Cover Story: New Farming Enterprises: A history of hard struggles, some successes and occasional complete disasters
Monday, October 6, 2008
by MARY BAXTER & DON STONEMAN
This past summer, Pigeon King International, a Waterloo-based pigeon breeding business that was the subject of a special investigative report in Better Farming's December 2007 issue, closed its doors abruptly, casting hundreds of farmers on both sides of the border into financial turmoil. So how do you avoid the pitfalls so often associated with new agricultural endeavours or exotic products?
Though the craze to raise flightless birds is long over, a handful of ostrich breeders, such as Don and Deborah Simmonds of Rockwood, east of Guelph, remain in business on a large scale, serving well-heeled customers who want to put a new kind of meat on their table.
In Lambton County, dairy goat farmer Anthony Sjaarda is going full speed ahead producing for markets he expects will continue to grow for the next five years.
Livestock and cash crop farmer Dan Scheele, near Ingersoll, is convinced hemp has a solid future as a commercial crop and so waits patiently for a company to honour the contracts he signed to buy up a hemp crop gathering dust in his barns.
For former pigeon breeders like Keith Ewoldt of Paulina, Iowa, waiting isn't an option. Strewn across Ontario, Western Canada and into the United States, these breeders are facing financial pressures following the June demise of Pigeon King International (PKI). Their debts are mounting and the scheme that had promised to be the salvation of their family farms may end up being their downfall.
The history of new farming enterprises is one of apparent successes, hard struggles and the occasional complete disaster. Yet not all new ventures are destined for disaster. So how do you tell the difference before jumping in?
Ask the right questions of the right people, advise the experts. But what are the right questions and who are the right people? How do you know if a market really has potential before jumping in? In agriculture, how do you conduct "due diligence" – the phrase favoured by Ontario's Better Business Bureau, the Waterloo Regional Police Service's fraud squad and countless other authorities contacted over the past year in connection with PKI? How do you put into practice the old adage "if it sounds too good to be true, it probably is?"
Out of pocket $200,000
Iowa farmer Keith Ewoldt thought that he had asked all the right questions when he invested in Pigeon King breeding stock last fall.
For years, Ewoldt had dreamed of quitting his day job to work full-time on the farm. Hearing about PKI both through promotional material and word of mouth in his Iowa community, he became intrigued. He and his wife, Lori, drove to Boone, Iowa, and were impressed by an operation run by company sales consultant Mark Nemechek.
Ewoldt remembers Nemechek assuring him that PKI's owner, Arlan Galbraith, had "deep pockets." Ewoldt talked to Nemechek's brother, who was also involved, and to other local players. He read testimonials in the company's monthly newsletter. Everybody claimed the money was "always there," he says.
In the fall of 2007, he learned that his state attorney general's office was looking into the company's activities. Ewoldt pressed on anyway, having already invested $50,000 to acquire 480 pairs of birds and another $120,000 into building a barn. Breeding stock arrived late and got sick in cold weather. On June 17, just weeks ahead of Ewoldt's first shipment, the company's owner, Arlan Galbraith, announced that he was shutting PKI's doors and declaring bankruptcy.
Ewoldt has tried to figure out what to do with the pigeons, which PKI's bankruptcy trustee, BDO Dunwoody, declared valueless. Income from renting the barn wouldn't come close to covering the loan financing its construction, he says, and he is $200,000 out of pocket.
Ewoldt says that, after learning of the bankruptcy, his wife Lori was so devastated she couldn't eat for three days.
If "due diligence" meant following the payment trail in the PKI case, the exercise only reinforced the business's promise. Owner Galbraith boasted about always paying his bills and being debt-free, denying that the breeding contracts he signed – some intended to last 10 years – were a form of liability. "That's a production contract. It's not a mortgage or a bank loan," he said in a May interview.
If "due diligence" means checking with authorities, officials' responses to PKI don't mean much either. By April 2007, the Better Business Bureau, awash in enquiries, published a report about the company. That report only affirmed that the bureau had not received any complaints. Before PKI crashed in June, the Waterloo Regional Police Service acknowledged receiving some third-party complaints, but said they were unable to act because the complaints weren't from investors. As for the Competition Bureau of Canada, spokesperson Brent Homan says that legislation does not give the bureau power to investigate that type of scheme.
As a result of the collapse, the Ewoldts became unsecured creditors of a company they were convinced was their key to financial success.
