Add value to double your farm profit

Farmers who add value to their produce usually make more profit from the value adding than they do from farming. This is how they double their profit.

Value adding involves increasing the value of your produce to your consumer.

The value to the consumer may be quite different from the value to you.

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The value to the customer is determined by the price they pay for the product or service and the benefits they receive in return. The more benefits the customer receives, the more the value increases for the customer.

Sometimes the customer sees a more expensive product as more valuable, even though it offers no other additional benefit.

Why add value

If you sell your produce for less than it costs to grow it, you subsidize the customer. And even if the customer pays all the visible costs, what about preventing and repairing acidity, salinity, erosion etc?

Many farmers and consumers don't appreciate that there will be no sustainable farming until there is sustainable marketing.

One way to make farming more sustainable is to add value and thus retain or keep value.

The more value you retain, the more income you get. If this increase in income returns you more than it costs you, you have increased your profit.

Farmers are largely price takers. Middlepeople do more price setting.

The market (buyers plus middlepeople plus sellers) sets the price. But, to a large extent that price reflects what is offered by wholesalers. The final prices are often very close to the prices wholesalers offer. This is the case for both farmers and retailers.

This is because the wholesaler is in the middle and therefore has a good idea of both the supply and demand for products on the retail side of the market and on the farmer side of the market. This knowledge gives them great bargaining power.

Plus, wholesalers are usually large organizations or organizations dealing in large quantities compared with any of their customers. They have greater bargaining power because they deal with large volumes and with large numbers of customers. Some of his power is the result of the wholesaler playing one customer off against another.

If you become more of a price setter you have more control of how much income you have.

It is worth adding value because

When you have successfully completed this and associated pages, you will be able to:


To get full value from this web page and relevant associated web pages, you need a basic understanding of your market including how your produce is used by your customers and ideally an understanding of how it can be used by other consumers who are not presently buying it.

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What this means

If you are thinking of adding value, are already adding value or are just starting out, you can use this overview and introduction to value adding as a starting point. It links you to a range of information including:
On this website, we aim to help farmers keep on farming. Adding value is one of the most effective ways to stay in business.

Value adding involves increasing the value of your produce to your customer.

Remember that the value to the customer may be quite different from the value to you. The more benefits the customer receives, the more the value increases for the customer.

The value to the customer is also determined by the price they pay for the product or service. And sometimes the customer sees a more expensive product as more valuable, even though it offers no other additional benefit.

Where the value goes

In many agricultural industries, the farmer gets a net profit of between $4 and $10 out of every $100 the consumer pays.

Very little of the final price goes on raw materials.

Some of the rise in price from farm gate to retail is unavoidable, particularly in manufactured goods such as cotton or wool clothes or in processed food. This is because there are many costs between the farmer and the consumer.

So, to look in more detail at some industries.

Fresh produce such as fruit and vegetables

Sometimes there are huge mark-ups with even on fresh produce such as fruit, vegetables and flowers. I have often seen wholesalers buy produce for $10 and sell it for $40, a 300% mark-up.

And that is by no means the limit. Some take the price up to $100, 10 times what they paid for it.

And then there are transport, taxes, spoilage and the retailer's markup.

When that produce goes on display at the retail store, it may more than double in price. If that happens, this $10 item at the farm gate goes to $40 by the time it leaves the wholesaler and then to $80 or $100 as it leaves the retailer's hands.

Out of the $10 paid to the farmers, they had to pay for transport, industry levies and the costs of production. Even the most efficient grower would be struggling to make much of a profit from that.

Clothing manufactured from farm raw materials

Bar chart showing the percentage of the retail dollar received by each link in the processing and marketing chain This includes clothes made from cotton, wool, cashmere, linen or hemp: A $100 item of clothing typically returns $40 to the retailer, $30 to the maker and wholesaler, $20 to the fabric maker and $10 for the raw materials. See the chart at right.

In a pure wool jumper (sweater or pullover) there will be non-farm "raw materials", such as the buttons, the label and the thread for assembling and embroidering the jumper. Plus transport and other items.

In a man's or woman's business suit there are many other raw materials plus a lot of labor.

The farmer doesn't get all the $10. From that the farmer has to pay the cost of shearing, breeding the sheep, growing the pasture, maintaining fences, levies, broker's commissions, transport and so on.

Breakfast cereals and other processed foods.
Pie chart showing a large slice that goes to the breakfast cereal maker and others in the processing and marketing chain (96%) and a small slice that goes to the farmer The chart at left shows the picture for one breakfast cereal.

My local supermarket sells one of the most popular breakfast cereals for $4/kg.

The on-farm price for the wheat on the day I checked the supermarket for this example was $160/tonne.

The only ingredients in this breakfast cereal are:
For simplicity I added the farmer's input costs to the non-farm part of the chart. That left the farmer with a small profit.

There are 1000 kg (1 kg is 2.2 pounds) in a tonne (much the same weight as a British or USA ton) so a breakfast cereal that sells for $4/kg ($1.80/lb) is selling for $4,000/tonne.

Wheat that sells for $160/tonne is selling for $0.16 or 16 cents/kg or about 7 cents a pound.

The chart was the result of my graphics software plotting the numbers I gave it. By chance it looked like a big mouth eating the small slice (4%) that is the farmer's share.

Who gets the big bite?

Who gets bitten?

