Potential supply and demand

The market for local and regional food in the Northeast USA is significant. In 2015, 30,297 farms in the Northeast sold $1.9 billion of locally branded products in the Northeast, and 167,009 farms sold $8.7 billion such products nationwide (USDA Economic Research Service, 2015). Twenty farmers gathered in March 2015 to discuss the potential to freeze freshly harvested produce for winter retail sales, including why so few took advantage of value-added production and marketing opportunities. Farmers responded that farm operations that produced scale-appropriate volumes of produce for regional retail frozen processing were too small to individually conduct market research needed to assess the key components of profitability in this market. That focus group identified knowledge barriers preventing them from assessing profitability. In October 2016, we surveyed Northeast farmers (n = 183; 23% response rate), confirming focus group results. We found that 63% of the respondents were interested in entering this market but needed more information. Sixty-three percent required information about processing/production costs, 57% were concerned about food safety/quality assurances and 49% required more information about packaging/marketing. Medium-sized farmers comprised 17% of responses (compared to 13% regionally). In our survey, 50% of farmers grew either/both blueberries/spinach. Of the 69% who indicated interest in frozen retail sales, 65% grew either/both products.

Blueberries and spinach grow well in the Northeast. In 2012, 275 operations harvested 556 acres of spinach, and yield in the Northeast is about 7000 lbs/acre, totaling 3,892,000 lbs. In 2012, 2593 operations harvested 21,594 acres of blueberries, and yield in the Northeast is about 4500 lbs/acre totaling 97,173,000 lbs (USDA, 2017). Frozen blueberries/spinach are leaders in frozen fruits/vegetables retail sales. Market researcher Mintel reports that blueberries are the leading product in the frozen fruit category (Bloom, Reference Bloom2014). The Institute of Food Technologists similarly found that frozen produce was among the top ten food trends (Sloan, Reference Sloan2015). To check these national trends against regional trends, we interviewed three regional retailers, and found that about one-third of frozen fruit products stocked are frozen blueberries, and that about 50% of frozen sales was generated by frozen blueberries alone. Spinach was the third highest vegetable in sales generated, ranking below peas and corn.

Processing facility capacity

The food processing facility (FPF) used in this study has the most robust processing capacity that was available for this research in the Northeast, but there are still gaps in their processing line that limited the crops that we could trial. Top selling frozen vegetables, such as peas, corn and green beans (Sloan, Reference Sloan2015), all require significant pre-freezing product preparation. Preparation can include expensive labor and/or equipment to shell/strip kernels/snip ends. Recently blights in the Northeast have made broccoli unreliable. Spinach requires only thorough washing, chopping and blanching. Other top selling frozen fruits have high spoilage rates (raspberries) and/or high labor costs (topping strawberries). Stone fruits require peeling, de-stoning and treatments for browning.

The potential for regional scale value-added food production is high, yet there is no guarantee that public and private investments will necessarily result in a more resilient food system, much less one that provides a stable, profitable return to farmers (Dimitri and Gardner, Reference Dimitri and Gardner2019). Potential market entrants, both farmers and regional food businesses, are understandably concerned that they do not have sufficient information to risk entering this market. This study provides information and tools that can be used to help possible market entrants make informed decisions (Cavigelli et al., Reference Cavigelli, Hima, Hanson, Teasdale, Conklin and Lu2009; Angioloni et al., Reference Angioloni, Kostandini, Alali and O’Bryan2016; Gaskin et al., Reference Gaskin, Cabrera, Kissel and Hitchcock2020).

Equipment

• • Depreciation for the building and equipment used in processing blueberries and spinach was determined following a straight-line approach. For each capital item, we used the current value, useful life and salvage value to estimate daily depreciation costs. Current values were taken from FPF records and field research. We determined salvage values by reviewing prices of various used items offered for sale online. Useful lives are based on product specifications.

