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Buy Local = Premium Price?

by Marcia Passos Duffy
Keeping profits close to home

Photos by Bob M. Montgomery.

Supermarket shoppers buy produce from all over the world, sometimes not even realizing where their food is coming from. However, when there is a “locally grown” label or sign on fruits and vegetables, shoppers are willing to shell out extra money for two reasons: they feel that it’s worth it to pay a premium for the freshest produce, plus consumers favor buying food produced by small farms over food produced by what they view as big-business agriculture, according to new research published by Ohio State University in the May issue of the American Journal of Agricultural Economics. The research was funded by the National Research Initiative of the U.S. Department of Agriculture, the Fred N. VanBuren Program in Farm Management at Ohio State, and the Ohio Agricultural Research and Development Center.

The findings are good news for growers, says Marvin Batte, who co-authored the study and is a professor of agricultural, environmental and development economics at Ohio State University. Co-authors of the study were graduate student Kim Darby, outreach program leader Stan Ernst and Professor Brian Roe of Ohio State’s Department of Agricultural, Environmental and Development Economics.

“Direct sales of locally grown produce provides growers an attractive niche market that can help boost revenues for them,” said Batte. Those growers waiting on the sidelines before jumping into the direct sales arena may want to seriously consider selling retail at a farmers’ market or on their farms, he said. “Our study shows that there is a market out there, and these consumers are willing to pay a premium for locally grown produce.”

Local reaps more profits

While the results of the study did not surprise the researchers because of the popularity of the locally grown movement in recent years, what was an eye-opener was the magnitude in which people were willing to pay extra for locally grown, Batte said. Those customers surveyed in grocery stores were willing to pay as much as 48 cents more per quart of strawberries (which had a base price of $3 per quart); those shoppers at farmers’ markets or roadside stands were willing to pay as much as 92 cents more. “This showed that the direct market shopper [at farmers’ markets or roadside stands] valued local and were willing to go out of their way to buy the produce,” he said.

The study surveyed 477 shoppers at 17 Ohio locations, including seven retail grocery stores, six on-site farm markets (or roadside stands) and four farmers’ markets.

The researchers randomly selected shoppers to pick one of two baskets of strawberries—with combinations of price, farm location and type of farm—and asked which basket of strawberries they would buy. After all the numbers were crunched, what became clear is what made the difference in the shoppers’ selection was local production, said Batte. “Local” in this study were the strawberries grown within the borders of the state of Ohio. A “freshness guarantee” was also important to shoppers, the survey found.

While the study was done in Ohio, researchers said that the trend could be true across the country. “These consumer attitudes are likely to be nationwide; however, the definition of ‘local’ may vary in different parts of the country,” said Batte. In Ohio, “local” was considered within the state boundaries. In big states, such as California, the state may be divided into north and south for the definition of “local” for people living in these regions. In New England, where states are clustered close together, the “local” definition has yet to be defined, he said. “Some people may identify ‘local’ as their state, or maybe the entire New England region. It is hard to know unless we conducted further studies on this,” he said.

While only strawberries were used in the study, Batte said that previous studies conducted by Ohio State University on other foods, such as fresh-baked pies, resulted in similar conclusions, except that in terms of baked goods, the definition of local was even closer to home. “They were willing to pay a premium for pies baked right in the store,” said Batte. In the fall, the researchers will take a look at processed foods, namely jam, to see if consumers are willing to pay more for the “local” label. The researchers will try to find out other reasons why consumers prefer local, such as environmental considerations of not shipping food long distances. The researchers also will tie in organic produce in the mix to see if consumers prefer and are willing to pay more for a “local/organic” over simply “local.”

Is local the new organic?

The growth of farmers’ markets is a good indicator of the popularity of local foods. According to the 2004 National Farmers’ Market Directory (from the U.S. Department of Agriculture, 2006), there are 3,700 farmers’ markets operating in the United States today; that’s an increase of 111 percent since 1994. CSA groups have also grown from only a handful in the 1980s to over 1,000 groups nationwide in 2006. There also has been dramatic growth of large retail grocers, such as Whole Foods and Wild Oaks (which have “choose local” campaigns, or promote locally grown foods). More conventional grocery stores are also labeling “locally grown” and prominently displaying local produce. Plus, Batte said, 44 state departments of agriculture across the nation now administer programs that label or promote foods made or grown within a state’s borders (based on his own survey). “Is local the new organic? I think this is why we did this study—it just might be,” said Batte.

Another reason the researchers did the study was to discover ways Ohio farmers could increase revenue with direct marketing. Although Batte noted that not all farmers may be willing to set up a direct-market operation or have time to participate in a farmers’ market, just setting up a small retail operation on the farm could help with cash flow, particularly since growers can charge a premium for the produce, and get it.

However, there can be a problem with supply and demand if more farmers get into the direct sales arena. “It could drive prices down,” said Batte. Which is the reason why it is important for farmers to capture the dollars of customers not willing to travel to farmstands or farmers’ markets, yet are willing to pay top dollar at the grocery store for locally harvested fruits and vegetables.

“There is no infrastructure at the moment, at least in Ohio, to get produce reliably to large grocery chains in metropolitan areas,” he said. The solution would be for growers and producers to band together and form growers’ associations to supply these chains reliably. “California already has a very good system for this, but most areas of the country do not,” he said.

Not all foods should be local

While the study touts the benefits of locally grown produce, Batte and his researchers do not want to imply that all food should be produced locally. “There is an assumption that because a food is produced locally it costs less in terms of energy consumption; that is not necessarily true. Food miles do not take into account the cost of production,” said Batte.

For example, while it may be possible to grow a banana or pineapple in New England in a greenhouse it would be cost-prohibitive to bring to market. “It is probably less expensive to grow these foods in warmer climates using fewer resources—even if you factor in the shipping—than growing it in the North,” he said. That may change as fuel prices continue to rise and transportation costs become so high that the scales will tip in favor of local production of certain foods. “The tipping point will be when it is less expensive to grow things locally than to ship it,” he said.

Marcia Passos Duffy is a freelance writer based in Keene, N.H.