Sales venues for farm produce are typically divided into two primary categories: wholesale and retail. Farmers selling on the wholesale market supply buyers such as supermarket chains, food service companies, cooperatives or other larger-scale buyers who purchase quantities of produce at a lower per-unit cost than the farmer would receive if selling directly to the end consumer. If selling directly to the consumer typically in smaller quantities, it’s called a retail sale, generating a higher per-unit price for the farmer.
Wholesale markets involve standard packing sizes and produce grading, and the farm has to have some volume of product available to access these markets. The farmer is a price-taker. Agreements with wholesale buyers can involve contracts, which allow the farmer the security of having a buyer lined up prior to growing the crop. In return, the farmer has made a commitment to supply product as agreed.
On the retail end, a farmer can sell produce in smaller units and can set their own pricing – as long as their customers will accept it – and grading and sizing of product isn’t needed. Retail sales avoid middleman costs, placing a higher percentage of the sales price directly into the farmer’s pocket. But these sales usually involve greater interaction with customers, increased labor costs associated with the day-to-day operations of a farm stand or at a farmers market, and increase the time spent on marketing and selling the produce, rather than growing it.
Barriers to wholesale markets
For food entering wholesale distribution chains, Food Safety and Modernization Act regulations, as well as retailer-initiated food safety protocols, are often a barrier for the small farmer. While smaller farms may be exempt from some FSMA regulations no matter their sales venue, supermarket chains or institutional buyers may implement their own set of standards, or require Good Agricultural Practices (GAP) audits and third-party certification.
“Since FSMA and food safety largely dictate wholesale accounts, the willingness and ability to comply with Good Agricultural Practices and the consequent paperwork and recordkeeping is really the determining factor in one aspect,” in sales venue selection, Laura Biasillo, Agricultural Economic Development Specialist, Cornell Cooperative Extension of Broome County, said.
Implementing basic food safety protocols should be standard on farms, no matter their size. While many small farms are becoming GAP certified, complying with some of the demands can be arduous and costly for the individual small producer. Lacking GAP certification often eliminates them from selling to wholesale venues.
The USDA’s pilot Group GAP (GGAP) program offers a way for farmers to unite together under a central umbrella group. The group implements a food safety quality management system (QMS). The central entity – a food hub, a large buyer, or a producers’ cooperative, for example – is responsible for internal food safety training and inspections on each member farm. The USDA then performs third-party audits on a sampling of farms in the group, saving the cost of individual audits. The understanding is that all farms have been internally audited to the prescribed QMS standards, so a random sample will show any deficits in the system. The GGAP pilot study is currently under way across the country. http://blogs.usda.gov/2014/09/22/big-help-for-small-producers/
With a greater demand for locally-grown food no matter where it is purchased, wholesale buyers themselves are making more efforts to source locally, and options for smaller farms to enter these markets are increasing. To this end, a variety of distribution chains that source locally are opening up wholesale opportunities even for smaller farms. As the local food system grows and transparency increases not only for food safety reasons but due to consumer demand, large buyers such as grocery stores and food service distributors are seeking access to locally-based producers.
“There will need to be a system of distribution services taking products from the farmer to the consumer,” Craig Chase, PhD, Leopold Center for Sustainable Agriculture, Marketing and Food Systems Initiative Program Manager, said.
“Farmers need to get on board with food safety regulations and understand packaging, transport, and how the overall wholesale business works.”
Developing such distribution systems allows small farms access to wholesale markets, where their size, logistics such as packing and delivery, recordkeeping, food safety, as well as the price paid for the produce, have traditionally been an obstacle. While solutions such as producer cooperatives have a long history in farming, today’s options lean toward retaining the farm’s identity throughout the supply chain; sourcing from many smaller farms; and ensuring that the farm retain a larger portion of the food dollar.
With innovative distribution systems in place, smaller farms can enter into wholesale markets despite smaller quantities of product. Product from several local farms can be used to fulfill the needs of large-scale buyers.
Food hubs, small distributors and other venues of aggregating food from nearby farms allow a flexibility that selling via traditional wholesale channels does not. For example, a local distributor can offer restaurants quantities of produce smaller than the standard pack size. This not only allows the buyer more ability to purchase only what they can use, eliminating food waste, it also allows the farmer to provide smaller quantities of produce to the distributor.
While the farmer is not directly pricing, marketing, delivering, or invoicing the restaurants, schools or others purchasing food, hybrid sales venues often return a higher percentage of the sales price to the farm. Produce in these channels is “value added,” retaining the local identity, and offering smaller quantities and often a wider variety of specialty varieties. The produce can then sell at higher-than-wholesale prices. Although sacrificing some of the price received to the intermediary entity, the farmer is also relieved of having to handle the sales transaction, and all of its logistics, directly.
