LSIRD NAFPLIO CONFERENCE PAPERS

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On-farm processing of the products of livestock systems

B J Revell & M François

SUMMARY

The paper reports on key aspects of an EU funded study into on-farm processing of milk and meat products in Belgium, France, Germany and the UK and into consumer attitudes and purchasing behaviour towards such products. The paper outlines the scale and distribution of on-farm processing of livestock products, the impact it can have on the farming business, household income and the contribution to rural employment it may make. All farms surveyed were larger than the national average in terms of utilisable agricultural area and most were in conventional agricultural production. Processing represented an important and generally growing share of household income. With the exception of the UK, labour in processing was largely from household members and averaged 0.5-1.5 full time equivalents. Between one-third and 60 percent of consumers in representative samples in each study country had purchased on-farm processed products during the previous year, although only about 10 percent of consumers were regular purchasers. The potential market for such products can be increased further given attention to strategies for pricing, promotion and distribution.. The artisanal image of such farm-processed products is fragile and may be exacerbated if direct contact is lost between producer and consumer. This poses the question and a dilemma as to whether farm-processed products can ever possess the potential for substantial market growth without the processing and distribution moving to a larger scale , and thereby jeopardising the specialist farm-produced image.

INTRODUCTION

It has long been recognised that one approach to the problem of declining farm household incomes has been diversification of activities on farm, or a re-deployment of farm household labour into off-farm activities. Such diversification has taken a myriad of forms from novel enterprises (deer and ostrich farming, angora and cashmere fibre production, fish farming), agricultural contracting services, to leisure related activities such as farm-tourism/accommodation, golf courses and shooting ranges, direct marketing of products to retailers or consumers and further processing of farm produced raw materials.. A large number of empirical studies have been made into aspects of farm diversification (Benjamin, Dalton & Wilson, Leavy, McInerney & Turner) to identify the number of holdings which had diversified and its impact on farm business/household income. Diversification aims to increase the returns to farm household labour, through shifting the resource into other activities where returns are higher than from traditional agricultural production. This may involve re-deploying the labour/management resource off-farm, or into other activities on-farm. One approach is to shift resources (or add them in the case of employment generation) into activities which add value to the existing agricultural production. One such activity is direct marketing, of which several studies have been conducted (Lagrange, Le Roy, Russell et al, Wirthgen & Maurer). However, few have focused specifically on on-farm processing with the exception of France where some seminal case studies have been conducted (GRET ed). This paper reports on the results of an EU funded study project into on-farm food processing in Belgium, Germany, France and the United Kingdom. Whilst the project attempted to identify the location of on-farm processing across a wide product range, detailed enterprise studies were restricted to farms processing milk and meat products. The full results of the study are available in François et al.

Processing of certain products on farm has been a traditional activity of farmers in almost all countries. The making of butter and cheese, for example, and selling directly to neighbours or in the village has been a small scale complementary activity to farming and income supplement where production has been surplus to domestic needs. But there also exist farm holdings which have separate and professional processing enterprises with specific processing investment, and which contribute a substantial proportion of farm-household and business income. Such activities have allowed the farmer to come closer to his market-place and generate added value to products the raw material prices for many of which have been under pressure through excess EU production. The questions thus posed at the outset of the research were "what were the establishments having a professional vision of processing on farm and if it was sustainable in the longer term. In this respect, it was important to understand how and where such products were positioned in the market for meat and dairy products and how they were regarded by consumers.

The objectives of the research were to:-

1. identify the population of on-farm processors, their location and product ranges manufactured
2. examine the interaction and organisation of the farming and processing production systems
3. establish the principle methods of marketing and distribution of on-farm processed products
4. assess the potential demand and markets for these products.

A number of major themes, issues and specific questions arose and were explored in the study in relation to its broad objectives.

1. The Economic Importance of On-Farm Processing

• Was the activity largely found on small or large holdings?

• Does it contribute significantly to farm household income?

• Does on-farm processing generate employment, especially in less favoured rural areas?

2. The Dynamics of the Processing Enterprise, its Management and that of the Farm

• Did it have an old-traditional base or was it a dynamic new activity on holdings pro-actively adjusting to the changing economic fortunes of European agriculture?

• What were the principal problems and difficulties in establishing the on-farm processing enterprise?

