Growing the Bottom Line Evaluating Marketing Outlets… Which to choose and how? Craig Chase, Field Specialist Farm & Ag Business Management

Transaction or Marketing Costs Transaction costs are those costs associated with the marketing and delivery of the product from the farm to the customer. Transaction costs include post-harvest handling, packaging, and storage, as well as the time to sell, invoice, and deliver the product.

Two Ways To Evaluate Outlets Evaluate based on a particular crop, such as tomatoes. This cost would be added to the enterprise budget for that crop. Evaluate based on whole-farm records and look at the entire marketing outlet as a whole.

Enterprise Records – Farmers’ Market Two markets per week for 20 weeks. Labor – 2 people, 6 hrs per market per person, $12 per hour. Vehicle – 80 mile $.50/mile. Supplies and misc - $20 per week. 800 lbs of tomatoes taken to market; 95% sold (760 lbs).

Example Vehicle $.50/mi, 3,200 miles$1,600 Labor hr/wk, Supplies (bags, other supplies, $20/wk$ 400 Total transaction costs for the season$7,760 Total transaction costs allocated to tomatoes (percent of total sales) – 15% $1,146 Total transaction costs/lb sold (760 lbs sold) $1.53

Total Cost Production cost per pound$ 0.38 Transaction cost per pound$ 1.53 Total cost per pound$ 1.91 Note that the production cost per pound was determined by keeping enterprise records…

Profit Margins So what was the selling price of the tomatoes? What margin or mark-up were you trying to achieve? NOTE: This procedure should be repeated for each marketing outlet used.

Alternative Approach Previous examples determined production costs and allocated transaction costs to a specific crop. What if you don’t have records at the enterprise level? How can you evaluate pricing and marketing outlets at the whole-farm record level?

Starting with some basic numbers Gross revenue per acre Production cost per acre Net farm income per acre Marketing costs Production profit margin $18,000 10,440 3,960 $ 3,600 $ 7,560

Marketing Cost Allowance Amount of $ left over given the gross revenue and net farm income goals and assuming all production costs are paid for. Question: –What marketing outlets or combination of marketing outlets allows the farm to sell all its products and maintain its net farm income goal?

Marketing Allowance Example Marketing Allowance$3,960 / ac For a 2 acre farm$ 7,920 Urban Farmers’ Market (cost per market) Supplies $ 50 Labor – prep and sales Transportation Total estimated marketing cost $ markets$6,920

Example – cont’d Now let’s assume you can only sell 85% of your product sales through that market. Adjusted allowance – 85% ($7,920) = $6,732 It will cost $6,920 to market the products with a marketing budget of $6,732.

Market Combinations Local Farmers’ Market Institutional Markets 50% Gross revenue$18,000$14,400 Production costs10,440 Production profit margin$7,560$3,960 Marketing costs3, Net Farm Income$3,600

Market Combinations – cont’d Supplies$20$5 Labor – preparation and sales9636 Transportation15 Total est. marketing cost$131$56 Total annual marketing cost$2,620$1,120 Total marketing allowance$3,960$360 Marketing balance vs. allowance$1,340-$760

Market Combinations – cont’d Although the institutional products cannot be marketed for less than their marketing allowance, the combination of outlets allows the farm to sell 100% of its products and meet its profit goal.

Questions….. Any questions or comments? Thank You for This Opportunity! Craig A. Chase Farm Management Field Specialist th Street NE Oelwein, IA (319)