Farming Magazine - July, 2012

COLUMNS

Opinion: Feeding the 20 Percent at a (Mini) Farm Gate Profit

An agricultural forum for the progressive farmers of the Northeast.
By Martin Harris Jr.

It's been almost a half-century since Dale Hathaway's ag-policy book, "Problems of Progress in the Agricultural Economy," became a sort of benchmark for ag economists both in and out of the college classroom. One of the Michigan State professor's long-range projections in 1964 was that as American agriculture continued to make remarkable productivity gains, fewer large-scale commercial farmers would be needed and there would be a massive labor force transition from agriculture to manufacturing and commerce. Then, the farm population was about 15 percent of the electorate. Today it's less than 2 percent. He also opined that as urbanites spent less of their disposable income on food, (then about 20 percent) they would spend more on nonfood necessities and optional "luxuries," ranging from more expensive health care to restaurants. Now, the USDA reports, spending on food consumed at home is under 10 percent, and a whole new category - food consumed away from home - is another 4 percent. He didn't project that as urbanites spent less on food through traditional commercial channels they'd choose to spend more on a higher-priced set of edible products loosely categorized as organic, local and specialty, everything from ancient apple varieties to artisanal cheeses, in settings ranging from village farmers' markets to almost-supermarket-size urban retailers. It's now widely estimated that this sector of the urban-consumer retail food market is now near 20 percent of the total and (excuse the pun) growing.

With about 100 million households in the U.S., this relatively new 20 percent (20 million) quite willing to spend more for edibles they consider superior in terms of product quality, personal health, environmental impact or such sociological objectives as "supporting local growers" constitutes a potent economic force, and folks in ag-related businesses have begun to take notice. Two examples:

From the retail food sale sector comes news that Whole Foods, the national leader in the concept of selling "organics" to urbanites and suburbanites in large-scale settings, is on track to open a 20,000-square-foot mini supermarket in the heart of downtown Detroit next year. The corporation's customer target isn't the remaining less than a million of the once more than 2 million assembly line workers who were once the bulk of the Motor City's working population, but rather the upper-middle-class information-economy folks whose offices fill the new high-rise towers of the MidTown and Renaissance districts, whose food-preferences and spending behaviors will create a major new market for selected growers on the rural periphery of the otherwise decaying city. There's been much written (even in this little column) on the subject of "urban food deserts," where low-income inhabitants can't get green vegetables and fresh produce because vandalism, theft and consumer disinterest combine to make such stores in such neighborhoods economically unfeasible, but Whole Foods is betting that the glass-and-stainless-steel towers of the new downtown will house (at least during the workday) a more enlightened sort of customer who is quite willing to pay a premium for the output of relatively smaller scale, lesser mechanization and, therefore, lower productivity of organic operations. The store will open next year, and expert opinion is predicting commercial success.

From the ag-mechanization sector comes news of small-scale pasteurization equipment becoming available for the output of micro-dairies, operations with perhaps six cows. Two such industrial innovators are both, interestingly, home-based in exurban residential markets with populations already devoted members of the 20 percent. One is Micro-Thermics, in the Raleigh, N.C., area, and the other is Bob-White, in the South Royalton, Vt., area. A Web search of the subject brings up over 22,000 hits, many of which are serious equipment manufacturers or would-be start-ups, but the level of interest shows the potential market for a product, which, at a price range in the $20,000 to $30,000 area, would clearly enable producers to satisfy the usual regulatory requirements for producer-to-consumer sales of dairy products.

What's less clear is the economics of producing smaller quantities of higher-priced edibles for the 20 percent. We know with certainty that both Whole Foods and Bob-White, as conventional bookkeeping-based commercial ventures - one aimed at equipping producers, the other at marketing to consumers - are obliged to follow the accounting procedures that start at gross income (sales) minus direct expenses to derive net profit and include under expenses such items as interest, taxes, asset depreciation and debt amortization. The financial press typically takes pains to report on businesses that count in (or don't) the latter costs, combined under the EBITDA acronym: earnings before interest, taxes, depreciation and amortization. That's because "profitability" is more easily claimed when any or all of the latter aren't counted, as is often the case in ag accounting, partially because of old tradition (unpaid family labor, for example) or modern legal practice (reduced property taxes on farmland), which make farm accounting, for both large and small commercial farms frequently different from the standard utilized in nonfarm enterprise.

