Final Report for ONE07-074
Project Information
This project was initiated in response to institutional interest in buying from local producers. Demand by large institutional buyers often exceeds the ability of local producers to supply standing orders. A more deliberate networking effort to link producers and buyers is needed to build sustainable relationships that benefit farmers. This study focused on the capacity of producers within a 30 and 60-mile radius of Ithaca, NY to meet the demand of distributors serving Cornell Dining and other large institutional buyers in the Ithaca area. Barriers to institutional sales were identified through a producer survey and cost of marketing study. A key barrier, producer knowledge of how institutional sales work, was addressed through a producer-buyer networking meeting. Results show that producers that are already supplying wholesale accounts have the greatest ability to expand to meet growing demand. Small-scale producers are limited in their ability to expand into institutional sales because: they may be too diversified in both product and marketing mix to supply a larger buyer; they have limited in time and labor to expand; they believe wholesale prices are too low and wholesale marketing risks are too high. Incremental expansion could be promoted by linking the right size producer with the right size buyer.
Introduction:
Consumers are driving demand for local, sustainable, healthy and organic foods up the supply chain. Local college and high school students have gone to administration at Cornell, Ithaca College and the Lehman Alternative School (Ithaca) requesting organic and sustainably produced local foods. Ithaca College and Cornell Greeks have initiated limited local purchasing. The current Cornell President has requested that all events where he is present feature local foods. The Dining Director at Cayuga Medical Center is seeking healthier food choices for patients. The Executive Chef at the Statler Hotel School has made a commitment to a locally sourced menu. The wholesale distributors for these accounts are getting pressure to source NY farm products.
This interest amounts to millions of dollars in potential sales for farmers in Tompkins and surrounding counties, central NY and the Finger Lakes. There is a need to act on buyer interest, demonstrate success, and grow opportunities for farmers. A more deliberate intentional networking effort to link producers and buyers is needed to build sustainable relationships that will benefit the farmers of the region.
While there is strong demonstrated interest on the part of these institutional buyers, they need information and education on supply, seasonality and working with local producers.
Likewise, producers are not familiar with requirements of these buyers and how to meet their needs. Barriers vary from institution to institution from selling requirements to product and price. This project proposes to identify buyer’s requirements so farmers know what is required for sales.
A major barrier is that the volume and variety of farm products available within a 60-mile distance to these major Ithaca institutional outlets and the capacity of producers to expand to meet the needs of new buyers is not known. Within 60 miles of Ithaca we have a large number of small farmers and a smaller number of large farmers that combined could satisfy some of this growing demand for local products. However, this capacity must be assessed in order to make appropriate linkages between producers and buyers.
Many area farmers use direct marketing as their primary strategy. The successful Ithaca Farmers’ Market has fueled this, however, the Market is saturated and vendor sales are declining and large volumes of the harvested product is either being given away to food pantries or composted. If all costs were tracked, some small farmers may find it more economical to sell wholesale and realize the same or greater returns for less effort. A comparison of the cost of direct marketing vs. wholesale is needed so producers can decide on which strategy is more profitable.
This project focused on quantifying the capacity of area producers to supply institutional buyers and to help area producers understand the requirements of the institutional buyers. A cost of marketing study using a case study approach gathered information from four direct market farmers using a variety of marketing methods was conducted to help farmers assess whether wholesaling offers a way to expand their farm operations.
1 – An assessment of the capacity of producers in a 30-mile and 60-mile target area to meet the needs of local institutional buyers.
2- A cost of marketing study comparing direct and wholesale marketing costs that will help small scale producers assess their costs of marketing and help them decide the mix of channels they should pursue to expand their operation.
3- A profile of institutional buyers that describes what is typical protocol for sales to colleges, hotel restaurants, hospitals, schools, and others that participate in this project.
4- At least 6 producers within a 30-mile radius and 6 producers within a 60-mile radius will make deliveries to institutional markets in 2007. In 2008, the participating numbers of producers will double.
5- Evaluation and final report to document the impact of this project on farmers.
Cooperators
Research
I. Producer Survey- Assessing producer capacity within a 30 and 60 mile radius of Ithaca, NY to supply institutional buyers
The purpose of the survey was to assess the capacity of producers within the 30 and 60-mile target area to meet the growing demand among institutional buyers for local products. The survey focused on current acreage and products, how products are sold, and interest in expansion. The survey was mailed in February 2008.
