Sustainable Community Food Systems – A Catalyst for Rural Environment and Economic Regeneration – A Proposal for an Economic Feasibility Study

Project Overview

SW95-020
Project Type: Research and Education
Funds awarded in 1995: $59,448.00
Projected End Date: 12/31/1995
Matching Non-Federal Funds: $14,551.00
Region: Western
State: Washington
Principal Investigator:

Annual Reports

Commodities

  • Animals: bovine, poultry
  • Animal Products: dairy, meat

Practices

  • Sustainable Communities: community development

    Abstract:

    Executive Summary
    A. Introduction
    A growing number of people believe that sustainable community food systems (where
    food is grown, processed, and distributed locally with strong emphasis on environmental
    and social values) provide a viable economic alternative to the industrial food system.
    The purpose of this study is therefore to determine if sustainable community food
    systems can be cost competitive with industrial food systems and under what conditions.
    B. Establishinga context for sustainable communityfood
    systems
    In the past several decades farms have become larger and more industrialized. A mass
    production processing and distribution infrastructure has also developed to support these
    large farms. Meanwhile, many small scale, local producers and processors have been
    bought up or have gone out of business because they could not compete with the large,
    agri-business food producers.
    Despite the ability of the industrial food system to deliver ample quantities of a diverse
    range of foods to feed a large population, a growing number of people are raising
    concerns about its impacts on the environment, farm households, consumers, food safety,
    and quality of life in rural communities. Sustainable community food systems are
    therefore being suggested as viable alternatives.
    The key differences between the industrial food system and the community food system
    results from the fact that they are based on fundamentally different paradigms or "world
    views". The industrial food system is viewed as the commercial production and delivery
    of food at the least economic cost, to those who can pay for it. Profitability is achieved
    by replacing labor with capital; maximizing throughput; controlling nature with
    technology, fossil fuel and chemicals; and by specializing and routinizing tasks.
    Conversely, sustainable community food systems operate at a human scale with strong
    attention to environmental integrity, economic self-reliance and social well being.
    c. The economics of sustainable on-farm food production
    Sustainable, community scale food producers have the following characteristics: they are
    typically small in comparison with industrial producers;their crops are diversified; they
    use innovative practices to improve soil quality and plant and animal health; and they are
    often new to farming.
    Integrity Systems Cooperative Co. v
    1. Crop production yields
    A common perception about sustainable crop production is that yields are
    significantly lower than crops produced with industtial methods. While some
    research studies confmn this perception, many others show that yields can be the
    same or higher for a variety of crops under sustainable production. The most
    important factor in determining yields seems to be the management skills of the
    farmer. Further, most researchers agree that yields tend to decline for three to five
    years during the conversion from industrial to sustainable growing methods.
    2. Crop production costsand net income
    Crop production costs are difficult to compare between sustainable and industrial
    approaches because industrial production is usually evaluated on an individual crop
    enterprise budget basis whereas sustainable production is best suited to a whole
    farm analysis. As with yields, some research studies show that crop production
    costs are higher under sustainable production while others show that they are lower.
    However, on a total farm income basis, there is considerable evidence to suggest
    that sustainable food producers can generate similar and even better financial
    returns than comparable industtial food producers.
    3. Food animal production costsand net income
    One of the fastest growing, small scale animal enterprises is homestead chicken
    production. Many farmers have found that they can earn good supplemental
    income even on relatively small annual production levels (300 to 1,000 birds).
    While homestead chicken production generates less net income than industrial
    chicken production (which has higher throughput), the profit per bird under
    homestead production is much higher.
    Concerning homestead beef and pork production, evidence is growing that pasture
    raising and finishing of cattle and pigs can result in higher net income to farmers
    than indusnial confinement feeding alternatives. Funher, there is growing evidence
    that small herd dairies, managed on an intensive rotational grazing method, provide
    greater profitability per unit of production than large, high technology confinement
    operations. One Ontario study demonstrated that total farm income was 24% higher
    under sustainable dairy production.
    For both sustainable crop and animal production it appears that grower profitability
    improves the longer that they use sustainable food production practices. Further
    community scale food production has the benefit of puning underutilized farm equipment
    and facilities into productive use at minimal cost.
    Small scale, organic food producers typically receive a significant price premium for their
    products (many receive average premiums of 30%) when selling through conventional
    disttibution channels. They face the same distributor and retailer markups as industrial
    farmers.
    Integrity Systems Cooperative Co. VI
    . . – ..’ -. — —
    D. The economics of sustainable communityfood processing
    Very little published infonnation is available on sustainable community food processing.
    This is because there is not currently much activity in this area and where there is, it is
    conducted by private sector fInns who are very reluctant to release their competitive
    fmancial infonnation.
    A number of processing options have strong applicability to sustainable community scale
    processors. These include "ready made" (Le. ready-to-cook or ready-to-eat) processed
    foods, canning and bottling, and custom-packing meat processing. Ready-made
    processed foods are well suited to local markets, typically involve less capital equipment
    to produce than other processed foods, and command premium prices. There is good
    potential to can and/or bottle high acid foods although the best opportunities appear to be
    for ready-made canned or bottled goods such as soups, stews, and sauces. On-farm or
    off-farm custom processing of small quantities of chickens also has strong potential.
    1. Farmer controlled processing
    Traditionally, farmers receive their lowest returns from the commodity processing
    market. This is because processors need to acquire their farm inputs for as Iowa
    price as possible to compete in the very low margin processed food market. One
    strategy to address this is farmer controlled processing.
    A growing number of fanners have established successful grower owned,
    processing cooperatives to obtain secure markets and better prices. Some of these
    processing cooperatives are very large. Other farmers have resorted to small scale
    on-farm processing. In some cases, individual farmers have joined together to
    jointly purchase processing equipment and storage, washing, and grading facilities.
    2. Economiesof scale
    In general, the profItability of industrial food processing fInns increases in a linear
    fashion with fInn size. This is why there is a high degree of consolidation and
