Feasibility Study

The goal of the Kentuckiana Food Aggregation Project is to identify the feasibility of an aggregation business that creates a path for small-sized food producers to sell into the existing wholesale distribution system in our region.

In late 2016, we began work with the Kentucky Center for Agriculture and Rural Development to investigate the Kentucky-Southern Indiana regional market for local foods and determine what opportunities might exist to advance the growth of this market. The goal was to examine the conditions necessary for an aggregator and retailer entity with producer interests in mind to succeed in the region and to provide a road-map for the development of such an entity. In conjunction with an advisory board of local producers, our team surveyed producers, buyers, and distributors and examined models of other aggregators nationwide in the pursuit of that goal.

This feasibility study was the result of our investigation.  We hope that the conclusions of this study will serve the local food communities of this region with information on the state of food aggregation. 


Click the image to view the study.
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The Summary of the Needs section of the Final Report below presents the existing issues that need to be addressed in order for an aggregation business to be financially viable in Kentuckiana. 

KCARD Final Report

Prepared for High South Foods Partners

February 2018

Background

When the individuals who formed High South Foods began discussions with the Kentucky Center for Agriculture and Rural Development in late 2016, they sought to build a more robust picture of  the local food system in the Louisville, Kentucky region that sometimes left farmers in the region without sufficient local food markets and that left buyers in the region without sufficient local food suppliers.  They were aware that this gap had been examined previously through different lenses and had even prompted development and launch of multiple businesses and organizations designed to fill the gap. However, their relationships to producers in the region combined with their focus on developing a producer-centric approach provided a different perspective on the problem, prompting initiation of a feasibility study to examine the marketplace and determine whether any of a number of different food aggregation and distribution models might fit within the marketplace, reshaping it in a way that meets the needs of producers and buyers in novel and successful ways.

The Study

 

The project coordinators surveyed producers, buyers, and distributors along with examining models of other aggregators nationwide in the pursuit of that goal.  Below are some of the key findings.

 

  1. Small farms dominate.  The vast majority of the producers whom the project coordinators reached have smaller sales than would be advantageous to be producer-suppliers of the project.  For those where it could be determined, all of the models examined have average sales per producer of greater than $5,000, and for many of them, it is greater than $15,000.  

  2. The farms that are selling through a distributor appear to be satisfied with that distributor.  

  3. Those not selling through a distributor often cite price and their lack of volume or scale as the reasons why.  While a new business could play a role in aggregating that volume into more viable amounts, the transaction costs will be considerably higher to do so.  Given that the new business will be limited in their ability to offer better pricing given their own smaller scale, this will be a challenge to navigate.

  4. Producers are interested in selling to a distributor that offers certain features.  However, those features will come with a cost. In particular, producers indicated an interest in contracts and convenience.

  5. Buyers (schools and restaurants) also indicate a high degree of satisfaction with their ability to purchase local food, but also indicate a high degree of interest in increasing their purchases over the next five years.  

 

Initiation of Business Plan Discussions

Through the study, High South examined four different options for developing an entity to serve the marketplace with the producer-centric focus that the partners agreed was critical.  Based on the pro forma financial projections developed by KCARD as part of the study, the partners agreed that the low capital approach of the fourth option of a service-oriented entity that would facilitate buyer-grower arrangements would best fit the market and their goals.

Following the study’s completion, KCARD began work with the High South partners to evaluate the conditions that would need to be present to develop such an entity that could serve the market and address the gaps identified within the study.  Services identified as possible offerings by the entity include the following:

  • Provide information on potential buyers:  The business would form relationships with buyers, building trust and understanding of buyer needs for supply, logistical needs, and price points.  

  • Assist in scaling up production:  The business would work with the University of Kentucky MarketReady program to identify essential follow-up activities to conduct on-farm to facilitate the producer’s increase in production.  

  • Assist with delivery or logistics challenges:  The business would help farmers come together to apply for grants to secure equipment or pool resources to secure equipment to be shared.  The business would work with farmers on sharing of other on-farm resources as well.

  • Connect farmers:  The business would organize monthly potlucks, gatherings, providing space for farms to build connections with each other and have conversations about growth and collaboration.

 

Through consultations with a farmer advisory council, continuing evaluation of the study results, and identification of other service-oriented organizations within the region, however, the development of an actual business plan stopped.  When pricing options for services are combined with likely demand, it is clear that development of any new entity would rely on a substantial portion of external funding, such as grants.

 

Instead, KCARD and the partners decided to focus on how the results of the study could be used productively along with identifying next steps for real value to be created for producers in the region who identified unmet needs.  

 

 

Summary of the Needs

  1. ​​Small farms seeking to scale up production to sell more wholesale product face challenges in meeting the requirements of wholesalers and in mitigating the risk associated with that growth in volume sales to a small number of buyers.  These same small farms are not able to pay for services to assist them in the process and often face high levels of financial risk resulting in them remaining smaller than they might otherwise.
  2. ​​​Technical support organizations for producers working in the area cover a great deal of ground in terms of production, business planning, and marketing assistance.  However, none of the organizations have unlimited capacity to assist producers and often are passing producers between their services. Additionally, many producers, especially those who are beginning farmers, are unaware of available services to them.  A sampling of organizations are listed below:
    • Kentucky Horticulture Council – The Kentucky Horticulture Council works with the University of Kentucky to provide production support for horticultural producers in the region, including help with food safety requirements and certifications.
    • Kentucky Center for Agriculture and Rural Development – KCARD works with producers on business plans, cost analysis, evaluation of new ventures, and identification of capitalization options.  
    • Louisville and Lexington Farm-to-Table Contacts – Farm-to-Table coordinators in both metro areas facilitate contact with farmers and buyers for their respective metro regions.
    • University of Kentucky Market Ready Program – The University’s Market Ready program provides training to producers looking to begin or expand sales to wholesale buyers.  The program also offers a “Meet the Buyer” to help producers who have gone through the program to actually connect with those buyers.
  3. ​​Multiple distributors exist in the region to serve customers like restaurants, groceries, schools, and others looking to purchase locally produced food.  These distributors have requirements for quality that require on-farm investments (such as certifications and cooling units) that are harder for lower volume producers to justify.  
  4. ​​Producers ARE interested in selling to a distributor that offers contracts and convenience.  Contracts provide greater certainty for the producer though it should be noted that contract provisions on commitments to purchase are typically heavily conditioned on quality and delivery terms.  Convenience is often related to where and when deliveries occur along with the amount of volume required for a distributor.
  5. ​​Distributors incur significant expense in allocating time and resources to working with producers that deal in smaller volumes than their system was designed to accept.  Additionally, growing producers toward more commercial production requires investment in technical assistance that many food hub-type entities have struggled to fund.

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