1. Economic Assessment of Local Foods: Undertaking Input-Output Analysis
April 6, 2017
FINE Conference
Jeffrey K. O’Hara

2. GOOD AFTERNOON

3. Introductions: Today’s Presenters
Jeff O’Hara – USDA Agricultural Marketing Service
Jake Claro – Vermont Sustainable Jobs Fund
David Conner – University of Vermont
Dave Swenson – Iowa State University

6. The Issue
Local foods has emerged as an economic development strategy

7. Yet….
Estimating the economic impacts is challenging!

8. Today’s Topic

9. USDA AMS Toolkit
Toolkit objective: standardize measurement of food system initiatives through best practice recommendations
Use modules to align with discussions in community or address the specificity of economic measures required.
Users benefit from different modules throughout planning discussions as clarification of the shared vision of the community process.

10. First Set of Toolkit Modules
Module 1: Framing community economic assessment process
Module 2: Using secondary data
Module 3: Generating and using primary data
Module 4: Engaging community process with data

11. Second Set of Toolkit Modules
Module 5: Introduction to input-output analysis
Module 6: Addressing opportunity costs of local food investments
Module 7: Advanced IMPLAN analysis

12. Workshop Objectives (Workshop 2)
Understand assumptions and principles of input-output analysis
Interpret results of I-O analysis
Quantify trade-offs and opportunity costs with food system investments
Understand techniques in using IMPLAN

13. Get Involved!
localfoodeconomics.com

14. www.localfoodeconomics.com Download toolkit and module summaries
Watch webinar
Review case studies
Sign up for list-serve
Submit questions and content
Request trainings
View calendar of upcoming events

15. Audience Questions Background Region? Objectives? Researcher?
Policymaker?
Work at food business?
Farmer?
Region?
Objectives?

16. A Discussion of Modules 5, 6, & 7
Dave Swenson
Iowa State University
for the
FINE Summit, April 6, 2017

17. Introduction to Economic Impact Assessment
Analyzing linkages of local foods to local economies
Module 5

18. Primary Elements of Module 5
How to conceptualize the local foods system and changes that may be occurring in an economic context,
Which means we discuss:
Basic community economics concepts
Input-output model terminology and basic structure
How a multiplier is calculated
And economic impact analysis limits and cautions

19. Clarifying Economic Terms
Growth is a dynamic concept that looks at change over a period of time
Growth is synonymous with expansion; for example, more jobs, more people, more businesses, or more income.
In contrast, development is related to improvement relative to some starting condition, or sustained progress toward a particular goal.
This could be movement toward a more sustainable use of resources, or enhancing the quality of life in the community
Growth is relatively easy to measure whereas development is a more nebulous concept.

20. Clarifying Economic Terms
Impact tends to be associated with a specific event or change in behavior and can be static or dynamic.
Consequently, impact assessment is comparing and contrasting what a community looks like before and after a particular event or change in behavior.
Often referred to as a shock
Or, “but for” our scenario, the economy would have ….

21. An Intro to Economic Base Thinking
Can start with a very simplified but useful way of viewing a regional economy:
Basic firms: industries that depend in whole or very significantly on external (exogenous) factors – focus is on external markets – sometimes just called “export- base industries”
Nonbasic firms: industries that depend on local (endogenous) business conditions and community household consumption characteristics and preferences focus is on local markets (to include suppliers of basic firms) --

22. Economic Base Multiplier
In this simplified view, local activity is either basic or nonbasic.
Thus:
Employment = Basice + Nonbasice OR
Income = Basici + Nonbasici
And nonbasic employment (or income) is mostly driven by changes in the basic sector. Hence, we get a regional multiplier (M)
M = E/B or
E = M*B
How do we determine what is basic and nonbasic?

23. How does an economy grow? A simple formula
Before determining impacts, we need to remind ourselves of the foundations for net growth in regional productivity (or jobs)
Y$ = C + X – M  O
C = Consumption
X = Exports
M = Imports
Other = Invest, govt. pmts, …

24. Economic Impacts of Local Foods
One way to frame the impact of local food growth is considering it as import substitution. (therefore a “+” in the formula because you are adding to local consumption)
When locally produced foods are substituted for imported items, stronger regional linkages are forged.
If local foods production and consumption increase, there are economy-wide consequences.
Money that previously left the economy stays and is allowed to multiply through.