Farmers and processors within a 30 and 60-mile radius of Ithaca were identified using the following sources: CCE South Central NY Local Foods Directory (covers Tompkins County and 4 surrounding counties); Farmers’ Market vendor lists for markets within the target area; NYS Small Scale Processing Association membership; Pride of NY and NYS Dept. of Agriculture & Markets lists; regional groups like Finger Lakes Culinary Bounty; and through producer associations including the NYS Vegetable Growers Association, NOFA NY, NY Apple Association, and NY Berry Growers. The main focus of the study was on produce sales. Our database did not include all meat producers in the region and all processors. A total of 458 addresses were collected. The location of these enterprises was plotted on a map in total and by commodity using ESRI GIS.
The rationale for using the 30 and 60-mile target radius in identifying producer capacity had to do with our definition of local. We were intentionally more comprehensive in identifying all types of producers within a 30-mile radius; and mainly focused on larger scale fruit and vegetable producers within a 60-mile radius. These target areas were chosen because the Ithaca Farmers’ Market has a 30-mile membership requirement and many producers that sell at IFM are diversified in their marketing methods thereby it was assumed they might have the capacity to expand. The 60-mile radius was chosen because within this area there are larger scale vegetable and fruit producers selling to wholesale buyers. In conversations with them, they indicated it was within their capacity to deliver to customers within a 60-mile radius.
II. Farmer Distributor Networking Meeting
All producers identified for the survey were invited to attend the Farmer-Distributor Networking meeting held on March 25, 2008. The meeting included a panel of 6 buyers or buyer representatives whose customers included Cornell Dining, grocery stores, food cooperatives, and direct to customer delivery schemes. In addition to the buyer panel, at least two other individuals were present who were involved in buying produce and other goods.
The meeting agenda provided attending producers the opportunity to introduce themselves and what they produce, and ask questions of buyers. The buyer panel reviewed their purchasing practices and customer requirements. At the end of the panel presentation, producers asked questions and time allowed for informal networking. A meeting follow-up survey was sent out after the meeting but only a few people replied. Buyer profiles were based on what buyers presented at these meetings. A buyer contact list was shared with participants and mailed to those people in the survey indicating they were open to expansion. (See attached announcement, meeting minutes and buyer listing).
III. Cost of Marketing Study
The goal of this study was to get a handle on the cost of marketing through various channels used by small-scale producers. Direct market farmers are reluctant to switch from direct to wholesale marketing channels because they feel prices are too low and buyers are too demanding. A question we hoped to resolve in doing this study is whether when factoring all the costs of direct marketing, especially labor, returns from direct and wholesale channels may actually be comparable. Therefore, it might make sense for some producers to specialize to meet the growing demand for local products by institutional and a variety of other wholesale buyers.
An assumption was that producers are not tracking costs of marketing hence do not have an accurate means to compare costs and returns across channels. Additionally, we assumed producers are not valuing all of their costs especially their own labor, as well as the cost of what is harvested and not sold. Given all the costs of direct marketing, it was assumed that returns when comparing direct and wholesale marketing are not as far apart as producers may think.
The cost of marketing study was done using a case study approach. Four farmers of comparable size, years of experience, crop and marketing mix were identified to participate in the study. Information was gathered via intensive one-one interviews with the farmers and through field data collection.
Several iterations of recordkeeping forms were developed for use by the farmers. Each was instructed in their use but after several failed attempts at trying to get farmers to complete the data, it was decided that the only way to get the information was to track it first hand. Data was gathered at all farms using the same procedures during the first week of August 2008. This systematic and intensive data gathering process resulted in sufficient data to highlight differences associated with cost of marketing in the various channels used by farmers. The results are included in a longer report that is included on the disk.
The work of this study was done by graduate student, Matthew LeRoux, hired to conduct this study as partial fulfillment of his Master of Professional Studies degree from the Cornell Dept. of Applied Economics and Management.
The ultimate goal of this study is to prepare a template to help producers track marketing costs and make better decisions on how to market their products.
I. Producer Survey- Assessing producer capacity within a 30 and 60 mile radius of Ithaca, NY to supply institutional buyers
Of the total 458 surveys mailed, we received 66 useable responses (out of 67). This is a return rate of 14%, which is low but not atypical of farmer responses to surveys. The 66 surveys returned represented a diversity of crop/livestock enterprises, marketing methods, and scale of operation. They also represented all of the geographic areas included in the 60-mile radius. However, as there were not many farms of any one type located in any particular area, it is not feasible to interpret the results to suggest that one or another geographic area within the 60-mile radius was more appropriate to focus on for wholesale sales development.
