A question I have been struggling with lately is whether or not I should sell the vegetables I grow to a wholesale produce distributor. The reason I have been wrestling with this question is that after fourteen years of selling at farmers' markets, I would really like to have my Saturdays back. I love farmers' markets and I love the customer interaction, but I am starting to love the idea of having my free time even more than all the things I love about the market. What I don't know is whether or not I can make a living selling my crops to a wholesaler. I have become so used to the retail price I get at the farmers market that making the switch to the much lower wholesale price is scary.
I do have some experience with selling an entire crop to one buyer. My family has raised walnuts for the last 40 years and we have always sold the crop to Diamond Walnut. There is no negotiation, we sign a contract for (usually) a period of three to five years, and Diamond takes every nut we grow. The price fluctuates annually with the world market price of walnuts. My family is a price taker in this transaction, but that is not always a bad deal. Some years there are too many walnuts, and the price the farmer gets plummets. When you don't have a contract, you may not sell any of your crop at any price. When there is a shortage of walnuts, the price goes up and luckily, so does the price we get from Diamond. So being a price taker is easy and gives us some peace of mind knowing that no matter what, we will not have to scramble to figure out how to sell 80,000 lbs. of walnuts.
As far as I have been able to tell, there is nothing like the arrangement my family has with Diamond Walnut for the scale of fresh produce I grow. I am sure that if I grew vegetables on a much larger scale, I could get a similar contract with Dole or some equivalent vegetable packer/shipper. I grow vegetables on 10 acres at most (not 100's of acres) so there will be no giant vegetable packer/shipper contract in my future. That leaves me to find smaller scale wholesalers, food hubs, and individual stores and restaurants.
It helps me to think of the wholesale market in terms of levels. The top level being for the really big acreage growers (100s of acres) with those farms getting contracts with produce shipper/packers. The next level down is the 100 to about 30 acre farms that sell to produce wholesalers like Veritable Vegetable and Produce Express. Getting even smaller at the third level is the 5 to 30 acre farms that sell to places like Briar Patch Coop, Produce Express, Food Hubs, and some restaurants and local stores.
Okay, so now that I know what my options are for wholesale, what am I going to do about the price? I contacted a number of these buyers to find out what kind of prices the average farmer could expect to receive. Guess what all of them told me? “The farmer sets the price not me,” and “The farmer needs to know his costs, including some profit, and set his price accordingly.” This was not the answer I was expecting at all. I assumed there was some sort of price bracket that each of these buyers would find acceptable for any given farm product. I still think this is true and that the answer I got from each buyer is part of a negotiation tactic.
Luckily for me, I used to be an outside sales representative and I have gone through lots of sales training so I can recognize a negotiation when I hear one. The thing is the buyers are professionals and recognized that I was doing the same to them. There is a rule in negotiations that goes like this: whoever speaks first loses. What does this mean? Well, whoever names a price first is unlikely to get that price, and therefore “loses” the negotiation and gets less than the ideal price that they were looking to get. This is generally true unless you, as the namer of the price, have done your homework and know precisely what your price must be.
The only way to enter into this kind of a price negotiation and not get fleeced is for me, as the farmer, to know exactly how much it is going to cost me to produce my crop. I am talking about how much everything costs, seed, rubber bands, boxes, labor, and everything else that goes into producing and delivering the final product. I need to know how long it takes me to prepare my fields, plant, harvest, pack, and deliver my crops to the buyer.
Beyond the cost of producing the crop, I also need to add in a salary for me and a profit for my business. The profit is really important to include, because without it, your business will remain stagnant. You will be unable to invest in new equipment or improve infrastructure. The farmer shouldn't work for free and neither should the business. When you get all this information together you will know your Cost of Goods Sold (“COGS” in accountant speak) and then you will know how much to charge for your products.
Every business that produces a product for sale should know its COGS. Most farmers I talk to have a rough idea, but are not really sure. I would say this is true of small farmers like me. When I talk to large scale walnut or rice farmers, those guys know exactly how much it costs to produce a ton of walnuts or a ton of rice. By knowing the COGS you will be able to negotiate from a position of power rather than just taking what the buyer offers. I will be back soon with another blog entry and tell you about some cool tools that help farmers determine their COGS.