Saturday, April 14, 2012

Profitable farming: The sausage scheme

For the most part, my farm and procedures have settled down to a fairly stable routine.  Over the past 6 years I've worked out how to feed the animals, where to feed them, how to treat them, house them and how to sell them. 

Each part of that chain feed->house->care for->sell has  gone through revisions; I'd try something, and work with it a while to see how it went, and then if it works I'd adopt that practice.  if it didn't, I'd go back to what worked before. 

Part of that is the engineer training, where you do a lot of work refining an initial idea.  In software it's called version1, version 2, version 3 and so on. 

I've been working up to a new direction for the farm for the last two years; the area that I'd like to improve is the sale of animals.  I don't really want to produce more animals; I'm about the size that I'd like to be, but I would like to make more money per animal sold -- to increase the amount of money that the farm makes as a net profit. 

Lots of farms choose to keep their profit per animal the same and just increase the number of animals that they produce, and there's a logic in that argument. 

If you increase the number of animals produced, you don't have to do anything different.  The same procedures and technology (and make no mistake, your farm procedures are technology) remain the same, you just have larger numbers.   

That's fine, and in fact, is how our agricultural industry has moved to a confinement style of farming; the basic argument is that you can then minimize the amount of land (one of the more costly things on your farm) used to produce your product.  Less capital, more revenue, better ROI

In my type of farming, expansive, I  provide the animals with much more space and habitat.  So for me to double my output would require, if I were to do the same sorts of things I'm doing now,  that I double the amount of land I'm farming. 

It's a pretty seductive argument, and is easier than what I've been contemplating; let me give you a little more background to what I'm thinking: 

Instead of producing more animals, lets look at what we really want to do:  Make more money.  And in fact, we'd like to so in a way that is as invisible to the customer as we can.  Ideally, we'd like to make more money and have the customer think that the product is either the same cost or even to have the consumer think that it's cheaper than it used to be or cheaper than the alternative food supplies.  If we can convince the customer that it's cheaper and better the chances are good that they'll stick with us for the long haul.  And happy customers are the basis for any business, including farming.  

Kevin Kossowan wrote a blog entry the other day where he talks about upgrading his families food  to much better quality than he could buy at the supermarket, and the the fact that it actually REDUCED his food bill by doing so.  Now that's the reaction that I'd  like my customers to have.  That is the ideal reaction.  That's the reaction that I'd like to have for my customers, too.

So I don't want to raise customer prices; or better yet, I'd like to reduce their prices, but I'd like to make more money.  For me, the answer is pretty obvious:  I have to sell direct to the consumer, and  in fact, I need to concentrate on a product that the customer will pay a high price for that has margins big enough that I can play with pricing a little as a marketing tool.

Up to this point I'm talking about the general concept; what I've said above applies to any agricultural product you might produce; eggs, milk, cheese, beef, pork, poultry...  now I'm going to get specific about pork.  

If you ask someone to talk about the best part of the pig, you'll get a list.  It goes something like this:
  1. Bacon
  2. Ham
  3. Ribs
  4. Everything else
Bacon and hams are easy to sell.  And then there's the rest.  Sausage, for me, is the clear winner.  Most of the pig can be made into sausage, and fresh sausage is relatively easy to produce.  The recipes are simple, and the equipment pretty straightforward.    A bowl chopper, a mixer, a stuffer and a workspace.

But even better the consumer pays more for sausage in most cases than they do for the whole cuts.  Let me repeat this:  Sausage often sells for more retail than any part of the pig other than the hams and bacon.  So just converting the pig into sausage gives you a boost in revenue.

Much simpler inventory, too.  

So I've been exploring sausage, and there are various companies that will take my pigs and produce sausage from the pork, but I just haven't been able to make the math work yet. it just doesn't pencil out.    Here's some real numbers from my experience, assuming that I purchase the feed at current cost to produce the pigs. 

1 pig takes 800lbs of feed at $0.22/lb to produce.  The pig itself retails as a piglet for $95 around here.  So my cost of production (ignoring land, equipment, labor, fencing, bedding, etc etc) is at least $271 per pig with purchased feed. 