Most respondents grew and/or processed a variety of crops and foods. Some products, including maple syrup, honey, berries, and fruit were more likely to be the only, or one of just a few products produced by an operation. Vegetable producers using both direct and wholesale marketing channels, tended to grow a larger variety of crops. The smallest farm operations with sales under $20,000 tended to be the most diversified in their products, including produce, meat, eggs, etc., which they sold directly to consumers in a variety of ways.
13 respondents, or 20% of the total, indicated that they were not interested in expanding their operations. 26 respondents, or 39% of the total, said that they were “maybe” interested in expanding operations. 27 survey respondents, or 41%, answered the expansion interest question “yes.”
Product sales from the 66 farms yielded either very part-time to significant full-time income for the producer. 31 respondents or nearly half had sales less than $20,000. There were 15 farms in the $20,000 to $50,000 in sales range, and 9 with sales between $50,000-$100,000. The remaining 11 had sales over $100,000.
The majority of respondents who indicated some interest in expansion (22, or 42%) were in the lowest sales class, < $20,000 in sales per year. This suggests that these farm operators are motivated by the desire to increase farm income. Whether they have the capacity to produce for an institutional buyer is questionable given the scope of their farming operations. It was also noted that farm operations in rural parts of the geographic area using a variety of direct marketing strategies were not producing sufficient income, compared to similar operations tapping into the Ithaca Farmers’ Market or other markets in more populated communities.
Farm operations considered having more capacity for expansion included those that had been successful in growing sales beyond the $20,000 level.
13 respondents, or 25%, were in the sales category $20,000-$50,000 annual sales. 7 respondents, or 13%, were in the $50,000-$100,000 annual sales category, and 11 respondents, or 21%, were in the >$100,000 annual sales class. Note that all farm operations in the $100,000 plus sales category were interested in expansion. These are operations that already have experience in wholesaling and the infrastructure to do so, and additional outlets would be within their capability. They have the least to risk compared to those in the middle two income categories who would need to make more investments in order to become efficient at wholesaling.
Farm operators responding to the survey produced products on as little as .16 acres (hydroponic greens) to 4000 acres of vegetables. 53 respondents who indicated “yes” or “maybe” they had an interest in expansion, indicated they had acreage for expansion. On further examination, 28, or, nearly half, had 10 or fewer acres available to them for use in the operation. This indicates that while they are interested in expansion, but they lack the acreage to do so. However, 13 of the same group of 53 had 50 or more acres, ranging up to 4,000 acres.
In aggregate, the survey respondents (both those interested in expansion and those not interested in expansion) owned or leased 8,396 acres of land. Most indicated that they had land available for expansion should they need it, although many did not specify an available number of acres, or gave wide ranges of available acreage. An interesting comment was: “the problem is not land availability, it is labor availability, and also how to pay for labor.” One farm (not one that was interested in expansion) with 2.5 acres of land even had a reference to being cramped for space in their farm name: “Not Enough Acres.”
The marketing methods for all respondents are included in the following chart:
Marketing Outlet Respondents Using
Farmstand 34
Farmers’ Market 29
Grocery Store 24
Distributor 20
Restaurant 17
CSA 11
Institution 4
School 3
There was an “other” category for marketing outlets as well, and a number of respondents indicated that they sold “from the farm” (presumably without a formal farmstand); many others indicated that they sold “directly to individuals” (presumably either from their farm/home or delivering to the home of the customer). 2 respondents indicated that they were marketing through a cooperative, 1 was marketing via the Internet, 1 sold to wineries, several respondents operated pick-your-own farms, and 1 sold to processors.
II. Farmer Distributor Networking Meeting – Buyer Profiles
A total of 55 area farmers attended the Farmer Distributor Networking meeting. The purpose of the meeting was to educate farmers about the requirements of a variety of types of buyers and buyers were able to meet producers from throughout the region with a wide variety of products for sale. Ten of the farms attending the meeting completed the producer survey that was mailed to them with the meeting announcement. Others were encouraged to do so at the meeting.
Most of the producers attending could be characterized as small scale producers with sales in the $20,000 or under sales range. This suggests, as did the survey, that smaller scale producers are looking for outlets. Given their questions and the discussion, it seemed apparent that most had little or no familiarity with wholesale requirements.
