Urban farms need financially sound business models to be truly sustainable

Before launching an urban farm, the producer should consider the effect of scale along with substantial production risks. Expect small, single digit returns on their investment with the need for development of an appropriate business strategy.

Every week Michigan State University Extension educators and MSU Product Center counselors receive inquiries about the feasibility of starting a farm. In recent years, the interest in sustainable urban agriculture as a tool for repurposing cities such as Detroit has grown but has produced few ventures at a commercial scale. Financial sustainability urban farm operations we see in southeast Michigan however is still questionable. This is due to the smaller scale, lower prices of fruit and vegetable crops, and the production management skills of the farmer-producer. The dream of becoming a full time urban farmer is a lofty goal that few will achieve. Strategy, realistic planning, and beautiful execution of the farm plans are critical in achieving a successful outcome.

Currently, beginning farmers are experiencing the financial stress of low returns. Popular media has begun to report that the returns from farming in urban and suburban environments are insufficient to financially sustain the farm operators. Bren Smith states in the New York Times that farm income was a $-1453 in 2012, and that foundation grants and government programs are helping farmers make ends meet. This is not a new concept for those who have been engaged in traditional agriculture and supporting agriculture businesses. Weak financial returns are a new concept for those who new farmers who are gaining experience in this emerging industry.

For the suburban and urban farmer, scale becomes a critical factor because one cannot rely on premium prices and maximized production. The University of Kentucky, Center for Crop Diversification, 2013 vegetable budgets indicates a wide range of projected profit, for various vegetable crops, from negative $116 to $4704 per acre. If a farmer were to produce, and get paid for a mix of crops producing on average, $2000 net profit per acre/year, it would take 5.89 acres of land for a single farmer, to reach the poverty level income threshold. For a farm family of four, it will take 12.83 acres to reach the poverty level income threshold.

How much is an acre? The short answer is 43,560 square feet. A city lot is roughly 50x150 in urban centers or approximately 7500 square feet. The single farmer would need to accumulate and manage approximately 34 city lots, to achieve scale that has the potential reach the poverty threshold. The farm family of four would need to acquire approximately 70 city lots to reach the poverty threshold. Can the farm family acquire and efficiently operate 70 city lots? It depends on a many factors, including location, management ability, and government regulations to name a few.

An argument can be made that season extended, intensely managed high tunnel, hoop houses would require less land and thus increase income. A thorough analysis of the cost of land acquisition, cost of hoop house construction, and cost of fruit and vegetable production must be undertaken and considered. In MSU Professor John Biernbaum’s paper, Hoophouse Decisions and Opportunities, novice growers achieved a wide variety of net income performance ranging from $-545 to $5450 with a mean of $2248. Using the mean of $2248 the single farmer would need approximately 5 city lots and 5-6 standard sized 30x96 high tunnel hoop houses to reach the poverty threshold. Using the same assumptions for income, the farm family of four, would need 11 high tunnel greenhouses to reach the poverty threshold.

This prompts the serious question: Is it possible to acquire enough city lots for a farmer to have the potential scale to cross the poverty line? In Michigan, there are farms and gardens that have significant numbers of city lots, but these tend to be non-profit organizations with a different business model. Very few if any, individuals have been able to obtain use of significant land resources for farming in urban areas that would allow a full time operation. Corporate farms, using a non-profit structure, have been able to acquire larger tracts of land, but small commercial farmers, for the most part are working small to micro sized tracts, typically less than six city lots.

Every commercial farm has the uncompromising need to generate cash. After paying the operating expenses, each farm must cover principal and interest, must recapitalize, provide for family living, and be prepared for adversity. Given the limitations of scale for the urban farmer, meeting each of these needs tends to be a struggle. How does the urban farmer meet all of his needs for cash? Typically, the farm becomes a small piece of an array of cash sources. The farm is either secondary to, or is supplemented by other income. Typically, the urban farmer is farming part time, and working a paying job. The spouse of an urban farmer may work a regular job, or perhaps the farm is used to supplement retirement income.

Other possibilities would be to establish a farm related business that complements the farming operation. A business such as this might include retailing supplies, or providing custom services such as tillage or harvesting help. Corporate urban farms have relatively sophisticated businesses models and concepts. In southeast Michigan, these corporate farms provide community development services, funded in part by grants from regional foundations, and from payments or payments in kind from government.

Each potential urban farm operator must carefully plan, with the understanding that producing and marketing fruits and vegetables is a low return and high-risk venture. Individuals must develop their own financial projections, based their own ability and assets and make a critical decision regarding the risks and rewards of farming. Most importantly, one must consider complementary enterprises or off farm work to make up for the cash-flow shortfalls that are typical on the urban farm.

If you are interested in pursuing an urban agriculture venture, Extension educators at Michigan State University Extension and innovation counselors at the Michigan State University Product Center can assist potential businesses in the establishment of good practices to improve business effectiveness. For further information and assistance with employee communications please contact your local Michigan State University Extension office.