A Preliminary Economic Assessment of the Institute for Local Food System Innovation Prepared for Saint Joseph’s College by 45 North Research, LLC December 2, 2016 Revised March 27, 2017 45northresearch.com Executive Summary Saint Joseph’s College has proposed creating an Institute for Local Food System Innovation (ILFSI) to further the development of an emerging agricultural cluster in the Greater Portland region. The Institute will combine infrastructure investments and workforce training to increase the region’s capacity to grow, process, and market local food. This assessment has two objectives: 1. To estimate ILSFI’s potential economic impact, and 2. To describe the mechanisms by which that impact will spread through the regional economy. This is a preliminary assessment. ILFSI is in the planning stage and detailed information about products, revenue sources, and expenditures is not yet available. Therefore, we use estimates provided by project leaders and broad assumptions to assess its economic impact. These assumptions are plausible but preliminary; they are aspirational in nature. As details become clearer, a follow-up economic assessment will provide more precise estimates. We find that:  ILFSI will have a positive impact on the regional economy. We calculate a total net gain of $16.1 million in output, $4.1 million in earnings, and 135 jobs during construction and operation.  Of ILFSI’s six enterprises, the Commercial Kitchen will have the largest long-term economic impact as it helps home-based food businesses scale up their operations.  A significant amount of ILFSI’s economic impact will be from replacing products once purchased outside the region with products made locally.  ILFSI’s economic impact hinges largely on its ability to generate unique products and services that complement, not compete, with the region’s existing farms and retailers. Strong partnerships with local farms and food retailers will be essential to maximize the economic potential of ILFSI. ILFSI Enterprise Construction Phase Operation Phase Farm Hydroponic Farm Agritourism Commercial Kitchen Market & Cafe Education Operation Phase Total TOTAL 1 Direct Impact (Final Demand Change) $3,800,000 Total Economic Impact Output Jobs Earnings $6,496,000 40.4 $1,629,000 $285,000 $170,000 $528,000 $3,240,000 $456,000 $780,000 $463,000 $296,000 $923,000 $5,681,000 $780,000 $1,476,000 4.5 3.7 8.7 57.4 7.5 13.1 $118,000 $93,000 $219,000 $1,437,000 $198,000 $427,000 $5,459,000 $9,619,000 94.9 $249,2000 $9,259,000 $16,115,000 135 $4,121,000 45northresearch.com Introduction Saint Joseph’s College has proposed creating an Institute for Local Food System Innovation (ILFSI) to further the development of an emerging agricultural cluster in the Greater Portland region. The Institute will align with other regional initiatives and seek to catalyze new economic activity by scaling up local food production. It is comprehensive in scope with six distinct enterprises that span the agricultural production chain from farming to retail and marketing. ILFSI’s innovation comes from combining strategic infrastructure investments with targeted teaching and workforce training to contribute new products, capacity, and knowledge to the local agricultural economy. Objectives This paper’s first objective is to quantify the changes to the regional economy that will likely result from a fully-operational ILFSI. We use economic multipliers from the U.S. Bureau of Economic Analysis’s Regional Input-Output Modeling System (RIMS II) to estimate changes in Cumberland County’s output, earnings, and employment. Because ILFSI is in the early planning stages, we use projections by project leaders and broad assumptions as inputs to the RIMS II model. These estimates will be refined as the project progresses; therefore this assessment is preliminary. The second objective of this paper is to describe how economic benefits will flow from ILFSI’s six enterprises to the regional economy. This information will help project leaders align the Institute’s activities and facilities with their economic goals. For example, if ILFSI’s farm sales reduce sales at other local farms, then there will be little or no net benefit to the regional economy. On the other hand, if ILFSI specializes in products that are new to the region, or produced off-season, then its economic impact will be larger. Definitions Economic impact models such as RIMS II use a few terms that require definition. Region: A region is the geographic unit of analysis for an economic impact study. For this study, the region is Cumberland County, Maine. Throughout this report, “regional” and “local” are used interchangeably. Final Demand Changes: “Final demand” is an economic term for the total amount of goods and services purchased within a region for final consumption (not as inputs for other products). “Final demand changes” refer to net increases or decreases of those purchases. Exports: Sales by a business located within a region to customers outside the region are referred to as “exports.” Exports generate a net increase in the amount of money circulating within a region and benefit the regional economy. An increase in exports represents “new money.” Sales that occur within a region to customers from outside the region (“tourists” or “visitors”) are also exports. 