Am I making a profit? Using calculators to develop profitable prices for farm-raised meats

Final Report for ONE14-216

Project Type: Partnership
Funds awarded in 2014: $13,452.00
Projected End Date: 12/31/2015
Region: Northeast
State: Maryland
Project Leader:
Ginger Myers
University of Maryland Extension
Expand All

Project Information

Summary:

The “Am I Making a Profit? – Utilizing Calculators to Develop Profitable Prices for Farm-Raised Meats” project worked with five progressive Maryland livestock producers who direct market the majority of their meats. Matt LeRoux, Cornell Extension, has developed a calculator that calculates both total carcass costs and differentiated pricing of cuts based on a projected profit margin. It handles beef, pork, lamb, and goat calculations
These producers conducted on-farm testing of Matt LeRoux’s current calculator for ease of use, processing costs, pricing recommendations, and then made recommendations for any refinement to the tool. The pricing calculator does not include apportioning labor, mileage, or storage costs for the product. Therefore, the next step involved utilizing the per cut data collected with the pricing calculator combined with a combination of production, marketing and overhead costs evaluate their most profitable market outlets. Project participants were then involved in outreach efforts to educate of the farm-raised meat producers in the tool’s application and a more detailed pricing and marketing strategies.
While each participating farm has been direct marketing their meats for several years, they discovered they still didn’t have much depth of knowledge about carcass yields and varietal cuts. They weren’t really calculating prices based on the total pound of meat that returned to their farm but were only looking at the hanging weight. There is a considerable gap between the pounds returned to the farm and the hanging weight and none of the farmers really could document how many pound of meat per animal they were selling. Also, most only requested the cuts that were listed on their processors cut sheet without consideration for newer cuts or value-added products. These producers also struggled with the concept of profit margins to consider different pricing scenarios based on changing their margin mark-ups.

As a result of their participation in the project, participants felt that the most important things they learned were:
1. Be sure to include all costs for raising and marketing in the price of their cuts.
2. How to value the live animal and how important it is to include all the associated costs into the value of the live animal so you can find the baseline for your price per cut.
3. Raising prices did not change the volume of their sales.
4. How to increased profitability through more accurate knowledge of total costs and setting a better profit margin based on that baseline price.

Introduction:

There’s a movement underway in Maryland and elsewhere, focusing on something we all share — the basic need for food just about every day of our lives. This movement urges us as consumers to demand more locally produced foods in our grocery stores and restaurants. While the initial “Buy Local” surge began with the fruit and vegetable markets, the demand for farm-raised meats and poultry are also growing. When they first started, most CSAs were just doing produce.

 But in recent years, farmers are now doing CSAs that include meat, dairy and eggs. Some farms and ranches are even doing CSAs that are exclusively animal-based foods. Much of the lag time in bringing locally-raised meats from farm-to-table was due to regulatory changes needed to make direct sales of meats and poultry to consumers possible.

While the market for locally-raised meats and poultry has greatly expanded, livestock producers must deal with three different equations to determine if they are indeed making money from their meat sales-

  • production and processing costs
  • carcass yields
  • pricing structure for differentiate cuts

 Producers need to collect costs and then have the tools to first determine whole animal profitability and then pricing with mark-up levels for per cut prices. These pricing margins help them handle the extra risks involved in direct sales first by determining profitable pricing that includes the production and processing costs and then matching pricing to cuts.

 Several on-line calculators exist for converting an animal into a carcass and then making cuts out of the carcass (yield in pounds).   There are different calculator tools for different species. However, these vary in their ease of use. And, although they provide a spreadsheet of the total product availability, most still do not address the how to differentiate pricing of those cuts, for example ground beef vs. filet mignon, or a way to view various mark-up scenarios.

However, Matt LeRoux, Cornell Extension, has developed a calculator that both total carcass costs and differentiated pricing of cuts based on a projected profit margin. It handles beef, pork, lamb, and goat calculations. Matt has given his permission for this project to utilize his calculator, collect more data to share using this particular tool, and also evaluate the tool for refinements and/or changes.

