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

2. 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.

3. 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.

4. 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 roundtrip @ $.50/mile. Supplies and misc - $20 per week. 800 lbs of tomatoes taken to market; 95% sold (760 lbs).

5. Example Vehicle expenses @ $.50/mi, 3,200 miles$1,600 Labor - 2 people @ 12hr/wk, 20wks, @$12/hr$5,760 Supplies (bags, other supplies, misc.) @ $20/wk$ 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

6. 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…

7. 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.

8. 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?

9. 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

10. 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?

11. 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 18 hrs @$12 216 Transportation 160 mi @$.50 80 Total estimated marketing cost $346 20 markets$6,920

12. 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.

13. 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 costs3,960360 Net Farm Income$3,600

14. 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

15. 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.

16. Questions….. Any questions or comments? Thank You for This Opportunity! Craig A. Chase Farm Management Field Specialist 115 9 th Street NE Oelwein, IA 50662 (319) 238-2997 cchase@iastate.edu http://www.extension.iastate.edu/agdm/fieldstaff/cchase.html