Value Creation across the
Food and Agriculture
Value Chain
Maria Cucagna and Peter Goldsmith
Department of Agricultural and Consumer Economics
University of Illinois
1
Farm Share Evolution
Proportion of one dollar food
expenditure (%)
19
18
18.42
17
16
15.47
15
14
13
12
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Year
Farm Share
2
Motivation and Research Questions
• Increasing spread between farm share and the marketing
share
• Lack of understanding of the term value creation
• Lack of empirical studies measuring value creation within
a value chain context.
Research Questions:
1. What drives value creation in agribusiness?
2. Which chain members are creating the most value?
3. How can this be measured?
3
Agri-Food Value Chain
Stage 1
Stage 2
Stage 3
Stage 4
Inputs
Agricultural
Production
Processors
Delivery to
consumer
-Chemicals
-Agricultural inputs
-Farm equipment
- Farm products
-Soft drinks
-Brewers
-Wineries
-Packaged food
-Food distribution
-Groceries
-Restaurants
4
The Concept of Value
Creation in Food and
Agribusiness
To change a product
current place, time,
and form to
characteristics more
preferred in the
marketplace.
To add value to a raw
product by taking it
to at least the next
stage
of production.
Coltrain (2000); USDA
(2002)
Anderson and Hanselka
(2009)
To perform an
activity performed at
another stage or to
perform an
activity never
performed
Amanor-Boadu (2003);
Born and Bachmann
(2006); Evans (2006,2009)
5
Weaknesses of the Term Value
Creation
• The definitions of value creation provide a weak
description of what value creation really means
• Focus solely on the process and product levels
• Fails to provide a measurement of value creation
• There is no study measuring value creation in food and
agribusiness
• Inconsistent with the financial economics literature
• Do not take into account the cost of capital
6
The Concept of Value Creation in
Financial Economics
• Traditional accounting measures for assessing firm
performance
• Stock Prices
• Return on Equity (ROE)
• Earning per Share (EPS)
• Net Operating Profits After Taxes (NOPAT)
• Inferior measures of the true value of a firm
• Fail to measure the real value or performance of the firm
because they do not account for the cost of capital
7
Economic Value Added (EVA) as a
financial tool to measure value creation.
• Adding value means to use the capital efficiently
• Producing a return on capital above the cost of capital
• Not necessarily related with profitability.
• Research determining the superiority of EVA over traditional
accounting measures of value creation
• There is no research measuring value creation in a value chain
perspective.
• Nor applied to the food and agribusiness
8
Value Creation Metrics
𝐴𝑑𝑗𝑁𝑂𝑃𝐴𝑇
− 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 ∗ 𝑁𝑂𝐴
𝑁𝑂𝐴
Economic Value Added
𝐸𝑉𝐴 =
Modified Economic Value Added
AdjNOPAT
MEVA =
− Cost of Capital ∗ 100
NOA
Created Economic Value Added
𝐶𝐸𝑉𝐴
Persistent Economic Value Added 𝑃𝐸𝑉𝐴
1 if MEVA>0
0 otherwise
1 if MEVA>0 for at least 5 years
0 otherwise
9
Data
• This study uses a ten years panel data of 454 agri-food listed
companies for the period 2003-2012 .
• The main source of the data is Morningstar
• This data provides financial information of worldwide
companies.
• Balance sheets
• Income Statements
• The cost of capital of each company is estimated by using
WACC and CAPM models.
10
Empirical Model
𝑌𝑖𝑡 = 𝛼 + 𝜌𝑆𝑡𝑎𝑔𝑒1𝑖 + 𝛽𝑆𝑡𝑎𝑔𝑒3𝑖 + 𝛾𝑆𝑡𝑎𝑔𝑒4𝑖 + 𝛿𝑙𝑜𝑔𝑆𝑖𝑧𝑒𝑖𝑡 + 𝜃𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡
+𝜗𝐺𝑊𝐼𝑖𝑡 + 𝜏𝑅&𝐷𝑖𝑡 + 𝜋𝐶𝑂𝐺𝑆𝑖𝑡 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐹𝐸 + 𝑌𝑒𝑎𝑟𝐹𝐸 + 𝑢𝑖𝑡
𝑌𝑖𝑡 is the variable of interest (EVA, MEVA, CEVA, PEVA); 𝐺𝑊𝐼𝑖𝑡 is intangible
capital; 𝑅&𝐷𝑖𝑡 is research and development expenditures; 𝑢𝑖𝑡 is a random,
idiosyncratic error term.
