Wednesday, November 2, 2016

Farm business - distributors, profits and products

I've gotten an unusually large number of requests by folks who are operating farm distribution companies for product this year.  Turkeys, chickens and pork as well as beef.  I'm not sure what is driving the interest, but in October I've been asked by 18 different operations for products of mine that they can resell.

On one hand it seems like a no-brainer - that is, who wouldn't want to sell more of their product?  And if they're going to do the work, why, it's a sure win, right?

The problem is that the retail markup for the product is usually 100%.  That is, if the product retails for $10 they'll need to buy it from you for $5.  And honestly, if anyone gets that extra margin, I'd much rather that it be my operation, no offense to the middlemen, I just don't see a value.

In order to make it work economically for me, I'd have to increase my production volume - make less on each sale, but make more sales.   Why not?

Well, it costs money to produce product, and it costs money to grow.  Think about it this way;  if I raise 50 turkeys, the capital I have at risk is  about $1,000.   If I raise 500 turkeys,  it's $10,000.  If it's 5,000 turkeys it's $100,000.00.  At the lower end of that scale if I blow it in some way - like a dog gets in and kills my turkeys, or i have a disease issue, or the turkeys just don't grow as they should or whatever, yes, it hurts and yes it sucks, but the loss of that small crop doesn't sink my farm all by itself.  As I get into bigger numbers it's less likely that I'll lose the entire crop, but the percentage of my total farm enterprise revenue tied up in that crop also makes it critical, crucial, to the economic health of the farm.

So my solution is to produce small quantities of several different products - enough that they make a nice contribution to the farms bottom line, but the amount at risk in each isn't sufficiently large that if I have a failure of that particular product that it'll put me in the red for the year.

To get to that sort of balance I'll set a revenue goal for the farm as a whole, a net profit goal specifically, and then work with what I can produce until I have a plan that hits that goal + 10%.  So I might say that I want to net $50k on the farm this year.   I'll look back on my previous years for costs and experience, and then come up with what I'm going to produce in the coming year.  X tons of alfalfa, X tons of corn, X chickens, X turkeys, X auction steers, X market pigs, X weiner pigs.  For each of those I'll set an approximate revenue goal, and then I'll double check by looking at my expenses in previous years and figure out how many of each I'll need to produce to hit that goal.

Remember that for each product there's storage and marketing, feed and labor and mortality in the case of animals can also make an impact.  So I'll come up with a plan that takes all of that into account, and that becomes my business goals for the next production year.

This whole process takes me a couple of weeks to complete - remember that I'm doing it after doing all of the normal stuff on the farm, along with whatever is happening off the farm (and yes, there's other stuff I do - like most farmers I have an off-farm job).  Once written I view it as a goal, or a guideline, but I'll modify it from time to time as the year progresses.  Maybe costs are higher, or lower (this  year feed costs have gone down because grain prices in the US have crashed, which is good for the portion of the pig operation that depends on purchased feed) - all of that goes into the mix, and when I go to make up the plan for the next year I'll look at the notes and modify as required.
I figure about 20% of my farm time is spent doing this sort of planning - about 1 day out of every 5 days that goes by.  this is higher than I would have believed when I first started farming 10 years ago, but it's been pretty consistent for the last decade so I'm pretty clear that it's a fixed cost - a minimum.  Sometimes I spend more time.


Mary Beth said...

Man, that'crazy! The middle man ALWAYS gets the big bucks for (almost) none of the risk. I don't blame you. I wouldn't do it either.

Mary Beth said...

Hey Bruce~ Merry Christmas! I miss reading your thoughts and goings on at your farm. Hope to see you back soon....