Beyond Fresh: Expanding Markets for Sustainable Value-added Food Products in Texas

Taking a Farmer-First Approach 

Books and articles about value-added food enterprises almost always start from the question “What does the market want?” Do consumers want kale chips, fruit roll-ups, fermented carrot slices, or freeze-dried strawberries? This approach is primarily demand-driven, and we’ll refer to it as the Market-First Approach. It is certainly the prevailing point of view in the food processing industry.

We took a different approach.

For most small and mid-scale farmers, product development doesn't start with "What does the market want?" It starts with "What crops do I have?" and "What can I make with them?" Then (finally) “Of the products I can make, and enjoy making, which ones do consumers want?”

Taking a Farmer-First approach makes a big difference in how you look at product development. Exploring the implications of this approach was a major focus of our project. And we developed this simple-yet-powerful idea in great detail in our decision-making workbook. 

For small to mid-sized farmers, food product development ordinarily begins by thinking about crop production and proceeds through a series of test batches or prototypes, with frequent evaluations and reality-checking along the way. Trial and error play a large role, and failure is a normal and expected part of the process. Aside from profitability, we found that regulations are the most important factor determining the feasibility of value-added products. But other reasons for failure are harder to anticipate and could relate to recipes, labels, production requirements, or a host of other factors. You won't know until you try. When a product fails, you go back, change something, and try again. It often take many attempts and iterations before everything works and the pieces fit together.

One of the accomplishments of this project was identifying and describing a model of value-added food product development that fits the way farmers think. This process is essentially iterative, and we came back to this model time and again in developing our workbook and training materials. The basic idea is captured in the diagram below:

Winners and losers

Our market research reached a broadly optimistic conclusion about the potential for making and selling value-added food products from local and sustainably-grown ingredients. Among other findings, we learned that interest in food provenance continues to increase, especially among younger consumers. At the same time there are growing expectations for convenience. These trends, among many others, point towards growing demand for processed and conveniently-packaged foods made from local ingredients. 

We looked closely at fermented sauerkraut; salsas; pickled vegetables; dehydrated vegetable snacks; dehydrated vegetable soup mix; freeze-dried vegetables; relishes; ready-to-eat meals; vacuum-fried vegetables; freeze dried fruit; and fruit jams and jellies. Dozens of other product ideas emerged from our brainstorming sessions, including fruit ketchup; fruit paste; frozen shredded zucchini; frozen zucchini fritters; chocolate zucchini muffins; dehydrated squash chips, kale chips, or tomatoes; smoked tomatoes, peppers, or salsa; frozen ratatouille soup; kimchi; hot pickled okra; jarred tomatoes or peppers; green garlic paste; flax seed; dried greens (from brocolli leaves, chard, kale, collards, etc.) as powders for smoothies or ingredients sold to food makers; and products made from brassica leaves or moringa. Some fruits and vegetables that appear to have particularly good potential for value-added products in Texas are tree fruits (such as peaches, pears, and figs), cantaloupes or specialty melons, sweet potatoes, and butternut squash.

When we studied production requirements and economics, we found that only a small percentage of these products were likely to be profitable for farmers under "real world conditions." In the food world, scale is everything. A product that’s profitable in large-volume sales at the grocery store may be a risky logistical nightmare to make in small batches on a farm or in a commercial kitchen. We saw the best opportunities in products that can be made on-farm, under the Texas Cottage Food Law.

In our education and training materials, we urged growers to "start small and fail early." Every product idea is to some extent unique and needs to be considered on its own merits. To facilitate this evaluation process, we created four user-friendly Product Cost Calculators that can be used to look at profitability under varying assumptions.

We concluded that for most direct-market growers, it's not worth the trouble, cost, and risk to leave the farm and use a commercial kitchen. Those who choose to scale up to large volumes or sell their products wholesale will need to develop new skills and may need to completely change field management practices. Trying to get value-added products onto grocery store shelves (consumer packaged goods) is not a realistic goal for most small farms. For example, highly consistent supply and quality are essential to grocery stores. And seasonality -- normal in the produce department -- is absolutely not accepted or desirable on grocery store shelves.

While only a small percentage of value-added products generate high profit margins, taking a Farmer-First approach broadened our understanding of success. Value-added food enterprises can be worth considering for a variety of reasons. In some cases, a small profit margin is all the producer needs or wants, and many other considerations can be important. For example, food processing can be a good venture for aging farmers who want or need a lighter work load.

Negative consumer perceptions

The local food movement succeeded partly by convincing consumers of the premium value of fresh, whole fruits and vegetables. At the same time, consumers were developing negative associations with non-fresh produce. In their market research report, Dr. Holcomb and Dr. Bowser found that the tremendous recent growth in fresh vegetable sales has come largely at the expense vegetables that are canned, dehydrated, freeze-dried, and otherwise processed. Many consumers now think these products are too processed or have inferior taste compared to their fresh counterparts.

