What it Takes to Build a Food Hub Network

Cullen Naumoff:

At their core, food hub networks are grounded in trust and joint decision making. Joint decision making can be hard, especially when you’re used to making business decisions solely in the context of your own singular organization. An exciting aspect of economies of collaboration is decentralized power. Yet, in order to ensure every food hub has an equal vote and a platform to voice their opinion, food hub networks need processes to ensure equity is maintained in order to make the best decisions possible.

A food hub network maintains existing ownership and decision making at each hub, ensuring the aggregator is best designed to meet the needs of their own community. However, in the context of a transactional food hub network, a new layer of decisions must be made to support the operations of the network. Determining how to balance decentralized power while still enabling network decisions to be made on a timely and regular basis is important.

Determining a network’s governance structure may also be driven by the network’s desired ownership state. Ownership can take many forms and facilitating the network’s decision is another important role for the backbone organization. In some cases, it may make sense for network partners to be informally connected through a memorandum of understanding (MOU) but in other cases a separate legal entity that represents the network may be more favorable. In network discussion on this topic, ensuring a legal opinion weighs in on the pros and cons of each approach is important.

Often, a standard hierarchical decision making process isn’t as well matched to a decentralized business model. While electing a board of directors with membership from all network partners is an option, also studying and exploring other decentralized governance structures is recommended. For more information on recommended approaches to food hub network governance, please see this resource provided by Farm Fare.

Examples of possible areas of tension to arise that would require a governance structure and process:

• Price setting generally and specifically on the same product sold from multiple hubs
• Uneven balance of new network sales among hubs
• Need for infrastructure investment in one hub to best support the network as a whole
• Unfair distribution of potential risk among network hubs

Cullen Naumoff:

Subsidization will be a very important part of setting the network up for success. Over a five-year period, the network can expect to need at minimum just under $900,000 to subsidize network operations. A significant portion of this funding goes to support the organizational efforts of the backbone organization. Subsidization can come from public or private funds, but if structured as an investment from a private investor, understanding the slow timeline for return is critical.

During the initial operating years of a network, this subsidization will support the following “network partner support”:

• A full-time sales person dedicated and focused solely on generating sales for the network.

• Software that supports and enables inventory management and related accounting documentation necessary in a networked environment

• Backbone organization support, including a full-time “network manager” and grant management and fund distribution support.

• Logistics subsidization: This funding can cover logistics costs that sales volumes don’t yet support in the early days of network operation.

• Stipend to provide some financial support for hub staffers who’s time and responsibilities are impacted by network development.

Over time, the above network partner support services are funded by a network transaction fee, charged on any new sale brought to the network. Typically, this is often around a 5% transaction fee but can vary by network.

For more on a network business plan, please refer to Farm Fare’s Guide to Food Hub Networking, pages 14-16.

Cullen Naumoff:

It’s the “New Deal” for local and regional food systems at the USDA – NOW!  Thus, this is an opportune moment to catalyze your network. Some recommended sources of USDA to catalyze your network, include:

• AMS’s LAMP Grants, including:
  • Local Food Promotion Program Planning and Implementation (LFPP):  These grants have been the bedrock of AMS programming for a decade now.  There’s precedence in using this funding to support the efforts of a network. Planning grants can support analysis that might need completed to inform network strategy and/or generate initial, facilitated conversations between interested parties. Implementation will support actual and specific network work.  Note: implementation awards are typically granted to proposals that can show some level of existing network pilots/work.
    • RFA released: Early Spring 2024
  • Regional Food Systems Partnership Grants:  These grants were first released in 2020 and were more or less designed to fund food hub networks.  For example, this is what funds the Northwest Food Hub Network currently.  Similar to the LFPP,  if you and your fellow hubs are trying to gain footing in how to work together, the planning grant if the opportunity to take advantage of.  If you are looking to building on existing partnerships, the implementation grant is designed for your network state.
    • RFA released: Early Spring 2024
  • Resilient Food Systems Infrastructure Program (RFSI):  This is the latest opportunity released as a result of the Inflation Reduction Act. It is designed to fund infrastructure, including technology, in regional food systems.  It acts as a cooperative between states and the federal government.  Funds will be distributed via state agencies (likely state agricultural agencies); state agency plans for fund distribution are due to the USDA in August 2023.  Plans to access these funds will likely be, in the best case scenario, available in January 2024.  Get in touch with your state agricultural agency NOW to be in the know about these ideal funds.
  • Regional Food Enterprise Centers:  Twelve new Centers were announced in May 2023.  These centers will be staffed and funded to support the work of regional food systems and partnerships within these systems. A specific call to action is provided $100,000 Business Builder grants to enhance the market connectivity of regional food business centers. Likely next summer (June 2023) when we’ll start to see these funds available on a state by state basis. 