This project collected specific numbers based on regional production and processing cost and consumer price ranges. This process saved farmers from pricing products too low. This information can also be used by producers who may be considering shipping product via Internet sales through on-line marketing groups such as Homegrown Cow or LocalHarvest.

The Cooperating Farmers

  • Nora Crist, Clark’s Farm, 10500 Clarksville Pike, Ellicott City, MD 21042
    clarksbeef@gmail.com
    410-730-4049

 

Clark’s Farm is part of the farming operation of the Clark family, which is proud to be entering it’s 214th year of farming in Howard County. The main link between the seven generations of farmers in our branch of the Clark family has been raising beef cattle. The sixth and seventh generation, Martha Clark and Nora Crist, are pleased to be providing for the first time to their retail market, 100% grass fed beef. They raise Berkshire hogs and sell all their pork through their retail store. Nora also operates the family’s popular produce stand, growing many varieties of organic vegetables and flowers.

  • Robin Way, Rumbleway Farm, 592 McCauley Road, Conowingo, MD 21918
    rumbleway@hotmail.com
    410-658-9731

    Rumbleway Farm is a 62-acre organic grass based farm located in Cecil County, Maryland. They raise chickens, turkeys, cows and pigs on pasture and rabbits in house. In 2000, they built an onsite processing area and applied for and received the right to process their birds under USDA inspection. They choose this avenue for processing because of their proximity to Delaware and Pennsylvania and the opportunity for sales across state lines. In 2001 they added a certified kitchen to provide added value from their products. They utilize their commercial kitchen to host Dinner at the Farm and cooking classes from Dec through April. The farm sells custom processed beef and pork as well as freezer cuts direct to customers. The Ways received a NESARE grant to produce a video about their diversified livestock farm.

 

  • Cindy Thorne, Zekiah Farms, 5235 Bryantown Road, Waldorf, MD 20601
    info@zekiahfarms.com
    240-216-4065

    Zekiah Farms practice sustainable agriculture, produce naturally raised meats, and offer alternative agriculture enterprises that include on-farm learning experiences. Naturally raised beef, pork, lamb, and goat are available year round. Poultry is available seasonally. Local vegetables, fruit and honey. They also offer educational and agritourism events to local schools and clubs.

  • Deana Tice, Enticement Farm, 231 Polling House Road, Harwood, MD 20776
    enticemnetstables@msn.com
    443-336-8492

    A family owned and operated farm, this farm feeds many families and supplies a few restaurants in the Southern Anne Arundel County area. Pasture-raised (beef) that is grain/corn-finished. Antibiotics used only when medically necessary, no growth implants or hormones. The family also operates two nationally recognized performance horse operations.

  • (This farm decided to leave six months into the project due to time constraints. Their data is included in the initial surveys but no processing data worksheets were collected.) David and Lori Hill, Cabin Creek Heritage Farm, 18235 Clagett Landing Road, Upper Marlboro, MD 20774
    doug@cabincreekheritagefarm.com
    301-430-0170

    A first generation family owned & operated farm, established in 2000 in Upper Marlboro, MD. They are a local, pasture-based farm. Animals are never given steroids, antibiotics or hormones. They describe themselves as an old-fashioned sustainable farm that uses modern technologies coupled with historically proven practices such as rotational grazing, to produce the highest quality products.

 

Project Objectives:

The primary goals of this project were to:

  1. Working with cooperating farmers, conduct on-farm testing of LeRoux’s current calculator for ease of use, collecting regional production, processing costs, and pricing recommendations, and then make possible recommendations for any refinement to the tool.
  2. Develop a case study with real-time costs numbers from livestock producers who direct market their products as cuts. This case study will provide a resource for other direct marketing, farm-raised meat producers seeking tools to help develop their product prices. The document, the calculator, and instructions for its use will be posted on the   University of Maryland Extension’s Ag Marketing website, extension.umd.edu/agmarketing.
  3. Utilizing the data collected with the production and pricing tool, have cooperating farmers plug their results into the Marketing Channels Assessment Tool to evaluate their most profitable market outlets.
  4. Promote the use of cost and pricing calculators to help farm-raised meat producers set profitable prices and manage marketing risks.

