November 2011 Newsletter

By Karl Kupers on November 11, 2011

I am going to tackle an issue that has needed attention for some time. I have not been ducking the need, just haven’t had the right mindset to delve into it. The issue is pricing of Shepherd’s Grain products, the how and why, and because of our commitment to transparency even the makeup of our price.

Let me begin with the how and why as this certainly is an important piece to the makeup of the price. As I have mentioned many times the whole idea of Shepherd’s Grain is built on some pretty simple ideas and this is one of them. In order to be truly sustainable you must cover your cost of production and the commodity market does not recognize this need. This can be further described as a de-commodification of our price. The only answer can be a true cost of production price for the wheat which gets back to the farmer’s hands to ensure not only their operation now but also the next generation. Shepherd’s Grain producers have already made the distinction of environmental stewardship to ensure the next generations success. Therefore, we calculate our true cost of production per bushel across our now 43 producers and take an average of them, add the cost of transportation to the mill, a margin for Shepherd’s Grain to manage the program and that sets the price of wheat being sold to the mill. Within this total cost of production we subtract any direct payments from the USDA since you as a taxpayer already participated in this subsidization to the producer.

The makeup of the cost of production is a very comprehensive model. The author stated he had never developed one so complete and did so only because our producers were going from being a price taker to a price maker. He stated he could not create this in a commodity system because farmers would rarely achieve these numbers and wonder why they are still farming. The general percentage makeup of our producers cost of production is split out this way. The variable costs are the most significant at an average 60% of the total. The fixed costs including value of their shops, office, machine sheds and replacement cost of these is 6%. The capital expenditures include machinery, machinery repairs, machinery replacement, and return to capital amounted to 26%. This next cost includes a contribution to both medical and retirement which combined created another 3% cost to the total. The final number is a return to management which constitutes another 5%. This review does not provide for return to land as this particular example is based on sharing revenue (a lease) with the landowner who is not the actual producer. After these costs are calculated, we then subtract the income per bushel derived through the US Department of Agriculture in the form of a subsidy payment. This represents an approximately 3% reduction in the price of grain sold to the mill.

The last significant component is these costs are fixed for the year since the grain is in the bin and all costs have been incurred. We also provide this approximate cost of grain converted to flour six months in advance of its’ implementation.

As always, thank you all who support the SG producers through your purchase of the fairly priced de-commodified grains and flour.

Respectfully, The Shepherd’s Grain family of producers Happy Thanksgiving.