Considerations for aValue-Added Agribusiness

Agricultural Extension ServiceThe University of Tennessee

PB 1642

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Table of Contents

The Agricultural Development Center’s Role in Value-Added Agriculture

Tennessee Agriculture

Understanding Value-Added

Business PlanningA Worksheet ApproachSmall Business FailuresRegulationsInsurance

MarketingMarketing MixAdvertising, Promotion and PublicityWord-of-Mouth AdvertisingCollateral Marketing MaterialsMarketing BudgetMarket Plan Check List

FeasibilityFinancial FeasibilityBreak-Even AnalysisPrice Determination

Product Development

Value-Added Opportunities

Conclusions

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Rob Holland, Assistant Extension Specialist

Kent Wolfe, Assistant Extension Specialist

Agricultural Development Center

The Agricultural Development Center’s

Role in Value-Added Agriculture

The Agricultural Development Center (ADC) wascreated by The University of Tennessee AgriculturalExtension Service during the spring of 1998. TheADC’s mission is to increase the value ofTennessee’s economy through new, expanded andimproved processing and marketing of agriculture,aquaculture and forestry commodities, i.e., “addingvalue!” Value can be added by processing, packag-ing and marketing products developed from agricul-tural sources.

To take advantage of Tennessee’s value-addedagricultural potential, farmers and agri-entrepreneursmust be aware of value-added opportunities, as wellas informed about the feasibility, planning andmarket development associated with a value-addedbusiness. There are also income opportunities forrural areas related to tourism, farm vacations,entertainment farming and other recreational activi-ties and home-based industries.

The ADC assists new and existing producers,agri-entrepreneurs, service providers andagribusiness industries in Tennessee by providingeducational and developmental services andtechnical support through a multi-disciplinaryteam approach. The areas of specialization includemanagement, process engineering, business analysis,food technology, wood and wood products processing,market evaluation and feasibility analysis.

The ADC works with farmers, agribusinesses andentrepreneurs in the evaluation and planning ofvalue-added agriculture, forestry and aquacultureenterprises and ideas. The ADC provides:

• economic analysis• marketing and distribution strategies• market research and analysis• niche market identification• technical information for market

development• feasibility analysis• interpretation of regulations

• assistance with new-product development(in the areas of formulation, processingprocedures, sensory evaluation, packaging,content specifications, labeling and marketpotential)

Many farmers and entrepreneurs are trying toidentify ways to generate additional farm income.This additional revenue may be created by adding anew enterprise, adopting new practices incooperation with existing enterprises or by addingvalue to a commodity that is currently beingproduced. The ADC assists farmers andentrepreneurs in the evaluation, development andimplementation of value-added considerations. For aproject to be considered by the ADC, an applicationmust be completed and submitted to the center.Application forms may be obtained from any countyExtension office or at the ADC web-site:www.utextension.utk.edu/adc. All submittedapplications are evaluated by the ADC facultyaccording to a set of established primary andsecondary criteria.

The ADC is taking Extension’s traditional specialtyareas of production, management and marketingeducation to the next level by working in multi-disciplinary teams to evaluate and address value-added agricultural ideas. Projects are addressed by ateam of specialists and involve faculty membersfrom a variety of disciplines. The team approachprovides a complete investigation of the interactiveproduction, financial and marketing aspects of theproject. The ADC has the unique opportunity toassist Tennessee’s agriculture, aquaculture andforestry industries through pivotal transitions ofchange.

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Tennessee Agriculture1

Agriculture is a significant contributor toTennessee’s economy. Approximately 20 percent ofall economic activity in the state is related toagriculture. Agricultural production alone generatesnearly $2.5 billion annually in farm cash receipts.Food manufacturing, marketing and distribution,forestry-related industries, equine and otheragricultural products make the economic impacteven greater.

Tennessee’s agricultural impacts extend far beyondits geographical boundaries. International trade has asignificant impact, as exports of raw agriculturalcommodities generally total more than $513 millioneach year. Raw and processed agricultural and forestproducts are by far the state’s top export category,totaling more than $2.1 billion.

Tennessee’s top agricultural products include cattleand calves, hardwood lumber, dairy products, cotton,tobacco, poultry, nursery stock, fruits andvegetables, hogs and pigs, soybeans and corn.Farming and forestry dominate Tennessee’slandscape, with farm production occurring onapproximately 80,000 farms. About 11.8 millionacres, or a little less than one half of the state’s landarea, is in farms. Livestock and livestock productionaccount for approximately 44 percent of the totalfarm cash receipts, while crop sales account for theremainder. Farm and non-farm forest land accountfor another 13.6 million acres. Tennessee’s forestsproduced timber to manufacture almost 840 millionboard feet of hardwood lumber, making the state oneof the nation’s leading producers.

Understanding Value Added

Tennessee farmers are now more apt to consider newenterprises, activities and procedures than everbefore. While Tennessee agricultural productiongenerates approximately $2.5 billion annually infarm cash receipts, farmers have not been especiallywell paid for their efforts. In 1997, each Tennesseefarmer returned an average net cash income of$2,296.25.2

One reason for this low net return is that the pricespaid by farmers for inputs have been steadilyincreasing, while the prices received for productshave been stagnant. Historically, stagnant farmprices in economies of growing retail prices havecontributed to a steady decline in the farmer’s shareof each dollar the consumer spends on food over thepast 30 years. On average, less than 21 cents oftoday’s retail dollar spent on food makes it back tothe farm. For food items purchased at food serviceestablishments (fast food and restaurants) the farmer’sportion slips much lower, to less than 12 cents.

In 1997, consumers spent $561 billion on food itemsin the United States. Of that, farmers received $120million, or 21 percent. Primarily as a result of therising costs of labor, transportation, packaging, foodservices and other marketing inputs, the cost formarketing farm foods has increased greatly over theyears. For example, the cost of marketing foodbeyond the farm gate increased by 55 percent from1987 to 1997. An average breakdown of what adollar spent on food in 1997 paid for is depicted inFigure 1.3

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The difference in the prices that farmers receive fortheir production and the prices that consumers pay atthe retail level is referred to as the “farm-to-retailprice spread.” Since 1970, the farm-to-retail pricespread has grown (Figure 2).4 The reason for thisincrease is that farm receipts have stagnated or evendeclined, while retail prices have tended upwardwith inflation, in some instances faster thaninflation. An underlying principle of the farm shareof food expenditures is that the more processingperformed on a product before it reaches the retaillevel, the smaller the farm share. For example, fresheggs require little processing and have a higher farmshare than bakery products that require a great dealof processing.

Because of the increasing farm-to-retail price spread,the importance of value-added agriculture growsevery year. Since 1950, the value added toagricultural products beyond the farm gate hasgreatly outpaced the value of raw agricultural goods.Therefore, many farmers are now evaluating ways toadd value to their commodities to capture some ofthe value that is being added beyond the farm gate.

Value added is one of today’s most common“buzzwords” in agriculture. Value may be added toagricultural commodities by processing, packagingand marketing. At the farm level, value can beadded by retaining ownership of an item beyond thecommodity stage, thereby increasing the value ofthe item by further processing, packaging ormarketing. Value-added agriculture may convertitems into products of greater value, increase theeconomic value of a commodity or increase theconsumer appeal of agricultural products. Addingvalue is doing more of the preparation of a product/commodity for the consumer than was done before.

