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August 1, 2010
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Kentucky Agribusiness Grows Entrepreneurs

Ten years in, Commonwealth’s unique Agriculture Development Fund is diversifying state’s rural economy

By Kara Keeton

With the Agriculture Development Fund providing resources to diversify the commonwealth’s rural economy, Kentucky farmers increasingly are businessmen and entrepreneurs in addition to crop and livestock producers. Legislators created the ADF 10 years ago, dedicating 50 percent of Kentucky’s proceeds from the Master Settlement Agreement between the major U.S. tobacco companies and the attorneys general of 46 states. (Image made at Sky View Farm in Fayette County.)

Kentucky agribusiness has experienced dramatic change and growth since the historic entrepreneurial creation 10 years ago of the state Agriculture Development Fund, which has invested more than $300 million earmarked toward diversifying commonwealth farming operations. That proved crucial when the 2004 federal tobacco buyout program began chopping into the commonwealth’s long-time top crop.

Development fund dollars come from some of Kentucky’s proceeds in the 25-year, $206 billion national Master Settlement Agreement struck in 1998 between the four top U.S. tobacco companies and 46 state attorneys general. It’s looking like a wise investment decision.

Despite the loss of nearly $600 million of tobacco sales since 1998, Kentucky’s agriculture economy has shown significant growth during the 2000s, explained Will Snell, an agriculture economist from the University of Kentucky.

“The ag economy established a record high, reaching $4.8 billion in 2008, before falling in 2009,” Snell said. “Net farm income has exceeded $1.5 billion four out of the past five years, which is a record high for any consecutive five-year period.”

This record, he explained, is primarily in response to record cash receipts along with payments from the tobacco buyout.

During this growth period in cash receipts, Kentucky has observed some significant changes in the composition of farm sales, according to Snell.

“Traditionally Kentucky had seen a 50/50 split between livestock and crops,” he said, “but during the past 10 years growth in the equine and poultry industries has resulted in a noticeable increase in livestock receipts relative to crops.”

While the growth in Kentucky’s two leading livestock industries is not a direct reflection of the Kentucky Agriculture Development Fund investments, the state’s third-largest livestock industry, beef cattle, has seen a direct impact from fund investments. A 2008 study of Agriculture Development Fund investment showed that approximately 70 percent of on-farm investments directly or indirectly benefited the beef industry, helping many Kentucky producers transition from a high dependency on tobacco to a high dependency on beef cattle.

Historically high grain prices and good yields in recent years have enabled corn and soybeans to replace tobacco as the state’s top cash crops.

“Tobacco sales rebounded following the initial adjustment following the tobacco buyout in 2004 with additional burley export and dark-tobacco demand opportunities,” Snell explained. “The problem is, though, that labor and infrastructure, along with declining domestic cigarette sales, along with domestic and international regulatory concerns, continue to constrain additional growth in the tobacco industry in Kentucky.”

Despite an increase in the diversity, much due to the investments of Agriculture Development Funds, the top six farming enterprises – poultry, horses, corn, cattle, soybeans and tobacco – still comprise nearly 80 percent of the state’s gross farm sales.

“Although the state as a whole has achieved record ag cash receipts in recent years, these gains have not been equally distributed across the state, said Snell. “Nearly half of Kentucky counties have actually recorded a loss of more than 25 percent of their ag sales since 1998, with most of those counties located east of I-65.”

Most of this, Snell said, is a result of tobacco shifting from Eastern and parts of Central Kentucky to Western Kentucky where there are better yields and profit opportunities and available cropland. Tobacco buyout dollars totaling nearly $2.5 billion for Kentucky for the 2005-2014 period have softened the blow to many of these counties, but this was only a short-term economic stimulus as around 50 percent of the tobacco buyout dollars were distributed in the first three years of the 10-year program.

