Value-Added Agriculture: Enhancing Farm Opportunities

Introduction

Agriculture is often thought of as a commodity industry.  A commodity is something that is perceived as being consistent in all characteristics. Crops and livestock produced on one farm are indistinguishable from that grown on other farms across the country.  Farm production is sold to be processed by another business before making its way to stores where consumers purchase products.  Many view milk, for example, as the same regardless of how or where it is produced. These products are viewed as being undifferentiated. In the milk example, the commodity is transported to a dairy for processing into fluid milk, cream, cheese, yogurt, ice cream, etc. These products are often branded and eventually sold to consumers as differentiated products.

Are you looking to diversify your farm operations in an effort to improve farm business profitability? Have you heard the term "value-added" but are unsure of what that means for your farm or what your options are? Whether you are starting a new farm business or exploring options for your existing farm business, value-added agriculture may provide numerous opportunities.

What is Value-Added Agriculture?

What does the term "value-added" mean? To the U.S. Department of Agriculture (USDA) Office of Rural Business Development, "value-added products" are defined in the following manner:

• A change in the physical state or form of the product (such as milling wheat into flour or making strawberries into jam).
• The production of a product in a manner that enhances its value, as demonstrated through a business plan (such as organically produced products).
• The physical segregation of an agricultural commodity or product in a manner that results in the enhancement of the value of that commodity or product (such as an identity preserved marketing system).

As a result of the change in physical state or the manner in which the agricultural commodity or product is produced and segregated, the customer base for the commodity or product is expanded and a greater portion of revenue derived from the marketing, processing or physical segregation is made available to the producer of the commodity or product (Agricultural Marketing Resource Center [AgMRC], n.d.).

Why Consider Value-Added?

The fact that others are adding value to commodities is one reason why the farmer's share of the consumer food dollar is smaller than it used to be. In 1950, the farmer received over 40 percent of the consumer's food dollar. That figure has hovered around 20 percent through the beginning of this century and in 2022 stood at 14.9% (Image 1).

Image 1. 2022 Food dollar: Marketing bill (nominal) Credit: USDA ERS

For commodity farmers, their income per unit of output is essentially the same as that received by others producing the same commodity. Typically, the only way to raise profits is to lower costs. One other option is to assume the role of one or more of the market players who are capturing the other 85 percent of the consumer's dollar. Doing this requires a very different business model as the farmer must take on roles played by other industries and businesses such as processing, packaging, retail, and advertising (Image 2). 

Image 2. 2022 Food dollar: Industry group (nominal) Credit: USDA ERS

The challenge of taking on additional roles is one that farmers across the U.S. appear ready to take on.  USDA NASS data from the 2022 Census of Agriculture show that in 2022 37,881 farms in the U.S. sold value-added products. This was an 11.5% increase from 33,523 farms in 2017.  The value of processed or value-added agriculture products sold increased from $4,043,456 to $7,731,829.  This illustrates a potentially increasing reliance upon value-added products sales to support the overall farm operation. 

Figure 1. Number of U.S. farms that sold value-added products by value of sales, 2017 to 2022

In Pennsylvania, there was a gain of 22 farms that sold value-added products, rising from 1,765 in 2017 to 1,787 in 2022.  Significantly though, the value of processed or value-added agriculture products sold in the state increased from $95,333 to $269,732, an increase of almost 65%.

Benefits

The obvious benefit to farmers from developing and launching a value-added enterprise is the potential to capture a greater portion of the consumers’ dollar and in doing so improve profitability of the whole farm business.  No matter how one may choose to differentiate their product, doing so can have tremendous benefits. For example, you may find that the returns from a pound of strawberries sold as jelly are much higher than selling a pound of strawberries to a processor.

The potential for greater returns from value-added agriculture typically is associated with access to new and/or potentially high-value market(s), extended production season, or the development of a farm brand identity that can be leveraged to develop and grow customer loyalty.

There are claims of societal benefits from farm-based value-added food production as well.  The National Center for Appropriate Technology (NCAT) states benefits of value-added foods to include “providing better nutrition for children and mothers” and “new processes to improve packaging and storage in order to reduce waste and ensure greater food safety.”

Challenges

Adding a value-added venture to an existing farm operation is not easy and success and profitability should not be considered a guarantee.  The costs associated with developing a value-added enterprise should not be overlooked. Increased revenue doesn't come cheaply. It is costly to convert commodity products to processed products (e.g. strawberries to jelly). It is also costly, in both dollars and time, to market product(s) and service(s).  Think of the money needed for labeling, promotion and advertising, and communicating with buyers.

