Planning for Profit……

Starts with keeping and understanding your records… Craig Chase, Field Specialist Farm & Ag Business Management

Plan for Today

• • Discuss pricing, margins, and whatever else you want to (this is your program).

Be informal – ask questions when you have them.

• Summarize and answer any follow-up questions.

Initial Questions to Think About

• You want to grow tomatoes and notice the local grocery store has California tomatoes for $1.50 per lb., at what price should you sell your tomatoes?

•

Remember that this same process can be used for any product from whole chickens to gallons of milk.

Initial Questions to Think About

• You ask potential consumers what they would be willing to pay and they say 10 – 20% above grocery store prices, at what price should you sell your tomatoes?

Initial Questions to Think About

• If you produce 750 lbs of tomatoes in a 4x100 ft bed were you profitable? (why or why not?) • If your highest price for selling tomatoes was $2.50 per lb last year were you profitable? (why or why not?)

Initial Questions to Think About

• Pricing must take into consideration 3 things: – Competition – who is your competition?

– Customer – who is your customer and what are they willing to pay?

– Cost – what are your costs and how do your costs relate to your price?

• Although all three are important, if your price isn’t higher than your costs, how long will you be able to stay in business?

Initial Questions to Think About

• So what is the key to achieving profitability and running a successful business?

• My view: understanding profit margins and pricing accordingly.

Profit Margins

• So what are profit margins?

• Profit margins are the difference between what you sell a product for and what the total cost of the product was to

produce

and

market

that product.

Profit Margin

• • So if you sell your tomatoes for $1.50 per lb. and you don’t have any idea what they cost to produce and market, how did you come out?

• How many tomatoes do you want to sell?

To answer that, you need to figure out your costs…you need to start with an enterprise budget.

What is an Enterprise Budget?

• • • Estimate of costs and returns to produce a product. For producers who grow a large number of different products.

– Develop budgets for those products that contribute the most to business goals.

The process is the same for all scale of farming operations.

Enterprise Budget

• Or start with an enterprise budget for each major part of your business.

– Example, CSA with poultry/livestock. Complete a CSA and livestock budget.

– CSA with multiple seasons and use of high tunnels/greenhouses. Complete an enterprise budget for each season (spring, summer, fall) or production system (open ground, high tunnel, greenhouse).

Simplified Enterprise Budget

Salad Greens (4x100 ft bed) Revenue: 30 lbs @ $5.00/lb $150.00

Crop inputs: (Seed, fertilizer, etc.) Labor Supplies Ownership (machinery, land, irrigation) Total cost 7.00

28.00

1.00

11.00

$ 47.00

Return over total cost $103.00

Simplified Enterprise Budget

Green Beans (4x100 ft bed) Revenue: 120 lbs @ $3.00/lb $360.00

Crop inputs: (Seed, fertilizer, etc.) Labor Supplies Ownership (machinery, land, irrigation) Total cost 23.00

182.00

4.00

11.00

$ 220.00

Return over total cost $140.00

Types of Decisions

• • Now that you developed an enterprise budget, what do you do with it? You can use it for pricing, but you can also use it to make changes to your: – Production practices – Product mix

Changing Production Practices

• Use the budgets to calculate break even prices and yields.

– For example, cost per lb. of beans sold was $1.83 ($220/120 lbs).

– Compare this number to other producers or published budgets to determine where costs are different and why (benchmarking).

– NOTE: add marketing costs to your cost of production.

Changing Production Practices

• A second reason – track key costs .

– Green bean example, $182 (or 83%) of the total production cost is labor. Most of the labor is weeding and harvesting.

– Question - can labor be lowered without reducing yields (i.e., can labor be more efficient)?

– Crop inputs is a small percentage (10%) of total production costs, a 10% reduction in costs won’t affect total production costs significantly. Don’t spend time on small items…

Product Mix

• Enterprise budgets allow for a comparison of profitability and labor usage among the various crops grown.

• For example, green bean returns over total costs was $140. Labor usage was 18.25 hrs. Returns over total cost per hour was $7.69.

Product Mix

Asparagus Basil Carrots Cherry Tomatoes Eggplant Specialty Green Beans Garlic Greens Heirloom Tomatoes Potatoes Red Raspberries Snow Peas Strawberries Returns over Total Costs $ 35.47

$ 164.19

$ 54.02

$ 181.11

$ 85.02

$ 140.27

$ 43.89

$ 102.90

$ 547.21

$ 61.65

$ 131.50

$ 58.45

$ 55.46

Hours of Labor 2.95

6.90

5.35

11.20

6.45

18.25

7.15

2.80

11.20

5.10

6.15

7.65

1.55

Returns over Total/Hr $ 12.02

$ 23.80

$ 10.10

$ 16.17

$ 13.18

$ 7.69

$ 6.13

$ 36.75

$ 48.86

$ 12.09

$ 21.38

$ 7.64

$ 35.78

Comparing Budgets

• • A quick comparison of the crops in the previous slide indicates annual returns over total costs ranged from $35.47 to $547.21.

