Keys to success in value added ag

8/7/2019 Keys to success in value added ag

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2/20 Keys to Success in Value-Added Agriculture Page 2

Introduction

Updating the Keys to Success

In 1995, Southern SAWGconducted on-farm interviews with twenty-four farmers from around the South who were

adding value to their raw farm products andmarketing more directly to consumers. Fromthose interviews, we produced the booklet,Making It On the Farm: Increasing SustainabilityThrough Value-added Processing and Marketing,which listed ten general business practices thatwe considered keys to success.

Having completed a round of more intensivephone interviews with another fourteen farm-ers for a project funded in part by the SouthernRegion SARE program, its time to update our

keys to success, in the context of sustainableprofitability. We believe that profitability isessential to truly sustainable agriculture. Aswe stressed in the first booklet, there is nosimple blueprint for success when youre tryingto add value to your farm products. It takeshard work, ingenuity, and a financial invest-ment no matter what you do. However, a fewgeneral practices emerged from our interviewsthat could be considered keys to success. Manyof these keys are fundamental for the success of

any small business, while some are unique tofarm-based, value-added enterprises. Allshould be shaped to your particular situationrather than taken as absolute rules.

Sustainable Profits

Profits can be earned in many ways. Mostbusiness owners tend to concentrate on increas-ing sales in order to increase profits. However,cutting costs can be an easier way to increaseprofits. If your current profit margin is 5%,

then you can double your profits by eitherdoubling your sales (a 100% increase) or bycutting your costs by 5%. Which option do youthink is easier? Heres an example:

Current CaseSales: 100 units @ $5 = $500

Costs: 100 units @ $4.75 = $475

Profit = $25

Double SalesSales: 200 units @ $5 = $1000

Costs: 200 units @ $4.75 = $950

Profit = $50

Cut Costs by 5%Sales: 100 units @ $5 = $500

Costs: 100 units @ $4.5 = $450

Profit = $50

If you decide to produce exactly the samething that someone else is producing in thesame way they are producing it, and if yousucceed, any profits you realize will not besustainable and neither will theirs. If youexpect someone else to provide you withopportunities, you are destined to bedisappointed. If you expect someone else tosolve your problems, you will bedisappointed. You have to do something

creative and productive yourself if you expectthe market to reward you for having done it.And, if its easy to do, it wont be worth much.

If someone else provides you with a market,theynot you, ultimately will realize thebenefit. You didnt create the markettheydid. If someone else provides you with a newpest management or fertility program, theynot you, ultimately will realize the benefit.You didnt increase productivitythey did.You certainly can learn from others and can

integrate others marketing and productionservices into your production/marketingsystem. [But] your uniqueness is the onlysource of profitability that cannot be competedaway, and thus, is the only source of sustainableprofits.

However, you can only cut costs so far beforethe quality of your product and the servicesyou provide begin to deteriorate. Thus, this isnot a sustainable strategy in and of itself. Thisis where adding value comes in. In the Cur-rent Case example above, if you can charge 5%more without hurting sales, then your profit is

also $50. (If you can cut costs and raise pricesby 5%, your profit goes up another 50% to $75!)

Translating Uniqueness

into a Sustainable Advantage

Dr. John Ikerd, formerly atthe University of Missouriand long a champion ofsustainable agriculture, hadthis to say about sustainableprofits (1):



What is a competitive advantage? Basically, itsbusiness jargon for anything that keeps othersfrom successfully competing with you. It maycome from being able to sell at the lowest pricedue to scale economies, having a monopoly, orbeing among the first to produce or market in anew way. Most farmers are not in the position

to find advantage in the first two ways. Mostfarmers can change their production and mar-keting systems, and increasing numbers offarmers are producing new crops and newproducts, and experimenting with alternativemarketing methods.

A competitive advantage is almost alwaysshort-lived. The nature of the market is suchthat only the innovators, the first ones to takethe risks, are going to profit. As others learnhow to produce that new crop or enter that

new market, competition will drive pricesdown and profits will disappear.

Identify a niche and the type of market to fillthat niche, advises an interviewee. Nichemarketingselecting a specific group of con-sumers and targeting them in your marketingeffortis a system that farmers are hearingabout more and more. For many farmers, theniche approach has paid off. But, just as we seeorganics going from niche to mainstream, anyprofits from a niche will gradually be competedaway as others notice it. Unless you are fortu-nate enoughvery unlikely!to be the onlyone who can fill that niche, your profits willdecline. The process of finding and fillingniches is ongoing, not a one-time event.

Success in the short run requires producing ahigh-quality product or service, working toincrease sales and cut costs, diversifying toreduce risk, and finding niche markets wherethe added value of your product can be realized

in higher prices.

Success in the long run requires all of theabove, plus the added advantage that comesfrom whatever it is about your operation thatcannot be copied, or can only be copied withgreat difficulty or expense. For example,focusing on your location will attract buyerswho want to buy local. Tell the story of yourfarmno one else will have quite the samestory.

A cheesemaker says, The hardest part ofplanning was finding the time to do it! It wasdifficult to find other representative busi-nesses to serve as a model or template. Indeciding how to market, I first had to con-sider what would generate the quickest cashflow. The specialty cheese niche depends on

retailers whose customers would be likely toappreciate the product. I identified a niche,but I could have used a whole lot moreeducation. Certain markets set me backbecause of the difficulty of entrance.

Putting her ideas into practice proved chal-lenging. I had to consider how to distributemy products and whom to actually ap-proach, she says. My local farmers marketis open to producers only, so I have to attendthe market myself, which takes a huge

amount of time.

I began making catalog sales three years ago.Shipping is a problem, though. Its reallyexpensive on a perishable product, since youhave to ship by two-day air. Information islacking on better routes or methods. I consid-ered a website with online ordering, but ittakes enormous amounts of managementknowledge, and you still have the problem ofshipping.

