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Why are farmers price takers?

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The start

About 18 months ago when I started this company, I had no idea how little I knew about the challenges I wanted to solve.

All I knew was that when I bought “Half A Cow” from my neighbor I got the best quality beef I’d ever had, the price was better, and by her own admission she made more than taking the cow to the saleyards.

For the last 15 or so years, I’ve been a small business owner. You try to find better suppliers or cheaper prices so you can make more and provide a better service. However, at the end of the day, the price will only go as low as the manufacturer will accept.

However, in the farming world this does not seem to be the case. Farmers are what’s known as “Price Takers’ which means that they do not dictate the price of their goods. Imagine what you’d pay for petrol if you could get away with that logic!

So the situation with my neighbor seemed a little odd from an outsiders perspective. I had many thoughts … like how can you run a business if you don’t know how much you’re going to get paid?

How can you make good decisions about stock levels or investments in equipment etc. if your final price is a constantly moving target? Not to mention the other challenges of farming outside of anybody’s control like the weather and the seasons!

I had stumbled onto a scenario that, from my perspective, could be improved.

  • The meat was better.
  • The price I was paying was lower than a supermarket for similar or better quality.
  • The person doing the work was getting paid fairly!

Seems fine – so what’s the problem?


The Problems – Supply Side

AKA How do We get Meat from Cows?

So if the meat is better, the price is better, and the farmers control the supply, then why don’t farmers get to set their own prices?

(For background I live in Australia, so some of the following may not be true to your country. We also sell more than beef, however I will mainly focus on just beef for clarity)

At it’s core, this is a problem of Supply and Demand. When you have an over supply your prices go down, or when you have a lack of supply your prices go up. (or a perceived lack of supply like when there’s a shortage of iPhones)

Looking at the supply side you’ve got the farmers and the cow… But a cow doesn’t become steaks simply because people want steak. To fully understand the supply side of the equation you have to examine the process and mechanism in more detail.

For meat to legally be sold in Australia it must be processed at a registered abattoir and then ‘cut up’ by a registered butcher. Transportation of meat to the end consumer must also be done using a registered “food safe accredited” vehicle (i.e. not a cooler with some ice)

A summary of the process looks a little like this: 

Farm > Abattoir > Butcher > Courier > Customer Direct / Retail Outlet > Customer.

Each of these steps presents some difficulty for customers to access meat, and for farmers to control the ‘value add” process between Beef and Steak.

Supply Issue – Timing and quantity

The time between buying your first female cow (heifer) and the time you can sell the first young cow (usually a steer) for meat is measured in years!

You have to first breed the cow – which takes (according to google 283 days on average) a little over 9 months. Then the cow has to grow into the right weight and age for optimal eating quality. These are known as yearlings and are typically 12 to 18 months of age.

This gives us a lead time of between 21 and 27 months or just around the two year mark. Talk about a forward planning headache!

To oversimplify a little… this leads to boom and bust cycles where good cattle prices leads to increased herd numbers, which leads to an oversupply, that results in poor prices and less cattle being bred.

If times get really tough and you sell your breeding stock, then you have to wait about 4 – 5 years before you can ‘process’ your first farm born steer!

Sometimes you just get unlucky in farming. If everybody is trying to sell at the same time and you have limited buying opportunities this will drive the price down. Typically large scale weather events or geopolitical events will have a significant effect on livestock prices a long way down the line.

Supply Issue – Abattoir Access

If farmers can’t turn their cows into steak, then they can’t sell steak, they can only sell cows. Over the last 20 years small local abattoirs have been gradually going out of business and closing. Larger processing facilities have taken their place, often in central locations.

  • More travel time for farmers
  • More stress on livestock
  • Greater transport costs for processing

 These larger processors prefer to work with larger farms and in some cases do not even offer “service kills” (Essentially where farmers keep the meat) Those that do sometimes impose restrictions such as a minimum number of head per year, or per ‘run.” This may not sound like too much of a hurdle, but if your minimum processing run is 20+ cattle at once, you’ve excluded most of the small-scale farmers in Australia!

Abattoirs (processors) also see an opportunity to purchase the cows directly from the farmers, convert them to meat and pocket the gain for themselves. As a “value-add” company, they are well within their rights to do this, however being both your customers service provider and competitor puts a lot of power in the hands of the processing companies.

