Economic Implications for Producer Investments in Value-Added Business - Research Paper Example

? Economic Implications for Producer Investments in Value-Added Business Table of Contents …………………………………………………………………………………. 3 Economic Implications for Producer Investments in Value-Added Business …………… 4 The Need of Producer Investment in Value Added Businesses …………………………. 4 Models of Investments in Value-Added Business ………………………………………. 7 Planning to do Investment in Value-Added Business …………………………………… 9 Considerations before Making Investments in Value-Added Business ………………….. 11 Most Plausible Areas of Investment in Value-Added Business of Producers …………… 13 Conclusion ……………………………………………………………………………….. 14 References ……………………………………………………………………………….. 15 Abstract Agriculture is the economic backbone of many countries in the world. The last decade has seen an abrupt rise in population and weather changes globally leading to a sudden hike in the demand of food requirements. The growing economic concerns have caused inflation and shortage of raw material therefore affecting the entire supply chain of food products. This has resulted in the increase of production costs and lowering of profits for the grower of commodities that run the cycle of human existence. Consequently, the producers are identifying opportunities for their own growth and investing in value addition of the products that they produce. This removes many of the intermediaries in the supply chain resulting in lowered prices for the consumer and increasing profits for the producer. For today’s growers, the reins of the future are in their hands. Producer investments in value added business with a workable strategy is not only lucrative but also increases the potential of the producer with minimum output, therefore a very attractive option for the producers around the world. Economic Implications for Producer Investments in Value-Added Business The global economic spectrum has changed drastically in the last decade. The rise in population, inflation and prices of raw materials has changed the economic equilibrium that existed in demand and supply change. With the rise in population, the demand for food items is also on the rise resulting in increasing demand of agriculture produce. This should mean higher income opportunities for the producers. The fact is the other way around due to the rise in the prices of raw materials required for agriculture and diminishing consumer capability to buy. As a result, the returns that the farmers and the ranchers earn on agriculture produce decreases thereby affecting the entire rural class that makes up a good number of populations in many agriculture-producing countries. To get higher returns, more farmers and growers are investing in their produce to make them more value added even to the level of retailer. With the final produce reaching the stores and retailers directly from the producers, the profit margins for the agriculture related people has increased significantly resulting in growth of agriculture and of economic prosperity of the growers. Another benefit that the farmers get through these investments is freedom from industrial exploitation making it very beneficial for them (pg11-18, Tadlock Cowan, 2003). The Need of Producer Investment in Value Added Businesses The growing competition in the global market is changing the attitudes of the farmers by motivating them to improve their quality of produce by employing latest technology in farming and growing. Today, the farmers know the market economies and the latest technology that they can use to convert their produced raw material to more finished goods. The modern growers keep in the view the requirements of the end-user of the produce and try to develop the products keeping that in mind. This bold change in the farmers as a result to their exposure to latest technology and their commitment to the latest business trends is changing raw agriculture into an industry. The farmers understand that by investing into value addition in their produce, the returns will be much higher and the consumers can have the same products at relatively lesser prices due to exclusion of many intermediaries. With growing entrants in agriculture industry, technology is improving with a rapid pace and more economic studies are being done for the streamlining of business values for agriculture, primarily focusing on the development of the rural areas (pg11-18, Tadlock Cowan, 2003). Finance is the soul of any business whether it is of consumer services or provision of the end-user products. The processes of financial activities in the business signify its success or failure. While inadequate investment without a complete strategy may cause even the most profitable business to fail, the right timing and resourcefulness of the financial investment can take to success levels. The purpose of investment is achievement of better returns with growth of the business as well. For agriculture producers, strategic investment in agriculture produce has been in vogue for a long time. In these modern times, farmers are more oriented towards investment in value added opportunities that will give them a competitive advantage over other value added industrialists in the market. Producer investment in value added business implies the producer pursuing opportunities to get a higher return from the end-products instead of raw material or base commodities. For example, cotton grown on a farmland is processed on the land by separating the cottonseed and cotton fiber. The cotton fiber is then spun into yarn and thread, which is sold to the textile manufacturing industry. The farmer may sell the seed to the oil making industries. The processing of raw cotton and selling the produce separately adds value to it thus making is more valuable and transforming the value into returns. The textile industry also adds value to the thread and yarn by changing the raw material into useful and more valuable product. It is of prime importance for the grower to identify the activities that can add more value to the produce. Another requisite of the producer is identification of the mode of investments. Engineering of food and raw materials by applying better biotechnology and restructuring the production mechanism greatly enhances the return opportunities for the producer. Wheat