I find that person-to-person sales are themost effective marketing strategy. Wholesal-ing is the least effective, as buyers are slow topay. Its really hard to enter retail outlets,such as specialty shops, and months ofpromotion are usually required. I need toredesign my brochure to address deli andrestaurant needs. Ive broadened my market-ing methods since I began, but I always had amental plan of markets to develop.

A d d i n g V A d d i n g V A d d i n g V A d d i n g V A d d i n g V a l u e t o Mi l ka l u e t o Mi l ka l u e t o Mi l ka l u e t o Mi l ka l u e t o Mi l k



Start small and dont grow too fast, advises asalad mix grower, echoing the opinions of mostof our interviewees. Dont start too big andinvest a lot of money. Be patient and gothrough your research and development phase.Whatever you start with, try toget ALL the profitno whole-salers! Youll be learning, andnaturally making mistakes

along the way. Starting smallmeans that your mistakes arelikely to be less costly. Ifyoure new to managing anagricultural enterprise, it ismuch easier to manage a small operation.

A producer of baked goods and preserves says,We began value-adding to diversify. Ninetypercent of our product ingredients are grownon-farm. We also needed to make

more money. We started a step at a time. First,we looked around to see what the market wasntproviding and then we attemptedto fill thatneed, adding and dropping products as we wentalong. Were not into large, large volume. Weonly do 100 to 150 cases per year.

The flower growersrecommendation tostart with farmersmarkets is an excel-lent one, for manyreasons. Whileselling at farmersmarkets is time-consuming, costs arelow. In addition, many producers find thatfarmers markets are a great place to beginbuilding relationships with customers.

Many successful marketers began with a clientbase established through interactions at thefarmers market. A cheesemaker started withfarmers market and other direct sales in order toget contact with customers and to learn thebusiness, relying on some thirty years experi-ence in direct sales in a different line of business.She started by selling at the wholesale price. Ilooked at cheese prices in specialty and retailstores, and I raised my farmers market prices toretail level.

Our interviewees discussed their most importantproblems in starting the enterprise. Marketingand lack of familiarity with the product bycustomers were mentioned by four respondents,followed by financing, lack of technical informa-

tion and available expertise, and lackof labor (three respondents each).Two respondents mentioned zoning,tax, sanitary, and other legalities.

Only two producers said that comply-ing with regulations presented ahindrance to their business; as oneproducer said, regulations were theleast of my problems! Of the two

who did have difficulty, the expense and timeinvolved in complying with regulations wasmentioned. One producer had problems at firstbecause

KEYS TO SUCCESS

IN THE SHOR T RUN

Start small and grow naturally

Make decisions based on

good records Create a high-quality product

Follow demand-driven production

Get the whole family or partners

involved

Keep informed

Plan for the future

Continuous evaluation

Perseverance

Adequate capitalization

Start small and grow naturally

Grow slowly at an organic rate.Watch what sells. Dont increasedebt load. Farmers markets are asafe training ground to beginselling.

a flower grower



the authorities in her area were unfamiliar withthe products she produces, so she had to helpeducate them.

When asked whether taxes had caused anyproblems in running the business, four of thefourteen said yes. The time involved was cited

as the most important problem. One respon-dent said taxes were a hidden cost that iscomplicated and time consuming, especially ifyoure expanding. Workers compensation foremployees and liability for property tax forgrain in storage were also mentioned.

Finally, one grower emphasizes, Dont go intoit thinking that youll make a bundle!

Trying to manage and grow an enterprise

without good records is like trying to find anaddress in a strange city without a map. With-out records, you are limited to making edu-cated guesses about the progress of your busi-ness, whether or not you are meeting yourgoals, and the possible reasons why or whynot. Only two of the producers said that theywere not keeping records, but even these twoturned out to be keeping at least some recordsfor tax purposes.

Fifty-seven percent of the producers relied on acomputerized system, with QuickBooks soft-ware mentioned by three respondents as theirsystem of choice. QuickBooks is a really greatcomputer bookkeeping system, says one.Quicken was mentioned by one respondentand the other four did not specify what soft-ware they used. Two respondents relied on old-fashioned ledgers, and the others relied onsales and production records and notes andminutes of their corporate meetings.

Half of the producers had previous experiencein financial management in non-agriculturalbusinesses. The others were nearly all self-taught. Of those, two mentioned gettingassistance from their accountants. Two produc-ers mentioned that they were still learning, andwanted and needed to learn more about finan-cial management.

Since these farmers cant compete in the high-volume commodity markets, they have toconcentrate on quality, not quantity. Offer avery, very, very high-quality product, says agrower. Quality is made up of many dimen-sions. Fresh, better tasting, clean, reliable,

sustainably producedit may be hard todefine, but these producers know it when theygrow and process it. And consumers know itwhen they taste it!

While it may be tempting to use seconds, culls,or damaged fruits, vegetables, and herbs inprocessed food products, the wise grower willresist that temptation if he or she is seriousabout developing the enterprise. As onegrower says, For goodness sake, do it right!No low-grade, substandard ingredients, sincethe buyer knows what hes getting. No blend-ing! This is a downfall for a lot of specialtyfarmers, who dont want to throw away halfthe crop if it is substandard.

With growing concern today about food safety,it is important that products be safe to eat andto use. This is a vital dimension of quality.Cleanliness and attending sanitation schoolare crucial. If I would not eat my

Our biggest challenge was adapt-ing to a new environment. Keepingcareful records and maps to deter-mine what to plant, based on whatgrows well here and what sells,has been crucial.a flower grower

Make decisions based on good records

Number oneis having a good

product.a specialtycondimentsproducer

Create a high-quality product



product, I will not sell it, says one producer.

While it is legally required in some states to becertified as a food handler in order to sellcertain products, all producers should befamiliar with the basics of food safety. Just onecase of illness that could have been caused by

the product is often enough to put the smalloperator out of business entirely.

See what other companies do, but dontemulate them too closely. Innovate, dont copy;pick out only what theyre doing right. Findyour market first, adds the salad mix grower.When asked whether marketing considerationsaffected their choice of value-adding activity,eleven of the fourteen respondents said yes.

