FINANCING VALUE ADDED GETTING THE GREEN LIGHT FROM YOUR BANKER

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FINANCING VALUE ADDED --GETTING THE GREEN
LIGHTFROM YOUR BANKER
Jeff KistnerBusiness DevelopmentCoBank 1.800.346
.5717 ext. 2025 jkistner_at_cobank.com
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THE ADDED VALUE EQUATION

• Strengths - Weaknesses gt Uncertainties

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WHAT DOES IT TAKE TO ATTRACT FINANCING?

• Capacity--Repayment ability
• Capital--Financial condition
• Character--Management
• Collateral--Quality and value
• Conditions--Purpose, amount and requirements
• External
• Internal

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START UP STAGES FOR ADDED VALUE

• Initial meeting
• Organization formed
• Pre-Feasibility study
• Secure seed money
• Develop business plan
• Operation plan
• Marketing plan
• Management plan
• Financial plan
• Develop prospectus

• Membership drive
• Annual meeting
• Finance project
• Feasibility study
• Economic, Market
• Technical, Financial
• Management
• Hire manager
• Project construction
• Begin operation

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CONDUCT FEASIBILITY STUDY

• Use third-party assistance
• Market analysis/Marketing plan
• Supply and demand characteristics (inputs
  output)
• Market share
• Pricing trends and sensitivity for finished
  goodsand raw material
• Transportation of products and raw materials
• Response of competitors to additional
  supplies/suppliers
• Technology employed
• Relative cost competitiveness

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FEASIBILITY STUDY (CONT.)

• Ease of market entry
• Contracts with buyers
• Realistic income projections
• What if assessment
• Worst / best casescenarios
• Capitalization

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COMPREHENSIVE BUSINESS PLAN

• Markets
• Who
• What
• How much
• Management
• Board or local leadership
• Operational
• Money
• Capital
• Cash flow

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MARKETING ELEMENTS OF BUSINESS PLAN

• Marketing plan
• Strategic and tactical orientation
• Who are your customers, competitors?
• Distribution channels
• Alliances and partnering
• Nature of marketing contract(s) - legal review
• Contingencies / back up plans

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MANAGEMENT ELEMENTS OF BUSINESS PLAN

• Operating plan
• Building facilities
• Utilize engineers and technology experts
• Plan for cost overruns (minimum of 10)
• Select management
• Broad-based search
• Employee early in process
• Compensate to attract the best
• Reward based on long-term results

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MONEY ELEMENTS OF BUSINESS PLAN

• Financial plan
• Return on Investment
• Equity
• Debt
• Guarantees?

And now more about DEBT...
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RISK AND RETURN--WHAT ADDS VALUE FOR YOU?

• Return on investment?
• Should equity investors expect 15 for a
  value-added venture?
• Higher target w/ venture capital involved -
  20-25
• Return for additional expense?
• Investor analysis should not include return from
  the sale of any raw material input - Project
  basis only!
• Ability to stay on the farm?
• When should you expect to break even with a new
  venture? Three years?

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ITEMS TO CONSIDER WHEN PLANNING A VALUE-ADDED
PROJECT

• Total cost of plant, property and equipment
• Start up expense planning to full capacity period
• Beginning working capital

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CAPACITY--REPAYMENT ABILITYDEPENDS ON...

• General condition of the economy
• Competition
• The need for goods and services sold
• Technical changes in the industry
• Regulatory climate
• Cyclical nature of the industry
• Environmental or other threats

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KEYS TO SUCCESS

• Leadership - Local investors JV partners
  project manager
• Excellent management
• Sound business and marketing plan
• Excellent risk management plan and execution -
  solid contracts
• Well capitalized to cushion unplanned adversity
• Communications with investors frequent, open,
  honest
• Remember to focus on value of your stock, not
  just return to products committed
• Remembering your no longer a commodity or
  livestock producer, but that added value
  processor

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• Jeff KistnerBusiness Development
• CoBank
• 1.800.346.5717 ext. 2025
• jkistner_at_cobank.com

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Start-up Assistance

• Information on Sources of Start-up Assistance

Jeff Jobe Cooperative Services USDA Rural
Development [phone] jeff.jobe_at_ia.usda.gov
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Technical Assistance Resources

• Iowa State University Extension to Value-Added
• Iowa Institute for Cooperatives
• CoBanks Business Advisory Services
• AgMRC visit their site at agmrc.org for a
  complete list of consultants

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State Funding
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Value Added Agricultural Products and Processes
Financial Assistance Program (VAAPFAP) Joe
Jones Iowa Department of Economic
Development June 5, 2002
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VAAPFAP

• Created in 1994
• Primary Purposes
• Renewable Fuels
• Innovative Products and Processes
• Project Creation

