December, 2010

Research Perspective and Comments & Analysis

Can Local Foods Become Mainstream?

 Local foods have captured the attention of U.S. consumers, producers, food marketers and policymakers. Consumers are demanding stronger links with food producers as they gain a better appreciation of where their food comes from. Producers, retailers and food marketers, on their part, are hard at work to meet increased consumer demand for local foods. Today, local foods are displayed in a variety of mainstream channels including supermarkets and restaurants, as well as in direct channels such as farmers markets and Community Supported Agriculture (CSA) enterprises.

Despite this interest in local foods, little is known about their proper role in the national food distribution system. Therefore, in 2008 the U.S. Department of Agriculture commissioned a coordinated series of case studies addressing two questions: What factors influence the structure and size of local food supply chains? And, how do existing local food supply chains compare with mainstream supply chains for key dimensions of economic, environmental and social performance? This research concentrated on five “product-place” combinations: apples in Syracuse, NY; blueberries in Portland, OR; spring mix in Sacramento, CA; beef in the Minneapolis-St. Paul-Bloomington, MN-WI area; and fluid milk in Washington, DC. For each product-place combination, three supply chains were analyzed: a modern supermarket chain (mainstream), a direct market supply chain (direct), and a local supply chain that reaches consumers through intermediaries (intermediated). Here, based on the study findings, I offer four principles to shed light on the role of local foods in the national food system:

 1) Pay attention to the role of supermarket/foodservice channels in increasing local foods. Direct market and intermediated supply chains account for a very small portion of total demand in all study sites. If local foods are to be found only in these channels, they may be destined to play a minor role in the overall food system. The mainstream supermarket/foodservice chains are in a unique position to make local foods become mainstream. They have developed an efficient supply chain able to provide year-round availability of a wide variety of products at low prices for the end consumer. The supermarket offers certain conveniences to consumers, such as less time spent shopping and fewer trips and miles traveled for food purchases. Producers and supermarket/foodservice operators should devise strategies to increase the flow of local foods in mainstream channels.

 2) Having local supply chains does not necessarily mean lower fuel utilization. Food miles in local chains are lower than in the mainstream cases, but fuel use per unit of product varies. Transportation fuel use depends on many factors, including distance traveled, load sizes, vehicle type and logistics management. In some cases (e.g., apples), the longer distances traveled in the mainstream supply chain outweigh the larger volumes per load yielding less fuel efficiency. In other cases (e.g. spring mix), aggregation of product in the mainstream partially offsets the effect of greater food miles traveled.

 3) Businesses in food supply chains tend to diversify their distribution channel strategies, including local. In all apple cases, members of the supply chains exhibit a high degree of diversification in their distribution channels. Local and mainstream apples coexist and complement one another in the supermarket channel; the farmers market vendor engages in some direct marketing but is also linked to the mainstream chain through his relationship with a conventional apple packer-shipper; and the school district cafeteria procures produce both from foodservice suppliers and from local supply chains. Local supply chains are profitable and important for participating firms even if the volume is small, but it is not the only channel.

 4) Increased share of retail value is important, but not sufficient to higher profitability. A common argument in favor of direct market channels for local foods is that producers retain a higher share of the retail value. Indeed, the study finds that direct market local chains retain a larger share of the retail price, even after accounting distribution costs. Today, we see successful local supply chains serving specific, generally small, market niches. However, focusing solely on niche markets ignores the contribution of high-volume, low-margin strategies to profitability. Local food supply chains can tap into the latter strategy, via stronger links with supermarket/foodservice operators. Here, the role of the middlemen to aggregate production and ensure that the product meets the required quality standards should be underscored. 

 We should recognize that “local” and “mainstream” chains are complements, not substitutes, as some advocates appear to claim. The high level of complexity in food supply chains renders generalizations about the advantages of either chain difficult. Local foods offer promising new opportunities; marketing orientation (one focused on satisfying the customer) is essential in order to capitalize on the growing demand for local foods.