Project Methods:

  1. Hold a training session with participating farmers to explain the use of the calculating tool and marketing strategies assessment tool. Hold this training where everyone can have a computer to practice with the tool before using it on their own farm. Each cooperating farmer will also complete an individual assessment of their current pricing and marketing structure and philosophies.
  2. Project leader makes monthly contact with each cooperating farmer to collect data sheets and collate results. Farmer collecting data will see ‘real’ numbers and variation in weights and carcass yield they may not have been aware of without having to account for every cut from each animal.
  3. Project leader will make at least one on-farm visit to each cooperating farmers to answer project questions and evaluate use of calculator tools.
  4. Phone interview later in project with cooperating farmers to determine changes in knowledge about pricing based on their involvement in the project.
  5. Write a case study about this project that focuses on (a) using the tools (b) factors that affect pricing farm-raised meats, and (3) using pricing information when evaluating possible marketing strategies.
  6. Document pricing variables and farmer utilization of pricing changes as a result of project participation in a new Extension Fact Sheet.
  7. Cooperating farmers and Project Leader will give presentations about the project, their involvement, and how they are using the results at two well attended farmer conferences- UMES Small Farmers conference and Future Harvest –CASA annual Meeting. (Due to scheduling problems only the Project Leader presented about the project at the UMES
    Small Farms Conference. However, Crist, Way, and the Project Leader presented info about the project and its outcomes at the Future Harvest-CASA Conference in the Beginning Farmer Track.
  8. Distribute project results on-line, through newsletters, field day events and post calculator tools on the Ag Marketing website of University of Maryland Extension.
  9. Poster presentation at Women in Ag conference and National Small Farms Conference. ( Due to travel restrictions from the University of Maryland, The Project Leader shared information about the project at the Mid-Atlantic Women in Ag Conference in Dover DE but could not secure travel funds to attend the national conferences.

 The work in this project was very participatory between the project farmers and Extension. They developed a greater sense of ownership of the project and commitment to its success, as they viewed the data collection and evaluation of their own pricing structures as critical to the project’s design and success.

Cooperators

Click linked name(s) to expand

Research

Materials and methods:

All participants attended a training session on how to use the Excel calculator tool. They were encouraged to use it for at least four animals and submit the finished sheets to the PI. The PI visited each participating farm and went over the submitted worksheets with the farmer, fielding questions, and concerns. All the participants had made significant errors in entering data or calculating the hanging carcass weights. They were encouraged to try the tools with four more animals and submit those worksheets.

In November, the participants met to review blind samples of the submitted sheets, identifying errors and making recommendation on how to improve the tool. They also noted gaps in their knowledge of their total marketing and productions costs and having only a cursory understanding of carcass yields, percentages of cuts, and the use of profit margins when setting prices. At this meeting the group also moved forward with how to quantify their true labor and marketing costs and how to incorporate that information in their overall pricing.

Project Time Table – April 1, 2014 -March 31, 2015

April- Project team meets to review project goals and milestones. Training session on how to use the Cost/ Pricing Calculator and how to submit finished calculations sheet with computers available for each cooperating farmer. Introduce marketing Channel analysis tool with option to collect that data too for their own farm. Publicize project.

May- Send farmer cooperators on-line survey to determine their current pricing philosophies and practices. Listing their current marketing channels.

June- September- Monthly emails to cooperating farmers to answer questions, give updates, share support materials. Visit each cooperating farmer. Collect data from farmers about what worked and what didn’t when using the calculators.