As a result of stagnant or declining farm receipts,many farmers are looking for ways that they canadd value to their commodities to capture a largerproportion of the consumer’s food dollars. Someexamples of opportunities for income improvementthrough adding value to agricultural commoditiesare listed on the next page.

Figure 1. What a dollar spent for food paid for in 1997

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• A pepper grower who processes a specialhot sauce and hot salsa can add value to the rawcommodity.

• Further processing rough lumber into end-use consumer products adds value to acommodity product.

• A poultry grower who bags his or herpoultry waste compost and markets it as anorganic soil conditioner can add value tothe farm waste.

• A swine producer who opens his or herown retail butcher shop can “add value” byselling cuts of meat to the consumer ratherthan live hogs to a packer.

• A “pick-your-own-pumpkin” entertainmentfarming operation provides a direct marketopportunity.

Figure 2. Distribution of food expenditures

There is, however, a delicate “balance” betweenwhat it costs to add value to an agriculturalcommodity and what price the market will bear forthe product. A venture will only be profitable if theprice received is greater than the total cost ofproduction, packaging, transportation, operation andmarketing. The concept of value-added agriculture isan attempt to capture or obtain a portion of themarketing bill shown in Figure 1. As the farm shareof the retail dollar spent on food shrinks, farmersmay look for ways to obtain a portion of that whichis growing.

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070 72 74 76 78 80 8284 86 8890 92 94 96 Year

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Business Planning

Adding value toagriculturalcommodities oftenrequiressignificantlydifferent businessskills andinformation needs than an entrepreneur may posses.Adding value through packaging, processing andmarketing may require adherence to andunderstanding of many different regulation,licensing, tax, insurance, labor and public relationconsiderations, as well as a thorough understandingof marketing concepts. Because the development ofmany value-added enterprises often constitutes anew business venture, such enterprises should not beundertaken lightly.

A good business plan can help identify potentialcharacteristics that may cause business failure andimprove the chances for business success. Abusiness plan can be compared to a road map in thatit identifies business goals and presents a plan forachieving them. It should force the business ownerto:

• determine the feasibility of the proposedidea and its start-up requirements

• evaluate the need and potential payback ofborrowed money

• develop the groundwork for detailed operationalplans

The development of a business plan should be abasic management practice for any business venture.A business plan should provide a detaileddescription of the business and should address keyfactors such as:

• What products/services will beprovided?

• Who are the potential customers?• How will the product be produced,

marketed, distributed and supported afterthe sale?

• Will the revenues cover the expenses?

Many failed businessesmention “lack ofcapital” as the primarycontributor to businessfailure. However,because businessesoften do not adequatelyplan, additional capitaloften just postpones theeventual failure of thebusiness.5 A formalbusiness plan should be written. It does not have tobe long nor expensive, but it does require aninvestment of time and attention.

Many business plans are developed to securefunding from commercial lenders. In addition toseeking capital, a business plan should also bedeveloped so it can be used to clearly communicatethe plans of the business. The business plan can bevery useful in evaluating the potential and actualresults of the business venture. Farmers and agri-entrepreneurs need to be aware that it takes morethan a good idea for a value-added agriculturalbusiness to succeed. Agribusiness entrepreneursmust plan for success. This includes conductingmarket research, identifying the target market anddeveloping a five- to 10-year financial plan thatincludes cash flow, financing and expansionconcerns.6

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A Worksheet Approach

Following is a worksheet to help evaluate anentrepreneur’s level of knowledge and familiaritywith issues related to a value-added idea orenterprise. It allows for an assessment of theproduction, marketing, financial and personalattributes that should be considered for a newbusiness. Rate the questions on a scale of one to 10.

The rating should reflect your level of familiarity orknowledge with the respective question. Thisworksheet is not intended to provide a definite YESor NO answer, but merely a relative indication ofyour familiarity and understanding with the project.The rating should help you determine areas of theproject that require additional information and areasthat offer a competitive advantage.

- - - - - - - - - - - General Rating - - - - - - - - - - -1 . . . . . . . . . . . . . . . 5 . . . . . . . . . . . . . . . 10

Raw Product SupplyRequired inputs (specifications, quantity, quality)...............................Availability of required inputs (timing and price)................................Location/accessibility of inputs............................................................Alternative inputs..................................................................................Dependability of the input suppliers.....................................................Alternative for suppliers.......................................................................Long-term agreements with suppliers..................................................

Production and Financial PlanningMinimum facility requirements............................................................Social issues..........................................................................................Environmental issues............................................................................Start-up costs.........................................................................................Money to be borrowed..........................................................................Interest rates..........................................................................................Annual debt payment............................................................................Employees.............................................................................................Special skills needed for business.........................................................Employee training programs.................................................................Labor management issues.....................................................................Product development............................................................................Wage rates.............................................................................................Safety considerations............................................................................Management costs.................................................................................Fixed costs............................................................................................Depreciation..........................................................................................Insurance costs......................................................................................Taxes.....................................................................................................

Projected cash flow...............................................................................Break-even point...................................................................................

Not VeryFamiliar/

Knowledgeable

SomewhatFamiliar/

Knowledgeable

VeryFamiliar/

Knowledgeable

Project net income.................................................................................

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Market DeterminationConsumption trends..............................................................................Quality & quantity restrictions/trends...................................................Market characteristics...........................................................................Target market........................................................................................Market alternatives................................................................................Activity in the existing markets............................................................Competition...........................................................................................Distribution system...............................................................................Delivery requirements/considerations/schedules..................................Transportation.......................................................................................Product/service launch..........................................................................Sales volumes per customer..................................................................Target market........................................................................................Market potential....................................................................................Location of buyers.................................................................................Signals by potential buyers...................................................................Reliability/stability of the buyers..........................................................Payment schedules................................................................................Special selling services.........................................................................Seasonal price patterns..........................................................................Historical price patterns........................................................................Average market price............................................................................

Rate yourself on the following personal characteristics, with “1” being poor and “10” being excellent.Personal CharacteristicsPatience.................................................................................................Health....................................................................................................Willingness to continue learning..........................................................Support of the family............................................................................Responsibility.......................................................................................Selling/marketing skills........................................................................Ability to“roll with the punches”..........................................................Courteous and understanding...............................................................Good public relations skills..................................................................Good organizational skills and abilities................................................Self-starter and desire to achieve results..............................................Seeker of new opportunities.................................................................High degree of energy..........................................................................Ability to motivate people and get along with others...........................Experience in several aspects of business............................................Proven ability to execute ideas.............................................................Ability to adjust your managerial style to suit a situation....................Honesty.................................................................................................Foresight and planning abilities............................................................Strong work ethic..................................................................................Effective communicator........................................................................How much money have you saved for investing in the business? $________________How do you feel about never seeing this money again? _________________

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Small Business Failures

The old adage, “people don’t plan to fail, they fail toplan” certainly holds true when it comes to smallbusiness success. The first-year failure rate for newbusinesses is approximately 70 to 80 percent. Onlyabout half of those who survive the first year willremain in business the next five years.7 Of thesefailed business, only 10 percent close involuntarilydue to bankruptcy. The remaining 90 percent closebecause the business was not successful, did notprovide the level of income desired or was too muchwork for the effort.8

While no person should start a new venture preparedto fail, adequate planning should be invested indeveloping tactics to implement if things do gowrong. Every business has a life span that isdepicted by its business life cycle. A business lifecycle is normally defined by four stages:introduction, growth, maturity and decline. Figure 3depicts the four stages of a typical business life cyclewith regard to the introduction, growth, maturity anddecline in sales over time.