• • Interest is either the interest paid on a loan or an opportunity cost for a capital item that was purchased outright (no loan). We used small business loan interest rates for capital items. (see Appendix A for small business loan details).

• • Repairs and maintenance were determined from FPF records on monthly expenditures for repairs and maintenance of all building and equipment. We estimated an aggregate daily value for repairs and maintenance assuming 20 business days per month.

Building

• • Property taxes are not charged to a non-profit like the FPF. For-profit ventures, however, would be subject to property taxes.Footnote ¹

• • Insurance costs are estimated from an aggregate daily cost of insurance based on monthly payments and assuming 20 business days per month.

We estimate the capital costs of freezing blueberries and spinach for one production day based on rent charged for the FPF by the parent non-profit, which owns the building. That rental value covers the daily cost of using the facility. We assume that a full day is required for freezing either blueberries or spinach. Interest reflects an opportunity cost for the assessed value of building. Repairs and maintenance are from reported expenses. Taxes are not charged, as the non-profit does not pay taxes. Insurance expenses are those reported for the FPF. We add depreciation and opportunity costs for the equipment used for processing (freezing) the blueberries and spinach. Daily costs of capital are annual costs using an average of 20 business days per month. Building costs for the FPF, including rent, maintenance and repairs, and insurance are $184.83 per day (Table 1).

Table 1.

Building costs

^a Based on FPF records.

^b Items in bold represent category totals.

We also develop a second set of capital cost estimates to consider the possibility of beginning a new facility from scratch. We assume the entity is a for-profit firm that secures a loan for the value of the required building and equipment. All five DIRTI components discussed above are included in this estimate for the building and equipment used in freezing blueberries and spinach. Again, daily costs of capital are calculated assuming 20 business days per month.

An individual quick-frozen (IQF) machine and liquid nitrogen are used in freezing the products. The IQF is a capital item as is the liquid nitrogen tank. Liquid nitrogen tanks can be rented from a company and that rental value is assumed to represent the appropriate DIRTI costs associated with ownership. The rental costs for the liquid nitrogen tank may over-estimate the costs because the firm renting the tank likely includes some profit within the monthly rental rate.

DIRTI capital costs for freezing

The assessed value of the FPF is $759,402 and a salvage value for the building is assumed to be $200,000. (This may be conservative as no real estate appreciation is assumed.) Straight-line depreciation is determined based on a 30-year life. Interest is determined based on an annual interest rate of 6% and the current assessed value of the building of $759,402. Repairs and maintenance are based on FPF records and are identical to the costs assumed above in Table 1. We calculate taxes based on the assessed value and the local property tax rate. Insurance is based on FPF records and is also identical to the value used above. The total costs for the building are allocated based on an average of 20 business days per month. The building is used throughout the year, so the daily rate is not based on only the number of days used for freezing fresh produce. Total daily costs to a private for-profit firm to own and use a building of equal assessed value are $439.80 (Table 2).

Table 2.

Estimated freezing costs for a firm owning a facility like the FPF

^a Interest on the building is based on a 30-year mortgage at an interest rate of 6\%.

^b Building maintenance and repairs based on FPF records.

^c Taxes based on the FPF assessed value and the Greenfield, MA, 2019 tax rate of \$22.36 per \$1000.

^d Insurance based on FPF records.

^e Items in bold represent category totals.

Importantly, these two cost estimates represent the costs of using the FPF and its equipment (or an identical privately owned facility) to freeze blueberries for one full day. These costs will be the same regardless of the amount of blueberries frozen. It is assumed that retail bags will be the final product and equipment is included for freezing blueberries and sealing them in plastic bags. Processing for wholesale would not require the ‘check weight filler’ or the ‘band sealer’ equipment included above—a reduction in costs by more than $20 per day. The label printer for printing bag labels would also not be required reducing the equipment costs slightly.

