Why those who support 'locally grown' should support investment in intermediaries

Perish_Logo

In this exclusive interview from Jim Prevor's The Perishable Pundit, Cornell University Professor Miguel Gómez discusses the renaissance of the wholesale sector and points to research findings he will reveal during his presentation at the London Produce Show and Conference 2015

Last year The London Produce Show And Conference was fortunate to launch its Global University Interchange Program with Cornell University. This is a program, modeled after one we developed for The New York Produce Show and Conference in which faculty members from leading research institutions share their cutting-edge research with the industry through a series of presentations, while students gain an appreciation for the scope of opportunities available in the produce industry and gain a high level networking opportunity.

Cornell University is a charter member of the programs in both New York and London. At the inaugural edition of The London Produce Show and Conference, we heard this presentation:

At The London Produce Show And Conference: ‘ROOM AT THE TOP? — WHAT U.K. RETAILERS CAN LEARN FROM U.S. NATURAL/GOURMET RETAILING’ — Cornell University’s Rod Hawkes Points Out That ‘Upscale’ Has Changed And That The American Experience Points To The Possibility Of Big Changes Ahead For UK Retailing

This year at the 2nd edition of the annual event, we are expanding our cooperation with Cornell and will have two separate presentations by two well respected faculty members. We already presented a sneak preview of one presentation:

Will Reducing Food Waste Be Sufficient Reason To Embrace GMO Produce? Cornell Professor Brad Rickard To Guide A Controversial Session At The London Produce Show And Conference

Now we are honored to have Miguel Gómez join the faculty in London. He has been a superstar in New York, informing, educating and beguiling industry members with pieces such as these:

A New Hypothesis On Local: To Boost Sales, Sell It Through Supermarkets … Cornell’s Miguel Gomez Previews His Upcoming Talk At The New York Produce Show And Conference

Cornell Professors To Present At The New York Produce Show And Conference: New Ways of Thinking About Local: Can The East Coast Develop A Broccoli Industry?

Cornell Professor Miguel Gómez To Speak At New York Produce Show And Conference On Fruit & Vegetable Dispute Resolution Corporation

Professor Miguel Gómez Returns To The New York Produce Show And Conference To Unveil A New Study That Points Out A Path For Getting More Produce Into Hospitals

We asked Pundit Investigator and Special Projects Editor Mira Slott to find out what Professor Gómez has in store for us in London:

Professor Miguel Gomez Miguel I. Gómez
 Associate Professor
 Charles H. Dyson School of Applied Economics and Management
 Cornell University
 Ithaca, New York

 Q: Your annual presentations at the New York Produce Show &  Conference, as well as the adjacent Global Trade Symposium, garner wide-spread praise.  What is in store for London Produce Show attendees?

A: My plan for London is to adapt my research and analysis on realities of alternative market channels to an international setting. I will be integrating examples from Europe and Latin America into case studies I did in America.

The key focus is to explore the economics of alternative emerging marketing channels for fruits and vegetables. This includes avenues to market local foods, and developing alternative channels that try to connect the farmer to the consumer. Specifically, what our research is indicating, and what I hope to demonstrate, is that in order to connect the farmer to the consumer you need an intermediary. Going direct to the consumer is a limited opportunity.

The point is, there are lots of efforts to develop alternative market channels to connect consumers and farmers, and many try to eliminate wholesalers, distributors, etc. The argument is that this is a mistake… you still need those intermediaries, and they represent important value in the supply chain.

Q: Playing to consumer interest in local produce, U.S. retailers are building direct distribution agreements with local farmers. Some of these relationships go back generations. In certain instances, the contracts are exclusive, and retailers work with the growers to develop particular crops and specifications. Isn’t such an arrangement a much more profitable and advantageous route for the farmer?

A: The point you raise is a good one. Growers selling their products in supermarkets are in a much better spot than in a farmer’s market, because they have the best of all worlds; they remain local, but also capitalize on the marketing schemes and scale of the big store.