Most business life cycles will experience a slowintroduction and growth stage, a short maturity stageand a rather quick decline stage. It is important to

understand the typical cyclical life span of smallbusinesses — including value-added farmenterprises. Most single value-added farmenterprises will not remain at maturity long enoughto provide a family’s sole source of income.Therefore, diverse product lines and new enterpriseintroductions are essential to maintaining asuccessful business.

Unfortunately, many businesses enter the declinephase shortly after introduction. Studying thereasons for most business failures can be helpful inextending the business life cycle. In a broadperspective, business failures can be classified intotwo categories: catastrophic failure and general lackof success. Catastrophic failures are the primaryresult of economic factors but also result from thedeath of a partner, fire, fraud, burglary and acts ofGod. According to Dun & Bradstreet statistics,9 88.7percent of all business failures are due tomanagement mistakes. The following listsummarizes the 10 leading management mistakesthat lead to business failures.1) Going into business for the wrong reasons2) Advice from family and friends3) Being in the wrong place at the wrong time4) Entrepreneur gets worn out and/or

Figure 3. Four Stages of a Typical Business Life Cycle

Time

Introduction

Growth

Maturity

Decline

Sales

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underestimate the time requirements5) Family pressure on time and money6) Pride7) Lack of market awareness8) The entrepreneur falls in love with the

product/business9) Lack of financial responsibility and

awareness10) Lack of a clear focus

Regulations

Because many value-added agricultural enterprisesresult in direct sales to consumers, the personevaluating such an enterprise should be aware thatlocal, state and federal laws are in place to protectthe consumer. Such laws include the regulation andmonitoring of weights & measures; healthstipulations; sanitation regulations; meat, dairy andpoultry inspections; pollution controls; labelingrequirements; and justification of product claims.Workers’ compensation laws protect workers in theevent of injury on the job. Most states havemandatory worker’s compensation laws.

A variety of local, state and federal agencies requirelicense, permits and/or registrations for businessesand services. Most incorporated cities and manycounty governments in Tennessee have zoning lawsto restrict and protect the use of property.

Many value-added businesses will also face a varietyof tax-related issues during the development andimplementation of their idea. The following revenueand tax issues may apply to value-added businessventures: corporate taxes, limited liability companyfees, property taxes, sales and use taxes, businesspermits, license and fees, payroll taxes, franchisetaxes, excise taxes, unemployment taxes, fuel taxes,health and sanitation taxes, workers’ compensationand gross receipts taxes.

Maintaining adequate records is also essential for avalue-added business. Sales, income,expenses, labor, inventory,purchases, invoices anddelivery specifics shouldbe maintained in amanner that will allowfor efficient reportingand analysis. Thebusiness managershould be prepared to

maintain complete records of sales, income,expenses, accounts payable and accounts receivable.A reliable system should be developed to handlepayroll records, tax reports and payments. Acomplete, detailed and efficient system for recordingand reporting financial and production informationshould be carefully considered, designed andimplemented.

Insurance

Insurance coverage is a fairly standard cost of doingbusiness. Insurance coverage for fire and otherhazards, legal liability, property, rental, vehicle,worker’s compensation, crime, employee benefits,life & disability and business interruption should bethoroughly investigated and carefully evaluated.Sometimes, insurance coverage for small businessesmay be included as part of a personal orhomeowner’s policy. However, adequate coveragefor the business must exist. A separate commercialpolicy for full protection of the business should beconsidered. All insurance policies and businessrecords should be kept in a safe location.

While having insurance coverage often provides afalse sense of security, it is more important to havethe right type of coverage than to simply havecoverage. It is important to understand the type ofcoverage your business needs and has. Read andunderstand the fine print in all policies and re-evaluateyour business insurance needs periodically. Thefollowing types of coverage should be discussed withyour insurance agent.

• Product liability coverage: protects you if yourproduct causes injury to the consumer

• Auto liability and “non-owned” auto liabilityinsurance: protects the business in the event of anaccident involving an automobile that is used tosupport the business

• Medical payments insurance: protects the business ifsomeone is injured whether or not the business wasat fault

• Worker’s compensation: protects the business ifemployees are hurt on the job

• Business interruption insurance or earnings insur-ance: protects the business if it is damaged by fire orsome other cause and you must totally or partiallysuspend operations

• Disability income protection: a form of healthinsurance in case you become disabled

• Business life insurance: provides funds for transitionif you die

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Marketing

Unlike traditional markets for farm commodities, themarketing arena for value-added products, requiresan understanding of new terms and conceptsincluding market research, consumer preferences,niche marketing, target markets, market penetration,promotional activities, advertising and collateralmarketing materials. An overview of these and othermarketing concepts will be helpful for farmers andagri-entrepreneurs considering value-addedenterprises.

Market analysis is an essential component of buildinga successful value-added business. Market analysisrelies heavily on market research to obtaininformation on consumers, competitors and theoverall industry. This information is critical toevaluating the market feasibility of a value-addedbusiness. To appropriately evaluate a value-addedenterprise’s feasibility, an in-depth study of theindustry and extensive research into consumer tastesand preferences are needed. This investigation willallow you to identify industry trends, changes inconsumer tastes and preferences and how thecompetition is positioning its products. This type ofstrategic information is critical to effectivelyevaluating a product’s market potential.

One of the terms frequently referred to in the value-added industry is niche marketing. Niche marketingrefers identifying a “need” that is not currently being metin the marketplace and marketing a product or service tomeet the identified need. A niche market is one wherethere is a small segment of the population that desires aparticular set of product attributes. For example, organiccompost. A farmer supplying organic compost iscompeting in a niche market. To effectively marketproducts in a niche market, or any market for that matter,it is essential that you understand the consumers whopurchase the products. The group of people who aremost likely to purchase a product or service are referredto as the target market or target audience.

The concept of a target market can apply toconsumers and/or businesses and refers to a sub-segment of a total population that is most likely touse a product or service. The ability to identify aproduct’s consumers is essential in estimatingmarket potential, as well as developing specificmarketing strategies. It is likely that your targetmarket will be a subset of the general population,

i.e., affluent males, between 30-35 years of age. Byidentifying a product’s target market, the businesscan focus its marketing efforts on reaching thisgroup of consumers and maximize its marketingresources. It is important to remember that thenotion of identifying a target market does notexclude potential consumers outside the target; itsimply focuses on the group of consumers withcharacteristics closely associated with the users of aparticular product. For example, the target marketfor gourmet hot sauce products is young, college-educated, affluent males.

To successfully market a product or service, specificmarketing objectives and goals must be outlined. Bysetting business goals and defining objectives, it iseasier to develop a marketing strategy to ensure theobjectives and goals will be met. However, beforeyou develop marketing strategies, you must create aclear picture of expected accomplishments. Forexample, you need to set specific goals like selling1,000 units of brand X and 2,500 units of brand Y inthe next fiscal year. Again, you may want to setspecific sales goals by product and market.

