- Author: Molly Nakahara
“Set your own prices.” This piece of advice given to me by a seasoned fruit and vegetable farmer has proven to be one of the critical foundations of my own farm business. Now here’s a test for all of you business savvy farmers out there: What is the secret message, the subtext, the implied meaning in this great guiding sales principle? It does not mean set prices that you think your customers will like, or set prices based on prices at the grocery store. YES! You’ve got it: KNOW YOUR COSTS! It means set your prices based on the true costs of production. If you can embrace this concept, it will become one of the most influential tools of analysis you will use on your farm.
As small farmers and business owners, I would like to challenge my fellow producers with this idea: We have an obligation to the long term viability of local agriculture (and to each other, for that matter) to know the true costs of our production (and yes, that means the cost of your labor as well!) and to set our prices according to these costs.
Up here in the Foothills, we farm in a unique community made of folks who are farming for a living, farming as a hobby, farming as a second career, and farming as a second job! While this diversity of producers creates a vibrant small farm culture, it can also really impact the prices that we see at markets. The great news: We can all make more money by working together! If we truly want to see small farms thrive in Placer and Nevada Counties, let’s challenge ourselves to set prices based on real costs, including a living wage for farmers.
Of course efficiency of production must be considered. Understanding production costs will help you weed out the profitable farm enterprises from the less efficient, unprofitable ones. If it is costing you $7 to produce a bunch of kale, you may run into trouble putting those bunches on your market table at $8 apiece. The better idea may be to transition away from kale and focus on the areas of your business that are more efficient.
So, how do you calculate costs? There are many tools out there to help farmers calculate the true costs of production. Andrew Meyer, formerly of Four Frog Farm here in Nevada County, developed a number of budgeting tools for livestock, orchard and row crops while working with UC Cooperative Extension. Iowa State University has developed a handful of enterprise budgeting tools. The University of Georgia Extension has a couple online enterprise budgeting tools for livestock. The Organic Farmer’s Business Handbook by Richard Wiswall is an indispensable resource as well and comes with a CD of readymade spreadsheets. While these may not fit the details of your operation, they will give you an idea of the types of expenses you need to be capturing. Make your own spreadsheet, jot some numbers down on a napkin, or have your 5th grade math whiz kid take the reins- whatever works for you, works for you. And you don’t need to track every minute of every day. To capture labor costs, have your employees track their time for one day or one week a season and extrapolate from there.
Let’s take a broiler chicken as an example. The following cost breakdown assumes that a farmer is growing about 3000 chickens in a season (6 rounds of 500 birds each).
Shipping and handling: $0.10
Brooder infrastructure: $0.50
Brooder electricity: $0.35
Brooder bedding: $0.10
Organic Feed: $7.5
Field and Fencing Infrastructure: $0.50
Livestock Guardian Dog costs: $0.20
Field and Brooder Labor: $3.90 (2 hours per day for 75 days @$13/ hr for 500 broilers)
Cut and wrap (labor, supplies, kitchen rental): $1.50
Storage costs: $0.05
Marketing costs: $0.50
Total costs for one chicken from chick to consumer: $20.45
Your average chicken weighs 3.5 lbs., so to cover this year’s costs you need to be charging $5.85/lb.
But wait! We haven’t captured all of the costs associated with your business. You also know that to get next season started (buy feed, make repairs to infrastructure, buy your first couple round of chicks, etc.) you will need at least $15,000. You could borrow this money and pay it off next year or you could plan for profit this season and have the money in the bank at the start of next season. If you do not make this start-up money this season, you will have to borrow it next year, and then your cost breakdown per chicken will need to include: DEBT REPAYMENT! So, to hit our new profit goal you will need to make an additional $5 from each chicken. Therefore, your new price per pound, the price that will keep you in business year after year, the price that will let you make a living wage as a farmer, the price that will keep delicious chicken in the marketplace for your wonderful market customers is…… $7.27/lb!!
I know what you’re thinking: Can the market bear this price? Here’s my response: the market HAS to bear this price, because this is what it costs to produce your high quality, humanely raised, delicious and nutritious, “can’t be bought anywhere else,” chicken.
This raises a concern for me: How to lower income families afford boutique farm products that are priced so highly? I don’t know the answer to this, but I have been thinking critically about it. One thought is that the pricing calculation above is based on the average weight of a chicken. But there will be large variation in your production (ie some birds will weigh more than 3.5 lbs) and you may find that you are able to save more than the $25K needed for next year’s start-up costs. This extra profit could go towards subsidized sales to a specifically low-income audience.
Okay folks, go forth and calculate your true costs of production! It will take some effort, sitting in a chair, in front of a computer, with a calculator, and a spreadsheet, but it will be time well spent. You will be able to make sound decisions about your operation, and have the confidence at market that you are selling your products at a price that ensures the long-term success of your business and the long-term viability of our local agricultural community.