The goal is to connect local food systems to the mainstream distribution system. Markets where consumers buy directly from farmers are very limited in terms of volume, availability, and in terms of sustained economic viability for the farmer, who lives only out of these markets.

Margins are very thin, and the markets are easily inundated with excess supply. So the markets are restricted on the amount of farmers that can participate in going direct to consumers.

Let me continue to give you my argument by sharing the research we’ve been doing the last five years. What I’ve learned is what really matters for the consumer is that connection with the farmer. Who produces the food, how it’s grown, etc. There’s a human dimension to this… how this food came to my table. Consumers still demand convenience and excellent quality. They are not willing to sacrifice convenience, quality and pack. The challenge for the system is how can we integrate farmers into the supply chain?

Q: What do your case studies reveal on this front?

A: Let me give you an example from the U.S. We have seen Farm-to-Hospital (FTH) programs that have untapped potential here. The hospital cafeteria is a largely ignored channel for fruits and vegetables. There’s a private industry initiative, Healthy Food in Health Care, which is trying to increase fruits and vegetables in hospitals.

It also advocates these fruits and vegetables come from local farmers when possible.  [The initiative was launched in 2006 by Health Care Without Harm, an international coalition of hospitals, health care groups and affected constituencies, based in Reston, Virginia, with regional offices globally.]

Q: This is related to the research you revealed at the New York Show last December…

A: Yes. That’s right. Our study shows that almost no hospital will buy directly from the farmer. The hospital only buys from its supplier, who buys from farmers nearby and elsewhere.

Q: It seems ironic that many hospitals and their cafeterias, in particular, have reputations for carrying unhealthy food options, rather than dishes overflowing with fresh fruits and vegetables. Is it logistics, economics…?

A: In order for hospitals to carry produce year round, including local produce, they use the fruit and vegetable distributors and wholesalers that have the ability to buy local and elsewhere when local produce is not available. We didn’t find a single hospital to buy directly from farmers, except for ice cream.

I’m going to share what we’ve learned about the U.S. food distribution system, and then give examples of alternative marketing channels, based on local food system case studies we’ve done; what’s involved in developing an eastern broccoli industry in the U.S., as well as the Farm-to-Hospital Program. In addition, I’m been working on interesting examples in Europe and Latin America, so I’d like to wait until my presentation to reveal those.

Q: This is a sneak preview. We don’t want to give everything away!

A: I’m looking at opportunities to connect consumers to local products as the local food movement does, but also the challenges to develop a network of growers to achieve the volume to meet the needs of the buyer.

In the U.S., the main food distribution system goes through the supermarket and foodservice sectors and accounts for about 98 percent of the food we consume. Despite the publicity, the share of consumer purchases in farmer’s markets is very small and going down, according to Cornell and U.C. Davis compilations based on the 2010 U.S. census, ERS/USDA, NASS/USDA and other data estimates. We see very low volumes and not much room for access to come into the market. At the same time, consumers are demanding more local foods and more contact with the farmer.

Even in developing countries, where traditionally most people have shopped in farmers markets, things are changing. With the increase in incomes and convenience trends, and improved infrastructures, more and more people are buying fruits and vegetables in supermarkets. Share of direct channels of farmer’s markets is very small and going down.

The challenge to satisfy consumers and help farmers stay solvent requires the need to go through the main distribution system.

In the U.S., the number of farmer’s markets increased in the 90’s and early 2000s and is now leveling off. That’s an indication these markets have no room for growth.

Q: For perspective, though, farmer’s markets only represent a tiny fraction of the produce industry…

A: Consumers, particularly in the U.S., were yearning for that connection to the farmer. That’s why there was a sharp increase, but if you look at the big picture, these direct channels are less than one percent.

In developing countries, the number of public and farmer’s markets is declining, while the share of direct channels for fruits and vegetables in spending is going down dramatically. The modern sector with intermediaries and wholesalers is becoming more and more important in developing countries.

