Sustainable Food System Economics In the Midwest
By
Jim Steffen
Low populations and weak demand for locally grown organic foods are the main structural barriers to sustainable food production and processing in the Plains States and much of the Midwest. As a result, organic and natural producers are small, geographically scattered and poorly organized. Although E. F. Schumacher’s "Small Is Beautiful: Economics As If People Mattered" offers an important critique of Western economic systems, the fact remains that the small farmers, ranchers and gardeners who work alone or in small cooperatives simply cannot compete with large non-local growers in Midwest retail markets.
In response, we are developing new market information systems and organizing “core groups” of neighboring natural, organic and conventional growers who can work together to scale up sustainable production. We believe that the combination of reliable local demand information and better production planning will attract local private-sector investors to new sustainable farms.
Market Share Data
Local growers, landowners and investors need new market information systems to guide their business plans. These data are essential for tracking market shares and projecting returns on capital and operating funds.
To be useful, market research of this type should be based on store-specific origin, price and sale volume for selected non-local products. The objectives are to: 1) Identify imported products that could be displaced by locally grown foods, and 2) Attract investors and lenders to new production and processing ventures. In other words, local market research must support product and market-specific business plans. Store-specific demand data will point to new business opportunities.
Potential Demand
The potential market for sustainably branded foods is quite large. For example, the Omaha area has an urban population of over 870,000. According to Visual Economics, the average food expenditure per day is around $7.00. This means that the residents of Council Bluffs, Omaha, Bellevue and Lincoln spend over 6 million dollars each day on food. This amounts to 2.2 billion dollars per year, most of which is spent on foods and food products from outside of our trade area. In other words, the lack of effective competition forces local retailers to use non-local suppliers.
Take fresh vegetables. According to Iowa State University research, consumption is up across the nation, although much of this new production is imported. And while the states and the USDA are active supporters of Buy Fresh Buy Local, these agencies cannot not be involved in retail level market research for individual brands. And yet without reliable demand information, many small urban and rural producers end up taking ill-advised financial and operating risks. Worse yet, these same farmers and gardeners (who should be competing with non-local brands) end up competing with one-another on the back steps of grocery stores and restaurants, or in local farmers markets.
Industry Response
Good data will not come easily from retailers or from conventional brokers and distributors because they worry that large scale sustainable production will disrupt established supply lines and threaten profit margins. Nevertheless, some conventional brokers are experimenting with local food aggregation in response to customer demand. Unfortunately, these companies use a conventional brokerage model that does not feed retail market share and price data back to farmers. Sysco and Good Natured Family Farms of Kansas are two examples.
In the non-profit sector, a number of grant-funded brokers and aggregators are actively organizing small-scale local production and processing. But again, these groups are still using conventional wholesale (linear) business models that are not attractive to local and regional investors. Examples are Red Tomato from Massachusetts and the Community Alliance with Family Farms in California.
Linear supply chains that are managed by government agencies, non-profits or conventional food companies all have the same limitations when it comes to understanding consumers and estimating local demand for specific products. They do not:
• Provide growers with retail-level price and market share data for competing products
• Engage local investors in planning new, for-profit sustainable food companies
• Concentrate new production around population centers
In addition, we believe that non-profit brokers and aggregators are inherently unstable because their business models do not explicitly require them to align their financial interests with local growers, landowners and investors. Most prefer high profile partnerships with foundations and with big distributors, food manufacturers and retailers.
New Roles for Foundations and Government
Large scale sustainable food infrastructures cannot be developed without up-front investments by foundations, corporations and government agencies. However, this support should be contingent on sound business planning and practices that include the points covered above, and that make the best use of in-place facilities, equipment and operating experience. In other words, local growers and government agencies that ignore big retail markets and established distributors are helping conventional farmers and food manufacturers extract food dollars from local economies.
To keep food dollars in our economy, we are developing supply contracts between local growers and retailers. These contracts will require growers to deliver high quality branded products on time, at pre-negotiated prices, but with exceptions for weather and predators. In return, the retailers will provide us with reliable data on the origin, price and volume of competing non-local products. Please see “Farmer-Retail Supply Contracts” on this website.
Further, each farmer will own her or his own brand, but we will contract as a group with local processors and distributors. The goal is to attract investors to “brand partnership” that can help us add value to our products - without risking the equity in our land. Brand partnerships are also explained on this website.
References:
Farmers Markets & Local Food Marketing, Programs and Services, Agricultural Marketing Service, Found on: www.ams.usda.gov, Accessed November 29, 2010
VisualEconomics.com, “How The Average U.S. Consumer Spends Their Paycheck”, Found on: www.visualeconomics.com, Accessed: November 26, 2010
Clemens, Roxanne, “The Expanding U.S. Market for Fresh Produce” Center for Agricultural and Rural Development, Iowa State University, Ames, Iowa, Page 2, Found on: www.agmrc.org, Accessed: November 29, 2010
Cantrell, Patty. 2008, “Sysco’s Journey From Supply Chain to Value Chain, Results and Lessons learned.” Wallace Center, Winrock International, Pages 10 and 11, Found on: www.wallacecenter.org, Search Sysco, Accessed: August 3, 2010
Updated: 12-19-11
Copyright © 2011, James Steffen, All rights reserved.