Economics of a Local Food System

Steve Bosserman's picture

What's in a Word?

In the four years since the word "locavore" was coined and two years since it became the New Oxford American Dictionary's "2007 Word of the Year", the number of people involved in local foods continues to escalate.  The U.S. is becoming a Locavore Nation as more and more consumers learn they can eat well and healthy with food produced in close proximity to where they live and work.  Savvy customers expect locally sourced foods on the menus at their restaurants and in stock at the produce counters of their grocery stores.  The demand for locally sourced foods is UP!

Demand spurs supply.  The National Gardening Association anticipated a 40% increase in the number of homeowners who will plant gardens in 2009 compared to 2007--a forecast borne out this spring in articles and reports about seed sales across the U.S.  The Ag Census 2007 documents a leveling in the decline of farms in the U.S. for the first time since WWII and a major jump in the number of new farms under 50 acres.  More small-scale farming operations yield more output for local consumption which provides more opportunity for viable direct marketing approaches.  As a result, the Ag Census notes a significant increase in the number of farmers' markets during the 2002 - 2007 period.

So, more gardens, more farms, more market outlets, there's good money to be made here, right?  Not necessarily.  There's considerable work to be done to first understand the context in which local food systems can be profitable and sustainable and second, to adopt the business models uniquely positioned for success in those local systems.

How Big is the Opportunity?

A March 2009 final report, Local Food, Farms, & Jobs: Growing the Illinois Economy, given to the Illinois General Assembly by the Local and Organic Food and Farm Task Force opened with the following statement: 

Illinois consumers spend $48 billion annually on food. Nearly all of this money leaves the state. To retain a larger share of Illinois food dollars, public, private, and civic sectors must work together to build a farm and food system that meets consumer demand for “local” food.

Given that the population of Illinois is 12.9 million, each Illinois consumer spends roughly $10 / day on food.  This is a useful national average.  How much of that $10 is spent on locally sourced food?  An article in the September 5, 2007 Asheville Citizen-Times stated that it is less than 1%, or $.10, for North Carolina.  Studies on food miles conducted by researchers at the Leopold Center in Ames, IA conclude that over 95% of the food served in an average U.S meal has traveled in excess of 1000 miles from the point of production to the plate.  Taking these points into consideration, a baseline percentage is 5%, or $.50 of every $10 spent is for locally sourced food.

How high could the percentage go in Ohio?  Below is a table published in an article from the October 2008 edition of the Journal Of Extension (JOE) entitled "Local Foods: Estimating Capacity" by David Timmons, Qingbin Wang, and Dan Lass.  It shows the maximum percentage of local food that could be produced in each state.  Ohio, for instance, could grow 50% of the food consumed each year by its 11.5 million residents.  That's a $20 billion annual boost to the state's economy!

Maximums

20¢ Out of Every Dollar for the Farmer Requires Subsidy to Stay in Business!

Despite the market, is there any profit in local food production? The fact-sheet embedded below by the National Farmers Union illustrates the producer's share of several common items at the retail check-out in grocery stores. 

Farmer's Share

As the title of an article by Farm Policy Facts attests, Farmers Don't Get Much Bread for That Loaf!  On average, the farmer's share is $.20 of every dollar spent.  As the table remarks, the rest of it goes for off farm costs that include marketing, processing, wholesaling, distribution and retailing.  Some of these, such as marketing, wholesaling, distribution and retailing, add no value, but soak-up a considerable percentage of the food dollar.  This leaves only food processing and food preparation as the two value-added steps in the flow of food from production-to-consumption. 

A Real Cost of Food promotion hosted by the Grange at the 2008 Delaware State Fair dramatized the difference between what producers are paid for raw food products versus what the consumer paid for the prepared meal.  In this case, the estimated price paid to farmers was $.50, whereas the suggested retail price for lunch at Grange food booth was $9.00.  That's a huge difference in compensation for little value-added!  In effect, farmers are too often paid too little to stay in business solely on what they can earn through food production with an undiversified portfolio of what is grown or raised.  To stay afloat, portfolios are subsidized through price support and operations are subsidized through unaccounted for externalities.

Where's the Money in Local Foods?  The 80¢!

