CERTIFIED ORGANIC HERBS AND SPICES GROWN IN THE U.S. AND SUPPLIED FROM RUSSIA, CHINA  AND OTHER COUNTRIES OF THE WORLD FOR WHOLESALE The corporate site of Khabarovsk herbalists

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IT WAS SO LONG TIME AGO!
"ON BECOMING MARKET FOCUSED"

BY JAY B. PENICK, PRESIDENT AND CEO OF FARM CREDIT SERVICES



PAGE 1

The cover article of Yields Magazine in 1998

ORGANIC FARM PUBLICATION
Jay B. Penick,
President and CEO of
Farm Credit Services

Introduction


Over the years, agricultural producers across the Northwest have become very good at economically and consistently producing high-quality products. Today, we're seeing a new wave of farmers and ranchers who are not only top producers, but who are also developing the marketing savvy and initiative needed to develop market niches and grow their businesses in new directions.

Our cover story about Lon Johnson and Trout Lake Farm Co. is a great example of taking quality production to new heights. Years ago, Lon accurately gauged the growing trend of more consumers demanding healthy and organic foods and medicines. Since then, he has positioned his business to be a credible and quality source of organically grown herbs. Others in agriculture are benefiting from Lon's growing business by partnering with him to grow products and provide organic inputs.

While some producers expand their existing businesses by selling products to new customers, others are finding creative ways to add value to their core products. Often this requires teaming up with other producers to create a new processing venture.

Due to the changing economics of farming, many are choosing to supplement their main business with a side venture for a new product or service. In this issue of Yields, you'll find several Farm Credit customers that have successfully added a new business endeavor.

Regardless of the marketing direction you may take, any change in your business will certainly impact your financial situation and risk-bearing ability- either positively or negatively. If you are considering a new venture, or making changes to your business, let your Farm Credit representative help you analyze your options and how they can affect your bottom line. We're proud to be financing the next generation of market-focused producers.

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PAGE 11

ORGANIC FARM PUBLICATION
Trout Lake Farm Co. lies at
the base of Mount Adams,
north of Hood River, Oregon

TROUT LAKE FARM


Trout Lake Farm Co. lies at the base of Mount Adams, nestled in the Trout Lake Valley north of Hood River, Oregon. The operation specializes in growing, processing and marketing organically-grown herbs. Herbs such as peppermint, cilantro, parsley, and dill are sold primarily for culinary purposes, including bulk sales to health food stores. Other herbs such as feverfew, valerian and dandelion are used to supply an ever-expanding medicinal market. Currently, Trout Lake Farm ships approximately 3 million pounds of herbs each year, with over 30 percent sent to international markets. But, as Johnson will tell you, this hasn't always been the case.

GROWING THE VISION


Growing up on a cattle ranch in Colorado, Johnson's initial interest was ranching. However, after graduating from the University of Colorado, he spent a short time working with several friends who had started a new business- Celestial Seasonings. Celestial was one of the first herbal tea companies in the country. As a buyer, Johnson soon discovered that herbs made available to the U.S. market were left over dregs from Europe, where using herbs for medicinal and culinary purposes was a long-standing tradition. "I saw a need for high-quality products here in the states," says Johnson. "I guess I naively thought if I can grow hay, I can grow herbs."

The search then began for a place to grow his vision. Johnson pored over a U.S. atlas researching soil, water, climate, and topography characteristics of locations throughout the nation. He narrowed the list to five sites. After visiting the first two, Johnson arrived in Trout Lake and knew he had found a home. He initially purchased 80 acres of rich, volcanic soil, where he planted mint, catnip, comfrey, and red clover. Today, the operation has grown to 400 acres in Trout Lake and over 500 acres of owned and leased land at a new operation in Grant County, Wash.

Trout Lake Farm used organic farm techniques from the beginning, which is highly unusual for a large-scale herb farming operation. Today, almost all of the growers in the Trout Lake Valley practice these organic techniques. According to Johnson, land can be designated "organic" if the soil has remained free of synthetic pesticides and fertilizers for a minimum of three years. Trout Lake Farm Co. is certified organic by the Washington State Department of Agriculture. One benefit of locating the operation in Trout Lake was the close proximity to dairies. Manure supplies from dairies in the area provide the operation with natural fertilizer. Some of the manure is composted and spread on fields and some is piped from the dairies into lagoons and turned into liquid compost. Johnson also boasts that two large organic dairies are now operating in the valley who supply the nationally distributed Organic Valley dairy brand.

