Catching the organic wave

HARVEY, N.D. -- Despite its premium price, the organic market continues to rise, and a North Dakota company is working to get its fast-developing company in shape to capitalize on it.

Grayson Hoberg, chief executive officer of Dakota Prairie Organic Flour Co. in Harvey, N.D., says his company is making a some 70 flours from 40 different grains. Hoberg runs the fledgling company with his younger brother, Eric, who is its president.

The Hobergs are native North Dakotans. Grayson has a background in businesses involving multimedia and the internet. Eric is a former economic development professional.

The company has been operating since 2004, and is in the process of completing facilities and equipment installations that cumulatively amount to some $15 million.

The company specializes in all organic flours -- some gluten-free.

"It's kind of a massive undertaking, all the grains we deal with and the flours we produce," Grayson Hoberg says.

The company can do organic and gluten-free.

On the "gluten-in" side, about 80 percent is organic and 20 percent is from conventionally grown grains. On the "gluten-free" side, 70 percent is grown conventionally and 30 percent is organic for the "100 percent organic" segment of that market.

"Organic is only 2 percent of the U.S. food market, but organic is growing at 20 percent per year. Organic breads are growing at 35 percent," Hoberg says.

"As a company, we've averaged growth of 100 percent per year, and this year, it'll be 350 percent. It's been significant."

Everything is made to order.

Organic advantages

According Dakota Prairie brochures, organic is important because of its "environmental, food safety" factors and a "profound effect on health," but the brochures do not specify or quantify those advantages, except to say that the products are "free of carcinogens, known toxins and pesticides." The grains are produced without "sewage sludge, bioengineering or ionizing radiation," the brochure says, without directly describing the competition.

"You really can't," Hoberg says.

The company promotes a "better tasting" advantage.

"Our customers, the big bakeries and that have frequently told us that the breads coming out of our flours taste better," he says.

The brochures claim farm practices that "respect the balance of nature rather than attempting to control it with powerful often toxic synthetic chemicals."

Certainly some people are willing to pay more for either organic and gluten-free products.

Conventional wheat flour might go for 15 cents a pound and organic at about 30 cents a pound, Hoberg says. To compare, gluten-free flour can range from 40 to 50 cents a pound to up to $2 or $3 a pound, depending on market conditions at the time.

"Only a couple of countries produce quinoa, including Peru and India. If they have production problems, it can get expensive."

From these products, company produces retail packages from polypropylene bags of 1 pound to 15 pounds, as well as paper bags of 25- and 50-pound or 20- and 26-kilogram sizes. The company also makes "Super Sacks" of 2,000 pounds and sells bulk flour in truck or rail.

Gluten-free niche

"The gluten-free area is growing rapidly," Hoberg says. "About one in 133 people are celiac (have a gluten intolerance). Two years ago, a study recommended all children with autism should eat gluten-free. It helps with their attention and focus to exponentially increase."

Midwest sources of gluten-free grains include millets and flax. Others are amaranth, quinoa and rice. The product purity for gluten in gluten-free products is five to 20 parts per million, so the products must be kept strictly separate.

"The harvest (separation) issues are going to be there," Hoberg says. "On the manufacturing side we have to keep those tolerances, too."

The Hobergs are relative newcomers to the milling business.

They grew up near Napoleon, N.D., on cattle ranch, with hay, corn, oats and sorghum crops, and Grayson didn't expect to have a career in agriculture.

"As a sideline, agriculture is an enjoyable

area," Grayson says.

Grayson started out studying music in Norway and Germany. He later returned to North Dakota to pursue accounting degree in 1983 at the University of North Dakota in Grand Forks. He went on to get master's degrees in finance and computer science at the University of Denver.

He lived for 18 years in Denver, working with the accounting company Price Waterhouse, then for Coors Brewery and Tele-Communications Inc., the nation's largest cable company. In 1997, he was named chief financial officer for EarthLink Inc., a California-based Internet provider. In 2002, he was named chief operating officer and chief financial officer for iBlast Inc., a multimedia company that broadcasts movies, games and content over the digital spectrum.

In 2003, Hoberg sold iBlast Inc.

"When I sold it, my brother called me up and said 'organic' is going to be the big wave of the future," he says.

