October 2018

Economics of Urban Ag

Departments - Urban Agriculture

Targeting high-value, niche markets or products, and adapting a social business model can help urban greenhouses derive profit.

September 27, 2018
Robin G. Brumfield and Charlotte Singer

Editor's note: This article series is from the Resource Management in Commercial Greenhouse Production Multistate Research Project.

Urbanized agriculture is gaining momentum in response to increasing demands for locally produced fresh vegetables. Greenhouse or indoor vegetable production to meet local demands is the backbone for this evolving scenario. The viability of various indoor crop cultivation options demands proper documentation to guide appropriate recommendations that fit different production circumstances for growers.

Recently a popular trend toward eating local, deemed being a locavore, evidenced by a growing social movement, has evolved (Osteen, et al., 2012). While the benefits of buying food locally are debated due to the economics of comparative advantages, consumer groups support urban agriculture for a number of reasons, such as to support local farmers; to provide local, fresh food in inner city deserts; to buy fresh food; to know from where their food is coming; and to respect the environment (Peterson, et al., 2015). Specifically, one study found that 66 percent of those surveyed welcomed more local food options because local food supports local economies (Scharber and Dancs, 2015).

Many consumers also cite environmental impacts as a reason to buy local, evidenced by one study finding that environmental factors were an important reason to buy locally grown food for 61 percent of those surveyed (Scharber and Dancs, 2015; Reisman, 2012). Another popular reason is to reduce food insecurity. USDA defines food insecurity as “a household-level economic and social condition of limited or uncertain access to adequate food” (USDA ERS, 2017).

Buying locally grown food can reduce food insecurity in that having local farms provides consumers who might not have previously had access to fresh produce the opportunity to purchase it. Some urban farms make a point of targeting food insecurity, and having local farms allows a city to rely less heavily on external markets to feed its population. Despite debate of realized benefits, consumers eat local food to feel good about it (Scharber and Dancs, 2015).

High capital costs

Regardless of the strength of their consumer base, the number of urban farms is still low due to the high costs that urban farmers face compared to rural farmers. Not only is the land more expensive, but also the limited plot size and probable contamination of the land with lead and toxins essentially necessitates the use of a greenhouse with high investment costs. Cost challenges that many urban greenhouse farmers face include securing funding, finding economies of scale, and facing high capital and operating costs.

The energy necessary to heat a greenhouse through the winter makes utility costs high, the most productive greenhouse technologies are expensive, and land is of much higher value in cities than in rural areas (Reisman, 2012). Not to mention, the initial infrastructure cost involved in building a greenhouse is much higher than the costs that farmers growing in a field face. The costs of urban greenhouses vary greatly depending on size and type. The construction of, for example, a hydroponic greenhouse entails costs for site preparation, construction, heating and cooling equipment, thermostats and controls, an irrigation system, a nutrient tank, and a growing system (Filion, et al., 2015).

Another problem with growing in cities is shade from tall buildings and skyscrapers. Jenn Frymark, chief greenhouse officer at Gotham Greens, cites this as the primary reason that the business built rooftop greenhouses. This creates its own set of problems and increases costs compared to standard greenhouses on the ground. Other urban producers address the shade problem in cities by producing in buildings using vertical agriculture and artificial lights. However, this increases the costs even further because of the need for light all year. These high costs keep the number of urban farms small.

Marketing: quality optimization, high-value plant products, year-round production

Due to these high costs, urban greenhouses must derive profit in creative ways, such as targeting high-value niche products or markets, and producing year-round. Targeting niche products and markets allows urban farmers to charge a premium that covers the added costs of operating in the city. Targeting a niche product could entail producing special varieties of vegetables, like how Brooklyn Grange, a successful New York City-based greenhouse, grows microgreens and heirloom tomatoes. The low supply of these special varieties can drive a higher price to help cover the high costs of the greenhouse. To increase profitability, farmers can also find a high-end market (Sace, 2015).

Targeting a niche market could entail selling produce to high-end restaurants and supermarkets, such as Whole Foods, whose customers are already expecting to pay a premium price, or it could entail marketing produce specifically to locavores. In fact, one study found that, for example, consumers were willing to pay a $1.06 price premium on one pound of locally grown, organic tomatoes. In the same study, the researchers also found that urban consumers were more likely to buy locally grown produce, compared with rural consumers (Yue and Tong, 2009). The high costs associated with living in a large city means that cities have a high concentration of people who can afford to eat local in this way, and the demographics of large cities translate to a high concentration of people who also see value in eating locally produced food. Together, these create a market of locavores willing and able to pay a premium for locally grown produce.

By targeting niche products and markets, urban greenhouse farmers can take advantage of existing high-end markets to cover their relatively high costs. Since these producers use greenhouses, and a few use indoor facilities, they can produce year-round, thus providing a constant supply and a steady demand for their products.

