Developing regional distribution networks to enhance farmer prosperity: Retail value chains

Final Report for SW10-810

Project Type: Research and Education
Funds awarded in 2010: $24,906.00
Projected End Date: 12/31/2011
Region: Western
State: California
Principal Investigator:
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Project Information

Abstract:

• Values-based supply chains are not arranged in neat linear relationships but are networks that interact with one another in complex ways.

• Participants are looking for the same values. Chefs, institutional buyers, grocers and retail customers want to know the story of the farm, its scale, location and that the production practice is sustainable or organic.

• “Aggregation hubs” or “regional food hubs” are emerging in various forms for small- and mid-scale producers to consolidate product.

• It is more important to success in this market niche to tell an authentic story than claim to be “local.”

Project Objectives:

• To assess the success of values-based supply chains in California, particularly one anchored by a retail buyer — the Sacramento Natural Foods Coop.

• Determine the extent to which (1) access to financial capital; (2) policy/regulatory/industry context (e.g., processing, food safety, insurance); and (3) entrepreneurial (or business acumen) skills contribute to developing the distribution network, building strategic partnerships and overall success.

Introduction:

Small- and mid-scale producers are exploring new distribution systems to aggregate their products with other producers. Some have established relationships with nonprofits, innovative retailers, food service companies or progressive distributors. Such values-based supply chains enable a producer’s values to be embedded into the supply chain and conveyed throughout the distribution system. Producers are considered to be partners, rather than merely suppliers of commodities, and they become price makers rather than price takers since the supply chain enables them to differentiate their products. The success of the venture depends on trust and cooperation among all the partners.

Our Western SARE-funded project expanded on a two-year USDA NIFA-funded research project to explore the successful development of values-based supply chains in three western states (CA, OR and CO), especially focusing on the impacts of (1) producers’ access to financial capital, (2) government regulations and policies, and (3) producers’ business acumen/entrepreneurship. The four California case studies in the NIFA project all focus on institutional buyers as the last entity in the chain. The funding from Western SARE allowed us to conduct a fifth case study that focused on the supply chain anchored by a retailer as the last entity in the chain - the Sacramento Natural Food Coop, a grocery store in Sacramento, CA, known for working with local growers using sustainable farming practices.

Cooperators

Click linked name(s) to expand
  • Paul Cultera
  • Jim and Deborah Durst
  • Shermain Hardesty
  • Jeff and Annie Main
  • Larry Nurse
  • Judith Redmond
  • David Visher

Research

Materials and methods:

To assess the success of various values-based supply chains in the larger project, we began by conducting case studies of distribution networks. Our case studies examined established or emerging relationships between producers and other firms involved in the distribution networks of produce values-based supply chains. The four cases in California selling mainly to institutional buyers are identified by the primary distributor selling to institutions: Growers Collaborative (CAFF), Fresh Point Southern California (a subsidiary of Sysco), Greenleaf (SF) and Specialty Produce (San Diego). The fifth, funded by this Western SARE grant, profiles the values based supply chain anchored by a retailer - the Sacramento Natural Food Coop.

For this case study, we conducted interviews with distributors, suppliers (producers) to the network, and Sacramento Natural Food Coop (SNFC) staff. In addition, we have interviewed staff at a local community-based farm called Soil Born Farms that is integral to authenticating the values attached to some products moving through SNFC. Thus the entire supply chain is included.

A common interview protocol was created collectively by project team leaders and was used to gather data for the original case studies as well as this one.

Advisory committee

According to the mission of the Western SARE, we added a grower component to our existing Advisory Committee. Five growers were originally added to our existing advisory committee. Three of the producers listed as cooperators were interviewed for the case, two were unable to participate, and one new grower was added to the committee, for a total of four growers. All were polled about the content of the case and the relevance of its design. All the active farmer members have agreed to serve as speakers during outreach events and to review the research results and outreach materials.

In consultation with our Advisory Committee, we modified our research tool and perspective to accommodate the differences between a supply chain ending in an institution and one ending at a retail store. In the case of the values-based supply chain ending at Sacramento Natural Food Coop, we discovered that the chain is much more of a network than a linear chain. In order to achieve the mutual benefit of authentic branding, the communication along this chain is much more transparent than in the other cases.

