The following is a part of my final paper for one of my Rady MBA classes last quarter. The title of the paper is “Funding Small, Local Food Businesses.” I meant to post this earlier, as it is unmistakably linked to this farmers market blog I write. I’ve written about the countless benefits that farmers markets provide, to the community, the farmers, and the environment before on the blog. This excerpt touches on those beneficiaries and more, including a bit on CSA. I hope you enjoy!
Introduction to Our Current Food System
Our current food system is, in a word, inefficient. From production to distribution to sales, it seems there is value lost along the chain. For instance, according to the Farm Bureau, farmers only earn 19 cents of retail food dollars. The other 81 cents goes to transportation, packaging, distribution, processing, and retailing. If farmers could sell direct to their consumers, they would earn the full dollar and benefit fully from their labor. (3)
There are systems that would allow this full value capture, namely farmers markets. It’s a matter of getting more local markets up and running that would make this value capture plausible on a larger scale.Mainly, the produce that can be profitably sold in supermarkets comes from the large volume growers. Because of the large volume, the intricately large supply chains, and the federal aid, few growers can succeed this way. The federal government has a large impact on which farmers receive subsidies. Currently, according to the 2014 Farm Bill, 75% of government subsides is going to only 4% of farmers (1). These farmers specialize in production of commoditized crops like corn and soy. This means that most of the farmers growing fruits and vegetables are not receiving financial aid from the government, and this is only one reason it is hard for them to sustain their farms financially.
It’s no wonder that the majority of Americans eat food from super markets (32%), restaurants (36%), and warehouses/superstores (10%) (10). These places buy crops from larger, subsidized farms that have lower costs due to economies of scale. Economies of scale help larger farms deal with shifts in consumer demand, changes in the price of oil, and fluctuations in global commodity prices. Volume helps cover costs and fluctuations of demand. A better infrastructure would allow farms to compete on a more level playing field in these larger markets.
The goal of a local food business is to create a thriving and sustainable web of food and farm businesses that can succeed economically while also feeding the local region with healthy, locally produced food. The constituents involved in this local food system may include entrepreneurs, farmers, public officials, lenders, non-profits, and the local community (10). Each constituent has separate goals, but the small, local food system aims to mitigate agency problems by aligning incentives so that all goals are achieved simultaneously.Small business owners and farmers aim to make enough money to live comfortably. They want to be specializing in farming, since that’s what they do best. They strive for sufficient and stable demand in the market to sell their product. Lastly, they want to support their thriving farms and a vibrant local economy.Customers want to have access to fresh and local produce. They desire the produce be affordable, and if they are on a federal aid program, they want the benefits to work at local produce markets. Consumers also want to feel a connection to their food and investors want more knowledge about where their money is going.
There are many reasons to keep money local and there is a lot of proof that local money can support a stronger community. Some local food systems that have shown success in providing better financial and physical access to the community include farmers markets, SNAP, urban farming, and Community Supported Agriculture.
Data obtained by a study funded by Surdna Foundation revealed that farmers markets (from the study) generated significant economic benefit for vendors, host neighborhoods, and surrounding regions. The study utilized SEED methodology developed by Market Umbrella to summarize economic benefit of farmers markets (4). SEED is measurement tool that adds the economic benefit of farmers markets for its vendors to the economic benefit for nearby businesses. In short, it captures the impact of an initial round of spending plus successive rounds of re-spending of those initial dollars within a single region. The greater interaction each dollar has with local economy, the larger the impact (and the “stickier” the economy) (3).
It was discovered that farmers markets were good for all constituents involved. First, they were good for vendors. As referenced earlier in this paper, according to the American Farm Bureau, growers were able to earn 100% of retail food dollars when selling direct to consumers via public markets (as opposed to only 19%). Less profits were consumed by transportation, packaging, distribution, processing, and retailing. Secondly, farmers markets are shown to serve “Main St.” well, as there was an increase in revenue collected by local businesses. Lastly, farmers markets contributed to local and state tax revenues. Some specific examples include Echo Park Farmers’ Market (LA), which contributes over $2.3M to local economy (3), West Baltimore Farmers’ Market which contributes $72K to the local economy, and Hollywood Farmers’ Market which contributes over $56M to the local economy (4).
Farmers markets also serve as an effective way to reduce barriers to healthful food access. As far as funding goes, farmers markets can be sponsored by non-profit organizations and community health centers. While they often may seem temporary and informal with the pop up tents taking over parking lots, they are anything but. Farmers markets are highly efficient, enterprising, and democratic (2).
Farmers markets involve the four P’s: Place, Procedures, Product, and People. “Place” refers to things like the time, day of the week, frequency, and physical space (open air or indoor). “Procedures” involve decisions such as whether to be open rain or shine, which items can be sold and by who, if there is a mission statement, if EBT/Credit/Token accepted, and whether or not there are written rules/regulations for vendors/staff/shoppers. All products in a Farmers Market are sold directly to the consumer, but “Product” includes which items are sold to the consumer and from which categories, for instance, is reselling goods legal? Usually it’s not. “Product” also determines what percentage of sales vendors pay to market organization. “People” include the shoppers, vendors, neighbors, managers, and investors. The market stands as a place to meet each other, add nutritious, affordable dimension to family diets, and offer outstanding programs/ classes (3).