The comparison at the food booth illustrates the economic clout and pay-off that's possible if the remaining $.80 the farmer doesn't get is distributed differently.  A white paper entitled Factors That Determine the Cost of Food, by Chad Hart and John Lawrence offers further breakdown of the food dollar.  The distribution of costs outlined in the paper reflects the design of a global food system that is highly subsidized through extensive payment for non-value-added stages AND the exclusion of externalities from the cost equation.  However, this system is capable of delivering food volume, variety, affordability, safety, and security.  While many can rightfully argue the system generates undesirable consequences and, on occasion, fails to provide a safe and secure food supply, for the most part the global food system has successfully carried out its charge during the post-WWII period in the U.S.  At this juncture it reigns supreme as the primary source of food for the vast majority of the population.

As evidenced by the increasing demand for and output of locally sourced foods, the domination by the global food system does not preclude viable alternatives.  The incentive for a sustainable local food system is high as such systems offer widespread economic advantages of business development, job creation, health, traceability, and sustainability.  In this respect, sustainable local food systems are excellent complements to the subsidized global food system.  However, to take advantage of the opportunities afforded by local food systems, two conditions are critical:

  1. The current 5% level of food consumed from local sources is increased to 25%, which is not quite half of Ohio's maximum capacity.
  2. Producers diverisfy their product and service portfolios and integrate their operations with other value-add steps within the community.

In other words, farmers become an integral part of the complete food value chain rather than isolated in a production-only role on the front-end of the cycle.  This immersion in a wholistic system enables the $.80 to be redistributed so that all players have an even stake in the outcome and share in the production-to-consumption processes.

Local Food Systems Change the Rules of the Game

The sustainability of local food systems rests in the basic organizing principle of collective responsibility for the total life cycle of food from conception to consumption.  This sentiment is expressed in the following description of Community Food Systems on the Slow Food Movement website:

What is a community food system?  I use the term ‘food system’ to refer to all processes involved in providing us with food.  For example, growing, harvesting, processing, packaging, transporting, marketing, consuming and disposing of food.  The food system also extends outwards to include the inputs needed and outputs generated at each of the processes in the food system.  The system is also influenced at each process by human resources that provide labour, research, development and education.  And then from a system perspective the food system does not operate in isolation but functions within and is influenced by the social, economic and natural environments. 

Food systems can operate at any level.  We feel greatest connection when it operates at the local or community level.  Therefore, a local or community food system is promoted as an ideal – a food system in all processes in the food system occur in the one spatial area and in which all processes have positive benefits to the environmental, economic, social and nutritional health of that area.

The advent of local food systems changes the rules of the game.  The following slide (see attached PowerPoint presentation for editable, animated version of the next four diagrams) shows the theoretical relationship of a global food system to a local food system along three axes: portfolio selection, economic foundation, and food value chain.  The global food system focuses on commodities and maintains a separation between links in the food value chain through subsidies whereas the local food system embraces variety and promotes integration across the production-to-consumption cycle thereby assuring sustainability.

Theoretical Landscape

Characteristics of the global food system are illustrated in the following slide.  With 95% of our food consumed delivered by the global food system, it is clearly dominant!

Current Reality

The local food system has very different characteristics compared to the global food system as depicted in the slide below.  These differences, based on collective responsibility at the neighborhood / community level, enable any local food system to achieve the aggressive, but doable, goal of 25% local food consumption by 2025.  This goal complements the Renewable Portfolio Standard (RPS) goals set by over half of the states such as Ohio, Pennsylvania, and West Virginia.  The combination of food, energy, and manufacturing as part of a local food system provides a much firmer economic foundation than food alone as promised by the global food system. 

Future Reality

 

The growth of local food systems as indicated by the 25% local sourcing goal will generate $10 billion / year by 2025.  The difference between the current 5% and the prospective 25% is an opportunity space worth filling.  The slide below considers this challenge of filling the space as one of recognizing the fundamental differences in business models between the global food system and the local food system.  Successful proposals for local food systems operations will touch upon issues like branding and marketing, food safety standards, education, training, and skill building, community currencies, and councils and cooperatives.  And the process of forming a local food system draws upon a set of initial steps that quickly build capacity, engage members of the neighborhood / community, attract investment of non-monetary resources essential for operations, and establish leadership structures that further collective responsibility.

