Technological Choice: California Wild Rice Processing Under Uncertain Demand** By Jay E. Noel, Ph.D. James J. Ahern, Ph.D. Jess Errecarte Kyle Schroeder September 2001 * The first two authors are Professors in the Agribusiness Department at California Polytechnic State University. The next two are respectively, past undergraduate student and current graduate student of the California Polytechnic State University, Agribusiness Department. Abstract This study is concerned with technological choice under uncertain demand conditions. It begins with an overview of the California wild rice market. The wild rice product is described, the wild rice industry is review and wild rice market conditions are explored. The overview is followed by a discussion of wild rice processing. Technological choice and competitive strategy issues are reviewed and then a framework for choosing between two competing technologies is proposed. The two competing technologies differ in their ability to store and process wild rice over a marketing year. The traditional technologies requires almost immediate processing of the harvested wild rice while the experimental technology allows harvested wild rice to be stored and processed over the course of the marketing year. Technological choice is explored using multiattribute utility analysis and two economic evaluations. The economic evaluations are payback period analysis and internal rate of return analysis given uncertain demand conditions. The experimental technology is shown to be the dominant technological choice under both multiattribute utility analysis and the economic analyses. Acknowledgements This research was funded by grants from the California State University Agricultural Research Initiative and from SunWest Foods, Davis Ca. Additionally, we would like to thank those members of the SunWest management team who took time to contribute their knowledge to this study. Contents Introduction 1 Overview of the California Wild Rice Market The Wild Rice 2 The Wild Rice Industry 4 Wild Rice Retail Demand 4 Exportation 6 Farm Level Demand and Processor Demand 7 Wild Rice Processing and Technological Choice Wild Rice Processing 9 Technological Choice and Competitive Strategy 11 Technological Choice Using Multattribute Utility Analysis 13 Economic Evaluation of Technological Choice 17 Internal Rate Of Return and Uncertain Demand 22 Conclusion 26 References 28 List of Tables 29 List of Figures 30 Appendix A Wild Rice Wholesalers and Retailers 31 Appendix B Wild Rice Processing Plant Construction, Fixed, and Variable 36 Costs ii Introduction The California wild rice industry in 2001 is undergoing change. This change is being driven by increased wild rice production, changes in wild rice demand, and buyer concerns relative to product quality and food safety. These changes necessitate the need for the industry to evaluate its operational and marketing strategies. A major concern of the industry is how to meet the on-going changes while remaining profitable. The major emphasis of this study to evaluate two of the technological choices that are available to meet those changes. The technologies are a traditional technology and newer experimental technology that has been conceptualized, but not as yet used by the industry. The traditional and experimental technologies use the same basic wild rice processing steps (see Figure #1). The traditional technology requires that immediately after the curing stage that the wild rice be either parched or parboiled to infuse the bran layer into the wild rice kernel and then further processed into black or scarified wild rice. The experimental technology allows the wild rice to be stored after the curing stage. The technological choice begins with a multi-attribute analysis that compares the two technologies on the basis of certain selected characteristics. The technologies are then compare on the basis of their internal rates of return under three differing product demand scenarios The study begins with an broad overview of wild rice market characteristics. The market overview is broad in nature reflecting limited public information available on wild rice demand. The market data that does exist tends to be highly aggregated as wild rice market data is often included in general statistics on specialty products or other rice products. The information provided in the report is based on the public information that was available and information provided by knowledgeable people in the California wild rice industry. 1 Overview of the California Wild Rice Market The Wild Rice Product Wild rice derives its name from the Native Americans harvesting the wild rice1 by hand from lakes and streams in the wilds of Minnesota and Canada. Domestication of wild rice started in the 1950’s and supplies have increased greatly in the past twenty-five years due to various technological advances. These advances include the invention of mechanical harvesters, the development of research and marketing associations, and the development of shatter resistant cultivars. The growth of wild rice as a field crop coincided with the market expansion, which resulted in lower prices and a more consistent supply. “Wild rice is firmly established as a new cultivated crop and should continue to expand in production and usage as yield and production efficiency are improved” (Oelke, 1993). Markets for wild rice and wild rice products have expanded at a vigorous rate since 1978, especially during 1982 to 1984 when the demand increased 52%. Commercial wild rice production started in California 25 years ago. Today, the California industry accounts for approximately 60% of world production. California production of wild rice takes place on about 20,000 acres in the Sacramento Valley, Fall River Valley, and Alturas area. Average yields are 12 hundredweight to the acre giving a total production of 24 million pounds of green wild rice2 a year. This production is expected to increase dramatically in the near future due to the introduction of a new patented hybrid variety of wild rice that will increase yields to 30 hundredweight per acre thus increasing total production to 60 million pounds a year assuming acreage remains constant at 20,000 acres. California processed wild rice wholesale prices have declined steadily over the past 10 years and currently average $1.50 a pound. This translates in to an $18,000,000 industry. If prices were to remain unchanged the future wholesale output value would be approximately valued at $45,000,000 (Hasbrook). 