LSIRD NAPLIO CONFERENCE PAPERS
Direct Marketing of Livestock Products

II. Contribution of On-Farm-Processing and Direct Marketing to Safeguard Agricultural Functions

Ralf Bokermann

Summary

In order to generate additional income for farms, the farm processing with direct marketing is one alternative. For the conditions of the less favoured areas in East Hesse, two processes of direct marketing were presented. Referring to this the direct marketing of lamb in slaughter halves can achieve profit stabilisation and ensure sales. However, a considerable income increase cannot be reached.

In contrary to that, the processing of farm cheese can generate additional income and create jobs. This is also ensured in the case of higher processing capacities with the sale of the cheese at lower prices to retailers or other farm shops. All together, the on-farm-proccessing with direct marketing can considerably contribute to the safeguard of the functions of agriculture in rural areas.

1. Safeguard of agricultural functions in disadvantaged areas

1.1 Definition of the contribution of direct marketing

The less favoured areas of Germany extend 9.4m ha or of 50.6% of the agricultural area. Most of them are peripheral and rural regions. Because of unfavourable local conditions, these regions have to cope with high competitive pressure. The objective of the national regional planning as well as of the EC-policy is to preserve the agriculture of the disadvantaged regions with their multiple functions (3, p. 123).

One possibility of preserving viable farms is the expansion of the economical base through additional lines of business, in other words through diversification. These would be especially the land tourism with several variations, take-over of services, construction of commercial branch industries a well as the on-farm-processing of primary products into food products with direct marketing. - Figure 1 presents the potential effect of the on-farm-processing with direct marketing in disadvantaged areas. The primary effect of the on-farm-processing with direct marketing is usually an increase or a stabilisation of the farm income. This leads as secondary effect to the safeguard of agricultural functions in disadvantaged areas. Especial important are the following agricultural functions: Care and preservation of the landscape, safeguard of agricultural villages as settled locations, preservation of the rural infrastructure.

Figure 1: Effect of the on-farm-processing and direct marketing on regional functions of farms

1.2 A defined region as an example

The following deals with the economic stabilising effect through on-farm-processing with direct marketing. The economic conditions are represented by two procedures of direct marketing related to a particular region. As the livestock production in disadvantaged areas is far more important than the crop farming, it is concentrated on the processing and direct marketing of products of the livestock production.


Figure 2: Situation of the disadvantaged areas in East Hesse. Source: (5)

The region serving as an example are the disadvantaged areas in East Hesse. Figure 2 shows the situation of this region in the middle of Germany. Most of the region are mountain and hill areas. A great deal of the agricultural area is taken up by hill sides. The natural conditions lead to a yield level of the cultivated area less than the average. The density of the population and the added value per inhabitant lie under the abverage of the county. Therefore, the region is listed as an ovjective 5b region of the EU structure policy (3, p. 108).

2. Direct marketing of mutton

2.1 Referring to the situation of sheep keeping

The sheep stock of the region accounts of 41 thousands sheep (6, p. 37). The importance of the sheep keeping is primarily due to ist function of ensuring the maintenance and preservation of the agrarian environment on relatively large areas. The economic situation of sheep keeping has mainly suffered from the declining prices of lamb. Without public advantage of the sheep keeping on several levels, economic sheep keeping would not be possible anymore.

At least, most of the sheep keeping farmers have partly succeeded in direct marketing of lamb straight to the consumer. In Rhoen mountains - one part of the region -, it was possible to organise direct marketing more extensive. With the objective to maintain the local sheep keeping with its several functions, a cooperative direct market mainly to large consumers (hotels, restaurants) has been achieved (9).

2.2 Organisation of a sheep keeping farm

In which extent the direct marketing can contribute to the economic stabilisation of the sheep keeping, is shown by the following example of a farm from the north of the east hessian region.

The organisation of the farm activity sheep keeping can be seen in table 1. The farm has 95.5 ha self-cultivated grassland, which is used for 350 ewes in addition to own rearing sheep. The farm sells on average 385 feeder lambs. It keeps mainly a land race sheep (Rhoen sheep), which on the one hand shows good meat quality, but on the other hand has less slaughtering weight of the feeder lamb as fattening breedings. As can be seen, the total gross margin (no. 3) is not enough to cover the part of the fix costs due to sheep keeping. A positive profit contribution can only be achieved with public subsidies and premiums (no. 4, 6).

2.3 Organisation and effect of direct marketing

The farm is marketing already 50 feeder lambs in form of slaughter halves direct to local consumers. It is planned to extend the direct sales to 200 feeder lambs step by step. In addition

Farm activities

Capacity

Gross Input of
margin labour
ha % TDEM1) Wh2)
1. Agricultural area, ha 95,50 100
1.1 Grassland, ha 95,50 100
a) Grassland - grazing 63,50 67 - 3,8 267
b) Grassland - hay/grazing 25,00 26 - 4,1 240
c) Grassland - ensilaging/

grazing


7,00
7
- 1,1
65
1.2 Straw harvesting (5,00) - 0,6 23
1.3 Lime fertilizing (24,00) (25) - 2,0
1.4 Hay for sale 5,0
2. Livestock husbandry Head LU3)
2.1 Breeding ewes 350 35 - 15,8 1974
2.2 Feeder lambs 385 19 42,7 212
3. Total gross margin 54 20,3 2781
4. Public subsidies, premiums 42,0
5. Proportional fixed costs - 29,4
6. Profit margin/Sheep keeping 32,9
1) Thousand Deutsche Mark. 2) Working hours/year. 3) Large animal unit.

