What Exactly is… “Value Added”? Rodney B. Holcomb Agribusiness Economist Oklahoma State University Food & Agricultural Products Center

The Definition of “Value Added” The addition of time, place, and/or form utility to a commodity in order to meet the tastes/preferences of consumers. To put it simply… Figure out what consumers want, when they want it, and where they want it – then make it and provide it to them.

Changes for Agriculture Since the Mid/Late 1980s Agricultural prices see greater volatility due to: Farm policy changes Developments in international trade Weather Because of instability some producers left agriculture and others began to explore ways to enhance income

Adding Value to Agricultural Products Provides substantial benefits Increased ability to capture a percentage of the farm-to-retail price spread A typical loaf of bread for example Wheat represents less than 9% of the retail value Milling, baking, and related activities represent almost 65% of the final value The rest is transportation and retail mark-up

Value-added Marketing Cooperatives A noticeable phenomenon in U.S. agriculture since 1990 More than $1.2 billion were invested in value-added marketing cooperatives in the late 1980’s and early 1990’s (Egerstrom, 1994) Particularly evident in the Northern Plains, shown by development of farmer owned efforts Success in the Northern Plains has increased interests of Oklahoma producers and cooperatives

Value-added Processing: The State’s Perspective Possibilities for additional employment, gross state product, and tax revenues Friendlier environment for value-added food and agricultural products processing industries: Decentralization in U.S. manufacturing Population shift towards the “Sun Belt” states Resource allocations towards food processing research made by Oklahoma

Future Growth Oklahoma has the potential to expand its value-added processing activities Factors suggesting future growth: Agricultural output is tremendous and varied Several incentives for producers considering processing opportunities Ag Enhancement & Diversification Program Producer Value-Added Tax Credits Highway system and central location offer proximity to market centers

Planning a Value-added Processing Venture Success in developing depends upon careful business planning and marketing In most cases, producing a value-added product is the easiest part Main difficulties for a food business are: Manufacturing a product consumers are willing to buy Having a market outlet for the product

Initial Planning Four basic steps… Step 1: Compile all available information concerning the quality characteristics of the commodity In the producer’s trade territory Over a period of time. From this step an initial list of potential processed products can be identified

Initial Planning (cont.) Step 2: Obtain industry and production information for each potential product Market size Market growth Industry concentration Location of competitors within the region Complexity of processing technology Minimum efficient scale of operation Location of major market outlets and distribution points

Initial Planning (cont.) Step 3: Analyze the information via a rating or ranking system Addresses advantages and disadvantages Provides a means for quantifying/ranking each possibility From this analysis identify the ventures that show the greatest promise

Initial Planning (cont.) Step 4: Develop a specific plan of action for pursuing the “best” processing alternative Business structure to be used Necessary facilities, equipment, and management A plan for raising capital A marketing scheme for contracting production

Results An enterprise that is both profitable and consistent, providing a steady source of additional income for the producer Opportunities to capture a significant share of the consumer’s food dollar Make use of resources provided by Oklahoma state agencies and Oklahoma State University