Utilities

We base utility costs on data from the FPF on expenditures for utilities such as water, electricity, natural gas, water/sewer, laundry service, pest control and other necessary monthly expenditures like rental costs for the liquid nitrogen tank. While the tank could be a capital investment, the FPF chose a rental contract with the firm that provides liquid nitrogen. These inputs are necessary expenses for the FPF and are combined as a part of the fixed costs of processing. Daily costs for these utilities are calculated from the monthly expenditures for utilities and are based on 20 business days per month. These costs are paid monthly and while they may vary based on the amount of produce frozen (e.g., water, sewer, electricity), the amounts of these utilities are not easily measured based on amount or type of product frozen. Thus, these expenses are based on FPF records and are used to estimate costs for one day using the facility to freeze blueberries. These are necessary overhead expenses and many are unavoidable (e.g., liquid nitrogen tank rental) due to contracts, implying they should be included in the fixed costs of freezing. Table 3 shows the daily costs of utilities for freezing blueberries including rental of the liquid nitrogen tank rental, water/sewer, electricity, natural gas and other necessary monthly expenses. Daily costs are based on 20 business days per month. Total utility costs are $376.31 per day for freezing blueberries at the FPF. Energy (gas and electricity) represents over 46% of utility expenses for freezing. Rental of the liquid nitrogen tank adds an additional 15% of a day's utility expenses. We use the same daily cost estimates for spinach.

Table 3.

Estimated daily utility costs for freezing at the FPF

^a Items in bold represent category totals.

Supplies: materials and ingredients

This category of costs is variable and depends upon the amount of product that is processed. These costs include the raw vegetable or fruit to be processed and supplies or materials needed to freeze the raw product, including food safety supplies like hair nets, masks and gloves and packaging supplies like bags, boxes and labels. Liquid nitrogen used to freeze the product can be measured after each day of processing and can be easily assigned to the product. Liquid nitrogen used per pound of product processed is calculated and included in the supplies for processing. We estimated that the liquid nitrogen costs are approximately $0.132 per pound of processed product based on tank measurements before and after freezing products. This estimate reflects liquid nitrogen ‘start-up’ costs of cooling the IQF; greater amounts of product frozen during a run will reduce the cost per pound.

Labor

Labor costs for processing are straightforward—they are the aggregate of payments to staff that worked to freeze the blueberries and spinach. The time worked for each individual multiplied by their wage is aggregated. Additional labor costs are charged for management and administration. The FPF processing methods may differ from other processing methods. To allow other individuals or firms to compare their costs of freezing, time spent on each task in the FPF process was collected by observation for each worker. The time-tracking tools used during observation are shown in Tables B1 and B2 in Appendix B. The time-tracking tools show the same basic processes with a few additional steps for spinach processing, as spinach requires the additional steps of blanching, cooling and forming into patties. Initial trials with spinach showed that placing the blanched and cooled spinach on the IQF belt resulted in low yields, less than 50%, and much longer cleaning time for the IQF after processing. The decision was made to create spinach patties that were placed on the IQF belt increasing yield by 25% (to 75%) and reducing cleaning time for the IQF following freezing (see Appendix A. for time-tracking sheets used in data collection.)

Capital costs

Estimated capital costs for one day of freezing blueberries are shown in Table 4 and for spinach in Table 5. Equipment costs are based on depreciation, opportunity costs (assuming an investment of the asset values shown) and repairs and maintenance. Taxes and insurance are not charged on specific equipment items. Annual depreciation costs are converted to a daily value using the estimated number of days equipment is used in a typical year. The IQF and associated equipment are used 52 days in a typical year. Opportunity costs are calculated using an annual interest rate of 6%. We allocate the annual opportunity costs assuming 20 business days per month. Monthly repairs and maintenance based on FPF records are also allocated assuming 20 business days per month. Total equipment costs for a day of freezing blueberries at the FPF are estimated to be $177.27.

Table 4.

Estimated daily capital costs for freezing blueberries at the FPF

^a Weighted sum of all equipment values and straight-line depreciation where weights are the number of items.

^b Items in bold represent category totals.

