Final Report for GNE13-058
As Farm to Institution (FtI) programs in New England expand, new supply chains are being developed to handle the increased flow of regionally-produced goods to regional institutions. While some supply chains deliver product directly to institutions, using no aggregators, distributors, or processors, other supply chains rely upon these additional supply chain actors. These are referred to as “direct” and “intermediated” supply chains, respectively. Each time an additional supply chain actor is added, the costs incurred to perform the supply chain task for which the actor is responsible must be covered. The actor may also charge an additional fee. On the other hand, in the absence of these additional supply chain actors, farmers must absorb the costs associated with performing the supply chain tasks. We interviewed farmers to identify the transaction characteristics associated with New England farmers’ sales to the institutional market in direct and traditional-intermediated supply chain structures. The outcomes of this research are shared with farmers and FtI practitioners in New England to develop emerging FtI supply chains that explicitly account for transaction characteristics that impact farmers’ profitability. Outcomes will also be used in future research in which a field experiment designed to determine how farmers make choices to sell to different farm to institution supply chains. The results from this current research will be important to determining the range of New England farmers’ FtI-specific transaction costs. The results of the current research and the future experimental work will assist New England farmers and FtI practitioners in developing FtI supply chains that support farmer profitability.
We conducted in-depth interviews with eleven farmers about their costs and returns in selling to farm to institution markets and three interviews with farmers about their farm to institution markets more generally. Interviewees represented fruit and vegetable growers in each of the six New England states, and a broad range of farm operations sizes and farm marketing strategies. Farm to Institution marketing ranged from less than 1% of total sales to about 11% of total sales of the farm operations interviewed. Notably, while very few farm operations specifically track costs and returns to farm to institution marketing, only two target this market for future growth. The barriers cited to increased participation include low prices, volume requirements, and logistical challenges.
In addition, we identified three important emerging topics that impact farmers’ profitability in the farm to institution market and conducted additional research to develop materials to inform farmers about these topics. These topics include the emergence of online brokerage platforms to reduce transaction costs, the increased risk of violating Federal Department of Labor Wages and Hours violations as a result of engaging in some farm to institution activities, and the role of a value-added product in farm to institution sales.
The project “Costs and Returns to New England Farmers in the Farm to Institution Supply Chain” identifies supply chain-specific transaction costs and returns associated with sales in the FtI market in New England. The research outputs inform farmers and FtI practitioners about transaction characteristics of different market structures and support the development of emerging FtI supply chains that explicitly account for the transaction characteristics that impact farmers’ profitability. This research is important in that we identify transaction characteristics, such as transaction costs, returns, farmer preferences and farm characteristics, and consider their effects on farmers’ profitability in different FtI supply chains. We specifically identify three sources of increased costs, and provide two farmer and practitioner-oriented factsheets and a case study to provide farmers with information on how to account for those costs in their business planning.
The development of FtI supply chains has been advanced by FtI programs, which have grown considerably throughout the country in the last decade and represent an expanding opportunity for farmers. According to advocacy groups, only six documented programs existed in the nation in 2001, but by 2012 that number had grown to 2,571 programs in all 50 states, involving 10,217 schools and 2,470 school districts. In 2012, the USDA’s Food and Nutrition Service instituted a new $5 million dollar grant program to support the development of Farm to School programs, and in 2013 the USDA conducted the first National Farm to School Census to identify how many schools across the country purchase “local” food. Regional FTI programs, in particular those programs that are members of the Farm to Institution New England (FINE) collaborative network, have successfully focused on increasing both the volume of farm to institution sales and the number of farmers and institutions participating in these programs within their respective states. New England’s diverse and deep offering of FtI programs makes it an ideal environment in which to study how different farm characteristics, farmer preferences, transaction costs, and returns may intersect with different supply chain models.
Farmers, institutional purchasers, and practitioners who advance FtI programs are inspired by a range of financial, economic, and social motivations including: providing institutional-meal consumers access to fresher, more appetizing, and more healthful meal options in order to combat nutrition-related illness and disease; providing a new market for farmers; spurring local economic growth; and improving the environmental sustainability of the food system. For farmers, FtI programs represent an alternative market that may bring better profit margins, lower risks (reduced price variation), and connections with the community. Institutions can benefit by improving the quality of their meals, by saving money, and by purchasing local food for their clients. The potential for FtI sales to contribute to small and mid-sized farmer profitability has been demonstrated in case studies, but the increasing volume of sales has prompted the need for more sophisticated market structures that may or may not provide similarly competitive returns to farmers. FtI practitioners, farmers, and collaborative networks like FINE who are interested in developing efficient supply chains that meet this range of financial, economic, and social motivations have limited resources to devote toward identifying how different regional supply chains may or may not support farmer viability.
