Growing the Bottom Line
Evaluating Marketing Outlets…
Which to choose and how?
Craig Chase, Field SpecialistFarm & 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 roundtrip @ $.50/mile.
• Supplies and misc - $20 per week.
• 800 lbs of tomatoes taken to market; 95% sold (760 lbs).
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
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 acreProduction cost per acre
Net farm income per acre
Marketing costs
Production profit margin
$18,00010,440
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 / acFor 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
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% 50%
Gross revenue $18,000 $14,400
Production costs 10,440 10,440Production profit margin $7,560 $3,960
Marketing costs 3,960 360
Net Farm Income $3,600 $3,600
Market Combinations – cont’d
Supplies $20 $5
Labor – preparation and sales 96 36
Transportation 15 15
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. ChaseFarm Management Field Specialist
115 9th Street NEOelwein, IA 50662
(319) [email protected]
http://www.extension.iastate.edu/agdm/fieldstaff/cchase.html
