- Author: Dan Macon
Note: A version of this article originally appeared in the July 2020 edition of my New Foothill Rancher newsletter.
When my family started raising sheep commercially, we assumed that selling meat directly to consumers would be more profitable (especially at our small scale) than selling live animals. As we went through the logistics of getting animals to our processor, deciding what cuts we thought we could sell, determining our product pricing structure, picking up meat, getting it stored, and then getting it sold, we realized that meat marketing was far more complicated that hauling a load of lambs to the auction. We also got a crash course in the difference between gross profit and net profit.
Value-added marketing is a buzzword in local food system conversations – after all, who wouldn't want to add value to the crops or livestock they produce. Since the disruptions to our food system from COVID-19 have become obvious, producers and consumers alike have a renewed interest in selling (and buying) locally-produced meat. But as a producer, how do we know if we're actually adding value if we're selling meat rather than live animals? From an economic analysis perspective, we have to look at the meat business separately from the livestock production business. In other words, the meat business has to “buy” the live animal from the livestock business. How do we go about this kind of analysis?
In our own business, I started by using the market price for finished lambs (as published in weekly market reports from the closest livestock auctions) as the “purchase” price of lambs for the meat business. If a 100-pound lamb was worth $1.80 per pound at Escalon, my meat business would need to pay my livestock business $180 to buy that lamb, less what I would have paid in commission, yardage, and transportation. Let's value that 100-pound lamb at $160.
In economic analysis terms, the purchase of the lamb was a variable (or direct) expense for the meat business. Other direct expenses included harvest and cut-and-wrap fees (which are typically charged by the head or by the pound). Overhead costs – those expenses that are incurred regardless of the number of animals being processed, included transportation to and from the processor, storage, marketing expenses, and labor.
On the revenue side, I needed to know how much retail product I'd get from that 100-pound lamb. This is different than hot carcass (or hanging) weight – this is how much product actually goes into a package. We found that we typically got a 30-33 percent retail yield – in other words, the 100-pound lamb gave us 30-33 pounds of meat we could sell to our customers. We also needed to know the relative yield by cut – after all, folks will pay more for a rack of lamb than they will for stew meat. From this, we could calculate an average retail price per pound – for us, this came out to about $11 per pound of retail product. At 33 pounds of salable product, that lamb was now worth $363.
Let's look a bit closer at that $160 lamb:
Gross Revenue |
Amount |
Meat Sales (33 lbs at $12/lb) |
$363 |
Total Gross Revenue |
$363 |
|
|
Direct Expenses |
|
Lamb purchase |
$160 |
Slaughter/Cut-and-Wrap (per head) |
$145 |
Total Direct Expenses |
$305 |
Gross Margin |
$58 |
|
|
Overhead Expenses |
|
Transportation (live animal – 130 miles @ $0.57/mile) |
$74 |
Transportation (product – 130 miles @ $0.57/mile) |
$74 |
Storage (monthly locker fee) |
$125 |
Marketing (farmers market fee) |
$50 |
Labor (10 hours @ $15/hour) |
$150 |
Total Overhead Expenses |
$473 |
Net Profit (Loss) |
($415) |
Yikes – “adding” value to a single lamb would create a loss of $415! Maybe we should look at scaling up (so we can spread our overhead expenses over more units). I can take 20 finished lambs in my trailer – let's look at the numbers for 20!
Gross Revenue |
Amount |
Meat Sales (33 lbs at $12/lb) – 20 lambs |
$7,260 |
Total Gross Revenue |
$7,260 |
|
|
Direct Expenses |
|
Lamb purchase |
$3,200 |
Slaughter/Cut-and-Wrap (per head) |
$2,900 |
Total Direct Expenses |
$6,100 |
Gross Margin |
$1,160 |
|
|
Overhead Expenses |
|
Transportation (live animal – 130 miles @ $0.57/mile) |
$74 |
Transportation (product – 130 miles @ $0.57/mile) |
$74 |
Storage (monthly locker fee) |
$125 |
Marketing (farmers market fee – 5 weeks to sell 20 head) |
$200 |
Labor (10 hours @ $15/hour) |
$150 |
Total Overhead |
$623 |
|
|
Net Profit (Loss) |
$537 ($26.85/head) |
This time, we made a profit! All of that extra work added a whopping $26.85 per head to the value of our lambs! And this doesn't account for the time value of money – when I sell at the auction, I have a check within a week. When I sell meat, the cash flows in as I'm able to sell product – it may take a month or more.
Obviously, these numbers are sensitive to the current market price, the distance to your processor, and processing fees. In a depressed live market (like we're currently facing), marketing meat may add more value. And it's a complicated question - I found selling meat to my community to be rewarding in non-monetary ways. But non-monetary income didn't pay the bills, unfortunately. The key takeaway here is that it's important to do the analysis.
If you'd like to walk through a more thorough analysis of your own business, contact me at (530) 889-7385 or dmacon@ucanr.edu.