Buyers were asked to describe their company, products in demand, how to prepare products for sales, and terms of sale. This information was the basis of short profiles developed for each buyer.
The discussion revealed several things about the producers:
-knowledge of wholesale requirements is limited
-they lack infrastructure like coolers, vehicles for delivery, websites for ordering, etc.
-they lack necessary liability insurance and food safety protocols required by larger buyers
-labor is a key limitation
-they are reluctant to lower prices to be competitive in wholesale channels
Solutions were discussed and fall into the following categories:
1) Collaborative arrangements such as hubs for packing, cooling, and distribution; labor pools or shared equipment; websites for ordering
2) Education on business practices, packaging, invoicing, food safety, insurance, etc. required by buyers
3) Ways to lower production costs and become more efficient to be more competitive
Once the formal meeting adjourned, individual farmers and buyers had a chance to talk about their products and requirements. A follow-up survey attempted to gather whether any sales arrangements had been made but it may have gone out too late in the season (May). Producers may already have made production and marketing commitments. One of the buyers requested the list of attendees so that he could follow-up directly with some of the attendees. He indicated that he is carrying one of the products that he learned about at the meeting.
III. Cost of Marketing Study
The purpose of this study was to investigate the relative costs and benefits of the marketing channels used by typical small-scale diversified fruit and vegetable producers. The study compares the performance of wholesale and direct marketing channels including how factors of risk, owner and paid labor, price, lifestyle preferences, and sales volume interact to impact profitability across different channels.
The case studies of four successful small-scale vegetable and fruit farmers who sell though diverse marketing channels presents a “snapshot” of the costs and returns associated with marketing their crops. Each of the case study farms, located within 3 to 15 miles of Ithaca, has been in operation for over 5 years, and has between 15-20 acres in diverse vegetable and small fruit production.
The case studies showed that for small-scale producers, profit maximization by market channel is not feasible given the many factors that come into consideration. These include: crop mix, production and yields that vary with the weather, risk associated with marketing commitments, producer lifestyle preference and stress aversion, labor availability and requirements, and business overhead associated with wholesale that cannot be attributed to other channels the farmer uses.
Findings from these four case study farms reveal that profit is not the only factor they consider when evaluating marketing channels. Other factors that influence the marketing channel mix are: volume sold, risk, labor hours, and sales per labor hour.
In these 4 case studies, it was revealed that CSA scored highest on all of these criteria. CSA was the top ranking channel in terms of profit, gross sales per hour of marketing labor, and total hours spent on marketing. CSA ranked second in sales volume and third for price, which was valued at or near wholesale pricing. CSA was tied with U-pick as the channel with the least perceived risk. As a result, CSA appears to be the best channel for small scale diversified producers.
In this study, the second most efficient marketing channel was a self-serve farm stand operation located on a main road. While the volume of product sold was low at the self-serve farm stand, it ranked second in profit, risk, labor, and sales per labor hour. This put self-serve farm stands ahead of other methods but with the expectation that overall sales volume is limited by how much product a farmer is willing to put out without anyone there to watch.
Wholesale proved to be a better marketing channel choice than both the staffed u-pick/farmstand operation and going to a farmers’ market. Wholesale ranked number one in terms of volume of product sold but wholesale received the poorest ranking in terms of profit and risk. Labor hours and sales per labor hours were considered better than farmers markets and a staffed u-pick farmstand operation but not as good as the CSA and self-serve stand. Wholesale landed in the middle of the marketing mix in terms of the criteria being used by these farmers.
The u-pick and staffed farmstand required the most amount of labor and sales be labor hour were low. This also drove down profit. Risk is considered moderate and the volume depends on drawing lots of customers.
Farmers’ Markets were tied with the u-pick/farmstand channel because going to market also requires significant labor hours and sales per labor hour are lowest. Volume depends on the market location and is limited by what a farmer can bring once or twice a week as compared to more frequent sales in other channels. Profit may appear to be better because prices are higher, but returns are clearly lower when all costs are factored.
A key challenge is that farmers do not track costs and returns to identify the highest profit market channel. Furthermore, farmers in this study chose to maximize their utility, rather than income, by balancing lifestyle preferences and profit. Among the case study farms, wholesaling produce is perceived as a high risk, high stress option. Direct marketing channels are more relaxed and put lighter demands, exclusive of time and labor, on the farmer. Combining marketing channels is a strategy employed by the case study farms. Just as crop diversification keeps a farm productive when one crop fails, selling through multiple channels reduces risk for a farm. A mixture of channels allows a farm to take advantage of the unique traits of each channel. Each farm had a main channel with relatively consistent demand and placed priority on satisfying this channel. Other channels are supplied dependent upon the remaining harvest.