October- Collect all final input sheets. Prepare project presentation for Maryland Small Farms conference in November and prepare farmer to present. Send Matt LeRoux feedback from the group about the calculators and marketing analysis tool.

November- Conference presentation- Project Leader attended to present. Publicize project findings. Post results on Extension Ag Marketing website. Send farmer cooperators on-line survey to determine any changes since participating in the project to their pricing philosophies and practices. Noting any changes to marketing channels as a result of their participation.

January- Presentation on project at Future Harvest CASA Annual Meeting. Continue to disseminate information about the project to Ag press, websites, and newsletter.  

February- Poster presentation at Women in Ag Conference- Attended Women in AG Conference in Dover, DE but not the National Conference.

April- Write final project report.

Research results and discussion:
Lessons Learned

Pre-Project Launch Farmer Survey Results

 Prior to the launch of the project at a face-to-face meeting of all the project participants, the cooperating farmers were asked to complete a brief survey that examine their current marketing outlets, Pricing methods, and initial attitude toward their current pricing procedure. The same survey was conducted at the end of the project to determine changes in marketing strategies, pricing of their cuts, and any change in their attitude and skill sets in direct marketing and product pricing.

 

The project’s cooperating farmers conducted on-farm testing of LeRoux’s current calculator for ease of use, collecting regional production, processing costs, and pricing recommendations, and then make recommendations for refinement to the tool. These recommendations were forward to LeRoux for his consideration in refining his calculator tool.

While finding the tool to be very useful for increasing their awareness of yield calculations, marketing terms, and really making them consider all their production and marketing factors, they offered the following recommendations for changes to the worksheet tool.

Step One of the Worksheet -is to enter the base price and any premium-

The producers struggled with how to determine the base price in lb. /HCW (hot carcass weight). Should they try to calculate their total costs of production per animal and then calculate the per pound costs on a % carcass yield on a hot weight basis? They did not want to use weekly market reports, but wanted a way to address their own production costs.

They recommended more guidelines on how to determine their base price including whether they breed and raised the animal, purchased seed stock and finished raising the animal, or purchased the animal live and had it slaughtered.

They also requested some guidelines on how to set a premium price.

Step 2 -addresses costs, carcass weight and yields
   

They found this area helpful however, they wanted a way to capture additional processing costs such as smoking, slicing, cost of having patties made, etc. If it isn’t added in this section, where can it be considered? None understood where the percentage yield came from.

        Step 3 -is to review estimated yields for primal cuts

Here’s where a table of yield estimates could be included and the formula for determining their own yields if they have the live weight and the HCW. None of these producers had live weight and their processor only provide HCW.

       Step 4 -is to record that actual pounds received for each cut

Producers needed more slots to list all the variety of cuts they received

       Step 5- Enter the desired mark-up above costs (%)

Producers uncertain as to what is a reasonable mark-up, what are industry standards, and /or what will the market bear. Where looking for more guidance in selecting this percentage.
Adjust pricing to meet goals

       Step 6- Adjust pricing to meet goals

While the producers recognized that the columns in this section were in a certain order to facilitate Excel sheet calculations, they found the order of information confusing and also recommended changing the headings of the columns. The recommended that after the column listing the names of the cuts:

  1. The next column be “Your
    Farm Prices” then
  2. “Actual Total Sales”, then
  3. “Mark-up”, then
  4. “%of Carcass”, then
  5. “Suggested Mark-up Price”, then an additional final column
  6. “Suggested Price per Pound”

Finally, the color of the box for the difference between target mark-up and current pricing should not be pick or any form of red as some producers thought the color of the box indicated they were pricing product at a loss.

Lessons Learned

Before moving forward with a direct marketing farm-raised meats, producers

need to know the answer to a fundamental question: Why do you want to market your meat directly? Many consumers in the Maryland metro areas want to have a closer connection with the production of their food, and this trend has increased sales of niche farm raised meat products. Many producers are motivated by the higher prices they can command and by a desire to produce and market locally raised food. It is important, though, to understand that higher prices do not automatically translate to higher profits.

