September, 2013

Cover & Feature Stories

The State of Sustainability In The Produce Industry

The issue of sustainability has acquired some odd flavors over the years. Most notably, sustainability has come to be seen as a set of demands that retailers dictate to the supply chain.                                       

   This is both odd and dangerous. It is odd because producers and other vendors have every incentive to find efficiencies and sustainable ways of doing things. It is dangerous because retail dictates tend to paint with a broad brush, and the imposition of supply chain standards is likely to create its own waste.

If a retailer, out of concern for water conservation, decides to impose water usage standards, such standards typically hit both the grower operating in a parched area where water is scarce and the grower on the edge of a bluff in which a rolling river falls to the sea. In such situations, the retailer’s dictated sustainability standards may indeed allow the retailer to bask in the glory of statistics that show its policies have reduced supply chain consumption of water, carbon or whatnot, but the capital invested to achieve such reductions is lost in the calculations. In reality, our farming operator on the bluff invests good money to achieve no purpose at all, and that is the least sustainable of all options.

Sustainability itself has been tortured by retail policies that deny its very essence. Intrinsic in the argument for sustainability is that there are three forces at play: the economic, the environmental and social — the famous “triple bottom line” of people, profits and planet. Yet the retail focus on sustainability has almost completely negated the whole issue of social or people.

Few retailers have wanted to touch issues related to their own staffing and pay practices as part of a sustainable approach. They pay lip service to the environment — so called “green washing” — but it is hard to identify a single initiative undertaken by a publicly held retailer in which it chose to do something for the environment at the cost of its own profits.

So what was once a hearkening to a new way of thinking about business and life — a vision of the world reordered around sustainability priorities — has, in fact, simply become a quest for efficiency, and with much of that efficiency expected to be gained, not at retail itself, but in the supply chain. The liberating spirit of sustainability has come to be  felt like a boot on the back of suppliers — especially production agriculture — compelled to invest without the promise of profitable return or the assurance to maintain business with the retailer.

 

Resources Misallocated

Much of the publicity garnered by retailers on sustainability over the past few years has been something of a sham. Those retailers located in high electric-rate states, which also tend to be states that offer the largest subsidies for alternative energy, could send out press releases celebrating their solar panels, wind mills and fuel cells. Each installation of which represented a non-sustainable waste of capital and a horrible drain on the public purse, as grants and tax credits reduced public revenues so elites could celebrate feeling “green,” while poor children were stuck in over-crowded classrooms because money was not available to hire more teachers.

Standards intended to benchmark sustainability such as LEED (Leadership in Energy & Environmental Design) have turned out to be wasteful in and of themselves. Want to “up” your LEED status? Build showers in your new supermarket so workers can cycle to work and shower up. Yet whether any workers ever use that shower is irrelevant to the calculations, so once again, precious capital — the scarcest resource of them all — is spent in a misguided effort to not achieve sustainability but to pay homage to credentials that allow one to claim to have made progress on sustainability. Yet it is a pernicious and evil tendency that plays to the vanity of certain social classes while impoverishing us all.

Indeed the whole drive for energy efficiency may yet have turned out to be imprudent. Normally decisions about conservation are made based on price signals from the market, so sustained high prices for energy lead millions of market participants to take all kinds of actions. For example, individuals may buy more fuel-efficient cars, car pool or decide to live closer to work.

Businesses evaluate suppliers on delivered costs, which include transportation costs. When the government intervenes to encourage specific technologies — say ethanol or electric cars — it goes beyond those price signals to alter the market. The idea, of course, is to spur innovation with the hope that by creating incentives in specific markets, R&D funds will flow, and what was previously not viable will become viable.

Our experience, however, shows that government intervention is misguided. Perhaps subsidies for research might make sense, but subsidies for inefficient technologies just become sops for money. Germany is the world’s largest solar market as measured by installed capacity, primarily due to enormous subsidies given to those who produce solar energy. Most notably, these are high “feed-in tariffs,” which are subsidies that utilities are forced to pay to buy solar power that others produce and pump into the grid.

