The Economics of ValueAdded 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
Capital
Labor
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.
2.
3.
4.
Hire a consultant
Web search
Personal observation
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 valueadded 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 ValueAdded 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.