Economics 101: Farm to Table Edition
My in-laws live outside Indianapolis and previously lived in Chicago. Every time they visit, they fill their insulated bag with items from our freezer before they leave. Every time they ask if I'm sure when I give them their total due, and explain to me that it cannot possibly cost that little for the product we provide. "This costs half as much as it would at home," they'll say.
Conversely, we occasionally have people who see one of our Facebook posts that include a price and feel the need to comment, sometimes rudely, that the price is too high when compared to a particular store's prices. That doesn't happen often, and we are fortunate to have a fantastic customer base that generally jumps to our defense with a comment pointing out that an apples to oranges comparison is usually being made! (different grade of meat, non-local, imported, on sale, etc.)
How can both of these scenarios happen at the same time? Like any other item you buy, value and cost are not necessarily the same thing.
How are store prices set?
Ready for a dive into the inner workings of the meat industry? The four largest beef packers in the US (Cargill, Tyson, JBS and National Beef Packing Company) represent approximately 80% of all beef sold in this country. Those four companies have the collective capacity to process just over 100,000 head of cattle per day!
With that kind of volume, margins can be fairly low and still represent a significant profit potential for those companies. The average margin for these packers is expected to be $365 per head this year. This is achieved almost exclusively through economy of scale and efficiency.
Meanwhile, the cattle supplied to these companies are typically sold twice during the process. The first time from the cow/calf farmer to a feeder for an expected average net profit of $125 per head. The second time from the feeder to the packer for an expected average of $13 per head net profit. (Which likely provides the answer to why you often see feedlots with thousands of animals)
Furthermore, retailers buy wholesale beef from the packers, sometimes referred to as box beef, and then resell that beef to their customers. Meat departments and most butcher shops buy this box beef and further process or repackage it into the cuts you see on store shelves. While it is more difficult to find data for their margins, the USDA publishes a report indicating that the gross spread from wholesale to retail is $3.57 per pound. This does not, however, give us any indication for what percentage of that number is profit.
The key takeaway here is that each step of the process is volume driven and profit is made by selling a huge amount of product for a relatively low profit. We sell approximately 50 beef per year, which represents our entire calf crop minus some replacement animals we keep!
Obviously we could not survive as a viable business if we only did what is traditionally considered farming. Even if you factor that we raise our own animals and feed them ourselves, the above mentioned profit for those two activities combined is only $138 per animal, which would represent less than $7,000 per year profit!
How do you compete at all?
The only path forward for a small farm that wants to be economically viable is to control as much of the process as possible. That is the precise reason we started selling meats direct to consumers several years ago. We have grown since then and now sell all of our animals (cattle and hogs) direct to consumers. Also, all of the non-GMO corn we grow is used to feed these animals and to produce non-GMO feed options for other like minded farms. At this point, soybeans, which is important as a rotational crop for our corn, is the only product from our farm that is sold in a traditional commodity fashion for a market set price.
It may feel good to pat ourselves on the back for what we are accomplishing, but the products we provide still have to provide a great value to our customers or they won't buy them. We strive to provide a unique product. Our animals are all raised on our farm their entire lives. While there, they eat feeds and forages that are non-GMO and also grown on our farm, aside from some supplements that are also non-GMO, but must be purchased.
We do not use any hormones or antibiotics on any animals that we use for meat production. If an animal gets sick and requires antibiotic treatment, we will obviously care for that animal and give it whatever treatment it requires, but that animal is no longer suitable for use as one of our meat animals and is sold in conventional fashion at the stockyards. Furthermore, when we process an animal we will get feedback about the grade and quality of that animal and will use that information to select our breeding cattle, continuously improving our genetic potential for consistently high grading meat.
A cursory look around the internet or in the meat case of a retailer who is selling meat raised in a manner equivalent to ours with equal quality grades will show that our prices, which saw a 5% increase in August (our first since January 2020), are almost always lower than you will find elsewhere.
The reason for this is twofold. First, we absolutely do not want to price ourselves out of our home area and be forced to travel to areas with a higher cost of living to sell our products. That defeats the spirit of buying local. Second, because there are very few, if any, farms who control as much of the process as we do, there are more opportunities to find small aspects of added profit in each step. For example, producing our own feeds and not paying retail price for that input cost is a huge advantage.
The end result for our customer is a great value product that is high quality, local, and produced in a very different way than the streamlined 100,000 head per day assembly line! Thank you to all of you who keep telling your friends and family about us and allow us to share our farm with all of you.
Most of the information provided in this post focuses on beef. While we produce both beef and pork, the pork industry is much more centralized. Frankly, it was difficult to find comparable financial examples for pork to include. Aside from large scale hog farms, there are very few commercial hogs raised in this country. Fortunately, there is a recent uptick in homesteaders and direct to consumer producers like us. In fact, one of our most requested feeds the last few years is non-GMO hog feed. There are so few hogs, outside large operations, that commercial feed, especially non-GMO, can be difficult to find.