Value-added agriculture enterprises will require farmers to develop new skills.  These skills will be in areas including “processing and packaging operations, storing and transporting ingredients and products, marketing in a new way, managing new or more labor, serving more individual customers, adopting new regulations and a variety of other activities” (Leffew, 2014).

New responsibilities and tasks will require a lot of time, in addition to money, and farmers should closely scrutinize the current state of their existing farm business.  The addition of a value-added enterprise will probably not save a poorly performing farm.  Rather, the farm, its owner(s) and employees are likely to experience more stress as they work to handle additional responsibilities and develop new skills.  Farms experiencing production, marketing, financial, human resources, or community relations challenges should address these weaknesses before exploring a value-added venture.

Value-Added Opportunities

There are numerous examples of value-added food products, and these are what most often come to mind when discussing value-added agriculture. Options exist for all types of farms including dairy (cheese, bottle milk, yogurt), livestock (individual cuts, jerky, sausage), specialty crops (jam, salsa, sauce), and agroforestry (herbs, syrup).

Value-added food products vary in their amount of processing.  That is, all products will not have the same amount of processing as say, salsa or sausage.  If you recall the definition of a value-added product, the “production of a product in a manner that enhances its value” or “physical segregation of an agricultural commodity or product in a manner that results in the enhancement of the value of that commodity or product” also classify farm products as “value-added.”  This may include production systems with niche characteristics such as organic, regenerative, grass-fed, kosher, or using livestock or seed with attributes such as A2 or non-GMO. Marketing a product as "locally produced" or under the farm’s name are examples of value-added products meeting the physical segregation aspect of the definition.

Discussions about value-added agriculture often focus on food opportunities and marketing channels (e.g. CSA, farmers markets, on-farm markets). There also exist, however, numerous opportunities for non-food value-added products and services and these should not be overlooked by farmers researching their opportunities.  Non-food value-added options include energy, farm and food production by-products (ex. soil amendments) (Image 3), fiber (ex. yarn), wood products (ex. flooring, firewood), and personal care products (ex. soaps, lotions, etc.).

Image 3. Example of non-food value-added agriculture product.  Courtesy University of Tennessee Center for Profitable Agriculture

Starting a Value-Added Agriculture Venture

Farmers who are considering the development of a value-added product and enterprise, should begin by assessing their resources, both tangible and intangible.  Assessing the resources you have at hand and others to which you have access can assist you in your decision making and planning. What skills do you have and what will need to be developed?  What equipment, buildings, and land are available to be used for a value-added business and what will need to be acquired? The inventory you develop can help you decide which product(s) you may want to consider processing as well as knowing where you will need to make investments. You should cover all aspects--including physical/natural, human, financial, and marketing resources--when performing your inventory.

Another valuable action is visiting a wide variety of other farms that have a value-added operation.  Talk with both the owners and employees about their successes and the challenges they have faced along the way.

When evaluating the opportunity to start or transition into a value-added business, consider the following questions:

• Do I want to do this? You should really want to do what you are proposing. If you don't fully believe in the product and its potential to generate a profit, reconsider your plans. Even if your plans for a value-added enterprise are fantastic, the success of the business could be sabotaged if you are not fully committed.
• Are family members interested or in agreement? The support of your family is essential and can be critical to the success of any small business. If your family members have serious reservations or are set against your idea to transition to or start a value-added enterprise, you may need to consider putting off your plans until you can appease their concerns. Gaining family support may require providing the information they need to understand what you want to do, as well as integrating them into the planning and decision-making process.
• Is this a good fit for the farm? Assuming that answers to the previous questions are positive and you currently have an operational farm business, you will need to decide whether transitioning to or adding a value-added enterprise is a sound move for the business. Perhaps this is not the optimal time to make a change to the current business. It's possible that you cannot sustain profitability during the transition, and you need to take some time to prepare the business for a change. Is producing value-added products going to enhance the profitability of the business? If so, then you can continue your planning. If not, ask yourself why you are considering this option.

If you can answer "yes" to those three questions above, then you're ready to delve into the planning and decision-making process. From this point, farmers that decide to pursue a value-added business should invest in developing a business plan.

Business Planning

All well-managed businesses should have a business plan. A business plan is essential when starting a new enterprise or undertaking a major transition in an existing operation. Business plans provide a review of the history of the enterprise and goals for the future. The plan will serve as a road map for the management of the business, outlining goals and objectives. You should refer to your business plan on a regular basis to determine if you are accomplishing your stated goals and to make changes to the plan as needed. If you are unfamiliar with the business planning process, many programs and publications are available to assist you.

