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

1995 Annual Report for 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:

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


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
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.
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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
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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
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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.
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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.

Objectives/Performance Targets

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.


Impacts and Contributions/Outcomes

We draw the following basic conclusions about the economics of
organic farm production vs. industrial production:
o Organic farmers can produce crop yields for a variety of crops in a wide range
of locations that are competitive and even superior to crop yields produced by
industrial methods.
o Organic farmers can generate net cash returns from both crop and animal
production that are often superior to industrial farmers.
o Good farm management is the single most important determinant in achieving
high yields and good cash returns.
o A key to profitability in sustainable agriculture is to achieve high margins
(through cost reduction) on low production volumes as opposed to the
industrial approach, which maximizes profitability on high volume, low
margin production.
o The longer that farmers practice sustainable agriculture, the better their yields
and overall profitability.
o Community scale sustainable agriculture can often put under-used farm
equipmentandfacilitiesto productiveuseat a verylowcost.