Opportunity Space

The Local Food System Opportunity Space Is Open for Settlement

While the global food system appears to offer less expensive choices, when seen in total the local food system offers the better deal in many instances.  Of course, this advantage only works when those in the local food system develop relevant business models rather than rely on those for the global food system.  For instance, the article, Keeping Eggs in Their Backyard Nests in the August 4, 2009 NY Times, explores the case for raising urban chickens for eggs or meat.  Concerning egg production, the article states the following:

“You can buy eggs in the grocery store cheaper than you can raise them,” said David D. Frame, a poultry specialist who works with the Utah State University Extension. “You’re not saving money by doing it.”

He said that feed represented 75 percent of the cost of raising a bird. Commercial poultry operations that buy huge amounts of feed at wholesale have much lower costs per bird than the backyard chicken enthusiast can typically achieve.

Not much encouragement there.  Consider also this comment about raising chickens for their meat:

But this year, Mr. Walsh, who is married with three children, is trying something new. He spent about $300 to build a coop and a fenced-in chicken run on a vacant lot and is raising 49 broiler hens for meat. A share of the birds will go to the lot’s owner and others who are helping him.

The economics are very different from raising egg-layers. Broiler birds eat far more than the laying hens, and the organic feed he gives the broilers is expensive (the layers often eat kitchen scraps). He estimates that once he has slaughtered the birds, he will have spent about $8 a chicken, including the cost of the bird and its feed.

In contrast, he pointed out that, in a promotion, a restaurant chain was advertising whole cooked chickens for $1.99.

“I don’t know that, for small-time folks, you’re going to be able to beat the factories,” he said, referring to large poultry producers. “But it definitely will taste better.”

And Mr. Walsh, you won't be able to beat them with their business model.

But how does one do it?  It's back to the basics!

Diversify!  According to the Sustainable Agriculture Research and Education (SARE) report:

Strengthen Community, Share Labor: When farmers diversify, they create opportunities for their communities to benefit. One way is grower to grower: Teaming up to market alternative crops can spread the workload, while co-buying seed or equipment can lower costs. Sharing knowledge, farm to farm, can enhance crop performance. Some farmers even share labor.

Integrate!  A study about succession planning on farmsteads by Shoshanah Inwood with the Social Responsibility Initiative in Ohio State University's College of Food, Agricultural, and Environmental Sciences identified the following strategies being used by farmers in Ohio.  Notice the integration along the food value chain, of food, energy, and manufacturing, and different types of agriculture--food, feed, fuel, etc.--in the portfolio.

Expanders. These farms, primarily focused on commodity production (corn, soybeans or dairy, for example), were following the traditional path of finding more land to buy or rent to increase their acreage, allowing them to increase the volume they could produce and sell in commodity markets.

Intensifiers. Instead of expanding their land base, these families are intensifying operations by increasing production of higher value crops, such as nursery crops or higher-value commodity crops, to support more family members on the same piece of land. This group, Inwood found, is actively investing in new equipment and buildings.

Stackers. These farms were finding new revenue streams to add to their existing operations as a way to increase profitability and viability. For example, farms growing fruit and vegetable crops might have a family member interested in using the harvest to produce value-added products, such as jams or pies; some farms add completely new businesses, such as a landscaping business, as part of their operations; still other farms find ways to employ family members interested in marketing or education to use those skills to increase farm profitability.

Entrepreneurial Stackers. These farms started new enterprises complementary to the farm operation to provide more family members with a source of income. A case that typified this pattern was a fifth-generation farm that until the mid-1990s operated as a confinement dairy operation, barely able to support one family. The farm, Inwood said, made a conscious decision to adopt a holistic grazing system and became a certified organic milk operation. Since then, individual family members added enterprises including grass-based meats (such as beef, pork, lamb and poultry); eggs (from the pastured poultry); and artisan cheeses. The family also built an on-farm retail store and sold products directly to local retailers. In the end, the operation has been able to support four families with full-time work.

These approaches at diversification and integration only scratch the surface.  There are MANY more to take into consideration.

Let us know about your strategies.  The more input and feedback the better.  We will do our part to keep this topic on the front burner with examples we find.

Stay tuned...

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Every farmer out there is

richardrob's picture

Every farmer out there is happy as long as all his production has been sold, it's as simple as that. If he manages to receive a good price for his farms products, then success is not far away. This is why it's very important to know exactly how much you've grown over the years and how much you need to keep investing. I usually use Invoice Template to keep track of my sales, it gives me a better feeling on how I stand on the market.