By late July, claims against the company totalled nearly $40 million, an amount that could climb as further details are known. PKI's bedraggled list of assets included some office equipment, a couple of pickup trucks and less than $15,000 in bank accounts.
A former PKI employee, Bill Top, says that he registered his concerns about the business in 2006 with the Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA). The ministry claimed as recently as July 2008 that it had not received any complaints – from investors or otherwise – about PKI and says that it is anyway not authorized to investigate complaints about business practices.
In the United States, legislation empowers authorities in many jurisdictions to act on concerns about a business and communicate their actions to the public. By May 2008, Iowa, South Dakota, Washington and Maryland had all taken steps to curtail Pigeon King business within their borders.
In December, the Iowa attorney general's office alleged that the birds were props in a Ponzi scheme, whereby new investors are recruited to pay off commitments to earlier investors. Pigeon King was ordered to take on no new contracts. Making false statements or "omissions of fact" were listed among the reasons why Maryland, the last state to take action, issued a cease and desist order against the company.
Crazy for ratites
For farmers in Ontario, where authorities appear to lack legislative support to pursue concerns about a business's practices until things go really wrong, what other steps might be available to assess the risk of a new agricultural venture?
The key to assessing the level of risk lies in a good hard look at both the product and the market, asserts Carl Fletcher, OMAFRA's business planning lead (see related story on page 19.)
With no established market for its birds other than new breeding contracts, and with sales banned from four U.S. states in the months before its collapse, PKI was certainly a high-risk venture in anybody's books.
And in Ontario, high-risk agricultural ventures, defined by new markets and new products, often have a tendency to go wildly awry.
Before pigeons, there were ostriches and emus. In Canada, the craze for all things ratite started in the 1980s in the West, according to a 1999 federal report on ostrich and emu production. Production in the United States was already well established.
Initially, market demand revolved around building breeding stock. Former emu breeder Bernie Gauthier, who hobby farms near Stevensville, recalls emu breeding stock costing between $10,000 and $12,000 a pair when the market first emerged in the 1990s. Now, he says, emus are mostly just expensive pets and "free to a good home."
Gauthier, a one-time secretary-treasurer of the Ontario Ratite Association, says that the association tried to help producers make the transition to meat and oil markets from breeding by researching opportunities. Meanwhile, the Canadian Emu Co-operative Inc. focused on marketing different emu products. At one point, the venture had 300-400 members, he recalls. But it failed, taking "a lot of people for a lot of money." Its failure coincided with the introduction of more stringent, and expensive, government regulations concerning the processing of exotic meats, pushing many out of business, Gauthier says.
He draws parallels between what happened in the emu market and the collapse of PKI and he's not the first to do so. Ernie Hardeman, an Oxford MPP and former provincial agriculture minister, has gone on record as noting the similarities in the evolution of the ratite industry and the collapse of Pigeon King International.
Gauthier agrees that there are some similarities. Both business ventures suddenly failed and those involved were so enthusiastic that they failed to heed warning signals. Yet Gauthier points to an essential difference between the two: the emu industry had not been driven by a single company contracting breeding the way PKI had driven pigeon production.
Speculative bubble
Indeed, emus and ostriches may have more in common with tulips and Shetland ponies, suggest a pair of University of California Davis economists. In a 2005 report, Tina Saitone and Richard Sexton identified all of these agricultural products as subjects of an "unsustainable speculative bubble" at one time or another.
"At no time throughout the evolution of these industries was the underlying market demand sufficiently broad to warrant such investor interest or rampant speculation without the assistance of promotion to expand the base of potential investors," the economists wrote.
"Telltale signs ... prominent throughout the history of speculative bubbles in agriculture include a focus on attracting additional producers, limited information on investment, control of available information by industry representatives, investment appeals directed most to small-scale investors, and commonly held misconceptions perpetuating unreasonable prices."
They note that "advertising in the development stages of any industry is necessary to distribute information about product attributes. Yet marketing aimed at attracting additional producers, rather than promoting the product actually being brought to market for consumption, creates a substantially different effect."
Those observations on past agricultural speculative bubbles were a prelude to a scathing critique of the American alpaca industry. "Virtually the only information available to potential alpaca investors," the study says, "is provided by the industry through promotional publications, farm and ranch web sites, industry seminars and colloquiums, and television advertisements."