• Has resource re-structuring between farming and processing activities taken place and what were the responsibilities of the farm family and employees in each?

• What was the turnover generated by processing and farming, and what were the trends?

3. The Market for and Marketing of On-Farm Processed Products

• How were the marketing and distribution activities organised for processed products and what was the relative importance of on-farm to off-farm sales?

• What were the farmer-processors' perceptions of their customers needs and wants?

• Where are farm-processed products positioned in the market-place and what are their principle competitors?

• What quality marques are used by producers to enable recognition of their products, and how do consumers perceive them?

• Are there markets for farm-processed products in each country and what are their characteristics?

• Is the market for these products growing?

• Could the market absorb more of these products?
  

LOCATION OF PRODUCTION AND NATIONAL SAMPLE SURVEYS

There is a great deal of uncertainty surrounding the number, location and types of on-farm processing enterprises. No contemporary national censuses of processors exist in the EU, although there are various diverse sources of information which enabled an initial picture of the population to be constructed reflecting enterprise type and location (but not size), and from which subsequent samples could be drawn. The sampling procedures themselves may therefore embody potential sources of regional and business size bias, in that it was not possible to stratify according to known population characteristics.

Figures 1-3 show the location of on-farm processing by livestock product type in France, UK and Germany derived from the research. To a large extent, on-farm processing enterprise type and numbers will reflect the general farming types within particular regions, and also to some degree the proximity of local markets and demand. There are strong concentrations of milk processing in Rhone-Alpes and East Central Regions, foie-gras in the South West, pork products are more generally widespread but strongly represented in the south west and Rhone -Alps, and poultry in the Rhone Alps, South West and North West. In the United Kingdom, on-farm milk and meat processing concentrates in the South West and South East of England, with meat and game processing strongly represented in Scotland and some dairy processing specialisation in Wales and Yorkshire. In Germany, milk Baden Württemberg, Bavaria and Hesse have strong concentrations of meat processors, with milk and poultry processing also strong in Baden Württemberg.

Figure 1. On-farm processing in the France

Figure 2. On-farm processing in the UK

Figure 3. On-farm processing in Germany

On-farm processing is not a dominant activity amongst all diversification opportunities being realised by farmers. McInerney and Turner estimated that 41 percent of UK full time farms were diversified. This study estimated that only 1.6 percent of all farms in the UK were involved in on-farm processing (Revell and Dunn), although Colman et al estimated around 7.5 percent were involved in either processing or direct marketing. In Germany, the estimated proportion of farms on-farm processing was 1.9 percent.

In total, detailed surveys of on-farm processing businesses were made of 220 farms in Germany, 287 in Belgium, 536 in France and 106 in the United Kingdom (Great Britain).

THE PROCESSED PRODUCT RANGE

The nature and definition of on-farm processing is complex. In broad terms, a state change from the application of a transforming process was necessary. It was also recognised that the farmer would control the management of the processing and marketing activities, even if he had employees to conduct them on his behalf, and he must utilise his own raw materials, although not exclusively. Thus the concept of a farm-processed food would exclude simple washing, packing and selling. However, pasteurising and bottling milk was considered a simple processing operation. Clearly culturing of milk products is a more advanced process. For meat, especially large ruminants, slaughtering generally would legally be required to be conducted off-farm in a licensed abattoir. However, provided the farmer then received back the carcase for further cutting for fresh meat sales, or for further processing, this would not compromise the definition of a farm processed product.

The range of products made by on-farm processors differs in emphasis between countries. Table 1 summarises the key features.

TABLE 1

Principal processed product ranges by country

In Belgium the most holdings produce butter, followed by bottled and pasteurised milk. In Flanders, where urbanisation is stronger, other products such as cheese tarts, fromage blanc and yoghurt are made. In the UK

In the UK the product range is very varied and wide. It includes hard farmhouse cheeses, soft/cream cheeses, ice cream, cream and bottled milk. Although largely from cows milk, goats milk and ewes milk products can also be found. In the meat sector, fresh meat cuts are sold (especially turkey-meat), as well as other products such as charcuterie, farmed venison and game birds such as pheasant and quail, and smoked meats. France is similar in many respects to the UK, with the notable exception of the highly specialised and world reknown foie-gras production. Many of the French cheeses have Appellation d'Origine Controlé status. There are also products which adapt to changing needs of consumers such as small apéritif goat's cheeses, cheeses in pastry crusts, cheese-tarts, meat terrines and conserves. Generally, meat and dairy processors in the UK and France tend to specialise in either one or other product type.