In agricultural marketing, there are the pushand the pull approaches. The push ap-

proach means producing a product, and thenpushing it onto consumersthe traditionalmeans of marketing many commodity crops.The pull strategy, however, is increasinglybecoming the norm in todays environment.With this approach, products are pulled outby consumer preference. It appears that most ofthe producers employed this pull approachand looked for an existing market outlet oropportunity, rather than producing a productand then looking for markets.

The presence of farmers markets in the pro-ducers area was an especially strong induce-ment to begin producing. As weve learned,farmers markets are a good testing ground.Some of the respondents test-marketed or wereactually asked to develop products by buyers.Generally there was an attitude of producing tomeet the needs of the consumer.

Of those who did not let the market dictatetheir choices of activity, most started small andlearned about niches they could fill.

A cheesemaker says, I didnt know what ourmarket would be. We prepared for mail orderand wholesale options, but we never pursued

them because the on-farm market developed soquickly. We never had to try any other market-ing strategies. Really, we just developed ourown marketing style, depending on customerrequests, such as adding crackers, wine, andjams to our product line. Now all our milk goesto the on-farm cheese business.Follow demand-driven production

Find your market first andmake sure that the market fitswhat youre already doing.a salad mix grower

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A producer of organic packaged jasmine ricesays, We began our value-added enterprise asa way to diversify and because with low com-modity prices, to continue farming, we had tomake more money. We researched for sixmonths beforehand, looking at different crops.We decided to grow specialty rice organicallya new variety and new technology. We try newvarieties all the time.

The hardest part of planning was not knowing

how much we could sell. Looking back, weshould maybe have written a business plan, butwe didnt know what we were getting into! Weknew how to grow rice, but didnt know any-thing about packaging and marketing. We gothelp from the agricultural economics depart-ment at Texas A&M and the folks at the RiceResearch Station came up with the gift bagidea.

The state agriculture department was veryhelpful with legal issues. Being certified or-ganic complicates things, but weve found it tobe a very effective marketing strategy. We findthat most sustainable and organic associationsare oriented to small producers, which is nothelpful for us. Organic rules are not a good fitfor large-acreage commodity crops.

Lack of knowledge in marketing was ourbiggest problem in getting started. The stateagriculture department and the USA Rice



Federation gave us marketing assistance. Weparticipate in the Taste of Texas state-labelingprogram. Our labels also say that the productwas produced on a family farm, is organicallycertified, and that the rice is a special variety.We find that these labels do help sales. Theprocessing facilities are not on-farm; we con-

tract with a rice miller and packager. We offer2- and 25-pound packages. We need moreinformation on packaging options; in fact, thatis one of our biggest challenges since packagingis so expensive.

We have a diversified customer base. About75% of our product is marketed wholesalethrough brokers and distributors50% to thehealth food industry and 25% to mainstreamretailers. Food service accounts for about 5%and mail order 20% of our total sales. We added

mail order after five years. We were getting alot of publicity in food magazines, and peoplewere requesting our product, but there was noretail distribution in many areas. We do havesome problems with mail order, since theweight of rice really adds to shipping costs. Wealso had to hire some additional help since weneeded someone to take and fill mail ordersand handle the extra office work involved.

Our biggest management problem now ismore competition from large companies. Myadvice to other aspiring value-added producersis to make sure your product is unique. It hasbeen a great experience, but again, its verydifficult to compete now in the grocery indus-try.

A maker of jams, jellies, preserves, hot sauces,and baked goods can attest to the importance ofgetting the whole family involved. Two of herchildren are attorneys and they helped her

write the business plan and get the enterpriseincorporated, as well as research the legalrequirements for her business. She says, Plan-ning was a lot of fun. My husband wasfor-merly a chemicalengineer, and he did therecipes and kept a notebook of calculations. Healso takes care of financial management, in-cluding taxes.

When asked about the number and type ofpeople involved in the value-adding enterprise,most had two people, and most of the rest had

more than three, or only onethe respondenthim- or herself. Most of the people involvedwere family members or part-time workers.Over half the respondents had made a changein the number of people involved since startingup. Nearly all respondents added labor as salesincreased, although two respondents hadscaled back production for various reasons, andlikewise scaled back the number of peopleinvolved. As one respondent said, Salesvolume increased, but my energy decreased! I

had to have help. Of those who had notchanged the number of people involved, onegot more efficient equipment to take the placeof labor. Lack of adequate, affordable labor wasidentified as a constraint by many of the pro-ducers.

Get the whole family or partners involved

Although no one identified this as a key specifi-cally, during interviews the importance offamily and partner involvement became clear.The people we interviewed made the most ofthe different skills and talents available in thefamily. Spouses with skills in accounting wereessential to many of the enterprises. Nearlyeveryone we talked to had involved family,friends, co-workers and so on in

spreading the word of mouth about theirproducts.



A d d i n g Va l u e

t o B e e f

A beef producer says, I market my beef directto the consumer and through some local stores.

I got into value-adding after going to a salebarn. I never wanted to go there again! Iwanted some control over the price and I knewI wouldnt get fairly compensated at the salebarn. I like doing something different, but ifIm spending time and energy doing somethingdifferent then I should get extra revenue.

As a first step in planning, I did some adver-tising to see if I would get any response. Ialsodid some research on feeds and how to finishthe cattle. I got a lot of responses from the

classified ads I placed, and started selling halfand quarter beeves. Word of mouth helpedattract new customers.

Customers wanted separate cuts of meat, so Istarted doing that. I give away many poundsof hamburger, which brings in business, eitherdirectly or through building a relationship withthe community in general. Ive probably givenaway more beef than I needed to, but I think Ihelp the community as much as they help me.

Selling quarters proved too unwieldyit wasmore work to get the same amount of revenue,and customers didnt understand how muchmeat is in a quarter and thought they weregetting ripped off. Now Im thinking aboutonly selling half and whole beeves, sinceselling separate cuts requires a lot more paper-work and effort.

Labeling is part of my marketing strategy. Mybeef is labeled with our brand name and raised

hormone-free and antibiotic-free, which I thinkhelps in marketing by building recognition andmaking us a name brand.

