The Economic Feasibility of Forming A California Wheat Cooperative Prepared by Jay E. Noel1 James J. Ahern David J. Schaffner Jill Johnson Kristina Muelrath Kyle Schroeder September 2002 1 Noel, Ahern, and Schaffner are Professors in the Agribusiness Department at California Polytechnic State University, San Luis Obispo, CA. Johnson and Muelrath are past graduate students in the Agribusiness Department and Schroeder is a current Master of Business Administration student in the College of Business at California Polytechnic State University. The authors would like to thank Ms. Bonnie Fernandez, Executive Director, California Wheat Commission, Woodland, CA. for her time and information contributions to the study. Funding was provided by matching grants from the California State University Agricultural Research Initiative and the Rural Business Cooperative Service, USDA via the Center for Cooperatives, University of California. The Economic Feasibility of Forming a California Wheat Growers’ Cooperative Table of Contents I. INTRODUCTION ...................................................................................................1 Market and Industry Overview ................................................................................2 The Cooperative as a Business Entity .....................................................................6 Grain Cooperative Performance ..............................................................................9 Grain Cooperatives Adding Value.........................................................................11 The 21st Century Alliance ..........................................................................12 Dakota Growers’ Pasta Cooperative..........................................................13 Spring Wheat Bakers .................................................................................13 Value Added Products-Oklahoma .............................................................14 American White Wheat Producers Association.........................................15 IOF Versus Cooperatives as a Business Form.......................................................16 IOF Advantages .........................................................................................16 IOF Disadvantages.....................................................................................16 Advantage to Cooperatives........................................................................17 Disadvantage to Cooperatives....................................................................17 II. WHEAT GROWER INTEREST in a COOPERATIVE .......................................18 Sampling Procedures .............................................................................................18 Grower Survey Results ..........................................................................................20 First Handlers and Grain Buyers................................................................22 Prices Received..........................................................................................22 Secondary Uses..........................................................................................23 Current Coop/Group Involvement .............................................................23 Cooperative Services Desired....................................................................24 Statistical Limitation of Non-Response.....................................................27 Insights from the Grower Survey...........................................................................29 III. ECONOMIC FEASIBILITY of WHEAT MARKETING ....................................31 Wheat Merchandizing............................................................................................31 Price Data for Margins...............................................................................32 Margin Evaluations....................................................................................35 Export Margins ..........................................................................................40 Storage Costs and Capacity ...................................................................................43 Transportation Costs ..............................................................................................49 Transportation Contribution Margin Analysis...........................................51 Economic Feasibility of Wheat Merchandising Markets.......................................57 IV. MILLING COSTS and FLOUR MILL INVESTMENT.......................................60 California Flour Milling.........................................................................................60 Industry Structure ..................................................................................................60 i Structure in California............................................................................................61 Flour Milling Capacities In California...................................................................61 Sources of Wheat for California Flour Mills .........................................................62 Toll Milling Research ............................................................................................64 Extra Costs Associated with Preserving Identity...................................................66 Entry into Flour Milling.........................................................................................68 New Plant Implementation Option: A Model Plant Proforma .................68 V. MAJOR VALUE ADDED PROCESSING ARENAS..........................................70 US Pasta Industry...................................................................................................70 The US Tortilla Sector ..........................................................................................72 Frozen Dough Manufacture ...................................................................................75 Basis For Revenue Calculations ................................................................81 Issue of Market Access.............................................................................. 93 VI. MARKET NICHE OPPORTUNITIES and FOOD PROCESSOR FLOUR.........95 USE Wheat Containing Processed Food Products .........................................................95 Product Opportunity Areas ........................................................................97 Food Processor Survey Results..................................................................97 Data Problems - Survey Research in the Communications Age................99 VII. SUMMARY and CONCLUSIONS ....................................................................101 Grower Interest Survey........................................................................................101 Wheat Merchandizing Opportunities...................................................................102 Manufacturing Opportunities...............................................................................103 Flour Milling and Market Niche’ Products..........................................................104 References Cited ..................................................................................................106 List of Tables Table 1. Grain Cooperative Performance Measures, 1999 –2000....................................10 Table 2. Cal Poly-CWC Grower Sampling Stratification of First Mailing ......................19 (Summer 2001) Table 3. Cal Poly-CWC Grower Sampling Stratification of Second Mailing..................20 (Fall 2001) ii Table 4. Number of Growers Reporting Use of Government Price Support....................23 in the Last FiveYears Table 5. Frequency of Grower Use in the Last Two Years of Marketing and .................24 Pricing Method (n=33) Table 6. Average of Grower Rankings, and Frequency Each Service Was .....................25 Chosen by Growers Table 7. California Wheat Grower Opinions of the Overall Wheat Market.....................26 Table 8. California Wheat Grower Responses to Cooperative Business..........................27 Table 9. Percent of California Farm Wheat Marketed by Month.....................................31 Table 10. Assembly-Marketing Margins for Los Angeles Flourmills..............................37 Table 11. Assembly-Marketing Margins Chino Valley Feed Wheat Market...................39 Table 12. California Wheat Export 1992-02 by Country of Destination..........................41 Table 13. California Hard Red Wheat Exports 1992-3 to 2001-02 ..................................41 Table 14. Export Sales of Desert Durum® Wheat Produced in California and Arizona for Marketing Years of 1998-99 to December 11, 2001.................................42 Table 15. Gulf Export Market Assembly-Margins for California-Arizona......................43 Durum Wheat (Price/Cwt) Table 16. Western United States Storage Capacity and Grain-Soybean Stocks ............... 44 Table 17. On-Farm and Off-Farm Storage (tons) Selected Months .................................45 Table 18. California Grain Elevators Location, Capacity, and Transport Service ...........45 Table 19. California Wheat First Handler Responses on Storage ....................................46 Table 20. Estimated Monthly Storage Costs for California Wheat Short-term................47 Storage Costs Table 21. Storage Construction Cost Per Ton of Capacity ..............................................48 Table 22. Investment Cost per Ton For Wheat Storage Construction..............................49