 

While each participating farm in this project is an excellent producer and has been direct marketing their meats for several years, they discovered they still didn’t have much depth of knowledge about carcass yields and varietal cuts. They weren’t really calculating prices based on the total pound of meat that returned to their farm but were only looking at the hanging weight. There is a considerable gap between the pounds returned to the farm and the hanging weight and none of the farmers really could document how many pound of meat per animal they were selling. Also, most only requested the cuts that were listed on their processors cut sheet without consideration for newer cuts or value-added products. These producers also struggled with the concept of profit margins to consider different pricing scenarios based on changing their margin mark-ups.

 When calculating their per pound cost of production, all the participating farmers only calculated feed and replacement costs. They did not include labor, marketing costs, or mileage for sales. They were using other farmer’s prices or grocery store prices to set their prices regardless of their total costs.

 

Research conclusions:

Results of End of Project Survey

 

An end-of-project survey was conducted with participants. The survey tool included several of the same questions as the project launch survey with the addition of questions concerning increased knowledge about pricing their product, comments on the usefulness of the price calculator tool, and their best “take away” from participating in the project.

 

While there were few changes in the number of animals or species raised, all participants included production and marketing costs not previously considered when establishing their product pricing.

 As a result of their participation in the project, participants felt that the most important things they learned from participation in this project were:

  1. To include all costs for raising and marketing in the price of their cuts.
  2. How to value the live animal and how important it is to include all the associated costs into the value of the live animal so you can find the baseline for your price per cut.
  3. Raising prices did not change the volume of their sales.
  4. Increased profitability through more accurate knowledge of total costs and setting a better profit margin based on that baseline price.

Participation Summary

Education & Outreach Activities and Participation Summary

Participation Summary

Education/outreach description:

Announcements about the project were distributed through the the UME Ag Marketing Newsletter, Lancaster Farming, Del-MAR-VA Farmer, Extension newsletters, at the UME Small Farms Conference and Future Harvest- CASA Annual Conference. I also coordinated using the calculator tool with the Southern Maryland Meats Group and at the first Maryland Small Ruminants Conference. Information about the project, the calculator tool and the case study are published on-line at http://extension.umd.edu/agmarketing/value-added-products/meats-and-poultry .

This coming year I will be teaching several Food for Profit Workshops, at the Appalachia Grows Small Farms Conference, and using the calculator with one-on-one clients consultation for producers selling their farm raised meats through direct marketing outlets.

Project Outcomes

Project outcomes:

Farmer Adoption

The four farms that participated for the entire project, all found the process of looking at their costs and pricing very helpful, but found using the calculator tool somewhat clumsy. They still persevered to us the tool even after they had submitted the number of data sheets required from them. Nora Crist of Clark’s Farm discovered that she had been missing higher value cuts such as rack in her lamb processing and losing money by having too much of the lamb put into ground lamb. Enticement Farm found that their pork processing costs were almost double what they had previously calculated. In group meeting, the participants shared problem solving ideas for working with processors, cuts, inventory plans, and marketing strategies. This was unanticipated sharing that was outside the perimeters of the grant projects goals, but provided “coop-petition” among the participants.

The fifth farm, Cabin Creek Heritage Farm, is the farm that would have benefited most from utilization and adoption of this methodology, however, they were the least responsive during the project period. After repeated, failed attempts to collect data, I visited the farm to discuss some ways for them to continue on with the project.. The visit also revealed that, as was known during the proposal development, the farm was over-committed to production and marketing activities. They cited “busy-ness” as the reason that they repeatedly failed to collect the requested information and withdrew totally from the project.

Assessment of Project Approach and Areas of Further Study:

Areas needing additional study

Producers and food processors need more tools and support materials for calculating per unit profits.  Tools need to have more categories of expenses than most enterprise budgets or excel sheete calculators currently include.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.