Should I Produce Commodities or Go Value Added?

In seminars in Pennsylvania and Maryland, I was asked the same question within a 24-hour period, “Should I produce commodities or go value added?” The following is a quick synopsis of my response.

First, if you are going to be a commodity producer, you first must look within. If you are a person that likes independence, not having to deal with people and prefer production as opposed to deal making, then being a commodity producer probably fits your profile. If you are a commodity producer, you must be a low cost producer with a special eye on the fixed cost structure. Second, your financial leverage strategy should not exceed a one-to-one debt to asset ratio, particularly if you are a grain or cow-calf producer.

At the other end of the spectrum, the value added niche producer requires a different look from within. First you must be one that enjoys marketing, creating markets and planning to deliver your product to the marketplace. You must know your cost of production and be prepared to shift products and services if competition invades the marketplace. Connection between the consumer and the product is a must to retain values in the long run.

Thus, both models require an inside outlook, rather than from outside in; that is, know your strengths, and focus your energy and resources for optimal return.

United Flight 93 While in Sommerset, PA, a dairyman banker friend of mine was gracious enough to take me out to where United Flight 93 crashed on Sept. 11, 2001. A rough memorial has been created, which is manned by people of the area.

The lady that showed us around indicated that even on a cold winter day, 15 to 20 people come by to pay their respects. In the summer, they will see about 4,000 people daily.

She indicated that the day of the crash, the impact knocked her off her couch. She also said that had the plane been in the air two more seconds, it would have crashed into the Shankville School, just over the hill. If you get to the area, do pay your respects. These people saved many lives.

My e-mail address is:sullylab@vt.edu

Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.

To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.

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