This project built upon a number of qualitative studies surveying key players in FTI supply chains, their financial and social motivations and concerns, and what opportunities and challenges have opened as these supply chains have grown. The project also built on ongoing research conducted by FINE and UMass to interview FINE partners to identify farmers who currently sell to institutions and will be willing interviewees. FINE working groups and UMass are studying and mapping FtI supply chains in New England. Research is underway to identify a consistent data collection protocol for farmers and FtI partners so a consistent regional database can be maintained.
The project advances current knowledge in a way that will positively affect whole-farm systems by providing quantitative ranges of transaction costs, returns, farmer preferences, and farm characteristics in different supply chains that can be used by both farmers and FtI practitioners who include farmer viability as a goal of FtI supply chain development. Farmers’ ability to be profitable in FtI supply chains is crucial for the long-term success of FtI programs, and if these supply chains can support small and medium sized farmers in New England, there is great potential for these supply chains to promote sustainable agriculture in New England.
- Identify farmers’ supply chain transaction costs for direct, intermediated, and coordinated FtI supply chains.
The objective was achieved in part for direct and intermediated supply chains, but not for coordinated supply chains. We were unable to identify any farmers who sold through co-operatives in New England who explicitly sell to institutions and were willing to be interviewed. Ongoing results from this objective and the corresponding performance targets were shared with FINE (Farm to Institution New England) partners.
1.2 We did not meet the performance target to purchase USDA ARMS (Agricultural Resource Management Survey) 2011 Cost And Returns report data. The USDA ARMS 2011 Cost and Returns Survey did include a separate question that asked producers to report their sales to institutional purchasers. However, the USDA ARMS 2011 Cost and Returns Survey results will not be useful for our research. The ARMS Cost and Returns Surveys are designed to elicit detailed information on large commodity growers’ costs and returns. This has several implications. The survey sample is weighted towards “commodities” states, or states that produce the nation’s bulk of wheat, corn, cotton, sugar beets, soybeans, etc., and hog, cattle, poultry production. More farmers in these states are included in the sample. No New England, or even northeastern, states are large scale producers of the commodities of interest, so these states are included in the sample according to a decreased weight.
Related to this weighted sampling method, there were so few producers reporting any sales to institutions that ERS is unable to provide anonymous results to us because of the small sample size and reliability of the estimates. Further, even if we did have access to a sufficiently large set of anonymous results, questions have been raised as to whether the results from a sample weighted towards large scale commodity producing states will be valuable in drawing inferences about our population of producers in New England. ERS will not share the ARMS data when those data could be used for inferences for which the data are not suited.
1.3 We identified and interviewed 11 farmers who shared extensive financial information about their farm operations, and two additional farmers who were interested in discussing their experiences with costs and returns in farm to institution markets but were not willing to share financial information. The team identified potential farmers to interview and the appropriate means of conducting those interviews. Several unanticipated questions came up during the process of identifying potential farmer interviewees, particularly the issue of how FINE could be included in collecting farmer information in a way that satisfies the University of Massachusetts’ Internal Review Board (IRB) requirements for confidentiality. The end result of the concerns about confidentiality involve the process of identifying farmers, the different stages at which different people have access to information that has been collected, and how the final list of farmers will be determined.
In coordination with the metrics team, it was determined that Ms. Fitzsimmons and Mr. Allison would identify key FINE leaders, Ms. Fitzsimmons would speak directly with these individuals to build a list of potential farmer interviewees, and then the metrics team and Ms. Fitzsimmons, and Dr. Lass would review this list to determine the farmers to prioritize. This list of potential interviewees would include all farmers that leaders identified, and would include farmers from a range of farm size, products, location, marketing channel, etc.
Ms. Fitzsimmons and Mr. Allison identified key individuals from the FINE leadership team and individual FINE members. Ms. Fitzsimmons wrote an email request and two attachments (one brief, one detailed) to describe the nature of the request and proposed outcomes, and Mr. Allison sent out the email request to this group. Ms. Fitzsimmons followed up with individuals.
The list of potential farmer interviewees will be available to the FINE metrics team, but once the list has been narrowed to those identified to be interviewed, the list and raw interview results will only be accessible to Ms. Fitzsimmons and Dr. Lass.
