Evaluating Risk-Sharing for CSA Farms

Every year we see a new twist on the way Community Supported Agriculture (CSA) farms offer products to consumers. Businesses are adapting the core CSA model to provide innovative and competitive offerings to would-be customers. With these changes, however, business managers should revisit and clarify the risk-sharing component of the relationship with customers. This becomes very critical as we observe more severe weather events causing production delays or losses on farms. It is important that any risk-sharing expectations are clearly communicated between the business and the customers.

A conventional definition of the CSA farm looks like this: 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. We will use the term consumers or members in this article. The farmer and members agree to share the risks and rewards of growing food in their local climate. Farmers may receive all or most payment in advance. In the original definition of CSA, risk was spread between both parties. This includes the upside and the downside. If the farm had a bad tomato crop, the members get less but the farmer still got paid for their efforts 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 just 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 and issues for the business to consider. There is no doubt that many businesses benefit from concentrating most of their advertising at one time of year so that they can focus their energy on farming activities the rest of the year. Pre-payments also establish a certain income level. Let’s look at the risk-sharing implications of a few CSA models.

–  Declining Balance Subscriptions: 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.

Considerations: How long does the credit last and when does it expire? Is there a refund policy if a portion of the credit is unused? If there is a refund policy then the farmer still bears some of the risk of poor crops yields or poor selection that leave members unable to use up all their credit.

–  Add-On (products from other farms): members pay up front for a base share and then have the option to purchase add-ons at an additional cost. An example may be a payment of $65 for a dozen eggs each week during the summer.

Considerations: If these products are purchased from another farm, then the core farm (that supplies the base share) bears no production risk. This farm is simply acting as a retailer for another farm’s products with a pre-payment style set-up. If the egg farm can’t deliver it would seem appropriate for the core farm to provide a refund to members or source the product from elsewhere.

–  Meat CSA: members pay in advance for a future quantity of chicken, pork or beef.

Considerations: This forces us to remember 2008. Corn prices rose over $2.00 per bushel from January to June in some areas ($4.50/bu to over $6.50/bu). Feed prices went up, retail poultry prices went up but pre-paid farmers had already set their prices and received payments. By Fall 2008 these farms were realizing that they had not charged customers enough to cover costs and ensure a profit. Pre-payments help establish a certain income level but they do not protect the farm from increased prices for production inputs.

–  Winter Vegetable CSA: members make a payment by late summer or fall to receive a specified quantity of goods throughout the winter.

Considerations: The production cycle for many of these crops begins well before a membership payment is due. Garlic is planted the previous fall and onion propagation begins in later winter. The business has already taken on production costs and is subject to production losses/crop failures throughout the growing season. If member subscriptions for the winter share begin by late summer or fall we can’t really ask the members to share the risk on all the production costs already incurred, can we? At this point, the real risk sharing can only be applied to any losses that result during storage of these crops.

–  Multi-Outlet Farms: many farms maintain a CSA, but they also serve other direct marketing outlets (farmers markets) and wholesale accounts too.

Considerations: If this farm has a bumper crop of tomato will they compensate members (sharing the upside risk of a great crop) or will they wholesale the surplus for more cash income? There is a clear incentive to sell these crops to other outlets for immediate income. It is likely that some members will be disappointed if they do not receive any benefit for their personal risk-sharing from the pre-payment.

What is your strategy for CSA?

Risk or uncertainty can come in many forms on the farm. Crop failures and prices changes for inputs or products are common risks the CSA farm needs to balance. Your prices, refund policies and risk-sharing philosophy need to be clearly defined for the sake of the business and the customer to ensure that everyone is happy and no one is too surprised.

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About Mark Cannella

Mark is a farm business management specialist with UVM Extension based in Berlin, VT. He specializes in business planning, farm financial analysis and agricultural economics.
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