11
Results
VARIABLES
EVA
M EVA
CEVA
PEVA
-15.928
-0.601
0.055**
0.158***
(22.532)
(1.017)
(0.028)
(0.028)
40.634*
1.586*
0.088***
0.216***
(24.768)
(0.931)
(0.025)
(0.024)
39.273**
4.716***
0.146***
0.218***
(19.805)
(0.958)
(0.026)
(0.026)
40.346***
2.544***
0.059***
0.088***
(7.133)
(0.126)
(0.005)
(0.007)
3.645*
0.029
0.001
0.001
(2.133)
(0.019)
(0.001)
(0.001)
0.045***
0.001***
0.001***
0.001
(0.011)
(0.000)
(0.000)
(0.001)
1.464***
0.001
0.001***
0.001
(0.136)
(0.002)
(0.000)
(0.001)
-27.550**
-0.113
-0.036***
-0.009
(11.316)
(0.327)
(0.009)
(0.009)
-8.626
-1.744
0.417***
-0.116*
(55.598)
(1.232)
(0.054)
(0.064)
P-value Stage 1 = Stage 3
0.027
0.005
0.120
0.007
P-value Stage 1 = Stage 4
0.010
0.000
0.000
0.008
P-value Stage 3 = Stage 4
0.952
0.000
0.002
0.893
R-squared
0.505
0.186
0.264
0.31
Stage 1
Stage 3
Stage 4
LN(Size)
Leverage
GWI
R&D
COGS
Constant
12
Results
• Stage I: Agricultural Inputs
• Low value creator: No differences with Stage 2 in terms of
EVA and MEVA
• The efficient use of capital is low but persistent value creator
• Stage 2: Agricultural Production
•
•
•
•
The chain actor that least efficiently uses capital.
The lowest outcome in the EVA, MEVA, PEVA and CEVA
The probability of create value persistently is negative.
The most commoditized sector
13
Results
• Stage 3: Food Manufacturing
• High value creator- Efficient use of capital
• No differences with Stage 4 in terms of EVA and PEVA.
• Stage 4: Deliver to Consumer
• The chain node that most efficiently uses the operating
capital
• The highest MEVA of the entire value chain.
• The highest probability to create value (in terms of CEVA)
14
Results
Drivers of Value Creation
- Firm size has a positive effect on the four metrics of value
creation.
- Increasing firm leverage by one unit increases the level of
value creation by 3.6 million dollars
- Investing in Goodwill and Intangible has a positive effect on
EVA, MEVA and CEVA
- Increasing expenditures in R&D increases a firm’s EVA outcome
- Decreasing COGS positively impacts firm level of value
creation
15
Conclusion and Further Research
• There is statistically significant evidence of differences in
value creation levels across the food and agribusiness value
chain.
• Down-chain firms create most value.
• Key drivers of value adding
• Low cost of goods sold, R&D, Goodwill, Intangibles Assets
• The definition of value creation or value adding in
food and agribusiness should be consistent with the
finance literature.
• Therefore we offer the following definition:
• “Food and agribusiness firms add value when they generate returns on capital that
exceed the opportunity cost of employed capital.”
• Thus firms add value when they efficiently produce goods and services
from the capital they employ.
16
Conclusion and Further Research
• Complementarities among members in the value chain
• Coordination
• Horizontal and Vertical Coordination
• Value chain performance improvement
• Agri-food value chain as an entity
• Identify if there are differences in value outcome among
sectors within each stage.
• Value creation analysis among sectors across the agri-food value
chain
17