Capacity of Regional Producers to Supply Institutional Markets –
A survey of farmers was used as the main instrument for assessing producer capacity to meet the demand for local products by institutional buyers. The results indicate that small-scale producers are interested in finding additional markets but most are too diversified to meet buyer demands. Their primary interest in finding additional markets is to increase sales given that most are generating under $20,000 from direct marketing. A middle group of small diverse producers with sales in the $20,000 to $100,000 range appears to have more potential for wholesale sales but would need to specialize in a few products to meet buyer demand. Additionally, these producers are unfamiliar with requirements of wholesaling and need further education and information in order to become successful wholesale suppliers. As expected, farmers in the region currently involved with wholesale sales, have the greatest potential for meeting buyer needs and requirements. However, in order for them to make a commitment to a particular buyer, they need some assurance of regular sales. To date, Cornell and other local institutional buyers have not proven to be reliable regular accounts. Further efforts to link producers and buyers are needed to develop successful relationships.
Farmer Distributor Networking Meeting –
The purpose of this meeting was to acquaint producers in the region with buyers seeking local products. A panel of 6 buyers, plus two others in attendance, provided details on purchasing requirements. Farmers were able to network with buyers after the program and follow-up as needed. We know of at least one direct follow-up resulting from the meeting and at least 28 additional producers in the region are supplying at least 4 of the buyers on our panel. Some were in attendance at our meeting and other connections were made either through our recommendation or via the buyer’s own networking efforts.
Cost of Marketing Case Study –
Four farmers participated in our cost of marketing study. The purpose was to track costs by marketing channel and assess which channel produces the highest returns for farmers. The findings show that the CSA channel is the most profitable based on several factors including volume sold and labor per hour. An unstaffed farm stand ranked second, however, when staffed it would rank fourth among the channels. Wholesale ranked second in terms of volume sold and thus, overall profitability. CSA prices for product sold were very similar to wholesale prices but packing requirements and overall risk was considerably less with the CSA market channel. Staffing farmstands and PYO farms adds considerably to overall marketing costs reducing the profit of those channels, especially when volume of product sold is low due to low customer turn out. Farmers’ Markets appeared to be the least profitable channel for our 4 case study farmers given the high marketing labor and lower volume of sales. This is however dependent upon the farmers’ market being used and the numbers of markets a farmer attends per week. A key challenge to assessing the effectiveness of market channels is lack of recordkeeping on the part of farmers. A simple template has been constructed that we hope will help farmers track costs by market channel and thereby make more informed decisions about which channels to focus on for maximum profitability.
Education & Outreach Activities and Participation Summary
Participation Summary:
-Outreach efforts included a farmer survey (458 mailed), a farmer distributor networking meeting (55 participants), and the case studies of 4 farmers.
-A buyer listing was developed that was mailed to everyone who indicated in the survey an interest in expanding his or her farming operation.
-The case study report will be summarized and turned into an extension publication with templates for tracking production costs.
Project Outcomes
See previous section for pertinent information.
Farmer Adoption
We know, through informal communication channels with buyers, that several producers were “picked up” by the smaller distributors who attended our networking meeting. This was further verified by checking the distributor’s product lists. At this time we can identify a total of 28 producers from the region who are selling to the distributors at our networking meeting. Two of these distributors are new firms (Finger Lakes Family Farms and Garden Gate Delivery) and so the connections we helped to make have been very important to the development of their product lines. We have not tracked volume of sales by producer but estimate that sales are low because the distributors who were active in soliciting new producers are specializing in local and have small account. Cornell Dining purchased from several larger regional producers but they have not proven to be a consistent buyer in part because they changed their distribution company in August 2008.
Areas needing additional study
Next steps planned:
December 2008 – host a meeting with case study farms to go over the study results and discuss ways to track marketing costs and the potential benefits.
January 2009 – draft an extension bulletin
February 2009 – host a meeting for farmers on tracking cost of marketing
March 2009 – host a second farmer distributor networking meeting focused on some of the topics identified at the first meeting – packing and business requirements, UPC codes, insurance, collaboration opportunities
Spring-summer 2009 - Follow-up with producers and buyers to help facilitate market connections