Tuesday, December 20, 2011

Farm pricing - what's fair for a pig in 2011?

I was watching one of those reality shows; the one I was watching was a fellow who goes into failing restaurants, looks at their operations and rehabs them for $10,000.

He's a pretty rude fellow overall, but it maintains my interest because honesty is interesting.   The places he's working with are typically a few months from bankruptcy, and given the glide path will probably go out of business anyways, so they at least have a better shot.  (At the end they'll do a little followup on what happened to the particular place, about half fail anyways)

So he's needling a woman about her handling of the restaurant, and ends up asking her a question that I thought was interesting. 

"How do you price your food?" he asks.  She replies she doesn't really know.  "Well, with most places they take the cost of the food, and then triple it, and that's the cost of the finished dish.   So in the case of these crab cakes, your food cost is $6.80.  So a retail price for that dish is $20.40".  Oh, ok, she says.  "but you are charging them $18 for that dish, so you're losing $2 per dish.  How long can you do that?"

As I watched this unfold, I realized it had a strong echo in how I see a lot of the small farms around here price.  They sell their production at a price that I cannot understand. 

  So here's a little writeup on pork costs, using the ratio they described. 

Feed is $440 a ton right now -- darned high.  It takes 800lbs or so of feed to bring a pig from wean to market weight.  That's $176.  The weaner pig itself sells for about $80 around here.  Adding the two together ($176+$80), you get $256. 

Then multiple by three gives you $768.   If we were a restaurant, we'd need to charge $768 for the pig, and we'd expect the customer to pay 10 to 15% more than that to the guy who handled the order- their tip.    Wow.  What Would I have to do to get the customer to tip my farmhands?

Well, you're probably thinking that the restaurant has to pay rent, and has labor costs, and has to buy dishes, and advertise and...  wait a second.  My farm has rent, labor costs, tools and materials. 

Lets see what I'm charging for pigs these days: 

$2.25/lb hanging weight, or roughly $450 for a full-sized pig.  Add to that the kill fee for the farm kill, at $55, and the likely cut and wrap costs (200lbs at $0.65/lb, $130) and you end up with a consumer cost of... $635, and we are STILL under the standard markup for your average restaurant. 

Farming is a business, and like any other, the basic way it works is to sell things for more than it costs you to produce.  Examining your business by the standards in other businesses is good.  And this exercise leaves me feeling like we're undercharging. 

Lest you think that restaurants are particularly high priced;  most items at retail are marked up 50% over their cost to the retailer. 

4 comments:

Melody said...

I have such a great appreciation and understanding where you are coming from after this year. We raised turkeys from poults to Thanksgiving sized and they cost us around $40 each to raise with the cost of feed and the cost of getting the poults. That doesn't include things like time, feeders, etc. So now when I see turkeys priced at $4.00/lb....I completely get it. That's what we would have had to sell ours for to make it worth our while. I can imagine pigs are similar in the cost ratios. Thanks for this post :)

Bill Gauch said...

One issue with this approach to pricing is that it is really a method of using your fixed costs to estimate your labor costs an profits. Ideally, to properly price things you would account for your fixed costs, labor costs (including your own), and a reasonable profit for the farm. The per-unit total of that should be the price. The issue with the triple-cost pricing is that you may have higher or lower feed costs, but your labor is the same.

Bruce King said...

Melody, you're welcome. I'm really interested in people who make a living at farming, or at least support their (sometimes very large hobby) and the key ingredient seems to be to account for all of their costs, including their own labor. Too many people don't, and then price themselves out of business; getting frustrated when they can't make ends meet, or they have to subsidize their farms from their off-farm job. I write this stuff to get people (both farmers and consumers) to think about it, and to give folks a feel for what the business side of a small farm is like.

Bruce King said...

Bill: you're absolutely right that this model doesn't account for higher prices during a particular cycle. My goal here is to give people a reference into another industry to show them what the math looks like there, and from that they can evaluate their own pricing.

For a lot of small farmers, pricing is the hardest part of their operation. I cannot tell you how many small farmers have expressed guilt at pricing a dozen eggs at $5, for instance.

Careful husbandry, individual care, and differnet practices will inevitably cost more than large-scale farm operations that are optimized down to the last fraction of a cent.

So would I base a business plan on this pricing? Probably not -- but I might do a comparison of my pricing to other typical retail markups -- which is what I did here. I just showed people the math that I did internally. That I think most people in many industries do.