How to Become Involved in Adding Value *
Value-added projects should start with intelligent market information on customers and competitors to make sure an opportunity exists. A recipe for success is to begin with a basic commodity and add a healthy dose of ingenuity to create a product desired by consumers that also has a valuable edge on the competition. Successful groups enlist the counsel and involvement of many experts and stakeholders, study conditions and trends, develop a vision, chart the future and develop strategic and operational plans with which producers can identify.
In general, four different methods can be used to add value to producers' raw commodities. These methods are:
- selling into open markets for normal distribution channels of marketing and processing,
- investing in a portfolio of food companies,
- using production or marketing contracts, and
- forming of producer-owned businesses.
Open Market Distribution and Processing Channels
Food marketing channels include all the institutions and processes by which food moves from the producer to the end user. Perishable products, such as fresh produce, move through shorter channels, while more storable products, like frozen pizza, utilize longer distribution channels. The purpose of middlemen has been to smooth the flow of goods from manufacturers or growers who produce large quantities of a few items to consumers who desire to purchase small quantities of many items. However, as retail chains have grown larger and more concentrated, food processors have found it advantageous to negotiate with and distribute directly to large retail customers.
Over the last 25 years, food processors have provided innovative, easy-to-prepare foods with convenient packaging, because consumers desire product quality, variety, food safety and nutrition. In addition, fulfilling consumers' desires will necessitate closer coordination and communication between agricultural producers and food processors. Additional value related to food preparation that was provided in the home or restaurant is now contributed by processors, especially in niche products and specialty items. Successful processors in the future will add value through greater convenience, nutritional qualities and/or fresher taste.
This section describes direct marketing, conventional marketing and niche marketing and also provides some general marketing tips.
A technique that producers can use to seek to add value to their products is marketing to the end consumer through direct marketing channels. Direct marketing includes individual producer processing businesses, roadside stands, farmers' markets and community supported agriculture (CSA). For example, CSA involves a partnership agreement between growers and consumers to provide vegetables and fruits throughout the season, while sharing both the risks and rewards involved in production agriculture. Consequently, producers must know the potential customer base, their income level, household size, age, ethnic group and education level to estimate the demand for direct marketing.
Conventional marketing for grain production consists of selling to grain elevators, terminal markets, feedlot operators and other livestock producers. The conventional method of marketing livestock generally is to deliver finished livestock to animal packers and processors. Traditionally, value-added activities occur in the final stages of the agricultural commodity-marketing channel. However, opportunities exist at the beginning of the chain. For example, the introduction of identity-preserved grains can provide value-adding opportunities. Opportunities come in many shapes and forms, and the window of opportunity can change quickly.
Producers today are looking for opportunities to add value to their products, but they are finding that those opportunities may not fit traditional molds. Value-added agriculture takes research, innovation and drive. In fact, when the value-added venture becomes operational, members are transformed from commodity producers into processors and marketers of finished, value-added food products.
Niche marketing is a successful part of creating a need for value-added products. Even so, producers must rely on market planning, not emotion or guesswork, when producing to fill a market niche. Products must be developed carefully by targeting a specific group of consumers and focusing markets to smaller targets. Figure 1 portrays bulk farm commodities flowing into the processing sector through conventional commodity markets.
Figure 1: The Traditional Food Marketing System.
*Source: Barkema and Drabenstott.
In contrast, Figure 2 shows the new food marketing system as one in which farm products at production are targeted for more specific final uses and flow through narrower market channels to meet specific consumer needs.
Figure 2: The New Food Marketing System.
Niche marketing can achieve a higher market share and larger profits because of the following advantages:
- Market penetration is achieved without the vast expenditures normally needed to dominate the market and without attacking established brands.
- High market share can be obtained against competitive products.
- The product is positioned so that exclusive identification of that product is accomplished.
A niche-marketing program has other characteristics including:
- New uses or demands for existing products are discovered.
- New products for current or still unknown markets for consumer desires are developed.
- Current product lines are expanded to create more consumer use.
Niche marketing can be established in two ways:
- Analyzing the impact of trend or need among current and prospective users and then determining if the trend might create an opportunity for a new product or if a current product can be promoted in a new way,
- Continually monitoring product users to find out ways to subdivide them into niches. These divided groups can provide a market in which an existing or new product can be promoted.
An alternative solution to becoming involved in adding value to commodities is a portfolio approach to off-farm investment. This approach involves the purchase of publicly traded stock in firms already purchasing, processing and marketing the producer's raw product. This is a viable alternative for a producer considering directly investing in postharvest activities or seeking to link his farming operations to participate in the risks and rewards of downstream integration from the farm gate.
The advantages of investment in publicly traded companies when compared to other value-adding strategies include: no purchasing of facilities or equipment, no development of new products, no hiring of new management and employees, or the acquisition of new customers. It eliminates the costs associated with vertical integration, but downstream control or influence is virtually nonexistent. Nevertheless, before specific value-added ventures have been established, producers can become involved in downstream market integration of the raw commodities they are producing.
Production or Marketing Contracts
Contracting for coordination between processors and producers has existed in the past for some products. The relationship has been extended in recent years so that processors might obtain inputs with special characteristics. Although not yet common in grain, oilseeds or red meat, this is changing, because wheat is sometimes priced on protein content and hogs are priced on leanness. With production and marketing contracts, producers are able to add value to their production and are not faced with all the inherent output price risks that growing without contracts would entail.
The potential market, production costs and the pricing structure for the value-added product must receive high priority when considering the feasibility of any value-added, producer-owned business venture. Agricultural businesses involved in adding value should have effective marketing programs with these four basic requirements:
- engage in strategic planning to establish goals and effectively use resources;
- have a marketing program that is market-oriented, rather than production-oriented;
- acquire adequate financial resources; and
- hire experienced management with expertise in value-added products.
Steps for Forming Producer-Owned Businesses
The formation of a value-added business generally involves the following specific developmental steps from starting with an idea to becoming a successful business venture.
- Develop an innovative idea.
- Select a steering committee and advisors.
- Study the market potential.
- Conduct a feasibility study.
- Decide if business idea is viable.
- Develop a business plan.
- Create business structure and organization.
- Raise debt and equity financing.
- Hire a management team.
- Implement a business plan and begin operations.
* 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).