Further clouding the profit-or-loss analysis is the unique status of agriculture, both large and small-scale operations, in the degree to which the actual farming operation is subsidized by off-farm-income to obtain a final "household income" annual number. Your humble scribe can point to no identifiable building contractor or legal firm that operates at an actual direct-enterprise loss but stays in business because other family members earn household income teaching, doing health clinic work or local government clerking. As previously reported in these columns, on average some 90 percent of "farm household income" as reported by the USDA is actually the result of off-farm labor. Confirmation for official recognition of this situation can be found in a relatively new ag economics text, "Policy Reform in American Agriculture," a 1999 effort by a trio of experts including Robert Paarlberg, bearing a surname (think elder brother Don) well-known in USDA ag secretary office listings.

On page 191 he describes the 1996 Federal Agricultural Improvement and Reform Act thus: "a new public policy paradigm for agriculture that is distinctive because it assumes that a long-term economic equilibrium has been achieved because it stresses the importance of economic efficiency and off-farm income in place of governmental interventions to boost price by controlling supply." Whether de jure or de facto, off-farm income has become an essential element of the farm economy (see the dismal last 20-year summary of annual dairy farming non-profitability, discussed in a recent column in this space) enabling conventional food prices to continue to decline as measured in inflation-adjusted dollars and thereby enabling the 20 percent to choose to spend a bit more of their mostly middle to upper-income-quintile earnings for a somewhat more expensive line of preferred edibles. When the 20 percent exercises that economic preference with that degree of clout, an even larger-scale public policy question surfaces: Can state government build it into an overall economic development strategy? If so, it wouldn't come up at the consumer end of the farm-to-table food route; it would come up at the producer end because of the economic impact of food production, long recognized as the "primary sector" of the economy in an economic theory tradition going back to the all-new-wealth-comes-from-the-soil teachings of the 18th-century physiocrats.

That's for two reasons. One is wealth creation; setting aside the question of the difficulties in measuring ag profitability, particularly at the smaller-scale end of the spectrum, it must be recognized that food grown and sold has value. The National Organization for Raw Materials (NORM) has long argued (with stats) that agriculture earnings have the largest multiplier effect of any economic sector: seven. Money earned by food growers is recycled seven times in the economy, NORM says. The other reason is domestic spending: money spent in-state on food, particularly in a small gross state product state like Vermont, or in a region of a larger GSP-state like Virginia's Shenandoah Valley, is money not shipped out of state for food purchase. Encouraging either or both as state policy would be a reasonable policy that would encourage large rural lot subdivision for mini farms, and ease regulations for marketing of the resulting production via wholesale or retail channels. It would also, critically, require state policies supportive of rural industry, simply because mini farms catering to the 20 percent, even though they can, and typically do, charge more for unit of production than conventional commercial retail, are even more dependent on off-farm income to stay in business. It seems self-evident that, in Virginia for example, where every county has its own little industrial and/or commercial park, a more conducive economic environment for mini or part-time farming prevails than in states like Vermont where both government and the electorate are notably hostile to just that sort of rural nonfarm development.

An argument can be made that the smaller and more rural states can more easily focus on such strategies than larger ones with heavier commitments to urban realities, which may help explain why Wyoming has selected data processing as a strategic economic objective, much as Vermont, back in the '60s, briefly sought to be the "Education State." Now, both are struggling to reverse young-adult out-migration, while Idaho openly seeks to attract in-migrants from the 20 percent: upper-middle-class folks bringing education, earning and spending power toward what leaders in Boise term-perhaps exaggerating for effect- an "aesthetics-based economy." More on this subject next month.

The author is an architect and former farmer.