Chapter 4
THE PROCESSING
SECTOR
Andrew Del-ong
Lecture Notes in AB 11
1st Semester 2024-2025
PROCESSING SECTOR
■ The agro industrial
sector of agribusiness
Agroindustry - consists of
enterprises that
processes agricultural
raw materials including
ground and tree crops as
well as livestock
Importance of Agro- industries
■ Maximize the use of
agricultural raw materials.
■ Strengthen the agricultural
base of the country and
consequently improves the
industrial base.
■ Contribute significantly to
the total manufacturing value
added in developing
countries.
Importance of Agro-
industries
■ Play an important role in
economic development
through increased
employment.
■ Add storability, palatability,
transportability and nutritive
value through different levels
of transformations.
Importance of Agro-
industries
■ Pave the way for activating
“sideway linkages”-
linkages derived from the
use of by-products.
Classifications of Agro-industries
By levels of transformation
■ Level 1 - cleaning and grading
■ Level 2 - ginning, cutting,
mixing
■ Level 3 – cooking, canning,
pasteurization, dehydration,
freezing, weaving, extraction,
assembly
■ Level 4 - chemical alteration,
texturization
By activities
■ Upstream industries
o Companies that are engaged in
the initial processing activities.
E.g., cleaning, grading, ginning,
cutting, mixing
■ Downstream industries
o Companies engaged in further
processing of agricultural
products. E.g., cooking, canning,
dehydration, chemical alteration
By types of product produced
▪ Food Industries – basically follow the
same processes and have the same end
use (food).
* Processed meat
* Milk and dairy products
* Processed fruits and vegetables
* Processed fish
* Bakery products
* Beverages e.g. chocolate, coffee, tea
* Condiments and flavoring products
* Cereals
By types of product produced
▪ Non-food industries
• Leather and leather products
• Wood and woodworks and
cork products
• Tobacco manufactures
• Rubber and rubber products
• Textile manufacture
• Paper and paper products
• Fiber products
Considerations in Venturing In
Agroindustrial Enterprises
■ Selection of processing
technology
■ Plant location
■ Inventory Management
■ Supplies for processing
■ Programming and Control
■ By-products
A. Selection of Processing
Technology
Considerations
1. Qualitative requirements
▪ Determine what the
markets require
▪ The more strict the
requirements are, the higher
is the cost of processing and
the higher the value
attached to the processed
products.
2. Process requirements
▪ Depends on the level of
transformation that could be
done to the raw materials
▪ This could serve as barriers to
entry to processing companies
▪ Potential investor must
consider optimum labor-capital
combination, availability of
technology and suitability of
raw materials
3. Rated and Annual Capacity
Utilization
▪ Investor must look into the
possibility of the multiple
uses of equipment and
machinery.
4. Management Capability
▪ Supervisors must have
techno-managerial
competence in managing
the agro-industrial plant.
5. Nutritional value of
processed food
▪ An investor must also
evaluate the effect of the
processing technology in the
nutritional value of the
processed food.
▪ Prolonging shelf-life and
increased digestibility are
only one side of the issue.
B. Plant Location
Decision to make
▪ Locating the plant near
the source of raw
materials or near market.
* In both cases, an investor has to
determine availability of:
● labor
● basic utilities like electricity
and water
● basic provisions such as roads
and communication networks
● land costs
● development costs
Factors favoring plant location
near the raw materials source:
▪ Perishability of raw materials
▪ Sensitivity or fragility of raw
materials
▪ Difficulty of transporting raw
materials as compared to
finished products
* Not meeting the above conditions
would favor locating the plant
near market.
C. Inventory Management
▪ Agro-industrial raw materials
are characterized by
seasonality, perishability and
variability
Thus, it requires a careful
inventory management
▪ Dependent on availability and
timing of raw materials supply.
Things to Consider in Inventory
Management
▪ Storage capacity of raw
materials and storage cost
▪ Capacity of other physical
facilities like refrigerators
▪ Storage capacity of
warehouse of finished
products
▪ Shelf life of raw materials and
finished products
D. Supplies for Processing
▪ Next to raw materials in terms
of importance to the
processing activities.
▪ Include ingredients or parts
other than the raw materials,
packaging materials, and other
finishing products such as
varnish in the case of wood
furniture manufacture.
Supplies for Processing
▪ Contribute a considerable
proportion in the cost of
processing
e.g. packaging materials
such as cans
▪ Reliability and availability of
supplies must be ensured.
E. Programming and Control
▪ Aspects: Production design,
production scheduling, control
systems
▪ Production design
▪ Implementation plans and
production engineering
▪ Production engineering
▪ Specifies physical facilities and
layout
E. Programming and Control
▪ Production scheduling
▪ Specifies production runs
and timing of production
operations
▪ This is important in
scheduling raw material
deliveries and marketing
activities
F. Use of By Products
▪ Processors must be able to
identify potential by-products
and their commercial value
▪ e.g., molasses and ethyl
alcohol as by-products of sugar
milling operations
▪ Marketing-linkaging activities
must also include by-products
marketing
AGRO-INDUSTRIES AND THE
ENVIRONMENT
■ Agroindustries also cause
environmental hazards
▪ Discharge of organic or
hazardous wastes in water
supplies
▪ Emission of dust gases that
affect air quality and
produce toxic substances
▪ Use of dangerous machinery
affecting health and safety
of workers
Problems in the Processing Sector
▪ Lack of raw materials which
meet quality specifications
▪ Presence of many substitute
processed products resulting to
increased competition –
specially in food
▪ Technological disadvantage of
small processing firms
▪ High cost of processing
▪ Lack of quality standards
Potentials for Agro-industries
▪ Increasing demand for
processed food products.
▪ Increasing demand for
non-traditional non-food
products.
▪ Largely a private sector
undertaking with strong
industry associations, increased
attention is given to make the
sector flourish.