Despite the recent era of record farm cash receipts and net farm income, Snell forcasts that Kentucky agriculture has its share of near and long-term challenges even with continued investments from the Kentucky Ag Development Fund.
Cost and access to dependable labor supplies, energy-based input prices, land costs, anticipated declines in government payments, soaring health-care costs, access to off-farm income in rural areas to support small to mid-scale farming operations, and dwindling tobacco demand and tobacco buyout dollars are just a few of the challenges that Kentucky farmers are facing in the ever changing agriculture economy.

Settlement dollars boost entrepreneurship
History was made 12 years ago when the Master Settlement Agreement was signed, giving Kentucky more than $100 million annually for 25 years to be used at the discretion of the Kentucky General Assembly.

While many of the 46 MSA states quickly shuffled their funds into a general account, Kentucky’s legislators passed House Bill 611 in 2000, committing 50 percent of annual payments to the development of Kentucky’s rural and agricultural economies.

Establishment of the Kentucky Agricultural Development Fund through HB 611 created an unprecedented opportunity for Kentucky farmers. In the 10 years since the bill was signed into law, hundreds of millions has been sown into the rural economy to help diversify agriculture and improve net farm income.

Agriculture Development Fund investments have led to expansion of farm-based enterprises and inspired the growth of entrepreneurship throughout the commonwealth, according to a 2008 UK College of Agriculture study.

An example of this entrepreneurial spirit is Randy and John Seymour in Hart County. This innovative father and son team received grant assistance to help build their native seed business that started when the two began collecting native seed for their own farm with nothing more than a five-gallon bucket.
Today Roundstone Native Seed has grown to a company that is working in all states bordering and east of the Mississippi River, and contracts with over 30 farmers to raise the wide variety of native seeds to meet consumer demand.

Another successful entrepreneurial investment is Central Kentucky Custom Meats. This privately owned slaughter facility was awarded a zero-interest loan from the Agriculture Development Board for expansion of an existing USDA slaughter facility to allow the business to provide USDA poultry processing.
This investment provided a much-needed service to area poultry farmers interested in selling locally raised poultry in farm stores and at farmers’ markets.

These investments in farm-based entrepreneurs by the Agriculture Development Board have reached beyond the individual farms that were funded to have a community, regional and statewide impact on Kentucky’s agriculture economy.

“We’ve had a lot of good ideas in the state over the years, but we never had the money to put with them until the Ag Development Funds,” said Sam Moore, KADF board member and a Butler County farmer. “If you look at the impact this investment has had in the state, the change in attitude of the producers in the state because of these programs, it is just remarkable.”

In fact, the 2008 UK study showed that $86 million in project investments from 2001 to 2006 resulted in an estimated $161 million in additional farm income.

The study also showed almost 50,000 tobacco farmers have been impacted by project investments across the state. Plus, the new farm and business income generated by these investments had a secondary impact in the form of new income to rural communities. The investments created or expanded markets for 148 products and generated about 1,300 new jobs.

“The geographical distribution of the fund across the state is better than I thought it would be,” Scott Smith, dean of the UK College of Agriculture and a KADB member, said after the study was released. “I think what is really impressive is how many farmers have been reached and how many sectors of agriculture have been impacted by these funds.”

Investments broaden infrastructure, leadership
While the investment in entrepreneurship has been critical to diversifying Kentucky’s agriculture economy, it has been the investment of Ag Development Funds in infrastructure assistance in areas such as education, marketing, promotion, business assistance and research that has had perhaps the most far-reaching impact in the commonwealth.

Early investments in the Kentucky Beef Network, the Horticulture Council, and the Kentucky Center for Agriculture and Rural Development (formerly the Kentucky Center for Cooperative Development) were comprehensive approaches to provide a wide range of services to producers. These organizations have developed through the years, working with producers, extension and organizations to meet the changing needs of the evolving agricultural community.

