Southern Ag Today

Author: Kevin Burkett

  • Look Out Overhead

    Look Out Overhead

    An important financial consideration for any business is the costs they incur during the year. Ultimately, it affects the amount of profit or loss that will be realized by the business. There are certain “costs of doing business” known as overhead. These are things that an organization will have to pay for but are not designated to any one activity. An example might be property taxes. The taxes are owed and necessary for the business to maintain its property and obligations but typically could not be solely attributable to one activity like raising livestock or producing a crop. Usually, the costs are known but sometimes take a backseat to direct input costs when it comes to evaluation. For a true look at profitability, overhead must be factored in. The good thing is it may present opportunities for the business to cut down on its overall spending. 

    Overhead expenses occur once a year, several times a year, or even more sporadically. The first step is making sure they are logged in the books and records of the business. They can be reviewed to make sure they are necessary, reasonable, and have ultimately been paid. Common overhead expenses include insurance, taxes, depreciation, utilities, office expenses, and salaries. This list may not be all-encompassing, and it is important to mention that any personal expenditures for these items are not included in farm profitability.  Often, the business will have a bill or receipt that includes the amount. For others, it may be more of a calculation like depreciation or extracting the business use of utilities. The main goal is to account for all “costs of doing business”. 

    Determining total overhead is the first step. Once that has been completed, a producer may want to allocate the overhead costs to their different enterprises. This is not necessarily a precise calculation but is up to the owner or business manager. Some may approach it from a revenue perspective. For instance, if cotton is 50% of total farm revenue, then 50% of overhead will be allocated to it. Another method may be according to labor hours. If the time spent on a particular crop is 50% of the total hours worked (by everyone on the farm), then 50% of the overhead will be allocated to that crop. Product mix and profit margins will be different on each farm, so it is up to them to determine what is most appropriate. 

    In reviewing the information, a farm may realize that there are opportunities to cut costs. While not advocating for a farm to run without its necessary expenditures, overhead may be where some costs can be scrutinized. Checking insurance rates every couple of years can provide the same coverage at a lower cost from a different carrier. Computer software and other subscription services may have promotions or discounts for being a continued customer. Perhaps there are subscription services that are going unused and could be cut out completely. If computer equipment is upgraded every couple of years, extending that out an additional year or two can defer the expense. Often, farmers may attend trade shows or conferences to pick up new information. Sometimes, the conference host or other farm organizations will provide a cost share for travel or reimbursement for the conference. 

    The above are only a few ideas of cutting overhead costs. Individually, the costs may not account for much, but an effort to manage overhead can provide significant combined savings in the long run. If a farm is operating fairly lean from an input perspective, overhead may provide other opportunities to affect profitability. At the end of the day, revenues minus expenses determines net returns. Which expenses are reduced does not matter for the overall equation.

    Burkett, Kevin. “Look Out Overhead.” Southern Ag Today 3(52.3). December 27, 2023. Permalink

  • How Much Can I Sell This For? Part III

    How Much Can I Sell This For? Part III

    As a continuation of the “How Much Can I Sell This For?” series, this article focused on evaluating market potential. Part I, Part II. 

    Producers may have different opportunities with CSAs, restaurants, farmers markets, wholesale markets, on-farm, and retail outlets. So how can these avenues be evaluated? It will likely look different depending on the producer. For risk management purposes, it is recommended to set up multiple marketing channels. If one market is lost, there are still opportunities to make sales and find buyers for all of your products.

    Important questions to ask include:

    • How much product do I need to move?
    • What options are available to me?
    • What type of customers are in that market?
    • Am I charging a low, middle, or high price?
    • Are there additional costs to participating in that market?

    Typically, there will be an inverse relationship between quantity of product versus price. Meaning if you have few products, you will need a higher price per item to offset cost. Conversely, having greater quantity means lower cost per item but greater number of sales to make. A successful producer who builds relationships with multiple buyers will utilize several outlets and tiered pricing to hit their sales targets. Your marketing mix may also look different over time as you adapt to changing market needs and preferences.

    Here is an example of how to evaluate market potential. Assume there is $100.00 additional cost to participate in a farmers market each week. This may include a fee for the market, paying an employee to go to the market, and fuel for traveling to and from the location. That $100.00 would need to be covered by sales that week (or over the course of the season) for the market to be viable. Some weeks you may hit the target and other weeks you may not. If a market consistently failed to meet your goals, it may be time to look at other options. 

    If you were to charge average pricing for tomatoes ($1.25 per pound), what would be your breakeven for the market given this scenario? Recalling the examples shared in Tables 1 and 2 of our article titled “How Much Can I Sell This For? (Part II)”, the cost of production for tomatoes (at 38,000 lbs./acre) is $.31 cents per pound. Remember the $100.00 of marketing cost that needs to be covered. With the current scenario, $1.25 (sales price) – $.31 (cost of production) = $.94 per pound goes toward marketing (and hopefully ultimately profitability). Only when the $100.00 from marketing is covered does the business move into profitable sales. So, with the current cost of production and marketing expense you would need to sell roughly 106 lbs. of tomatoes for the market to be viable (see Table 1). 

