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VALUE CHAINS IN THE AGRICULTURAL INDUSTRIES







VALUE CHAINS IN THE AGRICULTURAL INDUSTRIES
by
Michael D. Boehlje, Steven L. Hofing, and
R. Christopher Schroeder
Staff Paper # 99-10
August 31, 1999
Department of Agricultural Economics
Purdue University


Copyright
©
Ag Education & Consulting, LLC





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public assistance status, veteran status, or sexual orientation. value_chains_in_ag_industry.doc

September 22, 1999
VALUE CHAINS IN THE AGRICULTURAL INDUSTRIES
by
Michael D. Boehlje*, Steven L. Hofing** and R. Christopher Schroeder**

Preface
The U.S. agricultural industry is in the midst of major structural change changes in
product characteristics, in worldwide production and consumption, in technology, in size of
operation, in geographic location. And the pace of change seems to be increasing. Production is
changing from an industry dominated by family-based, small-scale, relatively independent firms
to one of larger firms that are more tightly aligned across the production and distribution chain.
And the input supply and product processing sectors are becoming more consolidated,
more concentrated, more integrated.
Agriculture in the 21
st
Century likely to be characterized by: 1) adoption of
manufacturing processes in production as well as processing, 2) a systems or food supply chain
approach to production and distribution, 3) negotiated coordination replacing market
coordination of the system, 4) a more important role for information, knowledge and other soft
assets (in contrast to hard assets of machinery, equipment, facilities) in reducing cost and
increasing responsiveness, and 5) increasing consolidation at all levels raising issues of market
power and control.
These profound changes in the agricultural industry present new challenges and new
opportunities that require new opportunities that require new ideas and concepts to analyze and
implement. The require new learning and thinking. Some of those new ideas and concepts are
presented here, not as empirically verified truths, but as thoughts to stimulate different and
better thinking. They have been developed based on observations, analysis and discussions with
numerous managers and colleagues in agribusinesses in North America and Europe. This series
focuses on Value Chains in the Food Production and Distribution Industries; companion series
are also available on Farming in the 21
st
Century (Staff Paper 99-9), and Financing and
Supplying Inputs to the 21
st
Century Producer (Staff Paper 99-11).
Our purpose in sharing these thoughts is to invite discussion, dialogue, disagreement
in general to encourage others to develop better thoughts.
Keywords: Value chains, value decay, product differentiation, information, structural change
*Professor of Agribusiness, Center for Agricultural Business, Purdue University, West Lafayette,
IN 47907-1145 and Senior Associate, Ag Education & Consulting, LLC;
boehlje@agecon.purdue.edu
** Partners, Ag Education & Consulting, LLC, Savoy, Illinois 61874, www.centrec.com value_chains_in_ag_industry.doc
1

September 22, 1999
Table of Contents

Biological Product (Agricultural) End-Use Markets and Supply Strategies
2
Value Chains in Agriculture: Why and How Fast Will They Come?*
5
Critical Dimensions of Value Chains
9
Drivers, Competencies and Barriers in Forming Supply Chains*
11
Product Differentiation and Formation And Power In Supply Chains
14
Value Capture and Value Decay in Value-Added Agricultural Production
17
Power and Control In Supply Chains*
19
Knowledge, Information and the Structure of Agriculture*
22
On Organizing Supply Chains*
25
The Dynamics of Supply Chain Governance
27
Analyzing Structural Change*
31 value_chains_in_ag_industry.doc
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September 22, 1999
Biological Product (Agricultural) End-Use Markets and Supply Strategies1
The significant changes that are occurring today in the types of products produced by
agricultural producers are in part a function of changing end-use markets and the development of
different strategies to supply those end-use markets. What are these changes and how will they
impact the agricultural industry?
End-Use Markets
Historically, the agricultural production sector has focused on producing generic
commodities for the feed, and to a lesser extent, the food market. More recently, the industrial
use of agricultural products, including ethanol and other previously petroleum based products,
has been expanding rapidly. Like the feed market, the industrial market has obtained most of its
raw material from generic commodities.
More recently, the food and industrial end-use markets are demanding component
specific rather than generic commodities. Component specific commodities are distinguished
from generic commodities in that they are differentiated on one or two basic characteristics or
components. These components sufficiently enhance the generation of end-use attributes such
that a premium is paid for component specific commodities compared with generic commodities.
But the premium is modest and if it becomes too large, generic commodities can be processed at
a lower cost than paying the premium for component specific commodities to obtain the desired
end-use attribute.
The third production alternative is the design and production of specific attribute raw
materials for unique end-uses in the food or industrial markets. For example, for some food uses
one starch source may be as good as another. But rice starch is superior to other sources of starch
for baby food. Waxy maize is better for some types of starch production than typical commodity
corn. A partial listing of the specific attributes that might be important depending upon end-use
includes chemical composition such a starch, protein, fiber, and sugar content; nutritional value;
palatability; texture and processing properties, volume and availability; freshness and timing of
delivery. Such characteristics as the process used in producing and growing the raw material
(i.e., chemical free or pesticide free for crops and additive free and animal welfare sensitive for
livestock) and the attributes that are excluded as well as those that are included may also be of
interest.
Specific attribute raw materials are characterized by a broader spectrum of the attributes
noted above compared with component specific commodities, which may contain only one or
two of those attributes. In this context the types of products identified form a continuum from
generic to specific without definitive delineations between the three classes identified. As
illustrated in Table 1, the demand for component specific commodities and specific attribute raw
materials is expected to grow, whereas the use of generic commodities will probably decline.


1*Adapted from Boehlje, Michael and Lee F. Schrader. Agriculture in the 21
st
Century, Journal of Production
Agriculture, 9(3):335-340, 1996. value_chains_in_ag_industry.doc
3

September 22, 1999
Table 1. End-use markets.


End Uses
Types of products
Feed
Food
Industrial
Generic commodity
Decline
Decline
Decline
Component specific commodity
Growth
Growth
Growth
Specific attribute raw material

Growth
Growth
Supply Strategies
Four fundamentally different strategies can be used to supply the end-use markets
identified. The first strategy and the one most commonly used in the generic commodity markets
is that of blending. The basic concept of blending is to acquire commodities with various
characteristics (moisture content, foreign material content, weight per unit of volume, etc.) from
various suppliers, and blend these products from different sources into a single product that
meets specified commodity standards. This is the common supply strategy for the feed end-use
market as well as for numerous industrial end-uses such as ethanol.
The second strategy we will call the segment, select, and sort strategy. The basic premise
of this strategy is to recognize and use the variation in biologically produced raw materials by
identifying various segments of the end-use markets that can efficiently use agricultural products
with different characteristics. As noted earlier, higher protein wheat may have more value in
certain food products, or higher starch content corn may be more valuable in some industrial
markets. The approach of the segment, select, and sort strategy would be to first identify these
various end-uses that could use the natural variation in agric