Enhancing Farmers’ Markets: Producer, Consumer and Community Effects

By

Joshua Heinrich Pierce

Undergraduate Senior Thesis

University of Wyoming

Ed Bradley

I. Introduction

Small scale farming is slowly fading out of today’s high technology corporate world.

Drive across the Midwestern states and all in view are large farmland plots growing

conventional, commercial crops such as corn, soybeans, or wheat. Generally, most people do not

sit down to a dinner plate full of shell corn or a bowl of soybeans like livestock does. So if

agriculture is feeding the world, where is the food coming from? The grocery store advertises the

vegetables as “farm fresh” in the produce section, but is this really as close to farm fresh a

consumer can get in these modern times?

All across the nation, a growing industry has been attacking this very question and

allowing consumers to truly get farm fresh food. The United States Department of Agriculture

(USDA) states that farmers’ markets are a place where farmers’ can take their fresh grown

produce and interact with the customers who are interested in obtaining fresher, healthier sources

of food (United States Department of Agriculture, 2014). The concept of a market where

consumers can obtain their food straight from the farmers’ who grow their food seems to be a

practical idea, especially for towns across the Midwest.

The first glance idea of farmers’ markets paints a pretty picture. The research conducted

in this essay examines if there is potential for further growth in this industry. To first answer this

question, analysis must be conducted if there is potential for profitability on the producer’s

supply side of the market. Complimentary to the supply is if there is growth in the demand for

farmers’ market goods. These key questions can help draw conclusions toward the long term

expansion of farmers’ markets.

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Furthermore, throughout this research report, the main focus points will be on the market

as a whole, the demand for the market, and the supply from producers to the market. To begin, a

review of other literature will give some industry statistics such as how large, in U.S. dollars, the

farmers’ market industry is and how many markets there are in the U.S. Demand for the industry

will also be analyzed through related work to point out some key issues with the demand and

also opportunities for growth. This review of related work will set the foundation for the

profitability analysis of supply. Overall, this essay should give some light to the growth potential

in the future of farmers’ markets.

II. Review of Other Related Work and Background

a. Market Model

Farmers’ markets are an intricate market model which include and exclude variables

found in other markets. In this market set up, the middleman is eliminated and one individual or

firm takes the raw material, converts it into the final product, and markets the final product

straight to the consumer. The industry is much larger than most realize.

Farmers’ markets have been a growing industry for past decade. According to an article

in the American Journal of Agricultural Economics, in 2005 nationwide sales for farmer’s

markets were reported an estimated $1 billion, which is a 13% growth from 2000. Also, just

between the years of 1994 to 2006, there has been a 150% increase in number of farmers’

markets nationally (Brown & Miller, 2008). The following graph came from the USDA

Agricultural Marketing Service and shows the increase in number of farmers’ markets

nationwide from 1994 to 2013.

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Figure 1: Number of farmers’ markets registered with the USDA in the United States from

1994 to 2013.

The bar chart shows there has been steady growth in number of farmers’ markets across

the country. Already this is a growing phenomenon. According to the most recent data from the

USDA, as of August of 2013 the number of farmers’ markets nationwide is 8144, up 3.6% from

2012 (United States Department of Agriculture, 14). The USDA Agricultural Marketing Service

also has a search engine which allows consumers to find a farmers’ market closest to where they

live. Laramie, Wyoming has three farmers’ markets listed in the registry that were displayed in

the search engine.

The data shows steady growth, but the question remains why do we see a relatively slow

growth rate in an industry with such high potential? In a report from the United States

Department of Agriculture, a study done by Oregon State University was cited which targeted

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new farmers’ markets between 1998 and 2005, both markets which stayed open and those that

closed. It was stated that within the state of Oregon 62 would open and 32 would close within a

year. “A net gain of 30 markets for 62 openings signals significant level of risk associated with

new market ventures” stated the report (Lohr, Diamond, Dicken, & Marquardt, 2011). The report

from the USDA also expressed how a market is comprised of vendors (the supply) with variety

and quantity to hold consumer interests and be able to attract enough consumers (the demand) to

keep the vendors interested in that marketplace (Lohr, Diamond, Dicken, & Marquardt, 2011).

