If you’re planning to compete in local food markets, be prepared. The bite can be more than a small grower can chew.

That’s advice from a recent AURI market study of local foods.

There is strong demand for Minnesota grown foods, and small-scale direct marketing is flourishing. But when it comes to accessing larger wholesale outlets, the study found that supply, handling and pricing are significant barriers.

AURI surveyed farmers, grocers, food service management companies and wholesale distributors. The study, co-sponsored by Minnesota Farmers Union and released in June, describes demand, trends and markets for locally and sustainably produced foods. It also offers guidance to Minnesota farmers who want to pursue wholesale-food channels. What’s needed to expand “local foods” markets is “a larger, more reliable and varied supply of product that meets today’s standards for post-harvest handling and food safety,” says Dennis Timmerman, AURI project director in Marshall. Small and mid-size Minnesota farmers could gain access to mainstream distribution channels by pooling their farm products, raising specialty items for niche markets, and developing a memorable brand story, he says.

Local demand on the rise

An earlier shopper survey by University of Minnesota economist Robert King found that consumers “overwhelmingly indicated a preference for buying locallyproduced fresh foods.” King surveyed 500 shoppers at six Twin Cities food outlets in the summer 2006.

“In Minnesota, consumers want locallygrown produce,” agrees Gary Pahl, an Apple Valley, Minn. commercial vegetable grower. “And they search it out at local supermarkets, roadside stands and farmers markets.”

That’s confirmed by the rising number of Minnesota farmers selling directly to consumers. About 4,300 Minnesota farms sold fruits, vegetables, meat, poultry and dairy products directly to consumers in 2007, according to the latest U.S. Agricultural Census. That’s up 25 percent from a decade ago. The value of directmarketed Minnesota farm products grew by 140 percent during the same period, reaching $35 million.

The Minnesota Department of Agriculture’s popular Minnesota Grown program publishes an annual directory of nearly 750 pick-your-own farms, on-farm retail stores and farmers markets. Direct marketing sectors that have taken off in the last few years include state wineries, which now number over 20, and “CSA” or community-supported agriculture farms, which sell seasonal garden produce on shares, says Paul Hugunin, Minnesota Grown coordinator.

Food purveyors respond to demand

Minnesota grocery stores, restaurants and college food-service providers have started offering more local foods to attract and retain customers, says Bob Olson, director of the sustainable-farming certification agency Food Alliance Midwest, which performed the market study for AURI.

Minnesota-based grocery store chains, such as Kowalski’s Markets, Coborn’s and Cub Foods, are using local foods to differentiate themselves from their competitors, Olson says. They are regularly buying foods from area farmers and “telling the story of where the food is grown.” And as national discount retailers crowd into the fast-growing organic foods sector, “the local aspect has become even more important in their marketing efforts,” the AURI report says.

Food-service management companies are also responding to demand for local foods, especially on college campuses. Food Alliance Midwest is working with more than 30 colleges and food-service providers to source local ingredients for cafeteria meals. Bon Appetit, which manages a dozen food-service operations in Minnesota, recently launched Farm to Fork, a program to buy local produce, meat and dairy products.

“The demand for local and sustainable is growing immensely,” says Don Kulick, campus services district manager for Sodexho, which runs food service operations at 10 Midwest college campuses, including the University of Minnesota, Morris. “Our customers — students — want to see much more locally and sustainably-grown food.”

Wholesale distributors, who supply grocery stores, restaurants and institutions, report strong demand for local produce. Says one state distributor: “If Minnesota farmers have the product, we’ll buy it. If they could supply staple items like cucumbers, zucchini and peppers, we can sell that product, no problem. We’ll bring in local when we can get sufficient volumes. This is a growth area with some of our clients.”

Wholesale hurdles

Nearly all food sold in this country goes through wholesale channels. “This is where we see important growth opportunities for local foods,” Olson says. But he cautions: “Most individual growers are going to find it hard to get into these markets.”

Some of the challenges for Minnesota farmers:

Consistent quality. Retail and foodservice companies need dependable, consistent supplies. Products must be graded and sorted according to accepted quality standards — usually USDA #1. Uniform sizing, packaging and labeling are required. “It’s a different mindset than direct marketing,” Olson says.

In the meat sector, product variability is often a problem, the AURI report notes. “Large chain restaurants want product consistency and low cost,” says Michael Cheng, director of the culinology programat Southwest Minnesota State University in Marshall. Likewise, in sourcing local ingredients for processed foods, “consistent quality is often an issue,” says AURI food scientist Charan Wadhawan.

Sufficient volume. Few food outlets accept product in small volumes, or caseloads. Pallets are usually the minimum acceptable volume, and “products must move off the shelf quickly,” the AURI study says.

Reliable supply. “What we can buy locally is unpredictable given the weather,” says one distributor, a study participant. “And sometimes farmers don’t deliver when they say they will.” Supply outages leave distributors and restaurants scrambling to find the products they need.

Short growing season. Minnesota’s short and unpredictable growing season is a significant barrier to expanding local foods markets. One food buyer complained that “either all the growers have too much supply, or everybody is short, all at the same time.”

Competitive pricing. “Low cost is the most fundamental determinant in distributors’ purchasing decisions. A penny-a-case can make a difference … testament to the extremely competitive environment faced by distributors,” the AURI study says.

Distributors usually sell local products at “commodity” prices, unless it’s an unusual or out-of-season item. Local produce growers must compete with large, efficient producers in California, Florida and South America, Olson says. These producers “have huge advantages in scale, year-round production and very low transportation costs.”