Marketing strategies are concepts that can be used tocreate a set of activities aimed at achieving specificmarketing objectives and goals, that is “how”specified marketing objectives and goals are to bemet. More simply stated, marketing strategiesoutline and describe what needs to be done to reachspecific marketing goals and objectives. Once thebusiness has determined its marketing goals andobjectives, a method of achieving the goals andobjectives must be outlined, formulated andimplemented.

Four general marketing strategies are listed belowwith a brief description of each:

• Market penetration is a concept similar tomarket share and refers to the percentage of totalproduct sales that is captured by a company. Acompany can increase its market share by captur-ing a larger share of the market or having greatermarket penetration. Market penetration may beexpanded by cutting prices to attract competitors’customers.

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• Market development is a very simple strategywhere a business tries to identify new markets ornew uses for its existing products. If a businesswants to expand and does not want to develop orproduce a new product, it can use a marketdevelopment strategy.

• Product development strategies occur when abusiness develops new products or services forcustomers in the business’ current markets.Product development may be as simple as addingvalue to existing products or developing anentirely new product.

• Diversification is a strategy that is typically usedas a business grows. The purpose of diversifica-tion is to attract new groups of customers byproducing new products and entering new mar-kets. An example is adding a new flavor ofpreserves to a business’ product line.

Marketing Mix

The marketing mix, or marketing tactics, can bethought of as the set of specific methods used toimplement a marketing strategy. Specifically, themarketing mix is a combination of the actionsrequired to fully implement the strategy.Components of the marketing mix can be segmentedinto four broad categories, which are generallythought of as the four “Ps” of marketing:

• Product —refers to the physical product beingintroduced into the marketplace. The product canbe thought of as the total of the individualproduct’s physical and perceived attributes,including packaging. It is important to rememberthat when entering a niche market, productpackaging is a significant consideration that canimpact the product’s success or failure in themarketplace.

• Price — determination is a critical marketingtactic. A product’s price must be high enough tocover the total cost of producing the product, yetnot too high so that it discourages potentialcustomers from purchasing the product. Also,pricing can help position your product. Forexample, a high-priced product found in a gour-met store may suggest quality.

• Promotion — is a termused to describe theadvertising, promotion,publicity and sales of aproduct or service.Advertising, promotionand publicity are threedifferent methods that aresometimes used togetherto convince consumers topurchase a product. Thegoal of each of the threestrategies is to influ-ence purchasingdecisions. It is important to remember thatadvertising, promotion and publicity alone cannotgenerate significant demand for a product ifconsumers do not like the product or if it does notmeet a specific need and/or it is priced incorrectly.

• Place — refers to a general concept describinghow the product will get to consumers. The placecomponent of the marketing mix includes all ofthe targeted market outlets and distribution tacticsneeded to deliver the product for sale to consum-ers. Opening a retail shop, direct marketing tocustomers (i.e., mail order or the Internet), sellingto specialty retailers and wholesalers are ex-amples of “places” where a business might plan tosell its products. The place tactic also needs toinclude how the product will be physicallydistributed and should address issues relating towhat distribution services are needed, how theservices should be provided and what resourcesare needed to distribute the product.

It is important to understand that the ultimatefunction of developing a marketing mix is to sellmore product. There are numerous marketing tacticsthat can be used to pitch products to consumers.However, there is no single formula for success or a“silver bullet” marketing tactic that will guaranteesuccess. Instead, developing a successful marketingstrategy and implementing effective marketingtactics are more like an art than a science. Marketingis a creative process rather than an exact formulathat should be followed in all situations.10

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Advertising, Promotion and Publicity

As mentioned previously, advertising, promotion andpublicity are three distinctly different communicationstrategies frequently used together to increase sales.The goal of each of the three strategies is to influenceconsumers’ purchase decisions. Advertising,promotion and publicity cannot generate significantdemand for a product if consumers do not like theproduct or it does not meet a specific need.Advertising relies on both printed and electroniccommunication to deliver information about aproduct or business to potential and existingcustomers. Your advertising campaign should bedirected at your target market, both in terms ofcontent and the media where the ad is going to beaired or printed. Advertising has a number offunctions:

• to inform customers of the existence of yourproduct

• to inform customers why they should purchaseyour product (i.e., a benefit to the customer, savesmoney)

• to remind existing and potential consumers thatthey might want to purchase your product (rein-forcement of a benefit)

• to associate specific appealing qualities with yourproduct (i.e., wearing Nike® shoes makes you abetter athlete)

• to help differentiate your product from thecompetition (i.e., locally grown produce)

Sales promotion involves customer response andinvolvement as opposed to advertising, whichinvolves delivering information about a product orbusiness to potential and existing customers.However, product advertising and promotion arefrequently used together. Promotions are a way toentice the customer to purchase a product through aspecial activity. Everybody is familiar withpromotional strategies like clearance sales, in-storesampling and product give a-ways. The following isa short list of common promotional or marketingtechniques for small business owners.

• Build your image with well-designed productlabels and promotional displays

• Design a point-of-purchase display for yourvarious products

• Design and distribute company calendars,mugs, pens, note pad or other advertising

specialties displaying your company name andlogo

• Explore cross promotion with a non-competingcompany selling to your target market

• Hold a promotional contest (i.e., local radio give-aways)

• Provide free samples of your product or servicewhenever possible

• Donate your product to different fund-raising andcharity events

• Sponsor an amateur sports team

Electronic and printadvertising andpromotions areparticularly usefulwhen starting a new,direct-to-consumerbusiness. Byadvertising andpromoting your product, you are able to reach morepotential consumers. However, advertising via thesemedia can be very expensive and should beconsidered carefully. When deciding on whichadvertising media are best for your business, it is agood idea to evaluate a number of factors associatedwith each advertising medium:

• the advantages and disadvantages of each medium• the effectiveness of each medium in relaying your

advertising message and objective• the cost of advertising with each medium• the medium’s coverage area (i.e., range of radio

broadcast, geographical area)• the medium’s audience demographics (i.e.,

newspaper subscriber demographics)• audience attention (i.e., percent of exposed

customers who are aware of or who can recall anadvertisement)

Publicity might be considered inexpensive or freeadvertising, i.e., local television, radio or newspaperrunning a feature story on your business. Manytimes, advertising sources can also provide publicityif they can be convinced that the business has a goodstory. There are a number of sources of publicity.Publicity can achieve the same goals as advertising.However, it takes work and planning to obtain printand electronic media publicity. The followingoutlines possible methods that can be used to seekpublicity.

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• Develop a media list. The list should include local andregional media that are directed toward potentialcustomers. These media provide a means of advertis-ing your product to potential consumers or evengenerating publicity for your products throughfeature stories.

• News leads should be sent to appropriatemedia each time there is an occasion or eventassociated with the business or product. It isvery important that the news lead be formattedto meet a particular publication or media.Editors are not likely to spend the time andeffort to rewrite a news lead. Such occasionsor events could be the 10,000th jar sold, newproduct introductions (e.g., new re-sealablecontainer) and/or the business visited by anotable person. Don’t “manufacture” news,however, or you risk hurting your credibility withthe media.

• Key people in selected media should be identifiedand provided product samples or information atappropriate times, such as holidays or otherspecial occasions. An extensive list of print, radionews and local television personnel should becompiled and provided samples on holidays orspecial occasions. These individuals look forinteresting stories focusing on the region andcould promote your business via a news article orfeature story. Be sure to target these individualscarefully and don’t be blatant about givinggoodies in exchange for stories!

