Making a regular annual profit in the meat business is no easy task. Let’s start with the packers and processors of live animals. Of all the stakeholders, they have the most difficult time figuring out the true cost of goods sold of all the parts they sell. The larger processors have complex software programs to help them know their yields and their costs. Smaller processors don’t often have a way to weigh the production and yield of each employee and item, so they rely on ‘cut tests’ or yield tests to determine costs.

For example, a further processor of steaks will do a cut test to determine the yields of, say, cutting 189a beef tenders into 1190a, 8-ounce steaks. This may be a yield loss of 50% on a batch of steaks. The larger the cut test sample size, the more accurate the yield test. With yields, every box of meat and every packer brand will be slightly different, and each employee’s yield varies based on their skill. Managing this is hard, so knowing the true cost of what you sell can be difficult in the packing and processing plants. The large plants have this all dialed in, but in my experience, smaller plants struggle.

For box-in/box-out distributors, it’s much easier because there is no yield loss on cutting, and as long as you freeze meat before it goes bad, there are no losses other than market changes that occur.

For all of the meat industry, it’s a high-volume, low-margin business for the most part. There are some exceptions. The more value a plant can add to a product, the more margin can be made. Like making the meat into a hot dog, a sausage, cooking it, or forming it into a breaded and cooked chicken nugget that looks like a dinosaur. Value added is margin added.

Commodity meat items are often sold based on the USDA market prices published each day or week. For beef and pork, the USDA mandates that the larger packers and processors report what prices they get for their items. For poultry, it’s a voluntary system. USDA market reporters call poultry industry stakeholders and ask what prices they are getting for items each week. In general, large processors like to report that they are getting higher prices for their items than the traders and distributors report. For example, a turkey processor may report over the phone call with the USDA that they are getting $1.65 per pound FOB for fresh hens this week, but the traders may report they are buying at $1.59 delivered. Each week varies with the dynamics of market supply and demand.

I worked at a beef fabricator for six years, and we priced all the beef parts we cut using the USDA sheet for the boxed beef cutout. Our CFO would always complain that if we sold all the parts at the USDA sheet, or even 10 cents over sheet, we’d be out of business in a month. And he was right, the USDA sheet is too low to use as a guideline for pricing all your items. It’s just a guideline for checking the pulse of the market. Still, many plants purchase using an overage of the reported USDA market prices.

One pricing practice I detest is ‘bracket pricing.’ Called by other names, it basically means that the more pounds a company buys annually the better their FOB pricing. So a small family-owned distributor buying a half-load a week from a plant will pay more than the large national distributor that buys three loads a week for the same items from the same company. Volume gets rewarded in almost all food production. The chief reason I detest this practice is that it makes it very hard for the small family-owned distributors to be competitive on the street against the national food distributors. Also, the national distributors often negotiate bill backs or better credit terms, thus giving them further competitive advantages. This is smart business, but it hurts the small guys.

What’s your experience with pricing and finding the true costs of what you sell? What are your thoughts on the fairness of bracket pricing?

How is meat priced?

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