Editor’s note: This is an excerpt from Paul Dorrance’s online course, Proven Lessons for Success in the Business of Farming. To sign up for the course, visit learn.acresusa.com.
By PAUL DORRANCE
Putting a price on your farm product is a highly emotional experience for farmers. The price you ask for encapsulates so much more than profit. It includes all the sleepless nights you spent listening to the coyotes howl and wondering if your lambs were safe, that late frost that caught you and your tomatoes off guard, the equipment breakdowns in the field, and the love, care and stewardship you poured into your operation to bring that specific tomato or that pound of ground lamb to your customer.
The problem is that your customer doesn’t understand that, and despite how much we tell them, they never truly will. So most conversations you hear about product pricing revolve, as this one will, around mechanical, mathematical, logical approaches. However, it is worth recognizing from the very beginning that price represents so much more than the result of a formula. In this article, we’ll discuss what not to do first, and then move through some concepts of how to capture your sleepless nights and stewardship efforts in order to arrive at a price that you can be proud of and your customer can pay.
My first piece of advice: don’t attempt to be a low-cost producer. There are generally two categories of any business: low cost or high value. Whether you are purchasing clothing, tools or wine, all of us have a decision to make. Do I spend money on a quality product that will last or do I cheap out and buy something that will disintegrate in the washer, break in the field or taste like turpentine? I would argue that small-scale farmers fit squarely in the “craftsman” category of goods and services, and our pricing needs to reflect that.
Trying to produce food cheaply is a downward spiral that looks remarkably like a toilet flushing, and that approach is what has gotten America into the sewer of our current food system. Many people point to innovation, technology, efficiency and scale as ways to reduce or spread cost across more products, therefore reducing the cost of production, and I am not against any of those things. You can produce high-quality food on a large scale — just look at Will Harris and White Oak Pastures as one example. You can and should utilize technology to be more efficient. But there is only one way to produce cheap food: you cheat. Sub-therapeutic antibiotics, growth hormones, genetically engineered seeds, CAFO animal factories — these are all methods that indicate a business has chosen profit over values in an effort to produce food as cheaply as possible. Don’t be one of those farmers; your customers, neighbors and family deserve a high-quality product worthy of paying good money for.
So how do we price items? How much is it worth? How much is too much? We have to sell it to make money, right? It is so tempting in the face of those questions to glance across the aisle at our competitor’s price board, look up someone else’s online shopping platform, or find similar products in the grocery store aisle and just copy their prices. Surely they’ve done their homework, analyzed their markets, and have logically arrived at that price. Perhaps. Or maybe they did the same thing you are now contemplating, and so did the farmer that they copied from, and the chain of uninformed pricing goes back several iterations!
That’s a cycle you don’t need to perpetuate. But while I don’t want you to copy your competitor’s prices outright, it is worth knowing what they are for two reasons: it serves as a reality check on what you come up with independently and provides you with the knowledge that you are either cheaper or more expensive than they are in order to inform your conversations with your customers.
The good news is that we don’t have to copy, or even worse guess, to price our products. Instead, you need to start with what it cost you to produce said product. Ensuring that you are priced at least at/above cost of production seems so obvious, but you’d be surprised how many farmers don’t do it. It goes back to one of the initial questions I asked you: are you running a business or is this a hobby? Nothing wrong with either, but a business needs to be profitable to survive; a hobby does not.
Let’s cover the basic costs of production with a simple pork enterprise example, where I am purchasing ten weaned piglets, raising them to finish, processing, and selling the meat. To bring that pork to the point of sale cost me:
$500 purchase | 10 piglets, $50 each
$2,070 | Feed, 9,000 lbs
$2,000 | Processor, about $200 each
$4,570 | Total cost
$457 | Total cost per pig
So all I need to do is make sure that my cumulative pricing for one pig’s worth of products covers the $457 cost of production. Easy, right? No wonder they call hogs the “mortgage lifter” — hogs are so profitable! Not so fast. Let’s take a step back and look for what is missing from this example. For starters, we’re definitely missing some of the more hidden costs:
• Infrastructure (fencing, feeders, waterers, barn, trailer, freezers)
• Utilities (water, electric)
• Transportation (fuel, mechanical, for both initial pickup & processor trips)
• Marketing (online presence, farmers’ market fees, mileage)
• Death loss (minimal for hogs, but not for a poultry example!)
As you can see, there is much more that goes into producing a pound of bacon than a simplified chart. However, even after we are able to track down each individual input that needs to be accounted for, I’m guessing that there is one more thing that we’ve forgotten. Farmers are some of the worst about this; we always forget to account for … ourselves. We almost never pay ourselves, but our time is valuable, and must be accounted for. Daily chores, time spent in the truck moving animals or picking up feed or getting to the farmers’ market, time spent in front of a computer building a pork products flyer. However you tally everything up, your time had better be part of your calculations. Personally, I value my time at $30/hour. Another way to handle this would be to add in a profit margin above production. If you take this route I would recommend 25-35 percent for your high-end, craftsman-level product. Without sharing the entire cost chart and how I came up with it, my true cost of production for a single hog was $840 — almost double our simplified initial estimate!
The next question becomes how much meat comes off an individual animal. As I mentioned earlier, once I started tracking and adding up the cuts coming back from the processor, I was shocked at how few premium steaks there actually are on a finished steer. You have to track and count up the weights you get back in order to come up with an average number of each item. For my hog example, I figured on 32 pounds of sausage, 46 pounds of loin chops (bone-in or boneless? It matters), 12 pounds of bacon, 6 pounds of spare ribs, 24 pounds of ham and 10 pounds of shoulder; this totaled 130 pounds of meat. That means that my average price per pound for pork should be at least $6.47 to cover my true cost of producing that hog. There is definitely flexibility to move that price around depending on the cut, and this is where you can start to compare yourself against your competitor. She sells her bacon at $8 per pound? Maybe you can match that, but only if you sell your sausage at a pricey $6.50 per pound. Which will you have more of? Which is more likely to be seen as a premium cut? Probably move the sausage at $5 per pound, sell the bacon at $12, and be ready to tell your customers why the price difference is so completely worth it!
That brings me to my final word of advice on this topic: don’t back down. You worked hard on your product. You put in the time, you put in the money, your animal or plant paid the ultimate sacrifice, all so that your customer could eat healthy, clean and humanely. That is worth the price, no matter how many times someone visibly blanches or outright scoffs at your prices and walks away with their nose in the air before getting in their car to wait in the fast-food drive-through line. Be ready to tell folks why your product costs what it does, but do not waiver. If you can’t sell your product for what you need to, then the only conversation that needs to happen is whether or not to continue that enterprise. Have a sale every now and then, offer excess inventory for a reduced price, adjust your prices based on demand and supply, but always keep your bottom line in mind and do not sell below it — that is the realm of a low-cost producer who cheats to sell cheap food, and that cannot be you.
Paul Dorrance lives in Ohio. He’s run a successful pastured meat business and is now helping others do the same. For more information, go to pasturedprovidence.com.