    Table 1. Example: Evaluate Market Potential including Marketing Costs for Field-grown Tomatoes (one acre)

    Total Production Costs:$11,500 / 38,000 lbs. expected yield = $.31 per lb. 
    Sales Price: $1.25 per lb.
    Total Production Costs (subtract):$0.31 per lb.
    $0.94 per lb. 
    Marketing Cost: $100.00  
    / $.94per lb. 
    So, need to sell approximately 106 lbs.

    Perhaps that sounds like a lot to sell, so you decide to raise the sales price to $2.00/lb. Perhaps you determine the marketing cost is simply too high and it would be hard to recoup the cost. Perhaps you have three other vegetables you are selling and so the $100.00 is spread over additional items. This example looks at one product and one week at the market, but we know the season is longer and there are other markets and decisions you can make over that time period. If your price is high, you may have to adjust or find other markets. If your price is low, you may be hurting your bottom line and bringing down the overall prices others may charge in your market. Some markets have little to no marketing costs while others may charge a substantial amount. While it may be profitable, you may need to move higher volumes, so you decide to combine the farmers market and other market channels to move all your product. The analysis may be done with multiple variations, and the same principles apply but the process can become more complex with more variables present. The decision to market your own products presents additional challenges beyond agriculture production decisions, and these factors can change during the season. 

    To compete in the world of agribusiness often requires flexibility. Entering the market with a base level of knowledge provides information for you to be able to make informed decisions. Finding a particular crop or market is not viable can sometimes happen on paper before it becomes a reality. Additionally, being able to pivot and negotiate, because of your level of knowledge, is a business advantage. We hope this discussion has been useful as you think of your own goals and plans for profitability on your farm.

    Burkett, Kevin. “How Much Can I Sell This For? Part III.” Southern Ag Today 3(40.5). October 6, 2023. Permalink

  • Files for the Farm Business

    Files for the Farm Business

    Sometimes, in Extension, a farmer will ask what kind of recordkeeping system is required for the farm. It is an interesting question and one that can have several layers. If we think of all the records that a farm might be required to have, it can be a lot. Records for the farm include production, food safety, labor, marketing, sales, expenses, and other business documents. All these records are important for different reasons. Typically, a farm owner will need these to analyze, verify, and produce documentation of activities occurring (or not occurring) in their operation. Sometimes, it is solely for the farmer, and other times, it may be required by a regulatory agency. Either way, having systems in place to accurately and efficiently organize this information is important. 

    For this article, we are focused on financial records for the operation. This encompasses sales records, expenses, and other business transactions (like loan payments). The first goal should be to capture everything. Only recording half the expenses, for instance, would produce a bad set of data for the farmer. One step in the right direction is ensuring a business bank account is set up for the farm. Assuming there is not a mix of personal and business transactions, this will capture how much money is coming in and out of the business. 

    A business bank account will not include everything, however. Assume, for instance, a piece of machinery was bought but did not require a down payment or loan payments for the first six months. In this instance, something significant occurred, and only looking at the money going in or out would not tell the whole story. It is important to have an organized filing system, either electronic or hardcopy, where source documents are retained, secured, and backed-up appropriately. Once all activities are accounted for, other processes can be implemented to organize and categorize the information.  

    The most straightforward method of organization is recording everything by date. An example is a folder that records everything in January 2023, February 2023, and so on. Knowing an activity occurred during April, for instance, you could locate it in that folder. While this is serviceable, having additional categorization, like whether it is an expense and what the particular expense is related to – inputs, labor, overhead, etc. provides granularity for finding specific records. For finances, recording transactions in an accounting system where they are put into a ledger provides even greater organization and an ongoing tally of everything that has occurred during the year. This ledger can be used to determine profitability, analyze the business, file taxes, and make other necessary reports from the business. The source documents should always be available for backup, but having one file that encompasses everything provides a much more workable format.

    Primarily we’ve discussed financial records of the business. However, it is important the farm owner knows all of the regulations and record requirements of their business. Ultimately, the best system is the one you understand and will actually use.  Over time, it can become more refined to meet the needs of the business. It is a balance between how much detail and organization is needed and how much time and resources a business has to develop systems to put in place. A more complex filing system would be more difficult to set up but will likely pay dividends in the long run. And as with any large undertaking, you must start “one bite/file at a time.”

  • How Much Can I Sell This For? Part II

    How Much Can I Sell This For? Part II

    As a continuation of part 1 of our “How Much Can I Sell This For?” series, we dive deeper to determine how to set our price targets. 

