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Direct-to-consumer food sales could help growers succeed

A study of data collected in the 2007 and 2012 Census of Agriculture shows that direct-to-consumer sales could help growers remain in business longer.

In January 2015 a group of economists at the USDA-Economic Research Service released the publication “Trends in U.S. Local and Regional Food Systems: A Report to Congress”. The purpose of the report was to provide Congress with information regarding the “scope of and trends in local and regional food systems.”

As the demand for local food continues to increase along with consumer interest in locally-grown, USDA has made it one of its priorities looking at related topics including improving the rural economy, expanding food access and increasing nutrition, assisting agricultural producers and strengthening local markets.

Defining direct-to- consumer sales Nigel Key, a USDA-ERS economist and co-author of the Congressional report, studied some of the data that was collected to determine if direct-to- consumer sales had an impact on the survivability of farmers.

“I examined farms that sold directly to consumers, which is a subset of local food producers,” Key said. “I looked at whether farms that had direct-to- consumer sales were more likely to survive longer in business and grow more or less compared to farms that don’t do direct-to-consumer sales. That was the focus of my research.”

Key said direct-to- consumer sales would include roadside stands, farmers markets, pick-your-own farms, on-farm stores and community supported agriculture.

“These sales wouldn’t include intermediaries that would aggregate the food and then sell it to schools or to supermarkets,” he said. “It also wouldn’t include selling to restaurants that then prepare the food and sell it to consumers. That would be local food, but that wouldn’t be selling directly to consumers.”

USDA Farm Business Survival Rate

 

Tracking business survival

Key used the 2007 and 2012 Census of Agriculture data, which essentially includes all farms.

“We looked at all farms and broke them out by their sales categories: $1-$10,000; $10,000-$50,000, $50,000-$250,000 and over $250,000,” he said. “The Census of Agriculture is conducted every five years. The last one was in 2012 and the one before that was 2007.

“Looking at the 2007 census at producers who were selling directly to consumers, we determined how many of those producers showed up in the 2012 census and were still in business. We compared this data to the farmers who weren’t selling directly to consumers in 2007 and how many of those producers showed up in the 2012 census. We tracked business survival rate.”

Key said that 55.3 percent of all farms showed up again in the 2012 census compared to 60.9 percent of those producers with direct-to- consumer sales. The higher survival rate for direct-to-consumer sale producers was true for all of the different size sales categories. There was a significant increase in the probability of survival occurring for farmers with direct-to- consumer sales.

“The small farmers only had a 45.3 percent rate of survival compared to 72.8 percent for large farmers, but in every category survival was higher for direct-to- consumer sales,” he said. “For large growers with direct-to-consumer sales survival was higher, 78.1 percent. For the small direct-to- consumer sales farmers, survivability was 54.9 percent. In every sales category, there was a higher survival rate for direct-to- consumer sales farmers. We also looked at beginning farmers. These are farmers who have been in business less than 10 years. We basically saw the same effects.”

 

Reasons for increased survivability

Key said one of the reasons that there is a higher survival rate among farmers doing direct-to-consumer sales, is the amount of time these farmers are spending marketing their product.

“The direct-to- consumer farmers may be getting a higher price, but they are also spending more time marketing their product,” he said. “So in a sense they are a farmer and a marketer. As a result, for the same level of sales they don’t need as much farm equipment and they don’t need as much land. From the data we saw farmers who sell directly to consumers have $20 worth of machinery per dollar of sales compared to $31 worth of machinery per dollar of sales for those farmers who market through conventional channels.

“We saw similar results for the amount of land being farmed. Direct-to- consumer farmers had $240 in land per dollar sold compared to $309 in land per dollar sold for farmers selling through conventional channels. If a farmer doesn’t have to have as much land and machinery then he doesn’t have to borrow as much money.”

Key said farmers who were doing direct-to- consumer sales also had less debt.

“With less debt, the direct-to- consumer farmers likely have lower interest payments relative to their assets so they have a lower debt-to- asset ratio,” he said. “A lower debt-to- asset ratio makes a farmer less susceptible to production and market shocks.”

USDA Farm Percent Change in Sales

 

Slower growth rates

When Key looked at the growth of farms that remained in business in both 2007 and 2012, the farmers with direct-to- consumer sales had slower growth than the farmers with no direct-to-consumer sales.

“It’s kind of puzzling, why would these direct-to- consumer farmers have higher survival rates and lower growth rates?” he said. “One possibility is the direct-to- consumer sales tend to be more labor intensive. So given the same amount of sales, the direct-to- consumer farmers were hiring substantially less labor. So it makes it difficult to expand if expanding means having to hire someone. That can be a costly upgrade as compared to purchasing more land where a farmer can farm more of the land himself. Even though a farmer may not be able to grow the business, he may be able to survive.

“These direct-to- consumer farmers may also enjoy their work more. They like interacting with their customers. We don’t have any data to support that, but those are just my thoughts.”

 

For more: Nigel Key, USDA-Economic Research Service, Resource and Rural Economics Division, Farm Economy Branch; (202) 694-5567; nkey@ers.usda.gov.

David Kuack is a freelance technical writer in Fort Worth, Texas; dkuack@gmail.com.