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Pt. III: Business Planning to Sell to Institutional Markets

 

 How do you know if selling to institutions is right for your farm?

The first step is to understand the different characteristics of market channels, or where and how you sell your farm’s products. Typically, farmers use two types of market channels: direct and indirect. 

Direct to consumer channels include agritourism/pick-your-own, CSA, farmers’ markets, roadside stands, and online sales. Consumers in these markets are making decisions based on quality, emotion, and trust. Farmers using direct market channels typically do so because they can grow less volume and receive a higher price. 

Courtesy of The Common Market

Indirect market channels include marketing co-ops, brokers/distributors, packing houses, wholesale buyers, institutions, and processors. Commercial buyers and regional/national sellers typically use these supply channels. Buyers in these channels are also making purchasing decisions based on quality and price, but also on quantity, accurate invoicing, delivery, storage capability, packaging, farm safety plans, 3rd-party certifications, and insurance. Emotional connection is less of a decision factor than direct market channels, although this relationship-building can still be important for institutions that are trying to align their food dollars with their values. Indirect market customers speak a different language than direct market customers. As a seller, it is helpful to be fluent in that language to deliver what they’re looking for and to meet your needs. Farmers selling to indirect market channels generally have the ability to grow greater quantities of product and are thus able to take a lower price for what they produce. So, in general, marketing channels are often perceived as accessible based on your scale of production. Larger farmers are able to take advantage of economies of scale while smaller farmers take advantage of economies of scope.

 

 Market Channel Characteristics

Guide to Market Channel Selection, Cornell Cooperative Extension 2010

 

Other considerations for choosing a market channel from MSU

Labor: Selling in direct market channels is labor-intensive. USDA Ag Census data (2012) indicates that in every sales category, farmers with direct sales hire significantly more labor than farmers with no direct sales. For example, you might be able to add a wholesale account without adding staff, but you can’t increase the number of Saturday farmers markets without adding sales labor.

Infrastructure: Do you have the right tools to harvest, wash, and pack large amounts of a crop? Or enough cold storage to hold a large harvest before pickup by, or delivery to, a wholesale buyer? If not, are you willing and able to invest in the necessary additional infrastructure? 

Risk: This has two sides: a cost and a benefit. Risk occurs at every stage in production and in every market channel. It is personal and perceived differently by every farmer. Some find it risky to have a large truckload of tomatoes rejected or bought at a low price, but others like that one phone call means the entire truckload is sold. CSA’s can decrease risk by providing you with capital early in the season, but satisfying all those customers for an entire season is also risky. Farmers’ markets come with a bad weather risk; you might sell very little on a rainy day. On the other hand, selling wholesale volumes can be risky if you’re expected to deliver a truckload of tomatoes on a particular day, but the crop isn’t ready.

Stress: Every market channel has its own unique stress points. And stress often comes from your perceived level of risk. No one source of stress is easier to deal with, but what you perceive as risky, and thus stressful, may change as you gain perspective and experience.

Lifestyle and Values: Do you like or dislike face-to-face customer interaction or managing employees? Ultimately you need to balance your labor, infrastructure, risk, and stress by creating a system that works for you so you can have the lifestyle you want. 

CHECK OUT: Complete Michigan State University’s Market Channel Selection Tool to explore what   market channels might work for you based on your farm's unique characteristics and your personal preferences. 

REVIEW: NCAT Marketing Tip Sheet Series. Pp 16-27. Tip Sheets #8-#13

How would you begin planning to diversify your market channels?

Ultimately, it is about finding the right balance that works for you on your farm. Be aware that adding a market channel can increase the complexity of your farm system, but doing so can help you balance your risk. You may also be able to balance your profit equation by adjusting your production plans and diversifying your market channels. 

So just like we diversify our crops, we can diversify our markets. And diversity tends to make systems stronger and less vulnerable to forces beyond our control. The more experienced you are and the more planning you do, the greater the likelihood a market channel diversification strategy will work for you. Following the steps below will help you to make decisions and feel more confident about those decisions. You may not get it exactly right, but you will increase your chances of success.

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8 Planning Steps for Diversifying Markets

  1. Determine your primary motivation for adding in a wholesale or indirect market channel. Do you want to make more money? Are you exhausted by the grind of direct markets? Or are you motivated by knowing the food you grow will be sold to an institution that serves children, seniors, or hospital patients in your community?

