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Incubators and specialty farmers: A value-added partnership with room to grow

by Andrea Gibson

December 1998

Business incubators are linked to economic development of all sorts but not often do you hear them touted as a way to save the family farm. However, incubators are just starting to examine how they can help farmers squeeze the most value out of their crops while providing specialty food producers a steady, specific supply of produce.

An agribusiness incubator and local food processing center being developed in central Maryland, in the midst of the food distribution network for the Baltimore-Washington, D.C., region, is the latest and perhaps most ambitious project of the sort. The project has attracted both growers and entrepreneurial food processors, says Phil Gottwals, principal of Agricultural and Community Development, who is acting as project developer.

The project has two goals for working with the farming community. Not only does the incubation center want to offer farmers the opportunity to develop their own value-added specialty food products but also create an outlet for their produce. For every farmer who has identified a market for a product idea, Gottwals says, there are 10 others who would be glad to produce food for someone else's product.

Of course, kitchen incubators, specialty food businesses and growers all face challenges in making this marriage work. Food industry officials agree that the partnership is still in its infancy around the country, but once established, can offer economic growth for farmers and incubator companies.

The farm report

Farmers today are finding it harder to make a living raising traditional crops such as corn, barley and oats, Gottwals says, as commodity prices can't make the payment on the farm anymore. The reasons are complex but wholesale prices have a great deal to do with it. "When I bought my tractor in 1956 it cost $1,800 dollars and corn brought $1.25 a bushel. Today, that same tractor costs $21,000 and corn is selling at $1.85 a bushel, and the price is reduced if the moisture is too high," says Tom Williams, a family farmer in rural Southeast Ohio. As a result, farms are downsizing or consolidating, and the mid-size family farm is disappearing. Some growers are selling their land for development. However, a small group of farmers, particularly in urban areas, are enjoying stable, if not growing, business. "What's driving that is attention to value," Gottwals says.

These growers are raising nontraditional "value-added" crops to increase profitability on their farms. In Maryland, for example, value-added growers are venturing into ethnic vegetables, organically grown foods and specialty fruits, adding a unique twist to what consumers can find at their grocery store, Gottwals says. One farmer is raising 80 different types of eggplant.

There are several advantages for growers to switch to value-added agriculture, says Chuck Wolfe, principal of Claggett Wolfe Associates in Auburn, Calif., who also is working on the central Maryland incubator project. Specialty crop growers can get a higher yield per acre and become self-supporting on a smaller parcel of land. An acre of corn, for example, nets about $225. An acre of ginseng, a popular medicinal crop, however, can net $12,283 – admittedly a high-end example. With 10 acres of ginseng, a grower can make money, Wolfe pointed out. Value-added crops change the image of the business in addition to raising sustainability, he adds, which can make farming more attractive for the next generation.

Not all farmers are interested in making the jump from commodity crops to value-added agriculture, Wolfe acknowledges. The average farmer in Maryland, for example, is about 55 years old and has spent all his life raising traditional crops. The younger or more progressive farmers, including yuppie farmers who raise crops on a part-time basis, tend to be the ones interested in value-added. Education and field tests showing that value-added crops can be viable might persuade some farmers resistant to change, Wolfe suggests.

Cameron Wold, business development specialist and instructor at the University of Colorado at Denver, also notes that there are advantages – higher prices – and disadvantages for farmers growing value-added crops. These producers tend to be much smaller in scale than larger commodity growers, yet face all the traditional risks associated with agriculture, he says. In some regards they are worse off, as larger growers can often obtain crop insurance to offset some of their risks. There's no such program for specialty crops, and specialty means things as ordinary as carrots.

Gottwals also notes that many growers perceive the size of the market as a risk issue. A grower can flood the market for shallots, for example, by bringing on just five or six acres of them. If a grower hasn't developed another outlet for the crop, the income potential dead-ends. Value-added growers are grappling with other issues as well, including what to do with seconds and overproduction. "What do you do with a paw paw when you can't sell it and it has a two-day shelf life?" he asks.

Farmers who can figure out what consumers want seem to be leading the charge.

"A savvy small farm producer will understand that his crop may have several 'markets' – fresh in the farmers' market, upscale groceries, direct market to restaurants, or frozen, 'branded' or value-added as an ingredient in a processed specialty food product," Wold explains.

That's where the incubator comes in.

The kitchen incubator

At the same time more farms consider planting chiles instead of corn, organic berries instead of wheat, kitchen incubators across the country are hatching a growing number of specialty food businesses that need a steady, growing, controlled supply of raw materials.

Packaged Facts, which reports on consumer markets, estimates that gourmet and specialty foods sales will top $47 billion by the year 2000, based on a projected 7 percent annual growth. Why are Americans gobbling up gourmet goods? Packaged Facts cites several trends: aging Americans more affluent and interested in quality; busy, convenience-minded households; ethnic food trends; health concerns; renewed interest in American regional cuisine; and expanding distribution as specialty foods spill into the mass market.