The process of identifying farmers agreed to above, and the success in connecting with farmers, asking for a commitment to be interviewed, and then setting an interview date, was more challenging than anticipated. Because we asked for an introduction, but were not able to share information with FINE about which farmers responded to the introduction and which did not, our ability to follow up was very limited. The response rate to the introductions was very low, so the inability to ask FINE members to assist with follow up with particular farmers was a challenge.
1.4. – 1.8. Mail interview questions to farmers one month in advance; Send farmers reminder postcard and email two weeks in advance; Make a reminder call to farmers one week in advance; Interview farmers; Compensate farmers. These steps all went smoothly.
1.9. Compile and analyze ARMS data and interview data on supply chain costs, using multinomial, conditional and mixed logistic regression models to determine probabilities associated with market choices. For the reasons described under objective 1.2 above, we will not be doing this.
- Identify supply chain transaction returns, including those returns that satisfy farmers’ non-financial goals, for direct, intermediated, and coordinated FtI supply chains. These objectives were met for direct and intermediated supply chains, but not for coordinated supply chains as described in Objective 1 above.
2.1. Share ongoing results and solicit feedback on research methods and strategies with FINE partners during FINE Metrics Team conference calls and bi-annual FINE gatherings.
Results from the interviews were communicated to the FINE Metrics Advisory Team throughout the project. These results have also been used to inform the development of FINE’s 2016 Producer Survey, which will be distributed via a snowball sample through state agencies of agriculture in all six New England states to all producers in New England in early 2016. Preliminary results have also been discussed with Massachusetts Farm to School staff, who undertook a similar study recently. In 2015, FINE conducted a Distributor Survey, and results from this research that will contribute to questions on future Distributor Surveys, as well. Preliminary results have been communicated to staff from the John Merck Fund, which funds farm to institution projects in New England.
2.2. ARMS Data – purchase USDA ARMS 2011 Cost And Returns report data – see above.
2.3. Develop interview questions, including questions eliciting non-sales related returns to farmers, such as increased access to customers, farm tours, CSA sign-ups, etc.
We developed questions, and added an additional objective to test the survey instrument by conducting a pilot interview. The pilot interview lasted a little over three hours. The farmer spent a significant amount of time looking at files (both paper and computer) to find accurate answers to our questions. The farmer was very generous with his time, and among the helpful outcomes of this pilot was a comprehensive list of documents to suggest that interviewees have on hand for the interview.
For further discussion of the instrument design and design process, see Objective 3.3 below.
2.4. – 2.10 Interviews – Work with FINE to identify farmers to be interviewed; Mail interview questions to farmers one month in advance; Send farmers reminder postcard and email two weeks in advance; Make a reminder call to farmers one week in advance; Interview farmers. For the most part, these steps went smoothly. See Objective 1.3 above.
2.9. Mail farmer compensation – As per University of Massachusetts guidelines, we compensated farmers directly, in cash, upon the conclusion of the interview. This method entailed some inconvenience and risk on the part of the interviewer, who was required to travel with large quantities of cash, but was otherwise a very streamlined process.
2.10. Compile and analyze ARMS data and interview data on supply chain returns, using multinomial, conditional. Removed from project, as per 1-3. Above.
- Identify other causal factors that relate to supply chain transactions, including farmer preferences, farmer socio-demographic characteristics and farm characteristics.
We included questions intended to elicit farmers’ preferences for the social outcomes attributed to Farm to Institution programs. Results suggest that farmers do, in general, express preferences for these outcomes. The next question, which this research is not able to explore, is the extent to which these preferences impact farmer decisions to sell to institutions, and prices that farmers choose to charge in this market. One farmer did explicitly say that, when selling to institutions, he chose a lower price than he otherwise would for wholesale markets.
In addition, we identified three emerging topics that relate to transactions in this supply chain. The first topic is the development of a number of non-profit and for-profit organizations that have developed online ordering platforms that minimize many of the transaction costs associated with farmers and buyers interacting in this market. The second topic is the increased chance that farmers will be in violation of Federal Department of Labor Wages and Hours regulations as a direct result of new farm activities that farmers may engage in to sell to institutional markets, including aggregating product from other farmers and processing product. The final topic is the role of engaging in value-added processing for the farm to institution market. We developed extension and outreach materials to guide farmers in their choices regarding two of these issues, and a Case Study to explore the third.