Farmers often purchase product from other nearby farms to sell at their own retail farm markets. Other innovative means of sharing revenue have developed as the emphasis on buying local has grown. At Best’s Fruit Farm in Hackettstown, New Jersey, a freezer with L.L. Pittenger Farms meat allows customers the convenience of purchasing local meat without having to make another stop. But the meat is not purchased directly by the farm stand. Rather, they allow the meat to be sold at their farm stand in return for a small percentage of the sales price. This reduces the out-of-pocket expenses for the farm stand, and decreases the level of risk should meat sales prove slow.
While a boon to customers, arrangements such as these also offer farmers a way to market and sell their products at retail prices, sharing a small percentage with the host farm, without directly having to have their own farm stand, or having to spend time staffing and preparing for farmers markets. In turn, the host farm is able to offer customers a wider variety of locally-grown products, hopefully increasing overall sales of their own farm products, too.
A CSA is another hybrid sales model. While selling directly to customers, the farm offers a price break to those willing to commit to purchasing food throughout the season. Typically, an upfront payment to the farm sells the deal. The weekly produce boxes contain more value than if the product was purchased separately at the farm stand or farmers market. It’s a direct sale to a retail customer, with a wholesale-type of twist.
Auction markets are a traditional venue for selling produce in large quantities to wholesale buyers. Auctions work by satisfying both the needs of area growers – offering a consistent sales outlet, storage and packing space, and staffing to handle sales – as well as the needs of the buyer – consistent, quality produce. Pricing is set by the laws of supply and demand. There is no commitment or contract with a farm or distributor, food can be inspected prior to purchase, and the grower and buyer can meet face-to-face. A commission is paid to the auction house, which markets to buyers, handles the sales paperwork and sets packing standards and lot size minimums. In its own way, an auction market is both a direct farm-to-customer sales venue, and one in which the farmer has no direct marketing to do. While typically selling to larger buyers, some auctions offer small lots, too.
Pros and cons of retail sales
When selling directly, farmers can keep the full retail price of their produce in their own pockets, but that often entails other out-of-pocket expenses. Depending upon the venue, fees for participation, costs for establishment of retail space, time away from farm work, the number of additional employees needed, or travel expenses can add up.
Connecting directly with the end consumer allows farmers to market themselves and sell their products via personal connections. This may be a part of the farm’s philosophy, or an important part of the reason for farming in the first place, and can help to increase sales. For others, however, who may prefer time alone in the fields and don’t find that sales is a strong point, traditional retail sales venues – farmers markets, farm stands or other direct sales models – may not be a good fit.
Other retail sales channels are developing, which don’t require as much time directly in front of the consumer. Home delivery services and online ordering capabilities are gaining in popularity. Online farmers markets, where customers order weekly and pick up their food from many vendors in one location, can be found across the country.
These type of direct sales venues often combine products from several farms, with one farm or outside entity managing the operation. This type of venue allows farmers to receive retail pricing, minus a fee to the managing entity, while still selling directly to the retail consumer.
The Internet has also allowed farmers with value-added, nonperishable or shelf-stable items to ship across the country. This offers another sales venue for farmers who are willing to invest time and money to establish an online marketplace, process orders and ship product. This model also allows consumers to experience a direct connection with farmers, even if they are not nearby, and for regional products such as Vermont maple syrup or Florida citrus to directly travel from farm to fork.
Profiting from sales
“There are quite a few mechanisms where farmers can find buyers and vice versa,” Chase said. “Tools like MarketMaker, Buy Fresh Buy Local campaigns, Local Dirt, and many local Extension offices can help locate buyers.”
Many of these and similar tools or programs offer sales to both retail and wholesale buyers. Some play an intermediary role, aggregating product, processing orders and payments, or providing transportation. Others simply allow farmers and buyers to connect, where they agree on pricing and quantity, and complete sales on their own.
A key to farm viability is resiliency. Having a diverse stream of sales venues reduces the risk should one market venue close, the selling price go below cost of production or the product not meet venue standards. If retail customers won’t accept cosmetic imperfections, having a secondary market directly with a local food processing business, or with a wholesale buyer who serves this market, can be critical. Likewise, if the wholesale market channel pricing is low, the ability to sell some product directly to consumers can offset the deficit.
“If a small farmer is to remain sustainable, they must be consistently profitable, and their prices need to reflect a profit margin,” Chase said. “So if the consumer wants to purchase local food from local farmers, they need to pay them enough to stay profitable.”
The key to any sales venue is that the expenses don’t trump the sales income. While the profit needed to continue to sell via any given outlet will be different for every farm, knowing and recording your time, expenses and sales for each venue will go a long way to understanding what sales outlets offer the best fit for your farm.
Today, the lines between retail and wholesale are blurring, as hybridized sales options are becoming more commonplace, allowing small and mid-size growers more flexibility in finding the sales venues which best fit their needs, and bring in the profits. Whether selling via CSA; farm-to-school; via wholesale contracts; at auction; at the farm stand or farmers market; or via food hubs and other aggregators; farmers are finding that the options are diverse, and the lines are not clearly drawn between wholesale and retail sales venues.