There is intense price competition among local growers, too, Pahl says, especially at the height of Minnesota’s brief harvest when a glut of perishable produce often floods the market. Local vegetable and fruit growers usually don’t have supply contracts with distributors, the AURI study notes, but instead must rely on “verbal agreements that establish an understanding about price and quantity.”

Post-harvest handling. Produce suppliers must be able to quickly cool, clean and transport products at appropriate temperatures. Customers “buy with their eyes,” Pahl says.

Many food products, such as meat, also need some initial processing. “Getting processing facilities in place is a challenge,” King says. “Many times, there are significant economies of scale in processing, so you need a lot of product to make it costcompetitive.”

Food safety and traceability. Food safety is a growing issue at every link in the food supply chain. In the produce sector, for example, distributors are requiring farmers to have costly hazard analysis, or HACCP plans, third party food-safety inspections, insurance, facilities upgrades, irrigation water standards and a host of other things to ensure safe production and handling, Olson says.

More food outlets are also demanding traceability to the farm of origin, making distributors and retailers reluctant to deal with a large number of individual farmers. “These may become new barriers for growers in the Midwest,” Olson says.

Liability insurance. Growers may be required to carry liability insurance of $1 to $5 million, depending on the product, according to the AURI study.

Food-service contracts. Food-service companies “buy in tremendous quantities at very competitive prices,” Olson says, contracting for nearly everything they distribute to restaurants and institutions. Food suppliers, in turn, may offer volume discounts or other incentives to get their products specified in contracts, he says. “These agreements are usually exclusive and limit flexibility to purchase local products.”

One area that is not usually covered by contracts is fresh produce, Olson says. This represents an opportunity for local growers.

However, food-service companies often write exclusive contracts with distributors. So local produce must be delivered on that distributor’s trucks. A grower in west central Minnesota might be dismayed to learn that he has to truck his produce to the Twin Cities “so it can go on a distributor’s truck back out to west central Minnesota,” Olson says. “But that’s the way it works.”

Opportunities do exist

Yet despite these barriers, “it’s not impossible” to break into wholesale markets, Olson says. And “we know consumers will pay attention to locally-grown food.”

Among the opportunities for Minnesota farmers:

Raise specialty products. Retailers and distributors say there is demand for “a greater diversity of local products,” the AURI study found. “They would encourage growers to grow complementary products and avoid everybody growing the same stuff.”

Growers must understand what their customers want and build it into their production practices, distributors say. For example, there’s a demand for small, consistently-sized apples for school cafeterias, and milk in 5-gallon dispenser bags. Organic-certified meats and pasture-raised beef and chicken are other opportunities, the AURI report says.

Partner with a local-foods distributor. Distributors vary a lot in their commitment to buying local foods, the AURI study found.

Some specialty distributors, such as Co-op Partners, which supplies Twin Cities natural food stores, have longtime relationships with local farmers. Minnesota distributors, such as Bix Produce Company and H. Brooks and Company, also buy local products. “Distributors expressed interest in exploring opportunities to work together” with farmers, the AURI study reports.

Cultivate restaurant chefs. Chefs at local, independent restaurants “are looking to differentiate themselves” through the use of local ingredients, says Minnesota Grown’s Paul Hugunin. There are opportunities for farmers to develop “a one-on-one relationship with a chef,” Olson says. “A grower might supply eight or 10 restaurants and that could be a good fit.”

The hospitality industry “will use local if it’s available at the right price,” Cheng says. Green Bistro, a cafe on the Southwest Minnesota State University campus, buys “as many local foods as possible,” he says. The restaurant serves all locally-grown chicken and beef, and uses Pastureland butter made in southern Minnesota.

Minnesota has several programs that bring chefs, farmers and consumers together. Minnesota Cooks at the State Fair, founded by Minnesota Farmers Union and sponsored by AURI, pairs local farmers with leading Minnesota chefs to demonstrate the use of locally-grown foods. Minnesota Grown’s Farmer-Chef Network also connects chefs and local farmers. “We get folks in a room together so they can exchange business cards and see who needs what,” Hugunin says.

Bring it to the store door. Some Minnesota grocery stores buy produce and other foods directly from local farmers, a practice known as Direct Store Delivery. Farmers taking this route will need a strong marketing program that includes store visits, demonstrations, samples and sales promotions, the AURI report says. An advertising budget and point-of-sale merchandising materials are also helpful.

Extend seasonal production. Out-of season local produce is in demand, the AURI survey found. Extended season production in greenhouses, hoop houses or high tunnels would boost local produce sales. The University of Minnesota is working on seasonextending horticulture techniques.

Market collectively. Midwest growers could gain wholesale market access by aggregating their products, Olson says. Group marketing could give farmers the “supply and efficiency needed to compete in these markets.”

A local fit

Minnesota ranks seventh in the nation in agricultural production, and the state exports more than $3.5 billion of corn, soybeans, livestock and other farm products. Obviously, “we’ll continue to produce commodities here,” King says. “We’re good at that, and we have a comparative advantage.”

Still, he says, “There’s room to grow the local sector. This deserves some attention to see what sorts of changes will attract more land into local food production.”

Expanding local foods markets would add diversity to the landscape and help sustain rural communities, says Doug Peterson, Minnesota Farmers Union president. And producing high-value food crops for local outlets could be a good fit for farmers with small acreage. “It’s not for everybody,” he acknowledges, “but we need all types of farms in Minnesota.”

Read the entire AURI 2009 Local Foods Market Study at www.auri.org/research