• Labor usage ranged from 1.55 to 18.25 hours.

Returns over total costs per hour ranged from $6.13 - $48.86.

Product Mix Summary

• • • Labor should be considered a scarce resource - limited number of hours for any farming operation.

Analyze not only returns over total costs, but also returns over total costs per hour.

Some products with lower returns over total costs may have higher returns over total costs per hour because of low labor requirements.

Product Mix Summary

• Exercise #1 – Read through and answer the questions – take about 5 minutes

Back to Profit Margins

• So if you sell tomatoes for $1.50 per lb. that cost you $0.38 per lb. to produce, what was your production margin?

• • $1.12 per lb.

How many tomatoes do you want to grow and sell at that margin?

• Are you forgetting anything (hint: any costs missing)?

Marketing Costs

• Marketing costs are those costs associated with the marketing and delivery of the product from the farm to the customer.

• Marketing costs include post-harvest handling, packaging, and storage, as well as the time to sell, invoice, and deliver the product.

Example: Farmers Market Costs

• What are they?

– Labor – Transportation/vehicle – Supplies – Others?

Example

• • • • • Two markets per week for 20 weeks.

Labor – 2 people, 6 hrs per market per person, $12 per hour.

Vehicle – 80 mile roundtrip @ $.50/mile.

Supplies and misc - $20 per week.

800 lbs of tomatoes taken to market; 95% sold (760 lbs).

Example

• Exercise #2 – Read through and answer the questions – take about 5 minutes

Example

Vehicle expenses @ $.50/mi, 3,200 miles Labor - 2 people @ 12hr/wk, 20wks, @$12/hr Supplies (bags, other supplies, misc.) @ $20/wk Total marketing costs for the season Total marketing costs allocated to tomatoes (percent of total sales) – 15% Total marketing costs/lb sold (760 lbs sold) $1,600 $5,760 $ 400 $7,760 $1,164 $1.53

Total Cost

Production cost per pound Marketing cost per pound Total cost per pound $ 0.38

$ 1.53

$ 1.91

Back to Margins

• • • So what was the price of the tomatoes?

What margin would I get? What should I do?

• NOTE: This procedure should be repeated for each marketing outlet used.

Back to Profit Margins

• • • So if you sell your tomatoes for $1.50 per lb. and they cost you $1.91 per lb. to produce and market, what was your profit margin?

-$0.41 per lb.

How many tomatoes do you want to grow and sell at that margin?

Back to Profit Margins

• Can you change your production practices?

– Is it possible to lower costs of production without affecting yields or increase yields without increasing costs?

• Can you change your product mix?

– Is it possible to focus on higher margin products ?

• Can you change your marketing outlets?

– Is it possible to find a higher margin outlet?

• Can you raise your price? Are you courting the right customer?

Pricing

• Number #1 question…what price should I sell my products at?

• • For an individual product, what does it cost me to produce and market that product?

If tomatoes cost me $1.91 per lb. to produce and market, what should my price be?

Pricing

• What are your consumers willing to pay and what is your competition allowing?

• How much above your breakeven cost are these prices? • What is your net farm income ratio goal (10yr Iowa average for all kinds of farms was 20-25%)?

Pricing

• So if you want to net 20% of your gross income and your break-even cost is $1.90 per lb., your sales price would be $2.38 per lb (2.38-1.90=0.48; 20% of $2.38).

• Will your consumers and competition allow this price (maybe higher)? The goal is for the farm, not one product.

Pricing

• • Same process regardless of what you are producing… Example – CSA share cost you $240 per share to produce and market, price it at $300.

• Chickens cost you $2 per lb to produce and market, price at $2.50 per lb.

Pricing

• Exercise #3 – Read through and answer the questions – take about 5 minutes

Summary

• • Although pricing needs to take into consideration competition and customers’ willingness to pay… Profit margin can be consistently obtained only if production and marketing costs are known.

Summary

• In addition to pricing, budgets can help in evaluating production practices, product mix, and evaluate marketing outlets.

Questions…..

Any questions or comments?

Thank You for This Opportunity!

Craig A. Chase

Leopold Center for Sustainable Agriculture

Marketing and Food System Initiative Program Leader

Iowa State University Extension and Outreach

Local Food and Farm Program Coordinator Local Food Systems and Alternative Enterprise Analysis 209B Curtiss Hall Ames, IA 50014 (515) 294-1854 [email protected]