How many times have you heard that when you shop locally, farmers win? Families shop at farmers markets, school districts procure locally-grown and raised items, and restaurants curate seasonal menus at least in part because they believe they are supporting the economic viability of local producers. But do we have evidence that these local markets actually provide economic benefits to farmers and ranchers?
For the past decade, we have seen growing evidence that household and commercial buyers are willing to pay a premium for local products, and that farmers capture a larger share of the retail dollar through sales at local markets. But until recently, there was little evidence of the impact of these markets on farmers’ and ranchers’ bottom line.
To better understand the potential of local food markets, we evaluated the financial performance of farmers and ranchers selling through local markets compared to those selling through traditional wholesale markets, which may pool undifferentiated grains, animals or produce from hundreds of producers to sell to large food manufacturers or retailers. We use data provided by the U.S. Department of Agriculture’s Agricultural Resource Management Survey (ARMS), a nationally representative survey providing annual, national-level data on farm and ranch businesses. ARMS targets about 30,000 farms annually, of which about 1,000 report some local food sales.
For this research, we define local markets in two distinct categories: direct to consumer sales (such as farmers’ markets; community supported agriculture, or CSAs; and farm stands) or intermediated sales to local food marketing enterprises that maintain the product’s local identity (such as restaurants, grocery stores, or food hubs).
Local food can spur rural development
The first notable difference between farms and ranches that sell through local food markets and those that do not is that, on average, farms selling through local food markets spend a higher percentage of their total expenditure on labor (8% compared to 5%). Even more interesting is that as local food producers get larger, their share of expenditure on labor increases! (See the green bars in figure 1). This stands in contrast to the ‘efficiency’ story we have long heard in agriculture. Conventional wisdom dictates that as farms scale up, they substitute capital for labor, becoming more efficient and producing more with less. But in the case of local markets, it appears that as the volume of direct and intermediary sales grows, the hours, skills, and expertise needed to manage buyer-responsive supply chains increases, as well. This finding supports the argument that local food can serve as a rural economic development driver; farms selling through local markets require more labor per dollar of sales, thus creating jobs.
Figure 1 Share of Variable Expenses, Local Food Producers, by Scale (Bauman, Thilmany, Jablonski 2018)
Do these additional labor expenditures impact the profitability of local producers? To answer this question, we categorized farms and ranches that sell through local markets by size, or sales class—the smallest reporting less than $75,000 in sales, and the biggest reporting $1,000,000 or more. We then broke down each sales class by performance, using return on assets as our indicator for performance, and organized farms and ranches into quartiles (see Figure 2). This categorization allowed us to zero in on the highest performing producers of every sales class.
Though performance varies widely, we found that of all producers with more than $75,000 in sales, at least half were break-even or profitable. Of every sales class – even the smallest!—farms in the top quartile reported returns over 20 percent—very strong profitability for the agricultural sector, where profit margins are generally slim.
What makes a local farm succeed?
To explore patterns in profitability a little bit further, we can compare how various financial measures vary across those with low vs. high profits. Among the top performing quartile, farms and ranches that sell through intermediated channels only or a combination of direct and intermediated channels performed much better than those using direct markets only. This may signal the importance of intermediated markets, and justify support for intermediated market development through grant programs such as the Local Food Promotion Program. Further, using more in-depth statistical analysis of local and regional producers, we found that farms and ranches selling only through direct-to-consumer markets may be struggling to control their costs, and that strategic management changes to these operations could result in significant improvements in profitability.
Figure 2 Local Food Producers Return on Assets by Sales Class and Market Channel (Quartile 4 is the most profitable) (Bauman, Thilmany, Jablonski 2018)
In summary, we see that local food markets provide opportunities for profitable operations at any scale, but that sales through intermediary markets are correlated with higher profitability when compared to producers that use only direct channels.
To learn more about the economics of local food systems (including more about this research), we encourage you to visit localfoodeconomics.com, where we have compiled a number of fact sheets on this topic. We started this community of practice in conjunction with the U.S. Department of Agriculture’s Agricultural Marketing Service and eXtension. The website and listserv serve as a virtual community in which academic, nonprofit and policy professionals can engage in conversations about the economic implications of the many activities that fall under the umbrella of local food. For the broader food system community and consumers, gaining insights on the underlying economic implications of how food markets work may inform their decisions on how they can use their food dollars in ways that impact their community in a positive way. We hope to see you there!
This research is supported through the U.S. Department of Agriculture’s National Institute of Food and Agriculture (award number 2014-68006-21871).