    It is important to know how much has been invested in order to recoup the cost. Next is to generate revenue greater than the investment in order to be profitable. Capture ALL costs of carrying out a particular activity, often referred to as production or variable costs. This varies according to how much is produced of a certain item. Think of inputs like fertilizer, seeds, irrigation, labor, etc. that will go up as you produce more. Not all crops will have the same inputs or amount of inputs so it is specific to what you are growing. Generally, total cost will go up but the cost per unit produced will go down as you produce more.

    Second, there are various costs of operating a business such as insurance, rent, property taxes, utilities, and depreciation. They are not specific to a particular crop but an overall cost to the business. It is important to know these too and then allocate them in a reasonable method. This is where it can be part art and part science. How much of the electricity bill do you charge to the tomato crop for instance? One method would be segmenting the production of your farm, and if tomatoes are roughly 20% of your farm production, you will allocate total general overhead expenses at 20%. Perhaps some costs are allocated completely if it only applies to one enterprise. Another method would be charging a percentage, 10% for example, on top the direct production expenses, as an estimate of overhead costs for the crop. With the second method, a way to check for accuracy is totaling the estimates charged from all crops and seeing if it is close to the actual overhead for the year. If so, the estimate is suitable. Otherwise, you may need to change your percentage or use a different method.

    We have done a quick calculation on 1 acre of tomatoes to demonstrate both the art and the science needed to set price targets. The examples and numbers have been simplified and do not reflect actual production costs (Table 1).

    Table 1. Example: Total Costs (Allocated and Estimated) for Field-grown Tomatoes (one acre)

    To be conservative, we’ll use the allocated method which estimates a greater cost, $11,500. This starts to give targets for marketing the product. The $10,000 of direct cost is the first revenue goal. But ultimately $11,500 or greater needs to be generated for long term profitability. Meaning we are covering the production costs and a portion of the operating expenses for the business. 

    For further analysis, this can be broken down by yield or expected yield (Table 2). The price per lb. and price per box end up being the same number in the end, but it is a different way to evaluate the information depending on how you plan to sell. 

    An additional piece of the puzzle is the cost associated with participating in a specific market. If you know there is a market fee, there is mileage, and labor hours, that must be factored in as well. In Part III of “How Much Can I Sell This For?”, we will discuss how to evaluate your marketing expenses.   

    Burkett, Kevin. “How Much Can I Sell This For? (Part II).” Southern Ag Today 3(21.5). May 26, 2023. Permalink

  • How Much Can I Sell This For? Part I

    How Much Can I Sell This For? Part I

    How much can I sell this for? This is a question producers often ask us. It is an important question and one that is not always easy to answer. Usually there are many factors to consider in pricing your farm products. In Part I of our series on product pricing, we discuss factors that may affect what you want to reflect in your product’s price.

    • Cost – It can be a challenge to hone in on this number, but it is important to know how much has been invested. The first step is capturing ALL costs associated with carrying on a farming activity. Over time these can be broken down by categories and segmented into individual crops/enterprises. Capturing product cost(s) is done through a chart of accounts and the books and records of the business. Oftentimes at the beginning of the season you may not know exactly how much you will spend. Enterprise/crop budgets are farm management tools that can help fill in the gaps. 
    • Price Comparison – Referencing other markets can tell you what comparable products are selling in area markets. Comparable product prices is helpful information to know, but it is not advised to simply match your price to what you see elsewhere. It is better to develop a range for what is acceptable. If you determined that you are profitable at $5.00 per lb. (based on your costs) but you see that a grocery store is selling for $7.00 per lb., that may help you understand what customers are willing to pay. Other places to reference would be farmers markets, grocery stores, USDA reports, market bulletins, and other places where similar products are sold.
    • Customers – Evaluating your customer segment is important because you may know what your price needs to be, but you have to find buyers that will support that. That means your customers must be willing and able to pay the set price for your product. Some questions to ask:
      • Do the customers have the means and willingness to pay? If you have premium products, who will be willing to pay for that and where are they located?
      • Is your market local or will you have to travel to reach them? If there are additional costs associated with that market, consider the additional revenue you will need to make it worth it.
      • What’s the capacity of the market? If you and several others are growing similar items but there are a small number of customers, it may be hard to make enough sales to cover your cost. Some markets may even put restrictions on what you can bring to discourage duplicate offerings. At that point, it is not a price problem but having enough buyers available. 

    Price for products can be quite variable and experience large variations throughout a season. Farmers can influence the price their customers are willing to pay through successful marketing and branding efforts.  However, other factors such as perishability may add additional market pressure. Knowing your cost, a range of acceptable prices, and opportunities to reach buyers can help net an acceptable return for your crop. 

    Part II of this series on product pricing will include an example on calculating price for a Southeastern-grown fresh fruit or vegetable. The related article is planned for release in an upcoming Southern Ag Today article.

    Burkett, Kevin. “How Much Can I Sell This For? Part I.” Southern Ag Today 3(15.5). April 14, 2023. Permalink

    Photo by Erik Scheel: https://www.pexels.com/photo/person-giving-fruit-to-another-95425/