Saturday, October 15, 2011
Value-Added Without Adding Value
For the last 6 or 7 years, we've marketed grass-fed lamb at our local farmers' markets. To do this legally, we must take our lambs to a USDA-inspected facility - our closest option is in Dixon (about 65 miles away) - and have them harvested and cut-and-wrapped. By converting our lambs into a meat product, we are attempting to "add value" to our production.
When the lamb market was low, this worked great! We'd take a lamb that was worth about $110 at an auction, spend $65to haul it to Dixon and have it converted into meat that we could sell at the farmers' market, and sell it retail for about $250. At this rate, we enjoyed a net profit of $75per lamb. Sure, I spent most every Saturday working (selling lamb at the farmers' market), but this system worked fairly well!
Today, our 100 pound lambs are worth about $1.90 per pound (for a total value of $190). Our processing costs have increased to $80-90 per lamb. Fuel prices have also increased - if I haul 20 lambs to Dixon, the transportation cost (for hauling live lambs and picking up meat) is about $10per head. While I've raised my prices somewhat, the retail value of the meat from one lamb is about $280. In other words, I could sell my lambs for $190, or I could spend an additional $90 to $100 per lamb. At current market prices, I am breaking even or even losing a small amount of money on each lamb - and still spending every Saturday working.
My dilemma is a micro-economic version of a macro-economic phenomenon. Live lamb prices have risen by 50% since last year (due to fewer Australian and New Zealand imports, the relative value of the U.S. dollar to other currencies, and the lack of domestic supply). Prices paid to processors (like Superior Farms, who processes my lambs) for wholesale meat have also risen about 50%. At the retail level, however, prices have only risen by about 16%. Retailers have been reluctant to raise prices more significantly because there is a price line over which consumers won't cross. Rather than buy lamb, the theory goes, consumers will buy a cheaper protein (beef, chicken or pork).
We see this in our farmers' market sales. While we've raised our prices slightly, we are reluctant to go much further. We feel like our customers will not buy a leg of lamb that is priced at more than $10 per pound. As I've indicated above, our current prices result in a total lamb value that results in a loss when compared with selling our lambs to our processor (and having our Saturdays free).
What would a rational business person do in this situation? The live lamb market will most certainly decline in the next 3-5 years. We've spent considerable time and effort in developing a genetic program and brand identification to meet our customers' needs and desires. If we pull out of the farmers' market, will our customers remain loyal to us when we come back? Surely other businesses face these questions!
Every business must balance short-term cash flow and profitability needs against long term marketing strategies. One of the reasons that we started Flying Mule Farm was to participate in the feeding of our community. We appreciate the direct feedback we receive from our customers, and we like to be part of an effort to localize our food production system. On the other hand, we also need to make a living. As a husband and a father, I also feel like I need to be part of my family - working every Saturday morning can limit my ability to do so.
I'm most interested in other perspectives on these questions - what am I missing? I hope others will offer insights and perspectives!