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Methods for calculating marketing costs

By Jim Munsch, Coon Valley, Wisconsin — Take a stroll through the meat market, do some math, and your first inclination is to say that direct marketing of beef will pay a producer.

We farmers have been basically saying that for years. Ever since I can remember, I’ve heard uncles, cousins and neighbors complain about store prices for food, and the fact that the “middleman” is making all the money. Behind this emotional observation is an acknowledgement of a real economic truth: Middlemen tend to be a small number of for-profit organizations with considerable economic power compared to individual producers of much smaller scale and with feeble economic power. In some cases their performance can be inconsistent, resulting in equally inconsistent demand and prices for your products.

On the other hand, these middlemen provide a service that is important to getting that animal on the hoof transformed into meat, and putting it in front of the buyer/eater. This costs money, and they have to get paid for this service. Marketing requires some skills.

Should you do your own marketing? There are lots of personal considerations involved in such a decision, ranging from personality to labor availability. I won’t address those in this article.

Instead, let’s look at whether or not you can make money doing the middleman functions. In the April issue of Graze, I explained my approach for setting prices based on what the market will pay for your unique product and services, and then comparing those prices to the cost of producing the meat and performing the services. Production costs can vary a lot, and are also a subject for a different article. In this article we’ll explore only the cost of direct marketing.

The starting point is the price at which you can sell a finished animal without doing any real marketing at all. That price for conventional beef is easy to find. If you have a sales barn close by, you can get results of actual sales there. If you don’t want to do that, you can look on the USDA Agricultural Marketing Service web page to see sales results for finished animals in nearby markets.

Determining the price of grass-fed, organic, natural and other niche market types is more difficult, but people are buying these products on a regular basis, and you should be able to contact one of them to see what they are paying.

The second piece of the equation is the retail price, which I covered in April. But to determine the retail value of the whole animal, you need to know how much meat you can get out of an animal.

The first step is to determine the ratio of dressed carcass weight to live weight. We average 58.5%, or 585 pounds from a 1,000-pound animal. But that can vary based on gender, how much shrink occurs during shipping, and your processor’s procedures. Keep such records for your animals.

If you sell cuts of meat (as opposed to sides and quarters), you then need to go from carcass weight to sellable cuts. Our ratio is 70% sellable to carcass. With a 585-pound carcass, that means just over 400 pounds of saleable cuts. Averages vary depending on your animals and how your processor does things so, again, you should keep your own records.

To get the retail price of saleable meat, you need to know the cuts you’ll get, and price each of them out based on their value in the market as we discussed in the earlier article. When you tell a processor what types and sizes of cuts you want, he can tell you approximately how many of each you’ll get. We’ve kept records of this for 15 years and have good data on our cutting method.

I encourage you to keep similar records, but in the meantime talk to the person doing the cutting at your processor. Most can help out on this and, if you are going to be in the meat business, you should get to know these folks. There are other sources of information out there. One that helps me is the Meatman web site: www.askthemeatman.com.

Once you know the prices, number and weights of cuts, you’ve got the retail price potential of the animal. The difference between what you can get for it live and this price is what a middleman — you, potentially — has to work with.

So the next analysis is to learn the services a middleman performs, and what they will cost to duplicate. The goal is obvious: If you can’t figure out how to perform the services for less than the difference between your costs and the retail price potential, you are better off selling the live animal.

Some of this is easy. You usually get a bill for anything done by certain service providers, such as trucking and processing. You can also figure the costs of supplies such as gas, packaging, coolers, and other tools of the trade.

It’s tougher to figure the cost of services you perform — in other words, your labor. At least two variables are hard to measure: how much time you spend, and how to assign cost to your time.

I don’t know any magical way to determine the time you’ll invest in marketing. If you are already in the business it’s important to keep track of your time. If you are just planning, I’d make sure you think through all the things you’ll have to do, including an estimate of the time you’ll spend with each customer before and after a sale. A great assist is to talk with someone already doing it. The first time you keep records of hours actually spent, you’ll be surprised at the size of the numbers.

Putting a cost on your time can be an emotion-driven issue, but shouldn’t be. One way is to look at what else you would be doing during the hours spent selling. If you can make money some other way during times you would be selling, then from an economic standpoint that becomes the wage you should ascribe to your selling time. If your selling time takes away from producing your products, then you may have to hire someone to do the farming, and that becomes the wage to ascribe to your selling.

Basically, you have to be honest with the analysis and yourself. If you see that you will make $6-$8 per hour, is that enough for your marketing labors? You are not likely to enjoy direct marketing over the long run if you are unhappy with the monetary returns from your efforts.

Direct marketing costs depend greatly on how you go to market — how many services you offer — and these will vary a lot. Our package of selling services is modest: We sell only bundles of frozen meat, and we offer it only four times a year. Over the years we have determined that for our set-up, our customers and our pricing, cost of sales and marketing labor (not including processing) is 25-30% of the price of our meat.

In our beef production and marketing we partner with a vegetable grower who has a large CSA (Community Sponsored Agriculture) clientele that buys all the meat we produce. The CSA is large enough to have a couple of people who devote almost all their time to sales and marketing of all the CSA’s products. They do the promotion (web page, brochures, personal contact), helpin the pricing analysis I described in the April article, work on developing new products, process all the orders and, along with an assortment of drivers and handlers, get the meat delivered to where it needs to go. The CSA also has a pretty decent costing system for such activities.

So we are confident of the costs to perform these services. Yours aren’t likely to be much lower in percentage terms, and they could be higher.

The analysis outlined above looks specifically at the question of whether you can make money doing direct marketing. But it also points to cost problems, which allows you to address those problems before they become too serious.

Such an exercise involves some work, but the work is important to figuring out if direct marketing is worth the effort for your enterprise and your life.

Jim Munsch grazes organic-certified beef cattle near Coon Valley, Wisconsin.

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