Q: Just to clarify, when you reference direct channels, you’re just speaking about farmers’ markets, farmers selling direct to consumers.

A: Yes, that’s right. When looking at consumer attitudes about fresh produce, almost 75 percent of consumers in the U.S. say buying local is important. Consumer preference for purchasing local fruits and vegetables is strong.  

Q:  Is this from a study you conducted?

A: This is from research by the Hartman Group, which I’ll discuss in more detail in London.

Q: How are consumers defining local? Do you think consumers care whether it’s local from a farmer in their community, or are they more interested in the grower’s story in Latin America?

A: Consumers don’t care if the mangos came from Colombia or Peru; they just want to know about the farmer, how it’s produced, responsibility with GAP, and that someone is benefiting from the purchase I’m making. The concept of local is so confusing to consumers. Local is confused with organic, with the small family farms, geography.  It’s a complex definition of what local means. Consumers really care that they are buying a wholesome product from a real farm, that the farmers are working hard, being good stewards of the environment and doing things right.

Q:  Consumers say all that, but don’t most shoppers go into the supermarket and buy what looks the freshest at the best value, or what’s the most convenient…? We write about these programs where consumers can scan a QR code on an item and see a video of the farmer telling his story, or go to a website to see personal anecdotes about the family farm’s sustainability measures.  How many consumers are actually investing the time to explore that? Is it making a difference in what they are buying? And while many of the stories are touching, there is not a lot of scientific measuring or perspective on the impacts…

A: It’s very subjective. What I’ve learned in my research is that consumers focus on fresh, good quality product. If everything else is equal with price, quality and safety, they may prefer to buy the produce with the nice story about the family farm.  But the first attributes are quality, availability and consistency, and that relationship between value and price.

In part, what I’d like to say in my presentation is that the most effective way to keep local farmers is for them to become such good farmers that they are able to sell to wholesalers and distributors at the same quality and with enough volume and consistency to be in the supermarkets and the foodservice sector, including institutional customers such as hospitals.

They need to go through intermediaries. The distributors have flexibility of buying from different places and genres, so they can supply produce of comparable quality year round.

I want to show the importance of intermediaries and lessons we’ve learned from a series of case studies. There are two messages I want to emphasize. The idea that local foods are more environmentally friendly is not true. We have shown there is no relationship that more environmental benefits support going direct.

Q: Can you elaborate?  How do you get that message across?

A: Direct market supply chains consistently offer consumers detailed information about where, by whom and how the product was produced, but the addition of intermediaries to the supply chain makes it more difficult to convey this information.

For instance, products in local food supply chains travel fewer miles from producer to consumer than in mainstream chains, but fuel use per unit of product can be greater. I’ll reference a case study done in England, looking at direct channels to mainstream that shows it’s more efficient with fuel use per pound of produce to go through intermediaries.

In addition, retail price premiums are difficult to maintain when local is the only differentiating characteristic. Almost all of the wage and business proprietor income generated in the local food supply chains studied (direct and intermediated) accrues within their respective local areas… but mainstream supply chains also contribute significantly to local economies. And further, local food supply chains tend to place more emphasis on social capital creation and civic engagement, although results vary widely across supply chain types and locations.

Q:  What did you learn regarding grower profits when going through intermediaries, especially in an industry where margins are squeezed?

A: In our case study, producers in local food supply chains tend to receive higher revenues per unit and a larger share of the retail price. In the case of apples, for instance, 80 percent of the value goes to the farmer. But the volumes in local food supply chains are too small to sustain business in the long run in many cases.  These markets are just too thin. They’re very attractive because farmers capture a lot of the value, but the volume is very small.

There is a need to go through intermediaries to get more volume through the system, and that is apparent in our case study on developing an eastern broccoli market in the U.S.

Q: Can you extrapolate this case study to other commodities and geographies?  What can the global audience in London glean?