One of the first steps in the development of a business plan is to assess your current skills and those you'll need for the future. Here are just a few of the issues you will need to address.

• Do you have, or have access to, the skills and knowledge necessary? Starting or transitioning to the production of a value-added item will likely require new and different knowledge and skill sets. These skills may encompass production techniques, equipment operation, marketing, and so forth. If your knowledge or skills are lacking, you can acquire the missing pieces through numerous and accessible resources such as fact sheets, publications, and short courses.
• What resources (e.g., land, equipment, facilities, supplies, employees) will you need? If you are starting your value-added business from scratch, you need more resources than you would if you currently had an operating farm business. Even with an operating business, you will probably have to invest in some new or additional resources. Many value-added products will require specialized equipment. You may also need to invest in additional facilities to house this equipment and store your products.
• Do you have access to the resources required and people with the skills or knowledge you need? Knowing what resources you will need is not enough. You also need to determine whether those resources are available to you. Are qualified individuals available, should you need to hire employees? Can you find and purchase the equipment required to produce your item? If your plans require land (e.g., for grazing), is quality land available within a reasonable distance?

A business plan will also address marketing, finances, human resources, and risk management plans for the proposed business.

Marketing Considerations

Your business plan will also need to contain a marketing plan. Marketing is an integral component of all value-added enterprises. Not only do you need to research and assess your market options before beginning production, but you must also effectively market your product to your target market population to create and maintain sales. How well you can market your value-added product will, to a large extent, determine your enterprise's success (or failure) and profitability. Marketing is a wide and complex topic.

The marketing component is essential, particularly with value-added products. You will need to research the industry, competitors, and the market to prepare a comprehensive marketing plan. The information gleaned from your research will be useful in answering the following questions about marketing your product:

What customers would be interested? Knowing who will be interested in your product(s) requires an understanding of people's location, values, needs, and economic status. Academically, these are referred to as geography, demographics, psychographics, and behaviors.

How and where will the product be marketed? Part of your marketing plan will require you to decide on the channels through which you will market your product. Common marketing channels include the following:

• Direct marketing--on-farm markets, farmers markets, community supported agriculture (CSA) programs, online stores, and home delivery, among others.
• Wholesale marketing--if you are capable of producing large quantities of your value-added item, wholesale marketing to grocery stores, specialty shops, or restaurants is an option.

Marketing value-added agriculture products and/or services differs from marketing commodity farm products.  Marketing channels for value-added products include wholesale and direct-to-consumer.  Each has their own unique set of advantages and disadvantages, benefits and challenges.  Some of these include:

Marketing is all about understanding target customers and developing strategies to reach them. A marketing strategy provides a roadmap for how you will understand who your target consumer audience is and is your plan for reaching prospective consumers and turning them into customers of your products or services, allowing you to achieve business goals.

Developing a marketing strategy provides a process for you to identify:

• who you want to sell your product to,
• why they should want to purchase it (from you), 
• what your product is, and its characteristics or attributes, 
• where, or how they can purchase,
• how your product will be priced, and
• how you will communicate with potential consumers as well as the general public.

These last four points are your marketing mix, often referred to as the Four P’s - product, place, promotion, and price.  It is crucial that you identify the needs of target customers and match the 4P's to the target consumer.

Think of your value-added product as a bundle of characteristics comprised of quality, attributes such as flavor, size, shape, appearance, etc., as well as its packaging, options, brand elements including name, logo, slogan, colors, etc., and any support that you offer or provide to the customer.  When determining the assortment of product(s) that you want to produce, consider target consumers' needs, values, preferences, competition, profit potential, and consistency with the brand image you want to develop.

Where does the customer purchase your product? This may be at your own on-farm market, at the farmers market, or elsewhere. Issues associated with distribution will impact your placement decision.  As you consider physical market outlet placement, consider aspects such as market environment, consumer experience, location, price potential, aesthetics, and customer service.  Also think about your ability to influence consumer perception regarding your value-added product(s).

Promotion is where people generally focus when thinking about marketing as it addresses how customers learn about a business and its products.  How do customers learn about your products?  How you will communicate, interact, and engage with consumers. Promotion extends beyond advertisements to include signs, brochures/flyers, samples, established promotional programs, charity donations, event participation or sponsorships, speaking engagements, social media, email, press releases, word of mouth, and coupons and discounts.  Effective use of these tools requires an understanding of which tools resonate with consumers and best practices for their use.  Successful promotion centers not only on the how, but the when and where as well.  Timing and location of promotional activities contribute to their success or failure. Success with promotion will see you creating excitement while providing product information, promoting goodwill, and generating repeat sales (retention).

