Author: Kevin Burkett

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)

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

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? 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/