Farmers’ Markets also have a unique social effect on the communities where they

preside. Goland and Schlatter discuss these topics in an article about farmers’ markets in Ohio,

highlighting some of the social and economic benefits to the community. “Customers who

support [farmers’ markets] keep their food dollars in the community and support local

businesses” (Goland & Schlatter, 2010). They also bring up how consumers can communicate

straight with the producers on how their food is grown and brought to market; compared to the

traditional grocery store where the consumer does not have that personal connection to the

produce they purchase (Goland & Schlatter, 2010).

Moreover, farmers markets are meeting places for communities to come together and

encourage social lives. In Des Moines, Iowa, the community is even finding ways to continue

this year round. KCCI channel 8 news reports of a new indoor farmers’ market proposal going

up on a vacant lot downtown Des Moines. Although still in the proposal stage, the new

renovation to the property shows already the growth toward the future of farmers’ markets

(KCCI News, 2014).

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b. Demand Impacts

The other side of the market to consider is the consumers which provide the demand for

the farmers’ market goods. The issue for vendors is traveling to where the demand and the

market are located. In a report from USDA on farmers’ market competition, they discuss that

metropolitan areas with 1 million people or more have the highest demand for farmers’ market

goods. Because of the concentrated demand, vendors have to travel greater distances to get their

products to market. It is estimated in the report that 35% of national farmers’ markets are in

metropolitan areas with populations of 1 million or more, where vendors drive an average

distance of 46.8 miles and customers drive an average distance of 10.4 miles (Lohr, Diamond,

Dicken, & Marquardt, 2011). This increases the marketing costs to producers to access the

higher demand.

Another issue with the demand for farmers’ markets is the strength of demand. In the

report on competition of farmers’ market consumers, the density of demand is much less than

that of supply. Farmers’ markets are not in such high demand that they are willing to drive longer

distances to go to them. “Managers may need to focus on drawing more customers from within

their existing trade zones.” In rural areas, the demand is not as high as the larger metropolitan

areas (Lohr, Diamond, Dicken, & Marquardt, 2011).

In order to increase demand, there should be an understanding of what brings consumers

to a farmers’ market. A research study cited in the International Journal of Consumer Studies

surveyed attendants of the Stour Valley Farmers’ Market what their attraction to the farmers’

market was. The results found that curiosity was the main reason for the primary visit and also

for a better source for local fresh foods (La Trobe, 2008).

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A similar study was done in Renewable Agriculture and Food Systems regarding the

social reasons of consumers for attending a farmers’ market. The survey found “…enjoying the

market, talking with farmers about seasonal products and making a trip to the market a family

event, are significant and positive influences on spending at farmers’ markets…” (Hunt A. R.,

2007). This shows how large of an impact the social elements of farmers’ markets can have on

the aggregate demand.

Furthermore, an article in the American Journal of Agricultural Economics paraphrased

another finding which affects demand habits. Brown and Miller cite Darby et al. (2008) that

regarding locally grown versus U.S. grown, customers will pay close to two times as much for

locally grown. They further go on to explain that “local” is defined by a survey done by the

Hartman Group (2008) to the majority as “made or produced within 100 miles [of their home]”

(Brown & Miller, 2008).

This information can help draw conclusions to the expansion of farmers’ markets. With

“local” being defined up to 100 miles from the consumer’s home, the right incentives could

allow for expansion on the average distance consumers AND producers would be willing to

travel to make the exchange. Moreover, if the positive health impacts and social benefits are

made known, the demand for farmers’ markets can lead the growth of the industry.

Finally, a look at one last demand factor focusing on governmental policy and assistance

on low income families. One program listed on the USDA website in place is the Senior

Farmers’ Market Nutrition Program (SFMNP). This is a governmentally funded program which

gives low-income seniors coupons which can be used at farmers’ markets and roadside stands in

exchange for fresh goods (United States Department of Agriculture). Another more popular

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program is the Supplemental Nutrition Assistance program (SNAP) which provides low income

families with funds to use on foods for the family to eat. The funds from this program may be

used at any farmers’ market or roadside stand which will accept the program (United States

Department of Agriculture).

c. Supply Risk Factors

“Price fluctuations are a common feature of well-functioning agricultural product

markets.” (Food and Agriculture Organizations of the United Nations, 2014). As much of the

research in this article shows, vegetable production has many differences to the more common

production agriculture. However, the market volatility and price risk within farmers’ markets is

still present. Unlike large scale production agriculture, there are no real methods of protecting

against price risk, such as hedging, options, or futures contracts.