3.1. – 3.2. and 3.4 – 3.10, please see repeated Objectives above in Objectives 1 and 2.
3.3. Develop interview questions, including questions eliciting social preferences
We designed the survey to meet many goals. The survey instrument is intended to be compatible with existing USDA surveys and reports and IRS forms, and additionally include questions that address costs and returns not currently gathered in these existing instruments. There were multiple purposes for this intention. Primarily, we hoped to make straightforward comparisons to existing data for those fields that are included in both existing instruments and our instrument. Farmers were able to refer to forms that they have already completed in order to answer many of our questions, which streamlined the process and make the interviews go more quickly. Finally, the questions are designed to complement the existing instruments so that they may be easily inserted into future federal instruments and/ or may serve as a pilot for potential questions, should USDA decide to begin soliciting farm to institution data in future surveys.
The survey was also designed to be compatible with existing measures of social preferences. This is more of a challenge, and is the primary reason for requiring a redesign of the first draft of the survey after the completion of the pilot survey. We originally designed the social preferences section with the intent of using the results to inform a field experiment design. To achieve this, we reviewed the literature on field experiments, and developed a survey intended to identify a robust Dictator Game to identify farmer social preferences for three social outcomes, as identified in the literature. In the process of making this design decision, we reviewed and rejected a number of other social preference frameworks.
- Provide case studies for each of the three supply chains identified – direct, intermediated, and coordinated.
After discussion with our partners, it was determined that a number of case studies have already been completed that look at different farms and their farm to institution sales – notably two case studies from another NESARE funded project undertaken concurrently with ours. Instead, we decided to produce three reports that explore emerging issues in farm to institution markets, “Federal Labor Laws and Farm to Institution Sales in New England: How to Make Sure Your Farm is in Compliance”, “Online Brokers and Farm to Institution Sales: Streamline Your Sales to Institution”, and “Processing for the Farm to Institution Market: Just Roots Community Farm and Soup.” To provide useful information to farmers and practitioners about the issues uncovered in the interviews with farmers, we extended our research. We interviewed farmers in New England who had been the subjects of Department of Labor Wages and Hours violation investigations, reviewed the Fair Labor Standards Act and relevant case law, and interviewed a number of labor lawyers with expertise in agricultural labor law. We determined the important characteristics of online brokerage platforms, identified the non-profits that offer these services to farmers, constructed a survey to elicit the relevant information and asked non-profits to fill out the survey. Finally, we worked with a farm that is engaged in developing a value-added product line for institutional consumers and conducted an in-depth interview about the costs and returns for that product and its role in the farm operation’s long term viability.
4.1. Share ongoing results and solicit feedback on research methods and strategies with FINE partners during FINE Metrics Team conference calls and bi-annual FINE gatherings. See above Objective 1.1.
4.2. Interviews-Work with FINE to identify farmers to be interviewed and also be willing to serve as a published case study.
In the course of identifying interviewees and clarifying the purpose of case studies, it became clear that the case studies as proposed did not advance an understanding of farm profitability in farm to institution markets in a way that has not already been demonstrated. Instead, we have identified three different emerging topics which are important to understanding farmer profitability in these markets, and will be highlighting the experiences of the farms that have been grappling with these topics.
Note that we were not able to identify any farms, and therefore did not interview any farmers, who coordinated (in the sense of working together as a co-operative) sales to institutions. The categorization of “intermediated” sales was not specific enough to identify the relevant aspects of different intermediated supply channels. However, the idea of establishing a co-operative was mentioned without prompt by three farmers; two suggested establishing a co-operative processing facility, and one suggested a sort of hiring co-operative to address labor issues.
4.3. – 4.7 See Objective 2 above.
4.8. Compile interviews into 3 case studies. Emerging Topic Studies were completed instead, see explanation above.
4.9. Share case studies with farmers and FINE to verify accuracy. While we did not write case studies as originally planned, after each interview, the interview notes were typed and emailed to farmers. Farmers are given a (flexible) deadline, and asked to review the notes for accuracy, and to edit or redact any information that they consider to be identifying or proprietary.
4.10. Distribute case studies online. Emerging Topic Reports will be offered online through FINE and through University of Massachusetts Center for Agriculture and the Environment.
4.11. Submit case studies for publication. Emerging topics will be submitted for publication, and a paper is in preparation for submission to the Journal of Extension.
- Provide results of this research to farmers, distributors, institutions, and FtI advocates in order to inform farmers about this potentially profitable enterprise, to support farm viability, and to enhance FtI markets.