Nevertheless, despite the study's dire warnings, interest in alpacas and llamas persists. Statistics Canada's census of agriculture has recorded a sharp growth in alpaca and llama numbers and farms in Ontario, says Brian Tapscott, alternative livestock specialist with the OMAFRA (see Figure 3). Tapscott tells callers asking about alpacas to "test the waters and make sure there is a market before you make a hefty investment"
in breeding stock. He says prices for fleece range from $10 to $45 a pound and there are small mills in Ontario which spin the fleece into yarn.
Some Ontario breeders are asking as much as $50,000-$100,000 for a male with a top pedigree. "I'm not sure how many of those they will sell," Tapscott observes skeptically. The Canadian Livestock Records Corporation shows 20,341 alpacas were registered between 1989 and Dec. 31 of last year. In 2007, there were 1,965 alpacas registered and only 180 llamas.
James Cole of Peterborough, past president of Alpaca Ontario, is one of the larger breeders in the province with as many as 100 animals on 100 acres.
In August, he said he had 30 animals after making major sales, including selling to Britain.
He argues that the University of California study is out of date and that prices have tailed off gradually, rather than in spectacular fashion. He agrees that the biggest market is still in the breeding stock, but notes that breeding stock prices have been coming down. An average registered female costs $5,000, a herd sire as little as $500 to $1,000.
Moreover, nearly every ranch has a store where alpaca products are sold, he adds, emphasizing that alpaca association members are serious breeders averaging 20 animals per ranch. He looks to Australia as a model where imports now supplement locally produced alpaca products and where most Australian alpaca fleece is made into products in China.
Nevertheless, he admits the alpaca industry right now in Ontario is "not a huge money generator," adding:
"No alpaca rancher … would tell you to quit your day job."
Early disappointments
Trouble with contracts was a defining feature of the production of hemp, another early attempt at establishing a new crop in Ontario's southwest.
Dan Scheele of Ingersoll began growing hemp on his 200-acre cash crop and livestock operation in 1999, a year after the federal government began issuing cultivation licenses.
He contracted to sell the crop to Hempline Inc., a company based in Delaware, Ont., which proposed to substitute hemp's unusual fibres for some oil-based materials and replace products such as plastics and fibreglass.
The 10-acre crop grew well and, at the end of the season, the company's owner, Geof Kime, "picked up a few of the bales but the rest of them are still in my drive shed," he says. Nevertheless, two years later Scheele grew more hemp for the company to be used for research, wanting to support Kime's efforts to establish a market for the crop. To date, he's given the company 66 bales of more than 100 he has harvested, and 40 tonnes remains in his drive shed. Scheele says that he's heard of many other farmers who have simply disposed of the crop.
Despite the early disappointments and unfulfilled agreements, Scheele has stuck with hemp, these days mostly focusing on growing seed. He has also stuck by Kime, pointing out that the entrepreneur continues to work towards establishing a market for hemp. To establish the crop, "we need a market, so we need Geof Kime to build his plant for the fibre and we need processors who are willing to process the grain in Ontario," he says.
Kime has also heard of farmers who have disposed of the hemp he commissioned several years ago. But he emphasizes that his company, recently renamed Stemergy Renewable Fibre Technologies, still plans to "pay the contracts as written." Stemergy may be able to process some of the material that has been in long-term storage, he says.
Stemergy received a $3.3 million loan from the province's Innovation Demonstration Fund in May to scale up for commercial production. Along with hemp, the facility will process flax and crop residues into fibre. He hopes to have a $10-million plant up and running in the summer or fall of next year, but is still putting financing in place. He cautions that it could still take years to reach a projected annual volume of 10,000 acres of crops to keep the facility running at peak capacity.
"People who have kept tabs on what we're doing … I think have a really strong appreciation for how hard it has been to get this far," he says. "There was a lot of hype around the potential without a recognition of the challenges that lay ahead and obviously we hit a few challenges."
Although hemp had some promising properties for manufacturing, there was no value chain to get the product from the fields into the market. "We effectively built this value chain from scratch."
Ten years ago, little was known about the materials, the economics weren't as strong and government support of new market development was nominal, Kime notes. Today, significant jumps in the price of oil have helped stimulate interest in using renewable materials and political support for market innovation is strong, Kime says.
And what about obtaining feedstock from growers disillusioned by earlier setbacks? Ultimately, it's going to take action, rather than words to regain trust. "Building the plant will be the first and foremost thing that needs to happen," he says. Until that trust is re-established, Kime plans to supplement supply for his plant with partially processed feedstocks.