 Source:  U.S. Department of Agriculture, Economic Research Report No. 99


What Local Advocates Won’t Want To See

Discussions about local sometimes carry a striking resemblance to the child’s tale of The Emperor Who Had No Clothes. Miguel Gómez is a noted academic, coming from a distinguished department, and it is notable that the strongest case he makes is that local has “captured the attention” of everyone. Translation: It is hot and trendy, but there is no research indicating that sales of local are actually any higher than they used to be.

This is significant, because it is not clear that the research Professor Gómez and his associates conducted is particularly relevant to the kind of “local” that local advocates are actually advocating. The specific study that Cornell worked on, which dealt with New York State apples, is a case in point: New York had a substantial apple industry long before anyone ever heard of Michael Pollan. In general, when New York State had an apple similar to Washington State, say a Red Delicious, the New York apple brought a higher F.O.B. price than Washington because it was closer to major markets. Put another way, the market adjusted for higher freight costs from Washington by paying New York apple growers more.

Yet we have no sense that local advocates simply want people in Washington to eat Washington apples and people in New York State to eat New York State apples. This would, after all, leave lots of places where they don’t grow many apples without apples. The “locavore” activist wants to create a new paradigm in which growers within regional food systems diversify agriculture and grow multiple items. In fact, they want to avoid monocultures entirely. The ideal model for these advocates is a Community Supported Agriculture or CSA model where the consumer gives a kind of blank check to a farmer who then bases what he grows on what will best sustain the land and the environment rather than consumer demand.

Whatever its flaws, the free market is pretty efficient and, typically, we don’t determine what to buy through a study; we rely on the market to incorporate costs of energy, etc., in the price and then we wind up buying – all things considered – the most efficient product for our needs. Still Professor Gómez offers four intriguing ideas about which we would say the

1) Indeed, anyone serious about increasing sales and consumption of locally grown and produced foods would be wise to work toward getting such foods into mainstream distribution, which is, by definition, where most of the food is sold. Such advice is, however, almost certain to be ignored by advocates for local for the same reason that advocates for organic are unhappy that Wal-Mart now plays in the game.

Local is not just a matter of geography to its core advocates. It is a proxy for “small scale” for “bio-diverse” for people “knowing who makes their food” and much more. These advocates will be no more happy with Wal-Mart selling more local than they are with it selling more organic. They will feel that, one way or another, it cheats the core of what they are looking for.

2) Many local advocates mindlessly assume that “food miles” is, in and of itself, a valuable metric, but fuel use in transport is only slightly more valuable a calculation than food miles – which is almost worthless. First, different regions and different farms grow with different techniques that use different amounts of energy. So grass-fed lamb in New Zealand may overwhelm feed-fed lamb in the UK, regardless of transport. Second, there are many concerns from output of CO2 to water use that go beyond fuel use. Only a comprehensive lifecycle analysis can even hope to provide a useful piece of data.

Beyond this, whatever resources are used in the production, packaging and distribution of an item are presumably captured in its price, so it is not clear why we should care about this issue. It seems that the proper role of economists would be to identify externalities that are not properly captured in the price people pay for an item. For example, if a food-processing plant pollutes the air, it may impose costs on society not captured in the price of the product. This is the place where regulations and taxes can have a net positive impact
on society.

3) When regionally produced foods have advantages in flavor or in cost, they have always found a place in the produce distribution system and on the tables of consumers. Still, we have the sense that advocates for local will not find this arrangement acceptable for the precise reason that it depends on neutral parties finding value in selling local. Advocates want to sell local precisely when the value is not obvious to those not ideologically committed.

4) In small volumes, selling direct
to consumers can be a highly profitable alternative for the farmer. But for society overall, a closer look at the behavior behind this phenomenon might reveal another perspective: Do farmers who sell at farmers markets pay the proper sales and income taxes? Do cities and towns maximize their revenues or could they rent farmers market land to alternative uses at higher prices?

Externalities can work both sides of this issue, and if our cash-strapped municipalities are giving out for free what they could sell for a high price or if we subsidize the sales force for direct-to-consumer sales with unemployment insurance and disability payments, this might impact the way we view these efforts.

Hats off to Professor Gómez and his associates for trying to bring some hard facts to an area that is driven by ideology. We confess some skepticism as to whether those so driven will actually care about
the facts.