Farm Management Update

Quarterly Publication of Ohio State University Extension

Spring 2003

Value Added Opportunities for Agriculture — Wave Into the Future

John Ellerman
Extension Marketing and Cooperative Development Specialist

Ohio's agricultural industry complex contributes somewhere in the range of $56—$68 billion to the state's economy and employs one-in-six Ohioans in areas related to agriculture. Agricultural production contributes total sales around $4.5—$6 billion annually. In 1910, about 44% of consumers' food expenditures went back to the farm. By 1990, that figure was less than 10%, and it is projected that this trend will continue. These trends have created an interest in value added enterprises for agriculture. As agricultural producers find it more difficult to make ends meet with diminishing profit margins from increasing input costs and shrinking commodity prices, more emphasis is being placed on adding value to those products with processing.

Value added agriculture does not, and probably never will, increase commodity prices, but it can add value to those products by performing activities usually performed by someone else. The benefit comes from the value added activity performed. Another distinction is that the value added goes back to producers both directly or through producer owned businesses, not agribusiness processors. Some of the ideas being developed for value added enterprises in Ohio are a straw board plant, a corn ethanol plant, white pine processing, meat goat processing, fish processing, vegetable processing, and soybean processing. There are many other ideas waiting to be developed. These developments will help to support and sustain agriculture in Ohio.

Predicted trends in agriculture that support the development of value added agriculture activities are:

• To stay competitive, U.S. farming must move towards a more industrial model in order to cooperatively produce products with improved, consumer driven attributes. The focus of the production sector will continue to move away from growing products and towards the manufacturing of goods with value added consumer-driven attributes. Niche markets and a growing demand by consumers for a variety of preprocessed, ready-to-cook, and ready-to-eat foods will become a significant force in the development of value added products.
• Food supply chains will rely on vertical integration and coordination techniques of production, marketing, and/or processing to optimally deliver products with attributes that meet specific end user needs.
• Food safety and quality control will become a driving force in the food sector. Consumers will become more sensitive to where their food comes from and how it was produced.
• Consumers will become more involved with environmental, social, and cultural issues related to agriculture.

Consumers' demand for more processed foods is reflected in the growing wedge between annual food expenditures and the value of farm commodities (fig. 1). In 2000, consumer expenditures for domestic food (excluding seafood) consumed at home and away from home totaled $661 billion. The value farmers contribute to food expenditures by providing agricultural commodities accounted for $123 billion, or about 19% of the total value and the majority of that pays for production inputs. The remaining 81% reflects the value added as labor, advertising, processing, transportation, packaging, and other marketing costs incurred transforming farm commodities into food products and meals. This trend is likely to continue. Farmers will be challenged to increase their share of the marketing bill through vertical integration and coordination to survive.

The popularity of dining out is a clear indication of market trends. Expenditures on away-from-home food now account for about 47% of total U.S. food expenditures and it is predicted that away-from-home expenditures will exceed at-home expenditures by 2010.

Another form of value added agriculture is direct marketing. Many producers are finding that the way they sell their products significantly affects their profits. Direct marketing does not require substantial capital investments. It fits into the urban development trends that are now occurring in Ohio and a consumer demand trend for healthy food products. The berry industry is an example of production that is driven by a consumer demand trend for a healthy and nutritious product. There is also a growing consumer interest in locally grown food that can be traced back to where it came from and how it was produced.

Direct marketing and other value added enterprises require a change in focus by producers. They have to focus production around their market, rather than produce a commodity and sell it. The underlying concept is that there is a difference between marketing and selling. Producers who market their products are price makers, while producers who sell their products are price takers. It's possible to add value to products by direct marketing when producers assume the marketing functions traditionally done by others. It's another way for farmers to increase their share of the marketing bill.