The cost of the subsidies and the higher power costs in Germany these subsidies necessitated have caused a revolt, and after imposing billions in cost for no known benefit, the government is trying desperately to unwind these massive subsidies.

And this is all before the full implications of improved oil and gas extraction technologies, everything from surface mining and in-situ production from bituminous sands, such as the Alberta tar sands, to hydraulic fracturing are realized. After years of decline, U.S. oil production has risen to levels not seen since 1989, thanks particularly to the Eagle Ford Shale range in Texas, which now produces more oil than Iran. The Bakken Shale range in North Dakota also has created an unprecedented boom for that state.

During the last week in May 2013, the United States produced more oil than it consumed for the first time since February 1995. Imports of crude oil into the U.S. are expected to be down to 5.4 million barrels a day next year; in 2005, imports were at 12.5 million barrels a day. Indeed the hottest energy question today is whether to allow the export of U.S. liquefied natural gas.

The production released by fracking has lowered the cost of natural gas in the U.S. more than 75 percent from its relatively recent highs. Natural gas with the same energy content as a barrel of oil sells for around $18. And the world is just starting to respond. In May of this year, the United Kingdom dropped its ban on fracking to allow companies to explore for shale gas reserves.

Of course, this dramatic change in the energy landscape means that all these efforts to force investment into so called “sustainable” sources (such as wind and solar) may not have been sustainable at all. Indeed the implications are that these efforts to promote favored sources of energy may have caused colossal misallocation of resources in a most unsustainable way.

 

Carbon Footprint Expands Despite Best Intentions

On the consumer level, the blossoming of the sustainability movement in produce has been in the form of the “local” explosion — yet even here both the reality and the prospect are uncertain.

There certainly has been a boom in the marketing of local product and a rise of an almost parallel industry in which buying produce is treated as a kind of entertainment. Farmer’s Markets, CSA’s (Community Supported Agriculture) and whatnot have exploded, yet the impact on either retail sales or consumption has been virtually undetectable. This leads to the assumption that though people may enjoy the day visit to a farmer’s market or the psychic pleasure of supporting a farmer with a commitment to a CSA, the purchase of an unusual heirloom tomato or the delivery of three pounds of rhubarb does not actually change consumption or procurement practices very much.

Though there has certainly been a concerted effort to cultivate sustainable produce farming outside of California, the consequences are still not that substantial — leading to a sense that much of the “local” explosion is marketing. The National Agricultural Statistics Service is filled with a wealth of information. It shows that peaches (a product on which much local attention has focused for years and where many believe local producers are believed to have an edge in flavor) still finds California accounts for 74 percent of all U.S. peach production — accounting for 97 percent of processing peaches and 51 percent of fresh market U.S. production.

In contrast, California accounted for 48 percent of U.S. fresh peach production in 2004. So after almost a decade of “buy local” promotion, fresh market peach production is more concentrated in California than previously.

Indeed, for all the local marketing efforts, the continuous trend for U.S. produce consumption has been for “food miles” to actually increase, as imports continue to expand as a percentage of U.S. produce consumption. The FDA claims that nearly two-thirds of the fruits and vegetables consumed in the U.S. are imported.  Of course, that number includes all fruits and vegetables, whether canned, frozen or fresh, and imports of fresh-market produce account for a smaller, though still substantial, portion of consumption.

Sophia Wu Huang, Kuo S. Huang and Hodan Farah Wells of the Economic Research Service of the U.S. Department of Agriculture report that “54.3 percent of fresh fruits and 25.2 percent of fresh vegetables in the U.S. produce market came from imports during 1999-2010.” Imports are only likely to grow with shortages of land, water and labor restricting the growth of U.S. production, and liberalized trade. Improved transportation technology, new solutions to phyosanitary problems (such as increased use of irradiation and even more uniform food safety rules) are likely to drive imports even higher in years to come.

 

Is There An Answer In Urban Agriculture?