- Author: Dan Macon
Direct marketing, for some farmers and ranchers, can be a way to capture more of the consumer dollar. By bypassing the middlemen - wholesalers, distributors, and retailers - direct marketing can allow a producer to receive retail value for his or her product. But direct-market meat is a different story. Direct-market meat requires substantial processing - the harvest and cut-and-wrap services provided by processing facilities and butchers require significant skill and capital investment. Over the last 50 years, we've lost local meat processing capacity - small local butchers simply don't exist in very many places. Many of us assume that increasing this processing capacity would solve the problem. In my experience, the solution isn't quite so simple. As someone who has marketed meat directly to consumers at a modest scale (120+ lambs per year at our peak), I have observed a variety of complicated questions regarding the real issues involved increasing harvest and processing capacity.
As a small producer, I wanted the ability to call a plant one week and deliver animals the next week. However, most of the small plants in our region are fully booked as much as a year out. A new small plant would be similarly impacted eventually – and from the perspective of the plant, it would be easier to have 10 clients bringing 200 steers (or 500 lambs) per year than to have 200 clients bringing 10 steers (or 25 lambs). In my mind, the only way to address this need for scheduling flexibility for the producer would be to build a plant with excess capacity, which is not economically efficient. This excess capacity would allow me to call the plant on Thursday to schedule a harvest, deliver my lambs the following Sunday, and have packaged meat by the next Friday. If the plant were running at capacity, it could not accommodate me.
Seasonality is related issue, in my mind. Grass-fed meat is a great opportunity for some producers, but typically not a year-round product for many small-scale ranchers. What will a new plant do to keep its crew busy on a year-round basis? I think this is another factor that pushes plants to find fewer, larger-scale customers.
Meat processing has largely been organized on a manufacturing model. The plant buys the raw product (livestock), converts it into meat, and then sells it to distributors, wholesalers, consumers, etc. The model we're talking about is a service model – the plant has to make money on the service it provides rather than adding value to product it owns. That's a very different model, one that is a struggle for existing operations (let alone new ones). For example, when we started with our regional processor, we could get a lamb harvested and fabricated for $50/head. The company soon realized that the cost of providing this service was much greater than the cost of the labor involved – they had to deal with 100 or more operations like mine that each wanted to harvest 10-15 head once a month. The cost is now $120-130 depending labeling and other factors. This is reflective of true cost of providing a service rather than selling a product.
Despite the interest in new processing capacity locally, there has not been any significant financial commitment from local citizens or producers towards the construction of a facility. This is where the rubber meets the road. And I suspect that this is the crux of the issue – there are both regulatory and economic barriers to entry in the meat processing business. The low return on investment for a service-oriented meat processing facility may make the economic barriers the more difficult to fix. I think if the economics were positive, we'd see private investment in new USDA-inspected processing capacity.
Alternatively, we may want to consider focusing on the regulatory barriers. Along those lines, a couple of things come to mind for me:
- There are inspection-exemptions for direct-marketed poultry based on scale of operation. In some circumstances, a poultry producer could harvest as many as 20,000 birds a year without USDA inspection and sell the meat directly to end users. No similar exemption currently exists for livestock.
- There was state legislation adopted last year making it legal for cattle producers to sell a live animal and for the buyer to then arrange for harvest and cut-and-wrap. There has been some confusion as to whether this new law applies to other livestock; the California Department of Food and Agriculture (CDFA) is taking the position that it only applies to cattle since cattle producers pay for an ownership inspection (e.g, brand inspection) at harvest. There is interest among other livestock groups (California Wool Growers, California Pork Producers, etc.) in extending this option to other species.
- CDFA could provide more state inspection (for a fee, perhaps). This could facilitate direct marketing of meat products.
This is probably WAY more information than anyone wants on this topic, but I do think it's important for us to understand the complexity of the issue. I guess I see a couple of important needs:
- Economic analysis and extension – I think UC Cooperative Extension (and others) could help small-scale producers (and large-scale, for that matter) better understand the economics of selling meat versus selling live animals. My very simplistic assumption when I started was that I would be more profitable selling $350 worth of meat than I would be selling a live lamb for $150. Reality was much more complicated. I think there's a need to help folks better understand this question. Producing a finished product (as opposed to a live animal) at scale is a complicated production and economic model for most livestock producers. It requires a very different set of skills.
- Research-to-policy – I also think there is a role for extension and others to help regulators understand the opportunities and barriers involved in direct-market meat production. This runs the gamut from ensuring food safety to understanding economics to quantifying consumer demand.
Many of my extension colleagues - in California and elsewhere - have spent considerable time and effort examining this problem. Their work has been exceptionally valuable - we have a much better understanding of the complexity of these challenges today than I did when I started in the direct-market meat business more than a dozen years ago. Perhaps these questions are part of the maturity process - the early pioneers must expose the weaknesses in the system. Some of these weaknesses are economic; others are regulatory. I'm hopeful that we're making progress towards discerning - and addressing - the most critical barriers.