Table 1: Organisation and profit margin of a chosen sheep keeping farm

to private households, large consumers such as hotels and restaurants shall be targeted. The promotional approach can be the farm and its natural sheep keeping with outstanding meat quality. The sales of 200 lambs per year can be considered as realistic target. The direct marketing is organised as follows: the slaughtering is done by contract slaughtering through a butcher and the sale direct off farm. Referring to this the farm requires the investment of a dissectioning room with equipping and cool storage. At consumers' request` a dissectioning of slaughter halves is possible through a provided butcher.

The required investments, the gross margin and the profit of the direct marketing are presented in table 2. The profit of the direct marketing of DEM 6.4 thousands can increase the profit margin of the sheep keeping (table 1, no. 6) to DEM 39.3 thousands which is an increase of 19.5%. This can be considered as income stabilisation for sheep keeping, however, not as considerable extension of the income basis. The latter would need a much higher number of

Items direct marketing Capacity
1. Investments, TDEM 22,7
- Rebuilding dissectioning room, cool storage, equipment -
2. Direct marketed lambs, head/year 200
(Contract slaughtering, direct sale from farm)
3. Input of labour, Wh/year 2) 164
4. Gross margin, TDEM/year 10,1
5. Fixed costs, TDEM/year
5.1 Fixed costs of investiments 3) 2,5
5.2 Other fixed costs 4) 1,2
6. Profit margin, TDEM/year 6,4
7. Profit margin, DEM/Wh 39,-
1) Thousand Deutsche Mark. 2) Working hours/year. 3) Writing off costs, repair costs,

credit interest (50 % credit financing). 4) Advertising, telephone, accounting, insurance.

Table 2: Economic data of the direct marketing of mutton in form of slaughter halves

feeder lambs directly marketed. This is hardly possible, because of rivalry of other sheep keepers and a general relative low consumption of lamb per inhabitant in Germany. An essential advantage lies in the partly dissociation from the sheep trade, which has to cope with permanent price pressure and therefore has less sales guarantee than the direct marketing.

3. Processing of farm cheese by a dairy farm

In general the direct marketing of farm cheese shows good market chances due to its specific quality. The number of farms with cheese processing is usually not very high. This is caused by the requirement of applicable knowledge for the processing, and the time factor, which is already at a medium processing capacity as high, so that the available working hours of a farm family are usually not enough.

Referring to the presented east hessian region, the dairy cows are the most important livestock husbandry. Therefore, it is examined in which extent the processing of farm cheese can support this farm activity.

3.1 Organisation of the dairy farm

The organisation of the dairy farm, for which a cheese processing shall be planned, is provided in table 3. The farm cultivates 73.95 ha. The plough land is planted with grain and rape. The grassland is extensive cultivated and used for dairies and rearing cattle. Furthermore, the farm keeps 120 fattening pigs. The profit of DEM 49,2 thousands is roughly the same as the average income of a full part farm in East Hesse (4, MB, pp. 224).

3.2 Procedure and economic contribution to the cheese processing

The current situation of the chosen farm is that, the son and heir coming back to the farm. The best possibility to create a further farm job is the milk processing.

Assuming this situation, the cheese processing is planned for three capacities: for 100 kg, 250

Farm activities

Capacity

Gross Input of
margin labour

ha

%

TDEM 1)

Wh 2)

1. Agricultural area, ha 73,95 100
1.1 Grain growing 20,00 27 23,7 228
1.2 Straw harvesting (23,40) (32) - 0,6 70
1.3 Rape 5,50 7 6,1 55
1.4 Acreage reduction programme 4,50 6 2,8 15
1.5 Catch crop fodder (3,80) (5) - 1,1 35
1.6 Grassland 43,95 59 - 18,9 617
1.7 Lime fertilizing (10,00) (14) - 1,5 7
2. Livestock husbandry Head LU3)
2.1 Dairies + rearing cattle 30 44 88,5 2349
2.2 Heifers for sale 7 14 8,7 215
2.3 Fattening pigs pens 120 12 12,8 371
3. Total gross margin 70 120,5 3962
4. Public subsidies 4) 6,2
5. Fixed costs - 77,5
6. Farm profit 49,2
1) Thousand Deutsche Mark. 2) Working hours. 3) Large animal unit. 4) Location in less

favoured area.

Table 3: Farm activities and economic data of the dairy farm with planned cheese processing

kg and 500 kg milk per day. Referring to these three variants, the most important data concerning organisation and economic contribution are provided in table 4. With a daily capacity of 100 kg and 250 kg milk, it is only possible to process a part of the amount of milk produced by 30 cows (5500 kg yield per year). The remaining bit will be given to the creamery.