The only hope of changing these patterns may not be good news at all. Researchers at Ohio State University’s Center for Urban Environment and Economic Development trumpeting the possibility for Cleveland and other “post-industrial cities,” such as Detroit, to become self-sufficient in food, highlight the fact that Cleveland now has 3,000 acres of vacant lots resulting from the shuttering of manufacturing operations. The Ohio State study found that if all this land was used growing produce, raising chickens and putting beehives on the land — plus if 9 percent of every occupied residential lot was made into a garden and if rooftop gardens and greenhouses on commercial roofs were added into the mix — Cleveland could produce between 46 and 100 percent of its fresh produce needs, 94 percent of its chicken and shell egg consumption, and 100 percent of its honey.

Of course, unutilized assets create opportunities, but the study has this kind of mercantilist economic assessment that simply ignores comparative advantage. Sure, Cleveland could produce all the bananas and pineapples its people want, but only at much greater cost than such produce could be acquired elsewhere.  Indeed, even more suitable crops are problematic. Right now, the Brooklyn Grange, the Long Island City, NY-based rooftop commercial farm, is the leading rooftop operation in the United States. Its two rooftop farms grow over 40,000 lbs. of organically raised — though not organically certified — fresh produce each year. Yet New York City had to invest public funds to help Brooklyn Grange expand beyond its Long Island City, Queens, location to one at the Brooklyn Navy Yard.

The lack of financial feasibility of urban agriculture on a commercial scale means that many of the proposals are more marketing- than production-oriented.

The new Whole Foods Market being built on the edge of the notoriously dirty Gowanus Canal in Brooklyn is supposed to be topped with a greenhouse, designed, built and operated by New York, NY-based Gotham Greens — a commercial greenhouse operation that also receives subsidies in the form of grants from the New York State Energy Research & Development Authority.

The new greenhouse seems to serve two purposes. First, by replacing originally proposed rooftop parking with the greenhouse, it paved the way for zoning approval of the complex. Second, the location directly above the store allows for a kind of hyper-local marketing. Indeed, beyond marketing the specific produce grown in the greenhouse, retailers involved in projects such as this often hope for a “halo effect” in which consumers might think all the produce sold by the store is grown locally.

Because the Whole Foods project is being built from scratch with the greenhouse planned from the start, it is structurally feasible and permissible by zoning. In contrast, many other proposals for rooftop production on top of retail stores seem not to be panning out. Yardley, PA-based McCaffrey’s Markets had plans to have New York, NY-based greenhouse financer and operator BrightFarms design and manage the rooftop greenhouses, but structural issues and zoning concerns led the project to morph into a regional greenhouse that supplies both McCaffrey’s stores and has enough excess product to be sold by John Vena Inc., a wholesaler based on the Philadelphia Wholesale Produce Market.

The project has been controversial because the greenhouse is being built on public land leased at what some perceive to be a sweetheart rate.

The basic business model of all these proposals is somewhat curious. Greenhouse developers, such as BrightFarms, basically go to supermarkets and ask for a contract at an agreed price on future production. This eliminates the marketing risk of the projects. It does not eliminate the growing risk — as evidenced by Backyard Farms’ recent problems with whitefly infestation at its greenhouses in Portland, ME.

But why should a produce production facility need a contract? Since time immemorial, farmers have raised their crops and then sold them on the open market. It seems as if the price of this product won’t be competitive with other sources. Additional problems come to mind: What about food safety certifications? Most retailers won’t buy produce from vendors not third-party audited. Yet there is no mention of third-party audits by any of these companies.

There is, of course, a possibility that urban farming will yet be an important component of agricultural production. Dickson Despommier, a longtime professor in the department of environmental health sciences at Columbia University, now runs The Vertical Farm Project. The visionary project is based on the fact that by 2050, almost 80 percent of the planet’s population will live in urban areas, and the population will increase by 3 billion people.