  2. Review and analyze your current farm finances. Update your balance sheet, income statement, and assess your cash flow. A good practice is to update your balance sheet on January 1 every year and monitor your working capital on a monthly basis. A shortage of working capital can prevent a business from taking advantage of a market opportunity. 

  3. Make sure to report all sales (including cash sales), as lenders use tax returns to verify your income. So if you're selling things for cash and not reporting the sales on your Schedule F or Schedule C, you may not qualify for a loan to purchase the equipment needed to manage a larger scale of production. An additional consequence (beyond the risks associated with committing tax fraud) is that your business will be undervalued. If you want to sell your business, its value will in large part be determined by earnings before interest, taxes, depreciation, and amortization (referred to as EBITDA). Verification of EBITDA comes from tax returns, not a separate set of books that show more income than was reported.

  4. Understand your current costs of production. Do you know your break-even price? Pay particular attention to your labor costs. Remember, as Paul Dietmann of Compeer Financial often says, “The value of your labor is not zero.” If you aren’t already tracking your labor time, consider doing so to understand just how much time you spend marketing or managing specific crops. Use a free app to help you do this. 

  5. Understand your marketing costs. Prepare marketing budgets to compare costs and profits between the different direct and indirect market channels. Marketing costs include labor for delivery, invoicing, and selling; packaging and post-harvest handling; and processing, storage, and transportation. You should have records of all expenses for your taxes. These records can be used to calculate your marketing costs. 

  6. Complete an enterprise revenue projection exercise. This builds off the information you prepared in steps #4 (understanding production costs) and #5 (understanding marketing costs). Prepare a crop enterprise budget for the crop you are considering selling in the indirect market channel. Then compare and contrast projected earnings from different market channels for this crop. It’s critical you not only know how much you can produce but how much can be sold through each market channel. Perhaps you could easily produce one additional acre of carrots, but does your intended wholesale buyer wish to purchase an acre of carrots? How many pounds of carrots can be produced in an acre? “Play” with different market channel mixes to see what your revenue might look like. Remember to plan for some crop loss (plant a little more than you intend to sell). 

    If you are an experienced farmer managing multiple crops and market channels, consider taking this a step beyond revenue projection by completing a Veggie Compass exercise for a deep dive into your farm’s profitability. This can help you better understand which of your current crops and market channels are the most financially viable. After completing your current analysis, Veggie Compass numbers can be adjusted to help you make predictions about future profitability and alternative business scenarios. 

  7. Consider the non-financial impact of making a change on you, your family, your employees, and your entire farm system. For example, will you need additional land to grow more carrots? Does the land you are planning to use have a hidden or non-monetary value to your current farming system? Perhaps this “unused” land is playing an important role on your farm as a pollinator buffer or is planted in cover crops every other year. What about your labor needs and availability? Who will manage the wholesale account? Is this person suited for this type of work and will they have the time to take on the additional responsibilities? 

  8. Review and rewrite your business plan based on what you learn in steps 1-7. A business plan is a living document meant to guide your decision making. It should be reviewed and revised on a regular basis. AgPlan from the University of Minnesota’s Center for Farm Financial Management has a video series on developing a business plan as well as an online template. 

Comparison of Marketing Costs by Market

*Reprinted from Fearless Farm Finances by permission. 

For more information, read Chapters 18 and 19 in Fearless Farm Finances or watch Fearless Farm Finances online course Module 13 and complete the exercises. 

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Recommendations and Tips for Diversifying Markets from UVM

  1. Start small, choosing just one crop to scale up. Keep your current market channels in place. 

  2. Invest in appropriate technology/machinery for larger-scale production. Especially important are wash/pack stations, coolers, storage, and refrigerated trucks with the capacity to handle your higher volume of production. USDA’s Farm Service Agency (FSA) Farm Storage Facility Loan Program offers low interest loans for infrastructure investments like these. To participate in the program, the borrower must be a farmer and own the product while it is in storage. Mechanized harvesting systems may also reduce your labor costs. The Small Business Association (SBA) offers guaranteed loans and microloans for machinery and equipment. Some loans have lower down payments, flexible overhead requirements, and no collateral. However, the guarantee amounts tend to be lower than those from the FSA, and there are annual fees built into the interest rates. So, an SBA loan might not be the best option for farm equipment, but might work for smaller food processing operations. 