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Program Operations

• Funds awarded as Loan/Forgivable Loan
• Generally 20,000 or less is a grant or
  forgivable loan
• Over 20,000 is combination loan/forgivable loan
• Maximum award is 25 of annual appropriation
• Higher the award, the higher the loan portion
• 141 projects awarded to date (September 2001)
• two-thirds of counties represented to date

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Program Rules

• Application Complete Business Plan
• Ag Products Advisory Council recommends to
  Director of IDED
• Cannot fund production agriculture
• Facilities must be located in State

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VAAPFAP Assistance
Project Creation Assistance

• Focus on Strategic Initiatives affecting
  broad ag interests
• Requires consultation with major
  agricultural organizations
• May utilize 20 of annual appropriation

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VAAPFAP Initiatives
Project Creation - Strategic Initiatives

• Research and feasibility studies to address
  significant new opportunities
• Organization of collaborative ventures among
  Iowa farm operators
• Livestock waste management and food quality
  assurance issues
• Development of systems to manage identity
  preserved grains
• Cooperative programs for advanced plant or
  animal biotechnology
• Development and marketing of new food products
  utilizing soybeans
• Innovative agricultural risk management projects

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Contact Information

• Web - www.iowasmart.com/financial.htmvaapfap
• E-mail joe.jones_at_ided.state.ia.us
• Phone [phone]

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Federal Assistance
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Technical Assistance for Multiple Owner Businesses

• meeting process facilitation
• basic cooperative knowledge
• organizational development- articles by-laws
• surveys feasibility studies
• market research
• business planning
• board training
• strategic planning

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Value-Added Agricultural Product Market
Development Grants
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• The primary objective
• Is to help eligible producers of agricultural
  commodities, agricultural producer groups, farmer
  and rancher cooperatives, and majority-owned
  producer-based business ventures develop business
  plans for viable marketing opportunities and
  develop strategies to create marketing
  opportunities in emerging markets.

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The Farm Security and Rural Investment Act of
2002

• Farm Bill Highlights
• 40 million per year for 6 years
• Maximum Grant Amount 500,000 (priority points
  will be given for applications under the 500,000
  max)
• Applicants must provide matching non-Federal
  funds at least equal to the grant.
• Expanded eligibility

The Farm Security and Rural Investment Act of 2002
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Is Your Project Eligible?
Three Questions to Ask?

• 1) Are the funds being used for an eligible
  purpose?
• Planning
• Working Capital
• 2) Is your project an eligible entity?
• Independent Producers
• Farmer or Rancher Cooperatives
• Ag Producer Groups (Commodity Organizations)
• Majority Owned Producer Based Businesses (50 or
  more)

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Is Your Project Eligible?

• Does your project meet one of the four categories
  of value-added activities?
• Change in the physical state of the product
• The production of a agriculture commodity or
  product in a manner that enhances its value, as
  demonstrated through a business plan.
• The physically segregating of an agricultural
  commodity or product in a manner that results in
  the enhancement of the value of that commodity or
  product.
• Any Agriculture commodity or product that is used
  to produce renewable energy on a farm or ranch.
• These Activities Must
• Expands customer base for the product or
  commodity, and
• Result in a greater portion of the revenues
  derived from the value-added activity that is
  available to the producer.

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Application Process

• An original and two copies of the proposal, with
  all required forms and documentation, must be
  submitted in one package to the appropriate USDA
  State Office.
• Electronic submission is encouraged!

Original
Copy
Copy
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Other Grant Sources

• State Private
• Numerous state funding programs are available
• www.reeusda.gov/smallfarm/valuedir.htm
• www.nasda.org/nasda/nasda/member_information/usmap
  .
• www.reeusda.gov/1700/statepartners/usa.htm
• www. fdncenter.org/funders/
• http//www.iowacorn.org/pdf/TAGP20Gudielines.pdf

• Federal
• The United States Department of Agriculture has a
  variety of funding opportunities.
• www.reeusda.gov
• www.sare.org/htdocs/sare/.
• www.rurdev.usda.gov/rbs/
• .reeusda.gov/crgam/cfp/community.htm
• www.fedmoney.com/grants/fn0000.htm

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Grant Writing Recommendations

• Grants have limited funds and applications are
  selected using a competitive scoring system.
• Address all selection factors ?
• Provide all application materials ?
• Submit application early ?
• Be clear and concise ?

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FOR MORE INFORMATION

• Contact the Rural Development Area Office nearest
  you

Storm Lake 712-732-1851 Humboldt
515-332-4411 New Hampton 641-394-3183 Tipton
563-886-6006
Albia 641-932-3031 Indianola 515-961-5365 Atlant
ic 712-243-2107
Or Rural Development State Office in Des Moines
at 515-284-4714 www.rurdev.usda.gov