For $271 I get a 280lb live weight hog.   To produce a value-added product, I have to have it slaughtered at a USDA inspected facility, which costs $60 (I'm ignoring the transport costs; maybe I have a mobile trailer come to my farm). 

so my cost is now $331, and that gets me 220lbs of inspected pork. 
I then have it cut-and-wrapped at a USDA inspected facility, which costs me $0.61/lb.  Since I'm making sausage, I have them trim the hams and belly, and convert the rest into sausage. 

220lbs * $0.61 is an additional $135.81. 

My cost is now $465.81, and I now have 165lbs of mostly boneless cuts.  Lets say that the hams are 40lbs of that, and that the bacon is 30lbs of that.  That leaves 95lbs for sausage. 

The hams and bacon have to be cured, and then smoked.  Local costs for that are about a dollar a pound.  Add $70 to my cost, and then the place that produces the sausage charges $2/lb to do that.  Add another $190. 

Still with me?   My total cost is now $625.81, and for that I have 70lbs of cured meat, and 95lbs of sausage.  My average price  per pound is a minimum of $3.79/lb

...Which isn't bad at all when you look at it from a consumer point of view.  Good quality pastured pork that is completely cut and wrapped and cured, cook and eat.  Yum!

What I've talked about are the hard costs to produce this.  I'll need to mark it up to make a profit;  so with a hard cost of $3.79 a pound, what would I have to charge to make a profit?  What's a reasonable margin? 


Jordan Elizabeth said...

thanks for writing this post; as someone who is looking into farming (currently i am still a college student) i found the realistic breakdown of costs really fascinating. i'm a (half) business student, so i thought i would do some research (aka googling).

at the local supermarket (i live in CT), the cost of pork is about the following:
Boar's head smoked ham: $7.99/lb
Boar's head bacon: 6.99/lb
Boar's head Bratwurst: 4.99/lb

i would say boar's head is considered "quality" for general grocery store "i don't know or care where my meat comes from" situations... i tried with no luck to find any farms that sell of boar's head (surprise) or the breakdown of costs for raising a pig in a more... "compact" environment.

however, let's assume you price your meat the same as boar's head is priced at the grocery store. you mentioned that you like to sell directly to the customer, so not having to pitch your product to stores and such saves you some money.

70lbs of ham/bacon x ~avg.7.50= ~$525

95lbs of sausage x 4.99= $474.05

this leaves you with a profit of somewhere around... $373.24/pig and 2.26/lb

you should also note that people seeking quality meat are most likely to be willing to spend a bit more... so i would start somewhere around that price when running "specials" and can honestly say you should be able to increase your price by an EASY (and fair) 2 bucks a pound.

i wish i could have found better sources as far as the operating costs of the not so nice farms, but that lack of access is typical i suppose.

also, your blog rocks; it's insightful, entertaining, and i'm really learning a lot. your previous post about farming unicorns was great. i'm actually a vegetarian, but mostly because i do not have the access or income to sustain an organic meat eating lifestyle (organic veggies and bulk bin grains are much cheaper, haha), and agree with both your ideas and the NYT's article. I think the key is simply mindful meat eating- realizing that we don't need it 3 meals a day, recognizing that you get what you pay for, and realize that meat should, in fact, be a privilege, something that is appreciated rather than a food of convenience. but then again i suppose we should eat all things that way. hell, we should live our lives more mindfully.

anyway, sorry for the rant, thanks for the posts, and i look forward to hearing more about your profit decisions.

Bill Gauch said...

Seems like you're missing a big cost item in your math. Labor cost is missing. If you do most of the work yourself, you might consider that to be your profit. That said, you have lots of "overhead" costs which are legitimate expenses which should have a per-animal consideration. There are usually product-specific multipliers which work pretty well to determine price from cost. Generally, 4 is the typical multiplier, although I have seen a number as high as 16 for a retail landscape nursery who grew all their own trees and shrubs. Although $15/lb for sausage is really pricey, even in a suburban upscale retail shop. Farms around here charge that price for grass fed beef.

It seems to me that the best (only) way to increase profit without increasing volume would be to decrease costs. $2/lb to make sausage seems high.