Private foundations and related sources of capital are another important source of capital to catalyze your network.  When working with these funding sources, be prepared to first describe the context of regional food systems and supply chains. Often with funders not steeped in the supply chain, describing the need for a food hub network requires greater background information.

Cullen Naumoff:

Backbone organizations serve as the “network center”.  A backbone organization is central to adding capacity and organizational management to a decentralized network. Examples of backbone organizations include cooperative development centers, eXtensions, related NGOs, etc. In many cases, this organization is also the lead applicant in any grants for which the network may be applying for.

Due to the conscious lack of power structure within a transactional food hub network, an entity whose role it is to organize meetings and provide facilitation is critical. This organization plays a “Network Manager” role. Activities and responsibilities this organization may lead include:

• Lead grant authorship, management and reporting
• Organize and manage regular network meetings, including managing and facilitating the agenda
• Add fill-in capacity to network when needs arise

• Herd (food hub) cats

Cullen Naumoff: 

Often, transactional food hub networks stumble when evaluating how to best sell to one another due to the challenge of a double mark-up. That is, if Food Hub B wants to sell their customers products that Food Hub A sources, how do both hubs retain their necessary margin without pricing the product above the customer’s willingness to pay?

Instead of relying on both hub’s marking the product up to meet their financial needs, one option is to use a commission-based approach to properly reward each of the hub’s specific efforts within the transaction. In this model, the network agrees to a commission rate that appropriately reflects a customer relationship and last mile delivery.

Cullen Naumoff: 

Institutional buyers and other large volume sales accounts drive the $630 billion wholesale food market. Currently, local food represents $5.8 billion of this total, of which $1 billion moves through food hubs. Given that local food now outranks organic preferences on consumer surveys, we anticipate the local food segment can grow to $13.5 billion over the next five years. This represents 133% growth, the same rate achieved by the organic market between 2012 and 2017.

A network approach allows regional hubs to provide institutional customers with a region-wide catalog of inventory, providing the volume necessary to meet their demand while simultaneously driving down operating costs by sharing hard assets, like equipment and distribution trucks. By working together food hubs can retain commitment to hyper-local supply chains (typically 60-100 miles) yet leverage what Farm Fare calls “Economies of Collaboration.”

Over time, the data generated through platform transactions will enable the entire region’s family farms to more efficiently crop plan with a scale and precision they’ve not previously experienced. This will give food hubs and ultimately family farms the ability to consistently move their product to market at predictable prices and volumes.

Food hubs aren’t the only industry to utilize this approach. In the early 1990s independent cooperative food grocery retailers were struggling, with a significant issue being the lack of economies of scale when purchasing inventory from distributors. Their product costs were orders of magnitudes higher than their competitors. Thus, these independent cooperatives established a cooperative association (National Coop Grocers) that enabled them to act as a larger force than they were able to as independent stores. Through this work, they negotiated a contract with United National Foods that in exchange for a specific volume of foods purchased across all stories, discount volume pricing would be offered to all coops. A food hub network uses the same principles but instead to sell more food to large volume buyers.

Cullen Naumoff: 

A food hub network does not imply that every product in a hub’s catalog is traded among regional food hubs.  A newly created food hub network should aim to trade 6-10 products among its collaborators.  When considering which products to trade, the following elements should be considered:

• • What gaps in one another’s product catalog can network hubs fill? 
    • Ex. A network hub supplies stone fruit to another network hub who’s growing climate doesn’t support stone fruit production.
  • What are high value items that drive up the value of a pallet, creating more financially viable logistic opportunities?
  • What are products that can sustain possibly longer and more complex logistical journeys?
  • What are your market partners demanding?

Amy McCann:

Many hub networks that are focused on best practices or irregular transactions do not utilize a shared technology platform.  In fact, many use simple Google Sheets to share availability,  which can be effective to get started.  As sales volume increases between hubs, a shared platform, like LFM’s Local Food Network, to manage network sales enables more efficient and streamlined transactions.

Amy McCann:

Populating a network platform can be done manually or through integration.  As the number of transactions increase, the need and types of integration will increase.  LFM’s Network platform integrates directly with Local Food Marketplace, ERP and online sales platform for each hub, to streamline transactions.