With a daily capacity of 500 kg the whole amount of milk will be processed. - Until a capacity of 100 kg milk, it is usually possible, to sell the processed cheese through the own farm shop. A daily capacity of 250 kg and 500 kg milk will supposingly lead to an amount of processed cheese which need to be sold additionally through retailers or other customers. In this case, the sale through other farm shops would provide a good solution. These farms are often interested

Items of

Variation I

Variation II

Variation III

cheese processing
1. Processed milk
1.1 Milk per working task, kg/day 100 kg 250 kg 500 kg
1.2 Processed milk, kg/year 36500 kg 87500 kg 165000 kg
2. Type of outlet Farm shop

Retailer 1)

Retailer1)

3. Input of labour, Wh/year 2) 2690 3028 4076
of it: Family-labour 2300 2300 2300
Paid labour 390 728 1776
(15,-/25,-/DEM/Wh)
4. Investments, TDEM 3) 46,4 89,2 104,1
(Rebuilding of rooms)
5. Gross margin, TDEM/year 49,9 78,1 147,2
6. Fixed costs, TDEM/year
6.1 Fixed costs of investments 4) 6,4 11,2 13,2
6.2 Other fixed costs 5) 4,3 7,2 10,1
6.3 Labour costs 5,9 10,9 45,2
6.4 Milk analysis - - 1,8
7. Profit margin, TDEM/year 33,3 48,8 76,9
8. Profit margin, DEM/Wh 14,5 21,2 33,4
(2300 family-Wh)
1) Retailer: Direct marketing farms with farm shops. 2) Working hours/year. 3) Thousand

Deutsche Mark. 4) Writing off costs, repair costs, credit interest (50 % credit financing).

5) Advertising, telephone, accounting, insurance.

Table 4: Economic data for the three variants of the cheese processing

in extending their product assortment with an attractive offer such as farm cheese. For the processing farm, the sale through other farm shops means a price shortage of 20% (for the profit margin of the marketer). The labour organisation for all three variants is planned, so that in each case 2300 working hours are provided by the family-labour. For all further required working hours other people will be employed. These will be paid like agricultural part-time workers or agricultural skilled workers depending on the work scope (no. 3). - It should be noticed that the working hours of the processing will highly decrease by increasing daily capacity. This degression is mainly caused by the increasing labour productivity of the variants II and III. (1, pp. 189).

3.3 Investments and profitability

The setting-up of a farm cheese processing requires relative high investments beside others due to legal hygienic rules (no. 4). For building investments it is planned to rebuild existing rooms to a processing room with ripening cellar. The equipment investments include the purchase of hay drying. In order to ensure the quality of the cheese processing most of the farms have switched their feedration from silage feeding to hay feeding. This change is also planned for the planning farm. The gross margin was calculated for the following assortment of cheese: 20% of hard cheese, 25% of Gouda, 15% of Tilsiter, 25% of Camembert and 15% Limburger. The sale through the own farm shop, leads to a gross margin of DEM 136.8 per 100 kg milk, while the sale through other farm shops (with 20% price shortage) generates DEM 89.2 per 100 kg milk. Taken off the fix costs including labour costs, the economic results of the three variants differ. At a daily capacity of 100 kg milk, the profit margin of DEM 33.3 thousands will hardly reach the target income of a family-labour. Caused by the specific high working hours, the profit margin per working hour is relative small (no. 8). The variant II with a daily capacity of 250 kg generates a relative high profit for the family-labour and enables the employment of a part-time worker.

A high income, on the level of large farms, can be earned with variant III, at a daily capacity of 500 kg milk. Furthermore, this variant ensures the job for a skilled worker and achieves a higher labour productivity.

All together, the processing of farm cheese can be considered as a good possibility for farmers to increase their income and to ensure jobs in rural areas. However, it should be noticed that the, at the beginning, listed requirements for the processing of farm cheese, are only met by a part of all farms.

Literature

BOKERMANN, R., 1996: Economics of on-farm-processing and direct marketing. Kassel.

BOKERMANN, R. & F. WILLIG, 1996: Regional organisations of on-farm-processing and direct marketing. Journal of Rural Engineering and Development 37, p. 66 ff..

Federal Government, 1996: Agricultural Report of Germany 1995 - Bonn.

Federal Ministry of Regional Planning, 1994: Regional Planning Report of Germany 1993 - Printed matter 12/2143, Bonn.

Hessian State Office of Regional Development and Agriculture, 1996: Results of farm accounting in Hesse 1994/95 - IfB, Nr. 15/96, Kassel.

Hessian State Statistical Office, 1993: Hessian District Statistics, Nr. I/1993, Wiesbaden.

KERN, W., 1974: Investment calculation. Stuttgart.

MOSER, G., 1987: Farm cheese processing. Tholey.

PLAEN, Th. & D. POPP, 1993: New future for an old land race sheep. Information-paper, association „Natur- u. Lebensraum Rhön".

WIRTHGEN, B. & H. KUHNERT, 1995: On farm food processing in Europe. National report of Germany. Research report of the University of Kassel, Witzenhausen.

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