Increase profitability by adding value to farm products

Creating value added products and businesses can increase the bottom line for farmers.

The term “value-added agriculture” gets tossed around a lot, but what does it really mean? Many farmers want to increase profitability and adding value to raw agricultural products in one way to accomplish that goal. To achieve this however, farmers need to think in new and different ways and break away from focusing all of their efforts on production. There are two ways to add value: by capturing value or creating value.

Capturing value relates to capturing some of the value that is added to a product by processing or marketing. The farmer’s share of every dollar that consumers pay for food has been shrinking over the years. It was about $.33 per $1 in the 1970s and in recent years has dropped to about $.16 per $1.  The farmer continues to get less and the rest goes to processing, distribution and marketing. These figures sound discouraging but clearly illustrate the potential opportunity to attain more value.   

Farmers can capture value by entering the processing arena—turning farm products into food products adds significant value. This involves risk and requires a new skill set. Often farmers can create alliances in cooperatives or limited-liability companies that can combine resources to achieve common goals. One very successful example is the Michigan Turkey Producers Cooperative.

Direct marketing is also a way to capture value and can be done in a variety of ways on both a small or large scale. On-farm stores, farmers’ markets, CSAs, mail order and Internet sales have proven to be beneficial in capturing value. Many farmers are also now achieving a bigger profit margin by direct sales to the food service industry serving restaurants, schools and hospitals.

Creating value is another strategy that involves developing products that are differentiated in some way. The product difference may be real or perceived.

The key to success is that the consumer feels there is added value to the product and is will pay for it. Creating value can be accomplished with branded products or those with special certification. One product that combines both of these attributes is Certified Angus Beef. Products produced using special methods such as organic or environmentally friendly practices also create value. The current consumer trend of preference for locally produced foods fits with creating value. In this case the production practice is not different but methods of marketing the products become key in creating the perception of value to consumers.

If you are interested in exploring the development of value added agricultural products, contact the MSU Product Center. Specially trained innovation counselors are located throughout Michigan and can assist producers in developing value added products and businesses.

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