27. Reliable Local Foods Impact Estimates
We use input-output (I-O) models to produce our multipliers:
I-O models allow us to track the flow of transactions between local industries, sales by industries to households, and to other “final users” of goods or services (e.g., government).
They are specified for particular geographies
Most analysts use IMPLAN (IMpact analysis for PLANning) for their I-O analysis because of its ease of operation, transparency, and modifiability
That is the modeling system used for demonstration purposes in the toolkit

28. We derive our modern economic impact multipliers from input-output models

29. Multiplier Examples Per Unit of Output
Earnings:
Jobs (per
$million of
output)

30. Example of Industry Sectors Impacted by Increased Demand for Food Hub
Stronger community food linkages resulting from a shock have spillovers.
Slide title: Indirect and induced effects per $1 increase in final demand (top impacted industry sectors), with food hub farm data including opportunity cost
Adapted from: Jablonski, Schmit, and Kay

31. Finally, Properly Defining the Study Area
Determining what constitutes local can have a decisive impact on the results: the larger the definition of local, the more inter- industry linkages exist.
Functional (and defensible) market area is critical to a valid analysis
Elements to consider:
Labor supply
Input sources

32. Advanced Economic Impact Assessment
ADDRESSING OPPORTUNITY COSTS IN THE ANALYSIS OF ECONOMIC IMPACTS ACROSS LOCAL FOOD SYSTEMS
Module 6

33. Module 6: Examining Net vs. Gross Impacts
Problematic assumptions in this framework include:
The no resource constraints assumption on the supply side –
i.e., gross gains in local food production must be balanced against the fact that these shifts (countervailing effects) will usually come in the form of a direct, acre-by-acre reallocation of existing uses of agricultural land.
The no opportunity cost of spending assumption on the demand side –
i.e., farmers directly marketing their crops constitute a positive local economic impact, but there may also be negative impacts due to the opportunity cost of lost direct sales activity in other sectors of the economy (the wholesale and retail sectors).

34. Case Study: Fruit & Veg Production in Midwest
Study estimates county-level fresh fruit and vegetable production potentials (supply side) for the states of MN, WI, IL, MI, IN and IA, as well as expected sales based on current population (the demand side).
Secondary data demonstrate that the land, water, and other resources required for the growth of local foods production must come from existing conventional crop production.
Corn and soybean are the dominant crops in these states, and net impacts would occur from shifts to fruit and vegetable.
Consequently, value of existing uses must be subtracted from new uses to properly measure net productivity gains.
Land needed to satisfy regional fruit and vegetable demand is small, and overall production consequences would be nominal.

35. Estimating the net regional gains

36. Case Study: Fruit & Veg Production in Midwest
Source: Swenson, D The Regional Economic Development Potential and Constraints to Local Foods Development in the Midwest. Iowa State University

37. Case Study: West Virginia
Evaluating the Economic Impact of Farmers’ Markets Using an Opportunity Cost Framework
Primary data collected from producers who participate in West Virginia farmers’ markets to account for the opportunity cost
Assuming the positive impacts associated with money spent at farmers’ markets results in decreased spending at local grocery stores, building material, and garden supply stores.
Study finds that while farmers’ markets do result in a net positive impact on the state economy
Accounting for the opportunity cost of spending
reduces the economic impact of the markets.

38. West Virginia Winners and Losers
Source: Hughes, D.W., C. Brown, S. Miller, and T. McConnell Evaluating the Economic Impact of Farmers’ Markets Using an Opportunity Cost Framework. Journal of Agricultural and Applied Economics. 40(1):

39. Advanced Economic Impact Assessment
ADVANCED IMPLAN ANALYSIS TO UNDERSTAND THE ECONOMIC IMPACT OF LOCAL FOOD SYSTEM INITIATIVES
Module 7

40. Module 7: Adapting Your I-O Model
Good evidence that farmers and other ag value- added businesses interact differently with the local economy than more commodity-oriented businesses.
Farmers and other local foods oriented value-added businesses purchase greater shares of their inputs locally – by definition.
e.g., Food hubs, local food aggregation and distribution businesses.
That means we often need to modify our model’s default data
A careful and comprehensive local food system assessment usually involves making several adjustments to the default modeling systems, such as:
Scrutinizing the default baseline data contained in the model;
Modifying existing data where appropriate;
Amending assumptions about relationships among sectors;
Manually introducing missing or new sectors into the economy;
Distinguishing between gross and net economic effects
Although these steps can be challenging, they are necessary to create a depiction informed by your community-based conversation and planning efforts

41. Module 7: Adapting Your I-O Model
Local food system producers have different expenditure patterns
Red Fire Farm, Cherry Tomato Harvest. Source: Emily Shannon, Formaggio Kitchen Cambridge
Source: California Tomato Machinery

42. Module 7: Adapting Your I-O Model
Expenditure patterns for U.S. farms, those that do not use local food markets compared to those that do
Source: USDA ARMS 2013; analysis by Jablonski, Bauman, and Thilmany McFadden

43. Case Study: New York Small Direct to Consumer Farmers
Multipliers for the Default Agriculture, Small Direct Agriculture (SDA), and Non-Small Direct Agriculture (NSDA) sectors.1
When we actually take this differential expenditure information and put it into our model, we see it does impact the multiplier estimates.
Source: Schmit, Jablonski, and Mansury forthcoming Economic Development Quarterly

44. Key Takeaways
Local food systems have different community linkages that elicit economic impacts. We can measure those differential impacts, but it requires a thoughtful approach – including diverse community stakeholders, resources, reliable data, and expertise.
Analysts have opportunities to improve the modeling framework to more adequately convey regional impacts
This module demonstrates how to modify models or adapt your approach to better measure your situations.