Just because the bubble might burst in a new industry and new market doesn't mean all opportunities will be lost. Ostrich raisers Don and Deborah Simmonds are a case in point. Despite a major and rapid decline in their industry, the couple has built a successful business specializing in ostrich meat. They are one of only a handful of larger-scale ostrich producers in the province and hatch as many as 100 birds in a season. Most of these are sold as meat, with a few kept as breeders. The couple sells meat products, eggs and oil at their farm store and wholesales to other retailers and chefs.
At their own store, a package of four quarter-pound ostrich burgers sells for $6.95 and an ostrich steak, a meal for two people, goes for $16.95. Even at those prices, demand is growing. While Deborah says that a provincial promotional campaign of Ontario-grown products may have helped stimulate some growth, both agree that it was their willingness to promote their business and its products which helped them to continue when the ostrich market bubble burst.
"Most people who got into (ostriches) didn't want to actually market their own product. They wanted to raise birds and just sell them – that's the impression I got," Don recalls. Doing their own marketing has also helped. "You had to be aware who you were dealing with," he says, noting that some farmers had difficulties collecting revenues for hides that they had sold to middlemen.
Goat's milk market grows
Not all new products and their markets are destined to collapse in their early years.
Anthony Sjaarda and his wife Marjorie, along with their four children, milk 500 goats at their 100-acre farm near Wyoming. When he first became involved about five years ago, the industry was considered an unusual niche market. The 100-member Ontario Dairy Goat Co-operative that Sjaarda chairs expects to supply nearly eight million litres of milk to as many as a dozen processors in the next year.
Because its prospects look bright, however, more farmers are entering the market. For now, Sjaarda isn't worried. If a surplus occurs, the co-operative will find new markets for the milk, such as powdering it to make cheese. There are also direct marketing opportunities, such as making and selling artisan cheese. Goat's milk drinkers were the first market. With so many new entries into the market, selling goats to milk has a lot of potential, he says.
So the question remains: How do you distinguish a promising business opportunity from one that's not so viable, especially when you're dealing with new products and new markets?
Find out as much as you can about the end consumer for your product, advises OMAFRA's Carl Fletcher. The business is about meeting the end client's needs, he points out, and that's where new money starts into the system. "If that new money doesn't happen, if that end purchase doesn't happen, then nobody else is going to get a sale all through the value chain."
Spending the effort is crucial, even for those who don't plan on directly supplying an end client. "Real markets have details," he says. "And real markets have order sheets."
Carl Moore, who offers business planning services under the Canadian Farm Business Advisory Service, also emphasizes the importance of knowing the end market, no matter where your business fits into the supply chain. "You've got to really go in and research a) how much market is there and b) how much potential market is there."
The Woodstock-area advisor points out that the market may be currently serviced by imports. Working backwards to identify the different components of the supply chain may reveal how to break into the market. Also be aware of any barriers to getting your product to the end user, such as government legislation or grading requirements, he adds. Surprises in details like these "can bankrupt you before you start."
Both Moore and Fletcher emphasize the importance of researching industry partners. Verify the reputations of the other players in the supply chain by asking to whom they are selling and then call those buyers, they advise.
Ask the buyers if they think the supplier is a good one and how they would rate in comparison to others. You might want to consider spreading the risk by having more than one customer. Richard Cressman, who operates a seed business with his brother and counsels farmers on how to overcome the challenges of running a multi-family business, points out that the timing of a venture plays a deciding role in determining success or failure. "With every opportunity there are places where you can make money if your timing is immaculate," he says. "But for every one (investor) that's going in with perfect timing, there are probably a dozen or more whose timing is wrong."
In farming, where profit margins are typically small, that means every decision has to be well-calculated. It also means making sure that there's an exit plan developed when undertaking a new venture, he says.
All three point out that new ventures inevitably involve substantial energy, expertise and resources. Farmers' skill levels and ability to tolerate adversity are factors which need to be taken into account, advises Cressman. Scale your involvement to the resources you have at hand, adds Moore. "Start small, but not too small. You've got to be comfortable with the amount of investment you're putting in." While considering resources, don't forget to take into account financing plans for farther down the road, he says.
To Moore go the last words in evaluating a business opportunity.
If it appears too simple and too profitable, the opportunity is not realistic. "You've got to realize that there are a lot of smart producers" out there.
If the opportunity is that simple and profitable, "it's already filled." BF