Since founding Half A Cow Online I have had many instances where a farmers order has been delayed because the processor has simply “bumped” their processing request in favor of a larger customer.

This is of course a vast simplification of the issue and the processing industry. However, the key points as they relate to this discussion are.

  • Lack of local processing access
  • Minimum stock requirements
  • Some processors are also meat wholesalers and therefore competitors to farmers selling meat.

Supply Issue – Butchering

From the processor to the butcher!

Now we have what’s known as a ‘side’ of beef. All the parts most of us don’t eat are removed, and you’re left with a ‘dressed weight” carcass.

This must be cut up and prepared by a butcher, both for food safety and because there’s quite a lot of skill involved in turning a side of beef into the various ‘cuts of meat’ we recognize in the supermarket.

This dressed weight includes all the fat and bone of the entire side of beef, The exact amount of saleable meat is generally 20 to 25% less than the dressed weight. However to further complicate things, the ‘yield” of meat can be impacted by the cut options, the individual animal and the diet of the cow!

The butcher will cut up the side of beef, based on the customer selection using something known as a “cut sheet”. This is where the customer gets to choose between options such as Round Roasts, or Schnitzels, Ribeye or Scotch Fillet.

There are about 100 different ways to prepare a side of beef. We’ve been working with butchers and customers to simplify the cut sheet as much as practical as to not give people information overload. We will revisit the cutsheet and customer expectations later in this article.

Similar problems exist for butchers as they do for abattoirs.

  • Local access can be difficult.
  • Not all butchers will ‘break down’ a side of beef.
  • Farmers and Butchers are in direct competition for meat sales

Butchers will charge the farmers for their services with prices varying greatly between state and region. However, it is important to note that the fees are based on the “dressed weight” of the animal, and not the “meat weight” commonly known as “boxed weight.

This leads us to the other side of supply and demand… customer expectations around price, price per kg and meat purchases in general.

Supply Issue – Bulk Quantities and Timeframes

In my opinion the fundamental issue preventing farmers from capturing value from the meat market is the mismatch between the “bulk” the farmer supplies, and the ‘specific” cuts customers want.

When buying in bulk from a farmer as a side of beef or even our ¼ pack and 1/8th pack the customer is still restricted to getting the cuts of meat that are available from a side of beef.

Simply put, the shape of the cow dictates the meat cuts. You can’t change the shape of the cow, so you can’t change how much of each cut you can supply.

In a side of beef, you’ll only get about 1kg of “Eye Fillet” and about 20kg of mince! Unfortunately, that is just a reality of the cow, and can’t be changed no matter how much management theory is applied.

Without a functioning middleman with the ability to store, distribute and market the “secondary” cuts of meat on behalf of the farmer, the ‘product’ options available for them to sell are somewhat limited.

We’ve been working with farmers and butchers to help expand this supply limitation.

BoxInclusions
Try and See Box2kg – Mince, Sausages and Random Cuts
5kg Beef Box5kg – Mince, Sausages and Guaranteed mix of Prime and Secondary Cuts.
10kg Beef Box10kg – Mince, Sausages and Guaranteed mix of Prime and Secondary Cuts. (2x 5kg box)
20kg Beef Box (1/8th)A full Side of beef divided between 4
40kg Beef Box (1/4)A full side of beef divided between 2
80kg aka Side of BeefA full side of beef

The key issue here is avoiding “storage” and “Wastage.”

Simply put, farmers don’t want to, or in most cases “can’t” store meat on hold for customers. They either don’t have the facilities or the accreditations to do so. This creates a very real-world problem that determines what the farmers can “sell” to customers.

No butcher that I’ve met would be happy to hold onto the unsold portions of the cow on behalf of the farmer as they sell it off over time. Therefore, it has to be sold before the cow is at the butcher… or the farmer is “stuck” with meat they have to eat or throw away.  (Remembering of course that just one cow produces approximately 200kg of beef!)

Rightly or wrongly, I believe this is where meat wholesalers add and capture the most value from the farmers. Customers can be quite particular about what cuts of meat they want and when. For Farmer to Fridge, it’s a process of education around farmer and customer expectations that is helping us develop products to fit with customers, and helping customers expand their purchasing habits to accommodate for the realities of farming.  