Just like selling your business or products toconsumers, you will have to sell your business orproduct to the media to be considered for a featurestory. Below are some simple questions you shouldhave answered to help you effectively and efficientlypitch your story:11

• Why is this a good story? (How will the storyaffect the viewers or listeners?)

• What is the story? (Two sentence maximum —why should the editor or reporter care?)

• Who is in the story? (List the people who can beinterviewed, and their area of expertise)

• When is the best time to air the story? (Thinkabout the goal you want to achieve getting yourstory on the air. If you are trying to build partici-pation, the story should be aired prior to your

event)• Where will the story take place? (What are the

visuals? Will it look good on TV?)

It is critical to measure the effectiveness of youradvertising and promotional activities. For example,if you spend $255 weekly for a 2" x 3" ad in thelocal newspaper and a $400/week for a radio spotaired twice daily, you need to know which, if either,of these two advertisements is having an impact onsales and by how much. By monitoring eachadvertisement’s impact on sales, you may find thatone medium or advertisement works better than theother in attracting consumers. Experiment with youradvertisements and promotional campaigns todetermine what works and what does not work foryour particular business. Monitoring the effectivenessof different advertising and promotional strategies canbe as simple as asking the customer or inquirer wherehe or she heard about your business and your productor, run different ads in different media for short terms,and measure audience response.

Caution: Before you decide to advertise, promoteor seek publicity for your business via print orelectronic media, make sure that the viewer orlistener demographics of the media are similar tothe demographics of your target market(customer).

Word-of-mouth Advertising

Word-of-mouth advertising appears to be a veryeffective way of attracting customers. However,word-of-mouth advertising can be both positiveand negative. As a general rule, people are morelikely to complain about their experiences thanthey are to compliment them. As a result, ifcustomers are less than satisfied with quality,price, service or any other aspect of the operation,they may actually hurt business by generatingnegative word-of-mouth advertising. Thus, it iscritical that you maintain a quality product,deliver exceptional service and make theexperience enjoyable for the customer. A simpleformula to remember is that 20 percent ofcustomers account for 80 percent of yourbusiness. Therefore, generating loyal repeatcustomers is a critical success factor.

Collateral Marketing Materials

Collateral marketing materials are essential for asmall business. It is important to have material that

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promotes your product in your absence. Forexample, if you plan on providing a supermarketbuyer with a sample of your product, you need toinclude marketing literature explaining your productand its benefits as well as product pricinginformation. The following are five types ofcommon marketing literature or material that can beused to educate potential consumers (both wholesaleand retail) as well as to create name awareness.

• A logo and/or trademark should be developedand registered so it cannot be used by anotherindividual or company. You could lose the right touse your logo if another individual or businessapplies for your trademark.

• Brochures and/or flyers have proven to beextremely valuable marketing tools for smallbusinesses and should be considered a necessity.Many times the brochure or flyer is all thatpotential customers have to learn about yourproduct and find your business. These brochurescan be used as handouts or mail pieces. Thebrochure/flyer is a selling tool by which informa-tion about your business and its products arerelayed to potential consumers. It should include alist of products, prices, activities, hours of opera-tion, directions or any other pertinent businessinformation. It is important that the brochurereflect your product’s desired image, as this maybe your business’ only exposure to potentialcustomers. A price list insert is suggested if youare ordering a large number of brochures or youexpect to have a price change before you deplete yoursupply of brochures. This will allow you to changeprices without having to print new brochures.

Brochures can provide potential customers with information about your product or service in your absence. It is a good idea to leave brochures/flyers in locations that are frequented by your target market. For example, if you are operating an agri- entertainment business (such as a pumpkin patch with a Halloween theme) you might display or distribute brochures in:

• Area supermarkets — bulletin boards• Area convenience stores and gas stations —

bulletin boards or tape to the door• Area schools — take a stack of brochures to the

school secretaries and see if they will put them inthe faculty congregation area or place in teachers’

mailboxes• Area preschools — take a stack and leave at the

front desk for parents to see and pick up• Little League® and other sporting events• Facilities and organizations focused on children

and children’s activities. For example, a gymnasticcomplex, karate school or Sunday school.

Think of your target market and try to distribute these materials in locations where potential customers frequent.

• Stationery should be designed and purchasedusing the company logo. Using company statio-nery in written correspondence portrays a profes-sional image and an official business. The statio-nery can also be used to send out news releasesand official notices. The logo should be oneverything associated with the business, such asbrochures, invoices, signs, stationery, businesscards, displays, etc. These items can be referred toas your business stationery system and they mustbe consistent in the image they send to customers.

• Mailing lists are a very important part of directmarketing. Start a guest book to collect basicinformation (names, address, city, state, ZIP codeand telephone number). As you fill orders to shipto consumers, it is necessary to collect basicinformation. To ship the product, you will need tocapture the consumer’s name, address, state, city,Zip code and telephone number. By collecting andsaving customer information, you can graduallycompile an extensive mailing list/database ofconsumers.

• An answering machine can provide a greatservice to a business operation. For example, theanswering machine can free personnel fromanswering the phone and at the same time it canhave a pre-recorded message that provides callerswith pertinent business information such as hoursof operation, general prices, products and/orattractions, or weather-related issues (“closedtoday because of rain” or “opening an hour latedue to heavy dew”).

Marketing Budget

A marketing budget is a necessity. After a creativemarketing plan has been developed, money isrequired to effectively implement the marketingplan. Money must be allocated from the operating

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budget to cover marketing expenses (e.g.,advertising and promotional materials, marketresearch, marketing consultants, marketdevelopment and marketing personnel). Themarketing budget should include the cost for all ofthe advertising and promotional media to be used,travel expenses, the cost of collecting additionalresearch data, monitoring trends and shifts in themarketplace, developing collateral marketingmaterial and all other marketing-related expenses.

The marketing budget should be developed at thebeginning of the year. For the existing business, agood place to start is using the past year’s expenses.Additional marketing costs can then be includedbased on any new marketing or promotionalstrategies to be implemented in the upcoming year.However, for a new business, marketing costs willhave to be estimated based on the upcoming year’smarketing plan. The marketing budget costs shouldnot be carved in stone, but should be used as a guideand modified according to the business’ marketingneeds and projected income during the year. A rule-of-thumb would be 5 to10 percent of expectedannual sales or a specified set minimum.

Market Plan Check List

The marketing check list is to provide a simplemeans of tracking the company’s marketingactivities and to establish marketing goals. LeeIacocca said it best, “The discipline of writing thingsdown is the first step toward achieving them.” Thecheck list should be used to record which marketingactivities the company intends to pursue and to trackthe progress in meeting its marketing goals. Forexample, the company may set a goal of placing itsproducts in two mail order catalogs during the nextyear. The goals would then be written and wouldinclude which part of the activity is to be pursued, asonly portions of each activity might be of interest.

Feasibility

The mere mention of a feasibility study suggests amultitude of different concepts, definitions andideas. Feasibility can be defined as the process ofdetermining or assessing the capability andlikelihood of a business idea being accomplished,brought about, used or dealt with successfully.Feasibility studies for a value-added enterprise mayinvolve any portion or segment of a lengthy processthat includes financial analysis, technical evaluation

and market potential assessment. Some individualsadhere to a very narrow definition of feasibility thatconcentrates only on the financial capability of abusiness. That is, a project is feasible only if it isprojected to cash flow or generate a profit. Otherstake a broader approach and include production,regulatory and marketing concerns in determining aproject’s feasibility.