  3. Consider the cost of your delivery route. If your farm is planning to make the delivery itself, a large delivery to an institution at a lower price point could be combined with several smaller deliveries at higher price points (like to restaurants or food co-ops) to increase the cost efficiency of your distribution.

  4. Consider allowing a food hub or distributor to handle your marketing and delivery to reduce your distribution costs.

  5. Commit to establishing a relationship with your wholesale buyer. This is an on-going process requiring clear, consistent, and prompt communication. Understand each other’s needs. 

  6. As your bulk sales grow, you may want to hire a dedicated Sales Manager. 

  7. Have a clear understanding of your price point or break-even cost of production. What is the lowest price you are willing to accept that allows you to make a profit? For this, you need to track and understand your labor costs. 

  8. Be comfortable with negotiation. If you’ve done your homework on your break-even cost of production, this will be easier. 

  9. To maintain good relations with your wholesale/institutional buyer, make sure you are not over-promising the amounts you can deliver on a weekly basis. Be conservative in your production planning/forecasting. The buyer is depending on you. If you deliver significantly less than they need, they will have no choice but to seek other suppliers. 

  10. Develop simple marketing materials to tell your farm’s unique story. Emphasize the GFPP values that apply to your farm. Tailor the materials to your end user. If you are selling to a school, develop kid-friendly materials. When selling to a hospital, develop nutrition-related content. This will make you stand out to a buyer, as you will be making their job easier for them. Examples of materials include 1-minute videos, 1-page information sheets, and prepared social media posts. Use consistent branding. 

  11. Look for farmers in your region who want to do something similar and collaborate. Perhaps you could sell more easily to an institution through a farmer-run food hub, or explore sharing farm equipment with other growers. Check out the USDA Food Hub Directory for a list of existing local food hubs. If you’re interested in starting your own collaborative project, participate in a local network of farmers to meet others who might be interested in joining you! Here are some groups to check out: 

    1. Advocate for Urban Agriculture’s Listserv: Join AUA’s listserv to communicate with other urban growers and community gardeners across the Chicago metro area.

    2. Illinois Stewardship Alliance Local Food Farmer Caucus: this resource provides information for how farmers can participate in ISA’s Local Food Farmer Caucus, where growers weigh in on ISA’s advocacy agenda, drive adoption of sustainable and diversified farming practices, speak out on the need for greater transparency in the food system, raise awareness for local supply chains, and educate decision-makers on issues that impact farmers.

    3. Midwest Farmers of Color Collective: Based in Minnesota, the Midwest Farmers of Color Collective is a collective of BIPOC farmers centered on racial justice and the development of food and farming systems that honor their communities’ past, present and future. 

    4. Routes to Farm: Routes to Farm is a collaborative effort to make resources available to farmers who are launching or growing their farm businesses in the Chicago foodshed.

    5. Urban Stewards Action Network : USAN is an action-based transformational network of community farmers and partner organizations in the food system. The network holds a safe space for Black, Indigenous and People of Color (BIPOC) coalition building and redefining power in the Chicago region. 

READ: 1) Producer Perspectives a report from Farm to Institution New England to learn more about the experiences and perspectives of farmers selling to institutions in the Northeast US.

 2) CFPAC is planning to compile case studies on farms and food businesses who are selling to institutions. Coming soon! Please visit the website for updates.

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FAQ’s

Q: Are small farmers locked out of wholesale markets due to low prices?

A: No. Every small farm has a unique profit equation based on how the farm is managed. The fact you are able to command a higher price in a direct market does not automatically equal profit. Small farms generally have higher labor costs as a result of selling in direct markets and managing many different crops. It might be possible for you, as a small farmer, to add in an acre of carrots that you then sell to a wholesale buyer for a lower price, without adding a significant labor cost. This additional revenue (without many additional costs) might mean you end up a more profitable farm. 

Q: How do I determine if this is for me? 

A: It isn’t easy. You’re going to need to take a deep dive into your farm finances to understand what market channels are working well for you and what they could do for you. If you aren’t already tracking your labor time, consider doing so to understand just how much time you spend selling through direct market channels or managing many different crops. There are some neat free labor tracking apps that could help you do this.

Courtesy of The Common Market