Marketing and Farm Business Management

You don’t need to be an economist or hold an MBA to do good market research. It is fairly straightforward: simply ask and get answers for the following questions:

1. Who is your potential customer base? This could include individuals, distributors, stores, restaurants, institutional food services, food processors, and so on. Get demographic data on the individual customers (income, ethnicity, and family size are key variables) and business data on the business customers (gross revenues, food budgets, other suppliers they buy from, reputation, who their typical customer are, etc.). Give a handful of prospective business customers a call to find out what they might be looking for. Don’t rely on their word as a contract to buy; however, it may give you a sense of market potential.

2. Where is your potential customer base? Will you be selling off the farm only (this may be required for certain raw-milk producers, for U-pick, farmstands, etc.), in your local community, regionally, across the state, around the country, or for export? Will you be able to satisfy the logistical issues involved in getting food into these different locations (washing, sorting, packing, freezing, drying, food safety protocols, etc.)? As the distance increases, so often do the complexity and the number of middlemen (handlers) earning money off your product (meaning you will be earning less of the consumer dollar).

3. What are the current gaps in these potential markets? Are there specific products that seem to be in short supply or simply missing? Or are these markets missing high-quality or values-based products? There may be a good reason these foods are missing or in short supply. Try to understand why that may be. You don’t want to assume there will be demand for a product just because nobody else is doing it. Other farmers may not be growing that crop or animal for a good reason (climate, soils, daylength, disease pressure, poor economic performance, logistics, etc.).

However, just because the market demand for a product might currently be a little soft does not mean that can’t change over time. Consumers are growing in their education level about the food system and their desire for healthy, local food. A farmers’ market we used to attend seemed to be full of young college students and vegetarians, meaning our sales of meat were somewhat disappointing. After several years of nonstop education and mind-numbing Q-and-A sessions, many of these vegetarians started adding local humanely raised meats to their diet, and our products were their first choice because of our commitment to transparency and education. They became some of our best customers and strongest allies, but it took time. As a farmer or rancher, you need to be constantly aware of what the new trends or opportunities might be (make friends with at least one chef and one retail buyer). If you are an early adopter, you may be able to capture the market share and be considered the “go to” source of a food.

4. What are others charging for similar products? Although I believe strongly that you should price your products based on your specific costs of production, you should have an understanding of the pricing of other similar products in your marketplace. If farmers’ markets will be a venue for you, what are other vendors with crops or animal products similar to yours charging? Are your products superior to theirs, such that you could charge higher prices? If wholesaling will be part of your sales mix, look at wholesale price lists from similar farmers or ask your buyer to furnish you copies from other vendors. Ask chefs what they are willing to pay and under what scenarios they would be willing to pay a premium (certified organic, humane animal care, unique flavor, heirloom variety, picked that morning, etc.). It may be possible, at least for the time being, that what you want to grow and the way in which you want to grow it will not command the price you need to raise it.

As an illustration, while attending farmers’ markets in some rural and economically marginalized areas this year, I have seen organic eggs sell for as low as $3 a dozen. Under the current organic feed prices (which have been incredibly high for the past several years), I know that it costs between $2 and $3 a dozen in feed costs alone to produce these eggs. If the market will only bear a price close to $3 a dozen, it may not make sense for you to produce eggs at this time, or to produce them for this particular market segment, because you will not be profitable. However, test the market first (on a very small scale, before making any large investments) before you make the assumption that your local market will not bear the fair price—you may have a higher-quality product that consumers will recognize and reward.

If you will have to travel farther to get to higher-priced markets, will the transport costs negate any potential price gains?

Examples of Food Product Research

To expand on the subject of market research, let us discuss some of the nationwide food purchasing and consumption trends. This will be essential for good planning. With the economic downturn of the last several years, unemployment and poverty have risen, driving American consumers to look for more value in their food purchases. Coupon redemption is up 25% from 2009 to 2010 (Compass Natural, 2010), eating out is down, and Walmart is the #1 grocery retailer in the nation (Supermarket News).

However, organic food and beverage sales are up 7.7% from 2009 to 2010, generating around $26.7 billion in sales for the organic “industry” (Organic Trade Association [OTA], 2011). This now represents over 4% of the US food market. There are more retailers than ever selling a wider variety of organic food. Even nonfood organic sales are up, reaching almost $2 billion in sales of such items as organic fiber, beauty care products, and supplements (OTA, 2011). A broader range of Americans are adding organic food to their grocery list: Indeed, the latest research shows 78% of Americans say they purchase organic food at least sometimes (OTA, 2011).

Although food trends change rapidly, especially the list of “hip” ingredients, there are some interesting changes afoot that are worth paying attention to. Can you position your farming enterprises to take advantage of any of these trends? Will you be an early adopter or come in later once a concept has been “proven”? Here is a list of some noteworthy trends, adapted from a Nutrition Unplugged blog post dated 5/8/2011 and from Steven Hoffman of Compass Natural, in no particular order:

1. Changing Demographics—Food will be more demographically directed, targeting flavors, foods, and messages to different generations and ethnicities.

2. Cooking at Home—Home cooking is on a slight upswing after being on the decline for a few decades. However, many Americans are inexperienced home cooks or lack confidence in their cooking skills; indeed, 28% don’t cook because of their perceived lack of skills (Impulse Research, 2011). They are still looking for ways to cut time and make dishes more “foolproof.” Think frozen, precut ingredients, as well as heat-and-eat dishes.

