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) 238-2997cchase@iastate.edu

http://www.extension.iastate.edu/agdm/fieldstaff/cchase.html