Many consumers are seeing empty shelves for the first time in their lives, leading to general frustration and a hefty amount of panic buying. But no, we are not running out of food; we are, however, having trouble getting it where it needs to be. And although our food and drink supply chain is rather resilient, the current crisis is exposing some of its shortcomings. This has reignited a debate on how local food systems fit into a system that has historically focused on specialization and commercializing agricultural commodities. I find this debate fascinating, and I would like to share some of my thoughts and open the flood-gates to various research topics.
First is the debate under normality (i.e., not in COVID crisis mode). From the ECON 101 perspective, we are taught the idea of comparative advantage and how everyone could benefit through specialization and trade. This is why we see the majority of the nation’s potatoes grown in Idaho, apples primarily in Washington and Michigan, etc.
While production is highly concentrated for some agricultural commodities, others — such as beef cows — see much more variation. In fact, all fifty states reported some level of commercial beef cow production in 2017.
How did consumer preferences change commercial agriculture?
About a decade or so back, there was a large shift in consumer preference for local food and drink, as well as a realization that local value chains can provide a significant boost to state economies. We push-aside the idea of direct comparative advantage for this idea that consumers get greater utility, or happiness, from consuming local. Local food systems are often less developed than the industrial operations, incapable of taking advantage of economies of scale. These small, local operations thus incur higher per unit production costs as a result. However, it is well documented that a certain segment of consumers are willing to pay premiums for locally produced goods. See Printezis, Grebitus, & Hirsch (2019) for a thorough analysis. For a general since of these price premiums, think the cucumbers you buy from the grocery store versus those you may buy from a farmer’s market. Likely, the cucumbers at the farmer’s market are of identical quality, but priced higher. Some people are willing to pay this higher price, while others are not.
But one issue often overlooked is the fact that local agriculture does not necessarily go straight to the final consumer. Instead, it is used as a final input of a local business. For example, local hops are used as an ingredient in a local brewery’s beer; local tomatoes are used as an ingredient in a local business’s pizza. In this sense, the real consumer of the local agriculture is not the beer drinker or the pizza eater, but rather the brewer or the pizza maker.
There is good reason to specialize and abide by comparative advantage, as previously alluded to. The producers who specialize and industrialize (e.g., large operations, expensive machinery, and advanced technology) the crop production can produce high quality inputs at the lowest cost. That is why we see these local markets having higher prices and potentially lower quality (of course the quality is product specific).
In a working paper, Dr. Trey Malone, Dr. Rob Sirrine, and I look at what drives a brewer’s decision to purchase locally grown hops. The Pacific Northwest (Washington, Oregon, and Idaho) has the comparative advantage, and still produces 96% of all United States hops. But local hop markets are emerging all over the country, with the most recent data showing 29 states reporting some level of commercial hop production. Though still dwarfed by Pacific Northwest production, these small hop plots are largely the result of the craft beer movement, one of the primary examples of the localness movement.
What our paper shows is that, indeed, brewers hold localness in high regards, as many of them are the beneficiary of the localness craze themselves, but they’re not sacrificing quality if local inputs don’t meet their standards. Even if they believe local agriculture stimulates the local economy, if the brewer perceives the consistency of the local inputs as less than that of the established PNW operations, they will continue to purchase PNW hops.
Another important point here is that a non-trivial number of breweries do not believe their consumers are willing to pay a premium for beer with locally grown hops, so if the same hop variety is priced higher locally than in the PNW, they cannot pass a portion of this premium onto the consumer. Finally, brewers have benefited from the localness movement, but when we think of local beer, we don’t typically think of local inputs.
To conclude the normality case, developing local food systems can boost a local (or state) economy if you can find the niche consumer base. But local food systems aren’t built overnight, and there are plenty of barriers to establishing the system, including: reaching quality standards, not benefiting from economies of scale, and high transaction costs to finding buyers.
An exogenous shock, in this case the COVID-19 outbreak, is testing the overall structure of our agricultural and general goods supply chain. This shock has brought the ‘what role should local food chains have?’ debate back to light, and it is not going away any time soon as it meshes well with agricultural adaptation to climate change. Here, I will focus on the hog industry, and then I’ll go back to the brewer and pizza shop example.
Hogs: A highly concentrated market
Figure 5 shows the distribution of hops and pigs for commercial agriculture in 2017. You can see that the industry primarily operates in Iowa and surrounding states with small pockets of production in North Carolina, Oklahoma, etc. This is much different than what we see for beef cows (Figure 3), where production stretches all 50 states.