^c Opportunity costs based on a 6\% rate of return.

^d Maintenance and repair and insurance are based on FPF records.

Table 5.

Estimated daily capital costs for freezing spinach at the WMFPC

^a Weighted sum of all equipment values and straight-line depreciation where weights are the number of items.

^b Opportunity costs based on a 6% rate of return.

^c Maintenance and repair and insurance are based on WMFPC records.

^d Items in bold represent category totals.

Capital costs for freezing spinach at the FPF are very similar to the capital costs for freezing blueberries. There is one important difference; the nature of the vegetable makes it impossible to use the FPF ‘vibratory filler’ machinery to fill retail bags with the spinach. Spinach also requires blanching prior to chilling using the dunk tank and freezing. Daily cost for equipment needed to freeze spinach is less than the costs for blueberries because the check-weight filler was not used. But the need to hand pack the retail bags of spinach results in higher labor costs.

Equipment must be housed somewhere and those costs must be included. The FPF pays monthly rent to the venture center. Rather than depreciation and interest costs, the rent paid ($1666.67 per month) is included. Insurance costs are also added as well as repairs and maintenance to the building based on the FPF records. As a non-profit, the FPF does not pay taxes. As shown in Table 2, total FPF building costs are $3696.68 per month, or $184.83 per day. Adding building costs and equipment costs, the total costs charged by the FPF for a day of freezing fresh produce is $362.10. This represents the costs to the FPF for one day of freezing blueberries at their facility.

Supplies: materials and ingredients

The costs of supplies and ingredients are variable costs that depend upon the type and amount of blueberries that are frozen. Supplies and ingredient costs, including the raw produce, are calculated from the quantity used and per unit costs of supplies used. In addition to the raw produce, inputs such as bags, boxes, hair nets, labels, sanitizing products and other materials are included. Liquid nitrogen is included in material cost; the tank used to store the liquid nitrogen is included under capital costs. To determine the amount and costs of liquid nitrogen, tank measurements were used to calculate the volume. The price per gallon of liquid nitrogen was used to estimate the costs and a cost per pound of blueberries/spinach frozen was determined. The cost of liquid nitrogen per pound of blueberries/spinach frozen can be used to estimate liquid nitrogen costs for alternative levels of production. Greater amounts produced would result in lower per pound costs because of the liquid nitrogen required to cool the IQF before starting to process.

As an example, consider a batch of 500 pounds of blueberries frozen and packaged in 12-ounce plastic retail bags. Bags were packed in boxes (12 bags per box) for storage. Liquid nitrogen cost was 13.2 cents per pound frozen. The costs of supplies and ingredients are shown in Table 6. The cost of the raw blueberries is about half of total supplies and ingredient costs.

Table 6.

Supplies and ingredients for freezing blueberries at the WMFPC^a

^a These estimates are for freezing 508 pounds of blueberries.

^b Items in bold represent category totals.

For this research trial, we processed batch sizes of 500 pounds of spinach. Supply costs for freezing spinach are shown in Table 7.

Table 7.

Costs of materials/supplies and ingredients for freezing spinach

^a Items in bold represent category totals.

Labor

The labor required differs depending upon the process followed to freeze the raw product and the amount of raw product delivered for freezing. Labor inputs for each part of the FPF process for freezing blueberries are shown in Table 8 and for spinach in Table 9. The labor costs shown below are for packaging a total of 500 pounds of blueberries in 12-ounce plastic retail bags and 500 lbs of spinach in 16-ounce plastic bags.

Table 8.

Labor input and costs for freezing blueberries at the WMFPC

^a An average wage rate of $17.23/h was assumed.

^b Items in bold represent category totals.

Table 9.

Labor input and cost for freezing spinach

^a A wage rate of $17.23/h is assumed.

^b Items in bold represent category totals.

