Adding value is about exceeding buyer expectation.
The second most popular topic among producers behind ' what's the most profitable crop? ' centers on a value-added enterprise. Popular press as well as trade press is full of value-added examples. Sometimes I feel as though value-added is promoted as a certain road to success. To maintain and grow an economically viable business we expect profitability. Value-added is not a risk-free path to achieving profits.
What is value-added?
Fortunately, the concept of value-added applies across most stages of most industries. The farm-food producer getting great press on a value-added venture is typically making ketchup out of their own tomatoes or there is an orchard marketing ready-to-eat fruit pies or hard ciders. These are common examples of value-added enterprises. However, the value-added concept is at the core of effective marketing and is often much simpler to pursue and capture.
Many sectors of the farm community face financial stressors today. Seeking additional income is prudent. A grain producer with clean, appropriate test weight, correctly dried corn is adding value. A wholesale lettuce producer is adding value with an industry standard pack suited to local buyers, consistent quality, consistent supply, and proper product handling. A dairy producer regularly exceeding quality standards is adding value.
The value-added concept is not exclusive. Buyers of most sorts are eager to discuss their idea of what value-added means to them. To me, generally, the words ‘value-added’ mean somebody in the supply chain somehow creating enhanced product/service value for customers.
For U.S. farm producers the attraction of value-added is obvious. Recent research at USDA, ERS reports the average farm producer may get less than $0.10 of the food $1.00 spent by consumers. Producers see the extra $0.90 left on the food-dollar table and start to figure how they might generate additional revenues from value-added. Taking on value-added requires taking on the tasks associated with the particular stage of the marketing channel you will be providing.
“Price spread” is the topic of many farm conversations. Producers know what the farm gate price is and see the retail price wondering why they don’t get more. USDA, ERS tracks price spreads comparing differences for a commodity at different stages of adding value. Different farm products have different consumer dollar capture. For example; there is $0.08 of wheat in a $3.00 loaf of bread while there is $1.60 worth of farm milk in a $3.20 consumer gallon. Milk is a U.S. farm commodity capturing one of the highest rates of consumer spending at the farm gate.
While the attraction of more revenues is enticing, we sometimes minimize or completely neglect the costs of value-added. In taking on more tasks associated with the supply chain of whatever it is we do we will likely consume some labor, capital, and management. Additionally, we ask businesses considering value-added to review their current state of affairs. A business without profits may not be a suitable candidate for taking on the risks of more and different work. A business that shows signs of risk aversion or limited capital access may not have the highest probability of success with a more complex value-added enterprise. An entity with production, marketing, financial, human resources or community challenges may be better off addressing these deficiencies before exploring value-added possibilities.
We sincerely believe the opportunities before us are only limited by our imagination. We also believe the challenges are great and difficult to fully understand. Value-added has many advantages. It also has many disadvantages.
A basic way to illustrate this is: let’s pretend we grow tree fruits and think bananas are expensive. We can grow bananas in Pennsylvania. Imagine the buzz around PA branded local tropical fruits. However, inputs costs exceed projected revenues. We need three times the normal price of regular bananas to succeed. Is this price premium likely, or easily obtained? This may be too extreme an example but it does give the message. There are many avenues to increased profits for consideration.
Penn State Extension is currently assisting businesses to explore the complexity of value-added. These entities represent a diverse mix of business types covering an even bigger mix of business and personal objectives. Our primary question as we initiate our work and begin to learn and understand a specific business and its goals for the future is “what is your competitive advantage today?” From there many an economically viable business has evolved.
Considering where an entity is at today is the first step to discovering if value-added is feasible for you and yours tomorrow.
Food For Profit: Marketing Your Food Product , Penn State Extension
Marketing Poultry Slaughtered Under USDA Exemption , Penn State Extension
Get More from Your Milk: Increasing Profit through Value-Added Products , Penn State
‘What I’ve learned about value-added,’ Iowa State University
Ag Marketing Resource Center