The gourmet and specialty foods produced at the Bonner Business Center in Sandpoint, Idaho, which houses one of the oldest true kitchen incubators, mirror many of the products gaining popularity in the market. Laurie Katana, manager of the center, says the kitchen has 26 active users, who make jams and jellies, enchilada sauce, salad dressings, muffin mix, salsa, fudge and more. The kitchen is certified by the Food and Drug Administration.

The Bonner Business Center provides the same types of general resources as other incubators as well as specialized services unique to the food business. For instance, through their network of resources, the six-year-old incubator helps companies do an initial market assessment and staffs the center with a registered dietitian to provide assistance with recipes, labeling and packaging, FDA guidelines, safety, and sanitation issues. Equipment at the Sandpoint kitchen includes commercial ovens, a steam kettle, a hot water bath and a jar filler. The companies also make liberal use of the networking opportunities an incubator affords. The incubator puts special emphasis on the make-or-break issues of marketing a specialty food business, finding brokers and sales representatives or developing an entire product line.

The incubator provided something that really fit with the area's culture and needs, according to David Sawyer, mayor of Sandpoint, and also has created jobs over time. "It's just offered another solid but simple opportunity for self-employment job creation," Sawyer says. "People who live out here, a lot of them, want to be their own boss." According to Katana, the kitchen has created at least 50 full-time equivalent jobs.

Currently, there is no partnership between local growers and specialty food producers in Sandpoint, Katana says, as the producers use a restaurant supply house called Food Services of America to supply their goods. That doesn't mean there isn't support for the concept in the area--both Katana and Sawyer say they would like to see growers and specialty food producers network.

The incubator has limited resources, however, with a $100,000 annual operating budget and 1.5 employees, and other programs have taken priority, Sawyer says. Katana says such a network would require a partnership between the business incubator, the University of Idaho, the county extension office and other entities.

Mutual benefits

Specialty food producers have everything to gain by using local suppliers. They'll get raw materials in better time, lower their delivery costs and keep on top of what is or will be available, according to Wold. Producers don't have to ask, Where was the food grown? Under what circumstance? By whom? "I think that as the instance of food borne illness increases, the answers to these questions will be increasingly important to the specialty food producer," he says. "Specialty food products will be increasingly known for safety, just as they have become known for quality, freshness, etc."

Jeff Westenbarger, a Meigs County, Ohio, farmer, grows garlic, basil, leeks and spinach for Ginger Spice and Company, a client firm in the ACEnet kitchen incubator in Athens, Ohio. He lists several advantages for the company, which makes a line of pesto, to use his crops. Locally grown produce is fresh and tastes better than other produce, he says. Produce that has been shipped long distances is transported before it gets ripe, and shipping wastes fossil fuels. Specialty foods producers also may not get the personal service from a big distributor that they do from a local grower. Working with an area farmer, producers know the product they're getting, he says.

There are also benefits for Westenbarger in this partnership. Though he doesn't make as much money per pound selling his produce to the company as he would selling to, say, restaurants, he is guaranteed to sell everything he grows. Restaurants will give no guarantee that they will need everything he produces. Right now, as is common among family farmers, Westenbarger has a full-time job and farms only part-time. In the long-run, though, Westenbarger believes when Ginger Spice and Company breaks into the specialty foods market, he'll have a guaranteed income.

Hank Huggins, who also supplies Ginger Spice, believes it's important for specialty food producers to buy locally. He explains that while they can buy Mexican-grown basil at $3 per pound, a dollar less per pound than what Huggins would sell the crop for, the product quality isn't the same. If oil prices rise, the cost of shipping that basil, and hence the price of the plant, also will increase, whereas oil prices won't have much impact on his deliveries to a local food processor.

Both Westenbarger and Huggins expect to enter into a formal contract with Ginger Spice and Company for their produce. This agreement will set produce quotas and the price. For example, if Huggins agrees to produce 1,000 pounds of basil at $4 per pound, he's guaranteed $4,000 from his partnership with the company.

Gottwals also gives an example in which a specialty foods producer and grower benefited from working together. An entrepreneur who made high-end desserts was searching for locally produced berries. Shipped berries degraded in quality, and he needed goods that were mold free. Because the specialty foods processor avoided shipments by using a local grower, he saved on transportation costs. The farmer, on the other hand, made more money selling to the dessert maker than he would selling to a wholesaler.

Incubators working with growers may find they have not just a supplier but a customer. "I think that kitchen incubators might also find that many grower/producers would want to try producing their own products at the incubator," Wold says. Many states do not allow on-farm production, according to Wolfe, so this affords them a way to meet health regulations and diversify their businesses.

Making it happen

There are several ways incubators can help get the relationship between the local grower and the specialty food processor off the ground.

