How is Value-added Agriculture Explained?
Reviewed August 2009.
Department of Ag Economics
Kansas State University
In general, adding value is the process of changing or transforming a product from its original state to a more valuable state. Many raw commodities have intrinsic value in their original state. For example, field corn grown, harvested and stored on a farm and then fed to livestock on that farm has value. In fact, value usually is added by feeding it to an animal, which transforms the corn into animal protein or meat. The value of a changed product is added value, such as processing wheat into flour. It is important to identify the value-added activities that will support the necessary investment in research, processing and marketing. The application of biotechnology, the engineering of food from raw products to the consumers and the restructuring of the distribution system to and from the producer all provide opportunities for adding value.
A broad definition of value added is to economically add value to a product by changing its current place, time and from one set of characteristics to other characteristics that are more preferred in the marketplace. As a specific example, a more narrow definition would be to economically add value to an agricultural product (such as wheat) by processing it into a product (such as flour) desired by customers (such as bread bakers). Producers involved in adding value should think of themselves as members of a food company that processes and markets products to consumers. Often, this involves building processing plants in the producers’ geographical regions to process locally produced crops or animals. However, another model has occurred, which involves building the processing plant wherever it is most feasible and profitable, such as closer to where the final products will be marketed. An example of adding value to wheat through a distant processing plant is illustrated by the following case study.
Commodities vs. Products
The produce-and-then-sell mentality of the commodity business is being replaced by the strategy of first determining what attributes consumers want in their food products and then creating or manufacturing products with those attributes. With the continuous shifting to a global economy, the international market for value-added products is growing. Market forces have led to greater opportunities for product differentiation and added value to raw commodities because of:
- increased consumer demands regarding health, nutrition and convenience;
- efforts by food processors to improve their productivity; and
- technological advances that enable producers to produce what consumers and processors desire.
Producers involved with adding value will become more than commodity producers absorbing all the shocks brought about by global markets in this transitional period of agriculture. They will think of themselves as producing products for end users, instead of producing only raw commodities. For example, beef producers produce table-ready meat instead of finished (slaughter-ready) animals.
No longer content to sell raw commodities, some producers are striving for a larger share of the food dollar. These projects range from:
- adding value to hogs, cattle, bison, fish and eggs to
- marketing crops like organically grown grains, potatoes, carrots, beans, tomatoes and corn for sweeteners and fuels, to
- producing specialty cheeses and even alfalfa-based biomass for a local power plant.
Producers have a challenge to be responsive to consumer demands by producing what is desired. Attentiveness to consumer demands in quality, variety and packaging are important, because demographic trends show growth in the convenience-oriented, health-conscious and environmentally concerned sectors where price is not as important as quality. Because value-added research is important, producers might examine competitive advantages obtainable with processed products compared to raw commodities
Approaches to Adding Value
Adding value to products can be accomplished in a number of different ways, but generally falls into one of two main types: innovation or coordination. In general, the problem is to evaluate what, where, how and who can efficiently perform the marketing functions.
Innovation focuses on improving existing processes, procedures, products and services or creating new ones. Often, successful value-added ideas focus on very narrow, highly technical, geographically large markets where competition is sparse. Innovative value-added activities developed on farms or at agricultural experiment stations are sources of national growth through changes either in the kind of product or in the technology of production. By encouraging innovative ideas, adding value becomes a reality.
Innovation also can come from research about alternative crops that can be grown successfully by producers to replace traditional crops. Value-added producers are able to economically profit by growing these alternative crops instead of traditional crops. Some alternative crops that show promise include industrial hemp for its fiber, kenaf for fiber, and castor bean for its oil.
Industrial Innovation – A specific type of innovation is industrial innovation, which is processing traditional crops into nonfood end uses. These value-adding innovative activities use the research and emphasis that has been placed on finding industrial, nonfood uses for common agricultural products. Several innovative processes have been developed to transform traditional crops into nonfood products. Examples of these ventures include producing ethanol from corn, biodiesel from soybeans and particleboard from straw.
Coordination focuses on arrangements among those that produce and market farm products. Horizontal coordination involves pooling or consolidation among individuals or companies from the same level of the food chain. An example would be hog producers combining their market hogs to make a truckload. Vertical coordination includes contracting, strategic alliances, licensing agreements and single ownership of multiple market stages in different levels of the food chain. Vertical coordination, either through ownership integration or contractual arrangements, is necessary to link production processes and product characteristics to the preferences of consumers and processors.
Fundamental changes through coordination are altering traditional marketing relationships that link consumers, food retailers and wholesalers, food processors and producers. However, individual producers usually do not have sufficient levels of production to effectively produce, process and market their products. Few individuals possess all of the very different skills necessary for processing, marketing and business management, as well as staying efficient with their production enterprises. Therefore, a coordinated effort is needed to increase market efficiency or cost reduction. Many observers believe that both upstream and downstream linkages of processors will continue to increase in the 21st century.
Complete vertical integration is to align and control all of the segments of a production and marketing system under single ownership. The factors aligned and controlled are price, quantity, quality and transactional terms of exchange. Producers who invest in value-added projects past the farm gate cause the market to become more vertically integrated. A totally integrated system can provide consistent quality from the field to the shelf, eliminating middlemen and even saving money for consumers. Integration downstream towards consumers by producers commonly involves an equity investment for processing, sometimes by means of a producer owned business. So, producer owned businesses are positioned uniquely for further integration in food processing. The success of these value-added ventures hinges on thorough planning and implementation.
The Importance of Minimizing Costs
Nevertheless, before producers examine value-added processing and marketing, cost minimization in production must be achieved. Only low cost and efficient producers will be able to survive and compete in production agriculture. Adding value cannot take the place of reaching the efficiencies of production attainable through technology and economies of scale.
* Based on Value Added Industry Profile, Department of Agricultural Economics, Kansas State University.
Akridge, J., D. Downey, M. Boehlje, K. Hariing, F. Barnard, and T. Baker. 1997. "Agricultural Input Industries." Food System 21 Gearing Up for the New Millennium, Chapter 15. Purdue University Cooperative Extension Service, West Lafayette, Indiana.
Barkema, A., and M. Drabenstott. 1996. "Consolidation and Change in Heartland Agriculture." Economic Forces Shaping the Rural Heartland. Federal Bank of Kansas City, Missouri.
Barkema, A., and M. Drabenstott. 1995. "The Many Paths of Vertical Coordination: Structural Implications for the US Food System." Agribusiness, 11(5).