Value-Added Agricultural Enterprises in Rural Development Strategies

Publication Date: October 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Agriculture, forestry and fishing

Type:

Abstract:

From 1910 to 1990, farmers' share of the overall GDP of the food and fiber system fell from 21% to 5%, while the share contributed by the agricultural input and distribution subsectors rose from 13% to 30%. Congress is concerned about how these and other changes in agriculture are affecting rural America and the role valueadded agricultural production might play in future rural economic development strategies. Value-added production is a legislative concern in the 107th Congress; the rural development title in the 2002 enacted farm bill (P.L.107-171) includes provisions for the development of value-added agricultural enterprises. By adding to and capturing the value in commodities grown and processed locally, proponents of value-added production argue that farm households, rural businesses, and rural communities will benefit through new and higher-wage employment, new markets for agricultural commodities, and more vibrant rural and regional economies.

U.S. agriculture is also changing rapidly from a sector characterized by production of undifferentiated bulk commodities sold in spot markets to one of specialized markets driven by new end-user demands. As production shifts away from commodity agriculture to product agriculture, vertically integrated agribusiness firms are increasingly organizing production into agro-food value chains to synchronize all stages of production from seed to supermarket. Value-added production is a central element of agro-food value chains, and control over specific "identity preserved"(IP) traits is basic to the development of product agriculture. Many farmers and ranchers are beginning to consider how they might reorganize their operations to better anticipate these changes and to participate in them, for example, by forming "new generation" value-added cooperatives, and engaging in increased contract relations with value chain integrators. Some producers see IP traits and contract production as sources of new markets, lowered risks, and higher farm and ranch incomes. Emerging opportunities for biomass-based fuels and materials processing facilities, new food processing plants, and alternative farming systems (e.g., organic) could create important new markets for producers. Smallerscale producers too may find new opportunities in regionally-branded products, farmers markets, new specialty crops, ethnic markets, or in establishing direct marketing links between farms and regional groceries.

While capturing more of a commodity's value at the site of primary production can have positive impacts on some farm household incomes and farm-related businesses, important questions arise regarding the extent to which value-added agriculture might become a significant rural development strategy for the future. These identified opportunities, however welcome, are unlikely to significantly alter the diminishing role production agriculture plays in most rural economies. Moreover, because of its comparatively low wages, low net employment generation, and low labor-skill requirements, value-added commodity manufacturing may not become as effective a driver of broad, sustainable rural economic development and new competitive advantage as rural communities and advocates might hope for.