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VIDEO: PacificAg brings sophisticated logistics to byproducts market

GEORGETOWN, Minn. — Thomas J. “Tom” Borgen and his wife, Stephanie, are new regional managers for PacificAg LLC, a company based in Portland, Ore. It brings corporate-style management of the straw and corn stover byproduct market, and claims to be the nation’s largest crop residue supply chain. In a sense, it is designed as a way to bring a corporate-style organization to a market that has always been more ad-hoc.

For several years, Tom and his brother, Mike, produced straw for regional markets as Red River Straw Inc. A year ago, Tom and Stephanie downsized their part of the farming enterprise to focus on just the straw market, and in February met PacificAg officials at an industry meeting in Texas.

In mid-April, Tom became PacificAg’s general manager for the upper Midwest — Dakotas, Minnesota, Wisconsin and Iowa — and Stephanie became part-time office manager. The company purchased a straw supplier in the region in 2015, and acquired about 20,000 acres of straw inventories. With the Borgens on staff, they’re hoping to contract about 30,000 acres, or 45,000 tons. Borgen says the suppliers likely will be in eastern North Dakota and western Minnesota because of the amount of material and proximity to end markets.

Harrison Pettit, a partner and vice president of business development in Hermiston, Ore., says the company started 18 years ago in the Pacific Northwest states of Oregon and Washington. In the past decade, they’ve added California, Iowa, Texas, Kansas, North Carolina, Oklahoma and the Texas panhandle. In North Dakota, the focus is on wheat straw, but also corn stover.

PacificAg is the only company in the country that operates on this scale that is nationally focused on this business, Pettit says. It controls about five times the supply of its largest competitors, is the largest purchaser of large square balers in the world and is the largest purchaser of twine. “The windrow equipment, the stacking equipment, is all the biggest. With its purchasing power, the company can specialize in innovations and improvement.

State to state

Much as with other custom farming operations, PacificAg uses specialized harvest equipment that moves from state-to-state, following the small grain and corn harvests. Though company workers operate the equipment, PacificAg often hires local operators. Soon, 13 balers from North Carolina and a few from Kansas will come to North Dakota, with the expectation that crews will be in the region for 45 to 60 days.

The company recently signed a national deal with Krone balers, a pale yellow paint-made product that creates a high-density bale. It allows the bales to contain an extra 100 to 150 pounds of material per bale. All of the bales are “square” — 3 feet tall, 4 feet wide and 8 feet long. The company gets efficiencies from keeping their balers in use for eight months a year, compared to as few as 60 days in local or regional operations.

During the busy winter and spring seasons, the company can ship 50 to 60 loads every week with two loader-operators — about six to seven loads a day per loader, with each load holding about 36 to 39 bales. Some dairies have loading docks, and the company is transitioning to dry van semi-trailers for safety and comfort in adverse weather.

“We’re connecting the harvest with the market,” Pettit says. “Our innovation to the grower is that they don’t have to be concerned about harvesting and marketing. They grow it and get a small amount of return. It’s a marginal improvement in their (economic) yield per acre.”

Stubble fee

PacificAg pays growers a “stubble fee,” with most deals by the bale.

“We’re paying them for access to that straw, and for the ability to take a certain amount,” Pettit says. The company pays 50 percent of its individually agreed-to contract price within 30 days of making field-side bale stacks. The first 50 percent is based on an estimate of the volume. The company typically makes its final payment on scale weights obtained from a local elevator scale, at a truck stop or at the destination dairy.

PacificAg owns the straw as soon as it’s baled and is responsible for insuring it and maintaining its quality. Some of it ships right away, but it’s largely shipped before the following harvest, Pettit says. The straw removal yield is typically 1.5 to 2 tons per acre. At $6 to $7 per bale, the price to the farmer is roughly $10 to $15 an acre, although that varies by the quality and crop source.

Stephanie helps Tom, supports the loader-operators, handles inventory management and pays the growers. Load-tracking management is done remotely out of the North Carolina office.

“I think the operating efficiencies that PacificAg provides are appealing to the suppliers,” she says. “It’s running like a business, which is the way ag is going now. It brings a lot of value to the grower and the customers, instead of it being kind of disjointed. The smaller suppliers don’t have the resources that we do at PacificAg, to market on a large scale.”

Annual contracts

Grower contracts are annual, although PacificAg’s contracts with some growers in the Pacific Northwest have run 18 years in consecutive one-year contracts. “It’s important for growers to have the power to decide,” Pettit says. “Our first customer is the grower.”

Tom’s work involves talking to farmers, trying to find out who’s interested — often up to 50 farmers. The bulk of them this year are between Fargo and Grand Forks, and west to Michigan, N.D. They worked roughly 20,000 acres last year, to more than 30,000 acres in 2016.