Caribou said...

I think you could easily charge $5-6 per pound for fresh sausage and more for anything smoked.
Would you have to have a USDA inspected sausage kitchen to retail the sausage to the public?
Love your blog!

Jordan Elizabeth said...

knowledge; haha, guess that's why you are the successful farmer and i am not yet. labor is definitely a major cost that i clearly forgot to even consider. i guess i was, like you said, assuming that you'd be doing the labor yourself and therefore considering it profit. but like i said as well, i really think that people who actually care about their food are willing to pay the necessary cost of quality meat, so unless you are blatantly scamming people, i really don't think you will have any trouble selling said sausage. they key is making it unique and delicious. the unique part can really be covered on the marketing front- boar's head claims to be of the utmost quality and people claim it tastes better... but they have no idea if it actually IS of any quality and i honestly couldn't tell the difference when i ate meat. it was much easier to identify the difference between that and well fed, well treated animals though. thanks for pointing that out, and i'm curious about the answer to carolyn's question as well! my guess is yes? would that cost you extra money as well?

Kelly Johnson said...

Let me first say I have no experience in marketing pork to consumers (yet). With that said I believe a major factor in your decision that was not listed in your blog is what would you get for the hog without going the extra step in making it into sausage. I believe that if you take the amount you normally get and the amount you think is minimum you can charge and figure the difference that would be a starting point. If your putting out a lot of hogs each year there will be x amount of sausage you will end of selling at the minimum price. Some to retailers that will take the extra markup as their profit and some that is getting old and you have to move it. Jordan Elizabeth has some very good points. I could use her formulas and put in my local numbers (TN) and give you some more amounts. The only problem with her numbers and my numbers is unless you plan on selling sausage in CT or TN in the spring time they are not accurate.

Bruce King said...

Via email:
I can't post on blogspot blogs, so here is what I mentioned about
prices for cut and wrapped hogs, as a consumer who's purchased them
and will do so in the future:

As a local consumer who has purchased whole/half hogs that come
wrapped and cut, 5.50-6.50lb seems to be pretty typical for the Puget
Sound area for pastured pork from small farms.

At some farmer's markets you will see higher prices, but enough small
farmers offer the 5.50-6.50 (and a few, mostly down south in Pierce
County, offer 4.50/lb) that it is a typical expectation.

Hope this helps in determining pricing.

--Mrs. Johnson

Bruce King said...

Jordan Elizabeth; I'm glad you enjoy the blog.
You're absolutely right that people will pay more for quality; that's one of the things that makes a small farm economically viable. It's an advantage that large-scale agriculture tries to copy -- industrial dairies have a picture of a red barn and green grass on their cartons, which isn't really what the farm looks like, but it makes a nice story for the consumer.

Bruce King said...

Bill: I didn't miss the labor thing; in fact, I explicitly said that I was ignoring various costs in the post, one of which was labor.

But there are labor costs built into some of the costs -- like the $2/lb for the sausage maker. Presumably part of that cost is labor.

I think it's worth talking about labor, but it's a big enough subject that I'd like to do that in a post all by itself. What I'm after here is to give people an idea of what goes into product and production decisions.

Bruce King said...

Caribou: If I start with inspected meat (meat killed in a USDA inspected slaugther plant), and I prepare that meat in an inspected kitchen (which around here means county health department) I can then sell direct to consumers from my premises, either fresh or cured/smoked products. So I can set up a storefront, either on my farm or off of it, and sell direct. That's how most of the meat shops in this area sell meat; they buy inspected meat in bulk and then process and sell it on premise.

If I wanted to sell the meat through other retail channels I have to go through another layer of inspection and regulation for the processing. So to sell a pound of bacon in a store that I don't own/operate, I'd have to do another group of regulations, become a USDA inspected meat plant, basically. HAACP plans, federal inspector on premises, record keeping and a more-stringent building code (185 degree hot water, for instance. Stainless steel fittings, etc).

Bruce King said...

Kelly, your comment is right on. Whenever you're making a business decision it pays to work out all of the different options. So how much do I get from various sources for the same pig...