Weather in agriculture remains a large risk factor. Crop insurance has helped to lighten

some of this risk in the situation where weather affects the crop output. Jerry Hunt, of

Monticello, Iowa, has been selling federal crop insurance for 7 years and currently is starting a

business with his wife to produce goods for a farmers’ market. An interview with Hunt revealed

that farmers in conventional production agriculture, producing corn or soybeans for example, can

get insured through federal crop insurance the first year they plant a crop. The crop insurance

covers a percentage (usually up to 85%) of the average yield. Since first year farmers do not have

a ten year average yield, the insurance coverage is calculated by a county average until the

farmer has their own yield history. However, vegetable production insurance is different (Hunt J.

, 2014).

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Farmers in vegetable production can get federal crop insurance, but not right away.

“Vegetable producers must have a three year history to qualify for federal crop insurance.” said

Hunt. He also mentioned that hail insurance is available the first year for vegetable producers.

The three year production history must also be on the same plot of land to give a good estimate

of the average yield. A beginning farmer would not be able to get federal crop insurance until

year four of production; therefore the first three years he is left without any risk protection from

the weather (Hunt J. , 2014).

III. Methods and Procedures

After seeing the benefits of farmers’ markets on the community and as a market itself,

examination on the profitability of the supplier is necessary to the long term sustainability of the

expansion of farmers’ markets. The suppliers in a farmers’ market are the farmers who grow the

produce and other goods to bring to market. Using example enterprise budgets and capital

budgeting analysis, the results show favor toward beginning farmers and the profitability toward

the expansion of farmers’ markets.

Suppose there is a small farmer in Iowa, just out of college working a full time job and

wants to start farming. Using Iowa State Extension’s Ag Decision Maker example enterprise

budgets [Appendix B], a cash flow spreadsheet from the combined enterprise budgets of carrots,

garlic, basil, potatoes, green beans, snow peas, and red raspberries; hereinafter referred to as

“basket of goods,” gives a capital budgeting analysis approach toward this type of enterprise

[Appendix A].

The Iowa State Extension’s enterprise budgets are all based on a 4 by 100 feet bed. At 7

products in the basket of goods, each in a 4 by 100 feet bed, this represents 2800 square feet of

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garden. Since most crop reports are in dollars per acre, the results from the cash flow analysis

were converted into dollars per acre by means of converting square feet to acres; also giving the

assumption that each acre is split equally between the seven crops.

Each of the enterprise budgets for the crops in the basket of goods included a full listing

of expenses which were calculated into dollars per unit. Expenses were categorized in pre-

harvest and harvest costs. Pre-harvest costs were split between supplies and labor costs. The

various pre-harvest costs are seed for cover crop, seed, fertilizer, soil mix, burlap, straw mulch,

cages and other. Not every crop has each of these costs associated with it, but all had a

combination of these costs. Pre-harvest labor calculated at $10.00 per hour to be used as either an

opportunity cost, or a labor expense if the producer was to hire someone to do it for them.

Various labor activities included bed preparation, cover crop, soil mix, fertilizer spreading,

transplanting, planting, laying burlap, mulching, hand hoeing, setting cages, irrigation set up,

weeding and other. Also included in these enterprise budgets from Iowa State University Ag

Decision Maker is interest on pre-plant costs, which assumes the producer bought supplies on

account at 3.5% interest.

The enterprise budgets split up the remaining expenses by harvest costs, as previously

mentioned, and ownership costs for the irrigation system, machinery and land. Harvest costs are

just the cost of bags and containers to package the vegetables in to take to market. Labor

activities include harvest labor, packaging and other. The total labor was calculated in the capital

budget analysis both by total labor for each of the seven 4 by 100 feet beds and by total labor per

acre. For the labor analysis, some assumptions were made to standardize how many full time

workers were needed for one acre of land. The assumptions were the vegetable enterprise only

takes place over 90 days in summer, or roughly three months. One worker works five days per

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week and eight hours per day totaling 40 hours per week. In one season then, one worker can

work 480 hours total in the three months of the vegetable production. This only factors labor for

pre-harvest and harvesting, it does not include labor to take the goods to market and selling

goods at market.