Pricing has an important role in marketing. It is an indicator of quality, conveys value to the customer, and determines profitability.  How you determine prices is a function of the costs to produce or provide your product and the pricing strategies you employ. Make sure to understand how your target customers would respond to different pricing strategies and price changes. Pricing must be consistent with the product(s), placement, and promotions used. 

With your market research influencing your marketing mix decisions, you will have developed your business’s marketing strategy, a key component of your business plan.  Ensure that your marketing plan moves you toward accomplishing/attaining your business goals and that you have, or can get, the resources needed to execute the developed plan.

Financial Considerations

Another major component of your business plan will be the financial plan and outlook. The financial potential of your value-added enterprise should be a determining factor in whether you proceed.

What is the profit potential? Can you provide estimates for your proposed business's profit potential? What are your estimates for cash flow in the first months to years of this business? You will need to formulate pro forma, or projected, financial documents for the value-added enterprise. If you are currently operating a farm business, include financial information or documents to demonstrate your situation.

Value-added businesses hold numerous opportunities for revenue generation and there are pricing strategies that can be used for various situations (see Additional Resources).  Knowing costs and performing breakeven analysis are key for selecting strategies and setting profitable prices.  It is also wise to perform a sensitivity analysis to assess the likelihood of profitability under different revenue and expense scenarios.

Are the financial resources available for start-up or transition? You will most likely need to tap into some sort of financial resource pool to start or transition to your value-added enterprise. If you need to apply for assistance from a lending institution, you will need the financial documents you developed to support your proposed enterprise's profit potential.

The proper use of financial tools is essential for determining whether the value-added product choices you are considering are profitable.  Use financial tools such as budgets (enterprise, cash flow, etc.) and investment analysis, not only when starting your value-added enterprise but also when making changes to your marketing strategy, pricing, or to help decide whether to purchase a piece of equipment or change from black and white to colored product labels--all decisions that financially impact your business. You need to know how changes in strategy or unexpected expenditures will impact profitability. It could well be the difference between continuing with this new enterprise for years to come or having to close shop. Financial analysis becomes even more critical to your business when starting a value-added enterprise since you are not guaranteed a sale of your product as with commodities (such as shipping fluid milk to a cooperative).

Funding Opportunities

Funding opportunities exist at multiple levels for farmers starting or engaged in a value-added business.  At the national level, the USDA Department of Rural Development manages the Value-Added Producer Grant (VAPG) program.  Many states offer grant or low-interest loan programs for farms that are pursuing value-added business opportunities.   Contact your state department of agriculture or department of economic development to learn about what may be available.

Regulatory Aspects

Many value-added products or services will require farmers to follow regulations that will be new to them.  It is essential to check with your state's regulatory agencies--in most cases, the state Department of Agriculture--to ensure that you satisfy all regulations and guidelines before investing in equipment. With value-added food products especially, failure to produce items with approved equipment could result in having a stock of product that you are unable to sell, causing significant money loss and putting your business at risk.

Township or county officials may view a farm-based, value-added enterprise as a manufacturing business, subject to different zoning regulations.  It is also important to understand how the Federal Food Safety Modernization Act (FSMA) could affect a value-added food processing business. This act focuses on ensuring the safety of the U.S. food supply by shifting the focus to preventing contamination rather than responding to it.

If the value-added business involves processing animals, you must meet certain other requirements before beginning operations. If any animal products cross state borders, the facility must be USDA-inspected, and an inspector must be on the premises during slaughter. You should contact your state regulatory agency (PDA in the case of Pennsylvania) regardless of your initial marketing plans. They can inform you of the agencies responsible for your operation.

How you wish to market your product may also impact the regulations you will need to abide by. Check local regulations such as zoning to ensure that new marketing practices that you wish to pursue, such as on-farm markets, are allowed, or to determine the need for a zoning variance.  States, counties, and municipalities may also require permits for different types of marketing, such as a retail permit for an on-farm market.

Your choice of marketing channel may require that you obtain certain certifications (GAP, etc.) or are audited by a third-party.  Likewise, the ability to market your product or business as having attributes such as organic, non-GMO, A2, B-Corp, or women-owned, among others will also require you to follow certain processes to obtain the relevant certification.  Certifications incur a cost and require you to follow the guidelines and maintain records to the satisfaction of the certifying organization. There are marketing benefits to certifications, including the ability to use the certification logo on your product packaging/label and marketing materials. Additionally, there are consumers willing to pay a premium price for certified products.

