Planning for Profit……
Starts with keeping and
understanding your records…
Craig Chase, Field Specialist
Farm & Ag Business Management
Plan for Today
• Discuss pricing, margins, and whatever
else you want to (this is your program).
• Be informal – ask questions when you
have them.
• Summarize and answer any follow-up
questions.
Initial Questions to Think About
• You want to grow tomatoes and notice
the local grocery store has California
tomatoes for $1.50 per lb., at what price
should you sell your tomatoes?
• Remember that this same process can
be used for any product from whole
chickens to gallons of milk.
Initial Questions to Think About
• You ask potential consumers what they
would be willing to pay and they say 10
– 20% above grocery store prices, at
what price should you sell your
tomatoes?
Initial Questions to Think About
• If you produce 750 lbs of tomatoes in a
4x100 ft bed were you profitable? (why
or why not?)
• If your highest price for selling tomatoes
was $2.50 per lb last year were you
profitable? (why or why not?)
Initial Questions to Think About
• Pricing must take into consideration 3 things:
– Competition – who is your competition?
– Customer – who is your customer and what are
they willing to pay?
– Cost – what are your costs and how do your
costs relate to your price?
• Although all three are important, if your price
isn’t higher than your costs, how long will you
be able to stay in business?
Initial Questions to Think About
• So what is the key to achieving
profitability and running a successful
business?
• My view: understanding profit margins
and pricing accordingly.
Profit Margins
• So what are profit margins?
• Profit margins are the difference
between what you sell a product for and
what the total cost of the product was to
produce and market that product.
Profit Margin
• So if you sell your tomatoes for $1.50
per lb. and you don’t have any idea
what they cost to produce and market,
how did you come out?
• How many tomatoes do you want to
sell?
• To answer that, you need to figure out
your costs…you need to start with an
enterprise budget.
What is an Enterprise Budget?
• Estimate of costs and returns to
produce a product.
• For producers who grow a large
number of different products.
– Develop budgets for those products that
contribute the most to business goals.
• The process is the same for all scale
of farming operations.
Enterprise Budget
• Or start with an enterprise budget for each
major part of your business.
– Example, CSA with poultry/livestock. Complete
a CSA and livestock budget.
– CSA with multiple seasons and use of high
tunnels/greenhouses. Complete an enterprise
budget for each season (spring, summer, fall) or
production system (open ground, high tunnel,
greenhouse).
Simplified Enterprise Budget
Salad Greens (4x100 ft bed)
Revenue: 30 lbs @ $5.00/lb
$150.00
Crop inputs: (Seed, fertilizer, etc.)
7.00
Labor
28.00
Supplies
1.00
Ownership (machinery, land, irrigation)
11.00
Total cost
$ 47.00
Return over total cost
$103.00
Simplified Enterprise Budget
Green Beans (4x100 ft bed)
Revenue: 120 lbs @ $3.00/lb
$360.00
Crop inputs: (Seed, fertilizer, etc.)
23.00
Labor
182.00
Supplies
4.00
Ownership (machinery, land, irrigation)
11.00
Total cost
$ 220.00
Return over total cost
$140.00
Types of Decisions
• Now that you developed an
enterprise budget, what do you do
with it?
• You can use it for pricing, but you
can also use it to make changes to
your:
– Production practices
– Product mix
Changing Production Practices
• Use the budgets to calculate breakeven prices and yields.
– For example, cost per lb. of beans sold was
$1.83 ($220/120 lbs).
– Compare this number to other producers or
published budgets to determine where costs
are different and why (benchmarking).
– NOTE: add marketing costs to your cost of
production.
Changing Production Practices
• A second reason – track key costs.
– Green bean example, $182 (or 83%) of the
total production cost is labor. Most of the labor
is weeding and harvesting.
– Question - can labor be lowered without
reducing yields (i.e., can labor be more efficient)?
– Crop inputs is a small percentage (10%) of total
production costs, a 10% reduction in costs
won’t affect total production costs significantly.
Don’t spend time on small items…
Product Mix
• Enterprise budgets allow for a
comparison of profitability and labor
usage among the various crops grown.
• For example, green bean returns over
total costs was $140. Labor usage was
18.25 hrs. Returns over total cost per
hour was $7.69.