Encourage networking
At a recent trade show, a specialty cheese producer approached Gottwals, looking for a water buffalo dairy to supply him with goods. Gottwals, who knew of such a farm, hooked up the two. An agricultural specialist will be working exclusively on finding and matching growers and processors at the new Maryland food facility. Huggins suggests connecting through a farm bureau or an agricultural extension agency. In small towns, growers and processors can find each other by word of mouth, he says. As for transportation, which is an issue in getting the two parties together, Gottwals says the agencies working on the Maryland facility chose its location – right at the junction of Interstates 95 and 70 – so it could take advantage of existing traffic coming through the area and avoid bearing the cost of establishing its own transportation system.

Develop training for the farmer as well as the food producer
Wold says specialty crop growers need to learn marketing savvy and gain understanding of the distribution channels for specialty food supplying. The marketing of value-added products is much more like consumer product marketing than traditional commodity marketing, he explains. It will position them better to overcome the risks of value-added agriculture. They may also need a business plan, help with financing – the same things other businesses need.

Encourage contracts
A written contract is important for taking the risk out of the relationship, Gottwals says. A contract would spell out quality, production level, price and delivery date. "There's a need on both sides to have some security," he says. Many contracts are written so that the farmer is paid up front and specifies what he will grow. Not only does the specialty food processor get the produce he wants, but the farmer avoids the risk of deciding what to plant, Gottwals says.

Link up with agriculture organizations, grower groups and government agencies
There are many entities entering the value-added agriculture discussion, including the U.S. Department of Agriculture (USDA), American Farmland Trust (which works to stop the loss of farmland), organic farming associations and university sustainable agriculture programs, Wolfe says. "I think it is just beginning, and we will see a substantial increase in this area in the next few years," Wold agrees.

Be sure to incubate
Strong companies that provide a sure outlet for farmers need a good incubation program. Duncan Hilchey, an agricultural development specialist with the Farming Alternatives Program at Cornell University in Ithaca, N.Y., conducted a study that revealed how important it is for incubators to provide incubator clients with more than just a space to bake and bottle. In a random sample of 600 small-scale food processors, he asked what their barriers and limitations had been in the food processing business. Access to equipment and facilities didn't show up as a major issue. "By far marketing and liability insurance and other ordinary business issues is what they're concerned about," Hilchey says. "Kitchens not able to address these needs are going to fail. If they're simply interested in bricks and mortar and want to create a facility that provides equipment and a place for them to process, they will have a limited market, and a lot of people in the small microfood business will be left out."

Find ways to increase incubation outreach
While many argue that the biggest obstacle in a rural environment is money, Sawyer argues that decentralization is the major issue. Marketing and finding new ways for people to link up and use the facility are a challenge in a rural area like Sandpoint, where the population is spread out, there's low media penetration and capital is scarce. Sandpoint is starting to look at how it can take its incubation resources and extend them outside the building, such as with a "virtual incubator" that would offer resources on the Web, including opportunities for entrepreneurs to download and post business plans.

Consider alternatives to the single kitchen
West Virginia's mountains prevent easy travel to a centrally located kitchen, so the state, working with the USDA, set up a network of existing kitchens. The USDA contacts restaurants, community centers, civic associations or others with an underutilized kitchen to ask if the facilities might be made available to small scale processors in the area. Ithaca, N.Y., is ready to try the same approach. In Ithaca's plan, the USDA would broker the relationship with a contractual agreement between the processor and the kitchen, with the processor paying for the service, he said. Hilchey and other industry specialists are hoping to establish a network of small kitchens to accommodate small processors, with help from the statewide small-scale food processing association and Cornell University. A worker-ownership resource center will provide business services. Hilchey believes this model will work in a rural area because it's low-cost and substitutes social networking for financial capital. "This is a fresh way to look at kitchens," he says.

Offer the right equipment
After two years of running the ACEnet kitchen incubator in Athens, Food Ventures found that only 10 percent of the specialty foods clients were value-adding to locally raised produce, according to Russell Chamberlain, kitchen manager. Chamberlain believes the missing piece in the relationship is that many farmers lack equipment to prepare the food for processing. For example, a farmer could freeze and store berries for a specialty foods producer to use in a value-added product. To solve the problem, Food Ventures is embarking on a large-scale renovation of its kitchen, adding a vegetable processing area geared toward mass preparation of raw produce. Chamberlain is convinced this will attract more farmers to working with value-added food processors.

Demonstrate
Chamberlain also believes it's important to bring farmers into the loop by showing them how to process their produce and create specialty food products. Food Ventures is working on a videotape demonstration project it will use as an outreach tool for farmers showing food production in the kitchen using 100 percent locally grown produce.

A kitchen incubator that extends its influence all the way to growers must remain dynamic. Incubator managers must thoroughly understand the needs and nature of the growers, keep up with the changing world of specialty food processing and marketing, be constantly looking at how the community is evolving and determine how else it can be a value-added entity. You can't just set up an incubator and stop there, Sawyer advises. Incubators need to keep thinking about how to sell themselves to potential clients and employees. "We're selling a product just like they're trying to create one."

Keywords: kitchen incubator, networking activities -- client, rural incubator, special-focus incubator

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