Interviews

We conducted interviews in person and by telephone with nine participants in the retail supply chain: two distributors, three farmers and three retail staff. Each interview took about two hours with follow up questions by telephone. The results were transcribed and inserted into a database that allowed us to analyze the data from a variety of perspectives.

Research results and discussion:

Summary of Findings

In the analysis we combined the results of all five cases. We identify common features among the five case studies (four with an institutional buyer as the end user and the fifth with a retail buyer as the end user) and make comparisons across two dimensions. The first is related to the three factors affecting the development of values-based supply chains — financial, policy and entrepreneurial. The second is related to the perspectives of the three classes of businesses that make up the chain — farmers, distributors and foodservice/institutional, restaurant or retail buyers.

Key Findings

• Values-based supply chains are not arranged in neat linear relationships, but are networks that interact with one another in complex ways.

• While there are real differences among the supply chains in how values are connected to the product as it moves, the values themselves are the same — restaurant chefs, institutional buyers, grocers and retail customers want to know the story of the farm, its scale, how far away it is and that the production practice is sustainable or organic.

• “Aggregation hubs” or “regional food hubs” are emerging in various forms for small- and mid-scale producers to aggregate and consolidate product.

• It may be more important to success in this market niche to tell an authentic story than simply claim to be “local.”

1. Financial

a. The people that manage the traditional sources of capital for agriculture are not familiar with the alternative farming and marketing enterprises, including values-based marketing that these producers are building.

b. The “right balance” of small-, mid-scale and large producers in distribution networks is important for financial viability of distributors.

c. Non-profits allied with distributors will probably need to continue relying on outside funding (grants, etc.) to support their marketing and branding. Distributors who rely entirely on the values-added product line, (as opposed to a “line” among several), are unlikely to succeed without a subsidy.

2. Policy and Regulations

a. The participants in this study roughly divided into two groups: those who proactively identify the applicable regulations and develop a plan to comply with them, and those who prefer to wait for some external pressure that forces them to both become aware of a new policy and comply with it.

b. Retailers and institutional buyers, rather than government, have been largely responsible for imposing food safety standards (GAP, HAACP, etc.)

c. Both the producers and the foodservice retail/buyers tend to place the main burden on the distributor for identifying, complying and making sure that marketing and food safety regulations are obeyed along the entire chain.

d. Regulatory and food safety issues are more of a challenge for institutional and retail buyers who are under contract with a particular produce distributor and want to buy directly from local growers. These buyers may want to buy directly from a local grower but cannot because institutional food service policy requires that they buy from the contracted distributor.

e. The debate about food safety standards, responsible agencies and application to different scale farms is murky. Most small farmers are waiting to see what will emerge and will then decide if and how to comply.

3. Entrepreneurial

a. The distributor and the buyers help to carry the farmer’s story forward, but they do noy generate it. The producers who effectively access the values-based supply chains are building their own brand, story and position. They have taken responsibility to tell their own story.

b. The ability to communicate authentic stories of producers is critical. This may trump “local.”

c. Distributors are looking for small local farms with good stories. They need these relationships to access the values-based market niche. However, it is expensive for the individual distributor to buy from very small farmers, and they prefer using a formal or informal hub.

d. Retailers who are adapting a values-based strategy want the farmers in the store to educate their customers and to authenticate the retailer’s position.

e. All the managers in our cases understand that they are building a brand or at least a branded line among their other offerings. They are trying to help the organization position itself and build a reputation as a supplier of values-based products.

f. Each case we studied is a thread in the network of produce distribution. The industry is marked by innovation and business skill. Margins are so thin and price information so ubiquitous that in many cases, business acumen is the only thing that separates the losers from the winners.

Research conclusions:

We have not gathered data on measurable impacts of this project. Our intent was to gather exploratory data to describe the nature of five values-based supply chains in the California produce industry, particularly how they are influenced by financial, policy/regulations and entrepreneurial factors.