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PAGE 12

ORGANIC FARM PUBLICATION
Withiut the use of pesticides, crop-eating
bugs are ofter contralled by planting buffer
areas that house natural predators

MEETING CUSTOMER DEMAND FOR QUALITY


As a leader in the industry, Trout Lake Farm continues to advocate for quality testing and standardization of herbs. "Customers are becoming more sophisticated in their knowledge of herbs, and they are demanding high quality," says Johnson. "We have been long-time proponents of quality testing because that's our niche. We compete on quality and no other basis." In the spice market, for example, dehydrated basil can be purchased from Egypt for as little as $.85 a pound. California basil, on the other hand, sells for around $5 a pound. However, there is a huge difference in quality. According to Johnson, "You're lucky if you get what you pay for, but you certainly don't get what you don't pay for."
ORGANIC FARM PUBLICATION
Caisse's Herbal Tea, which was fomulated
by Nurse Rene Caisse in the 1930s, is
grown and packaged at Trout Lake Farm.


Johnson believes that consumer demand will continue to increase for high-quality, organically-grown products in the United States. "Consumers are becoming more and more aware of growing practices in other countries. In Mexico, for example, there is little regulation regarding pesticide use-it's still legal to use DDT: Less than one truck in every 100 is checked at the U.S./Mexican border. And, by the time the tests are complete and the results are obtained, the trucks are long gone. As people realize how centralized the food system is becoming, they're going to be more supportive of local, organically-grown products. It's a coming market that people should be aware of."

OUT TO SAVE THE WORLD


Perhaps Johnson's most ambitious vision was the marketing of herbs for medicinal purposes. "Lon is a visionary," says Brian Rust, who

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PAGE 13

ORGANIC FARM PUBLICATION
"Our industry is definitely quality
driven--if you want to market
a particular herb, you’ve got to
make sure that the chemical
component matches the exact
species and profile you want"
- Greg Pennyroyal

has worked in Trout Lake's purchasing division for two years. "He wants to see natural products used to keep people well. And it makes sense, you are what you eat. In some respects, Lon's out to save the world-he wants to see medicinal herbs accepted as a way to keep people healthy."

More and more consumers in the U.S. and abroad are taking an active role in their health. As a result, the market for natural medicines continues to grow. While precise market figures for the industry are difficult to track, the American Botanical Council in Austin, Texas, estimates the 1996 sales of botanical medicines at $2 billion, with a growth expectation of 20 to 25 percent a year. However, when Trout Lake Farm began marketing herbs for medicinal purposes in 1975, the market was almost non-existent.

In 1985, Johnson formed a new division of the company known as Flora Laboratories, Inc. Flora Labs grows, manufactures and markets all Food and Drug Administration consumer products and botanical extracts, including selling bulk tinctures to other manufacturers. Flora Labs also markets its own line of consumer products-First Sneeze Echinacea, Valerian and Caisse's Herbal Tea. According to Greg Pennyroyal, general manager of Flora Labs, the first and most critical step of producing medicinal herbs is species verification.

ORGANIC FARM PUBLICATION
A fully staffed lab verifies the species and
chemical nature of the herbs marketed
by Trout Lake Farm Co.
"Our industry is definitely quality driven," says Pennyroyal. "If you want to market a particular herb used in natural health remedies, you've got to make sure that the chemical component matches the exact species and profile that you want." This ability to provide scientific species verification put Trout Lake on the world map in 1986.

As the story goes, Steven Foster, a well-known herbalist and botanist from Southern Missouri, found several people in Arkansas who were shipping snake root to Germany. According to the group, snake root was commonly known as Echinacea, an herb that helps stimulate the immune system. But with his experience, Foster knew that snake root was actually Parthenium & Integrifolium, not Echinacea. After further research, Foster determined that the snake root was being shipped to the

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PAGE 14

ORGANIC FARM PUBLICATION
1st Sneeze Echinacea is
marketed through health food
stores and mass retailers

University of Munich, the foremost pharmacology research center in the world. The university had been studying the medicinal components of Echinacea and other herbs for years. After being contacted by Foster, the university asked where they could obtain official vouchered samples of the Echinacea plant. Foster recommended Trout Lake Farm.

