Today’s booming ethanol industry is just one segment of a massive farmer-led movement to enhance the value of crops and rebuild the economic vitality of the U.S. heartland over the last decade. In the cattle industry, ranchers now own the fourth-largest meat packer and are earning sizable premiums on branded, high-quality beef. In the soybean industry, 4,400 farmers operate crushing plants in the new soybean regions of South Dakota and western Minnesota, representing a capital investment in excess of $100 million.

While not a panacea for all of rural America’s ills, this ownership trend represents what could be the largest infusion of private dollars in rural development projects in decades. Farmers have committed more than $3 billion in a wide variety of rural-based factories and other value-added ventures since the mid-1990s. That stands in stark contrast to the mass migration of other types of U.S. manufacturing overseas during the same period, including a large number of the country’s cotton mills and soybean crushing capacity. Producers of raw commodities know that without a commitment by private industry to reinvest in all types of grain, meat and fiber processing in this country, the ultimate profitability of U.S. crop and livestock agriculture, as well as the health of ag-dependent communities, remains at risk.

In many communities, farmers and rural entrepreneurs already are filling the gap left by corporations and traditional farmer cooperatives. More than 80,000 producers have invested in processing facilities owned by so-called new generation co-ops or limited liability partnerships in recent years. One measure of popularity is that while fewer than a dozen of these farmer-owned, value-added ventures existed in the early 1980s, today more than 165 are operational and at least another 100 are in some phase of development, according to the Illinois Institute for Rural Affairs at Western Illinois University. Projects range from tortilla plants to producer-owned meat packing co-ops, pasta and flour plants, egg-laying operations and designer hay for the pampered horse market.

Much of this entrepreneurial activity is concentrated in the Upper Midwest and Great Plains states, areas that have suffered chronic low grain prices relative to the Eastern Corn Belt. However, modified business models could be adapted to almost any region of the country. For example, despite initial production problems, a dozen crop producers who invested in a 1,500-cow dairy operation in South Dakota in 1999 typically capture at least $100 more per acre by supplying haylage and corn silage direct to their own dairy rather than producing commodity grain. Raising alfalfa hay in the crop rotation increases net returns per acre by 113%, compared to historic harvest-price corn sales to a local elevator. Beef producers in Nebraska, Colorado and Kansas are also enhancing profits through networks of branded, identity-preserved grower-packer chains such as U.S. Premium Beef or Ridgefield Farms, a fork-tender Hereford beef for white-tablecloth restaurants that will be born and raised in South Dakota.

These new farmer ventures differ significantly from traditional farmer-owned supply and grain cooperatives formed during the 1920s. Instead of a Fortune 500 company with thousands of members, most new generation cooperatives involve several hundred partners or less. Most of these “new generation” ventures are organized as (1) limited liability companies (LLCs), which allows them to be taxed as partnerships, or (2) hybrid co-ops that combine the business structure of a co-op with the flexibility of allowing outside investors (similar to Wyoming’s Processing Cooperative or Minnesota’s 308b-type cooperatives).

Unlike traditional co-ops which are forced to retain profits to rebuild equity and often suffer from chronic capital shortages, most new generation co-ops rely on some investors (such as retired farmers, small business owners and local entrepreneurs) to fully capitalize their businesses. This flexibility means that they can make a point to distribute dividends on a regular basis. Bylaws of some new generation cooperatives require that 70% of the profits be distributed back to members in any given year.

Upstream diversification for commodity agriculture is an important trend because farm price supports alone have not translated into robust growth in rural America (see Chapter One). In contrast, dollars invested in processing and value-added ventures appear to generate more economic activity than direct government transfer payments. For example, a single 40 million-gallon, dry mill ethanol plant not only increases local corn prices 5¢ to 10¢ per bushel, its operation and its secondary effects expand the economic base of the local economy by $110.2 million, generate at least $1.2 million annually in new tax revenue for state and local governments and support the creation of as many as 694 jobs, according to a study by economist John Urbanchuk of LECG.

Profitable farmer-owned enterprises also circulate more dollars back into a local community than would a traditional cooperative or a publicly owned company with stockholders scattered across the country. One southern Minnesota ethanol venture that required $4.3 million in capital investment five years ago has since repaid more than $14 million in investor dividends and employee profit sharing.

Although profit margins fluctuate wildly (see chart on page 12), the current 5-year average after-tax return on investment for a typical dry mill ethanol plant is 23%, according to Iowa State University. That far outdistances the average returns to corn, wheat and soybean producers in the past decade. For comparison, ISU estimates that 70% of the state’s counties averaged returns on farmland of only 2.5% or less in 2002. One community banker in Minnesota who actively finances stock purchases in value-added cooperatives considers the investment in processing plants far less risky and potentially much higher return than lending money to farmers to buy $2,400/acre Such ventures can pose substantial risks, however. Several high profile failures—such as the bankruptcies of Spring Wheat Bakers in North Dakota and the Southwest Iowa Soy [Processing] Cooperative—remind investors of potential pitfalls in manufacturing technology or management. Failures also make farmers much more cautious about future projects.