Economic Feasibility of Value-Added Honey Products

Summary

Hillside Orchard Farms contracted with the University of Georgia's Center for Agribusiness and Economic Development to conduct a feasibility study to investigate the technical, market, and financial feasibility of expanding their value-added food production in Rabun County, Georgia, to include honey products. The technical analysis was limited to the building, equipment and process for making value-added honey products. Bee-keeping and hive management was outside the scope of this study. Currently, the farm adds value to their apples, muscadines, blackberries, and blueberries in their own processing plant making ciders, syrups, sauces, preserves, jams, and jellies. In addition to these four major crops the farm also grows various other produce used for ingredients in their consumer-ready products, such as beans, corn, cucumbers, pumpkins, and strawberries. They purchase additional locally-grown ingredient produce, such as onions, peaches, tomatoes, cabbage, and many varieties of hot and mild peppers, and create numerous varieties of relishes, chow-chow, salsa and other specialties. From the base of the four major raw commodities the farm produces, they have created approximately 150 different consumer-ready products. A key component to the successful production of these commodities is the need for honeybees for pollination. Building on that need, the farm intends to expand their bee operation to not only fulfill pollination needs but also to include production of value-added honey products to be offered to their existing wholesale customers. They also plan to become a leader in technology advancements and educational leadership related to the bee and honey industry. The business, which utilizes commodities they produce locally, has great interest in investigating additional value added opportunities to sustain their economic viability. The Center for Agribusiness and Economic Development carried out a feasibility study to assess the venture being considered.

Situation

The prospective owner is a diversified agricultural producer growing a variety of produce. Throughout his tenure in agriculture, he has been proactive and often taken leadership roles in the local, state, and national arena. He understands the importance of moving past producing a commodity to offering a good desired by consumers. The current state of bee-keeping and honey production both in Georgia and nationwide coupled with heirs showing interest in returning to the family farm and processing business further sparked the need to investigate expansion in the bee-keeping and honey industry. Currently, the farm adds value to their apples, muscadines, blackberries, and blueberries in their own processing plant making ciders, syrups, sauces, preserves, jams, and jellies. In addition to these four major crops the farm also grows various other produce used for ingredients in their consumer-ready products, such as beans, corn, cucumbers, pumpkins, and strawberries. They purchase additional locally-grown ingredient produce, such as onions, peaches, tomatoes, cabbage, and many varieties of hot and mild peppers, and create numerous varieties of relishes, chow-chow, salsa and other specialties. From the base of the four major raw commodities the farm produces, they have created approximately 150 different consumer-ready products. A key component to the successful production of these commodities is the need for honeybees for pollination. Building on that need, the farm intends to expand their bee operation to not only fulfill pollination needs but also to include production of value-added honey products to be offered to their existing wholesale customers. They also plan to become a leader in technology advancements and educational leadership related to the bee and honey industry. A number of key issues have affected the U.S. honey market over the last five years. These issues have had a profound effect on export opportunities. Overall, the U.S. honey industry is dealing with declining bee colonies, increasing production costs, and rising prices. These factors have combined to create a number of issues which have directly impacted the shopping habits of the U.S. honey producer. There are approximately 210,000 beekeepers in the U.S., and a total of 2.5 million bee colonies being managed. There are roughly 1,500 commercial honey producers, but the majority of beekeepers producing honey are producing on a small scale for local sale and farmers markets. A wide variety of honey is present in the U.S. market, with large supermarkets providing dozens of brands, types, and flavors. Market share based on brand in the U.S. market, is dominated by two companies: Dutch Gold Honey and Sioux Honey Association. In 2006, the Dutch Gold Honey brand held a market share value of 25.3%, while Sioux Honey held 24.1% with its Sue Bee brand. The only other players with significant market share were Golden Heritage Foods LLC and T W Burleson with market share of less than 10% each (Datamonitor). Perhaps the most serious issue affecting the U.S.'s ability to supply domestic demand has been the decline in domestic colonies. Primarily, declining bee colonies have come as a result of Colony Collapse Disorder (CCD), which has been occurring now for several years in the U.S., and has resulted in bees decreasing 60 to 80% in some hives. In more severe cases entire colonies have disappeared as a result of CCD. As an additional pressure on colonies, both wildfires and drought in 2007 further depleted the U.S. domestic supply of honey and greatly raised production costs. To counteract this decreasing production supply, honey producers in the U.S. have resorted to importing new colonies, but rising energy prices have made this increasingly costly. These difficulties have resulted in increased prices and a lack in the variety of brands available in stores. Macroeconomic factors such as a weakening economy and U.S. dollar have also fuelled rising commodity prices, and an international supply shortage of honey has not helped to lower the impact of rising honey prices. Some experts are also placing the blame for the decline in production on global warming or less controversially on the more recent unpredictable/volatile weather. Regardless of reasons, a honey supply shortage has not been restricted to the U.S., as Europe deals with similar shortages. The U.S. currently consumes more than double the amount of honey that it produces. Imports currently supply 60-70% of honey consumed in the U.S. market. Not surprisingly, honey prices in the U.S. reached a record high in 2008 at USD141 cents per pound; an increase of 30.9% from 2007's USD107.7 cents per pound. White honey prices have seen the most significant increase; however, the increase in price for white honey has led to a large increase in demand for light amber honey (a traditionally cheaper substitute for white honey) which has led to rising prices for this product.