A: Let me give you the big picture of why I’m using our research on the Eastern Broccoli Project. If you think about the case of broccoli, 85 percent comes from California and Arizona. We have a broccoli production system that is quite concentrated in this geographic region. This region is facing very, very serious problems of water in the long run. It makes sense to diversify the supply of products. What if you have years of drought in California? We won’t have broccoli in the U.S.  It’s like when you invest, you don’t put your $1 million in just one investment, you diversify.

The idea here is you see great opportunity to diversify production in regions on the East Coast. You have advantages of reduced transportation cost. Transporting broccoli from California to the East Coast is about 13 percent of the retail value. With broccoli, you have to transport with ice. We have a big demand for broccoli on the east coast. And crop diversification is useful to growers.

Q: You also can connect with consumers on the locally grown aspect, and reduced carbon footprint.

A: Yes. That’s right. Farmer’s markets aren’t going to offer the diversification because the markets are just too small. So, if you want diversification, you have to develop a system as competitive as California in whatever region you target, in this case the East Coast.

Q: What about the seasonality and growing conditions? Is there a wide window for production on the East Coast?

A: Seasonality is also very important. One of the premises of the East Coast Broccoli Project is if you start in December, at the end of January you can harvest in Florida, then in the spring you go to South Carolina, Georgia, North Carolina coastal areas, moving into the summer in Virginia, New York, Pennsylvania, and then in the fall, Maine… and then you have kind of a year round distribution system.

Q:  What are the biggest obstacles in building an East Coast broccoli market? How complex is the process? How do you get all the players in the supply chain on board?

A: The key issue there is how are you developing incentives for growers to do broccoli and do big volumes, and who is going to buy this.  

Q: It’s a big investment… Are growers convinced of the product quality, yields, etc.? Where are you now in the piloting process?

A: A typical east coast broccoli was ugly. But breeding lines being developed are high quality, with the right traits in taste and appearance.  However, having that is not sufficient because you need to have the economic systems to optimize supply. Can we compete as a region?  And will retailers and consumers accept broccoli from the East Coast?

Q: That’s a critical element. You could get the whole system in place, and then there’s a marketing problem…

A: I can give you the bottom line on this. Our studies suggest, yes we can compete; it makes economic sense when you compare cost of production and distribution, and the right varieties, which we have right now.  The East Coast should be able to supply year-round supply of broccoli.

In addition, from our research, we are learning from retailers that consumers like the idea of buying local. But retail buyers enjoy the local product as long as it is the same quality and same price as the product from California. For retailers, the most important characteristic is the quality, reliability of supply and the price. So the East Coast broccoli growers need to be competitive with the California growers.

We know that we have the cost and quality to compete. The biggest challenge for the East Coast is how can you change the mindset of growers to enter into lucrative big volume production?  What incentives can you give them to produce more broccoli? This issue of training and developing this network of growers is not very clear. Then you need the large packer-shippers and distributors.

We know we can be competitive, and we know retailers will buy the product, but who is taking the risk of investing; that is the problem. There is the network of growers on the East Coast that needs to take the risk to produce broccoli. The other risk is the large packer-shippers. The large buyers have to work closely with these networks. Then there’s the need to develop the standards and volumes.

We know the economics are there, what is left is the team effort from growers, packer-shippers and buyers to develop significant volumes. And that takes time.

Q: Aren’t these kinds of systems also being developed in other commodities internationally?

A: Yes, not only in broccoli, but in many other products to diversify production away from the West Coast to the East Coast, from Mexico or South America.  Not only here in the U.S., but elsewhere. Today you see the success of the blueberry supply chain, where there’s a nice team effort from Argentina to the State of Oregon between growers and buyers.

Fruit and vegetable supply chains are becoming very international. It’s very rare they are coming from one small area because you are constrained to produce at certain times of year. Supply chains are becoming more coordinated with very sophisticated business models to insure the minimum quantities and qualities required by retailers.  For example, packers and shippers in New York coordinate with growers in Chile and New Zealand to bring apples here in the summer, and they also do all the marketing here in the U.S.

