What is profit?
Simply put profit is the number of earnings that exceeds expenses in a year or period. Running a profitable farm is a very challenging form of business but many would say it has its perks despite the difficulty.
Types of perceived profit
While the profit formula is relatively simple what gets factored into expenses is always going to be different from company to company. Excluding the cost of your labor as an expense can result in a skewed idea of profit. Understandably, young business owners may not pay themselves for their labor to get the ball rolling and instead invest in the company. It is important to factor in your own time to ask the question, “Can I ever be profitable in my market and where can I be more efficient with my time?”. If you broke an arm or were unable to run the farm for a year, would you be able to pay someone to take your place?
These are all great questions to consider as we think about farming as a profession and explore our market.
Hidden or Unexpected Expenses
It is often very easy to watch or listen to somebody selling a pitch on how to be successful farming but if they do not explain any of the hidden expenses in starting or running a business chances are they are making more money off of selling you the dream.
Labor
If at any point you hope to grow your farming business and employ someone at your farm there are many legal requirements per state or country regarding labor, insurance, and safety. To meet all your local and federal compliances often requires yearly fees that were once not applicable when it was just one or two people internal to the business.
Taxes
If you are new to running a business don’t forget that before we calculate our profits we will see reductions for employers’ social security and medicare for any employee’s paychecks. We also have to pay state sales tax and if you made a profit on the period then State and federal income taxes may take a nice portion as well. It is important to know your local tax rates while determining if your business can be profitable and help you decide on your efforts.
Tools
It may seem that farming is a low-cost business to get started in but more often than not there are huge leaps to be made in efficiency with tools or mechanization. Often we need to find what is taking too much time or effort to stay competitive with pricing your product for the time invested. Making well-thought-out investments in tools that reduce your workload or help create a better product is often worth it.
Local Market Research
As they say in farming, you are not a professional until the 10-year mark. So for your beginning years, you are asking the market to pay often full-price or a higher than average price for an inexperienced job or inferior product. It is a big ask so learning to interact with your customers and build relationships is just as important as eventually having a mastery of the product or service that you are offering.
If relationships are important in getting started with our farming business then we should try to avoid wholesaling as this will skip over relationship building. Generally, with farming, our profit margins are very small as we compete with much larger corporations or large-scale farming businesses. These operations grow at an economy of scale, meaning they can provide a product at a lower retail or wholesale price due to the quantity of product produced. They are heavily invested in machinery and rely on networks of infrastructure to operate. Where they fall short often is customer relationships at a retail level and this is a great opportunity for small farmers to fill the gap. But first, it’s very important to explore your local market and see if there are enough potential customers that seek out local markets and value your services.
Market Saturation
It is sometimes a difficult idea to swallow that your product may not receive the response you had hoped from your local market. This is why making an effort to examine market characteristics is very important. How many businesses can you find that offer a similar product that you were considering?
Mushrooms, grassfed meats, and “organic” produce look around at the beginning of a farmers market at the volume of products displayed at a market and then come back at the end of the market to see how much success these vendors had. This may identify a niche for you to fill or give you an indication of market saturation. Or if the market hasn’t quite picked up and the vendor appears to have a moment, approach them and ask how their business is going and what insights they can share. More often than not farmers enjoy talking about their struggles or success.
Just because a market is saturated doesn’t mean that you cannot find profitability in that niche. It only means that you will have to be more inventive with how you will deliver your products and capture part of the market share.
Pricing & Scale
When choosing a niche for your farm it is important to examine local prices. On my farm, at one point we were making goat cheese which sold very well but we only had 2 milking does and had not invested in any equipment. It was a huge time suck with a low payout compared to other things that we filled our time with when we stopped milking the goats and making cheese. Having an idea of the economy of scale to run a portion of your farm is important to make wise decisions to get to that number of goats where it now makes sense. At the same time that I was hand milking 2 goats, I could have machine milked 8-10 goats for example.
Too many Markets
Another consideration in your market research is to look at how many and how often are they market opportunities in your area. When there is a farmers market every day of the week within 5-10 miles of your local cities or suburbs and lots of them be weary. This probably means that you will only be presented with a fraction of your potential traffic. This was one of the issues that continues to hurt the profitability of farmers in Virginia is the over-abundance of markets and convenience. You now have to attend three markets to see the same amount of traffic that you may have had in the past with fewer market opportunities. This doesn’t leave you with much time to farm if you only rely on markets for traffic to your products. This is one of the reasons that we eventually started offering our farm products on our website.
Branding and Marketing
Branding or the name, or image that people associate with your business can be very helpful towards finding your niche in a market. Humans are drawn toward things that look good. From your website to your logo, we want to spend time fine-tuning these things to attract more potential customers.
Or potential customers are over-saturated with information, and advertisements and it’s important to be precise, offer value, and look good if we ever want to successfully advertise our services. Then finally we need to deliver!
Diversity in Sales or Income
Just because you produced it doesn’t mean it will sell! Having a mixture of products and potential income sources may be better than being too narrowly focused. A market will only sell a certain amount of one product. For example, I could bring 100 quarts of apples to one market and only sell 10 of them. Having a variety of products increases your chances to capture more sales in a given market. The more that you produce of one thing, the more places you will need to offer it to sell all of it.
Non-perishable products that have a longer or indefinite shelf-life are a great addition to perishable items such as eggs, vegetables, fruits, or mushrooms.
Land Use
Depending on your situation, or the land available ideas such as on-farm dinners, events, farm stays, or camping are great ways to add value to your business. It will help with community building, and exposure, and may lead to more sales of your farm products as well.
Education
Offering paid tours, how-to classes or digital courses are also great ideas to help your farm seek profitability.
Often people are willing to spend more money on leisure or education than they will on local products. With the prices presented in the Costcos and local grocery stores, it may be down to lower cost and convenience that they skipped your products. That is why increasing exposure to your farm through education and events on your farm could increase local awareness that spending the extra dollar on your product will keep you in business.
Stacking functions on a farm
Again having more variety of products offered on your farm also benefits your budget. The more that you produce that you would have otherwise needed to buy means that all those ugly veggies are yours for the taking.
Homesteading
With perishable items, often you can’t move all your product. If you can find the time, there are many great ways to preserve foods from the growing season into pressure canned soups, pickled vegetables, dehydrated foods, and frozen items. Food preservation may be a big part of your first 10 years of farming to help lower the livable income that you would otherwise need if buying everything off the farm.
Recap
Starting a business that relies heavily on yearly expenses is always going to be a risk. Hopefully, with correct planning and strategies, you have enough information to decide if you want to start a farm business. Or maybe it makes more sense to just have a small-scale operation on the side of a different job with less risk.
Always remember that farming has a built-in risk- that you are only in business as your body ables. This is why we want to always be thinking about profitability and strive for systems that can be replicated by a laborer.
It takes time to build a following of great customers but farming is a lot of hard work, trial and error, and can be very satisfying to reap what you sow. I hope that our future supports more farmers and our consumer habits change to favor local businesses.