Evaluating the feasibility of a new project involvesassessment of many different items. However, aprimary component of a feasibility study shouldfocus on the evaluation of economic feasibility.Important technical and physical relationships, aswell as social and political issues, should also beaddressed. For instance, a poultry waste processingcenter may be economically and physically feasible,but zoning regulations or public opposition maymake it infeasible. Both economic and non-economic factors can be addressed and evaluated ina feasibility study.

Future costs and returns from investments cannot beforecast with certainty. Changing technologies andconsumer demand may cause a project that isfeasible today to become infeasible in the future.Similarly, a project that is feasible in one locationmay not be feasible in another.

Financial Feasibility

Simply stated, a feasibility study is a structured wayto efficiently organize the information you need forconfident decision making. A feasibility studyinvolves assembling, analyzing and evaluatinginformation to address the question: “Should I doit?” The saying “How it looks depends on whereyou stand” is very relevant to understanding theconcept of feasibility.

If two people (A and B)enter into a contract thatprovides for the first (A)to pay the second (B) toperform a service, thereare many ways for each todetermine the feasibility of theagreement. Whether the venture is indeedfeasible depends on how each party chooses toevaluate it. The person who is to pay money for theservice (A) must decide whether the agreement isfinancially feasible, that is, whether he or she canafford the service. Besides this, he or she must

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consider whether it is economically feasible —whether or not the service provides a benefit equal toor greater than the price. The contractor who willrender the service (B) is concerned primarily withphysical feasibility — whether or not the job can bedone and whether or not available resources areadequate for it. B must also consider economicfeasibility, in terms of whether or not the fundsreceived are equal to or greater than the costs ofproviding the service.

Either party to such a contract can consider theproposal from a variety of viewpoints, but somefactors will inevitably dominate. If the pricerequested exceeds the consumer’s available funds,he or she will not be able to enter the contract andthe proposal will fail because it is not financiallyfeasible. If the service requested cannot be providedbecause the necessary techniques or equipment arenot available, then the proposal will fail because it isnot physically feasible.12

The actual financial analysis phase of a feasibilitystudy should be considered part of the planningprocess and each component should be considered aplanning tool. Financial analysis is easiest tostructure for a given point in time and is oftenmodeled for the start-up phase or assumes fulldevelopment. A projected financial analysis willtypically deal in constant dollars. However, futuredollars can be discounted if it is necessary to put allprojections in current dollars.

All references to revenues and costs should betreated as estimates in these analyses. The financialanalysis will likely undergo continual adjustmentand revision in an attempt to optimize the economicbenefits of the project and to increase the chances ofan optimal conclusion. If, for example, the costestimates developed in the production plan exceedthe revenue projections developed in the marketstudy, then adjustments may need to be considered.

All variable cost elements should be carefullyreviewed. Perhaps less costly inputs can be used.Less expensive marketing, advertisement andlabeling systems may be considered. Certainamenities may be foregone and higher prices may beevaluated. It may be after a thorough financialanalysis has been developed and scrutinized that thebest designs of architects, engineers and marketanalysts may be set aside because the costs exceed

what the market can bear.13 Profit is still a primarymotivation for most projects that require a feasibilitystudy. However, in today’s economic, agriculturaland business environment, very few projectsgenerate higher-than-average profits. Generally,after all production, marketing and distribution costsare considered, low or negative net returns mayresult.

A financial analysis is often best achieved throughthe development and interpretation of a balancesheet, projected income statement and projected cashflow analysis. A balance sheet provides a listing ofall asset values and liabilities of the business. Thedifference in the values of assets and liabilities is thefirm’s net worth. The ultimate measure of feasibilityis the change in a company’s net worth over time.The generation of profit and cash surpluses overtime can increase net worth. Depreciating assets, notbeing able to meet debt payments and continuedcapital expenditures in the absence of profitableoperations can significantly decrease net worth.

To evaluate the ultimate consideration of feasibility(increasing net worth), projections must be madeconcerning a project’s profitability. This is best doneby developing an income statement, which providesa listing of the expected earned revenues and cashand non-cash expenditures incurred by the businessfor a certain time period. The revenue section of theincome statement records revenues that aregenerated by the firm. Income from the sales ofassets, capital contributed by the owner andadditional loan funds are not included in the incomestatement. Changes in accounts receivable and thegains or losses from the sales of assets are included.The expense section of the income statementincludes production expenses necessary to produceand market products, make interest payments andcover depreciation. The difference in the revenueand expenditure sections of the income statementrepresents the true profit potential of the business.However, the profit of a business does not insurefeasibility. A business may be profitable but unableto make debt payments or pay family and manageriallabor, thus it is infeasible.

A cash flow statement is a financialplanning tool that shows theprojected cash income andexpenses for a specific timeperiod and is often the focal

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point of a feasibility study. A projected cash flowstatement is accurate only to the extent that inputand product prices, quantities and other production,marketing and distribution estimates are accurate.14

The cash flow statement should reflect estimatedprice ranges, key results of the market study,projected capital investments, revenue, operatingexpenses and finance terms. These items can then beorganized into the total report, reflecting theproject’s potential financial results over the entireperiod analyzed. One of the first steps in developinga cash flow projection is to consolidate the estimatesof various start-up costs, operating expenses,financing terms and revenue projections into a basicsummary format.

The cash flow statement should be consideredanother planning tool and an integral part of theprocess of creating an optimal business plan. Themajority of the financial feasibility analysis is static,in that it uses constant or fixed estimates. However,the cash flow statement is a dynamic planning toolthat reflects the timing of cash inflows and cashoutflows. An in-depth cash flow model can bedeveloped once the preliminary investigation andtechnical aspects of production, processing andmarketing establish a tentative “go” position.Successive revisions in the processing and marketingplans and cash flow projections are then undertakenuntil an optimal plan is developed.

Break-Even AnalysisAnother useful financial analysis tool is the break-even analysis. The break-even point is also anexcellent benchmark by which a company’s short-term goals can be measured. The break-even point iswhere revenue is exactly equal to cost — no profit ismade and no losses are incurred. The break-evenpoint can be expressed in terms of unit sales ordollar sales. Expressed in units, the break-even pointindicates the units of sales required to cover costs.Expressed in level of sales, the break-even pointindicates the gross revenue required to break even.Sales above the break-even point result in profit andsales below the break-even point result in loss.

It is important to realize that a company will notnecessarily produce a product just because it isexpected to break even. Many times, a minimumlevel of profitability or return on investment isdesired before a business decides to implement anenterprise. Sales substantially higher than the break-

even point are often required to meet profitabilityand return on investment objectives. While it mayonly serve as an intermediate step in an overallfeasibility analysis, the break-even point calculation isan excellent tool for quantifying the level ofproduction and sales needed for a business to evaluatethe balance between production costs and sales.

Break-even analysis is based on two types of costs:fixed and variable. Fixed costs are overhead-relatedexpenses that do not change as the level of outputchanges. Variable costs are expenses that do changewith the level of output and are generally stated on aper-unit basis.