Johnson and his team of specialists at Trout Lake Farm immediately went to work. In collaboration with a taxonomy expert from the University of Kansas, Johnson and his team provided the University of Munich with samples and official vouchers of the Echinacea plant. After further testing, researchers in Munich realized they had been basing their research of species verification on a species that had not been verified. They were not using true Echinacea.

When research studies touting the value of Echinacea as a medicinal were finally published by the University of Munich, the studies included an interesting footnote. Included in the research papers were the words, "Echinacea (Trout Lake Farm, Washington)." According to Pennyroyal, the rest is history. "Once the research papers were published, we began receiving calls from around the world. In many people's eyes, Trout Lake, Wash., was the only place in the world to find true Echinacea. We have been working with the various universities ever since."
ORGANIC FARM PUBLICATION
Custom fabricated machinery is used to
prevent cross contamination and to cut
and sift herbs into different grades


RESEARCH & DEVELOPMENT


To position themselves for the future, Trout Lake Farm has heavily invested in scientific research and development. The operation includes a fully-staffed lab which verifies the species and chemical nature of the herbs they market. "Our strategy is to provide the R&D up front, so that we can provide a Certificate of Analysis to prove scientific characteristics of our products. Most small companies can't afford to invest the type of R&D monies that we do, but our goal is to amortize these costs over the entire consumer base. Now customers who are interested in high-quality herbs can get them at a decent price and, ultimately, provide a savings to the consumer," says Pennyroyal. In addition to species verification, Flora Labs is going a step further by conducting constituent testing with other consulting labs.

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PAGE 15

ORGANIC FARM PUBLICATION
Lon's mother Sandra oversees packaging
and ad design for Trout Lake Farm's
consumer products

This type of testing examines the chemical content of herbs for active constituents-chemical compounds that are naturally occurring in a plant that provides medicinal value.

With an increased focus on R&D, Flora Lab's testing not only verifies specific types of species and the safety of their use, it also seeks to identify how chemically effective an herb may be in the healing process. Detailed documentation from field to processing is a unique aspect of Trout Lake Farm. As a result, many pharmaceutical companies who may otherwise be skeptical of medicinal herbs are now contacting Johnson's team for information.

TARGETING THE RETAIL MARKET


Johnson's entry into the retail market began as a demonstration project. His premise was to prove that a company could survive the hassle and trouble of legally marketing a regulated, herbal drug in the U.S. Once again, Johnson was a man before his time.
ORGANIC FARM PUBLICATION
A 60,000 sq. ft. horse stable and corral were converted to house Trout Lake Farm Co.
headquarters


At the turn of the century, there were several schools of thought regarding healing procedure-Homeopathic, Eclectic (an equivalent of modern day naturopaths), Allopathic (modern medicine) and an array of Chinese and Native American medicine. The American Medical Assn., a strong legislative body, lobbied for U.S. legislation that would identify Allopathy as the only type of recognized medical practice. When the vote went to the House

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PAGE 16

ORGANIC FARM PUBLICATION
Chief Forman Cruz oversees the workers at
Trout Lake Farm Co. Most of the farm
employees are from the same small town
in Mexico

floor, the Speaker of the House, who was a homeopathic physician, threatened to filibuster the legislation unless homeopathy was grandfathered into the bill. Thus, the door was left open for homeopathic medicine.

Seeing market potential, Flora Labs was one of the first companies in the country to market a legal, over-the-counter herb drug in 1987. It wasn't until seven years after Johnson's successful demonstration project that Congress passed the Dietary Supplement Health and Education Act of 1994 which eliminated many of the roadblocks to marketing herbs as medicinals.

With an increased focus on R&D, Flora Lab's testing not only verifies specific types of species and the safety of their use, it also seeks to identify how chemically effective an herb may be in the healing process. Detailed documentation from field to processing is a unique aspect of Trout Lake Farm. As a result, many pharmaceutical companies who may otherwise be skeptical of medicinal herbs are now contacting Johnson's team for information.

