When we began looking at farming in 2013/14 as something we both wanted to do as a "second career" we invested time and money to understand what sector of farming was profitable. A few things emerged, First, high-quality, source-proven, organic farm products consistently have much higher profit margins. Secondly, transformation accounted for nearly 80% of total profits, and production and distribution accounted for 20% of profits: Farmers and retailers have low profit margins and the middle bits make all the money.
A profitable farm operation needs to be involved in the transformation of its produce. The low-hanging fruits: cheese and butter. Milk, generates a profit margin of 5% to 8%, depending on milk quality. Transformed into cheese and butter, and the profit margin rises to 40% (Taking into account all costs).
Second: 20% of a steer carcass is ground beef quality. The price is low, because (a) a high percentage of the carcass, and (b) ground beef requires processing. But Processing is the price killer in a retail setting, in an industrial setting, processing costs are negligible. The profit is captured by the commercial user.
It was evident that the key to successful farming is to capture some of these transformations profits. From day 1 all our ground quality beef is sold to two local companies, none of it goes to our wholesalers. We don't sell ground beef, we sell the inputs for ground beef, they produce ground beef when they need it, otherwise, the inputs remain frozen. The other business is a high-end baby food manufacturing company, they purchase our discoloured and misshapen produce. All blemished or mishappened produce are sorted out from what we send to our wholesalers.
Both companies had been around for a few years, but were capital-starved, their owners were excellent at marketing, but in both cases, their production was artisanal and inefficient. In the sauce business, our capital led to a tenfold increase in sales. Demand was there, supply could not follow. The business is very profitable, generating an IRR of more than 30%. In 2019, the business generated negligible profits (each of the two owners paid themselves a £ 12,500 salary). In 2023, their share of dividends was nearly £ 200,000. In 2019, the two owners did everything, they currently employ 15. Before you make a comment, we did a lot more than just provide capital. That was only a small part of our participation in the business.
Recently, Jenniffer had a wild idea about our pig venture. Our little forests where our pigs are doing a brilliant job of clearing the underbrush and rooting would be perfect for producing dry ham. The vast majority of trees on our property are oaks, which produce acorns, in the pig world, acorns are the equivalent of catnip. It also gives the meat a very distinctive flavouring. Our pork will never be "Iberico" level, but it we can quickly climb the value chain. A cousin of Jenniffer has been doing artisanal dry legs of pork for 5 years. Jenniffer is putting a plan together, the biggest problem is drying in our wet British weather.
Note: It is a known fact that Jennifer can leap tall buildings and walk on water. Although it's a little hard right now. On Friday, Jenniffer left with her two daughters - Florida for 10 days! Jennifer's first holiday in 3 years.
Note2: In 2023 we acquired two additional businesses that use farm inputs in their production. Both businesses are now primary clients, in that we produce certain products for their use (not a byproduct). We have deal with our wholesalers, they handle all the prime quality products, so vegetables and fruits that are for these two new businesses are handled by the wholesalers. They get their cuts but it also means that if we have a shortage of certain products, the wholesale will make up the difference. These two businesses are far larger than the ones we bought in the past. They are also not local, about 100 miles away, hence the benefit of using the wholesalers. In fact, it was one of our wholesalers who suggested that we purchase a controlling interest in the two companies, as they were struggling.
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