Farm Management Newsletter

Quarterly Publication of Ohio State University Extension

Winter 2001-2002

Enhancing Farm Income Through Value-Added Agriculture

By Tom Sporleder, Farm Income Enhancement Professor,	Ron Overmyer, Coordinator of ABE Center,	and Jeff Layman, Extension Agent

Agriculture has been a rapidly changing industry for many years. Farmers understand that commodity prices over time reflect the cost of production with little margin.

In fact, the latest U.S. Department of Agriculture statistics indicate that only 20 cents of every dollar consumers spend for food reaches the farm gate. The remaining 80 cents goes for adding value in processing, marketing, distribution, and retailing.

Can farmers participate in gaining some share of the 80 cents that currently goes elsewhere? Of course the answer is yes. Some farmers, particularly through farmer cooperatives, already participate in value-added processing and capture some value-added margin for themselves. Outstanding examples of this include Goldkist with poultry and Land 'O Lakes with dairy.

Value-Added Activities

Value-added activities are ones that add value to a product or service from the buyers' perspective. The forms of utility, or usefulness to buyers, include transforming commodities into other forms, such as processing wheat into flour. Another source of utility is time utility, such as storing.

Yet another form of added value is place utility, such as transporting commodities or products to locations where the price is higher. So, a broad set of activities adds value by improving the usefulness of the commodity or product to the customer.

Market Opportunities

Market forces have contributed to better 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.
• Technological advances in everything from information systems, such as precision agriculture, to genetic technology that allows producing specialized commodities for targeted end-use markets.

The combined effect of the technologies is that they help farmers more accurately produce what consumers and processors desire.

Investing Off-Farm

Primary motivations for farmers to invest in value-added activities include enhancing income or reducing the variability of income (e.g., processing a perishable commodity so it can be stored).

Participating financially in value-added activities would not necessarily increase commodity price for what the farmer sells. Rather, income enhancement is expected through the return on investment made in the additional value-added business, not an increase in the commodity price. In fact, further processing operations typically strive to keep input cost as low as possible.

Heartland AgVenture Association (HAA)

Some new assistance is available to farmers interested in participating in value-added activities. Heartland AgVenture Association (HAA), a nonprofit corporation, began operation in September 2001. HAA assists in the development of value-added ideas so they become viable businesses and helps farmers invest in the value-added businesses of others.

HAA offers four services for members:

• Networking with others who have similar interests.
• Evaluating the most worthy ideas intensively.
• Providing feasibility studies to determine the economic viability of the worthiest ideas.
• Putting together business plans based on the best feasibility studies. The business plan step is part of the process for obtaining funding for a start-up business.

Reducing Risk of Start-Up

The value of membership in Heartland includes the right, but not the obligation, to invest in the agriculture-related value-added business start-ups of others. The potential for diversification of farmers' portfolios is improved through participation in HAA.

The purpose of HAA over the long haul is to reduce the risk of start-up businesses in value-added agriculture. Members have the opportunity of investing in a wide array of new ventures over time.

Membership for farmers costs $200 in annual dues with an initiation fee of $800 payable over three yearly installments. Partners and affiliates are other classes of members.

Partners include the commodity organizations such as corn growers and pork council, and the general farm organizations such as the Ohio Farm Bureau. Partners also may be for-profit agribusiness corporations such as ADM and Cargill.

Affiliates include primarily nonprofit organizations such as the Ohio Department of Agriculture and The Ohio State University.

A New Business Opportunity

Farmers must cope with global commodity markets that influence their economic well-being. Increasingly there is a need for customized production of commodities that serve specialized end-use markets. This need translates into a new business opportunity for farmers.

Through HAA, farmers can participate in value-added businesses that are harmonizing to their existing operations. Visit Heartland AgVenture's Web site at www.heartlandagventure.com or phone 614-677-4531 for more information. Frequently Asked Questions are posted on the Heartland Web site to offer detailed information on almost every operational aspect of Heartland.