If I had it to do over, I would have plannedmore, especially for growth. I would have triedto get all the meat sold before slaughter, since Ihave difficulties in matching production andsales. It seems like youre either a bad produceror a bad marketer.

Keep informed

Your local, most experienced, best, friendlygrower-processorsand visiting their placeand taking pictures and notesare the abso-lutely best resources, says a flower grower.

Hands down, other farmers involved in value-adding were identified as the best informationresources. Farm visits, telephone and e-mail

conversations, and networking at conferencesand other events can give you information andinsights that you cant get any other way.However, be aware that others may see you ascompetition and not be willing to share theirknowledge. A good idea is to do as the saladmix grower did, and solicit information from agrower in another state who will not be threat-ened by you.

Trade shows are especially recommended for

producers of specialty and gourmet products. Aproducer of specialty vinegars, dry spice mixes,and other condiments says, In the first year, Iloaded up the pickup and headed to [thenearest big city] with a list of shops that I gotfrom a friend. We also relied on word ofmouth. We tried to target high-traffic stores. Iattended trade shows sponsored by the stateagriculture department, which increased ourstatewide exposure. We now supply specialtyand gourmet food shops, do mail order, andhave supplied restaurants in the past. We also

supply catalog companies. I dont drive aroundin the truck anymore, but prefer to concentrateon trade shows for my marketing. For whole-sale, trade shows are the most effective market-ing strategy. There used to be wine festivals forretail, but that market is now saturated. Weoffer free garden tours as a draw. We now alsohave a presence on the Internet, with a retailwebsite. Were trying to increase sales. Theupswing in the economy has helped a lot!

Farmers need to become more aware ofvalue-adding. Be mobileget intotownships and share information, lookinto partnerships and cooperatives.a beef producer



Plan for the future

Fail to plan and you plan to fail is a clich fora reasonits true. Planning is often neglectedsince theres no immediate payoff, but it isessential to success. Cindy Thyfault, presidentof Westar Trade Resources, a strategic market-ing and new business development company inAmarillo, Texas, says, Dont fall into the trapof writing a [business] plan just to get a bankloan (3). For small entrepreneurial companiesthe failure rate in the first 5 years is 90% (3)!Careful planning is crucial to avoid failure, orat least to minimize your losses as you learn.

You may or may not need aformal business plan, but you doneed a strategic plan. This planwill define your business mission,your present situation, and whereyou want to be in the next fewyears. You will need to coverassumptions and risks, goals andobjectives and how you will

report progress. Be realistic interms of goals, pricing, and thelimits of your time. Factor quality of life inthere somewhere, advises one interviewee.Another says Start on a shoestring and re-main flexible. Realize that thebest-laid planscan go wrong and that things change. You needto roll with the punches.

About half the respondents wrote a businessplan to start with and another wrote one laterin order to secure an expansion loan. While

one respondent had previous experience inbusiness and was able to write her own plan,and another had children who were able towrite the plan, the others relied on sources suchas Extension, the loan coordinator , the SmallBusiness Development Center, and the localEconomic Development Center. One respon-dent said that she just made it up and that itwas as much a projection as a plan, in

Do your research: ideally you wouldspend two or three years planning.a cheesemaker

which she included a worst-case scenario andoperated under worst-case assumptions

If they had it to do over, only four said thatthey would not plan beforehand. One respon-dent said, I dont think I could have foreseenwhat I know now. Of those who would have

planned, the need to plan for expansion wasmentioned by most. The growth of the businesspresents challenges to new entrepreneurs. Agrain products manufacturer says, Be carefulwhat you wish forI was inundated withorders! Prepare for issues related to a suddenincrease in demand since the worst thing youcan do is not be able to fill orders. Only threepeople said that if they had it to do over, theywould write a business plan. Two peoplementioned that the only need for a plan was tobe able to borrow money, since lenders usually

require a business plan.

Most of the respondents did notthink a business plan was neces-sary. A cheese maker, for ex-ample, says she didnt planbeforehand but just fell into it:The cheese business happenedgradually. I wanted to maximizemy efforts with the idea of onlyso many hours in the day. She

says she wouldnt plan if shehad it to do over again becausemy enterprise began as a path of spiritualgrowth. She says, I did write a business plan,but only to show the lender to borrow start-upmoney.

The easiest parts of business planning seemedto be figuring out the production requirements;since the respondents were already producing,they were most familiar with these. Judgingfrom what our interviewees had to say, farmers

without previous experience often have realdifficulty dealing with financial issues inplanning. Asked what was the hardest part ofwriting a business plan, putting real numbersin the plan, in the words of one respondent,emerged as the main difficulty. There weredifficulties in knowing which numbers toinclude and in finding or estimating accuratenumbers. Projections ofproduction volume are particularly difficult to



make. Another respondent said that just find-ing relevant information in general was hardand that you had to persevere and ask a lot ofquestions.

Once their businesses were past the start-upstage, marketing issues and competition posed

the major barriers to success for respondents.One said she is trying to redesign her promo-tional materials to target the needs of newcustomers; another said that, Its a letdownwhen sales deals fall through because myproduct does not have a long enough shelf life.I may need contracts in the future. Anotherproducer said, Competitors are using cheapvinegar in very fancy packages that sell betterthan my own high-quality vinegars.

Once their businesses were past the start-up

stage, marketing issues and competition posedthe major barriers to success for respondents.One said she is trying to redesign her promo-tional materials to target the needs of newcustomers; another said that, Its a letdownwhen sales deals fall through because myproduct does not have a long enough shelf life.I may need contracts in the future. Anotherproducer said, Competitors are using cheapvinegar in very fancy packages that sell betterthan my own high-quality vinegars.

When asked about whether they had a market-ing plan, about half the respondents said theydid, although only three had prepared a formalplan. Those who had chosen their productsbased on market opportunity had plans,whether written or not. Some respondents saidthat they didnt need a plan, since experienceand trial and error make marketing needs cleareventually.

