Background & Justification (March 1999)

In 1995, Tennessee Governor Don Sundquist appointed a 31-member Council on Agriculture and Forestry to study the strengths and opportunities of Tennessee’s agricultural industry and to develop a strategy for improving and enhancing its economic opportunities. During the year, the Council conducted numerous public listening tours across the state where more than 500 members of agricultural industries and communities participated in an exchange of ideas and concerns pertaining to agriculture, forestry and aquaculture in Tennessee. In 1996, the Council released its findings through a report including thirty-eight recommendations. Recommendation 1.5 called for initiatives to:

“Support the establishment of an agricultural development center administered by the University of Tennessee Agricultural Extension Service working in cooperation with the Tennessee Department of Agriculture. The proposed program will focus on feasibility studies
and market analysis of food processing, packaging, value-added technologies and niche markets.”

This call for public action on value-added agricultural issues was certainly a valid one. Tennessee farmers are now more apt to consider new enterprises, activities and procedures than ever before. While Tennessee agricultural production alone generates more than $2.4 billion annually in farm cash receipts, farmers have not been especially well-paid for their efforts recently. In 1996, on average, Tennessee farmers returned a net income of $4,826.25 per farm. One reason for this low net return is that the farmer’s share of each dollar the consumer spends on food has been steadily decreasing. In 1996, only twenty-three cents of every dollar spent by the consumer on food items made it back to the farm level. For food items purchased at restaurants and fast-food facilities the farmer’s portion slips much lower to less than $0.12. An underlying principle of the farm share for food items is that the more processing performed on a product beyond the farm but before it reaches the retail level, the smaller the farm share. For example fresh eggs require little processing and have a higher farm share than bakery products which require a great deal of processing.

Primarily as a result of the rising costs of labor, transportation, packaging, food services and other marketing inputs, the value for marketing farm foods has increased greatly over the years. In 1986, the cost of marketing food beyond the farm gate was approximately $271 billion but increased by 55% over the next decade. The difference (spread) in the prices that farmers receive for their production and the price that consumers pay at the retail level is referred to as the farm-retail price spread. Over the years, the general trend in the difference in these prices has grown. Farm receipts have tended steady to lower while retail prices have tended upward with inflation, and in some instances faster than inflation.

Because of the increasing farm-retail price spread, the importance of value-added agriculture grows every year. The value added to agricultural products beyond the farm gate has greatly outpaced the value of raw agricultural goods since 1950. Therefore, many farmers are now evaluating ways to add value to their commodities in order to capture some of the value that is now being added beyond the farm gate. Adding value may be defined as anything done to further prepare a product/commodity for the consumer such as processing, packaging or marketing.

In order to remain competitive during the past twenty years, Tennessee farmers have implemented activities of production integration, expansion and diversification. However, to be profitable into the 21st century, other opportunities must now be considered. Adding value by processing, packaging and marketing has been one opportunity for farm families to position their operations for the future by capturing more of the consumer dollar actually spent on their commodity or product.

Value-added agriculture activities require a new and different set of skills than are associated with most farming enterprises. Therefore, agri-entrepreneurs must think and plan more like mainstream business managers than traditional farm managers. These new value-added activities are often classified as small businesses. And the success rate for many small businesses is not very good. While small business growth represents a positive contribution to the nation’s continued economic expansion, entrepreneurs need to be aware that it takes more than a good idea for a small business to succeed. According to Dun & Bradstreet reports, “Businesses with fewer than 20 employees have only a 37% chance of surviving four years (of business) and only a 9% chance of surviving 10 years.” Restaurants only have a 20% chance of surviving two years. Of these failed businesses, only 10% of them close involuntarily due to bankruptcy and the remaining 90% close because the business was not successful, did not provide the level of income desired or was too much work for their efforts . The failure rate for new businesses seems to be around 70% to 80% in the first year and only about half of those who survive the first year will remain in business the next five years .

During the first half of 1997, more than 43,000 U.S. businesses failed. This failure rate was up 13% from the first six months of 1996. Dollar liabilities from business failures totaled more than $20 billion, 40% more than the same time period for the previous year . According to Dun & Bradstreet statistics, 88.7% of all business failures are due to management and marketing mistakes. While no magic solutions will guarantee a business success, five out of the top ten strategies for improving a business’ chances of success are related to marketing (customer profiles, competition, price, consumer preferences and development of a marketing plan).

In response to the Governor’s Council on Agriculture and Forestry and the fact that small business success rates are so low, The University of Tennessee Agricultural Extension Service established the Agricultural Development Center (ADC) in April, 1998. The ADC mission is to fill the need of agri-entrepreneurs and those interested in adding value to their operations by researching, evaluating, developing and planning for a project’s success. The ADC receives applications from individuals who are evaluating value-added agriculture products and enterprises. The ADC accepts those projects that indeed represent value-added ideas, relate to Tennessee agriculture, forestry or aquaculture and are produced in Tennessee. Using a multi-disciplinary, [financial-marketing-production] team approach, the center studies individual projects and evaluates market, financial and technical potential. Again, the purpose of the ADC is to provide information to small farmers, agri-entrepreneurs and small businesses to improve their planning for success.

However, the center often finds itself ‘breaking new ground’ as it evaluates the market potential of new value-added enterprises. Adding value at the farm level is certainly not a new concept, but it is an expanding concept. For example, some apple growers have been producing and marketing apple butter products and blueberry growers have operated pick-your-own businesses for years, but very little research on the characteristics of success and failure of these types of ventures exists.

The value-added concept is rapidly expanding in Tennessee among small farmers and agri-entrepreneurs. Livestock producers are considering opening their own fresh meat market and poultry operators are looking to bag their composted waste into organic soil amendments while sawmill operators consider manufacturing wood products and farmers evaluate value-added opportunities in entertainment farming and agri-tourism.

While the ADC assists in the evaluation of these ideas in order to improve the chances for success, the experiences of others involved in similar activities is not well documented. Similarly, the market demand for specific new, value-added agricultural enterprises is not readily available. The reasons that so many small businesses fail are compounded for many small, value-added agri-businesses because of the lack of documented experiences of others and the lack of demand measures and market potential for new markets. During the first nine months of operation for the ADC, fifty-five requests for application had been received, nine projects were accepted and completed and seven projects had been accepted and were in process. The agriculture communities of Tennessee have responded to the opportunity to receive assistance in the evaluation and development of a value-added agricultural idea. However, in several instances, project applications were turned down because the center did not have adequate information on certain projects.

In order to enhance the chances for success, entrepreneurs must develop thorough marketing, management and production plans. However, proper business planning for these new and alternative activities is often stifled by the lack of documented market information. The evaluation of actual related case studies and market research studies is valuable, if not critical, to the success of these new agribusinesses. Case studies and market research are just not available for value-added products. Therefore, through the FSMIP program, the development of a variety of case studies of actual value-added businesses in Tennessee and the results of actual, project-specific market demand surveys will have immediate and long-term impacts to the clientele and outreach programs of the Agricultural Development Center and the Tennessee Department of Agriculture