Meat Pricing Easier With Known Costs

5/3/2014 7:00 AM
By Philip Gruber Staff Writer

EXTON, Pa. — Pricing a meat animal can be as straightforward as taking it to an auction, but for small-scale farmers selling to the local-food market, pricing strategy is not so simple.

Farmers want a premium for selling to specialty markets, and costs are generally higher because small herds do not benefit from economies of scale.

“If there’s a lag in the local food movement, it’s in the proteins,” said Brian Moyer, a Penn State Extension program assistant.

Moyer and marketing specialists from other universities spoke April 22 at the Chester County Economic Development Council’s office about strategies and tools for setting meat prices.

The first step is to calculate the cost of production, said Joyce Meader, a livestock educator from the University of Connecticut Extension.

Meader focuses on the farm’s fixed costs — the expenses that occur as part of farm ownership — and variable costs, the outlays that are dependent on the scale of production.

Fixed costs include salary for the owner’s work on the farm, debt, repairs to farm capital, taxes and insurance. Variable costs include feed, utilities, vet services and the number of animals in the herd, she said.

“A lot of times, people are amazed at how variable the variable costs are from farm to farm,” Meader said.

New farmers tend to have much higher variable costs because they are trying to get their operation into working order, Meader said.

Farmers can become more efficient by increasing their yield or price, or by cutting costs, she said.

Increasing the number of animals creates more opportunities to make a profit, but if the additional animals require extra pasture and a new barn, they are adding to the fixed costs too, she said.

Analyzing the cost of each stage of production can help a farmer identify which part of the process to participate in.

A farmer can own an animal all the way from breeding to the retail meat cuts, but it might be more profitable to part with the animal earlier in the process, or buy it after a certain point, she said.

Meader said she encourages her farmers to figure out how many customers they will need to sustain their business, find the percentage of people likely to buy local in that area, and then determine the number of towns where the farm needs to market.

If a farmer knows the price of a type of pasture for a year — for example, $300 an acre for orchardgrass — that number can be broken down on a per-month or per-day basis, she said.

That is the cost no matter what species of animal is using the land. “I gave them the option that it’s going to be there if they want to eat it,” Meader said.

While these calculations can get baroque — the attendees debated whether the value of manure deposited on pasture should be subtracted from fertilization costs — Meader said the level of detail is up to the user.

“Do as much as you can deal with,” she said.

It helps to think of each stage of the operation as buying the product from the previous stage, she said. For example, the cow-calf operation sells to the feeder operation, even if they are both on the same farm.

If the freezer trade price goes up, the retail cut price should also go up because it buys the meat out of the freezer pool, she said.

Farmers need to remember that the cut-and-wrapped weight of the animal is significantly less than the live weight or even the hanging weight, Penn State’s Moyer said.

A pig’s hanging weight is generally about 70 percent of its live weight, while a dressed sheep weighs 50 percent or less than it did live, he said.

Once the farmer has an idea of the production costs, it is time to think about marketing.

The farm should use consistent lettering and a logo, “something that steps up the game a little bit” above a hand-written sign to show the quality of the product, Moyer said.

Showing live animals in the marketing materials is a bad idea, especially for lamb producers. Consumers do not want to think about eating a cute baby animal, Moyer said.

Pictures of the cooked meat or a lush but empty pasture make better visuals, Moyer said.

Farmers also need to think about the values that drive their customers to buy from them.

About 13 percent of consumers are core supporters of local food and related movements. “They go out of their way to recycle, buy local,” he said.

About 21 percent of people are on the periphery —they might recycle if they happen to pass a recycling bin — but most people are somewhere in the middle, Moyer said.

Core customers value transparency, localness, authenticity and service to the greater good, he said.

In-between customers favor experience and expertise. “I think of them as more of the on-farm customers in the fall,” who take their children to the pumpkin patch for an adventure, Moyer said.

The peripheral customers’ emphasis on price and convenience is more of a supermarket shopper’s mindset, he said.

If a farmer’s goal is to have the cheapest product, a farmers market is probably not the right place to market. Customers are not going there for bottom-dollar prices, Moyer said.

Identifying the best marketing channels requires good record keeping, but Matt LeRoux, an agricultural marketing specialist with Cornell Cooperative Extension, said he knows it is unrealistic to expect farmers to track a lot of data, especially over a long period of time.

As a result, LeRoux has been refining a marketing channel analysis that uses the labor required to market during a snapshot period.

For produce growers, for whom LeRoux originally developed the process, the snapshot could be a week in August. For livestock producers, it might be one typical animal, he said.

Farmers need to look at the costs associated with each marketing outlet, such as farmers market fees; the volume of sales the channel can bear; the risk involved; and — “this turns out to be the trump card,” LeRoux said — lifestyle preference.

One farmer LeRoux worked with said he knew that distributors were his most profitable buyers, but dealing with them was too stressful and made him too angry, LeRoux said.

All of the farms who have used LeRoux’s analysis have chosen to reduce labor. “The pressure point is on time,” he said.

Livestock producers also need to consider what mix of marketing channels will sell all the parts of the carcass. Continually buying freezers for unsold meat is not a sustainable option, he said.

LeRoux mentioned a farmer who sold his high-end cuts at a farmers market in an affluent suburb of Boston, while his chuck and ground beef got an enthusiastic reception in a farmers market in a blue-collar neighborhood.

Farmers can certainly abandon an unprofitable channel, but they can also raise prices or reduce the number of cuts offered at that market as a way to increase profits, he said.

Out of all of the marketing channels available to small-scale meat producers, “I thought freezer trade was the sweet spot,” LeRoux said.

It offers good prices the farmer sets, and it does not take a lot of time once the farmer connects with the buyer, he said.

All three presenters use spreadsheets for calculating costs or pricing. LeRoux’s spreadsheet allows farmers to tinker with the prices of individual cuts to find out what price combination will be profitable.

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