Many respondents did not get much help with

marketing, but rather developed their ownapproach with experience and talking to theircustomers and to other growers. A few of therespondents got help from state agriculturedepartments and economic developmentcenters. One respondent tried taking samplesinto her states small business developmentcenter, and never heard from them again.Publications such as Growing for Market werealso mentioned. Some respondents had

previous experience in marketing outside ofagriculture and were able to apply their experi-ence to agricultural enterprises.

Stop and evaluate (be objective)periodically, to see if its reallyWHAT you want to be doing andHOW you want to be doing it.a cheesemaker and manufacturerof gourmet dinners

Continuous Evaluation

A plan that is not periodically reviewed is

nearly useless. Your business is constantlychanging and your plan must be reviewed andmodified accordingly. The plan must be keptcurrent for you to effectively measure yourperformance. Be ready to change in mid-stream, as there is no way you can predictmarketing, says an interviewee. As you gainmore experience and knowledge, you shouldincorporate your new perspectives and insightsinto your plannning. Be sure to keep examiningyour original goals and make sure that yourbusiness is still meeting your goals.

When asked about whether or not their goalshad changed since they started, eight respon-dents said yes and six no. Those whose goalshad changed seemed about evenly dividedbetween growing the business and scaling itback in order to have more personal time.When asked what sorts of problems they facein managing their enterprises, it was clear thatpeople are, in the words of one respondent,finding it difficult to balance attention to the

business with quality of life. Nearly thirtypercent of the respondents said that this wastheir biggest problem. For example, one re-spondent said, Then, my goal was to findanything that was profitable. Now, my goal isto expand my ongoing profitable business.However, another respondent said, The pointcomes when I have to stop pushing the cartuphill. Ive made a conscious decision not togrow past a certain point.



It can be tough finding out how to get startedwith adding value to your farm products. Youwill need a good deal of perseverance just tofigure out how toproduce theproducts, much

less how to

market them.

A cheesemaker

says, We always

intended to pro-cess, but we didship milk fora couple of yearsjust to get a cash flow going. We wanted tohave a household business and be able to worktogether. I learned what equipment we needed

and how to set it up by visiting other process-ing plants, reading professional journals, andworking with cheesemaking professionalorganizations. We worked closely with thehealth department on building plans to obtaintheir sign-off. Small-scale milk processingequipment was very difficult to find. I workedat an off-farm job to finance the equipmentwhile my husband stayed home to build. Therewasnt much literature available to learn howto make cheese. I had to hunt and peck for

information. I did take a university course, butIm mostly self-taught. We started making onekind of cheese then added varieties to meetmarket demand as I learned how to makethem.

Identifying your niche and building a customerbase also takes time. You may have to do a lotof experimentation to find out what sells. Likeany other good relationship, developing rela-tionships with customers doesnt happenovernight. You will need to keep approaching

potential buyers despite the inevitable rejec-tions. Understand that no one wants to be theguinea pig to test your product acceptance. Beprepared to attend trade shows and seminars,advertise, and market to consumers for anextended period of time without profitability,says Cindy Thyfault (3).

Those whose goals have not changed haveoften learned a different perspective. As onerespondent said My attitude may havechanged but my goals havent. Others men-tion learning new ways to meet their goals:the means to the end are evolving. Now Ilaugh at my initial business plan!

A producer who started out making goatcheese decided to add gourmet dinners and abed-and-breakfast operation. As she says, Iwent from manufacturing a product towardmore involvement with the community. Whileshe admits that she is not fully using hercheesemaking plant facilities, she explains, Imade a conscious decision to become moreactive with the local community in the direc-tion of agritourism instead of expanding thecheese production.

She keeps good records and once a year evalu-ates how well the business is meeting her goals.Her goals have changed since she started thebusiness. Ultimately my goal moved towardbecoming more a part of the community. Beingable to influence the community meant main-taining a higher profile in order to effectchange.

Have a VERY deep well of perse-verance. Do the business plan andtake as much time as it takesbefore you invest a whole lot ofresources in your enterprise.Financial backers will take youmore seriously.a cheesemaker

Perseverance

Why is perseverance a key to success? Itssimple: most businesses take a long time to getestablished. The successful entrepreneurs weinterviewed had been involved in adding valuefor an average of nine years, with five yearsbeing the least amount of time reported. InMaking it on the Farm, the businesses profiledtook from a minimum of about five years toover twenty years to become successful.



A business is likely to operate at a loss for at

least the first year of operation. Make sure youhave adequate resources. Remember that mostbusinesses fail due to lack of capital (2).

The amount that youll need will depend on thetype of business. Manufacturing businesseswill need more capital than service businesses.After figuring out how much youll need foryour buildings and equipment, youll also needto have enough cash on hand to cover operat-ing expenses for at least a year. Be sure toinclude some salary for yourself in the operat-

ing expenses. You will need to have enoughmoney to live on until your business becomesprofitablewhich, as weve seen, can takeyears.

Successful marketing takes money. For manyproducts, explains a producer of gourmetvinegars, Upscale packaging is all-importantto getting a jump on the marketplace, and youneed adequate capital for packaging.

Labels can get really expensive for a smalloperation, especially in a humid, refrigeratedenvironment. Ive spent a fortune on labels,adds a manufacturer of goat cheese. I dontknow whether or not the labels have helpedsales.

Other costs can add up faster than you mightthink. Shipping and transportation issuespresent problems for many businesses. Thevinegar producer says, Dealing with UPS is

a problem for me. Their flat-rate charges arestacked against smaller businesses.

While good planning can minimize unforeseencosts, no one can plan for every contingency.Your budget should include some funds forthese costs. While youll need capital, make

sure that you balance the need to plan for theunexpected with the need to minimize yourdebts. Watch your debt load! People oftenbuy the wrong machinery, which can be a verycostly mistake, cautions a producer. This isanother reason to plan carefully and to start assmall as you can, bearing in mind theproduction capacity that you may need in thefuture.

