The Local Food Economy

Economy, Learn More, Tricia Phelps

Local food has become a burgeoning industry over the last few years as more consumers begin to question where their food is coming from. While it’s true that ‘local’ was popular decades before the rapid globalization of our food system, the local food industry we see today is actually a new one with different players, complexities and market opportunities that make it unique. That is why, at least for now, there is only limited data available to help explain what’s happening.

However, the data that is available is compelling in its description of what is now a maturing industry. Markets are shifting — and though growing pains are inevitable — there is clearly an incredible opportunity emerging in so-called intermediated markets, such as restaurants, retail and institutions.

Of course, consumer demand for local food has long been is evident. So much so, that local sourcing is considered one of the top trends in consumer buying behavior. The 2014 Cone Communications Report on Food Issues reveals “nearly nine out of 10 Americans (89 percent) say they consider where a product is produced when making food purchasing decisions.

Hard sales data supports this claim. In fact, the USDA estimated that “local food sales have grown from $5 billion in 2008 to $11.7 billion in 2014.

It’s important to understand that local food sales are classified into two types of marketing channels, with important distinctions between them. First there is direct-to-consumer (DTC) marketing; when producers engage with customers in a face-to-face transaction, like at a farmers market. And second, there are intermediated marketing channels that include all opportunities in the local food supply chain that are not farmer-to-consumer transactions. Today, that second category offers the biggest opportunities for expanding sales.DTC vs.Intermediated Marketing Channels

One reason for that difference in potential is that data suggests DTC sales have peaked. The Census of Agriculture has collected DTC data from farmers since 1978 — including transactions at farmers markets, roadside farm stands and through community supported agriculture (CSA) operations. But, even though consumers today have more opportunities than ever before to purchase food at these venues, and the USDA notes that in 2014 “8,268 farmers markets were in operation, up 180 percent since 2006, this recent rise has not correlated to a similar increase in overall direct-to-consumer sales for farmers.

In fact, according to the USDA’s “Trends in U.S. Local and Regional Food Systems” Report, “between 2007 and 2012 the number of farmers using DTC channels increased by 5.5 percent while the value of DTC sales actually declined by nearly 1 percent.

This may seem counterintuitive, but it’s actually not surprising, because farmers markets, CSA’s, and roadside stands tend to attract narrow segments of the population, and this particular market seems to have reached a saturation point. These days, farmers are competing in the DTC market for the same consumer dollars.

That’s true even here, in northwest Michigan; data from a well-established, local farm shows a very similar trend. While the 2013 to 2014 data did show a 30-percent increase in DTC sales, year-to-date information from 2015, suggests DTC sales may match 2014 numbers, but more likely will show zero growth, or perhaps even a decline.

These are not gloomy statistics, however. And they don’t indicate the end of growth for local food sales or profitability for farmers. Rather, they highlight a maturing local food system as market opportunities shift. Most consumers still purchase their food from a grocery store — and that’s where the opportunity lies.

It is important to understand that DTC sales and intermediated sales are not competitive, but rather complimentary activities. Those who attend farmers markets today are likely to continue attending farmers markets tomorrow even if retailers are also selling local food. This is good news because the fact is a DTC sale retrieves a higher profit margin for a local farm than the discounted wholesale price used to make intermediated sales. But, the opportunity lies in scale because intermediated sales involve larger quantities of food and can therefore return higher net farm incomes.

The USDA’s Agricultural Marketing Service confirmed this by studying farm sales data from the 2012 Census, concluding that “farmers using both types of marketing channels or only intermediated marketing channels generate higher sales per farm than farmers relying solely on DTC sales.”

USDA_Local Food Sales by Farm Size and Marketing Channel Use_Trends in U.S. Local:Regional Food Systems pg. 16

This was the first set of national data that represented local food sales in intermediated markets. Prior to 2012 there was likely little volume of intermediated local food sales to report, largely due to obstacles like convenience, reliability, and product quantity and quality. Now however, increasing demand for local food is bringing new players onto the scene including food hubs, distributors, and farm-to-institution advocates, to name a few. A lot of work is being done to solve the problems inhibiting growth in this new market.

While such aggregate services add a step to the supply chain between farmers and consumers, the kind of opportunity they offer to farmers may not otherwise be attainable. The introduction and initial success of new food-related business in northwest Michigan, such as Cherry Capital Foods— a local wholesale/distributor selling only Michigan products— demonstrates that they are in fact, badly needed to both spur and meet demand from intermediated markets.

“In the past few years we’ve experienced an average of 45 to 50 percent growth in sales each year, says Cherry Capital Foods’ Sales Manager Stephanie Pierce.

The most obvious places to spot the growth of intermediated food markets are restaurants, which are always the quickest to adapt to new emerging food trends. In fact, a National Restaurant Association survey found that ‘locally sourced meats and sea foods’ and ‘locally sourced produce,’ were Nos. 1 and 2 on its list of 2014 Food Trends.

Northwest Michigan restaurants are leading the charge, and going far beyond just specialty items. In fact, for many, local food is now a staple. That is why restaurants represent more than 57-percent of Cherry Capital Foods’ sales. And opportunities for growth remain strong.

The picture with retailers is slightly different, but still very positive. They tend to adapt more slowly to food trends than restaurants because of the up-front costs, complex ordering procedures, and the challenge of perishable product loss. But even regional retailers in northwest Michigan are beginning to understand the importance of local food. Northwest Michigan’s Taste the Local Difference® program is working with many of them to help differentiate local products on the shelf and in the produce department. This is improving sales for everyone — farmers, distributors, and retailers.

“When given a tag letting the customer know that the product is made regionally, sales really improve. says Pierce.

The final frontier for making local food a permanent, pervasive, everyday item is the institutional market — schools, hospitals, etc. Pierce says institutions are often the last to respond to local food trends, largely because they have strict rules & regulations they must change in order to alter purchasing practices. And, of course, they must also uphold the most exacting safety standards and be certain of both a large and stable supply.

So, as farmers, distributors and retailers work through these obstacles, it will become clear that the direct-to-consumer market, while very valuable, will soon be dwarfed by intermediated markets, which can expand with almost no end in sight. And as various segments of the local food market gain traction in northwest Michigan, we’ll see more and more evidence of a maturing local food system. In the next year, we should almost certainly expect sales of local food to grow in restaurants, retail outlets, and institutions. Since these new intermediated markets often require a longer supply chain that affects everyone’s profits, all those involved need to understand the value that each piece of the chain provides, as well as the fact that when everyone does their job efficiently the system runs more smoothly, and can create a greater impact— better profits, better food, better health—for all.

Over the next year, we expect more national and regional data collection related to local food. This information will further the success of the local food system if participants review it and respond accordingly. It will also provide better insight into how the local food system affects our economy. We are confident it will make the case that local purchasing is not just a trend, but a habit that should become universal— building stronger communities and more resilient food and farming systems.

*Note: This piece was originally included in the Traverse City Chamber of Commerce 2015 Economic Outlook Report, published by the Traverse City Record Eagle. [November, 2015]

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