3. A Return to “Americana”—There’s been an upswing in anything that is or perceived to be local or farm raised or has traditional “American” flavors. Regional American cuisines are increasingly popular.

4. More Natural, Less Processed—Foods that have fewer ingredients, no preservatives, no “chemical-sounding” ingredients, or more whole grains are becoming more popular. “Natural” appeals more to consumers than “organic” does now, despite the fact that the term is unregulated and sometimes used in a misleading way.

5. Rise in “Functional Foods” and Eating for Nutrients—Consumers are looking for food fortified with or naturally high in protein, omega-3 fatty acids, antioxidants, fiber, and so on.

6. Desserts and Retro Flavors Making a Comeback—Despite our obsession with weight, we are splurging on desserts at least two times a week. Caramel, butterscotch, malt, and vanilla are making a comeback. Homemade ice cream, popsicles, and cupcakes are hot, but there is also more interest in sugar-free and gluten-free desserts.

7. Return to Three Squares a Day—Eating breakfast at home is on the upswing, as are to-go breakfast foods such as breakfast burritos. Ethnic and minisandwiches are also popular for lunches.

8. More Entertaining at Home—Folks are entertaining more at home and less by going out.

9. Value Plus—Companies that can communicate both good price value and other benefits (health, environmental, social) will continue to grow in this tough market.

10. Sustainable Packaging—People are more and more concerned about food packaging, principally that it does not leach any harmful chemicals into the food and that the packaging itself produces less waste.

11. We Love Animals—More consumers are concerned about animal welfare and searching out products that convey improved animal-care practices.

Marketing Farm Products Locally

“Local” is the new buzzword, and it likely will be for some time to come. People are increasingly interested in keeping money circulating through their local economies and want to see farmers continue to survive in their local landscapes. There are considerable advantages to both a farmer and a community when the sales stay local. However, a farmer may want to diversify the geography of sales to reduce risk, to seek out higher-volume sales, to tap into better-paying markets, and for a suite of other reasons. Many farmers I meet do a combination of local direct sales and regional wholesaling. Some who live quite far from population centers also do direct sales but travel less frequently, selling via a monthly or quarterly buying club (this works better for frozen or nonperishable products).

It is important to think about your geographic reach and all the strings attached, particularly perishability, food safety, and transport logistics. What may at first appear to be a good market may involve more logistics and more costs than you care to entertain. For example, we were once asked to supply a chain grocery store with pasture-raised, organic eggs in all of their Northern California stores. This would have required us to do the following: buy a refrigerated vehicle, maintain and fuel that vehicle, hire and train a driver, insure that driver, call each store for weekly orders, pack those orders, transport those orders over hundreds of miles, invoice those orders, and purchase a more expensive liability policy.

So…another vehicle to care for in our fleet, another employee on payroll, a need for year-round consistent egg production (which would lead to a whole other group of issues), and increased administration—all to serve these more distant markets. To top it off, these stores paid wholesale prices, usually 60 to 70% of the price we could earn at closer farmers’ markets that required none of these added logistics. Think through all these issues before they cost you in time, money, and headaches later on.

Farm Business Management Tips

• Don’t grow anything without a defined market or without the “market in mind.”
• Understand your market demographics as much as possible (maybe they don’t eat kohlrabi or okra; maybe they don’t like pork but they do like lamb; maybe there is not the income level to support your high production values; etc.).
• Your market is not static. You will lose customers, and you will need to attract new ones constantly. You will have competition—what are you going to do about that? Play defense, attack, or potentially collaborate in some way?
• Try not to sell all of your products through any one sales venue (the proverbial “putting all your eggs in one basket” strategy). Conversely, don’t think you have to sell everywhere and run around distributing a small amount of product to lots of different places. This probably doesn’t make any financial sense, either, and it will drive you crazy being on the road all the time.
• Don’t get into processed, value-added food products without first doing the market research. For example, there may not be the local demand for yet another jam maker, but people may be looking for cut and washed produce. Likewise, when the economy contracts, research shows that people consume more basic staples and do more home cooking rather than eating out or eating processed foods. Will your value-added product be considered a luxury or a staple?
• Don’t attempt to compete just on price but rather on values. Unless you are a giant corporation, you should forget about competing on price alone. You are never going to be the lowest-cost producer, and why would you want to be? This is about creating sustainable, resilient farms, not corner cutters.
• Make your production values clear, and be honest about them.
• Don’t set your prices based on what you see in the store or what you think “the market will bear.” Your prices should be based on multiple factors, including a real understanding of your break-even price based on your real costs of production. Use a pricing equation to determine what the ideal retail price would look like for each of your products, and regularly revisit this equation as your variable and fixed costs change over time. Don’t be afraid to regularly update your prices.
• Do not ask, “How much will you give me?” Instead, state your price and your payment terms, being clear on how many days you can extend credit to a customer. Along with each market venue comes term expectations. The wholesalers and brokers want 30 days; retail usually varies between cash on delivery (COD) and 21 days. Restaurants can often be extremely slow to pay—make your payment needs clear up front.

More from Farms With a Future:

• Advice for Starting a Small Farm Business

Reprinted with permission from Farms With a Future: Creating and Growing a Sustainable Farm Business by Rebecca Thistlethwaite and published by Chelsea Green Publishers, 2012. Buy this book from our store:Farms With a Future.