Research results have been shared with all stakeholders in the form of Emerging Topics Reports, and workshops as described below in Publications/Outreach. All materials are available online from the FINE website and the University of Massachusetts Center for Food, Agriculture, and the Environment website. In addition, a FINE blog entry will be posted in March, 2016.
As described above in detail, we conducted in-depth interviews with farmers in New England who sold to instructions in 2014. We asked detailed questions about their farm finances and the costs and returns specific to farm to institution sales, and the overall role of farm to institution sales in their farm business. In addition to the what we learned about the effectiveness of these materials and methods as described above, two important findings emerged from our interviews: 1) Farmers do not explicitly account for farm to institution sales distinct from other wholesale sales in their business planning, and 2) this omission will continue to make an analysis of profitability in these markets challenging, and will likely result in farmers choosing other marketing options rather than enter an opaque market.
We will discuss the details of these interview results in the results section below, but the two findings are relevant as much for the design of research materials and methods going forward as they are for the results.
The survey questions, designed to reflect and be compatible with the categories and responses collected by other USDA survey and census tools, did not address some of the most important costs and returns in this market. (The survey design is described in detail above.) This is in part a reflection of the effort to make our research compatible with USDA research, which did not previously inquire about the costs in wholesale markets, and in part because the farm to institution market is changing rapidly, and in the three years since the project was proposed, a number in innovations and challenges have emerged.
The original intention of the research was to provide quantitative ranges for the costs and returns in the market. In terms of standard costs and returns – labor, transportation, liability insurance, and revenues, the questions were adequate and provided a good picture of the ranges as related to the overall farm operation. However, the questions did not adequately uncover standard costs and returns specific to the emerging topics in these markets- in particular the use of brokers and processing. The survey instrument was also not able to uncover non- standard costs, for example, the likelihood that a given farmers’ labor practices would be in violation of Department of Labor (DOL) regulations, and the potential resulting fines.
Because of this, the qualitative results of this research are in some ways more useful outcomes of this research than the quantitative results. In particular, the research has provided some structure to understanding the role that different online brokerage business models play in farm profitability. These results have been used to design survey questions for future producer surveys that will allow both researchers and farmers to account for the costs of FTI sales in farm business planning.
The emergence of a number online brokerage services in the last three years has some important impacts on the costs of FTI marketing. There are a number of non-profit or co-operatives; Some of these organizations have existed for a while, but until recently, when they implemented online platforms for buyers and sellers to interact, they mostly fit the model of small regional distributors. There are also a handful of for-profit firms that offer similar services. The services generally have an online “marketplace” where farmers can post product and pricing information at the minimum, and where buyers can view this information, place orders, and make payments. The farmers are then usually paid through this platform. Clearly, these platforms significantly reduce the costs of identifying buyers and gathering information, negotiating prices, and to a certain extent monitoring. Non-profits are generally more likely to also provide distribution and storage services, while fo-profits generally avoid offering those services. The availability of services is spotty around New England. Our survey questions were not designed to uncover how these services minimize costs.
The number of farmers likely to be in violation of DOL is generally small. However, the risk of being investigated by the DOL seems to be increasing for New England farmer in general, and for farmers who engage in the kinds of agricultural activities important to the FTI market in particular. FTI activities often are ambiguous in terms of whether or not they count as agricultural work that is exempt from overtime and minimum wage requirements, and the DOL has increased the number of investigations into farms in New England in the last three years. The cost of fines and back-pay that farmers are required to pay when found in violation is very large relative to the revenues that farmers earn in a year. For example, one farmer we interviewed was ordered to pay $130,000 in fines and back-pay; the farmer estimates that in a good year he is able to pay himself about $40,000, so this represents roughly three years of personal income for this farmer. Our survey questions were not designed to uncover whether labor is employed in violation of these regulations.
In addition to information about standard costs and returns, two important findings emerged from our interviews: 1) Farmers do not explicitly account for farm to institution sales distinct from other wholesale sales in their business planning, and 2) this omission will continue to make an analysis of profitability in these markets challenging, and will likely result in farmers choosing other marketing options rather than enter an opaque market. In this section we will outline some of the important information about the standard costs and returns, as well as discuss our qualitative findings.