Based on current standards of agricultural productivity, this means that more farmland than is represented by the nation of Brazil needs to be added to food growing capacity of the world to keep everyone fed. This amount of land doesn’t exist. Dr. Despommier’s solution? Farm vertically. Although the project’s website (VerticalFrams.com) is filled with visionary proposals, he identifies several more modest vertical farms now operating, including one in the United States and one in Canada:

 

Singapore

The island country of Singapore announced that a commercial version of a vertical farm, Sky Greens, was now in operation (skygreens.appsfly.com). It is a four-story, transparent structure fitted with A-frame growing systems that produce leafy green vegetables. It uses sunlight as a source of energy and captured rainwater to drive a clever pulley system to move the plants on the grow racks, ensuring an even distribution of sunlight for all the plants.

 

USA

Farmed Here (www.farmedhere.com) opened in 2013 as a commercial-level vertical farm housed in a 90,000 square foot post-industrial building in Bedford Park, IL. It produces three products — arugula, basil, and sweet basil vinaigrette.

 

Canada

Local Garden (www.localgarden.com) is a newly constructed two-story tall, 6,000 square foot transparent building located on a parking garage rooftop in Vancouver, British Columbia. It is outfitted with an innovative growing platform system (Verticrop: www.alterrus.ca/verticrop/the-technology/) that produces micro-green salad ingredients, baby spinach, and baby kales.

 

Japan

Plant factories (also know as vertical farms) have been up and running for at least two years. Some have been operational for a lot longer than that. There are some 50 of these indoor vegetable farms spread out over most of the country (e.g., Nuvege/nuvege.com; Angel Farms/anglefarms.com). Half of them employ sunlight as the sole energy source for growing crops, while an equal number use some variety of LED grow lights. Most of those using grow lights resemble large, windowless warehouses. All of them produce a wide variety of high yield leafy greens. One Japanese website estimates that the plant factory industry will grow by over 70 billion yen over the next five years. Most factories funded by private investment are largely driven by consumer demand for healthy, radiation-free food in the aftermath of the Fukushima meltdown.

It is fair to say that retailers are falling all over themselves for this hyper-local concept. The Farmed Here project in Chicago lists Whole Foods Market, Mariano’s, Pete’s Fresh Market, Shop ’N Save and other retailers as customers.

 

Altering Future Supply Chains

Farmed Here is a certified organic hydroponic growing operation stacked five to six levels high, integrated with an aquaculture operation and producing basil, arugula and bottling vinaigrette. The operation has plans to grow salad greens. This model just may be a modest expression of the future of both local and sustainable. If so, combined with other trends, the future may be troubling for retailers.

The last half century has seen a rise in retail power vis-à-vis farmers. As retail buying consolidated and production efficiencies and expanded trade brought surpluses, the Power of the Purchase Order came to rule the industry. Yet, if hyper-local turns out not just to be a gimmick (like a rooftop farm on a supermarket) that accounts for a tiny share of sales but, instead, turns out to be an actual business in which larger indoor, vertical urban farms supply the community, it is very possible that the retail supply chain will be constrained. These facilities are difficult to site and expensive to build — even more so if they grow in height and complexity as Dr. Despommier predicts.

There may not be as many options for retailers to buy from urban farms as there are in Salinas, CA. In fact, in many parts of the country, there may be just one large controlled environment agriculture operation from which to source local product. Indeed retailers may be at risk that these local vertical farms won’t sell them at all if the retailers clip the bills or if the greenhouse operators don’t like the chain’s buying practices.

If we combine the urban vertical farm initiatives with the initiatives to produce proprietary produce, such as The Grapery’s Cotton Candy grapes (a proprietary grape that was initially sold only at the Sainsbury’s chain in the United Kingdom) one can quickly imagine a major power shift in the industry. It may always be possible to buy produce, but to buy the produce consumers want — from the right local facility or of the right proprietary variety — may not be easy at all. Retailers may have to pay up, change buying practices, and maybe even be nice!

This could lead to a more profitable production sector, and in that thought,  is a little secret about sustainability that is not often noted. People sustain what produces profits for them, so a more profitable production agriculture sector will lead to the most sustainable practices. Essentially the whole idea of retail-driven sustainability may be a mistake. True sustainability derives from having profitable operations that their owners consider worth sustaining now and on into the future.            pb