The brothers started the milling company as a "C corporation" in 2003, bringing in variety of private investors, who Hoberg declines to list. The National Bank of Harvey is the primary lender, along with guarantees from the U.S. Department of Agriculture's Rural Development agency, the Bank of North Dakota and the North Dakota Department of Commerce.

By 2004, the company had built a small facility for about $5 million that could handle 20,000 bushels of storage and mill roughly 75,000 pounds of flour per day.

"I was the first miller," Grayson says. "I went to Italy for a week and got trained on how to run the mill and came back and, for the first six months, I was the miller. Now, we're up to eight full-time millers and we have head millers that are in charge of milling."

Gradually, the company has added packaging facilities, warehousing, and additional equipment.

"As we've grown, we've continued with more loans, and we've needed more equity," Hoberg says. "We were profitable for a couple of years and -- with this expansion and increased debt load -- we're not profitable right now, but will be in the next month or two. It's ramping up sales now that we have the infrastructure."

About two years ago, the company dabbled in the gluten-free business. In 2009, the Hobergs expanded this, increasing the total plant investment by about $11 million. The company employs 25 to 30 people now and, by the end of the year, should increase to 40 employees.

Chiefly, they added more storage, more milling capacity and a rail spur for shipping out bulk flour, as well as a dedicated gluten-free facility.

The company built 800,000 bushels of storage in 21 bins.

Hoberg says the location of the plant in Harvey is a good choice.

"Some companies feel good building near their customer, but I think it's more important to be close to the actual grain," he says.

One-stop shopping

The company makes 70 flours and baking mixes, for a total of some 100 distinct products, Hoberg says.

The company uses International Certification Services of Medina, N.D., for its organic certification. ICS also does Japanese, European organic and gluten-free certification. A separate group does kosher certification and the American Institute of Bakers handles food safety certification.

The company sources its products "worldwide," according to Hoberg -- chiefly from the U.S., but also Canada, South America and India.

"We try to get as much as we can as close as we can, in South Dakota and North Dakota. Some crops you can't buy here," he says.

The company deals with about 20 to 30 producers in North Dakota. All of the hard wheats are sourced locally. Soft wheats come from Washington or Ohio. The spelt comes largely from Ohio, Alberta and Washington. Hard white wheats come from Nebraska and Kansas.

The company typically purchases grain direct from producers and not through an elevator. The company is in the process of replacing its grain acquisition director.

There are few competitors in North America in either gluten-free or organic general and the United States. in particular, Hoberg says. Typically, a flour mill would two or three organic flours on the organic side. It is typical for a bakery to order organic flours from three or four mills to get the variety of they need, while Dakota Prairie offers a "one-stop shop," he says.

Producers of gluten-free flours are even less common, he says.

"I don't know who my competitors are on the gluten-free side -- no idea," he says.

Higher organic yields?

While the conventional wisdom is that organic crops yield less than conventional crops, Hoberg says that shouldn't be true.

U.S. and Australia are two of the largest organic production countries in the world, in acres. Side-by-side research done in both places indicates organic grains crops have 10 percent to 15 percent higher per-bushel yield potential than crops grown with synthetic chemicals, he says.

Hoberg says the plot research from Dickinson, N.D., and from Iowa that indicate these yield advantages with organic techniques, but field data from commercial organic farmers don't confirm that.

"Why we're not seeing it consistently with organic farmers is the question," Hoberg says.

He says the issue came up at a recent organic board meeting.

"I hadn't realized farmers weren't getting that yield" advantage, he says.

He says possible explanations may be a need for training.

"It's a lot more work, with paperwork, planning and a seven-year rotation to do organic crops," Hoberg says. "But from an economic standpoint, organic is a lot more profitable."

One thing that organics use more of, of course, is fuel, because there's more tillage control of weeds.

That must be balanced against other areas where there are lower inputs. For example, there are no "tech fees" for genetically modified crops. Of course, there are no chemical costs.

"We're going to continue growing, adding more facilities down the road," Hoberg says. "We're in a growing market. There are projections that the organic food supply will go from 2 percent of the total today to 25 percent in the next 15 years. That means a lot more farmers will need to get involved in organic. Prices will probably have to get a little closer between organic and conventional. It'll be interesting to see how that plays out."