on the same parameters can be processed into flour, which is required by the bakers and end users as well and is more valuable than that of wheat itself. Wheat producers would identify themselves as a part of food a production company rather than growers and better able to market themselves. In the recent years, producer investments in meat products and similar products, grains, fruits and vegetables and dairy products and fuels have increased manifolds thus bringing the farmers and ranchers in the main economic streamline of national and international businesses. The two major approaches of value addition in the commodities are of innovations and coordination (Mike Boland, n.d). Innovation in value added business implies the farmer identifying the opportunities for growing profit margins. The innovative value addition activities require to be directed in producing the base commodities where the competition is higher then transforming them into higher products where the competition that is lower. For instance, corn grown on farms are then fed to hogs on the grower’s own farm instead of selling them other hog breeders. The hogs then butchered to produce meat and skin, which may be sold to the retailers or retailed by the grower himself. Another way of bringing innovation by value addition in agriculture is producing crops that have more industrial and commercial demand for example sunflower, hemp and soybean seeds. These products cannot only be sold directly into the local but also in the international markets bringing more monetary benefits for the growers. Many of the growers of fruit farms and vegetable producers process the fruits and vegetable, pack them and directly sell them to international markets therefore increasing revenue opportunities (Mike Boland, n.d). Coordination also relates to innovation in many aspects. The growers coordinate horizontally to produce similar products by forming partnerships or associations with same class growers. Then they represent themselves as a single unit therefore regulating the pricing and sales mechanism of their produce to higher value adding industrials. The producers can coordinate vertically by having the co-ownerships of higher-level processing systems. They can also coordinate with value added processors for shares in the sales of final products. This will help in minimizing the costs of raw materials and less cost to the end user (Mike Boland, n.d). Models of Investments in Value-Added Business The changes in the competitive business environment are making the farmers improve the structures and mechanism of their product marketing resulting in the formation of various types of associations and alliances. With more profits as a driving force, the farmers and ranchers form alliances with the members of the same class or with higher-level investors who work only in value addition. The forms of alliances that are being formed are New Generation Cooperatives, Limited Liability Company, partnerships, corporations, joint ventures, strategic alliances and even ownership or long-term lease agreements. In some instances, formations of alliances with national and international marketing companies are also found. Before an association or alliance is formally formed, it is necessary to find out the possible ventures where the various organs of the alliance will be playing their roles in and what possibilities are there for investments in value addition of commodities (Joan Fulton, n.d). The primary premises that the producers are interested in are: 1. Increase the net price they get for their products; and/or 2. Benefit from the growth that the value added business generates. On the other hand, the vital answers to the questions that every investor in value-added business will be seeking are whether the investment in the business is worth the risk? What will be the working mechanism of his business or if the producers are in the alliance? What would be the structure of the alliance? Lastly, what will be the rate of returns on the monetary and physical investment that is made into the business venture? (Vincent Amanor-Boadu, n.d). The main purpose of any investment is the achievement of higher rate of return that makes it reasonable to invest but this is not all what makes the entire process of investment into a business venture. Another requirement is the growth of business and ultimately the growth of profits over time thus increasing the overall business value of the investment. This is defined as a complete evaluation of business processes and the growth potential that is in it. The economic and financial evaluation also provides the working strategy for the organization as a mechanism to control the flow of investment and rate of returns. This helps to analyze the progress over time and take corrective measures where necessary. However, with all possible concerns in preview, the risks on the investments altogether cannot be evaded as the situation of the market nationally and internationally may change abruptly in high degrees (Vincent Amanor-Boadu, n.d). Planning to do Investment in Value-Added Business The primary requisite of any business plan revolves around the definition of the opportunities that lie in and around the project that is to be started. Defining the opportunities means analyzing the potentials of the commodity growth and its quantity and net value that it as a raw product can bring in to the producer. There are three basic questions defining the investment potential that require to be answered before coming to the decision of investing in any value-addition business. Firstly, what is the demand of the product that is being produced by the producer in the market and what are the consumer demands for the value added products that are derived from that commodity. The second question is the identification of production practices that are applicable in various forms and how and at what costs can those practices be applied in the business venture. Lastly, external factors applicable to the regulation of value added product that business produce include the government policies, business ethics and the market competitiveness. The second step in the evaluation of economic implication of producer investments in value added business is the identification of the organizers who will be organizing the entire mechanism