On each of the individual enterprise budgets, the total pre-harvest supplies cost, pre-

harvest labor costs, interest on pre-harvest costs, harvest costs, harvest labor costs, and

ownership costs are added together to get a total cost then divided by the expected yield to get a

total cost per unit. This total cost per unit was used as the vehicle to transfer costs from the

enterprise budgets to the capital budget analysis for ease of calculation and to best include every

associated cost.

In the capital budget analysis, annual net income, the net present value and internal rate

of return were calculated to further examine the feasibility of this enterprise. Net present value is

the value of all cash inflows and cash outflows, including the initial investment, and adjusted for

present value, by means of a required rate of return or discount rate (Investopedia, 2014).Internal

rate of return (IRR) is the rate of return, or discount rate, when the net present value is equal to

zero; thus the higher the IRR, the more desirable the project is to undertake (Investopedia, 2014).

The Iowa State Extension’s farmland value survey reported that in 2013 Iowa farmland

was valued at roughly $8,713 per acre (Duffy). The initial investment used in this analysis was

the average value of an acre of farmland in Iowa. Because of the high amounts of risk in

vegetable production, namely with price volatility and weather risk, the required rate of return on

this investment needs to be much higher than a farmer in conventional row cropping. For

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purposes in this capital budgeting analysis, a required rate of return of 35% was used due to the

high risks involved.

IV. Results

The findings were incredible, but came with a relatively high investment. To start off

with, the annual expenditure per acre the first year was $13,097.03. To easily convert from the

enterprise budget to the cash flow budget, the expenses were transferred by total expense dollars

per unit. In the examples given by Iowa State University, the red raspberries have a lower yield

the first year at only 10 quarts because the raspberry bushes take a year to become established. In

years two through five, the raspberry bushes yield 30 quarts. The second year the annual expense

per acre was $13,646.20. Due to this, the annual revenue and expenses are different between year

one and year two. Also factored into this budget were the travel costs of commuting to the

market. Using the average distance vendors from metropolitan areas travel to market, 46.8 miles,

and the Internal Revenue Service standard mileage rate for business purpose of $0.56 per mile, it

would cost the producer $52.42 for a round trip to the market (Internal Revenue Service, 2013).

The revenue and profit projections are the incredible part of this analysis. The net income from

the first year came to $7,940.12 per acre and $9,880.09 per acre in years two through five.

Even with such a high required rate of return, the results proved this to not be an issue.

The net present value for a required rate of return of 35% was $11,780.41 meaning this vegetable

production would return 35% on the investment of one acre of farmland and an additional

$11,780.41. The IRR computed was 99% return. The total labor calculated from all the enterprise

budgets for year one came out to be 840.86 hours and 905.43 hours for years two through five.

This concludes that for each acre of land, roughly two full time workers would be needed.

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V. Conclusion and Recommendation

With returns like these from one acre, farmers’ markets could make beginning farmers a

much better start into an industry with a tough point of entrance. This analysis was just done

under the assumption of one acre, although generally most farmers do not only farm one acre.

Much of the producers which attend farmers’ markets have less than $50,000 in gross farm sales

which means most are small farms (Martinez, et al., 2010). If a farmer were to do this on a larger

scale, considerations such as additional labor and equipment costs would need to be factored in,

which was not done in this analysis.

This analysis was intended to take a very ideal look at the vegetable production for

farmers’ markets. By ideal, it is meant the analysis was conducted under the assumption that the

plants yielded exactly what the expected yield was calculated to be, prices were just as projected

in the enterprise budgets, every unit of produce was sold, and labor was exactly how much was

projected in the enterprise budgets.

Not included in this analysis was the comparison of organic and nonorganic production.

As can be seen at a grocery store, there are price differences between the two production

methods. Varieties of non-vegetable products, such as beef, milk, or handmade crafts are also not

included in this research. Both of these areas can be topics for future research in farmers’

markets dealing with more specifics on the supply side.

