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The transformation of a product from one form to another clearly involves costs associated with the operation of the processing facility. In calculating marketing costs, however, we need to consider two other important aspects of processing costs. Firstly, as with product losses, one kilogram of product purchased from the farmer cannot be compared with one kilogram of processed product sold to the consumer. We therefore need to ask, "how much will be sold to the consumer if one kilogram is bought from the farmer?" Secondly, there may be a by-product as a result of the processing and this by-product can often be sold. The value of the by-product must therefore be included in the calculations.
The cost of the food in very sophisticated processed food products sold in supermarkets (for example "ready-to-eat" meals) can be a very small proportion of the retail selling price, sometimes less than ten percent. Processing, packaging and other marketing costs absorb the rest. However, in this Guide we shall concentrate on the cost of primary processing.
Some examples of primary processing are:
In calculating processing costs we need to know the conversion rate, the quantity of by-product, the value of that byproduct and the costs of processing. An example of this calculation is shown in Figure 7.
Figure 7
Calculating processing costs
Assume that a rice milling operation converts paddy at the rate of 70 percent (0.7) and has saleable by-products equal to 25 percent of the paddy weight. Processing costs per kilogram of paddy have been calculated at $0.20 per kilogram on the basis of the mill's total annual costs divided by the number of kilograms of paddy processed. The buying puce of the paddy was $1.50 per kilogram and the by-products have a value of $0.50 per kilogram.
Then the processing cost per kilogram of paddy is ...
One kilogram of paddy purchased = $1.50
Processing costs or 1 kg x $0.20 = 0.20
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Total Costs = $1.70
Less the by-product revenue of 1 kg x 0.25 x $0.50 =
0.12
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Break even selling price per kilogram of paddy = $1.58
Thus the break even selling price per kilogram of milled rice is ...
$1.58 ÷ 0.7 = $2.25
Of course, it will not always be possible to obtain reliable information on a miller's costs. These will include not only operating costs such as fuel, maintenance and repair but also labour costs, the cost of the capital investment in the mill and its premises, and the opportunity cost of the owner's time. Calculating total costs from all these individual costs cannot be realistically done by an extension worker. However, he or she can perhaps get information about milling costs. Ministries of Agriculture may have model budgets for mills, according to their size, as may banks which lend money to mill owners. These can be modified according to circumstances and throughput of the particular mill.