In contrast, in Germany, the processed product range is broader than that the normal farming enterprise mix. Some 80 percent of farmer processors produced meat products, 33 percent poultry, 23 percent milk and 35 percent bread. In the meat sector, fresh meat cuts ,sausages and salted, dried and smoked meat products dominate. Dairy products are typified by hard cheeses, Gouda-type cheeses and semi-soft cheeses, together with fromage frais and yoghurt.

THE ECONOMIC SIGNIFICANCE OF ON FARM PROCESSING

In general, farms involved in processing tend to be larger than average (Table 2).

TABLE 2

Average utilisable area of farms processing milk, meat and cereals and numbers in less favoured areas

Of the farms surveyed, a large proportion in France and Germany were within the less favoured areas, whereas only about one quarter of UK farms were virtually none of the Belgian processors.

In fact, the necessary volume of raw material supply, together with investment and financing requirements means that on-farm processing cannot simply be a marginal complement to mainstream farming activities, but requires substantial entrepreneurial ability and an asset base to match. This perhaps runs counter to the traditional concept of a small scale or peasant farmer adding value or processing his production. Most of the processors surveyed were owner-occupiers of the farm holdings or tenants, and the processing enterprise either sole-trader or partnership, with company status more common in the UK. Some 85-95 percent of production was conventional, as opposed to organic, in the UK, France and Belgium.

In terms of the importance of on-farm processing to the farm household income, the enterprises on the surveyed farms contributed a significant share to household revenues in all countries concerned (Table 3).

TABLE 3

Sources of total farm household income(%)

However, whereas in Belgium and Germany, the activities were largely complementary to farming, in France and the UK (especially for milk processing), the processing enterprise was a major specialisation contributing over 50 percent of household income.

It is difficult to generalise about the impact of on-farm processing on rural development and the local economy. Some insights can be gained from examining the employment in such enterprises. Table 4 presents estimates of full time equivalent labour inputs (employees and farm household) into processing and marketing.

TABLE 4

Average employment in on-farm processing and marketing in full time equivalents (FTE's)

^a Processing only

In Belgium, labour use was little more than on a part-time basis whilst in France and Germany processing and marketing provided employment for about 1 -1.5 full time equivalent persons. In the UK, there was a great deal of variation in employment, and the average level of labour use was much higher than in the other study countries, with 6 FTE's. However, there were some very large enterprises in the UK sample and the employment distribution is highly skewed. Between 40 and 50 percent of the UK processing businesses employed no additional permanent staff, and between 30 and 40 percent of the businesses employed between 1 and 4 employees.
FIG 4
UK ON-FARM PROCESSING EMPLOYMENT AND BUSINESS TURNOVER

There is a clear relationship between size of on-farm processing enterprise and the number of employees. Figure 4 illustrates that there is a positive relationship between processing turnover and employment in UK farm-processing enterprises. But, the analysis also clearly reveals labour-capital substitution as the enterprise grows in size and implies size economies in processing and increasing labour productivity at higher volumes of production. A comparable analysis of Belgian dairy processing activity (Figure 5) shows that for any given level of labour productivity, a larger percentage of the holdings will be in the bigger size group in terms of volume of milk processed. Figure 4 shows too that businesses which expand beyond a certain threshold will require increasingly large increments in turnover for every additional employee taken on. The biggest employment effects (either in terms of labour retention or use of spare family labour or hiring new employees) are likely to be in the business start-up and early expansion phases to a medium size enterprise). However, that is not to say that large on-farming processing businesses will not contribute to rural employment, because clearly they do and employ more people than smaller ones. They may be more stable and less vulnerable to collapse than smaller enterprises. But for the marginal unit of public investment, the employment effect may be bigger assisting a small business than a large one in the on-farm processing sector.