Dr. Jayson Lusk, an Agricultural Economist at Purdue University, has released a series of blog posts on meat production, including one which states that “just 15 plants account for 59% of hog slaughtering” (Figure 6 from Lusk, 2020).
The 15 largest plants are centered in the same pockets as the inventory shown in Figure 5, which makes sense. Even the small pockets of hog farms outside the epicenter of Iowa — more specifically North Carolina and Oklahoma — each have a plant in the top 15. This should not come as a surprise, as having slaughtering sites close-by the farms reduces a variety of costs (the most obvious being transportation costs).
However, say a few of these plants see a COVID outbreak and we lose production capacity? This decreased production capacity translates to a decreased hog price received by farmer (Lusk, 2020). Figure 7 portrays this market shock. If plants close, this will result in a shift in demand to the left, as there are no longer the same amount of hog buyers. The supply of hogs aon the farm remain unchanged. But this shift in demand results in a lower quantity, and also a lower market price.
And in fact, over this past week, there have been a series of reports on various outbreaks occurring at meat packaging plants throughout the country, including two in Iowa (one hog slaughterhouse; one beef packaging) and one in South Dakota that produces 5% of the nation’s pork supply. As for how these plant shutdowns have affected total hog slaughters, they are down by approximately 30% compared to last year at this time (Sources: Lusk, 2020; USDA, 2020).
This is an area where we are most vulnerable, and it is ironically because we are abiding by the laws of comparative advantage. So, deviating from comparative advantage can have potential benefits during times like this, as diversity in production can propose some level of resiliency in the supply chain. Particularly in a time where we are also seeing trade falling off at the global level. It is also important to think about how often events like this occur. Is diversifying and losing social welfare from specialization worth it? Another vital point to recognize is crop harvest time. An outbreak hitting in March has much different ramifications on the food supply chain than say an outbreak in September or October; corn, soy, and other staple commodities are in storage, while it is fruits and veggies that must be harvested in the near future. Farmers around the country are becoming increasingly worried they will not find enough labor for their upcoming harvests.
Revisiting the local brewer
The last topic I want to revisit is the idea that local agriculture does not necessarily go straight to the consumer, but is often used as an input to production. To do so, we will revisit the idea of the local brewer.
Unfortunately, we are beginning to see breweries and other small businesses close their doors. The craft beer industry surpassed 8,000 breweries in 2019 for the first time in history. But recent Brewers Association survey results show that if the current conditions remain unchanged over the next few weeks, we could see 12.7% of breweries close; the total approaches 50% if current conditions last another three months. Most of these breweries rely heavily on taproom sales (on-premise consumption). In fact, it is not uncommon for a brewery to have 80-100% of their sales coming within the taproom walls; and though we have seen innovative measures taken to generate sales, such as delivery, curb-side pick-up, or hand sanitizer, this can not make up for the lost sales from the tap.
The important question on the agricultural side of things becomes: “Who is going to purchase the local agriculture if the local businesses close?” This is a scary question for local food systems right now. In the case of hops, the local growers rely heavily on the small, local breweries. These are the same breweries that face the highest likelihood of closing their doors. If we replace “hogs” with “local hops” in Figure 7, we get an identical outcome: The number of breweries falls, demand shifts to the left, and all of a sudden, there are way too many hops in the ground as the equilibrium quantity falls.
Again, local food systems are not built overnight and their resiliency will be tested in the coming months.
We are not running out of food, but we are having difficulty getting the food where it needs to be. This exogenous shock is raising several overarching questions about the current structure of our food system. One of which is the role of local value chains in the future. Under the steady state, we saw that local food systems are largely driven by consumer preference and their ability to spark local economies. However, doing so ignores the concept of comparative advantage and specialization, where we are able to benefit from economies of scale.
In the case of a market shock, such as the COVID-19 outbreak, our vulnerability lies in industries that are highly concentrated; or put differently, those in which we are abiding by the concept of comparative advantage (where we use the hog market as an example). This may provide a sense of false hope, if I may call it that, that hyper-localization is the way of the future. This is due to the major economic ramifications imposed by COVID on small businesses, the primary buyer of many agricultural commodities as inputs to their production. If the local businesses close, who is left to buy the local agriculture? It is a certainly a balancing act that we must play, as food system resiliency requires both.