Agri Value Chain

When we study the marketing of Agri-products it is essential to view the whole environment influencing the product and product marketing. In order to contextualise the marketing environment, let’s look at the Agri-value chain...

In “Strategic Approach to Farming Success”, Nell and Napier ask: “When you get up in the morning. Do you say, “I am a dairy farmer” or do you say, “I am a food producer.” In which way do you talk to yourself? The really winning producers these days have redefined the way they view themselves. At the very least they say, ‘I am a food producer.’ Now, when they say they are food producers, rather than sheep/grain farmers, they immediately think “I need to build relationships throughout the supply chain, all the way to the consumers and I need to think about what the market dictates- seeing that I am producing food for the market.” An average farmer with a good holistic strategy is in a much better position than an outstanding farmer who is only production focused.

The new farm, the new farming business, and the new agriculture tell us that the farm cannot be a fragment or an isolated part of the food production system; it has to be integrated, planned, constructed and farmed with a lively awareness of what is happening in the value chain.

What is a Value Chain?

Interlinked value-adding activities that convert inputs into outputs which, in turn, add to the bottom line and help create a competitive advantage. The chain of activities gives the products more added value than the sum of added values of all activities.

A value chain typically consists of:

These activities are supported by:

• Purchasing or procurement
• Research and development
• Human Resource Development
• Corporate infrastructure

The value chain concept provides a way of understanding relationships between businesses, methods for increasing efficiency, and ways to enable businesses to increase productivity and add value. Value-chain approaches in the agriculture sector are a vehicle for linking small businesses to markets and are essential for improving South Africa’s economy and reducing poverty.

To understand your value chain, you could draw a simple diagram that shows the key processes and inputs that contribute to your final product. In general, the value chain of most agribusinesses looks like this:

How the Value Chain Works

At its simplest, a value chain is an activity path through an organisation, outlining what and how the organisation conducts its business.

Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a fruit farm that needs its products to be packed will require its packhouse to be located nearby its farm. This will maintain the quality of the product and minimise the cost of transportation.

A value chain can be a very helpful tool for understanding the difference between two organisations that appear to be functioning in similar ways in the same sector. This is because organisations can construct their value chains in very different ways, thus creating a competitive advantage.

In a value chain marketing system, farmers are linked to the needs of consumers, working closely with suppliers and processors to produce the specific goods required by consumers. Using this approach, and through continuous innovation and feedback between different stages along the value chain, the farmer's market power and profitability can be enhanced. Rather than focusing profits on one or two links, players at all levels of the value chain can benefit. Well-functioning value chains are said to be more efficient in bringing products to consumers and therefore all actors, including small-scale producers and poor consumers, should benefit from value chain development.

The market is based on integrated transactions and information. Consumers purchase products that are produced according to their preferences. The farmer becomes the core link in producing the products that the consumers desire.

Research and development, whilst including techniques targeted at increased production, are also focused on consumer needs, and attempt to take account of all of the links and dependencies in the value chain, e.g. processing, environmental and social costs/considerations, as well factors such as health impacts, education and learning.

Communication is in both directions. It is important that both consumers and processors are made aware of factors limiting production, just as much as farmers and other producers are made aware of consumer requirements.

The value chain can help you analyse the external as well as the internal environment with regard to production and marketing.

External market analysis can include finding answers to the following questions:

• How do the products you produce reach the final consumer?
• The structure (economic relationships) between players in the chain.
• How this structure is likely to change over time.
• The key threats to the entire value chain.
• The key determinants of your share of the profits created by your chain.

Internal product analysis (with the aim of marketing your product) can include finding answers to the following questions:

• How do the products you produce reach the final consumer?
• The structure (economic relationships) between players in the chain.
• How this structure is likely to change over time.
• The key threats to the entire value chain.
• The key determinants of your share of the profits created by your chain.

Value chains can be used to identify sources of increased efficiency and to facilitate ‘benchmarking’ of how competitors create value and how their activities compare with yours.

Value chain analysis has four underlying elements:

• Identifying the cost of each activity.
• Understanding what factors are driving the costs behind each activity.
• Monitoring the processes of competitor organisations in relation to each activity (‘benchmarking).
• Understanding the linkages in the chain and horizontal strategy opportunities.

You may find that even a quite simple overview of an organisation's value chain gives a great deal of insight into its relative strengths and weaknesses. It is also the case that imaginative approaches to reconstructing (‘reconfiguring’) the value chain can release new ways of clustering resources and therefore new types of capability within organisations.

Analysis of the value chain enables us to identify where an organisation's distinctive capabilities are based. They may arise from clear advantages functions (e.g. R&D, manufacture), or from the integration of individual functional capabilities. These distinctive capabilities give rise to core competencies, which are what make the organisation what it is. They are the key to the continued success of the institution, and effective strategies need to recognise and build on them.

Value chain analysis, together with an understanding of an organisation's key capabilities, can provide a basis for decisions about whether to integrate all stages of the value chain within the same organisation or to enter into partnerships with other organisations better equipped to deliver some of those stages. Equally, value chain analysis may allow an organisation to make decisions about whether to extend its activities up or down the value chain. Certain activities on any value chain might add a high proportion of financial value to the finished product or service: these are known as high value-added activities.

Know your markets, protect your profits and add value to your products:

• Diversify enterprises
• Market outside the commodity supply chains and corporate vertical integrators
• Emphasize direct marketing and premium speciality markets
• Consider forming a cooperative with other farmers
• Add value through on-farm processing

The structure of the value chain will have a direct impact on you and your direct competitors’ profitability.

To an extent, the amount of profit that can be obtained by you is dependent upon the final value that your entire value chain delivers to the consumer. It is also important to realise that your value chain also competes against other value chains that may be delivering products and services to the same customers that your chain delivers to. Agricultural businesses that focus only on the firms nearest to them in the value chain are not likely to anticipate major structural changes that can dramatically impact their profitability.

No matter how you end up adding value to your farm products, these principles apply:

• Start small and grow naturally
• Make decisions based on good records
• Create a high-quality product
• Follow demand-driven production
• Get everyone involved
• Keep informed
• Plan for the future
• Evaluate continuously
• Persevere
• Capitalise adequately
• Focus

Click here to view a video explaining Africa's agricultural value chain development.

Click here to view a video that explains the agriculture value chain.

Click on the link(s) below to open the resources.

Maize Market Value Chain