:Brief Article
Geographic Code:1U8MT
Date:Jun 22, 2002
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