    vertical integration in the food processing sector. Nonetheless, there is evidence
    that small quantity, on-farm processing can be economically viable because the
    processors are able to keep their costs low by using farm family labor and on-farm
    kitchen facilities. However, small scale processors that wish to increase their sales
    of value added products face unexpected diffIculties. This is because they are too
    large to use hand processed, low overhead production methods but not large enough
    to capture economies of scale. The primary exception to this is processors of
    "ready-made" food products, which can be quite profItable at a medium scale.
    3. Significanceof incomepatching
    A key characteristic common to community level food processing activities is
    "income patching," where the processing activity is one of several sources of
    income rather than the processor’s sole source of support. A number of
    opportunities exist for farmers to significantly increase their cash returns on a
    Integrity Systems Cooperative Co. V11
    ". … – .. – . _..:.. .. n ___ __.
    portion of their crop from small-scale on-farm value added processing. For
    example, an apple sauce processor generated the equivalent of 6 months of a retail
    sales clerk’s salary in only 16 days of processing. Similarly, a homestead chicken
    processor earned 5.5 months retail sales clerk pay in 19 days of labor. As with food
    growers, strong management skills are needed to be successful.
    Unlike fresh products, the costs to produce organic and non-organic processed foods are
    very similar. Nonetheless, organic processed foods are generally much higher priced.
    The net margins for processors that distribute through industrial channels are typically
    less than 5%. It appears that the path to profitability for community scale processors is to
    achieve a high margin on small production quantities as opposed to the industrial strategy
    of producing high quantities of low margin products.
    E. Theeconomics of sustainable communityfood distribution
    The three primary options for distributing fresh and processed foods include: sale to large
    wholesalers/distributors, sale to local, independent retail outlets, and sale direct to
    consumer. While sale to wholesalers/distributors makes up the lion’s share of the food
    distribution market, the best opportunities for sustainable community food systems
    appear to be sale to retail outlets and sale direct to consumer.
    Producer/processor wholesale marketing cooperatives are a good example of selling to
    retail outlets (as well as institutions like schools and hospitals). These cooperatives give
    micro and small growers access to markets that would not otherwise be available to them.
    Direct to consumer distribution avenues typically include road side stands, farmer’s
    markets, direct home delivery, community supported agriculture (CSA), and food buying
    clubs. However, there are many different combinations of direct to consumer food
    distribution approaches that can produce profitable results. Further, these distribution
    methods not only provide economic benefits, they also provide social benefits by
    enhancing community relationships and educating people about the benefits of buying
    local, sustainably produced foods.
    Roadside stands can be a very direct to consumer retail food distribution approach
    because the distribution cost is eliminated by the consumer coming to the farm (or near
    the farm). Farmer’s markets are typically less capital intensive than roadside stands
    because buildings and equipment are shared and they are more conveniently located for
    the consumer. However, these costs savings are often offset by the higher transportation
    and sales labor costs. The gross returns from farmers’ market sales are typically 200% to
    250% higher than from wholesale fresh market sales and can be much more.
    Direct home delivery was once quite popular but has declined in popularity over the past
    few years (e.g. home milk delivery). However, recent consumer lifestyle and attitude
    changes are signaling a reversal of this declining trend. The strongest reason for the
    resurgence in the popularity of home delivery is convenience. In spite of this strong
    consumer demand, each home delivery firm tries, and is generally successful at keeping
    prices competitive with comparable retail grocery store prices.
    Integrity Systems Cooperative Co. viii
    Community Supponed Agriculture (CSA) is a pannership between farmers and
    consumers to create a fresh food supply without waste or pollution. While some CSAs
    operate in a typical commerce relationship, most involve much closer relationships
    between the customers and the food providers. Shareholders are encouraged to visit the
    farms, not only for festivals but also to help with farm tasks such as weeding and
    harvesting. There are over 500 CSAs in North America and the number of CSAs is
    growing at 12% per year. While the end consumer price of a CSA can be competitive
    with regular grocery store prices, prices vary widely from one farm to another.
    Food Buying Clubs are the reverse of grower cooperatives. Typically groups of
    consumers come together to pool their food purchases to generate large enough orders to
    deal directly with distributors or even growers. A consumer survey in Hartford showed
    that food buying clubs saved 20% on their groceries.
    In general, the fewer middle-agents that food products pass through on their way to the
    consumer, the more money the farmers or processors receive. Therefore, farmers and
    processors maximize revenues when they can sell direct to the retail consumer, followed
    by wholesale sales direct to retailers, then wholesale sales to distributors, with sales to
    processors typically bringing in the least revenue. Food producers can receive 50% to
    80% more by selling direct to the consumer. As with the growers and processors, the
    economic success of community scale distributors depends on excellent management.
    F. Conclusions andfutureresearch needs
    Based on the above, there appear to be a number of niche areas of production, processing,
    and distribution where sustainable community food systems can be competitive with the
    industrial food system. This finding helps to dispel the belief that costs under a
    sustainable community food system are so much higher than existing alternatives that
    they wo.uld be uncompetitive. It also provides strong justification for communities to
    explore the development of local food systems as a key component of a community
    economic development (CED) strategy. For example, assuming that a sustainable
    community food system could capture 5% of the total food market, it would generate
    $13.5 million in annual sales for a community of 150,000people.
    An expansion of the sustainable community food system gives farmers the chance to
    bring home a greater share of the consumer food dollar. At present, farmers receive only
    $22 for every $100 that consumers spend on food. However, under a sustainable
    community food system it is possible for the farm value to increase to $30 because such a
    system has lower marketing costs. It also returns more cash to post farm labor, which
    improves community prosperity. This 37% increase in revenues would represent a
    significant improvement in the economic viability of the average American farm.
    While this repon represents an initial effon to determine the economics of sustainable
    community food systems, more research is greatly needed. Key research needs include: a
    detailed analysis of the costs to shift from industrial to organic production for panicular
    food products; a detailed economic analysis of processed food products that could be
    viable at a community scale production level; and a detailed analysis of the costs and
    revenues associated with panicular direct to consumer food distribution techniques.