Figure 5

THE DYNAMICS OF ON-FARM PROCESSING ENTERPRISES

In the UK and Germany, the creation of the livestock product processing enterprises were relatively new whereas in Belgium most surveyed had been set up before 1984. In France, there was a mixture of new and established businesses. The primary motivations for initiating such enterprises in all countries were to maintain farm household income, to add value to the raw materials and personal interest. All businesses experienced difficulties at start up. The principal reasons given in most countries were:-

• To find market/sales outlets
• To find finance for the enterprise
• To obtain hygiene and sanitary approval

In all 4 countries, food processing is strictly controlled by the authorities, in order to ensure consumer safety. This posed major problems for producers starting up in France, Germany and the UK. A further difficulty was the variation which some producers perceived in the way in which regulations were interpreted and applied in different countries, although it was difficult to gather precise evidence about this in the survey. It was clear that much of the on-farm processing activity was initiated through producer interest and hence was in many cases a production-led rather than a market-led activity. A primary initial difficulty farmers experienced was to find outlets for their products. All processors felt the need for some further training in food processing technology, marketing and business law. Technology training is particularly necessary as the enterprise moves up from a small-scale activity level, and there are complementary demands for improvements to marketing expertise as the volumes available for sale increase.

The size and evolution of the on farm processors' turnover largely reflected the different sizes of agricultural enterprises. Table 5 presents the average turnover for each country. Processing businesses were smallest in Belgium, bigger in Germany and France, and very large in the UK, where some of the UK dairy processors have attained a quasi-industrial scale of production.

TABLE 5

Average turnover (sales revenue) from on-farm processing in 1992

Turnover for the majority of on-farm processors in all countries except Belgium was increasing whilst that from basic agricultural production was largely stagnating or in decline (Table 6).

The figures thus suggest that processing, once started, tends to assume an increasing importance in the farm household activities, and that resources and income shift away from agricultural activity to processing. This is also a feature of many farms which diversify. A corollary of the diversification is that agricultural production tends to become less intensive and more extensive, thereby proffering the possibility of environmental gains where intensity of production is lowered (Dalton, Appleton et al).

TABLE 6

Evolution of Income Sources

Although many farm businesses start by processing only their own raw material, as the enterprise expands, it may become necessary to augment the basic raw material with that purchased from surrounding farms. In the UK and France about 42 percent of meat and dairy processors surveyed drew some raw material supplies from other farms. In Belgium and Germany self-supply rates were higher, with 32 and 34 percent of surveyed processors respectively buying in supplies.

MARKETING ISSUES RELATING TO FARM-PROCESSED FOODS

Many producers had highlighted the difficulties of locating markets for their produce at the outset of their processing enterprise. The difficulties of developing a market when there are initially limited volumes of produce to sell, will frequently restrict selling activity to within the locality of the farm.

Table 7 illustrates the dominance of local sales in all countries except the UK, although even French processors must sell almost one-third of their output outside the immediate locality in order to survive..

TABLE 7

Proportion of sales turnover derived from local sales

Generally, the main distribution channels correspond closely to the size of the processing enterprise and the geographical location of its customers (Table 8). UK farm processors, like industrial food manufacturers, mainly use wholesalers and supermarkets for distributing and retailing their products, especially in the milk sector. On-farm sales only contributes a small share of their total turnover. In part this also reflects the increasing concentration of retail distribution in the hands of the supermarket multiples in the UK. However, the use of wholesalers and supermarket outlets enables the producer-processor to tap into markets far beyond his immediate locale. Processed meat products are also sold direct to the hotel and catering trades. In complete contrast, Belgian farm-processors are highly concentrated in the immediate vicinity of the farm.

In France and Germany, the main distribution channels are on-farm sales and at local fairs and markets. This trend is most marked in Germany, where 70-85 percent of sales value passes through these channels, as compared with 50-75 percent of French products. Other marketing channels are also used (delicatessens, specialist grocers, co-operative farm shops etc.) according to the type of product and availability of outlets.

TABLE 8

Main distribution channels by percentage of estimated total turnover

The principle factors contributing to the successful sale of the products were universally identified by all producers as "word of mouth" and "being a good salesman". The use of food-trade press articles, advertising, market research and having a good distribution network were particularly important in the UK with its bigger enterprises.

All farm-processors felt that the primary factors motivating consumers to buy their products were:-

• Taste
• Confidence in the producer
• Traditional and Artisanal Quality
• Healthiness and safety of the products.

In France, quality and tradition were rated as paramount. In Germany taste was most significant. In Belgium organic and regional image were most important whilst in the UK, confidence in the producer was the dominant consideration. The future of the processing enterprises rested on a number of key considerations. Quality and uniqueness of product were key elements dominant, together with the need for local and regional demand. Personal interest and the motivation of the producer-processor was also essential.