of the project. In addition to the investors, certain other factors are required for the smooth functioning of the business venture. In certain conditions, as in associations and alliances, the ownership of the venture is distributed in many members that are part of the project. It is of vital importance to give recognition to every member, assign their duties and responsibilities so that the investment of all the members may have the relative return as according to the input (Vincent Amanor-Boadu, n.d). Goals are set as a benchmark of organizational success and failure and as an evaluation benchmark of the progress of the project. The goals for the producer investing in the value added business are not just limited to monetary profits but also include providing employment opportunities for the community and growth of the business over time. The goals of a single business proprietorship may vary from businesses formed because of alliances. All the prospective goals need to rationally analyzed and put into comparison when evaluating the performance of the business. The stage then comes of the rudimentary assessment of the project by evaluating the business opportunities that are available to be explored in the area of the project. The financial activity that will be required to run the project, acquisition of the inputs including the workforce and their expenses over time, the competition that is to be faced in the markets where the end user product is to be sold all need to be explored. The capital required and the sources of the capital are to be identified and secured and a deadline of the project breakeven is to also be explored to evaluate the progress of the project and distinguish from input to the profits. The most fundamental aspects of the pre-investment assessment of the value added investment focuses on the rate of returns and risks involved in the business that is to be started. There are certain thresholds on which these factors are evaluated. The first being the evaluation of the product that is already in the farm for example corn, wheat, cotton, rice or similar in terms of crops or pork, beef or mutton in terms of meat products. With the identification of base products, the rate of returns on raw and the possible rate of return on the value-added product need to be identified. The returns can be increased with the diversification in the materials in which the producer is investing and or leveraging into more profitable areas of business. The second element of pre-investment assessment of value added business is the strategic positioning of the business over a longer term. It is important to analyze the growth opportunities and the market elements that play the role in the overall performance of the investment and the investor (www.ag.ndsu.edu, n.d). The final stage of the project is the investment in the project and the implementation of the plan. The business opportunity once explored does not remain consistent over time due to technological advancement and changing market patterns and therefore needs to be revisited again and reevaluated as needed. Many uncertain situations make the entire project to be revised before the final investment is made. Mere implementation of the project is not the entire of the business, like every business, there is a need to develop a comprehensive marketing plan for the project that has been implemented (Vincent Amanor-Boadu, n.d). Considerations before Making Investments in Value-Added Business The marketing plan of the value added business constitutes of the internal factors including capitalization, quality of workforce and performance over time and the external factors that includes identification of customer demands, competition and opportunities that will guide in making a comprehensive marketing plan. The development of a supply chain can be owned and run by the sole producer investor but it drastically increases the competition and therefore forming an alliance is always suggested. With the formation of an alliance, the producers can form chain of supply by partnerships with distributors and retailers. In traditional supply chains, every member of the chain tries to establish the relationships that helps buy at the cheapest prices and sell at as higher rates as possible to get more monetary advantage. In addition, the farmers and ranchers are considered an entity outside the sphere of the business transactions and are most of the time exploited. The processors and the distributors gain the prime benefit of the produce. A strategic marketing plan establishes a formal method of production, processing, distribution and retailing so that every element of the business chain may get the due share of the profit. Investment in the value added business by the producer brings them into the main stream of the open market. There are two prime areas of investment in the supply chain are in the crops and animals. The initial step is setting up a processing plant that turns the commodity into a value added product and then secondly forming partnerships with the processors and distributors based on input shares according to the end user price. In forming partnerships, the business relationship is on the win-win basis and all the associates are involved in the strategy planning and implementation of the project thus forming a strategic chain of supply. Partnership also assures that none of the partners is exploited and turned into a non-entity in the chain. As these partnerships are more bound by legal reservations, it ensures better profits, fair wages to the workers and growth opportunities for the growers. The formation of strategic partnerships develops a trust in the organization where every entity is considered as an essential part of the business. The formation of strategic partnerships also allows for the collaboration of growers and breeders to form alliances among themselves to supply bigger amounts of produce and play a vital role in the formation of the supply link. This also excludes the involvement of the non-strategic elements to take part in the business and make the ratio of profits higher for the core members in the business venture. Formation of New Generation Cooperatives and Limited Liability Company is therefore becoming a more favored option for most of the producers, processors and distributors (Jared G., Clement E., Rodney B., n.d). However, there are certain challenges that the producers see while investing in the formation of strategic supply and marketing chains. With growing global competitiveness and race in achievement of higher returns, it is not as easy to form associations with strategic partners and develop a sustainable mechanism of trust and transparency. Although, it becomes easier and quality effective for the processors and distributors to brand the produce that is being driven towards the consumer, the limitations of the region and mutual understanding hinders the process of forming strategic alliances (Joan Fulton, n.d). The producers’ personal investment however has higher ratios of profits for the producer and higher rate of threats from the external factors as well. With higher risks, however, the producers of small scale are more interested in forming their own supply chains on a limited scale on the initial level and gradually growing the business with time. There are certain highly productive sectors that are identified to be more plausible to bring profitability for the producer investor than other commodities. The highest rate of return that a single producer can get from investing in produce is from livestock. The beef industry is however is neither lucrative enough nor consistent as compared to other livestock products like chicken, mutton and pork. The investment and maintenance of the livestock is comparably more efficient and the revenues are consistent and regular. Further, the branded marketing of livestock produce has made it a prime center of producer business activity in national and international markets (www.ag.ndsu.edu, n.d). Most Plausible Areas of Investment in Value-Added Business of Producers One of the centers of interest for the producers now a day is the producer investment in food processing, preservation and exports making it reach the consumer as the final finished product. Many products are included in this category of opportunities open for producer investments including sugar, coffee, tea, eggs and poultry. The prime reason for these being the center of interest for the producer investment is that these products requires less operating cost and the market demands for these products is always consistent and high. The managers of the industry also do not require much professional expertise for the management of the resources and outputs, however fundamental knowledge is necessary. Processing of wheat and oilseed is also considered a highly responsive market for the producer investors. Some of the producers of wheat have been found having their own bakery thus forming a concrete self-maintained chain of supply to the end user. The production of oil from oil seed of sunflower and soybeans is although not easily manageable from the cost factor by a single producer investor; however some of the local producers build a plant for the processing of the oil and retail it. The government regulation, unavailability of finances, and high initial investment however act as stumbling block for the rapid growth of such processing plants, however the market responses to the products has remained consistent and on the rise most of the time (Jared G., Clement E., Rodney B., n.d) Some of the most efficient responses that have been found in producer investments of value added businesses are investment in organic food, vegetables and seafood. The fundamental difference that marks the main factors towards the opportunity for more profits is large sales volume and less cost of acquisition and processing. With low operating costs, and higher sales volume, investment in processing and production of seafood, vegetables and organic food is more attractive to many ranging from single owner businesses to large corporations that are employing hundreds of employees (Jared G., Clement E., Rodney B., n.d) Conclusion The economic implications for the producer investments in value added business are promising and becoming more in vogue with time due to economic uncertainties and rise in producer awareness of the market mechanisms. With less than 8% rural workforce employed in ranching and farming, 1.7% of the rural population is engaged in farming as a full-time occupation. Today, average farm household incomes are about 17% greater than the national household average; and the average net worth of farm households is double that of the national household average. From the basic production of commodities, easy stage of value addition can increase the value of the product from 7% to 20% and may even go up to 30% for certain products (Morehart, Mitch, J. Johnson, C.E. Young, G. Pompelli, 2005). It is not that difficult to identify what opportunities are of prime interest to the grower, however finances and strategic planning play a vital role in the development of independent agriculture industry, which is dominated by the growers themselves. It is the due right of the growers to have a worthy share in the profits of the products and with the growing demand of food items, producer investments in value added business is bound to grow with time. References Jared G., Clement E., Rodney B., (n.d). Success factors for new generation cooperatives. Oklahoma State University Press. Mike Boland (n.d). Values-based food supply chains. Iowa State University, Agriculture Marketing resource center, (http://www.agmrc.org/business_development/getting_prepared/valueadded_agriculture/articles/index.cfm) Vincent Amanor-Boadu. Evaluating agricultural value-adding business opportunities for equity participation. Iowa State University, Agriculture Marketing resource center, (http://www.agmrc.org/business_development/business_workbench/articles/evaluating_agricultural_valueadding_business_opportunities_for_equity_participation.cfm) Tadlock Cowan (2003). Value-added agricultural enterprises in rural development strategies. Nova Publishers. Joan Fulton. Are producer alliances/networks an alternative for producers? Publication; Department of Agricultural Economics, Purdue University Developing a New Co-Owned Agricultural Business: How do we Start a Value-Added Firm? (http://www.ag.ndsu.edu/pubs/agecon/market/ec1137w.htm#Identify) Morehart, Mitch, J. Johnson, C.E. Young, G. Pompelli (June-July, 2005). Using farm sector as a policy benchmark, Agricultural Outlook. Read More