Center for Economic Analysis

Introduction

Declining farm profits and low commodity prices relative to costs have increased the interest among farmers for value added opportunities.  This brief paper outlines what value agriculture is, the value proposition, and different demand drivers that value added firms can target when developing value added products.  The value proposition is especially important for value added agriculture.

One advantage to value added agriculture is that it can allow a small producer or a group of small producers to stay in business without large scale investments in additional land or equipment.  However, the value added activity has to generate enough of a price premium to support the farm.

Definitions of Value Added Agriculture

Value added agriculture is often thought of processing an agricultural commodity to a obtain a higher price.  This definition is too narrow.  Value added agriculture is any activity that differentiates a producer from the commodity market.  In addition to processing, examples of value added agriculture include agri-tourism activities such as u-pick or direct marketing such as operating a booth at a farmers’ market. 

The USDA defines a value added products as:

• A change in the physical form of the product (processing)
• The production of a product in a manner than enhances its value (for example high protein milk)
• The physical segregation of an agricultural commodity or product in a manner that results in the enhancement of the value of that commodity or product (such as Identity preserved soybeans) (agrmc), provided the segregated product has an attribute consumers are willing to pay a premium for

A key to value added agriculture is the need to be responsive to consumer trends and desires.  Instead of ways to reduce costs, the focus is on how to maximize consumer benefit.  In traditional agriculture, innovation is in the form of ways to reduce costs; in value added agriculture, the focus is on consumer oriented innovation. 

The Value Proposition

The key consideration with respect to value added agriculture is the value proposition.  This concept was developed by H. Christopher Peterson at Michigan State University.  It is simply the ratio of product benefits compared to its price.

In a value added activity the focus is on expanding perceived benefits.  By increasing perceived benefits, a farmer has an opportunity to charge a higher price for the product produced.  In commodity agriculture, the focus is on price and finding ways to minimize the cost of production to maximize profits.

It is important to note that the consumer determines value not the producer.  Perceived benefits are in the eye of the consumer.  As a result, being a good marketer is key to being successful in value added agriculture. 

In commodity based agriculture the producer is on a cost reduction treadmill.  In order to remain profitable, the farmer must consistently adopt new technology and increase the farm size to minimize costs.  In the case of value added agriculture, the farm needs to constantly innovate with respect to increasing perceived benefits, which is a different kind of treadmill.

Keeping a competitive advantage in value agriculture is difficult.  Many food products have many close substitutes and barriers to entry are not high.  As a result, there is a strong need to constantly innovate in the value added product.  Examples would be new packaging, new flavors, and expanding the market served.  One exception to this are products that are perceived as locally produced.  If a sufficiently large subset of consumers is willing to pay extra for locally produced foods this could create a sustainable competitive advantage.

Demand Drivers Facing the Food System

High prices, especially for groceries, have made consumers more price conscious.  This makes value added activities more difficult to be successful.  It is difficult for a farmer or a group of farmers to compete on the basis of price with large food processors and retailers.  Large firms can take advantage of economies of scale to minimize costs and keep prices comparatively low.  Nonetheless there are opportunities with respect to value added activities.  This is especially true for products that focus on being locally produced.  One advantage to products that are locally produced is that it is difficult for other firms and farmers to make the same claim. 

Much like many other economic sectors, food is becoming a way for consumers to express their social and environmental values.  Sustainably produced products, products that are considered “natural” and products that are consistent with the Make America Healthy Again (MAHA) movement can develop products that appeal to consumers that value food products that reflect their beliefs

Another demand driver is wellness.  Some consumers place a high value on food products that promote health.  Related to this is the increase in the number of people using GLP-1 medications.  High protein products have an advantage over lower protein products.  Products high in sugar, alcoholic beverages, and higher starch products are facing difficulties.  Another way to appeal to wellness is to have a “clean label,” a product that has few additives or preservatives.  The MAHA movement has a wellness component as well as social and environmental characteristics.

A common demand driver that has a great potential for those interested in value added agriculture is indulgence.  Indulgence does not necessarily mean unimportant or frivolous, but food and beverage items need to possess characteristics above and beyond the simple ability to maintain life or to provide a minimum quality at a minimum price.  One example is luxury.  Examples are high quality beer and wine, upscale chocolate gourmet coffees and cheeses.  Again, with the increased utilization of GLP-1 drugs, the demand for some of these items is declining.  Producing foods with a foreign taste profile is another way to appeal to indulgence, many consumers are interested in trying truly authentic foreign foods. 

One area of indulgence that has a great deal of potential is pet food products.  Households have become smaller over time and spending that was once directed towards children is now directed towards their pets.  Pet owners increasingly see their pets and members of the family and are willing to spend on them.  Pet treats likely have the highest potential for growth.

Convenience is another demand drivers.  Time has become more the valuable and ways to save time will meet the needs of many consumers.  Smaller households also mean that many people are unwilling to spend a lot of time cooking and cleaning up after one or two people.  There is a potential to make convenient foods more healthy or indulgent and stack benefits.  One aspect of these demand drivers is that product attributes are stackable.

Concluding Thoughts

While value added agriculture has potential a farmer has to decide if he or she is willing to invest the time, effort, and money to be successful.  Depending on the product or commodity, a farmer has to be a marketer, manufacturer, financial analyst, and innovator.  Interpersonal relationships become more in value added agriculture (Hofstrand, 2022).  This is true when interacting with employees as well as customers.  The regulatory environment in food processing is also more complicated.  The Michigan cottage food law does provide a way for food entrepreneurs to get started in food processing, but in the long term a food business will need a license and meet food safety and other regulations (Matthewson, 2007).  A producer will need to decide if he or she has the skills necessary to be a successful entrepreneur. 

While opportunities exist, starting and sustaining a value added business will be difficult.  The skills required exceed those of a typical farmer.  However, there are a number of demand drivers that a value added business can address.  The important consideration is the Value Proposition equation.  To be successful a farmer will need to maximize the benefits of the product in the eyes of the consumers in the target market.

References

Agricultural Marketing Resource Center. (2026). Value Added Agriculture. Retrieved from: https://www.agmrc.org/value-added-agriculture. September 12, 2026.

Hofstrand, D. (2022).  Should You Participate in Value-added Agriculture, File C5-04, Iowa State University.

Knudson, W. A. (2010).  Demand Drivers Facing the Food System, Strategic Marketing Institute Working Paper 01-0310, Michigan State University.

Matthewson, M. (2007).  Exploring Value-Added Agriculture, Oregon State University.