"It started with Chris Kummer, a Simpson County grain farmer searching for ideas to add value to his grain crops. After examining the industry and the possibilities for local producers, he set his sights on the potential for processing and marketing the soybean oil and meal as food ingredients.
He called on 15 grain farmers in the area whom he knew as progressive, forward-thinking individuals, and pitched the idea of creating an entity that could help them all. Thirteen individuals showed up to this first meeting, all agreed to move forward with the idea, and Kentucky Specialty Grains was born.
Now more than ever, innovation is essential for the welfare of Kentucky agriculture, but just as important is flexibility and the willingness to put the brakes on even the best business plan when it doesn't serve the interests of stakeholders — in KSG's case, local farmers. As KSG has found, sometimes even with a solid concept that has clear competitive advantages and a ready customer base, the timing just isn't right.
A workable idea
Shortly after forming, KSG's first step was a marketing study of the feasibility of creating the product. KSG asked the Kentucky Soybean Promotion Board and the Kentucky Agriculture Development Board to fund it. With positive results from the first study, KSG decided to go a step further and received a USDA value-added grant to begin the work toward making KSG a functioning entity.
"It was partway through the second phase of the feasibility work that the idea changed," said Kummer. "We determined it wasn't going to be practical to do what we wanted to do originally, so we began taking the idea in a new direction."
As the market for high-value food ingredients made from the meal became unrealistic, the next logical approach, in terms of a realistic project with a clear benefit for farmers, was to step down to the next tier — livestock feed.
"You will have less value in making a specialty extruded livestock feed, but more than in a generic, commodity-grade soybean meal," said Kummer. "KSG's vision is to provide a means for farmers to vertically integrate, which will allow them to capture more of the value from their soybeans. Livestock producers will also benefit from a new source of high-quality extruded soybean meal."
KCARD enters
In the winter of 2006, KSG received funding approval from the Ag Development Board to assist with the development of the project. One staff recommendation called for the group to work with the Kentucky Center for Agriculture and Rural Development (KCARD), to help with several aspects of the business development, specifically the equity drive.
After attending meetings with KSG, the KCARD staff suggested a reevaluation of the business structure, looking at the key issues and redeveloping the business plan.
Together, they set up teams to focus on marketing, operations and finance to help them analyze the project's business feasibility.
"KCARD came in late to this project, but without them, I really don't know if we would have made an informed decision," said Kummer. "They were critical in putting all the pieces together, and assembling them into a working business plan."
One example of KCARD's help that Kummer highlighted was the realization of their logistical advantage of their location. The group knew that being located near I-65 would be a positive for transportation, but within a couple of days, KCARD put that advantage into the business model by value per unit of oil and meal.
"KCARD has been the catalyst," Kummer said. "That is just the best way to describe them. We had all the pieces, but we were not able to bring it all together until KCARD began to work with us."
A tough decision
The business plan made the financial potential of the project clear.
It also brought to light several important changes in the industry at the time.
The growth in the biofuels industry had led to increases in the cost of the materials needed for the plant, which increased the needed capital and decreased the return on investment. Plus, Kentucky was deep in one of worst droughts seen in years, which was having a significant impact on the bottom-line of many producers looking to invest in the project.
On the positive side, the market potential for the products was still strong, and KSG had letters of intent from key potential customers interested in purchasing both oil and meal as soon as they were online.
The group realized the backdrop had changed, making the project significantly different than what was originally presented to the Ag Development Board. Though the project showed good feasibility, the KSG Board did not feel it would be possible to raise the necessary farmer investment to build the farmer-owned business they had presented.
"You have to have all the facts in place to make a sound decision," said Kummer. "As we finalized the business model, it became clear that it was going to be difficult to put the project together at this time, and we felt like we had to stay true to the original intent — to help our neighbors."
As a result, the group decided to withdraw their application from the Ag Development Board and put a hold on the project. Yet the KSG group doesn't intend to let the project fall by the wayside.
"We have farmers interested in the project, and we have markets interested in buying our product," Kummer said. "We don't intend to shelf this project, but we do recognize that now is not the best time for area farmers financially, so it is just on hold."
KSG is currently working to reduce the initial capital required and improve projected margins, both of which should make the project more profitable for area farmers. They also continue to work with markets and keep the networking lines open for the future.
"As a group, and with the help of advisors like the KCARD staff, we still intend to put this together for area farmers," said Kummer.
"This project shows feasibility with a reasonable return on investment," further explained Kummer. "The KSG Board just felt that the drought and impending cash flow crunch would make it very difficult to raise the investment capital needed at this time, but we have no plans to walk away from the company or our vision."