Value-added Agriculture: Rural America - American Business ...

The set of issues related to processing raw agricultural commodities. Value-added agriculture is a multidimensional issue. This article addresses six of these dimensions. One dimension of value-added agriculture means building a manufacturing base in rural regions to process agricultural crops and livestock, which suggests a need to consider location economics and vertical integration. A second dimension involves close ties with agricultural industrialization and the new-generation farmer-owned cooperatives. Still another dimension suggests switching from the crops traditionally grown to niche market crops (like organic) or developing new commercial uses for crops and livestock. A final aspect of value-added agriculture for the foreseeable future is the emergence of biofuels.

The Scope of Value-added Agriculture

Value-added agriculture is widely acclaimed as a key strategy to revive and strengthen rural economies. Politicians from both parties and most farm organizations view value-added agriculture as the means for rural development and new job creation. Despite its broad appeal, there is no simple interpretation of value-added agriculture. This discussion of value-added agriculture includes its scope, rural economic development, industrial uses of crops, alternative crops, vertical integration and location economics.

To begin, the U.S. Commerce Department classifies the food manufacturing system using the North American Industry Classification System (NAICS) into 56 industry sectors. These sectors are classified as higher- or lower-value-added based on how much value is added by processing. Higher-value-added sectors manufacture retail-ready, packaged, consumer brand-name products of which at least 40 percent of the value is added by manufacturing. From 1988 to 1992, the average annual growth rate for higher-value-added agricultural sectors was 3.6 percent compared with only 2.1 percent for lower-value-added agricultural sectors. From 1997 to 2002, the growth rate for higher-value sectors stayed around the same at 3.8 percent, while lower-value sectors actually declined by 1.0 percent.

In 1992, both sectors employed around 500,000 workers, with those in the higher-value sector earning on average $11.87 per hour, compared with $9.26 per hour in the lower-value sector. Both sectors grew in terms of employment and wage rates during the 1990s. In 1997, production jobs in the higher-value sector grew to 625,000 jobs at $13.65 per hour and in the lower- value sector grew to 580,000 jobs at $12.95 per hour. While wage rates followed similar patterns from 1997 to 2002 (both growing to over $15.00 per hour), the number of production jobs dramatically shifted. Almost 200,000 more jobs were created in higher-value industries, while jobs shrank by 180,000 in lower-value agricultural sectors.

In 1997, half of the food industry shipments were of higher-value agricultural products. The growth in employment was accompanied by a growth in the value of shipments. By 2002, higher-value agricultural sectors accounted for 58 percent of the $561 billion in food industry shipments. In 2002, the three largest higher-value agricultural sectors by industry shipments were poultry processing ($37.6 billion), cigarettes ($34.6 billion) and commercial bakeries ($23.8 billion). The top three sectors for lower-value agricultural products were animal slaughter ($565.4 billion), soft drinks ($31.8 billion) and meat processing ($25.8 billion).

The ?percent value-added? measures how much of an industry?s final shipment value is added in processing. A larger value for percent value-added means that more value is added during processing. In 2002, the top three sectors in terms of percent value-added were cigarettes (88.1 percent), flavoring syrup and concentrates (84.5 percent) and ice (81.5 percent). The lowest three sectors were creamery butter (16.7 percent) animal slaughtering (17.0 percent) and cane sugar refining (21.6 percent).

Rural Economic Development

A second dimension of value-added agriculture is whether the industries developing in rural America are high or low value-added processing. A major impetus for such strategy is rural economic development. In the Great Plains, developmental efforts in the 1990s were led by a resurgence in new-generation farmer-owned cooperatives, along with involvement from rural electric cooperatives.

At least three reasons explain the continued efforts at rural development of value-added agriculture. First, rural development strategies that promote job creation are seen as critical to replacing jobs lost in farming since the 1970s. Providing additional opportunities for the youth in rural America reduces their incentive to migrate to metropolitan areas. In addition, these jobs are critical to maintain and expand the client bases for retail businesses on the main streets of rural towns and cities. Second, the creation of new valueadded agriculture results in a more diversified economy, reducing rural states? historical reliance on production agriculture for tax revenues. Finally, while price supports are still a key component of the farm bill, increased emphasis is being placed on policies favoring market-based solutions. Thus, value-added agriculture is viewed as an important replacement for the expected eventual decline in federal payments to agriculture.

Industrial Uses of Crops

A third dimension of the growth in value-added agriculture considers industrial uses of crops. These efforts include new uses for traditional crops, such as corn and soybeans, as well as the introduction of new crops, such as crambe or switchgrass. Besides seeking new uses in food products, crops are being used to produce building materials, newsprint and ink, biopharmaceuticals, cosmetics, food colorings, plastics, and lubricants and hydraulic fluids. More recently, U.S. policy has focused on biofuels as one aspect of an energy policy more reliant on renewable fuels and less dependent on foreign oil.

Corn historically has been primarily used as a livestock feed. Yet even in the mid-1990s, 20 percent of corn was used in food, alcohol and industrial applications. The annual growth rate for industrial uses of corn from 1990 to 2001 was 3.5 percent. Since 2002, the annual growth rate for corn utilization as food, alcohol and industrial applications grew by 14.8 percent. By 2007, 36 percent of the corn crop was used for value- added products. Examples of food and industrial uses of corn include ethanol, high fructose corn syrup, dextrose and glucose, and starch. In part, the industrial uses of corn reflect societal efforts to reduce pollution. Ethanol reduces air pollution, and corn starches are used in biodegradable plastics. Research at land-grant universities is investigating alternative uses for other traditional crops as well. Examples include using soybeans for ink, sunflower pectin in jelly, and wheat in ice cream.