Supply Issue – Animal variability and Meat Weights

No two cows are exactly the same, this means that when the butcher breaks down your side of beef you never know exactly what you’re going to get.

Meat and Livestock Australia has good, general breakdowns between live weight, dressed weight and boxed weight, however these are just that – general breakdowns.

  • Live Weight: Cow in the paddock
  • Dressed Weight: Cow after the head, organs, blood, skin and legs have been removed.
  • Boxed Weight: The weight you see on the $/kg at the supermarket or butcher.

In a typical cow you’ll get about 1.1kg of fillet steak, however from experience if your cow is 20% bigger, you don’t necessarily get 20% more fillet steak!

Due to this variability, it is almost impossible for farmers to sell individual cuts on “boxed weight” unless they are also a butcher (or work closely with a butcher) Most farmers will sell on “dressed weight” or take a estimated ‘boxed weight” that specifies the overall weight of the box but not an exact weight of each individual cut.

In this situation, I would describe these products as “inexact” as in a lot of cases the customer is going a little “on faith” as to exactly how much meat they will receive. Buying meat in this way isn’t always desired by consumers, and I will examine this in more detail during the “demand” discussion.

Supply Issue – Transportation to the Customer

In the age of convenience suggesting a customer drive 20 minutes to pickup a 6 months supply of beef can seem like lunacy. (to the customer) Farmers are more than happy to deliver, however they can not just chuck the meat on the back of their farm Ute and pop over.

In Australia, meat for human consumption can only be legally transported in a vehicle with the proper accreditation. Farmers have the option to buy or hire a suitable transport vehicle, or the transportation can be outsourced to a third party courier.

I speak from experience when I say that farmers who self-deliver almost always do a better job than a third-party courier. In fact, most of the complaints we’ve received about delayed delivery has been due to courier mismanagement. We once had an order bound for NSW that ended up in QLD because we had the same order number as another company.

Ironically, if a customer collects their meat from the local pickup point, there are no requirements on them to have a suitable vehicle.

Supply Issue Recap

As you can see there are many barriers to prevent farmers from easily selling their cows as meat.. .and believe me we’re only halfway there!

In summary – our key supply price issues are

  • Background over or undersupply of markets (domestic and foreign)
  • Abattoir access
  • Butcher access
  • End user product limitations
  • Transportation access

All these issues contribute in some way to farmers being “price takers” however the other side of the fence (Demand) I feel has a larger part to play.


The Problem – Demand – Who’s Buying the meat – and why?

In this section I will mainly be looking at how the end user – the customer – buys and eats meat. There are massive wholesale markets operating behind the scenes which for our purposes aren’t accessible to farmers.

In order for customers to buy a product there must be a sufficient and matched demand for the product IN THE FORM that the farmers can supply.

If a customer wants to buy an Eye Fillet Steak they need only pop down to their local supermarket or butcher.

However, if a customer wants to buy direct from a farm, they typically must buy a box or a side. Larger scale operations with in-house butchers are moving to a ‘consumer direct” model, however yet again this transfers the value from the farmer, further up the supply chain.

Demand – Customer Freezer Space

A side of beef is BIG. You need a chest freezer. One of the breakthroughs we’ve made is helping farmers and butchers sell a side of beef evenly between 2 and 4 people. The 1/8th pack still gives the saving and benefits of buying farm direct, while facilitating many more consumer types to purchase the beef.

An interesting observation is the customer perception of freezer space requirements for lamb. Most people have assumed that they need a full-sized chest freezer for a side of lamb. This is not even close the true. A side of lamb can in fact fit into a standard supermarket reusable bag. The meat is very dense, and you only get about 10 to 14kg from a side.

A lot of work has been done by Farmer to Fridge to help farmers and butchers find products they are happy to supply, that fit in with customers’ expectation of freezer size. Our “Try and See’ 2kg boxes have been hugely popular and have resulted in customers gaining confidence to purchase larger quantities.

The larger packs also benefit the farmers, not just in the form of increased revenue, but also from decreased butchering costs. As a general rule, the smaller the package of meat, the more the butcher will charge / kg to do your cut and pack work. Quite simply this is because it takes more time and materials to create 4 “customer ready” boxes than it does to create 1 full side of beef packed in bulk 😊

Demand – Customer want specific cuts – or at least they think they do

There will always be a time when you really just need 20 scotch fillet steaks. Maybe you’re planning a barbeque or a party. Unfortunately, for the many reasons listed above, this simply isn’t possible when buying farmer direct in most cases.

