Lesson 2: Value Addition

Why do we need to do “value addition?” What are the different activities for us to add value
to our products?

Before we start learning about value addition and the activities related to it, let us watch this
video: https://www.youtube.com/watch?v=jJLw6D9uBbQ&t=2s

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Introduction

We learned from the previous lesson that the market chain is composed of different actors
that perform different roles in the market. But what happens to the product when it moves
along the chain?
As the product flows from the farmers who produce them to the consumers, the value of the
it increases because of the activities done to it by various market actors. These activities are
called value adding activities that make the product more convenient, useful and attractive
to the buyers.

What is Value Addition?

Value addition is the process in which a product or service is made more beneficial to increase
its worth or value in the market.
After you harvest your crop, many activities can be done that will add value to it. For example,
in the case of palay, the activities that can be done that add value are threshing, drying,
bulking, milling, packaging, sorting, wholesaling, and retailing. These add value to the palay
and make it more convenient and attractive for the buyer.
Another example are coffee berries. These berries are not useful to consumers who need
ground roasted coffee beans for breakfast. To make the berries marketable, value adding
activities are done by the market actors such as depulping, drying, milling, roasting,
grounding, packaging, and distribution through supermarket or grocery stores.

Why do we need to do value addition activities?

Value addition is a way to earn more from your harvest. We learned from the previous lesson
that value addition contributes to higher earnings of farmers in their agro-enterprise. This is
because when product flows in the market chain and more value-adding activities are done,
its value in the market increases. We can observe this in the higher price that the buyer is
willing to pay in exchange for the product.
In our coffee berries example, which would you buy as a consumer? A fresh from the harvest
coffee berries for Php 40/kg or ground roasted coffee beans at Php 90/kg?

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 Activities for value addition

1. Product improvement entails improving the physical quality of the product in terms of texture,
size, color, shape, taste, and weight through applying technologies, techniques, and controls
that can contribute to its quality.

Example: Product improvement of banana

2. Change or addition of functions

Example: cleaning, sorting, consolidation, processing of powdered onion

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3. Improvement of coordination. Example: group delivery for lower costs or finding better
buyers

4. Packaging – refers to the wrapping material around a consumer item that serves to
contain, identify, describe, protect, display, promote and make the product clean and
attractive. Packaging also aims to protect the product during shipment from the
manufacturer to the store selling it.

Important Functions of Packaging

1. To protect the product from dirt, insects, dampness, and breakage.
2. Packaging serves as an identification of the product.
3. Promotion of the product through traceability and labeling

Traceability is important within the supply chain of any manufacturer because it provides the
ability to recall products, track production quickly, and match replacement parts. Food
manufacturing is just one example of an industry where traceability is highly beneficial and
required.
Labeling helps to grab the attention of a customer. Marketers can use it to encourage
potential buyers to purchase the product. Packaging is also used for information
dissemination.

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4. Packaging serves as the placement of certifications that a product passed quality and
performance tests. In addition, it means that the item complies with all quality
requirements or manufacturing processes for such a product.

Profit and Cost of Value Addition

Value addition increases profit because the added value is shown in the higher price of the
product. But we also need to understand that doing value addition activities also
involves costs to make the product more valuable. Thus, it is important that we learn how to
compute for the net profit resulting from value addition.

Let us look at this example of value addition in bulb onion. As more value adding activities
are done, the price of the bulb onion increases, as well as the net profit.

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Product form

Bulb onion Bulb onion Bulb onion

Bulb onion
(fresh harvest (dried (sorted for
packed in red packed in red large size and (peeled and
bag) bag) packed in refrigerated)
crates

a. Price 12.00 per kg 18.00 per kg 26.00 per kg 38.00 per kg

b. Production 8.00 8.00 8.00 8.00

Cost

c. Gross Profit 4.00 10.00 18.00 30.00

Formula:

c=a -b

d. Value - 2,00 6.00 12.00

adding cost

e. Net profit 4.00 8.00 12.00 18.00

Formula:

e=c-d

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