An extremely important form of capital is cash.Managing your cash flow is crucial to success;

some say that cash flow is more important thanprofit. You can go a long time breaking even,especially if you remember to pay yourselfrather than plowing every dollar back into thebusiness. But if you fail to have enough cash topay your suppliers, creditors, or your employ-ees, youre out of business!

Seasonal businesses, as many agriculturalenterprises are, are even more vulnerable torunning out of cash in the off season. This

aspect of planning must not be neglected.

Wholesaling, while its not for everyone, can bea means of getting around seasonal cash-flowproblems. For example, a goat cheese maker isnow focusing on year-round wholesale cheesesales to retail and specialty stores, while build-ing her agri-entertainment business during thespring and summer months. Wholesale pro-vides us with income to pay for the upkeepexpenses we incur during the off-season (win-ter).

Be sure you dont under-capitalize.a specialty condiments producer

Adequate Capitalization



KEYS TO SUCCESS

IN THE LON G RUN

Focus

Establish a loyal customer base

Choose something you love to do

andsomething that fits yourOpersonality and goals

Make sure your product is unique. It s

very t ough to compete wit h large com-

panies on t heir turf, so identify a unique

niche that you can fill bett er than t he

big guys are.a rice grow er

Focus

Educate yourself about your product anddifferentiating yourself in the marketplace,advises a salad mix grower. You need to beaware that the expectations of the public and

the conventional business world are that yourproduct is no different from any other productout there, adds a cheesemaker.

To be able to both add value and capture thatvalue for yourself, youll need to think strategi-callywhat is your competitive advantage? Asustainable advantage is some aspect of yourbusiness that is unique and would be very hardfor others to copy. Focus in on how to best usethat advantage.

A cheesemaker says, All our marketing isdone direct to the consumer via on-farm sales.On-farm marketing is the best strategy for us,since our location is one of the last remainingagricultural pockets near a population center.Its part of the culture of the area to drive out tofarms, and our cheese is an exclusive item inthe area. Differentiating yourself in the market-place and educating your customers about yourproduct are keys to success, I think.

A salad mix grower says that he decided toproduce salad mix because its a narrow nichewith high demand from gourmet restaurantsand stores. His previous experience in thebusiness world made market development andplanning target markets among the easiestparts of planning for him. He did some marketresearch, and having received a favorableresponse to small test plots of salad mix, hedecided to pursue the enterprise.

He started out by wholesaling, but found itunprofitable. The least effective marketingstrategy is wholesaling. If your strategy is tosell large amounts to very large corporate users,such as hotels or chains, and dealing withpurchasing agents, you wont succeed.

He didnt have a formal marketing plan: My

plan was only to sell all the productor asmuch as we couldto end users and then toboutique grocers. Occasionally we discardedsome. The best marketing strategy has been toemphasize our reliability and the freshness andquality of our product. Price is not an issue,although I have reluctantly dropped prices toget large accounts. Were the only ones in theregion growing this product. Our biggestproblem now is achieving consistent produc-tion. In our climate, it is very difficult to pre-dict actual production volume.

Recognize your limits in terms of verticalintegration, says another producer. You donthave to, and often shouldnt, attempt to doeverything yourself. Outsource your ingredi-ents: it can be cheaper and it frees you up to dothe crucial business of marketing, advises agrower.

Dont overextend yourself. Focus.a producer of herbal bodycare products



A d d i n g Va l u e t o G r a i n s

A fourth-generation family farmer and manu-facturer of non-perishable grain products(crackers, granola, cookies, dry soup mixes)says, I think that if family farms are to remainviable, they have to diversify. While that was

her main reason for starting a value-addedenterprise, an important secondary reason wasthat she wanted to work on the farm and quitcommuting.

She got assistance in starting up the businessand developing marketing and business plansfrom the Great Plains Area Vo-Tech EconomicDevelopment Center. However, she also did agreat deal of research on her own on recipeformulation and adapting recipes to commer-cial-scale production, equipment, and regula-tions.

She says the hardest part of planning wasfiguring out which hoops to jump through interms of licenses, taxes, trademarks, and soon. She thinks planning is crucial since thereare always surprises after the fact and plan-ning helps to anticipate and prepare for theunexpected. She learned about legalities fromher state agriculture departments marketingdivision. The only rules and regulations that

have been a hindrance were those applying tomaking dog biscuits! She did have somedifficulty getting a no-interest loan through theEconomic Development Center: It took nearlytwo years! I had given up.

She sets prices based on production costs plusmarkup, which she calculated with input fromfriends in the food manufacturing business andwhat her competitionhigh-endgourmetcharges.

When asked how she decided how and whereto market, she says, Just having lived aroundhere for a long timeI know the area and thelocal market. Word of mouth and some radiopromos were helpful, but the major market formy baked goods and soups was my sonsrestaurant, which went out of business a year

ago.

She started out by selling at a farmers market,but found that it was not cost-effective to tieup two people all day. We did add to ourcustomer base, though. It gave us exposureinitially. She originally made bread, but hadtoo many problems with perishability. She stilldoes an occasional large batch of bread forbanquets or other special orders.

She tried marketing to local grocery stores, butfound that stores here arent geared to sellgourmet products. Now shes in the processof developing an online store. She says, Ya-hoo offers website development and onlineordering for $100 a month. Yahoo also offersvolume discounts on UPS shipping costs.

She capitalizes on her family farming historyand has developed a line of products that shemarkets under one brand. She participates in astate logo labeling program, which she feels

definitely helps generate substantial in-statesales. For gift baskets, in particular, its impor-tant that theyre made in-state. The combina-tion of her own story and customer loyalty tothe state represent a great example of sustain-able competitive advantage.

Establish a loyal customer base

One of the most important ways that ourinterviewees capitalize on their uniqueness isthrough relationship marketing. Since everyhuman being is unique, this makes a lot of sense.No one else can do exactly what you do,

My marketing activities evolvefrom year to year. There is oneconstant: the value of face-to-faceinteractions with customers at showsand market. a producerof herbal bodycare products



in the way that you do it, when part of whatyou are marketing is you and your particularoperation.