1 Wild rice is a grass cultivar and is not related genetically to either the japonica or indica rice species. 2 The average conversion from green wild rice to processed final product is 51%. That is, one pound of green wild rice will process into approximately 0.51 pounds of processed wild rice products. 2 The continual growth of the California wild rice industry is dependent on its ability to develop innovative marketing and processing techniques to meet changing buyer expectations and to reduce price. California wild rice is generally harvested on a “green” basis during the months of July, August, September, and early October. Harvested rice is delivered to wild rice processing facilities at average moisture content of 35%. The green wild rice is cleaned, cured, parboiled, dried, and roasted to stable moisture content of 14%. The original green wild rice, after processing, results in a fairly constant set of finished products, which are classified by grade (Hasbrook). The grades starting with A and progressing to C differ by length, weight and thickness. A is the longest, weighs the most, and has the greatest kernel thickness. Wild rice is sold in three forms at the processor level: black, scarified and pre-cooked. The “Black” wild rice form, in which the wild rice possesses a traditional black appearance, reflects the color of the black bran layer. This bran layer is extremely hard and requires a fairly long cooking time. Table #1 shows the input-output relations between green wild rice and finished wild rice products (Hasbrook). Table #1 Input-Output Relationship: Green Wild Rice to Finished Product Harvested Green Wild Rice Finished Product Distribution Input = 100 Lbs 100 Lbs Outputs Grade A 29 lbs Dirt 1 lb Grade A- 29 lbs Handling Loss 1 lb Grade B 28 lbs Hulls 33 lbs Grade C 6 lbs Moisture Loss 14 lbs Brokens Finished Products 51 lbs Large 6 lbs Small 2 lbs Cooking time for black wild rice varies in length from 55 minutes for A grades to 45 minutes for black B grade. This black product accounts for about 13.5% of all processed whole grain wild rice sold. “Scarified” products are the result of a mechanical process of scratching the surface of the black bran layer, thereby allowing a more rapid water absorption during the cooking process. Scarified A, B and C grade wild rice are cooked from 30 minutes for A 3 grades to 15 minutes for C grade. Scarified products account for 81% of the processed whole grain wild rice sales. The third category of whole grain wild rice processed products is for “pre­ cooked” products. This wild rice product has a cooking time of 5 and 10 minutes. This category of wild rice is for highly specialized convenience foods and food service accounts and represents 5.5% of the whole grain sales. Broken kernel wild rice is either blended into various whole grade wild rice products or utilized as an input to the production of rice cakes. The Wild Rice Industry The marketing system for wild rice consists of five major groups: growers, buyers, processors, wholesalers, and retailers. Green wild rice is generally purchased at the harvest site. Buyers can be agents for value-added processor or wholesalers or are buying for their own wild rice processing operations. Wild rice processors typically process the green wild rice into finished wild rice products that are either sold in bulk to value-added processors or wholesalers or used in producing their own value-added products under their own labels. There are fifteen major processing plants in North America designed and used exclusively to process wild rice. They include four in Canada, eight in Minnesota, and three in California. The value-added processors or wholesalers purchase wild rice from processors and then use it to produce branded wild rice blends or re-packages it for sell under their branded labels3. The marketing retailers sell branded packages of wild rice and wild rice blends while occasionally packaging and selling wild rice products under their own brand name. Wild Rice Retail Demand The retail demand for wild rice and wild rice products is dependent on product price, consumer tastes and preferences and product information. The retail price for wild rice varies by its value-added characteristics. An average retail price for a pound of packaged wild rice is $5.00 and can be as high as $10.00 for some specialty blends. Blended wild 3 Appendix A provides a table listing of wholesale and retail firms involved in wild rice marketing. 