In our analysis, we use USDA’s classification of farms according to gross income. 45.45% of interviewed farm operations were “small family farms” of less than $350,000 in gross cash farm income (GCFI) (USDA, 2013). Four of these farms are considered “low-sales small family farms” with GCFI of less than $150,000, and one is considered “moderate sales small family farms” with CGFI between $150,000 and $349,999. Interestingly, only one interviewed farm (9.09%) is classified as a “mid-sized farm,” or a family farm with a gross income between $350,000 and $499,999 a year. The remaining 45.45% of farms all are considered “large-scale family farms” with CGFI of between $1,000,000 and $4,999,999.
We asked eleven questions intended to elicit whether interviewed farmers valued the social goals that are commonly associated with farm to school programs. Farmers ranked their responses on a Likert scale from 1 to 5, where “1” indicated strong agreement with the social goals, and “5” indicated strong disagreement. The farmers were also allowed to opt out of stating a level of agreement, although none did for any question. In the case where a farm operation had more than one primary farm operator, we asked each farm operator with equal decision-making roles to fill out this portion of the survey; However, responses are not weighted to reflect the number of responses per farm operation.
100% of farmers “Strongly Agreed” or “Agreed” with the following statements:
- Small and medium sized farms are important drivers of rural economies.
- Increasing the sales of New England food to New England consumers helps preserve the region’s working landscape.
- Increasing the sales of local and regional foods is a driver of regional economic development.
91.67 % of farmers “Strongly Agreed” or “Agreed” with the following statements:
- Increasing the sales of New England food to New England consumers benefits the environment.
- Increasing the sales of local and regional foods is a driver of local economic development
- Increasing the sales of local and regional foods to consumers in New England could improve health and nutrition outcomes.
- Increasing the sales of local and regional foods could improve health and nutrition outcomes for hospital patients.
81.33% of farmers “Strongly Agreed” or “Agreed” with the following statements:
- Increasing the sales of New England food to New England consumers decreases the environmental impact of large-scale agriculture.
- Increasing the sales of local and regional foods could improve health and nutrition outcomes for the elderly
- Increasing the sales of local and regional foods could improve health and nutrition outcomes for incarcerated individuals
And 75% of farmers of farmers “Strongly Agreed” or “Agreed” that increasing the sales of local and regional foods could improve health and nutrition outcomes for students k-12.
Supply Chain Structure
We asked farmers to identify how they marketed all products sold by the farm operation, and in particular, to identify the structure of the supply chains through which products flowed to end consumers in institutions. .
“Direct Marketing” is defined as sales from the producer directly to the end consumer of the product.
“Intermediated Marketing is defined as any sales where an additional business or organization owns the product before it reaches the end consumer.
72.27% of farmers interviewed sold directly through a farm stand or farmers market. 81.81% sold directly through a CSA, and 45.45% sold directly through Pick-your-own.
Intermediated Sales, Sold to Outlets that prepared or sold product in turn to end consumers.
Non-Institution Intermediated Sales
100% of farmers interviewed sold product to a retail outlet, like a grocery store or co-op; 90.9% of farmers interviewed sold to restaurants; 54.54% sold to processors, 36.36% sold to aggregators, and 27.27% sold to buying clubs.
Institution Intermediated Sales
54.54% of farmers interviewed sold to a public pre-k through 12-th grade institution; 36.36% sold to private per-k through 12-th grade private schools or hospitals; 27.72% sold to a public college, or a private college, or a jail; and 9.09% sold to a pre-school.
Intermediated Sales, Sold to Wholesalers where buyer is known.
When farmers sell products to wholesale, they do not always know who the wholesaler’s buyer is. On the other hand, there are occasions where farmers negotiate sales with a buyer and then contract a wholesaler to deliver the product.
Of the farmers interviewed, 63.63% sold to a wholesaler.
Of the farmers interviewed, 27.27% of the farmers sold to a wholesaler and know who buys their product from the wholesaler.
Of the farmers interviewed, 27.27% of the farmers sold to a wholesaler and know who that the buyer who bought their product from the wholesaler was an institution.
Of the farmers interviewed, 36.36% used a non-profit online broker as a wholesale distributor to institutions.
Farmers Decisions to Sell to Institutions in the Future: Transaction Costs – the Costs of Gathering Information, Negotiation, and Monitoring.
We asked a number of questions intended to uncover the transaction costs associated with farm to institution sales, but only one farmer kept records that allowed us to calculate a dollar value of those costs as distinct from costs associated with other marketing. In this particular case, the dollar value is estimated as a portion of the salary of an employee whose job includes wholesale marketing, plus additional labor costs required for packing product for sales to these markets. This farm operation’s business planning is perhaps the most sophisticated of all farms interviewed, and may offer a window into how other farms will approach farm to institution marketing in the future, so we will share as much as we can about the costs without providing identifying information about the farm operation.
