What Exactly is… “Value Added”?

Rodney B. Holcomb Agribusiness Economist Oklahoma State University Food & Agricultural Products Center

The Definition of “Value Added”

 Value Added:  The addition of time, place, and/or form utility to a commodity in order to meet the tastes/preferences of consumers.

 To put it simply…  Figure out what consumers want, when they want it, and where they want it – then make it and provide it to them.

Changes for Agriculture Since the Mid/Late 1980s

 Agricultural prices see greater volatility due to:  Farm policy changes   Developments in international trade Weather  Because of instability some producers left agriculture and others began to explore ways to enhance income

Adding Value to Agricultural Products

 Provides substantial benefits  Increased ability to capture a percentage of the farm-to-retail price spread  A typical loaf of bread for example    Wheat represents less than 9% of the retail value Milling, baking, and related activities represent almost 65% of the final value The rest is transportation and retail mark-up

Value-added Marketing Cooperatives

 A noticeable phenomenon in U.S. agriculture since 1990  More than $1.2 billion were invested in value added marketing cooperatives in the late 1980’s and early 1990’s (Egerstrom, 1994)  Particularly evident in the Northern Plains, shown by development of farmer owned efforts  Success in the Northern Plains has increased interests of Oklahoma producers and cooperatives

Value-added Processing: The State’s Perspective

 Possibilities for additional employment, gross state product, and tax revenues  Friendlier environment for value-added food and agricultural products processing industries:  Decentralization in U.S. manufacturing  Population shift towards the “Sun Belt” states  Resource allocations towards food processing research made by Oklahoma

Future Growth

 Oklahoma has the potential to expand its value added processing activities  Factors suggesting future growth:  Agricultural output is tremendous and varied   Several incentives for producers considering processing opportunities  Ag Enhancement & Diversification Program  Producer Value-Added Tax Credits Highway system and central location offer proximity to market centers

Planning a Value-added Processing Venture

 Success in developing depends upon careful business planning and marketing  In most cases, producing a value-added product is the easiest part  Main difficulties for a food business are:   Manufacturing a product consumers are willing to buy Having a market outlet for the product

Initial Planning

 Four basic steps…  Step 1: Compile all available information concerning the quality characteristics of the commodity   In the producer’s trade territory Over a period of time.

 From this step an initial list of potential processed products can be identified

Initial Planning (cont.)

 Step 2: Obtain industry and production information for each potential product  Market size   Market growth Industry concentration   Location of competitors within the region Complexity of processing technology  Minimum efficient scale of operation  Location of major market outlets and distribution points

Initial Planning (cont.)

 Step 3: Analyze the information via a rating or ranking system  Addresses advantages and disadvantages  Provides a means for quantifying/ranking each possibility  From this analysis identify the ventures that show the greatest promise

Initial Planning (cont.)

 Step 4: Develop a specific plan of action for pursuing the “best” processing alternative     Business structure to be used Necessary facilities, equipment, and management A plan for raising capital A marketing scheme for contracting production

Results

 An enterprise that is both profitable and consistent, providing a steady source of additional income for the producer  Opportunities to capture a significant share of the consumer’s food dollar  Make use of resources provided by Oklahoma state agencies and Oklahoma State University