Creating value-added businesses for Corn Belt agriculture is a necessity, not a luxury. In the future, economic cycles will continue to show the mixed wisdom of solely relying on the production of commodity crops. Commodity pricing, a key variable to the profitability of most major crops, is expected to become more volatile due to globalization and democratization of world economies. That trend is expected to intensify competition for U.S. agriculture in both domestic and export markets. Growing recognition of these profit pressures has intensified efforts to develop value-added businesses.

An increasing number of rural business initiatives have created a broad diversity of first generation value-added businesses, largely financed by growers. Despite the successful efforts of many of these new value-added businesses, the strategic issue faced is creating and capturing enough sustainable value to generate adequate long-term financial returns. For example, many ethanol plant managers already worry that they are producing “tomorrow’s commodity.” Nevertheless, it is critical for U.S. agriculture, especially those commodity-oriented sectors in the Corn Belt, to move up the value-added curve to enhance growers’ value equation. This can be accomplished by: (1) creating and capturing a larger share of the value-added created between the farm gate and ultimate end-use markets; (2) creating new value-added markets, many of which will be non-conventional, non-food products; and (3) developing all together new integrated technology based product/information systems that redefine value creation between the farm gate and end-use markets. U.S. agriculture faces far different structural dynamics in global markets as it looks to the future. We are moving into a new world where democratization of Asian, Eastern Block and South American economies is accelerating. These dynamics are being manifested in markets, industries, breakthroughs in basic science that create new technologies, and most importantly, how people think about the role of production agriculture. For example, since entry into the WTO, China’s market-oriented farm programs have encouraged subsistence farmers to abandon grain production, and grow more labor-intensive, high-profit crops like fresh vegetables and produce. U.S. specialty crop growers already are experiencing intensive competition in garlic, apples and even pine nuts as a result.

Globalization of trade requires a change in mindset as to how U.S. agriculture will have to evolve in order to compete in commodity and value-added commodity and specialty businesses. According to Sano Shimoda, president BioScience Securities, global agriculture is being impacted by the three main drivers:

1. Market-Oriented Agriculture – Since the fall of Communism and centrally controlled economies, many developing countries have, or are in various stages of developing, significant agricultural production infrastructures. Many of these areas have the potential to develop a competitive advantage in terms of lower cost structures compared with U.S. agriculture for both commodity and value-added commodity and specialty agriculture-based products.
2. Free-flowing Information – The Internet has allowed greater transparency in information, technology, and market access on a worldwide basis.
3. Accelerated Science/Technology Transfer – Broadening scientific expertise is enhancing the global development of basic science and derived technological innovation.

Potentially, U.S. agriculture is headed for the “perfect storm” involving all three factors. This confluence is likely to result in intensifying competition at all levels, including both commodity and many specialty ag businesses and new infrastructures that link the farm gate to end users. The question is whether U.S. agriculture can rise to the challenge by shifting its focus to the development of value-added businesses based on competitive advantage that create both short-term and long-term value sustainability.

Experience has taught us about the geographical evolution of industries, as competitive advantage shifts from industrialized to developing countries. In the last few decades, the history book is replete with major U.S. commodity industries that have almost become extinct, namely, steel, textiles, and electronics. These industries did not transform themselves in response to structural shifts in global competitiveness.

Could U.S. agriculture become a dinosaur? Possibly, but the strategic advantage that U.S. agriculture has is productive land resources, infrastructure, technology, and expertise, the combination of which creates strategic advantage for many crops. However, U.S. agriculture cannot become complacent because the dynamics of global development is eroding U.S. competitive position for many major crops and intermediate products. Other developing agricultural regions have, or are developing competitive advantages. U.S. agriculture’s relative competitive advantage is eroding due to three factors: (1) foreign productivity is increasing more rapidly; (2) transportation costs are being impacted by a deteriorating infrastructure; and (3) although U.S. labor costs are high, U.S. agriculture’s relative labor costs have been moderated by the intensity of technology adoption, however, these technology benefits are increasingly being adopted globally.

U.S. agriculture has a critical advantage, at least, in the short-to-intermediate term, and that is broad scientific and technology development, especially in the area of biotechnology and information technology. However, U.S. agriculture can only maintain its advantage by staying on the edge of technological innovation and meeting the growing sophistication and product differentiation demanded by end users and consumer markets.

Developing a definition of value-added business is critical to this effort. Currently moving from planting and harvesting a crop, such as soybeans, and moving up one step to processing it into oil and meal for feed is considered value added today. In fact, however, this first level of processing creates another commodity business, which is subject to different competitive pressures. Many of today’s value-added businesses are large volume commodity businesses, including ethanol. Given the required capital investment for many of today’s value-added businesses, investors’ risk profiles have increased due the greater complexity of market forces and competitive factors.

The challenges faced in creating sustainable value-added business are numerous. The question is whether enough value-added can be generated, and, equally important, whether values can be sustained in order to justify the additional investment. Business models for these value-added businesses must actually differentiate products in order to minimize the potential squeeze on profitability and investment returns that could develop due to competitive pressures. The business challenge is to generate adequate long-term financial returns by creating and capturing enough sustainable value-added.

Creating sustainable value added will rest on embracing one or more of the following key factors that contribute to sustainable competitive advantage:

1. Multi-layer business model – In order to minimize the risk of profit pressures from commoditization, business plans must have evolutionary strategies that constantly enhance competitive position.
2. Marketing/branding power – Creating real and perceived value-added for a product through marketing/branding can insulate product values from competition.
3. Technology treadmill – In order to limit the risk of obsolescence, businesses must constantly protect, reinvent and broaden their technology platforms. Staying abreast of technology will enable producers to constantly enhance product performance and value.
4. Linkages in supply chain – To capture value throughout the chain, growers must establish an integrated structure of business relationships—from the farm gate to the retailer. This vertical coordination assures a constant supply of raw products with proprietary traits desired by end users.
5. Government regulation – Although government regulation can create market opportunities, just as it jump started renewable fuels, adequate profit levels are still subject to changing supply/demand dynamics. In addition, the long-term viability of biofuels will rest on reducing production costs, in order to compete in the marketplace without the need for government incentives (e.g., tax exemption). That may be a difficult goal to achieve, but it is worth attempting since U.S. ethanol producers may be competing with much cheaper foreign imports in the future.