By Tom Wrchota, Omro, Wisconsin — Most of conventional agriculture treats productivity as the be-all, end-all for financially successful farming. Productivity is nothing more than measuring inputs and outputs, such as how many pounds of grain it takes to produce a pound of beef, pork, lamb, or chicken. So productivity is the study of how items relate to each other.
Much more important than productivity is profit, which is margin multiplied by volume, minus expense.
As I noted in my last article (February 2006), your per-unit margin determines the volume required for an adequate living. Both low-volume/high-margin and high-volume/low-margin enterprises can achieve adequate profitability. However, for us “stone-throwers” the latter is not a wise choice, since our advantage over the goliaths in our industry comes with using our marketing and production flexibility, plus our wits, rather than our muscle.
To stay out of the big boys’ crosshairs, Sue and I elected to serve a very small, emerging market. We could move into it with little competition, allowing us to learn and grow in step with our market’s development. It allowed us to place emphasis on the financials from the get-go, since we actually created our market one client at a time. As market demand and profit margins picked up over the years, we seeded down more pastures and grew more cattle. Finally, four years ago, Sue joined our farm full-time because we wanted to increase sales, efficiency and profits per buyer, which demanded additional farm products and labor.
The niche market we serve is changing, and the financial dynamics necessary to succeed are also evolving, so our startup model might not be appropriate now. Most major regional farmers’ markets are becoming very selective in allowing producers to join. They now want lots of product differentiation to satisfy market-goers. Business reputation and adequate product availability are often key criteria for producer entry and acceptance.
Meanwhile, grass farmers who have developed good local reputations and considerable niche market “ownership” have a natural advantage over the less-experienced producer who is dealing with meat quality and quantity issues, along with getting known in certain client marketing circles. So, newcomers will have to explore their own paths.
Despite our own, slow-going efforts, folks continually ask us for a quick formula for “making it” without the complications that come with offering multiple products. We’re often asked about an enterprise size that’s necessary for making a “good” living solely off a direct-marketing, grass-fed beef herd in our northern region.
The quick answer: “It depends.” It depends on your desired living standards, how much you can or are willing to work, how much land you can control, and how much debt you will incur and need to service. It depends on the product prices you can charge, expected per-unit production costs, how many clients you can “capture,” and the production efficiencies and marketing plans you will need to meet your financial goals.
Nowadays, it takes about $40,000 to $50,000 to cover the costs of a typical farm family. So, the key question: How many dollars of gross sales will it take to satisfy the basic needs of an average farm family?
Sue and I can generate about $30,000 of income from $100,000 of gross sales. However, ours is a low-input, debt-free, highly diversified direct market business in which beef contributes about 50% of our gross. The margins in our beef enterprise can swing from 20% to 40% annually in selling 20 to 30 head.
Thus, if we were solely grass-fed beef marketers, most likely we would need about $175,000 in gross sales to net $45,000. However, we are not a typical family, as we are not supporting children, and our land base is debt free.
Let’s look at a younger, full-time Wisconsin grass-farmer, with kids and a wife working in town, who is well established in niche markets similar to ours. He’s closer to “typical.” This farm is higher-input and has debt. It grosses at least double what Sue and I do, but his current income draw potential is about the same. Because of his increased capital spending he has a much larger production and marketing infrastructure, which may pay off in the future.
Our higher-cost competitor would most likely have to generate at least $300,000 for the same earnings as we could attain from $175,000. In the case of this younger competitor, a $45,000 draw still should provide about $30,000 for debt payments and capital improvements or other off-farm investments. This assumes out-of-pocket costs take about 75% of his revenue.
If he is efficient enough to direct market 85% of his 1,150-lb., grass-fed beeves at $1.95 per pound, the gross income per beef calf is $2,242.50. This is high-priced beef by commodity standards, but we both sell about 24 head each year while charging these prices. Since we are assuming a 75% operating expense ratio to raise these calves and pay for their mammas, the net would work out to $560.63/head.
At this margin, the young grass farmer would have to produce and direct market about 80 finished calves to reach the $45,000 income target. Even assuming this grass farmer buys about two-thirds of his hay, he would need to control at least 200 acres of managed pastures in our region, since there would be about 92 cows to graze in addition to heifers and steer calves.
Selling 80 calves at those high prices is a major marketing feat. An alternative is the emergence of companies that are willing to purchase grass-fed calves. If you follow these buyers’ cattle protocols, and are lucky enough to have all of your grass calves qualify, they will buy your grass-fed beeves for about $1.05 per pound live weight.
Using this alternative, gross income per 1,150-lb. beef calf would be $1,207.50. With the same out-of-pocket expense, the grazier would net about $302 per head. This person would need to raise almost 150 calves, with 173 cows, and control at least 350 acres of grazing ground.
From my experiences and observations, it is difficult to pay for land solely from a direct market, grass-fed beef enterprise. For the grass farmer with little equity, it looks like off-farm income from would be needed. The other obvious route would be what Sue and I did, which would be to own (or lease) the land before seeking to make a living solely from the farm.
The numbers tell me that in a smaller enterprise, having a lot of different, higher-margin (and more labor-intensive) enterprises to go with direct-market beef will usually make more sense than beef alone. This tactic also allows you to utilize labor and time much more effectively.
If you are already an experienced grass farmer with access to at least 350 acres of pastureland and other necessary physical capital, you might want to learn more about marketing your calves through a grass-fed purveyor. My general recommendations for most younger people looking at grass-fed/direct marketing:
– Make a pile of money in a non-farm business.
-Control land within 35 miles of a major metropolitan area.
-Start real small and learn slowly while keeping the off-farm income.
-Be willing to look at multiple enterprises.
All of the above-mentioned income and cost numbers are subject to differences based on individual situations. I encourage potential grass farmers to visit www.misa.umn.edu, and click on “Building A Sustainable Business.” It is a complete guide to developing a business plan for farms like ours. Insert your numbers on the worksheets provided to determine your budgets.
Tom Wrchota grazes cattle and direct markets beef and other products from his farm near Omro, Wisconsin.