Our relationships with our clients are themost important and we do everything on avery personal basis, explains one producer.

Another says that her most effective marketingstrategy is having a personalrelationship with the buyerarelationship of trust over time.A producer of baked goods andjams says, One of the mosteffective marketing strategiesthat we use is to do favors at theend of the season. We givespecial gifts to all our regularcustomers, and do special giftpackages for people.

One thing our successful farmers have incommon is that they provide more than justfood or a product. They also provide pleasantsocial interactions, a chance to get in touch withthe rural way of life, education, and services.Some of the ways our respondents have pro-vided more include tours of gardens orfarms, bed and breakfast accommodations,gourmet dinners on-farm, and educationalworkshops on the farm. An herb grower andproducer of herbal personal care products says,Workshops on the farm bring people in to buymy other products.

A cheesemaker includes a brochure and recipeswith her products, but does not include label-ing as part of her marketing strategy, since it istoo costly. She finds word-of-mouth and directcontact with customers to be the most effectivemarketing strategies. Direct contact builds apersonal relationship. Our customers feel likethey are also our friends. We hold an annual

open house to build new relationships and addto our mailing list, as well as to reinforceexisting relationships. She finds any kind ofbroadcasted mailings, newsletters, and the likethat are not targeted to previous customers tobe the least effective marketing strategy.

Relationships arent limited just to customers.Build relationships with regulatory officials,educators, suppliers, and other growers, too.

well. A producer of specialty vinegars, dryspice mixes, and other condiments says, Ideveloped a good relationship with the localfood inspector, which really helped in figuringout the appropriate technology and packagingto use. The state land-grant universitys foodscience department was also very helpful in

solving technical problems.

One producer says his key tosuccess is Quality control, fairprice, and dependability atmarkets. You need to be therewhen youre expected. In gen-eral I try to follow the golden rule[treat others as you wish to betreated]. You never knowwhen you may need help, and ifyouve built solid relationships,

these people will go out of theirway to help you. Its a good idea to conductbusiness treating everyone you meet as apotential customer.

Not surprisingly, most respondents primarymotivation for beginning value-adding activi-ties was to make more money. Some men-tioned dissatisfaction with wholesaling andother market outlets that were unprofitable andoffered the producer no control over pricing.Three respondents did mention non-monetary

reasons such as developing their local FarmersMarket, encouraging environmentally soundliving, and encouraging local consumption oflocal products. Diversification was an impor-tant secondary motivationto minimize risk as well as maximize in-comeas was being able to stay on the farmand meet lifestyle goals.

When asked about what they consider keys tosuccess today, a common theme that emerged

Choose something you love to doand something that fits yourpersonality and goals

Love what you do; live with intention;always learn; dont forget to play.

a producer of herbal bodycare

products



among this group of farmers wasthat they love what theyre doing.Whether its making cheese on-farm, producing herbal beauty careproducts, or growing certifiedorganic rice, all these farmersstarted with a passion for their

product.

Why is this so important?Producers say they want to makemore moneyso why not just identify a prod-uct or service that is known to be profitable, inhigh demand, and so on, and go with that?

Well, there are a lot of reasons. First of all,establishing an enterprise takes time and hardwork. The time between start-up and actuallymaking a profit is usually a whole lot longer

than you think it will be, says one of ourinterviewees. Without that passion, its difficultto find the energy and motivation to stick withit. Will you be able to eat, breathe, and sleepyour enterprise for several years? If not, per-haps it isnt the right business for you.

The farmers we interviewed stress the impor-tance of doing what you love, but caution thathow you go about turning that love into value-adding enterprises must fit your personality

and your goals. Value-adding would prob-ably work best for farmers who are comfortablewith doing their own marketing and dealingdirectly with customers, said one producer.

While there are many ways to add value tofarm products without necessarily getting intoconsumer-direct marketing, the fact is thatmarketing activities account for the largest

share of the food dollar, and representthe largest potential for farmers tocapture more value. Even if theultimate goal is to sell the productthrough grocery stores or other retailoutlets, the farmer still has to do thebehind the scenes work that leads to

that product being stocked and avail-able.

Your sincere enthusiasm and belief inyour product are part of what makes youunique. Produce quality products that you canbe proud of, and set your prices to reflect thatquality. You may be convincing a reluctantcustomer at the farmers market to try a newvegetable, or convincing a reluctant manager atyour local grocery store to stock your salsa.Enthusiasm is contagious!

Resources

Producers and producers associations werementioned by five respondents as the resourcesthat were most helpful in solving start-upproblems. Four respondents mentionedprinted materials, such as technical productionmanuals, trade publications, and, as one re-spondent put it, encouraging and enthusiasticarticles in magazines about similar types ofproducts.

State agriculture departments and economicdevelopment agencies were mentioned by threerespondents, as was the local board of healthand health inspectors, and university assis-tance. Two respondents mentioned lenders.Others mentioned that they tried to problem-solve before they started and one respondentsaid he didnt rely on any resources sinceexperience is better than books.



Some of the least helpful resources for solvingstart-up problems were (each mentioned bytwo respondents) Extension, universities, andgovernmental small business and regulatoryagencies. Some of the respondents commentswere: Extension doesnt have much informa-tion in this area, but directed us to professional

journals and organizations, and, The localExtension encouraged us to start, but had notechnicalinformation for us. On universities,one respondent said, University peopletended to be unhelpful while thinking theywere helpful.

Least helpful management resources were thesmall business development agencies, with tworespondents of the six who answered thisquestion mentioning them. One respondentsaid, Small business agencies that purport to

help, dont. It seems like the people withanswers dont want to share. Extension wasalso mentioned as not being very helpfulthey need to be strategic thinkers and theyarent.

One respondent had hired someone to managethe enterprise, which turned out to be a bigmistake. Another respondent mentioned thatmost sustainable and organic agricultureassociations were too oriented towards the

small-acreage and/or specialty crop growers,which was not helpful for her as a large scalecommodity crop producer. Overall, few re-spondents had an answer for this question,since, as one said, Everything helps a little, atleast.