Clearly the future success and viability of on-farm processing depends on both the marketing skills of the producers, the quality, image and healthiness of their products competition from other products and consumer perceptions and demand. The position of farm-processed foods in the market-place is somewhat fragile. Table 9 shows the principle competitors for such products as perceived by farmer processors.

TABLE 9

Market position and competing products. Percent of processors mentioning.

In the UK and France the most strong competition was perceived from other farm-processed products and to a lesser extent comparable industrially processed foods. However, branded food products with a farmhouse image were seen as strong competitors, and this to some extent reflects the increased penetration of UK and French farm-processed products into the supermarketing and wholesaling sectors. The greater local emphasis and niche marketing of Belgian and German produce means that such branded farmhouse products are seen as less of a threat. However, unless the on-farm processing activity is to remain small scale with a local market, it will be important to protect and promote the authenticity of farm-processed foods in order to stem such competition. The creation of specific quality marques for authenticity of farm-origin (perhaps allied with geographic/regional origin (AOC) certification) might help in this respect.

In terms of the overall market penetration of farm-processed products, Table 10 reveals that some 40-60 percent of consumers in France, Germany and Belgium had bought a farm-processed product on some occasion. The level of penetration in the UK was somewhat lower. However, only some 6-10 percent of consumers were regular purchasers, and 10-17 percent were occasional buyers.

Almost half of the consumers of farm-processed products did not envisage increasing their purchases, either because it was too complicated to get more, because they were perceived as relatively expensive (except in the UK), because they were given them as gifts or because what they usually bought was already sufficient. On the other hand, almost another half of consumers hoped to increase their purchases if pricing, distribution and product availability were improved.

TABLE 10

Market penetration and purchase frequency of farm-processed products; (percent of consumers)

^a On one occasion in the past year

^b at least one in the last month

^c several times a year

As the national demographic profiles of the buyers of farm-processed products were quite different, any targeting of particular market segments would need to be closely allied to the socio-demographic characteristics of the country concerned. In other words, there may not be universal solutions for improving market penetration and sustaining market growth, although it is likely to be in urban areas and more removed from the immediate locale on which much of the growth in Germany, Belgium and to a lesser extent in France was hitherto based.

CONCLUSIONS

In France, Germany and the UK, and to a lesser extent in Belgium, on farm processing is a response by farmers to changing economic conditions of agriculture. Such activities have contributed to sustaining employment where they have been created, although the employment effects depend very much on scale of output and turnover.

Processing enterprises in some countries contribute over half of the household income on those farms actively involved, and despite the fact that it was not possible to estimate profitability of processing as opposed to turnover/revenue, presumably such enterprises were profitable as many had had survived for some 8-10 years. The majority of producers in all countries except Belgium were relatively confident of the future viability of their businesses, despite changing regulations and hygiene controls. Business success depended on quality of product, healthiness and uniqueness together with an appropriate distribution network for the product. While the largely small-scale German and Belgian farm-processors focused essentially on local markets and on-farm sales, those in the UK at the other extreme were involved in more sophisticated levels of supply chain management into large-scale distribution. Product ranges and marketing must therefore be tailored to the appropriate market conditions, although it seems likely that if on-farm processing is to grow, it will ultimately have to face the changing nature of retailing and its concentration into supermarkets and hypermarkets unless it is to remain of marginal interest and significance. This sits ill with the image of an artisanal product, and industrially produced products with similar farmhouse images are perceived as a threat to future development. Development of certification and certificates of origin and authenticity may therefore assist in underpinning and promoting the image of these products and afford a measure of protection from similar industrial products.

REFERENCES

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Dalton, G.(1995) The contribution of alternative farm enterprises to farm business development in the Highlands of Scotland. Scottish Agricultural Economics Review 8: 89-98. Aberdeen, UK

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Leavy, A.(1994). The contribution of alternative enterprises to competitiveness in the disadvantaged areas in Ireland. In Rural Realities Trends and Choices. Ed Copus, A.K. & Marr, P. Proceedings of the 35th EAAE Seminar, Aberdeen,UK. pp127-140.

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McInerney, J.&Turner, M. (1991). Patterns, performance and prospects in farm diversification. Univ. of Exeter Agric. Econ. Unit. UK

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