4 rice products would include those products that have special seasonings, dehydrated vegetables and/or other grains added to the wild rice. Increased market demand for wild rice has been due in large part to the introduction of wild rice blends. Although the blends usually contain only 15% wild rice, they account for over two-thirds of the total sales of wild rice. Sales in the blend market have increased an average of 15% each year since 1961 when the first blend of wild rice, long- grain rice, and herbs was sold. Blended rice ranged from $1.75 - $4.75 per pound with a rough average of $2.79 per pound (Oelke et al). The demand and price for wild rice and its blends can also reflect differences in consumer tastes and preferences. The demographics of the typical wild rice and wild rice blend consumers are some college education, in the 35-54 year old age group, and tend to be professional and managerial workers. These individuals tend to be in higher income groups, are well read, and enjoy cooking (Simmons Market Research). Other factors that can influence the demand and price for wild rice products include: its perceived nutritional value, its storability, organic vs. non-organic production, and by production region. The nutritional content of wild rice is an important benefit in relation to demand. The low fat, high protein content, and low sodium content, combined with strong yet acceptable flavor creates a strong demand in the health food market. Storability also affects the demand for wild rice. Wild rice can be stored for long periods of time when kept in an airtight container. Cooked, it will keep for 10-14 days refrigerated, or it can be frozen for up to six months. Organically grown wild rice is specific market segment. There are USDA standards, which must be met in order to label wild rice as “organic”. These standards are primarily based on the type and use of pesticides and herbicides. Typically, organic does not exclude the use of pesticides or herbicides but the ones used are used in a minimal fashion and are generally classified as non-synthetic or are generally acceptable as safe. This is an important quality in the health food sector. Organic wild rice sells for a premium in the retail market. An average of $1.00 premium is given to the organically grown wild rice compared with the non-organic wild rice (Hasbrook). 5 Regionally grown wild rice also has value. Consumers purchase more pure wild rice in Minnesota than elsewhere due to a greater familiarity with this food (Oelke et al). A rough breakdown of regional and organic wild rice is as follows: • Canadian Lake Wild Rice (organic wild rice from the wild) • Minnesota Lake Wild Rice (organic wild rice form the wild) • Minnesota Cultivated Wild Rice (farm grown wild rice) • California Cultivated Wild Rice (farm grown wild rice) Production technique can also influence the demand for wild rice. Lake grown and hand harvested wild rice is perceived by consumers to be more “natural” than wild rice produced on farms. Lake grown wild rice is grown in the wild in the lakes of Minnesota and Canada and is hand harvested. Farm grown wild rice is a cultivated row crop that was introduced in the early 1970’s. The cultivated wild rice has both a yield and cost of harvest advantage over lake grown wild rice. A price premium is given for the lake grown wild rice because it is considered more “natural “. Hand picked wild rice is found in Canada and Minnesota. It is illegal to mechanically harvest wild rice from lakes or rivers in Minnesota. An average premium of lake grown and hand picked wild rice is two dollars over the cultivated crop price (Hasbrook). The demand for retail wild rice and wild rice products would appear to be fairly price responsive. There are a number of possible substitutes for wild rice and wild rice products. These would include other grain products and blends, white and brown rice and their associated mixes. The presence of these close substitutes would suggest the price point for wild rice and wild rice blends needs to be comparable to its close substitutes. Therefore, factors that would influence that price point need to be carefully considered. These would include wild rice production and processing costs, value-added costs including costs of blend ingredients, and marketing costs. Any substantial increase in these costs and consequent upward pressure on wild rice prices could have a major effect on the quantity of wild rice demanded. Exportation The export demand for wild rice has fluctuated recently. Table 2 shows the exports of wild rice from 1994 to 1999. Major importing countries of U.S. Wild Rice include Canada, The United Kingdom, Netherlands, 6 Table #2 U.S. Exports of Wild Rice Year Quantity in Pounds 1994 11,353,000 1995 7,415,000 1996 11,131,000 1997 13,831,000 1998 12,989,000 1999 12,676,000 Belgium, France, Germany, Switzerland, Spain, and Australia. The outlook for the European Markets is bright. The European market has grown significantly in the past ten years from around a 1.5 million pound market to a market now estimated to exceed 4 million pounds annually. This growth has occurred due to two factors. First, steady and reliable exportable supplies have allowed/fostered increased promotional efforts by U.S. marketers and by development of distribution programs by European companies. Second, growth has come from a steady decrease in the delivered cost of wild rice to European ports of entry thus resulting in increased consumption. Farm Level Demand and Processor Demand Chart #1 is based on production figures developed by Oelke et al. Published wild rice production numbers after 1990 were not available. Production in both California and Minnesota increased over the 1968-1990 time period with California becoming the leading producer. It is expected that over the next five years (2001-2005) that California production will continue to grow and Minnesota production will decline (Errecarte). Farm level prices in the early 1970’s averaged about $2.50 pound on a green wild rice basis. Wild rice production levels increased by 26% between 1982 and 1984 and more than doubled in 1985, and while there was increased market demand farm level prices dropped to an average of $0.90 to $1.00 per green wild rice pound. Production increases attributable to both expanded acreage and increased yields per acre have further reduced producer prices. Current California producer prices for wild rice average approximately $0.45 per pound of green rice. Minnesota producer prices remain somewhat higher primarily due to some of the unique characteristics of the Minnesota market discussed earlier. The difference between retail prices and producer prices has become wider over time. The increase in the retail-producer margin may be attributable 7