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Risk Sharing Implications for Today’s CSA Farm

By   /  March 3, 2014  /  3 Comments

Considering a CSA? Here, Mark shares different CSA options and how they distribute risk among the farmer and the consumer so you can figure out what could work for you.

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Photo courtesy of Furious Dreams blog.

Photo courtesy of Furious Dreams blog.

Every year we see a new twist on the way a Community Supported Agriculture (CSA) farm offers products to consumers. Sometimes I am impressed by the creativity of the arrangement; at other times I get concerned that the model is changing so much that it should not be called CSA. Regardless of the day, however, a clear understanding of the Risk-Sharing component of the business is essential to business managers and your customers. This becomes more critical as we observe more severe weather events causing production delays or losses on farms. Farmers should understand what risks are or “are not” being hedged by the CSA arrangement and in turn, clearly communicate this to customers, members, subscribers….whatever the correct term is these days.

Community Supported Agriculture (CSA) is a partnership between consumers and farmers. Consumers contract with farmers before the growing season begins for a share of the upcoming harvest. In its original format, both farmer and consumers agree to share the risks and rewards of growing food in their local climate. Farmers generally receive all or most payment in advance. In the original definition of CSA, risk was spread between both parties. Both the upside and the downside. If the farm had a bad tomato season, consumers got less while the farmer still got paid for trying to grow the tomatoes. Don’t forget the upside….when there was a flush of tomatoes the consumers were expecting to get extra for fall canning.  This upside benefit to the consumers was the compensation for their willingness to commit to the farm and pre-pay cash in advance.

So where are we now? Here are some variations on the model where the risk-sharing should be evaluated and clearly communicated.

Wimpy• Declining Balance Subscription: members pay $400 up front and receive “store” credit at the farm. Each week they shop they work down on the balance to reach $0.

• Add-Ons (on farm): members pay up front for a base share and then have the option to purchase add-ons at an additional cost. Add-ons may include: Pick-your-own access or meat product options.

• Meat CSA: applying the pre-pay concept for future quantities of chicken, pork or beef.

• Multi-Farm CSA: members pay in advance and a farmer manages to supply a portion from their own production while using a portion of member payments to buy-in product from other farms.

• Multi-Outlet Farms: many farms maintain a CSA, but they also serve other direct marketing outlets (farmers markets) and wholesale accounts too. So if they have a bumper crop of tomato will they compensate members (the upside) or will they wholesale the surplus for more cash income?

images-3What questions are important to ask?

Let’s remember that in some regions CSA farmers are targeting a new segment of shoppers. In many places, the market has been saturated for traditional 18 week vegetable CSA’s where members pick up directly at the farm. As a new segment of buyers are recruited for CSA-style products these people may or may not be aware of any risk-sharing expectations. These are important questions the farm must answer:

• Are we sharing risk or just looking to get pre-payments from customers to smooth out spring cash flow?
• Do our customers/members know the answer?

Risk Management 101 says there are four types of risk in agriculture: production risk, market risk, institutional risk and human risk. Production risk relates to impact on yields and productivity for the items you produce. Market risk relates to the changing marketplace; fluctuation in the cost of inputs and the pay price for your outputs. Institutional risk embodies the consequences of policy and regulations on the business. Human risk deals with the impact of relationships, health and employee situations. It can be argued that the CSA set-up can be used to mediate all 4 types of risk, but for now, we will focus on production risk and market risk.

Market Risk:

Prices from the Long Island City CSA, July 2010

Prices from the Long Island City CSA, July 2010

By receiving a pre-payment for goods to be sold the producer has mediated the down-side risk of price changes in the marketplace. This also means that the producer has given up any upside potential from increasing prices over the production cycle.

The farm has in no way managed the market risk of changes in input prices. A great example of this is poultry farms that collected pre-payments for whole chickens based on prices set in winter/spring of 2008. Corn prices rose over $2.00 per bushel from January to June in some areas ($4.50/bu to over $6.50). Feed prices went up, retail poultry prices went up but pre-paid farmers had a tough time covering costs.

For CSA, the loss of customers may be considered market risk for the next year. It may also come in the form of customers wanting to pay less next year due to dissatisfaction this year. Pre-payments prevent some farms from having to access operating loans early in the season. If your operating loan is subject to an unpredictable interest rate change over 3-4 months, then pre-payments from customers to reduce loan exposure does reduce risk. Realistically, however, most managers can have a set interest rate (the market price for credit) on their line of credit. The time frame of the loan is so short that any volatility in rates cannot result in significant consequences. The CSA can help you avoid the loan but you have not necessarily mediated any market risk here.