Product Mix
Returns over Total Costs
Hours of Labor
Returns over Total/Hr
Asparagus
$ 35.47
2.95
$ 12.02
Basil
$ 164.19
6.90
$ 23.80
Carrots
$ 54.02
5.35
$ 10.10
Cherry Tomatoes
$ 181.11
11.20
$ 16.17
Eggplant
$ 85.02
6.45
$ 13.18
Specialty Green Beans
$ 140.27
18.25
$ 7.69
Garlic
$ 43.89
7.15
$ 6.13
Greens
$ 102.90
2.80
$ 36.75
Heirloom Tomatoes
$ 547.21
11.20
$ 48.86
Potatoes
$ 61.65
5.10
$ 12.09
Red Raspberries
$ 131.50
6.15
$ 21.38
Snow Peas
$ 58.45
7.65
$ 7.64
Strawberries
$ 55.46
1.55
$ 35.78
Comparing Budgets
• A quick comparison of the crops in the
previous slide indicates annual returns
over total costs ranged from $35.47 to
$547.21.
• Labor usage ranged from 1.55 to 18.25
hours.
• Returns over total costs per hour ranged
from $6.13 - $48.86.
Product Mix Summary
• Labor should be considered a scarce
resource - limited number of hours for
any farming operation.
• Analyze not only returns over total costs,
but also returns over total costs per hour.
• Some products with lower returns over
total costs may have higher returns over
total costs per hour because of low labor
requirements.
Product Mix Summary
• Exercise #1
– Read through and answer the questions –
take about 5 minutes
Back to Profit Margins
• So if you sell tomatoes for $1.50 per lb.
that cost you $0.38 per lb. to produce,
what was your production margin?
• $1.12 per lb.
• How many tomatoes do you want to
grow and sell at that margin?
• Are you forgetting anything (hint: any
costs missing)?
Marketing Costs
• Marketing costs are those costs
associated with the marketing and
delivery of the product from the farm to
the customer.
• Marketing costs include post-harvest
handling, packaging, and storage, as
well as the time to sell, invoice, and
deliver the product.
Example: Farmers Market Costs
• What are they?
– Labor
– Transportation/vehicle
– Supplies
– Others?
Example
• 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
• Exercise #2
– Read through and answer the questions –
take about 5 minutes
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 marketing costs for the season
Total marketing costs allocated to tomatoes
(percent of total sales) – 15%
Total marketing costs/lb sold (760 lbs sold)
$7,760
$1,164
$1.53
Total Cost
Production cost per pound
$ 0.38
Marketing cost per pound
$ 1.53
Total cost per pound
$ 1.91
Back to Margins
• So what was the price of the tomatoes?
• What margin would I get?
• What should I do?
• NOTE: This procedure should be
repeated for each marketing outlet
used.
Back to Profit Margins
• So if you sell your tomatoes for $1.50
per lb. and they cost you $1.91 per lb. to
produce and market, what was your
profit margin?
• -$0.41 per lb.
• How many tomatoes do you want to
grow and sell at that margin?
Back to Profit Margins
• Can you change your production practices?
– Is it possible to lower costs of production without
affecting yields or increase yields without
increasing costs?
• Can you change your product mix?
– Is it possible to focus on higher margin products ?
• Can you change your marketing outlets?
– Is it possible to find a higher margin outlet?
• Can you raise your price? Are you courting
the right customer?
Pricing
• Number #1 question…what price should
I sell my products at?
• For an individual product, what does it
cost me to produce and market that
product?
• If tomatoes cost me $1.91 per lb. to
produce and market, what should my
price be?
Pricing
• What are your consumers willing to pay
and what is your competition allowing?
• How much above your breakeven cost
are these prices?
• What is your net farm income ratio goal
(10yr Iowa average for all kinds of farms
was 20-25%)?
Pricing
• So if you want to net 20% of your gross
income and your break-even cost is
$1.90 per lb., your sales price would be
$2.38 per lb (2.38-1.90=0.48; 20% of
$2.38).
• Will your consumers and competition
allow this price (maybe higher)? The
goal is for the farm, not one product.
Pricing
• Same process regardless of what you
are producing…
• Example – CSA share cost you $240
per share to produce and market, price
it at $300.
• Chickens cost you $2 per lb to produce
and market, price at $2.50 per lb.
Pricing
• Exercise #3
– Read through and answer the questions –
take about 5 minutes
Summary
• Although pricing needs to take into
consideration competition and
customers’ willingness to pay…
• Profit margin can be consistently
obtained only if production and
marketing costs are known.
Summary
• In addition to pricing, budgets can
help in evaluating production
practices, product mix, and evaluate
marketing outlets.
Questions…..
Any questions or comments?
Thank You for This Opportunity!
Craig A. Chase
Leopold Center for Sustainable Agriculture
Marketing and Food System Initiative Program Leader
Iowa State University Extension and Outreach
Local Food and Farm Program Coordinator
Local Food Systems and Alternative Enterprise Analysis
209B Curtiss Hall
Ames, IA 50014
(515) 294-1854
cchase@iastate.edu