This farm operation only uses a non-profit online farm brokerage platform to coordinate and deliver farm to institution sales. Like many farms interviewed, the farm does not distribute to institutional buyers because the uncertainty associated with these deliveries is too high, and the revenue too low. The broker that they use adds a 20% charge above what farm price. The 20% shifts the cost of the non-profits brokerage services and delivery to the buyer, so that the farmer is not bearing these costs. In terms of transaction costs, the brokerage service is bearing the costs of gathering information about potential buyers and making a match among buyers and sellers; negotiating terms, including contracts, product quality and packaging, prices and quantities; and monitoring the value and quality of the sale. The farm does not process the product beyond what they would for any other wholesale buyer, but the FTI product needs to be packed differently than product for other wholesale buyers. The employee spends about 2% of their paid time on FTI sales, which constitute about 0.004% of the farm’s total sales, and has volunteered about 200 hours of additional unpaid time to developing the farm to institution market for the farm.
While other farm operations do not track information about transaction costs in a way that allows for this comparison, it is perhaps not difficult to see why 81% of the experienced farm business decision makers interviewed do not see Farm to Institution marketing as a growth area for the farm business operation. When we asked these farmers why they did not see this market as an area for growth, the answers all alluded to the transaction costs in the market.
Farmer comments that indicate that transaction costs are a barrier to increased sales to institutions:
-The wholesale learning curve is way more transparent than the FTI learning curve. Also, the rules for FTI are evolving more quickly, so it isn’t like you invest in learning something and then you’ve invested that time and you move on – instead the needs and rules change as you go. Not sure if it will each some kind of stasis.
-In wholesale marketing, the organizational relationship is much stronger than the institutional relationship, but in the institutional market, the relationship with the individual is paramount to getting anything done, even though it is dynamic – if a person [who you are working with at an institution] moves jobs, that may be the end. With institutions, you have to actually go and meet with them.
-Won’t do [delivery to insitutions], or will avoid it if at all possible. Probably less than 1% was direct. e.g. one local school wanted deliveries, but we said they need to go through the distributor bc it just isn’t worth all of the coordination for the volume that they want.
-Quantities are too small to make it worth running a truck. Makes no economic sense.
-Sold through [online broker to schools] for about 4-5 years, But 2014 was the last year – then they didn’t want to work with us bc we were too small. [online broker] has decided to focus on working with larger scale wholesale farms.
-We could have sold through [national distributor who works with food service companies in institutions] but we would have had to increase our Food Safety Liability Insurance to $10 million umbrella. That would have cost $3000 a year, so we avoided it.
-[To increase sales to institutions] you need to incentivize the people who buy. Buyers at schools need to get some kinfd of incentive – maybe 1% of local foods or something, as a bonus at the end of the year.
-For us to move more of our sales from wholesale to institutions, they would need to increase their prices.
-People who do food service are not accustomed to using whole vegetables, and they have to be willing to deal with the product we sell, to cook it, etc. We haven’t made efforts to lightly process product in the way that institutions would need. At the moment we wouldn’t take on that kind of processing. It is conceivable that we could sell to a middle man who would then process and move the product to schools. But they would have to make a commitment to organic, or the investment we’ve made in that wouldn’t earn the returns to make it worthwhile.
-What we need is a processor that can make the product into the kind of thing that cafeteria workers like.
In addition, these farms may have better options for growth areas for their businesses. Farms that are near metropolitan markets are investing in farm stands and other direct marketing, like CSAs. Farms further away from metropolitan areas are interested in moving into wholesale restaurant and retail markets, particularly those that have access to online brokerage platforms. These marketing options have much more clearly defined transaction costs.
With these comments however, it is important to distinguish the uncertainty about the transaction costs in the FTI market and the actual costs themselves. Perhaps with the boomlet in online no-profit and for-profit brokerages, the uncertainty will be gradually eliminated, and farmers will sort themselves into markets with clearly defined costs, including farm to institution markets.
