Issue #8 - The More Money You Make The More Problems You Get
The Math of Direct-to-Consumer Meat
Notorious B.I.G. (feat. Puff Daddy and Mase - Mo’ Money Mo’ Problems
As I identified in Issue #7, first up on the learning curve is meat processing. This is something I already know a little bit about. As I may have mentioned, in my day job I am a lawyer and teacher and one of the areas I work in is agriculture and value-added production. A lot of my clients (both in the L&E Clinic and at our firm) have farms and/or process raw agricultural inputs. Erin’s background is in genetics and dairy science, she grew up on a farm, a lot of her friends are farmers and work in the agricultural industry. Her sister and brother-in-law own a beef operation spread across multiple farms (including ours). So, over the years I’ve absorbed a little bit of information about the plight of meat processing - namely the shortage of meat processing facilities in Wisconsin. We’ll explore these challenges over the next few articles.
We’ve directly experienced this plight ourselves. We get our pork and beef from two of Erin’s college friends. In alternating years we get a 1/2 hog and a 1/4 beef. So every year we are buying some portion of a live animal, call in to the processor of choice and give cutting instructions, and then wait for our cuts to be ready. It’s a great way to know where our meat is coming from and directly support farmers and local processors. It saves a little money, but does require a rather large chest freezer.
As a farmer, selling direct-to-consumer has a lot of benefits as well. The most obvious being, of course, more money that goes to the farmer. The farmer gets more money in two direct ways. First, the direct-to-consumer relationship cuts out the distributor and simplifies the flow of money. Second, director-to-consumer increases the connection between the end consumer and the producer resulting in a more meaningful (read: long-term profitable) relationship. We will discuss the second benefit next week. Let’s look at the math of Direct-to-Consumer.
When we look at the direct-to-consumer relationship, we need to know what we are comparing it to. The other option (basically) is what we would call “commodity market.” The commodity market buys a lot of meat from all over a region, combines it all together, and then sells through a variety of channels primarily in retail shops like grocery stores. The direct-to-consumer relationship cuts out a lot of the companies operating in the middle of the distribution network of the commodity market and simplifies the flow of meat in exchange for cash.
If you buy your meat (or anything really, but let’s stick with meat) in a grocery store that meat started at the rancher, goes to a slaughtering facility, then to a butcher (often the slaughterer and butcher are the same company), then to a distributor, then to the retailer, then to you, the consumer. By the way, this is true for virtually every agricultural product: farmer → value added producer → distributor/wholesaler → retailer → consumer. There can be a few other steps along the way, too1 but this is the simplified version.
The last I saw at Costco for buying top round roast was $4.49-$4.99 per pound2. This, of course, is the retail price that you, the consumer, pay. It is not how much the farmer gets. The retailer purchased the beef from the wholesaler, who purchased from the slaughter/butcher, who purchased from the farmer. The actual amount the farmer gets is much lower.
How much does the farmer get? Here is a market report from Milwaukee Stockyards in Reeseville, WI3. It’s a little hard to read, so what are you looking at? In the left-hand column is the type of cow - Costco sells mostly Choice meats, so let’s look at the better quality cows that fit the bill: “Choice & Prime Angus Beef 1200-1500# 117 to 122.” So, this is for Angus cows that weigh between 1200 and 1500 pounds and grade as Choice or Prime. The “117 to 122” is the dollars per hundredweight; a hundredweight is exactly what it sounds like - per one hundred pounds. So for every 100 pounds of Angus beef that grades as either Choice or Prime, a farmer will get $117 to $122, respectively. This equates to $1.17 - $1.22 per pound. Recall that you pay $4.49 - $4.99 per pound at Costco. The entire rest of that price is taken by either the processor, the wholesaler, or the retailer.
Selling Direct-to-Consumer creates a fundamentally different business model. There are a number of ways to accomplish the feat, but let’s take a relatively simple approach. The farmer takes the cow to the slaughter/butcher and pays a slaughter/butcher fee. Here’s the processing sheet for Wisconsin River Meats in Mauston. They charge $110/head + $10/head disposal fee4 + $.75/lb hanging weight5 as a processing fee. Typically hanging weight is about 60-65% of live weight.
Let’s take that same 1200 pound choice Angus cow. The hanging weight will be about 780 pounds. So, the farmer will pay $705(ish) in total processing fees. The farmer can now charge retail price to the consumer, or $4.49 per pound since this is the going rate at retail. The farmer will make about $35006 in total (gross) revenue minus the approximately $382 per cow it takes to raise one cow to slaughter. Or, $2,415 in profit per cow ($3500 gross revenue - $705 processing fees - $382 ranching cost)7.
You will recall in our “commodity beef” example, the farmer was getting $117 per hundredweight. For our 1200 pound cow this equates to about $1,400 in gross revenue minus the $382 is $1,018 in profit. So, Direct-to-Consumer nets the farmer $1,400 in additional (marginal) profit per head!
Direct-to-Consumer works in a lot of industries, not just meat. Your local brewpub or winery is an example of Direct-to-Consumer. The producer (or even farmer if they grow their own grapes) is the retailer and absorbs the supply chain between them and the consumer allowing them to capture the margin instead of the companies in the middle.
This is why Direct-to-Consumer is great.
I know there will be a lot of farmers saying “Ha! I wish!” and that’s a fair point. Direct-to-Consumer has it own drawbacks even from a pure cost perspective. For example, the farmer needs to invest in marketing and administration of the direct-to-consumer relationship. We’ll leave the soft-side of that to another article, but this is a real cost to the farmer - websites, sales channel costs, credit card processing fees, retail and/or refrigeration costs, amongst others. These are not trivial expenses and, of course, eat into the margin. But we have over $1,000 of margin to play with here!
Next week we’ll cover the “softer” side of Direct-to-Consumer - acquiring and managing retail customers and other parts of the supply chain!
For example, bulk aggregators like grain silos or milk tanks that might sit in between the farmer and the processor, or warehouses that might sit in between distributors and retailers, or even re-sellers that sit after the retailers and be a second tier of retail (usually by adding some sort of value to the finished good by bundling it with other things).
We’ll use beef our example throughout, but this math more or less scales for any meat you can think of.
I’m looking at this on September 20, 2021
To get rid of all the gory bits that people don’t use like blood, hooves, etc. The reality is that some processors can turn around and actually sell that for a variety of uses.
Hanging weight is the weight of the cow after the hide, head, and some organs have been removed.
There will be some waste in processing, so the farmer is unlikely to actually realize the entire hanging weight as a finished weight. This calculation is based on hanging weight of 780 pounds; in reality the finished weight is more likely to be closer 750 or even 720 or so. Ask your processor what their typical waste percentage is for doing your own math.
For those playing along at home, this is gross profit (revenue minus cost of goods sold). It does not account for “below the line” expenses like salary, administration, utilities, taxes, depreciation, etc.