Thursday, February 11, 2016

Value-Added Products: Are They Economically Beneficial for Small Farmers?

F2F Volunteer Diane Twete leading a peanut
butter-making demonstration in Guatemala
Agricultural value-added products are typically defined as a crop or raw product whose value has been increased by changing its physical state through activities including  washing, processing, packaging, etc. Common examples of value-added products include jams, cheeses, canned produce, roasted coffee, soaps, chocolate, breads, cured meats—you name it.

Many F2F hosts - often small farmers - want to shift towards selling value-added agricultural products because they know that such products can typically be sold at much higher prices than their raw materials. The desire stems from a seemingly straightforward logical thought process— higher price means higher profit. However, higher sale price does not always mean higher profit. There are a multitude of factors that determine whether that logic holds true and those factors differ for every particular case. 

F2F host processing cacao beans in Panama
F2F engages with these farmers and producers, many of whom do not keep records or have other information about their current production to help them answer the question: “Is it economically beneficial to make and sell a value-added product?” F2F volunteers train program participants in basic budgets, farm records, and market analysis. Part of this process includes investigating various factors affecting the profitability of value-added products. Some questions that volunteers and farmers ask include: 

1. What are the available inputs? 
Inputs include raw agricultural products, labor, energy, and transport among others.

2. Given the available inputs, what value-added product(s) can be made?
As mentioned above, value-added products include washed and packaged produce, jams, cheeses, canned produce, roasted coffee, soaps, chocolate, breads, cured meats, etc.

3. Is there an accessible market for the product(s) and is there demand for the product(s)? 
Analysis of the market is critical. If there is no accessible market or specific demand for the product, the conversation should stop here. If this is a new product not currently available anywhere, some more detailed research may need to be done to survey people on potential demand. But this question about market and demand is the most important. 

4. How much will it cost to process and sell this value-added product? 
The long answer to this question includes many details beyond the cost of production but often when working with small producers, focusing on the cost of production is best.

5. Will a higher price give me higher profit? 
Answering this question may be especially challenging for small farmers who have limited capacity for recordkeeping and accounting. Calculating profit can be difficult because it involves thinking through all the costs of production. At the most basic level, profit is the difference between total revenue, or money earned from the sale of the product, and total cost of production. To see positive profits, total revenue must be greater than total cost of production. To determine if the sale of the new value-added product will result in higher profit compared with profits earned from selling raw agricultural products, small farmers must calculate profit in both scenarios and then compare them to see which is greater.

So are value-added products economically beneficial to our F2F hosts? It depends. And F2F volunteers can help hosts answer this question. 

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