 The Farm to Food Opportunity Online series was funded by a grant from the USDA Agricultural Marketing Service. This module is about forecasting. Please share your feedback using the link to the evaluation found in the video description below. Today's topic is regional food hub forecasting. We're going to discuss how forecasting can assist with management decisions within a food hub. Forecasting can also help someone better understand the risks involved in starting a food hub. Understanding the risks and the reasons for forecasting can assist in better planning for a food hub. Also, we are going to learn why professional services are needed for complete forecasting. Because food hubs can take on many different roles within the food system, it is important to strategically think about how a new food hub will operate during the startup phase and for the first few years. There are many questions to be answered and a systematic approach can help all parties involved in the new venture to better understand what the future food hub daily, monthly and yearly operations may look like. Let's begin with a general definition of forecasting. Forecasting is a decision making tool used by many businesses to help in budgeting, planning and estimating future growth. In the simplest terms, forecasting is the attempt to predict future outcomes based on past events and management insight. If forecasting is beneficial for businesses already in existence, it can be even more beneficial for new business ventures being started. The process of forecasting has several benefits that potential investors can appreciate. For example, forecasting is an attempt to reduce uncertainty about a new business venture that is rare in Alabama. It helps investors envision what it might look like someday. Forecasting may reduce farmer owner stresses of a new venture by determining a best-case, worst-case and most likely case scenario as well as other what-if models. Rather than making hopeful speculations or simple best guesses of the future, a disciplined and fact-based forecast will require documenting all assumptions made in the different models. This disciplined approach to forecasting may also significantly reduce errors and emissions, as well as allow all parties involved in the forecast to see and understand the facts and estimates used in the forecast. As we mentioned earlier, forecasting is used in efforts to reduce risk in a new venture, helping those involved fully understand the risk associated with a food hub. Forecasting can help them understand the initial costs and risks and see what risks lie ahead so they can better plan for them. Here are a few of the risks to consider. There are capital risks. Will we have enough money for startup operations as well as in the future? There are cash flow risks. Will the money be there when we need it? There are management risks. Do we have the right person or persons to manage food hub suppliers, employees, and vendors on a day-to-day basis? There are legal liability risks. Do we as potential managers and owners of a regional food hub understand the range of potential legal liability risks that we face in this new business? Lastly, there are regulatory risks. Do we understand the range of standards and rules that we have to follow in running our food hub? Here are a few more examples of questions to ask yourself when considering risk in a food hub. Can we successfully compete with other already established food distribution companies? If prices fall 5% next week, how will that affect operations? What can we do to ensure we can fill all of our orders from our customers? Can we manage perishable foodstuffs well? What can go wrong and how do we prepare for the unexpected? Forecasts are often done as an estimated profit and loss statement. Take a look at this example. In this example, Line 1 shows the projected revenue. This is the expected unit sales times the expected price. It can be calculated for one food item such as lettuce or many different types of produce. For this example, we sold 100 heads of lettuce, multiplied by $5 each to get $500. Line 2, what is our cost of production for each crop? These costs are calculated for each item the food hub will be selling. Ask yourself how much did it cost to grow the lettuce, seed, fertilizer, labor, etc. Look at Line 3. What are other food hub expenses? These numbers have to be calculated for a simple forecast model. This is where you will look at overhead, administration and other costs involved in running a food hub. You will subtract those two cost estimations from the projected revenue and get a projected profit for the crop. Look at Line 4. What is our projected profit or loss for this forecast model? Once we understand the basic concepts of the forecast, we can begin to grasp the design and more complex calculations for map sense forecasts. In the next several slides, we will be transitioning from a general discussion of forecasting to specifically discussing forecasting for an Alabama-based regional food hub network. Alabama Cooperative Extension System has commissioned a report for potential food hub producers, investors and partners for a possible food hub network in our state. This report is entitled, A Financial Model and Scenario Analysis for a Regional Food Hub Network. The Alabama Cooperative Extension System and Auburn University asked Matts and Consultants, LLC, to develop a report with a financial model and scenario analysis for a regional food hub in Alabama. Matts and Consultant has written numerous USDA position papers and analysis for food hubs in other areas of the country. Alabama Extension Administration believes that Matts' expertise in food hubs can also be useful in understanding the challenges of food hubs here in Alabama. Please contact Ruth Brock for access to the report. Her email address is rlw0031 at aces.edu. Matts' report is a comprehensive look at the first three years of operation for an Alabama food hub. It contains 55 pages of financial models and their underlying assumptions with extensive checklist and topics to consider during startup and initial operations of a food hub. This report was developed using estimations based on similar operations and research for regional food hubs in other parts of the United States. The conclusion of Matts' financial model is good news for Alabama. It shows that a regional food hub is feasible with a delivery area of approximately 100 miles. One of Matts' basic assumptions is that a regional food hub would serve multiple counties. To illustrate what a 100-mile radius delivery area would look like, here's an Alabama map with a circle in northern Alabama. This circle illustrates the multiple counties and cities that would be served with a Coleman-based regional food hub. Now that you have seen a very simple forecast model, now we turn to this baseline, pro-forma operating statement from Matts' report. The word pro-forma means that every number on this report is estimated or calculated based on assumptions. If you look at the revenue line, Matts' assumes that food hub sales can grow from 12,000 during the startup phase to over $3 million in annual sales in the third year of operation. As a potential investor in an Alabama food hub, you would want to have a clear understanding of how sales could grow that much in three years. An investor might ask, how many producers working together would it take to reach that level of sales? What type and amount of produce would have to be grown each year? And what is the unit price for produce to reach the dollar sale estimates? Once a potential investor is satisfied with the sales estimates, then they may ask exactly what our total variable operating cost and how were these dollar amounts calculated for the three-year period? How were the equipment, facilities, marketing, and administrative costs calculated for the three-year period? And what was considered an unforeseen and contingency expense? What assumptions were made to determine those three-year expenses? Much thought and expertise goes into developing a report as complex as the Matts' report. Readers may find themselves wanting to understand more about how it was developed and how it might apply to their local counties. Like the Matts' report, forecasting for a specific proposed Alabama regional food hub will likely require outside professional services to complete. It will require a team of people working together to contribute their different areas of expertise to complete different types of financial production and sales models to satisfy potential investor questions. This team of professionals will require people with expertise in making the following types of estimates or forecasts. Local estimates, production and pricing estimates, produce distribution estimates, facility and transportation need estimates, legal and regulatory cost estimates, contingency estimates, and marketing estimates. You can reach out to consulting firms, attorneys, and professionals within the food hub and produce industry. In summary, forecasting is a tool used in business planning that helps reduce risk. Also, the Matts' report shows that a food hub system is feasible in Alabama. Additional information about feasibility can be found in the report done by Matts' in consulting. This concludes this presentation on regional food hub forecasting. On behalf of the Alabama Cooperative Extension System and Auburn University, thank you for watching. We hope that you found this video helpful. Also please follow the link in the video description below to complete the evaluation.