45. Thank you!

46. Background

47. What went well: Basic IMPLAN analysis
UVMMC spent $1.784 million on Vermont food, representing 44.3% of UVMMC food purchases, with 16.3% of the local purchases bought directly from farmers, 22.9% bought directly from food manufacturers and 60.8% bought from wholesalers.

48. Multipliers
Employment: 1.72 Labor Income: 1.77 Value Added 1.78 Output: 1.38

49. What did not go well N=8 for purchase pattern analysis Despite
$ incentive
Cajoling from UVMMC and UVM
No modification possible

50. Caveats: How to Get Better Data
Collaboration with USDA NASS
Data from food manufacturers are also lacking
Provide greater incentive for farmers and supply chain actors participation in data collection efforts.
Partner with farm viability experts such as extension educators who are already working with farmers and have access to their financial records.
Create and maintain a database with farm and supply chain actor characteristics and expenditure patterns for use by researchers.

51. Local Foods Scenarios
Using the MSU Local Foods Spreadsheet Model to introduce standard practices, terms, interpretation, and limitations

52. First, just to get familiar with the spreadsheet model
Understanding how the spreadsheet model works – using the construction sector first
We’re next going to compare the different outcomes from a set of industries
Grain and oilseeds versus fruits and vegetables -- notice the huge difference in both direct and total job outcomes
Next, food and kindred processing followed by meat and poultry – huge multipliers are driven significantly by assumptions that the factory is creating net-new farm activity. “Chicken-egg” and “but-for” become issues
This is a HUUUUUGE problem for novice modelers – they tend to overstate value-added agriculture outcomes

53. Spreadsheet model continued
3. Here we’re using data from the model to estimate the size of Michigan’s fruits and vegetables industry – this is an economic contribution assessment. According to our Michigan SAM (in the Leontief Transformation tab), there was $ million of vegetable and melon output and $ million of fruit output in We want to assert the economic “footprint” of this sector of the state’s economy. What do we tell ag-sector stakeholders about F & V production in the state?

54. Note: This practice over-estimates the total contribution
We have a very minor problem with double counting when we do this because the indirect and the induced jobholders eat fruits and vegetables and stimulate a total employment number in those sectors that is larger than the direct (and total value) in the model.
We merely reduce the indirect and induced values by the amount of the error.
So, in the results summary we could multiply all indirect and induced columns by 7247/7268= 99.7% (as well as every item in the detailed results) and re-tally to get a better total.
It’s not much of an error, but an error nonetheless

55. A new production example
3. We’re going to replicate work that I did for the Leopold Center and for the state of Michigan back in 2010 with some updated numbers
Let’s imagine very significant new production to meet seasonal fresh fruit and vegetable consumption by MI residents that is currently mostly satisfied from purchases from other states
We’re going to estimate the economic impact of that assumption
But we are also going to calculate “opportunity cost” offsets because all of the new land for this scenario is coming from existing grain farming.

56. Potential Economic Impact Example
Fruit and Fresh Vegetables Analyzed
Apricots
Lettuce (Leaf)
Asparagus
Mustard Greens
Bell Peppers
Onions
Broccoli
Peaches
Cabbage
Pears
Cantaloupe
Plums
Carrots
Raspberries
Cauliflower
Snap Beans
(Collard) Greens
Spinach
Cucumbers
Squash
Eggplant
Strawberries
Garlic
Sweet Potatoes
Kale
Tomatoes
Lettuce (Head)
Watermelon

57. The numbers: Acre and direct output gains and offsets
Michigan
New acres required 75,192
Veg & melon = $170 million
Fruits = $77 million
Grain producing acres lost 75,192
Reduced Gain Sector production
= $118 Million
We first shock the economy by F & V values
We offset the grain production opportunity costs
The difference represents the potential net new productivity to the state from this shift

58. 4. Let’s do a food hub
We will use an “analysis by parts” (aka “bill of goods”) method
Requires us to use several sectors of your model simultaneously – here we have 14
Requires us also to piece together the finished output so that it represents the whole of what was measured
This is a very simplified example. Good analysis by parts studies often include dozens of categories

59. Here’s our raw data

60. But we need to parse these data into elements pertinent to our region – we have to estimate or discern a local purchase probability

61. Let’s do this

62. But we’re not done yet!
The output from our Analysis by Parts only summarizes the indirect and the induced values, i.e., the amount of inputs purchased plus the results of the workers and the owners spending their labor incomes
We need to add to that the direct values. They are:
$400,000 in output excluding the cost of goods sold and retail-related manufacturing not in the economy
$300,000 in labor income (payments to workers and proprietors)
5 jobholders (including the proprietor)

63. So to put it all together