This research provided a strong, basic look at the financial and economic aspect of the

supply side of farmers’ markets. The available information was condensed to look at a more

realistic approach of producing multiple outputs on one piece of land to achieve the desired

diversity consumers look for and see the overall return on the production.

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Areas where this research could have improved dealt with more in-depth look at supply

analysis and demand statistics. To overcome the simplicity of the ideal-state capital budget that

was composed for this research, the yields and prices could have been calculated over a range of

values and prices to better project for all different production years, good and bad. Also a further

look into demand statistics could help draw conclusions regarding the growth of the demand.

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BibliographyBrown, C., & Miller, S. (2008). The Impacts of Local Markets: A Review of Research on

Farmers Markets and Community Supported Agriculture. American Journal of Agricultural Economics, p. 90.

Duffy, M. D. (n.d.). 2013 Farmland Value Survey Iowa State University. Retrieved February 10, 2014, from Iowa State University Extension and Outreach: http://www.extension.iastate.edu/agdm/wholefarm/html/c2-70.html

Food and Agriculture Organizations of the United Nations. (2014). Price volatility in agricultural markets. Retrieved February 10, 2014, from Food and Agriculture Organizations of the United Nations: http://www.fao.org/economic/est/issues/volatility/en/#.UvkYLPldWSo

Goland, C., & Schlatter, R. (2010, August 3). Farmers' markets sustain Ohio communities. The Blade.

Hunt, A. R. (2007, March). Consumer interactions and influences on farmers' market vendors. Renewable Agriculture and Food Systems, pp. 54-66.

Hunt, J. (2014, February 10). Crop Insurance on Vegetable Patches. (J. Pierce, Interviewer)

Internal Revenue Service. (2013, December 6). 2014 Standard Milage Rates. Retrieved March 3, 2014, from IRS: http://www.irs.gov/2014-Standard-Mileage-Rates-for-Business,-Medical-and-Moving-Announced

Investopedia. (2014). Internal Rate of Return - IRR. Retrieved February 10, 2014, from Investopedia: http://www.investopedia.com/terms/i/irr.asp

Investopedia. (2014). Net Present Value - NPV. Retrieved February 10, 2014, from Investopedia: http://www.investopedia.com/terms/n/npv.asp

KCCI News. (2014, February 7). Business Record: Indoor farmers market on Court Avenue? Des Moines, Iowa, United States.

La Trobe, H. (2008, July 22). Farmers' markets: consuming local rural produce. International Journal of Consumer Studies, pp. 181-192.

Lohr, L., Diamond, A., Dicken, C., & Marquardt, D. (2011, September). Mapping Competition Zones for Vendors and Customers in U.S. Farmers Markets. Retrieved February 12, 2014, from U.S. Dept. of Agriculture, Agricultural Marketing Service: http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5094336

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Martinez, S., Hand, M., Da Pra, M., Pollack, S., Ralston, K., Smith, T., et al. (2010). Local Food Systems: Concepts, Impacts, and Issues. USDA ERS.

United States Department of Agriculture. (14, January 9). Farmers Markets and Local Food Marketing. Retrieved February 11, 2014, from United States Department of Agriculture Agricultural Marketing Service: http://www.ams.usda.gov/AMSv1.0/farmersmarkets

United States Department of Agriculture. (2014, January 9). Farmers Markets and Direct-to-Consumer Marketing. Retrieved February 24, 2014, from Agricultural Marketing Service: http://www.ams.usda.gov/AMSv1.0/farmersmarkets

United States Department of Agriculture. (n.d.). Senior Farmers' Market Nutrition Programs (SFMNP). Retrieved February 12, 2014, from USDA Food and Nutrition Service: http://www.fns.usda.gov/sfmnp/senior-farmers-market-nutrition-program-sfmnp

United States Department of Agriculture. (n.d.). Supplimental Nutrition Assistance Program (SNAP). Retrieved February 12, 2014, from USDA Food and Nutrition Service: http://www.fns.usda.gov/snap/supplemental-nutrition-assistance-program-snap

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Appendix A

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Appendix B

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