Among consumers, there are currently especially strong negative perceptions about canned and jarred fruits and vegetables, which have declined considerably in the marketplace. Frozen fruits and vegetables have been less affected. And dried and fermented foods appear to have the greatest market potential among processed foods, as sales have increased in recent years.

Consumers who prize freshness and are wary about processed foods need to be reassured with marketing messages that highlight positive features such as nutrition, local production, shelf life, and convenience. Successful marketing will appeal to nutrition, health, and convenience, and labeling must tell the whole "story behind the food." In their report, Dr. Holcomb and Dr. Bowser noted that Millennials are a key audience, and made specific marketing recommendations for three groups of Millennial food shoppers: Food Skeptics, Health-Conscious Independents, and Brand Loyal Eaters.

Consumer confusion

One of our research goals was to find out if creating value-added products from ingredients that were both local and sustainably-grown might support much higher prices and profit levels for growers. We learned that the answer is "probably not."

For one thing, many studies have shown that consumers don’t know exactly what labels like "local," "sustainable," and "organic" mean. This is not entirely the fault of consumers. For example, the overwhelming majority of packaged products in the grocery store labeled as "local" contain few if any locally-grown ingredients. The term "local" has no legal definition and most often means made in Texas or made by a Texan-owned company. The ingredients can, and usually do, come from far-away places.

There are also price ceilings that operate in the marketplace. Consumers will only pay so much more for (say) a 16-ounce jar of sauerkraut or a three-ounce package of sun-dried tomatoes. And consumer preferences are not necessarily rational. One study found that consumers who were willing to pay an average of $5.34 for blackberry jam made from local ingredients were only willing to pay $5.25 if the jam was labeled as BOTH organic and local (Meas et al, 2015).

An important finding of our project was that putting a fresh food item into a package separates consumers psychologically from the product. These psychological effects are complicated and hard to predict. But without the benefit of face-to-face interaction (as in direct-to-consumer sales at a farmers market), it's hard to get consumers to understand what's in the jar, let alone appreciate subtleties about where the ingredients came from or how they were grown. Consumer communication and education are big challenges for anyone attempting to capture the full value of products made from local and sustainably-grown ingredients.

Economic development potential

Our project included a strong economic development component, and confirmed that value-added food products made from locally-grown ingredients have real economic development potential in Texas.

Team member Dr. Rebekka Dudensing did economic impact calculations for products grown and processed in central Texas, using IMPLAN regional economic impact analysis software. Her study concluded that selling $1,000 worth of fresh tomatoes would generate $1,279 in total economic impact -- factoring in direct, indirect, and induced effects as money circulates through the local economy. By contrast, putting the same tomatoes into a canned sauce or salsa would generate a much larger total effect of $9,117 -- over seven times as much. Most of that increase is due to the increased value of the final product relative to the value of the unprocessed vegetables, and the processing stimulates additional activity across the economy as well. Benefits rippling through the local economy would include numerous non-agricultural industries. 

While the economic development benefits of value-added food products are well-known, learning the actual dollar value of these effects in a real-world Texas example was a powerful and useful result from our project. We created handouts featuring these numbers, aimed at decision-makers. Many small-town mayors, city council members, and county commissioners, and other elected officials attended our workshops and networking events. These rural civic leaders were keenly interested in working with local farmers to develop value-added food products.

Every large city in Texas is surrounded by peri-urban areas and small towns, often bedroom communities with many residents who commute into the city to work at low-paying jobs. These towns are hungry to create jobs, and they understand manufacturing. The Beyond Fresh project confirmed the importance of connecting Texas farmers, food entrepreneurs, food buyers, and economic development professionals. And a significant accomplishment of this project was getting decision makers in many small Texas towns thinking seriously about food manufacturing as a job creation opportunity.  

Untouched markets

Wholesale market opportunities are just beginning to develop in central Texas, and more work is needed to build them. Making the transition from direct-marketing to wholesale is a big and complicated step for farms.

Our research found good opportunities to sell ingredients to small-batch food manufacturers, where co-branding may be a possibility. Institutional markets for processed foods also seem to be virtually untouched in Texas and are a growing opportunity. For example, the City of Austin has launched a new Good Food Purchasing Program (GFPP) that prioritizes food from local farms. In May 2016 Austin Independent School District and the University of Texas at Austin became the first two organizations to pilot the GFPP program in Texas. Both are already buying fresh produce from Texas farmers. While not yet buying processed produce, they are interested in minimally-processed products such as carrot sticks, broccoli sticks, broccoli florets, and butternut squash cubes. The Beyond Fresh project led to a price study that has informed the work of the GFPP team in Austin.

Sources

Meas, T., W. Hu, M. Batte, T. Woods and S. Ernst (2015) “Substitutes or Complements? Consumer Preferences for Local and Organic Food Attributes.” American Journal of Agricultural Economics 97(4): 1044-1071.

TXP, Inc. 2013. “The Economic Impact of Austin's Food Sector.” Study commissioned by the City of Austin and available from the City of Austin's website, www.austintexas.gov.