So a 1 kg box of this cereal is made from
These ingredients bought by the and used at a rate per box of cereal of and at a cost per kg of cereal
Water Megalitre 30 g = 30 ml = about 1 ounce maximum maximum 1 cent
Vitamins 50 kilogram drum (110 pounds - 1 hundredweight) Traces only maximum 2 cents
Wheat - makes up 97% of the cereal Hundreds or thousands of tonnes Almost 1 kg (970 g or about 2 pounds) less than 16 cents
Packaging Truckload A plastic bag in a box less than 1 cent
Total cost of all ingredients used by the manufacturer of the cereal: Around 20 cents
Sale price of 1 kg of cereal in a plastic bag in a box to the consumer $4.00
Markup by all stages of production and distribution.
Note that this includes all costs once the wheat has left the farm.
The various stages (including manufacture, transport, warehousing and retailing) can take their profits from the 380 cents of "Gross profit".
From the 20 cents cost for all ingredients to the 400 cents ($4) sale price for the box of cereal is a markup of around 2,000 per cent 		From 20 cents
to 400 cents
= a markup of 2000%

Getting closer to the consumer

The closer you get to the consumer, the bigger the slice of the retail price you can get. To get closer, you will need to spend more. Most of this will go on administrative and processing costs but these are generally more than covered by the increased returns.

"Closer" means fewer people between you and the consumer and that your price rises appropriately as each person is removed from the chain. The consumer's price may also fall as you each get some of the margin other people would have received in a more traditional marketing chain.

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The value of processing

Few agricultural commodities can be stored raw, but most processed ones store for years. So, by processing you gain greater control of when you market.

Compare most processed commodities with their raw forms.

Jam, wine, juices and so on store better, are more easily marketed and their sales can more easily be spread through the year than can sales of their ingredients. Fruit has to be sold when it is ripe or ready for market. Except for varieties that can be stored in controlled atmospheres, most fruit won't store on farm for more than a few days.

Large grain buyers and grain bulk handlers probably only want your grains such as wheat when they have space in the local silo or a train coming to your local branch line or rail siding.

But if you store your grain and then mill it into flour, you can be selling it continuously throughout the year. Properly stored, both wheat and flour will keep fresh for quite some time. They can be milled on demand, depending on the time you have available and on the setup you have for milling.

Wool is one of the few raw agricultural commodities that can be stored. And look at the result of trying to store too much - the wool stockpile that brought the wool market crashing down in the late 1980s-1990s. Too much product stored depresses the market.

Much of the increase in price for processed commodities over their raw ingredients is from the processing and presentation. If this can be done for a reasonable cost, you're ahead. The ingredients (your product etc) are often the cheapest part.

One farmer used to sell cattle through his local saleyards at whatever price he could get. Now he sells ready-to-cook meals into Japan and this is his motto:

Why ship beef when you can sell dinner?



Investing in processing

Sensible investments in processing will usually net more on capital, labor and time than the same investment in farming.

The return on farming is notoriously low.

The cost of building and equipping a processing plant can be less than $50,000. For $50,000 you won't be able to buy much land or farm machinery. So a value adding plant can be a relatively small investment on most farms.

Depending on what you are processing and what machinery you use, the need for labor may not be much.

Often there is no need for your own equipment, the processing can be contracted out.

Adding value without big costs

You can see from the example of Profit from milling wheat into flour that a value adding investment need not be large. Ways to add value without having to invest even that much include:

Why people don't add value

It is important to look at what stops some people adding value.

If you can identify what might get between you and successful value adding, you are more likely to make a sensible decision about whether to add value and you are more likely to be successful at it.
So, all in all, you need initiative and a lot of push to get through the maze of rules, market demands and processing needs, let alone the economics.

Those who get through can do well, as is shown in the milling example:

Profit from milling wheat into flour

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Many ways to add value

There are more ways to add value than most people realize. Processing is just one way to add value.

For example, by taking people on farm tours, you can add value to what you do. At the sme time you can drum up business for a farm shop where you sell your produce (and other people's to expand your range). There are other ways, such as:

A suitable next step might be:
Work out the finances and practicalities for adding value to one of your crops.

To make this easier and to reduce the effort and complications, you might be best off finding someone to do any processing, marketing etc that you are not fully equipped to do or are not comfortable doing.


If you are looking at a printed version of this page and you would like to visit it on the internet and get a stack of other info that may assist you, the full web address is
http://www.OrganicExchange.com.au/all/valueadd.htm

Related info:

Profit from milling wheat into flour

Australian Broadcasting Corporation ABC www.abc.net.au rural radio and TV programs are very good sources of inspiration. And you can find some excellent value adding stories with a rural bent by using this link: Search the Australian Broadcasting Corporation TV and radio archives for value adding

There are useful articles about successful value adding in most farming weekly and monthly newspapers and magazines. When you read them, look for the principles, even if the product is quite different from yours. This is where a bit of inspiration from an innovative farmer can set you going in a really useful direction.

For any value adding operation that includes any potential for a risk (real or as perceived by one of your customers), it is worth looking into Hazard Analysis & Critical Control Points (HACCP) to reduce the risk and better manage any complications.

Get the relevant extension officer from the department of agriculture or primary industries or your county agent or private consultant to connect you with technical specialists etc.

Use the links on this website to other information. If you have useful links to pages covering good farming or value adding, please use the contacts page link below. Telephone is my preferred method, but please note my time zone (Sydney, Australia) before ringing.

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This page was updated on December 27, 2007