Response

The Center for Agribusiness and Economic Development conducted a feasibility study to consider the economic feasibility and viability of the proposed processing facility to transform raw honey into value-added products for sale in the wholesale and retail markets. The study addressed the technical feasibility of the proposed facility and included guidelines and recommendations related to regulatory issues surrounding honey. The market analysis portion of the study addressed current US honey situation, competition, consumer trends, specialty food trends, consumption patterns, and local food awareness. Target markets and marketing strategies were identified and characterized. The study also addressed management needs for a successful business venture. The financial analysis section addressed the overall economic cost and returns for the value-added processing facility based on similar studies conducted by CAED and the historical financial data provided by Hillside Orchard Farms. Capital, fixed, and operating costs were considered to determine the economic feasibility of the venture. Based on the findings and projections set forth in the previous sections, the economic impact of the proposed venture was considered.

Impact

Hillside Orchard Farms utilize produce they grow to produce fresh, local products, thereby adding value and support to Georgia's agribusiness base. The facility provides a two-fold opportunity for the family. First, as agricultural producers, their produce can be more profitable when used to produce value-added products instead of selling it into the commodity market. Likewise, by producing much of their own supply needs, Hillside has greater control over both the cost and quality of direct products purchased and used since they make all management decisions. The ability to have input on the supply chain can further enhance the value added-products produced and sold. The market for local produced products is growing and expected to grow as consumers become more concerned with their food and look to eat healthier. Current concerns over food safety and quality and public focus on the industrial food chain has enhanced the market for all types of locally grown products. Initially, the farm will target and advertise to their wholesale customers in the locations where their bee hives are stationed. People want local honey so they get local pollen to help with health issues such as allergies. However, their ultimate plan is to sell honey nationwide. They will be producing sourwood honey, which is recognized over the entire North American Continent, although, it is produced only in a small area in Northeast Georgia and Southern South Carolina. Tiger, GA, the location of the farm, is about center of the 50 mile radius where sourwood honey is produced. Financial analysis of the proposed venture was carried out to help determine the economic viability. Estimated capital investment to cover land, building, and all equipment necessary to process honey, package into value-added products, and market products through both retail and wholesale outlets is $475,000. Both fixed and operating costs were considered for the analysis. Total fixed costs are projected at $77,042 per year. Total operating or variable cost for the proposed venture is projected to be $1.24 million per year. The resulting annual total cost is estimated to be $1.32 million to cover economic costs of the honey processing facility. The per case total cost, assuming 19,345 cases annually, is $68.27. This would be the estimated break-even price per case. Revenue projections were estimated based on current and historical sales. It was assumed the products will be marketed through wholesale, on-site retail, local retail, and internet sales avenues. Projections were based on historical sales and volumes for the variety of product mix offerings. Assuming just over 19,000 cases annually, gross revenue is projected to be just over $1.4 million or $72.69 per case. Given the estimated revenue of $1.4 million and total cost for the facility of $1.32 million, the estimated net income is $85,409 for a return of $4.42 per case. The resulting return on investment is 18%. Based on the assumptions set forth, a honey processing facility to produce local branded honey products located in Rabun County, GA appears economically feasible. Construction and operation of a local honey processing facility in Rabun County would lead to economic activity throughout Georgia. Production generates annual impacts due to purchasing of inputs that include seed, chemicals, fertilizer, labor, raw ingredients, and other services. Revenue and itemized costs data for annual production are from the feasibility analysis under a scenario of operating at full capacity. Operation of the facility creates annual economic impacts within the Rabun County Regional economy, including employment, labor income, value-added, and output. Based on the assumptions set forth, the direct output (sales/revenue) impact of $1.4 million is equal to the value of annual sales/revenue. Direct labor income of $248,304 for 19 employees at the facility is the expense for wages and benefits paid to employees. Total output impact is $2,025,681 million for the regional economy. A total of $432,289 in labor income is created for 26.1 jobs. Through the timely assistance provided to Hillside Orchard Farms, rational and informed decisions could be made. The company is moving forward with their plans to expand their bee-keeping and honey production. They applied for the 2011/2012 USDA RD Value Added Producer Grant to further enhance their sustainability and likelihood of business success.

State Issue

Agribusiness Development/Value Added

Details

• Year: 2011
• Geographic Scope: Multi-County
• County: Rabun
• Program Areas:
  • Agriculture & Natural Resources