The shape of the cow determines the proportion of each cut of meat. If a customer wants to eat the same cut of meat every night then this method of purchasing won’t work for the farmer. This customer type is best served by a butcher or meat wholesaler.

However, through our research and extensive customer education we have been slowly changing the perceptions around various cuts of meat, and what is possible with a side of beef.

Popular culture has also shifted, you just have to look at “bad” cuts from 10 – 15 years ago, Brisket and Shank used to be dog food, now they’re center stage on most pub menus.

One such educational series has been produced alongside a popular influencer and butcher Jarryd The Butcher. He’s taken our viewers on a journey cutting and eating each cut of beef from a cow. Helping to educate farmer’s potential customer base how to properly cook and eat each cut of beef has significantly increased our overall order rate and customer satisfaction.

Demand – Upfront Costs

Along with the lack of freezer space, the significant upfront cost has been cited as a key reason for not purchasing farmer direct. This could be due to a genuine lack of funds, or a lack of certainly around the end product.

Against significant cost of living increases, dropping $1500+ on a side of beef, even if it is “cheaper” in the long run is a stretch for some people.

Aside from offering our smaller portion quantities as listed above, we’ve also incorporated deposits and other payment plan options into the platform to help increase the number of customers who are able and willing to buy “Farmer to Fridge”

Demand – Freshness, Fresh Meat and Freezing

Studies have shown that customers want fresh meat. Fresh is Best after all… right?

Unfortunately for farmers, unless they have a very hungry customer, or a very small beef box offering, the meat must be frozen in order to extend its shelf life.

In my personal opinion, freezing the meat does not negatively affect it in any way. However I do appreciate that this is not the case for some people.

The other side of the “fresh’ debate is a little more complicated and links back to the butcher.

The process of Dry Aging is when the “side” of beef is hung at a controlled, low (1 – 2 degrees) temperature for a period of time. Aging allows the meat to ‘relax’ and become more tender, resulting in a better flavor and a better customer experience. This process can take between 1 week to up to 21 days with the longer aged meat tasting better when compared to shorter aging period.

I do not have firsthand knowledge, but I’ve been told by butchers that one of the reasons they have superior tasting meat is due to aging process.

I may be wrong on this point, but I feel that the concept of “dry aging” is not known or understood by most customers, and definitely goes against the underlying concept of “freshness.”

The underlying challenge for farmers and the platform is to first overcome the perception of “freshness” as understood by customers, and then expand on the benefits of the ‘aging’ process.


A summary

As you can see there are significant and unavoidable factors on both sides of the supply and demand equation that push farmers towards “price taking” instead of ‘price setting’.

The “middle” of the market where the butchering and distribution takes place allows the farmer supply to align more closely with customer demand, maximizing profit opportunities.

It should also be noted that I have not mentioned the impact of global markets in this article. Their background demand of Australian beef significantly impacts the farm gate price, however for the purpose of this analysis it doesn’t change the dynamics between farmer supply and customer demand.

Farmer SupplyCustomer Demand
Bulk Quantities OnlySpecific Cuts Desired
Inconsistent SupplyLimited Freezer Space
Limited Processor AccessLimited Budget
Limited Butcher AccessPerceptions on Freshness and Quality
Transport Limitations 

What does Farmer to Fridge do to Help?

In short, we try to break down some of the barriers between customer and farmer. To help the farmer maximize the number of potential customers available to them.

In simple economic terms, greater demand for a product will result in a greater price.  If a farmer can sell one side of beef to their mates for a good price, then why not sell sides of beef to the whole country?

Our mission is to make that happen by increasing customer access to farmers, and helping farmers to understand the complex relationship between processors, butchers and end product the end customer wants to buy.

Our first step in our mission is to prove that customers will buy farm direct – even if it’s a little tricky – and we’ve done that with over $500,000 in sales in our first year alone.

As we continue to grow, and our network of farmers and butchers strengthens we’ll continue to innovate from the supply side – bringing more product options to more consumer types. We will also continue to educate meat consumers around the benefits of buying farm direct and the challenges faced by the farmers in bringing them steak from a cow.

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