Once the break-even point is exceeded —assuming a constant selling price and constantfixed and variable costs — a profit in the amountof the difference in the selling price and theaverage per-unit variable cost will be recognized.A break-even analysis is rarely a straightforwardprocess. In many instances, the selling price,fixed costs or variable costs are not constant andresult in a dynamic break-even point. As a result,a break-even point should not be calculated onlyonce, but should be calculated on a regular basisto reflect changes in a product’s selling price andassociated costs.15

There are three basic pieces of information needed tocalculate a break-even point:• average per-unit sales price• average per-unit variable cost• average annual fixed costs

The basic equation for determining the break-evenunits is:

Total Fixed Cost ÷ (Average Per Unit Sales Price- Average Per Unit Variable Cost)

The basic equation for determining the break-evensales is:

Total Fixed Cost ÷ 1 - (Average Per UnitVariable Cost ÷ Average Per Unit Sales Price)

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Break-even analysis can be very helpful in theevaluation of a new venture. In most instances,success takes time. Many new enterprises andproducts actually operate at a loss (at a point belowbreak-even) in the early stages of development.Knowing the price or volume necessary to breakeven is critical to evaluating the time frame in whichlosses are permissible.

Price Determination

Price determination for many value-added productsis often a function of the cost of production and adesired level of mark up. Price determination by adesired level of mark up is often referred to as cost-plus pricing, mark-up pricing or full-cost pricing.16

Each phase of a product’s distribution system oftenrequires a certain gain, or mark up, on the value ofthe product. For example, products that go from themanufacturer, to a broker, to a distributor and then toa retail facility will likely experience four differentmark ups en route to the consumer. There are rules-of-thumb related to mark-up pricing. Food brokersand distributors generally apply a 15 percent fee,while food retailers generally apply a 30 percentfee.17 Some retailers often expect to price items at 20to 100 percent above their cost.

It is interesting that most manufacturers, brokers,distributors and retailers use the term mark up torepresent their pricing formula, when in reality, thestandard pricing formula is that of a gross marginpercent. While often minor, there is a difference inthe price resulting from a mark up or gross margincalculation. As other segments of the distributionphase apply their commissions and fees based on theprices they pay, by the time a product reaches theconsumer, minor differences in formulas arecompounded to cause tremendous differences inconsumer prices.

It is important to have a good understanding of allthe terms, factors and calculations regarding pricedetermination. The price the market will bear isactually a function of demand. Luxury goods andniche products may command price premiums thatexceed the average markup. That is why cost ofproduction, desired mark up and market demandshould all be evaluated when establishing aproduct’s selling price.

Price determination using the mark-up methodrequires that the total cost of producing a product,on a per-unit basis, be known. Total cost shouldinclude all of the costs incurred in getting theproduct to the point of sale including, but not limitedto, input, labor, overhead, transportation,warehousing, distribution and marketing costs.

The formula for determining a product’s sellingprice using a desired mark-up percent is:

Selling Price = Total Cost x (1 + Mark-Up Percent)Selling Price = $2.00 x (1 + 0.30)

Selling Price = $2.00 x (1.30)Selling Price = $2.60

Therefore, if you want a mark up of 30 percent (aprofit equal to 30 percent of total cost) the sellingprice must be set at $2.60. Mark-up percent is theproportion of total cost represented by profit.

In some instances, the selling price may bedetermined by simply comparing the cost ofproduction with the price that the market will bear.For example, assume the cost of production is $2.00per unit and the prices of competitors are clusteredaround a selling price of $2.60. This information canbe used to determine the mark-up percent. In thisscenario, the formula for determining the mark-uppercent is:

Mark-up Percent = (Selling Price - Total Cost) ÷Total Cost

Mark-up Percent = ($2.60 - $2.00) ÷ $2.00Mark-up Percent = $0.60 ÷ $2.00

Mark-up Percent = 30%

The notion of mark-up pricing should not beconfused with profit margins and gross margins. Aprofit margin is the dollar value of the difference inthe selling price and total cost. Therefore, the profitmargin in the previous example is $0.60 per unit($2.60 - $2.00). Consequently, while the grossmargin is revenue minus the cost of goods sold, thegross margin percent is the percent of the sellingprice accounted for by the profit margin. Grossmargin percent is calculated as the profit margin(difference in the selling price of $2.60 and the totalcost of $2.00) divided by the selling price. Theformula for gross margin percent is:

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Gross Margin Percent = (Selling Price - TotalCost) ÷ Selling Price

Gross Margin Percent = ($2.60 - $2.00) ÷ $2.60Gross Margin Percent = $0.60 ÷ $2.60

Gross Margin Percent = 23%

If a desired level of gross margin is known, theformula for calculating a gross margin can bemodified to calculate the selling price. Using adesired gross margin percent, the formula forcalculating the selling price is:

Selling Price = Total Cost ÷ (1 - Gross Margin)Selling Price = $2.00 ÷ (1 - .23)Selling Price = $2.00 ÷ $0.77

Selling Price = $2.60

It is clear that the gross margin percent of 23 percentis different from the mark up calculated earlier (27percent), although both examples use a selling priceof $2.60 and a total cost of $2.00. Mark up and grossmargins are often used in calculating and evaluatingselling prices. However, they should not be usedinterchangeably, as they are defined and calculateddifferently.

Rules-of-Thumb

* Mark-up percent is the percent of total cost thatis profit

* Gross margin percent is the percent of theselling price that is profit

* Profit margin is the difference in selling price and total cost

Product Development

Complete development of a value-added agricultural,aquaculture or forestry product inevitably requiresmany steps. Some of these will be unanticipated, whileothers will follow a somewhat expected pattern. Manytimes, it is best to start by generating ideas. Then, athorough evaluation of concepts and development ofa prototype are in order. Appropriate processing andpackaging steps should be followed by a pre-commercialization phase and a test-marketprocedure. Then, the product should be introducedon the commercial level.

Figure 4 is a systematic, step-by-step, productdevelopment guideline.18 This guideline may helpminimize the risk of overlooking many productdevelopment details. Each step offers anopportunity for the project to be evaluated andrequires consideration of whether or not to proceed.

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Figure 4 - Systematic Step-by-step Product Development Outline

STEP ACTIONS

STEP 1 Idea Generation •Type of product, volumes, economics•How to produce•Discuss with others•Competition, consumer trends•Profit requirements/expectations

STEP 2 Concept Evaluation •Is there a market?•Can it be produced?•What does it cost?•What will it return?•Is it technically feasible?•Develop the product

STEP 3 Prototype Development •Can it be mass produced?•Does it meet your standards?•Can it be replicated, consistently?•Can adequate inputs be obtained?•What are the labor requirements?•Can it be transported, what is the shelf life?•Is it feasible?

STEP 4 Process & Package Development •What type equipment & facility is required?•What are the packaging options, (labels,containers)?•Are labor needs available?•Can standards and regulations be met?•What other distribution materials are needed?•What are the costs per unit & operating costs?