Other producers and businesspeoplehowthe other companies do itwere the bestmanagement and marketing resources found.Four respondents put others involved in theirindustry at the top of the list. Three respon-

dents mentioned both technology, especiallythe Internet, and reading.

As one respondent said,The Internet is a greatresource for its knowledgebase and communications aswell as the marketing possibilities. Othersmentioned establishing retail Web sites andusing technology to become more efficient.

Some printed materials ourinterviewees recommendedinclude the periodicals AcresUSA, Stockman Grass Farmer,and Growing for Market.

The Texas Department of Agriculture and Texas

A&M were said to be extremely helpful withmarketing. Organizations that were singled outas being especially useful included the Okla-homa Economic Development Center,SouthernSAWG, ATTRA, and the American Society ofCut Flower Growers. Other resources that werementioned included business consultants,financial experts, trade shows, and experience.

Som e other resources, in producers ow n

words:

Expeditors for labeling can be replaced by theindustrial development authority; RC&Ds[Resource Conservation & Development] andIDAs [Industrial Development Authorities] aregood resources since they have connections thatcan help farmers.

Cheesemaking Made Easy; government agencies,especially new state grants for former tobaccogrowers; schools for pickles, jam, etc. forsmaller-scale producers.

Reading IRS materials for accounting andtalking to other businesspeople.

The best thing to do is to look at existingoperations and seek help from Universityprocessing centers, as they are usually very freewith information.

Stockman Grass Farmer, Acres USA, Rodale Presspubs, authors such as Eliot Coleman, WendellBerry, Paul Hawken, Jane Goodall; any organic

association.

In Oklahoma, the system of Vo-Tech withattached Economic Development Centers has aworldwide reputation; State Agriculture Depart-ment market development people; Internetsites.



About the Farmers

Demographics:

State NumberArkansas 3N. Carolina 3Virginia 2Alabama 1Kentucky 1Louisiana 1Texas 1W. Virginia 1Total 14

All respondents were caucasian. Of those whogave their age category, five were between ages4150, two were between ages 3140 and onewas 5160.

Respondents average distance from the nearesttown was 10.2 miles. Average population inthe nearest town was 42,800 but this rangedwidely, from 600 to 275,000. Average distancefrom the nearest town of 50,000 or

more was 41.9 miles, with ranges from 5 to 110miles. Four of the fourteen didnt haveInternet access.

The average time involved in farming was 14years, with a range from 5 to 25 years; averageyears in value-adding was 9 with a range from

5 to 15 years.

Value-adding activities were very important tototal farm income. Except for one respondentwho said the business was a hobby, theseactivities accounted for an average of 75% of allfarm income. There was a definite split, how-ever, with 8 of 14 respondents who said theactivities accounted for 80% or more offarmincome, and the remaining respondents whoreported 50% or less.

Types of value-added products included (inorder of frequency. Note that some respon-

dents are doing several of these):

Condiments (jam, jelly, hot sauce, vinegars,seasonings) (5)Baked Goods (pies, biscuits, cookies, etc.) (4)Cheeses (3)Entrees (jambalaya/bean soup mixes) (2)Health/Beauty (soap/bath, lip balm, handcream) (2)Salad mix (packaged for retail)Beef (hormone/antibiotic-free)

Income FromValue-Adding

Number inIncome Category

$5001$10,000 3$10,001$25,000 1$25,001$50,000 3$50,001$100,000 3

$100,001$500,000 3



Rice (packaged organic jasmine)Popcorn (popped, whole-kernel, nuts/syrup)Crafts using on-farm inputsCut flowersPickled foodsAgri-entertainment (B&B, tours, workshops)

Most have on-farm processing facilities andthese were financed about 50-50 by theproducers own funds and by loans. Oneperson said, The hard part (of setting up thefacility) was finding the money. Respon-dents learned about what was needed andhow to set it up from other producers, and toa lesser extent from printed materials. Thecheesemakers said that it was very difficultto find sources of small-scale, affordableequipment, but others did not mention it asa problem.

USDA inspection was only applicable forbeef and cheese operations, and all but onecheesemaker provided a USDA-inspectedproduct. It appears that this was to complywith the law and not for marketing pur-poses.

Almost every producer relied on severalmarketing outlets except three who onlyused one outlet. The outlets in order offrequency:

Farmers markets (6)Mail order (6)Direct to stores (specialty shops) (5)Direct to restaurants (3)On-farm sales (3)Festivals/shows/conferences (2)Wholesale (2)Internet (2)Distributors/brokers (2)

Word of mouth (2)Home delivery (2)

References:

1) Dr. John Ikerd. Re: sustainable and profit-ableA bit long. Posted to sanet-mg elec-tronic discussion group, 23 June 1998.

2) Sullivan, Robert. Small Business Truisms.

Available on the Internet at:. Excerpted from:Sullivan, Robert. 1997. The Small BusinessStart-Up Guide: Practical Advice On StartingAnd Operating A Small Business. 320 pages.Available from Business Book Press for $19.95,s&h included. 800-363-8867.

3) Thyfault, Cindy. 1996. Developing NewGeneration Co-ops: Getting Started on the Pathto Success. Rural Cooperatives. Vol. 63, No. 4

The Electronic version of Keys to Success inValue-Added Agriculture is located at:www.attra.org/attra-pub/keystosuccess.html


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The ATTRA Project is operated by th e Nation al Cent er f or App rop riate Technolog y und er a grant f rom t heRural Business-Coo per ative Service, U.S. Dep art m ent of Agricult ure. These organizati on s do no t recom -m end or endo rse pr od ucts, comp anies, or in divid uals. ATTRA is located in t he Ozark Mount ains at t heUniver sit y of Arkansas in Fayet t eville at P.O. Box 3657, Fayett eville, AR 72702. ATTRA st aff m em ber s p ref erto receive requests for inf or m ation about sust ainable agricultur e via t he t oll-fr ee num ber 800-346-9140.

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Keys to success in value added ag