In the future, measureable impacts could be gathered about the following (organized by Western SARE’s priority topics):

Promote good stewardship of the nation’s natural resources…

Our project helps facilitate the development of new regional institutional and retail markets for growers specifically selling products using sustainable production practices. Products with these attributes are what consumers are increasingly demanding. The key is to create a distribution network in which those attributes (or “values”) are communicated to distributors and buyers all along the chain, all the way to the consumer. Consumers are willing to pay a premium for product with these values, which then translates to higher prices for regional producers. In order for this to happen, consumers have to be aware of when and where their cafeterias and groceries are supplying these products and who the producers are.
In this particular case, the retailer (Sacramento Natural Foods Coop) is a full service retail grocery store that sells only certified organic products and is committed to sourcing from local producers as much possible. While the store buys direct from many growers, the bulk of its product, including that grown within about 200 miles, comes from an organic produce distributor in San Francisco called Veritable Vegetable. The management, farmers and Veritable Vegetable collaborate to coordinate supply and promote the values they share.

Enhance the quality of life of farmers and ranchers…

Our educational and outreach strategies include training producers about creating and maintaining business strategies that access these new regional distribution networks. Regional markets will recirculate dollars locally. If stores, restaurants and cafeterias are showcasing the producers from whom they buy their food, farmers get the recognition they deserve for growing good food using sustainable farming practices. In this case study, produce sales alone accounted for $2 million of overall retail sales. Although it was beyond the scope of this study to document sales by all regional growers to this retail site, it was estimated by Coop personnel that 60% - 90% of the $2 million comes from local growers (200 miles from the store). Interviewees also noted that the Sacramento Natural Foods Coop is interested in maintaining and expanding their values-based supply chains. This will then translate to greater income for area farmers and ranchers.

Protecting the health and safety of those involved in food and farm systems…

Producers will be recognized (economically through sales and socially through branding) for their sustainable farming practices. Food safety practices will be encouraged as a precondition to access new channels for wholesale markets.

Promote crop, livestock and enterprise diversification…

A core characteristic of values-based supply chains is a shift in the relationship between buyer and producer. It becomes more of a partnership, less adversarial, and is marked by better communication between the parties. Buyers work with producers to open new markets for specialty products, find ways to add value, plan production schedules and develop new crops for niche markets. These activities increase diversification across both crops and enterprise models.

Participation Summary

Educational & Outreach Activities

Participation Summary:

Education/outreach description:

Publications:

Feenstra, Gail, David Visher and Shermain Hardesty. 2011. Developing Values-based Distribution Networks to Enhance the Prosperity of Small and Medium Sized Producers. Davis, CA: UC Sustainable Agriculture Research and Education Program.

Outreach:

Five representatives from our study participated in a panel discussion about the project at an event scheduled just before the Ecological Farming Conference at Asilomar in January 2011: Building Regional Food Systems: Regional Food Hubs and the California Food Hub Network.

Results were also presented by collaborators at the California Small Farm Conference in San Jose on March 8th. Supporting publications for these events will be prepared based on the research report. The presentation is captured on line at: http://www.sfp.ucdavis.edu/events/11conference/.

Project Outcomes

Project outcomes:

An economic analysis was not part of our study.

Farmer Adoption

Our project did not measure the extent to which farmers adopted new marketing strategies or positioned themselves differently vis - vis values-based supply chains. Through our outreach venues, we probably reached 100 growers directly. However, the Small Farm Conference presentation is posted on the website, so there is the opportunity for many more growers to access this information. Additionally, we will soon have the final set of case studies posted on SAREP’s website, and we will issue a press release at that time.

Reviewing the results of this project is only the first step for farmers considering values-based supply chains. We are currently engaged in a project funded by the USDA Rural Development program to review a variety of aggregation strategies for small- and mid-scale farmers and to highlight the pros and cons of each. This document will provide much more targeted information for farmers. We are almost ready to post an annotated bibliography of values-based supply chain/ food hub studies, reports and presentations. That document will allow interested researchers and growers to access the information we know is out there but has so far, not been well organized and distributed.

Recommendations:

Areas needing additional study

Our research points to the following areas that need more study, outreach and attention:

• Outreach to small- and mid-scale growers/ranchers about how to adopt appropriate food safety protocols for larger, values-based markets.

• Outreach to small- and mid-scale growers/ranchers about how to create an authentic story about their farm, production and marketing practices, and make sure it is communicated throughout the supply chain.

• Outreach to distributors about how to connect/educate small- and mid-scale producers about engaging in values-based supply chains.

• Outreach to food service and retail buyers not currently involved in these chains to become aware of this market niche and ideas about how to participate.

• Outreach to the nonprofit community about how to be engaged in these supply chains in a way that recognizes the need for long-term economic viability for producers.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.