The Economics of Value- Added Processing Jeffrey Hyde Penn State University Department of Agricultural Economics & Rural Sociology Penn State is committed to affirmative action and the diversity of its workforce.
A Question… What does ‘the economics of value-added’ mean to you?
A Definition… Economics: The study of how scarce resources are allocated among competing ends Land Labor Capital Time
Time is Money! The economics of value-added MUST include time for… Market research Sales & distribution Customer service Regulatory issues
Market Research You need to learn… Who your customer is What the customer wants Who else is serving the market How you will get your product packaged How the customer wishes to buy your product Food safety regulations Other stuff?
Market Research How to perform market research… 1. Hire a consultant 2. Web search 3. Personal observation 4. Direct communication with others
Sales & Distribution Who will sell the product? Who will prepare the delivery? Who will deliver the product?
Customer Service Who deals with unhappy buyers? Who negotiates return allowances? Who answers product questions?
Regulations The federal and state governments regulate Food safety Transportation Food processing Labeling Production practices (e.g., organic)
Tick, tick, tick… Market research, sales & distribution, customer service, and regulatory requirements must be managed in an ongoing way.
Gauging “The Economics” Enterprise Budgets A plan that describes expected revenues and expenses Tough to find published budgets for value- added enterprises You should develop one!
Enterprise Budgets Estimating Revenues Price X # Sold Do this for each output – Different sized jars, for example Both estimates come from market research!
Enterprise Budgets Estimating Variable Costs Cost X # Used per Unit Do this for each variable input – those that vary depending on production level Research is required to estimate both equation components
Enterprise Budgets Estimating Fixed Costs Total Fixed Cost X # of Units Sold Fixed costs include depreciation, interest, taxes, and insurance Research is required to estimate both equation components
Enterprise Budgets Estimating Profitability Total Revenues – Total Costs = Profits But where does TIME enter?
Budgeting for Time Method 1 - Time Accounting 1. Add hours spent in research, sales & distribution, customer service, and regulations 2. Define an hourly wage that you’d like to receive (opportunity costs enter here)
Budgeting for Time Method 1 - Time Accounting 3. Multiply hours times wage rate to get total unpaid labor cost 4. Deduct that from “profits” in budget
Budgeting for Time Method 1 - Time Accounting If modified “Profits” are positive, then your time is well spent. If not, you’re spending too much time!
Budgeting for Time Method 2 – The Eyeball Method 1. Develop enterprise budget without the time components discussed. 2. List all of the tasks that will require time not already budgeted 3. Decide if the “profits” are worth it given all you have to do to achieve them.
Budgeting for Time Method 2 – The Eyeball Method What profit level do you need to make your time “worth it?”
The Take Home Points The “Economics of Value Added” must explicitly consider the time it takes to add (and capture) value!
The Take Home Points Taking the role of the “middle men” means that you add value to your product, but it costs money and time to realize that value. Do you have time to grow crops, produce the value-added product, and market it?
The Economics of Value- Added Processing Jeffrey Hyde Penn State University Department of Agricultural Economics & Rural Sociology Penn State is committed to affirmative action and the diversity of its workforce.