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18% Premium for Local Produce

Updated: Aug 1, 2019

The last few articles have been part of a series about pencil farming. Growing plants is very different from theoretically growing plants. On paper, everything goes right. Not only does every seed sprout and turn into a beautiful head of lettuce, but every head of lettuce sells for full asking price. Your customers love you, and they keep coming back month after month. There are no disruptions, and everything works out perfectly.


One of the reasons that indoor farming looks so profitable on paper is because consumers are very willing to pay for local produce. The Future of Food: Are You Ready for the Millennials?, Maru/Matchbox finds that from brand biases to purchasing channels, millennials display unique and identifiable behavior in their interactions with food that challenge how the food industry should market and sell their products.


One of the significant findings from this study is that millennials trust small and local brands. Smaller brands have been gobbling up half the growth in premium sales (larger manufacturers have settled for a 3% share to date) because millennials associate them more with premium product features and ingredients. The study also finds a higher willingness to pay for organic, pesticide-free, and non-GMO as well, but today, we are going to look at local. Research shows that customers, on average, are willing to pay 18% more for local produce than conventional. The premium gives small and local producers more margins to work with and looks great when figuring out on-farm, gross revenue!


This research fits nicely with Nielson's research that shows that grocery stores can not supply enough local produce to meet shoppers demand.


There is a good profit major + an audience that is demanding more local greens = good business proposition.


What is local?

First, there is no USDA definition for local. Local is what you, your marketing team, and your customers decide is "local." Right now, most of the lettuce in the United States comes from Arizona and California. So, if you are producing closer than either of those locations, you might be able to say you are producing a local product. Many people use 100 or even 400 miles as a good rule of thumb on local.


Producing locally allows growers to charge more for their lettuce and pay less in transportation since the lettuce is not shipped across the country. It's a win-win for local growers.


The Math

When looking at the economics of a farm, many people look at the price per head of lettuce (or pound depending on the farm), the number of heads that can grow at one time, and the number of harvests per year. When all of the numbers are multiplied together, the answer is a pretty big number and many growers assume that it will be easy to be profitable if they are generating a lot of sales. It's exciting, and it should be.


The problem is that these numbers don't account for plants that don't grow well. Or that lettuce can be damaged during transportation. Or unsold or lettuce because there was terrible weather and the restaurant wasn't as busy as initially expected.


It's easy to see the perfect picture. It's exciting to hear potential customers talk about the benefits of buying local. The problem is, it takes a lot of time to work out all the kinks in a farm. To make sure your lettuce to basil ratio is correct so that you sell out every week. To manage the air temperature so that you maximize output. The local premium helps farmers be profitable, but it doesn't guarantee success.

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