by Sanne Kure-Jensen
Pricing farm products can be challenging for beginning and experienced growers alike. As a farm business, correct pricing will affect sales, marketing strategies and ultimately, determine farm viability. Cooperative Extension staff and a New Hampshire farmer shared their experience with farm product pricing at the 2013 Harvest New England Ag Marketing Conference & Trade Show in Sturbridge, MA. Michael Sciabarrasi and Nada Haddad of UNH Cooperative Extension recommended pricing models and addressed market trends. Tracie Smith of Tracie Smith’s Community Farm shared her plans to adjust product pricing for the 2013 season.
Pricing decisions must account for all production and processing expenses, transportation, competition, farm branding and product marketing. Farm entrepreneurs must understand, track and include all costs when setting prices to keep the farm business sustainable. Correct pricing is a critical for success whether you sell at farmers markets or wholesale, offer Community Supported Agriculture (CSA), run a Pick-Your-Own (PYO) operation or a farm stand.
Michael Sciabarrasi of University of New Hampshire (UNH) Cooperative Extension said, “Prices should, in general, be high enough to cover all costs, enable you to make a living wage and cover your debts, reflect a product’s value to the customer, never be higher than what is considered ‘fair’ and allow for modest losses (unsold crop or occasional theft).”
Costs can be broken into various categories. Variable costs change with the number of products you produce and (hopefully) sell. Fixed costs, which include overhead costs like depreciation on equipment and property taxes, stay the same no matter what volume you grow and sell.
Selling prices must reflect a reasonable contribution not only to fixed or overhead costs, but also to the owner’s labor and management. When setting the final price, it is important to remember that cost-based and cost plus pricing do not account for customer demand, market trends or competition.
Start with a list of all the expenses directly associated with growing a particular crop and/or producing a certain value-added product. This might include labor, soil amendments, seeds and fertilizer along with post-harvest processing, storage bins, packing and product-specific marketing. Allocate a share of overhead costs like depreciation, heat, hoses, tools, marketing, vehicle, fuel, rent/lease, office, computer, utilities, and a salary for the farm manager or owner. When raising perennials, shrubs or trees with a multi-year startup, include the prorated establishment costs. Factor in your time spent on farm meetings, marketing, training at workshops or conferences, CSA sales/management, general administration, bookkeeping and tax preparation. Be sure to remember the “Dirty 5:”
1. Depreciation on equipment and buildings
2. Interest charges
3. Repairs on equipment and buildings
4. Taxes on property
5. Insurance related to product liability and property casualty
Do not overlook opportunity costs or what your equity may have earned if it were invested elsewhere. This is compensation for your investment beyond a salary or hourly wage.
Sciabarrasi recommended allocating overhead expenses using a standard unit for all enterprises such as acres, linear feet or square feet. You might also use hours, weeks or seasons or some combination of units like equipment passes per acre, hours per row or square feet times the number of weeks in a greenhouse.
Add all these costs and compare them to industry averages and to your other farm enterprises. Calculate an initial breakeven price and then adjust up for shrinkage (product loss, theft or unsold product).
Then investigate to see if you can actually get this price in your marketplace. If not, cut some expenses or establish some efficiencies. If you cannot get your break-even price or make a profit, consider skipping this enterprise and investing in other farm efforts.
Make your calculations easier by tracking costs during the season. Keep a spreadsheet or paper system to track each of your major enterprises (greens, tomatoes, garlic, etc.) and fill it in regularly. Daily updates will yield maximum accuracy.
Cost Plus Pricing
Some growers or producers set prices by adding a specific percentage (markup) to production costs. Profits are then stated as a percent of the cost of goods sold. If indirect or overhead costs are not included in the basic cost of production, then the markup percentage must cover these costs or the enterprise will not break even or make any profit.
What are customers willing to pay based on perceived value, satisfaction of their wants and needs, quality, safety, convenience, prestige, lifestyle and image? Be sure your price will support your customers’ product image. Focus marketing efforts toward your target customers.
Discover customers’ price sensitivity to price changes or price elasticity. Do not assume that selling more products cheaply will be more profitable. Modest price increases will sometimes cause increased sales with higher perceived value. Additional price increases eventually cause sales volume decreases. Find your sweet spot for greatest profitability.
Nada Haddad recommends growers and producers check their competitors’ prices. State or regional reports are available at http://bit.ly/NEPricingReports.
Pricing in Practice
Tracie Smith watched her customers purchase smaller CSA shares because her shares were too generous. She runs a self-service farm store with an honor box (with some theft). Smith developed wholesale markets to sell excess produce and provide additional income. She prices her products close to grocery store price, and some close to organic prices, but not as high as co-ops to meet her market’s expectations (Smith has rural customers.) After calculating real costs using a similar method to Mike Sciabrassi, she found a need to charge higher prices.
Smith noted that every farm has different costs based on their real estate values, taxes, soils, weather, market saturation, location, proximity to well-traveled roads or population centers and labor and housing costs.
Smith admitted she had not accurately accounted for her overhead costs and personal salary last year due to increasing costs of equipment. She did not earn a living wage in 2012. Smith will carefully review her numbers and work toward a more sustainable pricing model into the future to ensure she earns a living wage every year.
Pricing farm products: An art or a science?
by Sanne Kure-Jensen