Sustainable Farming Connection Home arrow Adding Values to Our Food System

Adding Values to Our Food System:
An Economic Analysis of
Sustainable Community Food Systems

Table of Contents

Prepared for

United States Department of Agriculture
Sustainable Agriculture Research & Education Program

Utah State University
Logan, Utah

Prepared by

Integrity Systems Cooperative Co.

7101 Goodwin Road
Everson, Washington
USA 98247
phone: 360-966-2504
fax: (360) 966-7037

In association with

Sustainability Ventures Group

2686 Nelson Ave.
West Vancouver, B.C. V7V2R7
phone: (604) 878-1090

© February, 1997

Table of Contents

Executive Summaryv
A. Introductionv
B. Establishing a context for sustainable community food systemsv
C. The economics of sustainable on-farm food productionv
D. The economics of sustainable community food processingvii
E. The economics of sustainable community food distributionviii
F. Conclusions and future research needsix
I. Introduction1
A. Background1
B. Purpose and objectives1
C. Study methods2
II. Establishing a Context for Community Food Systems3
A. Food production is becoming increasingly industrialized3
B. An alternative food system approach is emerging3
C. Industrial food systems and sustainable community foods systems are based on fundamentally different world views5
D. Sustainable community food systems offer many benefits7
III. The Economics of Sustainable On-Farm Food Production10
A. Introduction10
B. Characteristics of sustainable agriculture farms and farmers11
C. Crop production yields12
D. Crop production costs and net income17
E. Food animal production and net income20
F. Wholesale and retail selling prices23
G. Summary and conclusions24
IV. The Economics of Sustainable Community Food Processing25
A. Introduction25
B. Food processing options26
C. Farmer controlled processing29
D. Economies of scale31
E. Significance of income patching35
F. Wholesale and retail prices and profit margins37
G. Summary and conclusions40
V. The Economics of Sustainable Community Food Distribution42
A. Introduction42
B. Sustainable community food distribution options42
C. Primary types of sustainable community food distribution43
D. Economic performance56
E. Summary and conclusions57
VI. Conclusions60
A. Can a sustainable community food system be cost competitive with the existing global industrial food system?60
B. Do the benefits warrant the development efforts?61
C. The market for sustainably produced foods is growing63
D. Consumer attitudes and beliefs are very important63
E. A number of key barriers need to be overcome68
F. Making the shift to a sustainable community food system69
G. Future research needs70
A. Personal communications73
B. Bibliography75
A. Background information on food productionA-1
B. Success factors in on-farm value added processingB-1
Praise For the Report
Order Form

Adding Values to Our Food System: An Economic Analysis of Sustainable Community Food Systems

First and foremost we would like to thank the review committee of the USDA Western Regional Sustainable Agriculture Research and Education Program in Utah for providing funding for this important research effort. Analyzing sustainable community food systems is a very new area of study and we are grateful for their willingness to participate in this kind of leading edge research.

We would also like to thank the following individuals who reviewed the draft report:

  • Peter Arcus, Arcus Consultants Ltd. (Formerly a professor of Agricultural Economics at the University of British Columbia, Vancouver, B.C.).

  • Sonia Banga, Small Business Development Center, Western Washington University, Bellingham, Washington.

  • Katherine Clancy, Wallace Institute of Alternative Agriculture, Greenbelt, Maryland.

  • Collette Dephelps, Center for Sustaining Agriculture and Natural Resources, Washington State University, Pullman, Washington.

  • Gail Feenstra, University of California, Sustainable Agriculture Research and Education Program, Davis, California.

  • Steven Garrett, Washington State University, Cooperative Extension, Tacoma, Washington.

  • John Hendrickson, Center for Integrated Agriculture Systems, University of Wisconsin, Madison, Wisconsin.

  • Duncan Hilchey, Farming Alternatives Program, Cornell University, Ithaca, New York.

  • Caroline Van Bers, Consultant, Dovetail Consulting Ltd., Vancouver B.C..

  • Mark Winnie, Hartford Food System, Hartford, Connecticut.

  • In addition to the reviewers, we spoke with over 125 individuals during the course of the project, some of whom are not referenced in the report for confidentiality reasons. These individuals gave generously of their time and knowledge. While they are too numerous to mention individually, we wish to express our sincere gratitude for their support and interest in our work.

    This report was co-authored by Fenton Wilkinson, President of Integrity Systems Cooperative Co. in Everson, Washington and David Van Seters, President of The Sustainability Ventures Group Inc. in Vancouver, British Columbia. Jennifer Banowetz, Nancy Lee Bentley, Steve Sahlin, and Janet Wadham provided research support at key stages of the project.

    Table of Contents | Order Form

    Adding Values to Our Food System: An Economic Analysis of Sustainable Community Food Systems

    The study of sustainable community food systems and, in particular, the study of their economic viability is very new. As a result, very little rigorously tested research is available on this subject. This study should therefore be viewed as an early effort that provides anecdotal information and general insights in a new field.

    For the most part, the study provides individual examples that are not necessarily statistically valid but which nonetheless indicate areas in which sustainable community food systems can be profitable and even competitive with industrial food systems.

    This research was designed to provide some useful baseline information on the economics of sustainable community foods systems, which future researchers can build upon.

    Table of Contents | Order Form

    Adding Values to Our Food System: An Economic Analysis of Sustainable Community Food Systems
    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. Establishing a context for sustainable community food 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.

    Table of Contents | Order Form

    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.

    1. Crop production yields

    A common perception about sustainable crop production is that yields are significantly lower than crops produced with industrial methods. While some research studies confirm 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 costs and 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 industrial food producers.