The spinach was blanched, chilled, spun, then formed into patties (about the size of a hockey puck). The spinach patties were then frozen and hand packaged in retail bags (16 ounces each). The tasks of patty-making and packaging (bag, seal, box) represent 43% of the labor input. The patty-making, a time-consuming process, was in response to poor yields (less than 50%) when trying to freeze loose spinach and the time required to clean the IQF after freezing. Small bits of loose spinach were embedded in the IQF belt requiring a lot of tedious labor to clean the belt. The patties created much less mess in the IQF and also led to smooth and rapid IQF input. Freezing the patties resulted in substantial improvements in both yield and cleaning time but did add labor for forming the patties.

The costs cover all labor required, from receipt of the raw product to final clean-up at the end of the day. Developing a cost per pound of final product (or a cost per bag) depends also on the yield, the final product weight divided by the raw product weight. The yield for freezing blueberries was very high at 99%. The yield for spinach was lower at 75%.

Data on labor input by task were gathered by observation. A team of five observers recorded start and end times for each task, by individual worker. To ensure coverage, team member assignments overlapped so that each of the worker's times were recorded by at least two team members. The amount of time individuals spent working on each task was determined; starting and stopping times were recorded and the difference calculated. Times on task were then aggregated to determine total labor required to process the raw blueberries. While individuals earned different wages due to experience, an average wage rate of $17.23/h was used in calculating the labor costs for each task and the total labor costs.

The greatest amount of labor for freezing blueberries was for packaging into the plastic retail bags. The task required weighing the frozen product into the bags, sealing the bags and packing them into boxes. For blueberries, a ‘vibratory filler’ machine was used to speed the process. The time required for packaging also affected the IQF time because the blueberries could not be left sitting very long before packaging. The packaged blueberries were immediately boxed and placed in a freezer. Total time and costs for the IQF and packaging portions of the process represented about 45% of all labor. General clean-up throughout the process and the final clean-up represented about 19% of all labor input. Fringe benefits are included as 40% of wages.

Spinach patty-making and packaging represent 43% of total labor. Clean-up throughout the process and final clean-up represented about 20% of labor, not substantially different from the clean-up for freezing blueberries, though total labor for spinach is higher.

Additional administrative labor costs are also added (Table 10). These costs represent administrative and management costs for the FPF and fringe benefits for those staff. This labor provides a wide range of services, like business development (contacts and contracts with buyers and sellers, as discussed in Appendix D), financial management and directing the FPF operations. These are costs specific to the FPF. While a for-profit firm would also have administrative costs, they may be very different and there may be cost savings in freezing blueberries. Combining the administrative labor costs ($537.60) and production labor costs results in a total labor bill of $1292.44 for blueberries and $1603.39 for spinach.

Table 10.

Administrative daily labor costs for the WMFPC

^a Items in bold represent category totals.

Summary: freezing costs

Table 11 combines the freezing costs for blueberries and Table 12 for spinach. The costs are for one day of processing the fresh produce into retail bags (12-ounce for blueberry and 16-ounce for spinach) and one day's use of the FPF. Capital costs include building, equipment, utilities, supplies and labor used to receive the product, prepare for freezing, freezing, packaging and cold storage of the bags in boxes. Also included are labor for clean-up and administration of the FPF. The greatest costs of frozen blueberries are the supplies and ingredients, and this cost is primarily the fresh blueberries. The price paid for blueberries for this research trial was $2.30 per pound and $3.40 per pound for spinach purchased (given the yield of 75%, the effect of cost of the spinach is $4.53 per pound of final product). Production labor adds about $1.20 per pound to the costs of freezing blueberries and $2.84 per pound for spinach. Administrative labor adds $1.06 per pound. Total processing costs per pound are estimated to be $6.32 for blueberries and $11.06 per pound for spinach. Adding additional capital costs brings total freezing costs for blueberries to and for spinach to $11.74 per pound. Costs would differ if a for-profit firm were to charge the full costs of depreciation, interest and taxes.

Table 11.