Many farmers who grow wheat or barley in the Red River Valley are doing so for sugar beet rotations. Residue is valuable on the land, Borgen says, but the bulk of the nutrient value is in the bottom 4 to 6 inches of stubble, while the amount on top is less valuable. Removing some of the residue can actually mean using less fertilizer with equal results, without a significant reduction in organic matter.

Farmers set the combine header height where they want to. “If they leave 4 to 6 inches of stubble, we’re happy,” Borgen says. “The norm is 3 to 4 inches of stalk height, which works best for them, and for us.”

Borgen asks farm owners or managers to fill out a one-page contract that specifies how much, when and at what point of harvest the producer wants the straw to be taken. “Frankly, the grower has all of the control,” Pettit says. “The contract is a way to capture the information so we know who to send the check to. It formalizes a relationship that’s based on trust.”

Customer focus

PacificAg sells the product delivered and works with freight companies in the region. The price of the straw is heavily influenced by the dairy market, and freight and fuel costs.

The main market focus is the dairy industry in Wisconsin, Indiana and Iowa. Most of this short- and medium- length straw, as a low-cost source of roughage. Some might be used for bedding. In the past five years, the dairy industry has shifted more into using straw — up to 3 to 7 pounds per day — Borgen says, as a way to offset richer, higher-protein diets.

By managing its logistics, PacificAg offers its customers a price about $5 to $10 per ton below the prevailing market, Pettit says. “We will begin by offering multi-year contracts, but we don’t have a lot of dairies interested at this point because it’s not their practice” to buy it this way, Pettit says. “It’s something we’d like them to accept but we’re going to go with the flow.”

Straw specifications vary by production plant, but most like medium- length straw, aged for 90 days. This breaks down the waxy film that needs to come off before the mushroom process starts.

Highest-quality straw is used in erosion control products — blankets and “wattles,” or tubes — for road construction to reduce storm runoff. This straw is longer-stemmed and brighter- colored — “the most pristine,” Pettit says. “There’s not a lot of that up here. We get that from conventional combines, or swathed barley, or durum wheat straw.”

The company also offers the largest supply of wheat straw to the North American mushroom industry, delivering across the country. The largest concentration for the mushroom industry is Chester County, Pa., a county in the southeast part of the state near Philadelphia, which produces 60 percent of the nation’s mushrooms, as well as North Carolina.

This straw moves the farthest, but the mushrooms actually thrive on wetter, more decomposed straw. “We call that ‘top bales’ and ‘bottom bales,’ where there is moisture damage on them,” Pettit says.

Straw isn’t straw

PacificAg asks producers to remove the chopper, which allows the machine to drop the straw in a windrow for baling.

“We prefer conventional combines (versus rotary combines) but that’s not always available anymore,” Borgen says. PacificAg doesn’t dictate what kind of equipment a supplier uses. “We’re not asking growers to step over a dollar to pick up a dime,” he says. The company harvests spring wheat, barley, winter wheat and durum, which is the longest.

For some larger straw suppliers, PacificAg will dedicate two or three balers to accommodate the entire harvest. The farmer starts their grain harvest, and about a day later the PacificAG crew arrives.

Earlier in the harvest, when stalks are green and tough, and if the straw is dropped behind the combine, they might have to wait two days on wheat.

On barley that’s straight-cut, the company might have to wait 4 days. The straw should be 10 to 12 percent moisture, because higher moisture means quicker shipping. If barley is swathed, PacificAg can start baling that same day.

Dairies can take much shorter straw, grinding or blending it as a feed additive. “We are very cognizant to grade it as a product and build an inventory that is segmented for different customers,” Pettit says.

“We’re a single source and a consolidated supply for customers that want year-round supply,” he says. “We control quality and quantity and can trace the material back to a farmer’s field. It’s not like buying something at an auction, where you don’t know what you’re going to get.”

For customers, PacificAg consolidates a fractured supply environment, which produces swings in prices, driven by supply-demand vagaries.

In reality, straw is an agricultural byproduct but not a commodity market, like the cereal grains that produce it. It is not influenced by global or national conditions, in terms of acres planted because it’s not the main reason people grow the crops.

Currently, Manitoba produces much of the straw that is delivered into larger markets, shipping relatively large distances in part because of a currency advantage.

“There are auctions, brokers, small baling companies and farmers themselves. It’s tended to be a ‘spot market’ dynamic,” Pettit says. “We know what our costs are. We do this all over the country, so there’s no reason we shouldn’t offer a consistent price, year-after-year. Other than fuel, everything else should be consistent.”

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