    3. Food animal production costs and 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 industrial confinement feeding alternatives. Further, 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 putting 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 distribution channels. They face the same distributor and retailer markups as industrial farmers.

    Table of Contents | Order Form

    D. The economics of sustainable community food processing

    Very little published information 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 firms who are very reluctant to release their competitive financial information.

    A number of processing options have strong applicability to sustainable community scale processors. These include "ready made" (i.e. 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 low a 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 farmers 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. Economies of scale

    In general, the profitability of industrial food processing firms increases in a linear fashion with firm 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. Significance of income patching

    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 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 clerkís 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.

    Table of Contents | Order Form

    E. The economics of sustainable community food 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 lionís 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, farmerís 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.

    Community Supported Agriculture (CSA) is a partnership 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.

    Table of Contents | Order Form

    F. Conclusions and future research 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 would 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 150,000 people.

    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 report represents an initial effort 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 particular 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 particular direct to consumer food distribution techniques.

    Table of Contents | Order Form

    What They're Saying About
    Adding Values to Our Food System: An Economic Analysis of Sustainable Community Food Systems

    Your paper of An Economic Analysis of Sustainable Community Food Systems is an excellent, comprehensive background paper. It pulls together many resources, making a helpful contribution to what we know about the economic viability of sustainable community food systems. Gail Feenstra. University of California SAREP. Davis, California.

    Nice work. Congratulations! I found this interesting and educational. I really like your writing style; very clear and clean. Duncan Hilchey. Farming Alternatives Program. Cornell University, Ithaca, N.Y.

    I think that a lot of people will appreciate the effort that you put into the report; and that it will be a very useful jumping off point for various research and action projects. Katherine L. Clancy. Wallace Institute Alternative Agriculture. Green Belt, Maryland.

    This is a tremendously useful document. I know that I will use it in my work, both as a practitioner of community food systems and in translating this important work to others. It is well laid out and easy to read. The tables are quite helpful and aid the general flow of information and look of the document. Steven Garrett. WSU Cooperative Extension. Tacoma, WA.

    Congratulations on putting together a unique, useful and thoughtful document. I look forward to using and sharing the final version of the report. I believe your report will be very useful to a wide variety of people working in this area - both researchers and practitioners. Thanks! John Hendrickson. Center for Integrated Agriculture Systems. University of Wisconsin. Madison,Wisconsin.

    On the whole I thought the report was quite good, an excellent starting point for anyone trying to analyze the economic viability of small to medium scale sustainable food production and processing. I found the information about marketing and consumer segments particularly interesting as it suggests the kind of larger scale marketing effort we'll need to move sustainable closer to the mainstream. Mark Winnie. Hartford Food System. Hartford, Conn.

    Many people have opinions as to the economic niche that small community based food production fills. This is the first and only study that I have found that addresses this question, with valid economic analysis. The methods are sound, the process detailed, and the treatment complete.

    This study establishes that, under competent management, long term sustainable production of crops and livestock produces higher profits for the farmer. The report analyzes the characteristics of successful farms and compares the sustainable practices to those of conventional farms to establish the extent of the organic advantage, both in yield and in profit.

    This report shows that sustainable production of crops is not always more profitable, but that profits can range from 75% to 471% of a conventional farm. The average range lies between 113% to 135%. In livestock production, profits per chicken are over 200% of those of confinement operations while dairy profits are up 25% over conventional farms. There is little data for beef and swine production, but evidence suggests that similar profits could be realized.

    This analysis recognizes the value of sustainable organic production only in terms of an added bonus to the economic returns. Thus clearly establishing that organic production is capable of producing a better quality product, with less environmental damage, at the same price or less than conventional farming methods.

    Perhaps the most interesting and useful information in the report deals with the market channels and value-added products that can boost farm prices higher and increase the economic impact on the community. These attributes are in addition to the higher quality of the food being produced. Detailed information about economy of scale processing, profit margins from different marketing aspects including Community Supported Agriculture is clearly presented.

    This report has carefully covered the ground from organic production through community food distribution, while carefully detailing the key factors for successful development of each stage. The statistics in the report are backed up by detailed appendices of production and price data as well as a complete bibliography. Another key item in this report is the 'Future Research Needs' section. The author has objectively addressed this complex issue so well, that this section should be taken as the laundry list of research needs.

    This report should be required reading for all farmers, rural economists, extension agents, community food activists, county commissioners, agriculture college faculty and administrators. The quiet power of this neatly packaged information could bring on a revolution in agriculture, but only if we the readers present it to others. Dr. Richard Knaub. Former extension agent, former agriculture research center manager and presently Director of Natural Resources for CNCC

    Table of Contents | Order Form

    Order Form

    Adding Values to Our Food System: An Economic Analysis of Sustainable Community Food Systems

    Please send ____ copies of Adding Values to Our Food System: An Economic Analysis
    of Sustainable Community Food Systems
    @ $ 24.95 ($34.95 CND) each, postage prepaid. I have included a total payment of $________________. Please make checks payable to Integrity Systems or provide credit card
    information below. Card Type: _____VISA or _____MasterCard Card Number____________________________________ Exp. Date_________________ Signature_________________________________________________________________ Name: __________________________________ Phone: ________________________ Organization: __________________________ Fax: __________________________ Address: _______________________________ email: ________________________ City, State, Zip: ________________________________________________________

    To order the full report, print this form and mail or fax with payment to:

    Integrity Systems
    7101 Goodwin Road
    Everson, Washington 98247
    Tel: (360) 966-2504 Fax: (360) 966-7030

    Table of Contents

    Sustainable Farming Connection Home arrow Adding Values to Our Food System

    © February 1997