STEP 5 Pre Commercialization •Finalize marketing plans•Consider test-market plans•Finalize financial analysis•Develop product introduction materials•Finalize production plan & schedule•Finalize quality control & regulatory issues

STEP 6 Test Market •Prepare test-market procedures & materials•Conduct preliminary production run•Conduct test market•Analyze test-market results

STEP 7 Product Introduction •Finalize marketing arrangements, estimate sales•Start full production•Introduce product to market•Distribute, make sales

STEP 8 Commercialization •Continue production•Implement & evaluate marketing strategies•Provide sales support materials•Test quality control standards•Moniter and evaluate cost of production, cash flow & sales

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Value-Added Opportunities

Figure 5 is a partial listing of common agricultural,aquacultural and forestry commodities and examples

of how they could be used in the development of avalue-added enterprises.

Figure 5 - Listing of Commodities and Example Value-Added Products

COMMODITY EXAMPLE VALUE-ADDED PRODUCTS

Hot peppers Sauces, salsa

Strawberries Preserves

Milk Ice cream, cheese, pasturized milk

Ostrich Meat products

Hogs Retail pork products

Livestock waste Composted soil amendments

Natural & unique farm resources Entertainment farming activities and agritourism

Sweet potatoes Sweet potato pies, muffins, chips, breads

Honey Gourmet honey products

Sawmill lumber Cabinet panels, doors, flooring, furniture

Tomatoes Salsa

In addition to traditional agricultural commodities,other farm resources may be used in a value-addedenterprise. Farm byproducts such as livestockwastes, cotton gin trash and low-quality products(culls) may be prime candidates for commercialfertilizers, soil amendments and processed products,respectively. Other farm resources such as unusedequipment, nonproductive land and antique/noveltyresources may be used to develop additional value-added product lines, entertainment farming activitiesand agritourism attractions.

Other value-added income opportunities, such ashunting and fishing, water sports, horseback ridingand farm vacations also exist. A recent resurgence ofinterest in rural and farm life has created additionalvalue-added, agricultural activities and enterprises.Farm-related, commercial entertainment and tourismactivities have been traced back to the early 1900s,

when families visited farm relatives in an attempt toescape from the city’s summer heat. Today’sdemand for a cool and slower-paced farm experienceseems to be somewhat difficult to satisfy by relativesbecause of the four and five-generation gap betweenfarm and non-farm citizens. “Increased leisure timeand discretionary, disposable income; greatermobility; and the social thrust toward relaxation,leisure and satisfying personal wants are creatingexciting, new recreation opportunities that did notexist a decade ago.”19 Entertainment farming andagritourism activities offer opportunities for on-sitefarm visits, the chance to talk with farm personneland the opportunity to observe and understandmodern farm methods. Farm tours and activitiesoffer access to working family farms, educationaltours, photo opportunities, take-home products, farmlunches and friendly and informative workers.

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Conclusions

Tennessee has long been home to value-addedagricultural businesses. Many of the world’s largest foodmanufacturing companies have production facilities inthe state. However, the roles of processing, packagingand marketing farm commodities have traditionally notbeen tapped by Tennessee farmers and agri-entrepreneurs.

To enhance the economic viability and sustainability ofTennessee’s rural communities and farm families, theAgricultural Development Center has been created toprovide technical, financial and marketing educationalprograms related to value-added enterprises. With thefarm portion of the consumer dollar steadily declining,

value-added enterprises offer farmers and agri-entrepreneurs opportunities to improve the economicviability of their operations and communities.

Transition by farmers and agri-entrepreneurs into avalue-added enterprise is not a straightforward process.New regulations must be understood, new businesscontacts must be developed, new procedures must beimplemented and new marketing techniques must beexplored. Evaluations of value-added agriculturalenterprises require significant investigations into productdevelopment, market research and economic feasibility.However, with the right combination and balance ofmany concepts and criteria, farmers and agri-entrepreneurs can take advantage of opportunities to addvalue to Tennessee agricultural commodities.

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1 Source: Tennessee Department of Agriculture: Tennessee Agriculture 1999, Tennessee Agriculture1998 and the Tennessee Department of Agriculture web-site http://www.state.tn.us/agriculture/

2 Cash receipts from farm marketings ($2,291.7) + government payments ($76.2) + other farm income($150.7) minus annual production expenses ($2,334.9) divided by number of Tennessee farms(80,000). [$2,518,600,000 - $2,334,900,000] ÷ 80,000 = $2,296.25.

3 Source: Agriculture Fact Book 1998, U.S. Department of Agriculture Office of Communications,November 1998, http://www.usda.gov/news/pubs/fbook98/chart1.htm.

4 Source: Agriculture Fact Book 1998, U.S. Department of Agriculture Office of Communications,November 1998, http://www.usda.gov/news/pubs/fbook98/chart1.htm.

5 The Business Plan, Small Business Development Center, Bradley University, Peoria, IL.

6 “Keys Two Long-Term Success in Business,” Paul Stappas, Franchise Handbook: On-Line.

7 The Business Plan, Small Business Development Center, Bradley University, Peoria, IL.

8 “Some of the Reasons Why Business Fail and How to Avoid Them.” Entrepreneur Weekly, Issue 36,3-10-96.

9“Small Business: Preventing Failure - Promoting Success,” Lewis A Paul, Jr., the Wichita StateUniversity, Small Business Development Center.

10 Creating a Marketing Plan; E.A. Estes and C.W. Coale, Jr., 1995 North American Farmers’ DirectMarketing Conference, Knoxville, TN.

11“Story Pitch Sheet.” Tammy Algood, Food Marketing Specialist, University of TennesseeAgriculturalExtension Service.

12 EDP Feasibility Analysis, Massey, L. D. and John Heptonstall, [HF 5548.2 .M3 .B37],D. H. Mark Publishing Company, 1968.

13 How to Conduct and Analyze Real Estate Market and Feasibility Studies, Barett, G. V. and J. P.Blair, [HD 1390 .B37], Von Nostrand Reinhold Company, 1982.

14 The Development and Use of Financial Statements: The Cash Flow, Gerloff, D. G. and R. W.Holland, PB - 1584, The University of Tennessee Agricultural Extension Service, 1997.

15 Management, Richard Hodgetts & Donald Kuratko, Second Edition, 1986.

16 Managerial Economics In A Global Economy, Dominick Salvatore, McGraw-Hill, 1993.

17“Getting A Food Product to Retail,” Kent Wolfe, The University of Tennessee AgriculturalDevelopment Center, ADC Info. #40, July 1999.

Notes

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PB1642-3M-1/00 E12-2015-00-162-00The Agricultural Extension Service offers its programs to all eligible persons regardless of race, color, age, national

origin, sex, veteran status, religion or disability and is an Equal Opportunity Employer.COOPERATIVE EXTENSION WORK IN AGRICULTURE AND HOME ECONOMICS

The University of Tennessee Institute of Agriculture,U.S. Department of Agriculture,and county governments cooperating

in furtherance of Acts of May 8 and June 30, 1914. Agricultural Extension Service

Charles L. Norman, Dean

18 Adapted from Food Product Development, P.T. Tybor and A. Estes Reynolds, Former ExtensionFood Specialist and Extension Food Specialist, respectively, The University of Georgia College ofAgricultural and Environmental Sciences-Cooperative Extension Service, Bulletin 1024, December1989.

19 This paragraph adapted from the following source: A Guide for a Feasibility Study of RecreationEnterprises, James E. Neal & John K. Trocke, Michigan State University, Tourism Educational Materials -33119707, 10-22-98. Http://www.msue.msu.edu/msue/imp/modtd/33119707.html

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