Summary of blueberry freezing costs^a

^a Freezing 508.4 pounds of blueberries, packaged in 12-ounce plastic bags and one day's use of the WMFPC.

^b Items in bold represent category totals.

Table 12.

Summary of spinach freezing costs^a

^a Freezing 500 pounds of fresh spinach in 16 ounce plastic bags, and one day's use of the WMFPC.

^b The yield was 75%—500 pounds of fresh spinach yielded 375 bags (16 ounces) of frozen spinach.

^c Items in bold represent category totals.

Distribution costs and returns field research

We interviewed two regional food distributors, three regional retail store managers and three farmers to identify the costs associated with retail sales under two different scenarios—selling through an established retailer or selling at a farm stand. Our interview questions included distribution, promotion, stocking, farm stand equipment and operating expenses and mark-up fees.

To sell to a retailer, farmers would need to invest in annual fixed costs. Fixed costs include marketing expenses of about $2500 per year to develop and maintain a label and brand identity. Distributors and retailers generally each require an annual slotting fee to guarantee freezer space for a product. Slotting fees are generally offered for a portfolio of products and run about $10,000 per year for a portfolio of five products per distributor and retailer. To obtain exposure to a distributor, food entrepreneurs generally attend at least one trade show per year, at a cost of about $2500.

Variable costs for selling frozen product through a retailer come in the form of per unit mark-ups. A distributor will generally add a mark-up on frozen items at a rate of 25%. A retailer will generally add a 40% price mark-up between the price paid per unit for the product and the retail price. These costs reflect the high costs of maintaining frozen casing at a retail outlet, which has high utility costs and high opportunity costs for retailers. We do note, however, that two of the interviewed retailers were food cooperatives that had frozen regional products stocked. These cooperatives had waived stocking fees and had significantly reduced mark-up in some cases.

To sell through a farm stand, the farm stand will incur fixed costs. Fixed costs include a freezer case, at a cost of about $5000 per case, must pay the mortgage on the farm stand in which the case is located, which we estimate at $300 per month. Variable costs for farm stand sales will generally include staff, utilities and other overhead, frozen storage, and cost of delivery between the farm and the processor (both ways).

To determine baseline prices for frozen products, researchers collected blueberry and spinach product data from 27 regional stores. Data included store type, whether the product was organic, whether the product had origin information such as local or regional branding, unit price, package unit size, product placement, package design and for spinach, whether the product was loose or formed into cakes. We analyzed these data to determine the most common unit sizes and packaging available to consumers, and to determine a baseline price for comparable commercially available products. The base retail price for blueberries was $2.50 for blueberries and $1.68 for spinach per 12 ounce bag.

Premiums for local and regional value-added produce

In this paper, we identify potential premiums that farmers and food businesses could add to FP from published literature on consumer demand for local and regional food products. Two recent meta-analyses of local food premiums identified that origin-identified labels such as ‘local’ or ‘regional’ command a premium between 27 and 30% (Printezis, Grebitus, and Hirsch, Reference Printezis, Grebitus and Hirsch2019; Li and Kallas, Reference Li and Kallas2021). Fewer studies address value-added local food products, but those that do generally find that premiums vary more widely than for fresh products. Hu et al. (Reference Hu, Woods and Bastin2009) estimate premiums for five value-added blueberry products with consumers in Kentucky. They find that premiums for the ‘Kentucky grown’ label vary significantly depending on the product. Pure blueberry jam, for example, has no statistically significant premium, blueberry raisinettes have an 18% premium and blueberry fruit rollups have a premium of 200%. Rihn and Yue (Reference Rihn and Yue2016) found that ‘Minnesota grown’ labeled apple juice commanded a premium of between 4 and 18%, depending on the experimental method used to elicit premiums. We note that many of these studies are conducted with representative samples of general populations. Local markets can vary greatly, and farmers at farm stands are generally able to accurately price products to meet their customer base. We offer the range of 27–30% as a guideline for premiums, but encourage potential market entrants to consider their own market conditions.