Only two of the thirteen farmers interviewed see farm to institution marketing as a growing market for their farm operation. These farm operations had a few characteristics in common – they did not perceive direct marketing as a growing market for their operations, either because they were geographically isolated from densely populated areas or because they felt that the direct to consumer market was saturated where they were located. Unlike most of the farmers interviewed, who identified as diversified farm operations, each of these two operations focused on growing a smaller number of crops. Both operations had made large investments in on-farm processing facilities in the last two years, and both farms aggregate and process products from nearby growers to sell to institutions. While the other eleven interviewed farmers engaged in on-farm processing, only these two farms served as aggregators, suggesting that the growth opportunity may be in aggregation, rather than a reallocation of product grown on-site from more general wholesale sales or direct sales to farm to institution sales.
These farmers, however, had far more differences than similarities. The operation sizes in terms of total dollars sales were on the opposite ends of the ranges of those interviewed. Farm labor expenditures were relatively low for one farmer, and relatively high for the other. The farms’ locations were very different in terms of access to markets and infrastructure. One farm had significant on-farm infrastructure and the other did not. The farmers had very different ratios of expenditures for distribution costs, utilities, insurance costs and other standard farm operation costs.
The project identified a number of critical potential costs for farmers in farm to institution marketing, and important new technological resources to mitigate those costs. As a result, we developed three publications designed to be accessible to both farmers and farm to institution practitioners who work with farmers. These publications help to clarify the uncertainties of the market, and provide farmers with information and resources they need to make informed choices to sell to these markets.
We believe that the results are also important for practitioners and researchers who have struggled to clearly understand the roll of farm to institution marketing in a sustainable farm business plan. In addition to the valuable responses to questions we asked about marketing, we have identified a number of questions that must be asked in the future, including the role of different market intermediaries and market structures, the role of labor and farm to institution activities, the role of processing, and the role of social preferences in farmers choices to sell to these markets.
Education & Outreach Activities and Participation Summary
Target Audience: Farmers and Farm to Institution Practitioners.
- “Federal Labor Laws and Farm to Institution Sales in New England: How to Make Sure Your Farm is in Compliance”
- “Online Brokers and Farm to Institution Sales: Streamline Your Sales to Institution”
- Processing for the Farm to Institution Market: Just Roots Community Farm and Soup
Publications in Process:
Federal Labor Laws and the Farm to Institution Market. Choices
Costs and Returns to New England Farmers in the Farm to Institution Supply Chain. Journal of Extension.
Online Brokers: Reducing the Costs of Selling to Institutions. FINE Blog post.
Events: NEFV, NH NOFA, CT Fruit and Vegetable Conference, FINE Metrics, NESAWG, NAREA, Summer NOFA
The information provided through this research will help farmers make informed decisions about farm to institution sales. In particular, the three emerging topics reports provide critical information that will help farmers make decisions that will significantly reduce their costs in this market. The research we conducted is the first step in identifying the questions that need to be answered to determine what will make farm to institution markets profitable for farmers in New England.
Farmers who use the information about online brokerage platforms will be able to increase profits in this market by reducing transaction costs, and perhaps by increasing revenues through additional sales. Farmers who use the information about DOL regulations may actually increase their annual operating costs by appropriately paying workers minimum wages and overtime if they did not before, but should have; however, we hope that they are also reducing the risk of catastrophic fines from a failure to follow these regulations. Farmers who read the value-added product case study will be able to understand the costs associated with creating a value-added product line, and will be better prepared to make an informed decision about whether or not a similar product line is a good fit for their farm business. Finally, farm-to-institution practitioners who use the information provided will better be able to support farmers in making informed choices to participate in this market.
The project design did not include a component to track farmer adoption.
Areas needing additional study
The extension materials developed as a result of this research – “Federal Labor Laws and Farm to Institution Sales in New England: How to Make Sure Your Farm is in Compliance” and “Online Brokers and Farm to Institution Sales: Streamline Your Sales to Institution” are both relatively narrow in focus. More research is needed to understand the scope of impact of labor regulations on the agricultural activities that farmers engage in to meet the demands of institutional buyers, as well as on the activities farmers in New England engage in for other markets. A number of farmers in New England have been found in violation of labor laws in the last few years, and engaging these farmers to research this issue in depth and develop materials to prevent non-compliance is a growing need. Online brokerage platforms, both those run by non-profits and those run by for-profit companies, are a growing trend across the country. More research is needed to understand in what circumstance these platforms support farmer profitability and in what circumstances they may contribute to a downward pressure on the prices charged by farmers who use the platforms. More research is needed into the prices and quantities of products sold by farmers in New England to institutions. Without this information, it will continue to be impossible to determine the profitability of this market for farmers. More research is needed to understand the costs and returns to different farm to institution food processing options.