    Project objectives:

    The primary purpose of this study is to determine if sustainable community food systems
    can be cost competitive with existing industrial food systems and under what conditions.
    Supporting objectives are to:
    o Determinethe economicsof sustainable,small-scaleagricultureproduction
    relativeto industrialagriculturalproduction.
    o Determine the economics of community-scale food processing systems
    relativeto industrialfoodprocessingsystems.
    o Determine the economicsof community-basedfood marketing/distribution
    methodsrelativeto industrialfoodmarketing/distributionchannels.
    o Describe the key barriers and opportunities for establishing sustainable
    communityfood systemsandidentifyingfutureresearchneeds.
    Integrity Systems Cooperative Co. 1
    While this study focuses on the economics of sustainable community food systems, we
    recognize that food systems can only be sustainable if the economic aspects are integrated
    with imponant social and environmental values. Because little information exists on how
    environmental and social values impact on the economics of food systems, they were
    under-represented in the study.
    Funher, the conditions affecting food production, processing, and distribution vary
    widely from one area to the next. For example, cenain types of crops, such as vegetables,
    can be grown in most regions of the United States, while others, such as grains, are more
    suited to panicular regions. Other variables such as rainfall, length of growing season
    and population density also have a major impact on the economics of local food systems.
    These variables underscore the point that the economics of a community-based food
    system cannot be taken as an absolute.
    Nonetheless, we were able to provide anecdotal evidence of the creative and
    economically successful ways in which people have incorporated these values at all
    stages of the food system. While this evidence does not provide conclusive proof, it
    points to some inspiring possibilities for building community, economic vitality, and
    environmental integrity into our food system.

    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.