When does it become profitable for agricultural products to find alternative uses?

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Question: 

At what point does it become profitable for the producer of an agricultural good to begin seeking alternative uses to its main product, similar to the way the corn, soy and cotton industries founded boards to research new uses for their product? If this principle has a name, what is it called for further reading on the subject?

Answer: 

If the principle has a name, I suppose it would be DIVERSIFICATION. But, given the inclusion of the words “boards to research new uses for their product,” the questioner may also be asking about how do agricultural industries decide whether to create a board to research new products? 

In answer to the first question, the point at which it becomes profitable to diversify is when the marginal revenue of the new product is equal to the marginal cost of that product’s production (ugh, econ-speak). For the non-economist, all that practically means is, “If it is profitable to venture into a new product, go for it!” But diversification is about more than profitability. It also reduces your risk. Having more products come out of a commodity helps both individual firms and the entire industry weather upturns and downturns in demand or supply for any given product. Whole turkeys may be very profitable around Thanksgiving, but other times of the year, many people just want the breast meat. Finding profitable uses for the whole bird helps the industry. 

A misunderstanding about agricultural industries is that there is a lot of waste. This probably comes from the observation in some of our refrigerators that there is a lot of food waste. Which is more or less true, final consumers are the biggest wasters of food. However, the supply line from farm to fork is amazingly efficient. The amount of waste between planting to eating is pretty small because of the diversification all along the supply chain. There is a saying at beef packing plants, “If we could sell the ‘moo’ we would.”  Every part of an animal gets used somewhere. In fact, “the drop” (the part of the animal that, er, doesn’t usually end up on your plate) is a very profitable part of the rendering. The recent devastating derecho winds that flattened Iowa corn may have eliminated feed in the form of corn, but not in the form of the stover, and ethanol will still be produced, as will animal bedding. Hulls from almonds are used in feed. Rice straw and saw dust are turned into packaging and building materials. Orange peels get turned into flavorings and perfumes. Manure fertilizes fields. Feathers are used for compost. And the chemicals that come from the final portions of both animal and crop processing go into everything from candles to adhesives to cosmetics... even explosives.

As to the second part of the question. How do agricultural boards come about to look into new uses? There are two main types. Agricultural Marketing Orders and Commodity Checkoffs. Legally, they have a distinction, but practically they are very similar. If a majority of producers in an industry (either statewide or nationwide) votes to create a board for research and/or promotion of their commodity, they can petition either their State Secretary of Agriculture (for a state program) or the US Secretary of Agriculture (for a federal program) and the secretary would make that final decision (in the case of checkoffs, Congress or the State Legislature can also get involved and create them by law). There is the usual period of public discussion, but once a board is formed, it does exactly what the questioner asked about:  it brings industry resources to spend on research, promotion or development of new or existing products. The Prune Board has examined uses of prunes in baking. The Almond Board has researched health benefits and promoted these to consumers. The Beef Checkoff has done research and promotion for their industry. To see the federal marketing boards and find out what they are up to, visit https://www.ams.usda.gov/rules-regulations/moa/commodities and to see an overview of the checkoff programs for research and development, see https://www.ams.usda.gov/rules-regulations/research-promotion .

Answered by:
Dr. John Crespi
Professor and Director of CARD
Last updated on October 14, 2020