Harlem Grown in New York gives students the opportunity to learn about agriculture and the food system in a hands-on nature.Photo: Instagram: @harlemgrown

Agricultural jobs in urban settings and other social values

Adapting a social business model can open urban farmers up to alternate sources of funding. They may want to provide jobs to disadvantaged groups such as low-income inner-city dwellers, or people with autism. Some of these businesses have reduced labor costs through volunteerism, as individuals may be willing to volunteer on a farm that supports a social issue (Reisman, 2012).  Some examples of causes that urban greenhouse social businesses focus on include education, research, the environment and food security. Harlem Grown in New York adds an educational component to the greenhouse, namely the opportunity for students to learn about agriculture and the food system in a hands-on nature, allowing the greenhouse to become eligible for funding from schools, governmental programs or donors particularly interested in education.

Other urban greenhouses can, for example, pitch themselves to city dwellers as an environmentally friendly alternative to commercial farms, using less fuel for transportation and fewer chemicals. This could again render the greenhouse eligible to new sources of funding. AeroFarms in Newark, New Jersey, has adapted a combination of the previous two models. It uses environmentally friendly techniques and collaborate with Philip’s Academy Charter School (Boehm, 2016). 

Greenhouses can additionally focus their business models on alleviating food insecurity by providing fresh produce to urban food deserts (US. New York State Energy Research and Development Authority, 2013). Unlike the previous cases, greenhouses that choose to focus on alleviating food insecurity would not be able to additionally use the method of targeting high-end markets, unless they make an effort to use the high-end markets to subsidize the cost of providing their produce to food deserts. An example of an urban farm targeting food insecurity is World Hunger Relief Inc. in Waco, Texas, which brings produce grown in its greenhouse to food deserts in the City of Waco at a market or discount cost. What these three options share is a business model that incorporates multiple bottom lines, which allows them access to new funding and volunteer labor to reduce costs.

As consumers increasingly look to eat locally produced food, for reasons such as to support the local economy, to protect the environment, to change food deserts and to understand better where food is coming from, urban agriculture is becoming a growing trend. Targeting high-value, niche markets or products, and adopting a social business model to provide agricultural jobs in urban areas, constitute some of the ways urban greenhouses to derive profit in a capital-intensive industry. By utilizing these techniques, individuals looking to start their own urban greenhouses can add value to their business and derive profit.

Robin is a Professor at Rutgers, the State University of New Jersey, where she has been the Farm Management Extension Specialist since 1988. She is internationally known for her work in greenhouse economics. brumfiel@njaes.rutgers.edu

Charlotte is senior economics, mathematics, and statistics major in the Rutgers University Honors College and worked on urban agriculture through the Aresty Research Assistant Program. cts86@scarletmail.rutgers.edu

References:

Turner, Michael. 2008. A History of World Agriculture from the Neolithic Age to the Current Crisis By Marcel Mazoyer and Laurence Roudart. The Economic History Review 61(3): 766-67.  

Vitiello, Domenic, and Catherine Brinkley. 2014. The Hidden History of Food System Planning.  Journal of Planning History 13(2): 91-112.

Peterson, Hikaru Hanawa, Mykel R. Taylor, and Quentin Baudouin. 2015. Preferences of Locavores Favoring Community Supported Agriculture in the United States and France. Ecological Economics 119: 64-73.

United States. Department of Agriculture. 1945 Census. Vol. 2.USDA ERS. 2017. Farming and Farm Income. Feb. 2017

Osteen, Craig, Jessica Gottlieb, and Utpal Vasavada. 2012. Agricultural Resources and Environmental Indicators, 2012 Edition. SSRN Electronic Journal

Scharber, Helen, and Anita Dancs. 2015. Do Locavores Have a Dilemma? Economic Discourse and the Local Food Critique. Agriculture and Human Values 33(1): 121-33.

Reisman, Alexandra. 2012. A Greenhouse in the City: The Uses and Roles of Community-Oriented Urban Greenhouses.” ProQuest Dissertations Publishing.

USDA ERS. 2017. Definitions of Food Security. USDA ERS - Definitions of Food Security. Oct. 2016. 

Filion, Nicole, Carly Wine, and Eli Turkel. 2015. Urban Farm Complex Research. University of Delaware Center for Research in Education and Social Policy, Apr. 2015.

Sace, Chito. 2015. Economic Analysis of an Urban Vertical Garden for Hydroponic Production of Lettuce. International Journal of Contemporary Applied Sciences 2(7).

Yue, Chengyan, and Cindy Tong. 2009. Organic or Local? Investigating Consumer Preference for Fresh Produce Using a Choice Experiment with Real Economic Incentive. HortScience 44(2).

Boehm, Jessica. 2016. Ag for Urbanites. New Jersey Department of Agriculture. 

United States. New York State Energy Research and Development Authority. 2013. Sustainable Urban Agriculture: Confirming Viable Scenarios for Production., Mar. 2013.

Urban agriculture Tomato Sustainability Urban farm Local food Education Labor Microgreens Marketing