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Location, Location, Location: Where and How do Food Hubs Flourish?
New York Ag Connection - 08/12/2019

For a new food hub to succeed, it should be located in a community with a population sufficient to sustain it, according to a team of economists, who found that a county seeking to establish its first food hub needs roughly 182,000 residents for that food hub to break even. Their findings could help funding agencies establish criteria to determine whether and where new food hubs should be added.

According to Stephan Goetz, professor of agricultural and regional economics and director of the Northeast Regional Center for Rural Development, food hubs are intermediary businesses in the food supply chain that connect small- and mid-sized farms to markets they wouldn't be able to access otherwise due to their relatively small scale of production.

"Food hubs have enjoyed public and private support because they play an important role in local and regional food systems," he said. "What we've shown is that while there is a market to support food hubs in many places across the U.S., there also is a potential danger to unintentionally over-support and over-populate the sector, which poses a threat to the hubs that have found a business model that works and no longer need government support."

Goetz and his collaborators adapted an "entry threshold" model--a computational model commonly used by businesses to determine the best location to open a new store, based on the size of the potential market, operating costs and estimated profit margins. They calculated the county population needed to generate enough sales for one, two and three food hubs to break even. They also made the same calculations for traditional fruit-and-vegetable wholesalers in order to contextualize how food-hub competition compares to that of the broader food wholesale industry.

Compared to the 182,000 residents needed in a county to sustain a food hub, only about 105,000 residents are needed to sustain a traditional wholesaler, according to the study. The difference is more glaring when the researchers considered the possibility of adding more food hubs. Roughly 500,000 residents would be required to sustain a second food hub and three times more to sustain a third, whereas only about 190,000 residents would be needed to sustain a second wholesaler and about 342,000 to sustain a third wholesaler.

While traditional wholesalers and food hubs both purchase food from farmers to sell to retailers and institutional markets, the vast majority of food hubs are mission-driven, committed to sourcing their products from small and mid-size farms and to assuring a fair price to farmers, according to National Food Hub Survey conducted by Michigan State University and the Wallace Center at Winrock International.

"In order to stay true to their mission, food hubs can't control their costs as tightly as other wholesalers, but their mission is important enough to their customers that they can get a higher price for their products," said Dawn Thilmany, professor of agricultural and resource economics at Colorado State University and one of the study's authors. "However, there's a smaller set of buyers looking for these value-laden products, which explains why any given county will need a much larger population to sustain a successful food hub than it would need to sustain a more traditional wholesaler."

As the average U.S. county population is 99,530 residents, the findings suggest that most counties lack the capacity to support one food hub on their own, and only 129 U.S. counties have the population necessary to support two.

The team's findings also demonstrate the potential for market cannibalization: each successive food hub added takes sales away from the existing food hub. That raises concerns, said Thilmany, given that food hubs are often partially funded using tax dollars.

"As a society, we've been investing in food hubs over the last 20 years, and the good news is that we have lots of them," Thilmany said. "More thoughtfully, though, how likely are these food hubs to survive, particularly if they are relying on grant funding that typically covers only part of the costs and only during a startup period?"

The researchers also examined a number of county characteristics to determine which ones are associated with food hub profitability, including economic activity, the presence of other food businesses, and social capital. Social capital refers to the connections and bonds that act as "the glue" of a community, according to Goetz, who was a member of the team that developed the standard measure of social capital for use in economic analyses. It provides a social-capital score for U.S. counties based on several proxies for social capital, including the number of religious, civic and business organizations; educational attainment of residents; voter turnout; and many more variables.

Higher levels of social capital in a county increased food hub profitability, thus lowering the county population threshold required for food hubs to break even. Goetz said he suspects this is a function of the characteristics of people living in high social capital places. They may be more prone to volunteering, which would lower a food hubs' labor costs, or more likely to support businesses that purchase from hubs, which would drive profits, Goetz said.

The team also found that hubs benefit from the presence of other local-foods businesses. Counties with small farms that sell directly to consumers, mobile farmers markets and small full-service restaurants were found to require a smaller population to sustain a food hub than counties lacking these businesses.

The researchers suggested that counties wanting to establish their first food hub will have a higher chance of success in those areas with relatively high rates of social capital or should invest in efforts to increase it. Similarly, investing in other local foods businesses may also give a new food hub a boost.

In addition to Goetz and Thilmany, the study authors include Rebecca Cleary, Colorado State University, and Houtian Ge, Cornell University. Prior to their current positions, Cleary and Ge were postdoctoral researchers in Penn State's College of Agricultural Sciences, working on a large-scale USDA-funded research project led by Goetz, titled Enhancing Food Security in the Northeast through Regional Food Systems (EFSNE), which supported this study. This work also was supported by the USDA Multistate Research Appropriations.

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