Production Risk:

Photo from extension.org

Photo from extension.org

By receiving pre-payments the farmer has mediated the risk from loss of a certain crop if the risk-sharing element is fully conveyed to customers. Hail storms hit early summer crops of chard or a fall flood eliminates storage crops. If the customer is sharing the risk, they realize that they have paid the farm to try to grow an abundance of crops but some may never make it to harvest. The farmer has insured against crop failure by taking a non-refundable payment in advance. On the upside, the customer may get a higher volume of other crops to make up for losses or even exceed the market value of the price they paid. Many farms have built in a specified “discount from retail” value where they calculate to deliver $480 worth of retail value but the CSA share costs $400.

Price Adjustments:

Livestock producers should consider if they have enough information to set firm product prices in advance or if they need a mechanism to change prices closer to date the meat or poultry product is received by the customer. Identify your most significant costs of production and determine if your number one, two or three greatest expenses are subject to change. If your cost could shift a lot during the production cycle you may want to take steps to lock-in input prices through negotiations with your vendors or retain the right to adjust prices with your customers.

Winter CSA Dilemma:

This happened all over VT in 2011. Farmers had invested in growing winter storage crops for CSA shares that would offered from November-March. The CSA shares usually get sold or pre-payments begin in September of that year. Flooding in late August rendered crops unfit for consumption just about 2 weeks before farms were going to start receiving winter CSA payments. We can see the risk management problem here. There is no production risk management if the farmer is investing in the production of the crops before the CSA members have invested in that winter share.

KeepArticlesComingJoinInnovations to the CSA model in recent years have made tremendous improvements to the variety of products and relationships available to potential CSA members. With these changes, however, farmers need to re-assess if they are getting the same risk management and risk-sharing out of the relationship that the original CSA model provided. Consider what type of risk sharing you want to establish with your membership and then take advantage of all the advances web and digital communication to send your message out and promote the unique CSA experience offered at your farm.

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About the author

Mark Cannella is a farm business management specialist for University of Vermont Extension. He has been working in the field of agriculture in VT for over 10 years. He has managed farm operations in vegetable production, maple sugaring and agricultural education. His current focus is the management and delivery of farm business planning programs, business management trainings and farm economic research. Mark contributes to programs that serve a diverse audience of farm producers raising different products at different scales. His areas of expertise are farm financial analysis, farm business planning, project/program management and applied food systems research.

3 Comments

  1. Agreed! In our business planning program we have mostly tried to drop “CSA” language and have substituted it for “subscription” if we see no clear risk sharing intent. Oh, and we have all our accountants setting up LIABILITIES on farms balance sheets to reflect the balance owed to pre-paid customers. This works well with declining balance set-ups, although it is tricky to factor in discount rates to reconcile the liability to “0”.

    We have plenty of new farmers that get queasy with the idea of loans. Many do not realize that the CSA model is more or less an annual equity based finance agreement (don’t tell them shareholders sounds very similar to stockholders, as in the stockholder of big nasty profit centered companies, oh my!). Bumper crop of kale = divendends
    No winter lettuce = you know investment is like gambling

    Don’t get me started on the “CSA” farms that short their membership on crop abundance dividends in order to sell the crop to wholesale buyers.

  2. Josh says:

    It’s a pet peeve of mine how often the terms “members” and “share(s)” are used for so-called CSA programs now. Originally, as Mark points out, CSA was set up as an agreement between a group of consumers and a farmer (sometimes with consumers actually soliciting a farmer, essentially hiring them to grow their food), and those members would in turn receive an actual “share” of the produce – proportional to their membership, just like stock. E.g. if there was 100 members, each was entitled to 1% of the produce, and those amount could change each season, as noted.
    Most “CSAs” that I see today though are in essence just pre-paid subscriptions (e.g. for that box or bag of produce), rather than an actual “share.” And as noted, just what type of risk the consumer if taking is not often clear.
    With our focus on pastured meats, we decided to offer a declining-balance “farm credit” – we reward this early, up-front pre-payment by added bonus dollars/credit, which the customers can use for virtually anything and anytime. This systems gives our customers a financial incentive (the bonus %) as well as flexibility, but without as much risk, I think (there is the risk that we’ll run out a certain product at times (eggs!), and of course the risk we’ll go out of business or disappear…).
    But it also gives us, the producer, flexibility too (not having to guarantee having an exact quantity of some product in stock as such and such a time), and providing that up-front cash to meet expenses as they incur. A handful of prepaying customers last winter made the difference for us in paying the bills without having to seek out a line of credit from a financial institution!

  3. Finally…..This articulates what I have been seeing in CSAs for some time now. Most new CSAs for which I am familiar don’t understand the concept of risk mitigation and management. Frankly, I am appalled at how consumers are being treated by this model, and shocked at how willing they are to give away their hard-earned money. We’ve been farming for over 10 years and would never ask for money up front, nor expect our customers to pay for our inability to manage risks. We chose to pay for our mistakes in production and marketing through experience, rather than placing that burden on our customers. Thanks for a thoughtful piece of writing.

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