With the futures market unlikely to explode skyward anytime soon, increasing your profit margins may depend on your ability to add value to the commodity you produce.
“Adding value holds the potential to allow the now often defined family farm of 1,000 to 2,000 acres to survive without growing in size. The caveat, however, is the farm's management focus will have to change from commodity agriculture to a value based agriculture,” says Joe Parcell, director of the Missouri Value Added Development Center at the University of Missouri.
Agricultural Economist Darren Hudson, who spoke at the Mississippi Agricultural Economics Association's annual meeting in Starkville, Miss., says producers must decide whether their competitive advantage lies in volume or value.
Large agribusinesses are often not structured for identity preservation, Parcell says, yet clearly domestic and international markets are beginning to demand products that offer quality and are traceable.
That desire to trace a product from the farm to the consumer's dining room appears to be an increasingly hot button issue since the Sept. 11, 2001 terrorist attacks against the United States.
Parcell defines “value-added” as adding value to a commodity after it is produced. The key, he says, is giving consumers something they want, whether that's a real or perceived quality attribute. “Laura's Lean Beef, gives consumers lean beef, but the meat from cull bulls originates from animals that most producers wouldn't associate as being in great demand.”
Another example, he says, is Twenty-first Century Alliance Wheat Milling. A group of more than 1,000 producers, they produce high protein wheat for a producer owned flour mill in Ricone, N.M. that produces items for the specialty tortilla market. “They direct market high quality, identity preserved, wheat to processors for a premium because the wheat improves operating efficiency of the milling and baking facilities.”
Value-added commodities can be broken down into four basic categories — bundling, collective bargaining, integration, and retail product development.
Jointly marketing products, also called bundling, can be achieved simply by combining your raw commodity with a staple grocery item. One example, Parcell says, is the packaging of locally produced steaks with a marinating sauce and bread.
Standing in the way of you and your potential windfall is the abundance of money and infrastructure needed to start a business, and the markets and attitude necessary to make it a successful business.
While opportunities to develop value-added products are out there, and will likely increase with advances in technology, they won't come cheap. “The capital requirements will be high and access to information will not be easy. In most cases taking advantage of one of these opportunities will require partnering with a private or public owned agribusiness,” Parcell says.
“It requires considerable funds to meet the capitalization requirements to achieve economies of size, and the most overlooked aspect of starting a new business is insufficient operating monies to allow the business a couple of years of considerable losses to work the quirks out,” he says. “Many producer-owned new generation cooperatives are reorganizing to allow for outside investment.
Hudson says, “In some cases, the capital needed to start-up a value-added enterprise simply doesn't exist because many farmers have all of their capital worth tied up in land and production expenses.”
Parcell warns growers to understand the risks inherent in the value-added system. “Before you invest in a producer-owned value-added enterprise, make sure you understand what future opportunities you are forgoing. Capital for producer investments often comes from taking loans out against assets, such as land, and the return on your investment is not always instantaneous.”
Infrastructure, Parcell says, refers to not only physical infrastructure, but also to knowledge. He believes much of the production agriculture sector is poorly trained in how to operate a customer-focused business. The secret, when starting a producer-owned business, is to fill in any weak spots with people from both within and outside the agriculture sector.
“You must spend the time and energy needed to learn the value-added system, and you must always view the wants and needs to the consumer as your ultimate goal,” Hudson says. “As commodity producers, we've been operating under the assumption that if we plant it, they will buy it, and that's not how value-added enterprises work.”
Tim Hammonds, president of the Food Marketing Institute in Washington, D.C., explains it this way. Historically, growers have produced a commodity and then pushed it through the supply chain. When there's too little of the commodity produced, prices go up, and they go down when too little is produced. Increasing the push and pull of production, however, is changing to a pull and push system where a producer first determines what consumers want and then plans production according to those needs.
“In this world if you are selling a pure commodity, the low price wins. It's a race to the bottom, and there isn't much room down there for many low cost producers, Hammonds says. “The question then becomes how to adapt, not how to hold back the tide because these kinds of trends are happening all over the world. Agriculture is not unique, it's just late to the party.”
The one thing that ties the system all together, and determines whether your value-added business is successful, is your attitude as a producer and business owner.
“The biggest issue is for producers to look at this as an investment and not as rural development,” Parcell says. “Too many projects have gone under because producers want to be able to kick the tires. For example, if you want to invest in a corn-ethanol plant, then invest in one in northern Iowa or southern Minnesota, where corn is the cheapest. Eventually the funds will flow back to your local community, and your risk of loss decreases significantly.”
Areas of opportunity for value-added agricultural products include the development of functional foods, institutional foods, nutrition-enhanced foods, and identity preserved commodities.
Parcell defines functional foods as foods that provide consumers with a dietary need or remove some unwanted dietary component. Examples include high vitamin A rice, or cooking oils that reduce cholesterol. In comparison, institutional foods: are foods developed for a specific end use, such as rice polymers that allow for the cheaper production of new food products for global markets.
Consumers in some countries are also increasingly demanding to know where the food on their table originated, and more retail products are being produced on demand. “Some of this is stimulated in the international market where up to 30 percent of income is spent on food, whereas the U.S. consumer only spends 11 percent of income on food,” Parcell says.