Diversification in production is a point I want to make, but how do you develop this team effort between the buyers and the network of growers? This is a global phenomenon.  I was reviewing proposals for the Inter-American Development Bank for Agricultural Research in Latin America. I was on the panel of reviewers. Two of the proposals were about local food systems, developing farmer’s markets in Latin America.  These are issues that are important everywhere.

Q: What do you hope attendees will take away from your presentation?

A: The first point, if you look at the fresh fruit and vegetable supply chain, you have to be as local as you can when you’re close to the consumer, but your supply chain has to be as global as possible – to realize the supply chain is becoming more and more connected.

The other point, we know consumers prefer products when they know the farmer, but the key is that the farmer’s markets or direct channels are so small. To meet this demand, we have to go through the main system. The challenge is how do you convey that message?

Going to a farmer’s market is not an option. Not all can participate, and it won’t be there all year round. The sophisticated food supply chains we have today are the best we have to convey that message between the consumer and farmer.

I want to emphasize the importance of team efforts between networks of growers and buyers to develop true business relationships that will allow investments for the long run.


******

Statistics that show direct marketing — farm to consumer — is more profitable than working through wholesalers and retailers mostly fail to account for the value of labor. Yes, if the farmer’s mother is free to stand all day at a stall selling to consumers, the farm will make a lot of money. But if you consider that Mom could have gotten a job or done other useful work, the economics rarely work out.

It is these uncounted costs that upend many calculations. The American East Coast broccoli project isn’t as successful as the numbers would suggest. Why? Well, first of all, most of the broccoli in a city such as New York is already Mexican or from Maine, not California.  But, here is a little secret: Lots of farmers in California produce broccoli, and have for years, but they can’t remember the last time they made a profit on it. Why would they do this? It is a perfect crop to use for rotation purposes.

So when they price out the cost of growing in South Carolina or in California and it seems as if South Carolina is competitive, it may not be so.

So what seems like a low cost distribution system — farmer direct to consumer — often is not when you factor in labor, inefficient transportation, etc. So the future of local growers has to be through distribution centers.

In the big battle that has been going on in London over the redevelopment of New Covent Garden Market, this is what has often been lost.

Markets serve as the hinge of two things that people really want to succeed. On the one hand, they sustain open space, smaller farms and local producers. These are growers who need the markets because, whereas retailers buy the size, grades and varieties they want, wholesalers help the grower sell what he needs to sell.

And, of course, this is possible because of the other end of the hinge — wholesalers make possible cities filled with idiosyncratic and interesting independent retailers and restaurants. They allow our urban spaces to not fall into utter conformity, whereby every place one goes, one sees the same stores and restaurants.

All over the world, one gets the sense that governments, focused on the rich market value of urban property, have forgotten the vital role of the markets on both rural and urban life and, instead, focus on the short-term profitability of selling off development rights.

But long after that money is spent, we will live in cities poorer because the nearby green space is not preserved and the diverse city fades into homogeneity.

Come to the London Produce Show and Conference and participate in this important discussion.

You can learn more about the London Produce Show and Conference right here.

This is a small brochure we created that showcased the event from last year.

Please register at this link.

And, remember, we have a great “better-half” program; you can learn about it here.

You get the most out of the event by staying onsite at the headquarters hotel. It maximizes networking and thus the value you take out of participating. Get discounted rooms at the headquarters hotel right here.

We still have a few booths left if you want to participate as an exhibitor, so please let us know here.

And sponsorship opportunities allow you to position your company as a leader; find out about opportunities right here.

Come join Professor Miguel Gómez from Cornell University for this talk, and meet the students who have come so far to learn so very much.

 
All stories


Previous page

Leave a comment


  1. Your e-mail address will be used solely in case we have a question about your submission.It will not be published or used for marketing.
 
 
 
Share