“We now provide a wide range of services, including organizational development and business analysis, to clients ranging from the farm market owner like Chaney’s Dairy Barn to a cooperative organization like Lexington Farmers’ Market,” explained Larry Snell, executive director of KCARD.
Investments in 4-H, FFA, the Kentucky Agriculture Leadership Program, and the Kentucky Entrepreneurship Leadership Institute have helped promote leadership for the current and next generation. The funding of marketing initiatives such as Kentucky Proud and the Kentucky Farms are Fun program, have helped to raise the awareness of buying local and visiting local agritourism venues.

The single largest investment the Agriculture Development Fund made was to revive the Kentucky Agriculture Finance Corporation (KAFC) to help meet the capital-access needs of farmers across the state. The KAFC was awarded $26 million in 2005. Staffed by the Governor’s Office of Agricultural Policy, the KAFC Board worked to develop programs to reach out to the agriculture community.

“We have created a system – one might say a vertical integration plan – to help farmers,” said Wayne Hunt, a member of both boards. “First it was grants and forgivable loans through the Ag Development Fund to start the business. Next is KAFC to provide a low-interest loan. And the third level is a sustainable operation they can run on their own.”

On-farm cost-share programs
When the first applications arrived at the Governor’s Office of Agriculture Policy (GOAP) from across the state in 2001, staff began to identify a trend in county-level applications. Many were requesting funds for improvements on specific farms.

In an effort to reach out to individual farmers and accommodate county councils that identified these on-farm improvements as essential to agricultural development, GOAP worked in cooperation with representatives of the state Department of Agriculture, UK College of Agriculture, industry organizations and local councils to develop what is today’s county programs.

“We started getting proposals from counties and one county would want a genetics program, but they would have entirely different criteria than the county adjoining them,” explained Moore. “We saw right away we were going to have to have a standard to ever make it work across the state. So that is what we started doing with the model programs, creating standards across the state.”
The first county programs to be rolled out mainly focused on supporting the beef industry, but before long the Ag Development Board began working with GOAP staff to develop a wider range of diversification model programs. Over the decade, producers have received cost-share funding on everything from goats to honeybees. Many programs have worked in tandem with infrastructure investments in the state.

In a 2008 UK evaluation, researchers found county program investments have been highly successful in improving producers’ knowledge, farming operations and net returns. During the investment period from 2001 to 2006, almost $100 million was invested in model programs with more than 72,000 participants across the state, averaging $1,387 per award.

Along with the economic impact cross the commonwealth, these county programs have spurred community leadership as county council members, extension agents and local Farm Bureaus, Cattlemen’s Associations and Conservation District offices have stepped up to the challenge of making sure programs were available for producers. The hours of volunteer time these individuals have given to the effort were the key component in making them a success.

Creating history
“I think this fund was exactly like it was designed to be, and we have funded a lot of dreams,” said Hunt, the KADF and KAFC board member. “We had to make every form, create the program, and it has matured over the years to meet the needs of our agriculture community.”

The passage of HB 611 was historic for Kentucky agriculture, but that is only one part of the story in this important diversification effort taking place the past decade.

It was the idealism of agricultural leaders in the early ’90s who embraced the idea of creating a new agriculture economy. It was the commitment of agricultural leaders, legislators and the state government who came together in support of HB 611 to lay a foundation for Kentucky to transition from an agricultural economy dependent on tobacco production to an agricultural economy that thrives on diversity. It has been the commitment of producers, communities, legislators and all of Kentucky agriculture that continue to work toward growing Kentucky’s agriculture economy.

“I think agriculture, for the first time, spoke with one voice, in one accord. The whole agriculture community was united behind securing that money for agriculture, that is what made the difference,” said Moore. “We were the only state in the nation that did that and we are still the envy of all the other tobacco producing states. It has been a godsend for Kentucky.”

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Lane Report Cover August 2010 In This Issue
Kentucky Agribusiness Grows Entrepreneurs
Ten years in, Commonwealth’s unique Agriculture Development Fund is diversifying state’s rural economy

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