WORKING COLLABORATIVELY WITH THE REGULATORS


Pennyroyal can still remember the first PDA inspector who visited the Trout Lake Farm operation. "He basically told us that he was here to find a problem-he made it clear that he didn't believe in marketing medicinal herbs." But, time has changed all that.

According to Johnson, "We now work together with the PDA. We enlist them as partners in what we're trying to do. Basically, the PDA's role is to protect the consumer, and that's our goal, too. When they come out for an inspection, we view it as a free audit. We are continually looking for ways to improve our operation, and the PDA has been a great partner in helping us do that. When we have questions, we call them. I think it must be music to their ears."

In fact, during the last inspection, several representatives from the PDA arrived in Trout Lake. "At first I thought there was a problem," said Pennyroyal. "They had quite a number of people with them." As it turns out, several of the PDA inspectors were trainees who had come to see the operation. According to senior inspectors, they wanted their trainees to see a homeopathic company that was doing things right. By working with the PDA, Johnson and his team hope to create a shift in the regulatory consciousness of government. They hope to prove that herbal medicine is safe and can be scientifically controlled.

Presently, Trout Lake's medicinal products include First Sneeze Echinacea (to combat colds and flu) and Valerian (a natural relaxant). These products are marketed to health food stores and through mass retailers such as Walgreen, Pay Less and Bartells.

ASSUMING THE RESPONSIBILITY OF LEADERSHIP


The team at Trout Lake Farm believes that being a leader in the industry warrants an enormous amount of responsibility. Their investment in R&D and meticulous attention to detail pushes the entire industry to a new level of performance. Unfortunately, other companies have chosen a different path.

For example, an herb extract called Ephedra Sinica provides a natural occurring source of Ephedrine, an ingredient in Sudafed. However, if taken in large doses, it reacts as a stimulant or form of "speed." Several

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PAGE 17

ORGANIC FARM PUBLICATION
"As the consumer becomes
more sophisticated and
knowledgeable about how their
food is grown, the potential of
the organic market continues
to grow"
- Lon Johnson

unethical companies, recognizing a way to market an unregulated drug, began selling high concentrations of this herb to kids. Teenagers used the drug to get "high" before attending slam-dances known as "raves." With unethical use, a good medicinal product was being turned into a bad drug.

Another example is a Polynesian herb known as Kava Kava. Taken in proper dosages, the herb is a very effective, mild sedative that doesn't impair a person's ability to function. However, in large dosages, it can be slightly hallucinogenic. Several customers have approached Trout Lake Farm to produce the herb.

According to Pennyroyal, "We've avoided producing Kava extract until we could guarantee that it will be marketed responsibly. Right now we are working to develop a voluntary code of ethics that will be signed by everyone we sell to-and we have a couple of companies that are interested. Basically we are saying, 'those of us in the industry recognize there could be a misuse with this, but we are doing a self-policing, ethical contract that ensures that this will be manufactured and sold in a responsible way.'"

GROWING THE OPERATION


As the Trout Lake Farm operation continues to grow, Johnson's use of contract growers increases. According to Lon, "With some 600 to 800 different species that are commonly traded, we can't do it all ourselves." Trout Lake Farm currently contracts with growers throughout the United States and Canada and with farmers as far away as Israel. When asked what advice he would give to growers interested in the organic spice and herb market, Johnson stresses, "It's one thing to see someone else growing a particular herb or spice, but that market is already established and being filled. Instead, focus on plants that no one is producing -there's the true potential." Johnson also adds, "Specialty crops are different than a commodity that you can always sell- maybe not always for a profit, but you can sell it. Growers in our market, or anyone who markets a specialty crop, should have contracts established before they stick their necks out. We always have contracts established with our growers-that way they know they'll get paid."

A VISION FOR THE FUTURE


From the headquarters at Trout Lake Farm Co., Johnson continues to advocate for the use of organic growing techniques. His relentless schedule includes extensive travel throughout the world where he sells the benefits of organic farming. "The industry has come a long way over the past 25 years," says Johnson. Technical advances are making it more and more economical for growers to switch to organic farming. And, as the consumer becomes more sophisticated and knowledgeable about how their food is grown, the potential of the market continues to grow. "In this market you have to be adaptable and get into marketing what the customer wants. It makes life more complex, but the payoffs are there."

Many dreams come true WITH TIME...
but some dreamers quit too soon!

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