Certainly, you can use certain production methods and business models and choose not to be certified. As with certification, there are advantages and disadvantages to consider. By not being certified you will avoid the certification fees and there will be time savings on recordkeeping and inspections. However, you will likely be unable to price your product(s) at the same premium as certified products. Additionally, building trust with consumers looking for products with those attributes will become even more essential as they cannot rely upon the logo to guide their choices. Lack of certification may also limit your ability to sell your product to certain retailers and wholesalers if that is a niche they are looking to fill.

Summary

Farmers who want to produce and sell value-added products have many options. Value-added production is all about finding ways to increase your farm business profitability. How you achieve that will vary depending on your interests, abilities, resources, and the market you can tap into. 

To succeed, an entrepreneurial spirit is required. You will be faced with many tough decisions that will impact current and future operations and all aspects of the business, from processing to human resources to financial management. The thought you put into the choices you make and the research, preparation, and analysis you do are integral to the start-up and management of a value-added enterprise.

The following traits define successful value-added entrepreneurs (Leffew, 2014):

• Start in a strong financial position and have capital to invest in the start-up and operation of the business.
• Have a long-term commitment to the operation. They understand that success does not typically happen overnight. They start slow and grow smart.
• Possess management skills to efficiently and effectively manage time, labor, cost, and all the aspects of the enterprise.
• Are able to produce a quality product consistently.
• Are able to seek out, understand, and adopt appropriate regulations.
• Learn, possess, or obtain (through team members) marketing savvy. They can identify target audiences and connect with them.
• Have people and customer service skills to win loyal employees and lifelong customers.

The most important aspects to evaluate when deciding whether to start a value-added enterprise are marketing and financials. Without a market through which to sell your product and people to buy the product, your enterprise will not survive for very long. In addition to sales, many other areas impact enterprise profitability; therefore, properly analyzing a new enterprise's potential using appropriate financial tools is critical.

The key to success in value-added agriculture is developing a unique product that is demanded by consumers. You will succeed if you are able to identify their preferences and provide products that meet their desires. Value-added products and services offer a vast array of business opportunities, and careful planning can make the difference between success and failure.

References

Agricultural Marketing Resource Center. (n.d.) USDA Value-added Ag Definition.

Entsminger, Jason S., and Claudia Schmidt. 2024. “Direct-to-Consumer Sales of Agrifood Products by US Farms: Data from the 2022 Census of Agriculture.” NERCRD Data Brief 2024–2. .

Leffew, M. (September 2014). Value-Added Agriculture, Direct Marketing and Agritourism: Cultivating a Fruitful Enterprise. University of Tennessee Center for Profitable Agriculture.

National Center for Appropriate Technology. (n.d.) Value-Added Agriculture.

U.S. Department of Agriculture, National Ag Statistics Service.

U.S. Department of Agriculture, Economic Research Service. (2023, November). Food Dollar Series.

Additional Resources

Agricultural Marketing Resource Center. (n.d.) What is Value-added Agriculture?

Agricultural Marketing Resource Center. (n.d.) How is Value-added Agriculture Explained?

Born, H. and J. Bachmann (n.d.) Adding Value to Farm Products: An Overview. IP141. National Center for Appropriate Technology, ATTRA Sustainable Agriculture.

Cornelisse, S. (2007). Understanding Pricing Objectives and Strategies: For the Value-Added Ag Producer. University Park: The Pennsylvania State University.

Cornelisse, S. (2023). Product Pricing: What Do I Charge? The Pennsylvania State University.

Cornelisse, S., M. Bernsten, and M. Graziani. (2023). Growth Strategy: Pricing Strategies for Farm and Food Business. The Pennsylvania State University.

Dalton, A., R. Holland, S. Hubbs, and K. Wolfe. (2007). Marketing for the Value-Added Agricultural Enterprise. University of Tennessee Center for Profitable Agriculture.

Lu, R. and R. Dudensing. 2015. What Do We Mean by Value-added Agriculture? Choices. 4th Quarter 2015. 30(4).

Rahe, M., A. Roach, and R. Milhollin. (October 2022). Adding Value in Agriculture, Food and Forestry. University of Missouri Extension.

Acknowledgement: This article reviewed by Rob Holland Jr., Director and Extension Specialist III, Center for Profitable Agriculture, University of Tennessee