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How can value-added improve profitability?

“Farmers must find a way to compete and hopefully, value-added is one way to do that,” Roger Monson, president of Citizens State Bank of Finley, ND told lenders at the 2002 National Agricultural Bankers Conference in Indianapolis.

What is driving the value-added agriculture industry is not agriculture. What’s driving the value-added agriculture industry is the consumer, because consumers are asking for products that are tasty, offer variety, and are easy to prepare, according to Bill Jorgenson with SJH and Co., a consulting firm in Danvers, Mass.

Value-added products, by definition, must offer value to the consumer. However, Jorgenson says, having value is not the same as being cheap. “Value is defined by the customer in a very intelligent manner, which often means value as a trade-off for time.”

Joan Fulton, an agricultural economist with Purdue University, says value-added agricultural enterprises are increasing as producers continue to look for alternative ways to increase cash flow.

“If you are in agriculture and you thought you were getting screwed before, just wait. There is nothing on the horizon that says prices are going up, and I do mean nothing,” Jorgenson says. “With 99-cent fast food products, and businesses like Wal-Mart pushing retail prices down, you are not going to get more money for your products.”

Before investing capital in a value-added venture, however, Monson cautions growers about closely examining the risks, as well as the potential in any proposed opportunities. “It’s like any other entrepreneurial industry, you have your successes and you also have your failures. That’s part of the business.”

According to Fulton, producers often benefit from diversifying their operation, including leveraging into a more profitable area of business.

Still, she says, there are three over-riding questions that you should ask yourself before investing in a value-added business venture. Is it a good business investment? Will the proposed organizational structure work? Are there other goals, such as local economic development, that could either compliment or conflict with your business plan?

In order for a newly formed business organization to succeed it must be based on trust. There must also be communication; financial stability; a small number of homogenous players; a penalty for those who defect; and a mechanism to share profits, losses and risks. Fulton also recommends evaluating any and all barriers to entry into your market, the rivalry among competitors, other substitute products, and the bargaining power of potential buyers, or suppliers.

Roadblocks to success, according to Fulton, include: the lack of a clearly identified mission; inadequate planning; failure to use advisors and consultants; lack of leadership; lack of commitment; inadequate management; the failure to identify and minimize risk; overly optimistic economic assumptions; not enough money or an excessive debt to equity ratio; inadequate communication; problems with the physical plant; and a noncompetitive business location.

Jorgenson says value-added is about growing the pie, not fighting for a slice. His advice is to focus on your customer and what they want. That includes being analytical about the financial options of value-added, and forming partnerships or alliances with different groups to add to the producers’ commitment to the project.

The success of any value-added enterprise hinges on profitability. “Sometimes the hype gets going and producers forget this one important element,” Fulton says.

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