KEYWORDS: agribusiness, farm value, food expenditures, and production technology

The importance of value-added agriculture grows every year. Total U.S. food expenditures of $561 billion dollars were produced in 1997 by what is known as the agribusiness sector of our economy. Agribusiness is often described as including firms that; a) provide inputs for production agriculture, b) produce raw commodities on the farm or ranch, and c) transform raw agricultural commodities to consumer ready goods. The accompanying figure illustrates how these three agribusiness areas have contributed to the value of total food expenditures from 1950 to 1997. Over this period, value added beyond the farm gate or the transformation of raw agricultural commodities to consumer ready food products has experienced most of the $251 billion dollar growth in total food expenditures. Much of this increase can be attributed to the increased demand for convenience oriented food products and away from home food purchases. Away from home food includes food items purchased at restaurants, drive-through windows, hospitals, schools, and other institutions. These away from home food purchases have increased from 24.3% of total food expenditures in 1963 to 40.4% of total food expenditures in 1997.

Total food expenditures have increased at an average annual inflation adjusted rate of 1.3 percent from 1950 to 1997, while the average annual change in gross farm sales has been -0.1 percent. At the same time, the value of off-farm inputs has increased at an average annual rate of 0.3 percent, while the actual value contributed by the farm has dropped -0.8 percent annually. In 1950, 40.9 percent of all food expenditures could be attributed to the total farm value but this figure has slipped to only 21.4 percent by 1997.

Because the value of off-farm inputs like machinery, fertilizers, fuel, and chemicals purchased to produce raw farm goods has increased over this period, the value contribution of a dollar spent on food for the farm has slipped from 22.8¢ in 1950 to only 8.6¢ in 1997. This decline for the farm has occurred in spite of almost a two to three-fold increase in production for many raw agricultural commodities. For example, between 1950 and 1997 U.S. corn, cotton, and wheat production increased 206, 90, and 148 percent, respectively (USDA, Agricultural Statistics). But over this same period the real value of production for corn, cotton, and wheat declined by 26, 56, and 40 percent, respectively. Using a three-year trailing average, per acre yields for corn, cotton, and wheat have increased 229, 135, and 137 percent, respectively, from 1950 to 1997. Advances in production technology have increased on-farm productivity and total output, but the total value of farm goods has remained flat or even declined. Clearly, producing more raw product of a commodity does not ensure that the total farm value received in the aggregate will increase or that local communities will have economic growth.

The farm share of each consumer dollar spent on food and clothing varies greatly by product. In 1997, the total farm value share was 46 percent for fresh eggs, 37 percent for fluid milk, 36 percent for meat products, 21 percent for fresh vegetables, 18 percent for fresh fruit, and 7 percent for bakery and cereal products. Expenditure figures from the Statistical Abstract of the United States and Cotton Counts Its Customers indicate that the total farm value share is only 2.3 percent of each retail dollar spent on apparel and household textile products.

Transforming raw agricultural products into consumer ready goods requires lots of managerial expertise, general and specialty labor, packaging, transportation, rent, business taxes, and many other costs. Labor is by far the largest component of taking products from the farm gate to the consumer and in 1997 amounted to almost 50 percent of the value added beyond the farm gate. In 1950, production agriculture alone accounted for over 16 percent of U.S. workers. Today production agriculture accounts for only 1.7 percent of our civilian workforce, while other areas of agribusiness account for roughly 15 percent of workers.

In addition to good economic growth potential, value-added activities can help diversify the economic base of rural communities. Retail prices tend to be more "sticky" than raw commodity prices, resulting in a more stable economic base. However, cost issues related to location, processing technology, and economies of size are likely to be central to the competitive position of your product versus competing firms. Because a large portion of processing costs are sunk into plant and equipment costs, competitors at established plants can make it risky for new business ventures to invest in new processing facilities. Local agricultural producers and community leaders need to work together to attract agribusiness ventures for value-added activities that will utilize local resources wisely and enhance the quality of community life desired by everyone. The intent of this web site is to help individuals identify how they can proceed to capitalize on adding value to agricultural products that will benefit the whole community.

Agricultural Statistics, various issues, United States Department of Agriculture, Economic Research Service, United States Government Printing Office, Washington D. C.

Cotton Counts Its Customers, 1999 Edition. The Quantity of Cotton Consumed in Final Uses Produced in the United States, National Cotton Council of America, Economic Services.

Denis Dunham, Food Cost Review, 1993, United States Department of Agriculture, Economic Research Service, Agricultural Economic Report #696, United States Government Printing Office, Washington D. C.

Statistical Abstract of the United States, 1998. United States Department of Commerce, Economics and Statistics Administration.

Russell Tronstad is an Associate Specialist in the Department of Agricultural and Resource Economics at The University of Arizona.