Organic Broadcaster

Do a cost assessment to decide if market is right for you

By Jody Padgham, MOSES

It’s a chilly October morning, and you are tired and grumpy because you were up late harvesting the last of the frost perishables, but there you are with a smile pasted on your face for the last of the farmers’ market customers. How did you do at farmers’ market this year? Did you break even, maybe make a little, or even a lot? Was going to this farmers’ market worthwhile?

These questions can’t be answered by adding up how much cash you brought home each Wednesday or Saturday, or by whether you were able to pay your bills over the summer. The true answers involve an assessment of how much it actually costs you to sell at a particular market. Once you know the answer, then you can consider if a market is the best one for your situation, or if you might do better elsewhere.

Cost of Production
To a point, the cost to grow a beet or a rutabaga or raise a lamb or a chicken will be the same no matter how you market it. You have to plant, weed, pick, feed and water the raw “product” no matter how it is sold. Generally costs are consistent through the point that you have to harvest or process the plant or animal. What you have to put in to get your product to this point is considered the “cost of production.” Those costs generally include labor and inputs, overhead, equipment and some supplies.

Cost of production is important in setting prices, which should differ with various markets. A price in each market should be based on the cost of production added to the cost to market, plus a margin of profit. (To learn about figuring costs of production, see Fearless Farm Finances, the 264-page farm finance book published by MOSES. It is available at mosesorganic.net.)

Once your product is ready to harvest and market, your costs may change for differing markets. For example, if you’re selling wholesale, you may be able to use equipment to harvest and clean your beets or carrots. However, a CSA or farmers’ market may require you to put extra time into hand harvesting, washing and stripping damaged leaves so you can present a pretty bunch of greens with your roots. In the same vein, a lamb marketed directly to consumers as meat will be grown out longer than one sold live as a feeder, adding additional management and feeding time, not to mention the costs to butcher, cut and package.

Market Types
Anyone selling in more than one market type, or considering new types of marketing, will benefit from an assessment of the cost of each market. While market opportunity for diversified farmers is ever-expanding, the most common markets are:

• Direct sales to customers through farmers’ market or farm stand

• Direct sales to customers through subscription Community Supported Agriculture (CSA)

• Direct sales through home delivery, online, etc.

• Sales to restaurants or stores

• Sales to institutions, such as hospitals or nursing homes

• Sales to wholesales, co-ops or other third-party marketers, processors, etc.

Begin by determining your market alternatives, and at what point in production the costs vary for each market. In comparing one market to another, you will only look at how things change after the cost of production.

Sample Market Assessment: Carrots
Let’s say that you currently sell bunched carrots and other vegetables at a Saturday farmers’ market in Carrottown from 7 to noon, and at a Wednesday market in Beetville from 2-6 p.m., but want to look at selling bulk carrots to a nursing home in Cabbageburg. You go to 20 weekly markets at each location, and could deliver to the nursing home once a month for 4 months.

You’ve been going to the farmers’ markets for two years, and estimate that carrots are about 15 percent of your total sales. This summer you sold 400 bunches of carrots at Carrottown, and 200 bunches at Beetville, for $2.50 per bunch. Each bunch has a pound of carrots. You talked to the cook at the nursing home, and they’d like to buy 600 pounds of carrots this winter and are willing to pay you $0.80 per pound. Unfortunately, for now that’s all they’ll buy from you.

Since you want to compare selling carrots bunched with greens and boxed wholesale, which will be harvested and packed differently, you will consider the common costs of production through the time of harvest. At harvest, different labor is needed to process carrots for bunching vs. bulk pack. But, since you don’t have a mechanical harvester, the difference starts in the packing shed because all carrots will be dug by hand.

The Carrottown market is 30 miles from the farm. You leave for the Saturday market at 5:30 a.m. and come home at 2 p.m. It is busy, though, so two of you need to be there. Beetville is 45 miles away, but the Wednesday market doesn’t start until 2 p.m., giving you time to harvest in the morning and leave the farm at noon. One person can do that market, and is home by 8 p.m. The Cabbageburg nursing home is 30 minutes in the other direction. Each sales call will take 1.5 hours for one person.

sample market assessment

Looking at the results of the analysis above, we can see that if we want to continue selling bunch carrots at Beetville, we must raise our price. We actually lost $26 selling carrots at $2.50 per bunch there this year. While it is a lot less work to sell at the nursing home, our net profit per unit is lower due to the much lower selling price. If we could sell the nursing home more items or more carrots each time we go, we could split the delivery costs among more items and this would become more profitable. If we could convince the chef that our carrots were really worth $0.90 per pound, we’d make $0.14 per pound—a good looking $84 profit above labor for the four deliveries. Obviously Carrottown is the best market here, but it takes us 9 hours to harvest and 340 hours to do the actual selling. That is a lot of time. We have to be sure to have a lot of labor available to make this market work.

There are a few things to note about this exercise. Be sure to pay yourself (and your friends or relatives) for the labor you put in, including management and time at the market. A lot of farmers say that they’ll “pay themselves from the profit.” But, it is better to figure your wage into the selling price, then the net profit (after your time is paid) can be reinvested in the operation or saved.

Of course, the mighty dollar isn’t the only decision factor in selling a particular product in a specific market. You must take into account your labor force, your interests, your time availability and what the competition is doing in order to decide if a particular product or market is right for you. While wholesale may mean lower per piece profit, the sales take a lot less time out of your day (or week, or month) and orders are generally done in advance. You can plan your growing and harvesting, and will not be bringing any valuable product home, as is common at a farmers’ market. Wholesale accounts also have the potential to grow with very little additional cost. If the nursing home loves your carrots, there’s a good chance you can talk them into buying potatoes or onions next year, with very low additional marketing costs.

In this example we just looked at one product: carrots. You can use this model to look at your market at any scale—from everything you sell to one or a few items. Just fill in the numbers appropriate to the sector of your production that you want to assess. A market cost assessment such as this can be very useful in helping you gauge the potential success of a future market or the value of a market you are currently using.

Jody Padgham is the financial director for MOSES and editor of the book Fearless Farm Finances.

From the November | December 2015 Issue

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