Tuesday, January 1, 2013

Your passion and business decisions

Walter Jefferies over at Sugar Mountain Farm wants to bring more of the dollars spent on his farm products back to the farm. 
concrete forms for butcher shop at sugarmtn.com

The basic problem that small farms have these days is that farmers in general get about 5 cents of out every dollar spent in the grocery store.  The other 95 cents go to the co-op / distributor, retailer and branding folks.  Each step along the chain marks up the product. 

To expand on this a little, you may have noticed that corn prices have been very high for the last year or two, and there's been a lot of press about rising meat prices based on increased feed prices

Point in fact, corn prices are higher than they have been for decades right now - the last time corn was more expensive was in 1983.   How can corn double or triple in price, but only raise the price of meat 5 to 10%? 

Farmer sells to distributor for $1.  Distributor marks it up to $2, sells it to processor, who marks it up to $4, and sells it to retailer, who marks it up to $8, and sells it to the consumer.  In this example the farmer gets $1 out of every eight, or 17%.  In the real world the farmer gets 5% on average. 

When I sell a pig, the markup goes like this: 

I sell the pig for $2.25/lb hanging weight.  The farm kill guy comes to the farm, kills the pig, guts and skins it, and transports it to the meat shop for $60.  The meat shop cuts-and-wraps the pig for $0.60/lb (220lbs * .6 = $132) and charges a bit more for curing and smoking - call it another $30. 

So here I make ($2.25 * 220) or $495 gross sales and the processing folks make ($132+$60+30) or $222. 

Two thirds of the pigs revenue goes to the farm, one third to the processing folks.  

Now back to Walter: 

He wants to keep more of the processing fees on his farm:  Instead of paying an outside vendor, he'd like to keep that revenue.  I completely understand that; I look at these numbers every few months myself.  But  for me, the $132 per pig, less the costs of a facility to do the work, hasn't penciled out, yet.   

Walter decided that it did in his case.  So he's been working on a custom meat processing setup at his farm, and has chosen to do it with a concrete building, because he loves concrete.  Actually, I love concrete, too.   It's a pretty cool material, and you can do very sturdy, durable structures with it. 

Sometimes when you're doing something your passion can get involved in your decision making process.  In this case, Walter announced his intention to build this facility in 2009,and here we are, 3+ years later and he has yet to process his first pig at his new location. 

Be careful about your business decisions.  I hate to say this, but I think that Walter might have been better off with a conventionally framed building at a much lower construction cost than what he's working on right now.  From what he said in this thread, it might not be until 2014 or 2015 before he gets USDA certified.   He doesn't start saving money until he starts cutting, and 3 to 5 years to the first production is a very long time.  I don't know how much money he's put into this so far.  $300k?

I wrote about a butcher shop about 2 hours from my farm that is USDA certified last year.   He has a small processing facility -- call it 25'x25', with two semi truck refrigerated trailers as his cooler.  He built it himself at a cost of about $50,000. 

Passion and profits are sometimes a poor match. 

No comments: