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The Economics of Value-Added Processing
Jeffrey Hyde
Penn State UniversityDepartment 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 ResearchYou 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 ResearchHow to perform market research…
1. Hire a consultant2. Web search3. Personal observation4. 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?
RegulationsThe 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 BudgetsEstimating Revenues
Price X # Sold
Do this for each output – Different sized jars, for example
Both estimates come from market research!
Enterprise BudgetsEstimating 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 BudgetsEstimating 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 BudgetsEstimating Profitability
Total Revenues – Total Costs =
Profits
But where does TIME enter?
Budgeting for TimeMethod 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 TimeMethod 1 - Time Accounting
3. Multiply hours times wage rate to get total unpaid labor cost
4. Deduct that from “profits” in budget
Budgeting for TimeMethod 1 - Time Accounting
If modified “Profits” are positive, then your time is well spent.
If not, you’re spending too much time!
Budgeting for TimeMethod 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 TimeMethod 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 UniversityDepartment of Agricultural Economics & Rural
Sociology
Penn State is committed to affirmative action and the diversity of its workforce.