Other public and private sector research is developing new industrial crops as substitutes for existing manufacturing inputs. Criteria for successful new industrial crops include 1) replacing an existing industrial input by being less expensive or more effective; 2) meeting a specific market niche requirement; 3) being compatible with the existing farming system; and 4) meeting quality standards and being produced in volumes sufficient to meet buyer requirements.

Alternative Crops

Yet another dimension of value-added agriculture suggests that different crops should be raised. Instead of growing commodities, such as corn, wheat or soybeans, individual producers might shift to specialty crops for niche markets. Two difficulties may prevent this as a viable strategy for many producers. First, the machinery complement designed for 2,000 acres of wheat probably does not adapt to growing 20 acres of carrots or garlic. Similarly the agronomic methods to raise alternative crops may require completely different production practices. Second, there may not be an established market, and size becomes critical. Until a certain minimum quantity is grown, building a processing plant is not feasible. Nevertheless, agricultural trade shows are filled with displays featuring niche market products, ranging from mustard to ostrich eggs to organic foods.

Consumption of organic foods has been growing at an annual rate of almost 20 percent over the past decade. One sign of organic foods? growing acceptance has been the allocation of shelf space by most major grocers for organic products. More recently, the emphasis has shifted from organic to local food, as ecoconscious consumers seek ways to lower their carbon footprint.

Vertical Integration

As a fifth dimension of value-added agriculture, the movement toward processing in rural America is a form of forward vertical integration. That is, farmers are taking ownership in forward assets, such as pasta plants, ethanol plants or buffalo slaughter-plants. These efforts are driven largely by farmer-owned cooperatives and individual farmer entrepreneurs. Their motivation is to capture the profit or value earned further up the value chain. Since production agriculture is a mature industry with slow growth, these new ventures become attractive to capture the returns earned by existing food processors.

Some large food companies, such as Conagra or Coors, are backwards vertically integrated. Reasons for vertical integration include capturing the profits or value in different stages of the value chain or ensuring a supply of critical raw materials. For example, Coors contracts with farmers in Colorado to grow malting barley. The malting barley is then processed in malting plants owned by Coors, before the malt is shipped to Coors breweries. In contrast, Miller Brewing concentrates on producing beer. Instead of vertically integrating, Miller buys all of its malt from independent suppliers such as Cargill or ADM.

Vertical integration is not without its difficulties. Studies in strategic management identify four disadvantages of vertical integration. First, vertical integration concentrates a firm?s investment in a particular industry. Large financial commitments may make it more difficult to exit the industry or adapt new technology, despite changes in the industry that make it less attractive. Second, vertical integration may reduce flexibility in sourcing raw materials by linking the firm to particular suppliers. This is especially worrisome for farmerowned cooperatives. Third, balancing capacity at each level of the supply chain might be difficult. For example, although a farmer-owned flour mill may be at an optimal size, its milling capacity may be more than is required at the next level of processing, say baking. Thus, the vertically integrated firm may be forced to sell its primary product to competitors. Finally, different business activities may require management with much different skills and business capabilities. Being a low-cost processor does not make one an effective manager of logistical or information technology issues.

Location Economics

Developers of new value-added agriculture also face pressure to build new processing plants in rural areas, despite firm economics. For example, traditional locational analyses suggest that weight-losing agricultural processes should locate near producing regions, whereas weight-gaining processes should locate near consuming regions. A further complication is a rail rate structure that heavily favors the movement of multiplecar shipments (70 to 110 rail cars) of bulk commodities. In contrast, processed products typically move in smaller rail shipments or by truck. The transportation cost difference can be enormous.

Thus, when promoting rural economic development, issues of altering the traditional description of firm objectives must be faced. Under traditional economic analysis, the objective is maximum profit, not location. However, a farmer-owned cooperative may opt for a lower return on their investment in exchange for the additional economic development in their community.

A final locational factor for the developers of new value-added agriculture is how to extend the definition of community. Large-scale value-added agriculture projects can require capital, labor and raw materials that can only be generated at a regional level. They may need to view several towns or even counties as their home rather than a specific town. Although all may benefit from cooperation, putting aside 100 years of rivalry among communities can be difficult.

Value-added agriculture is breathing new hope into many concerned with the future of rural America. The many sides of value-added agriculture make this a complex issue. Yet as U.S. agricultural policy increases its reliance on free markets and reduces government price support programs, new value-added agriculture will likely increase in importance.

? Frank J. Dooley

See also

• Agricultural and Applied Economics; Agri/Food System; Cooperatives; Development, Community and Economic; Economic Development; Manufacturing Industry; Marketing; Markets; Policy, Rural Development

References

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• Drabenstott, Mark. ?Industrialization: Steady Current or Tidal Wave?? Choices 9 (1994):4-8.
• Nelson, Paul N., James C. Wade, and Julie P. Leones. ?The Economics of Commercializing New Industrial Crops.? Agribusiness: An International Journal 11 (1995): 45-55.
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• U.S. Census Bureau Economic Census?Industry Series Reports?Manufacturing. Washington, DC: U.S. Census Bureau, 2005.

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