1 45northresearch.com Imports: Purchases by consumers within a region from businesses outside the region are referred to as “imports.” Imports generate a net decrease in the amount of money circulating in the region. “Import substitution” happens when consumers substitute local products for products they previously purchased from outside the region. By reducing the flow of money out of the region, import substitution benefits the regional economy. Replacement Sales and Replacement Rate: When a new business enters a region, some of the products it sells to local consumers may replace products they previously bought from other businesses within the region. These “replacement sales” do not change the final demand for goods and services in the region. In this assessment, we estimate “Replacement Rates” as the percentage of total sales that replace sales to other regional businesses. Methodology This assessment uses the Regional Input-Output Modeling System (RIMS II) created and maintained by the U.S. Bureau of Economic Analysis.1 RIMS II multipliers estimate the total change in economic activity across all industries resulting from an initial change in one industry. They are based on analysis of interindustry linkages that track how revenues and expenditures in one industry relate to other industries. RIMS II multipliers quantify the impact of new sales to a region in two ways: first, through purchases the industry makes as part of its production process (in ILFSI’s case, that will include raw materials like fertilizer and services like accounting); and second, through increased spending from additional earnings by the industry’s workers and workers in the industries that supply its inputs (in ILFSI’s case, increased earnings by ILFSI employees and the employees of ILFSI’s suppliers). RIMS II multipliers reflect the total impact across all industries of a change in final demand in one industry. For instance, the RIMS II output multiplier for farms in Cumberland County is 1.63. That means that a $1 increase in final demand for farm products increases output across all industries in Cumberland County by $1.63. The following equation summarizes that relationship. Change in Final Demand * RIMS II Multiplier = Total Economic Impact RIMS II jobs multipliers represent the number of part- and full-time jobs created across all industries from a $1 million increase in final demand in one industry. For instance, the RIMS II jobs multiplier for farms in Cumberland County is 15.73. That means that a $1 million increase in final demand for farm products increases employment in Cumberland County by the equivalent of 15.73 jobs. The economic effects described by RIMS II multipliers last as long as the initial stimulus. This is particularly relevant for construction projects. In ILFSI’s case, local output, earnings, and jobs will increase during the Institute’s construction phase as the College builds and upgrades facilities. Once 1 For more information on RIMS II, see http://www.bea.gov/regional/pdf/rims/rimsii_user_guide.pdf. 2 45northresearch.com construction is complete, those impacts will dissipate and the Institute’s economic impact will come from its on-going operations. To estimate the change in final demand generated by a new contributor to a region’s economy, such as ILFSI, one must estimate the amount of new sales that occur in the region. “Replacement sales” that reduce sales to other regional businesses do no change final demand. For each ILFSI enterprise, we estimate the replacement rate and the change in final demand using the following equations: Replacement Rate = % of Sales that Reduce Sales to Other Regional Businesses Change in Final Demand = Sales * (1-Replacement Rate) RIMS II multipliers are available for thousands of geographies ranging from counties to the entire United States. Defining an appropriate region is imperative to generating accurate results. For this assessment, we follow best practices for agricultural economic impact studies and use the smallest appropriate region with available data, Cumberland County.2 RIMS II provides multipliers for 406 detailed industries and 62 aggregate industries, defined by the North American Industry Classification System (NAICS). For each ILFSI enterprise, we select the most appropriate industry that is available in the RIMS II system. We list the industry selected for each enterprise below the economic impact tables. All projections of ILFSI’s sales and expenditures are provided by project leaders. They are based on estimates of ILFSI’s activities when it is fully operational in 2021. Economic Assessment of ILFSI The ILSFI proposal contains six enterprises: a crop and livestock farm, a hydroponic farm, an event center focused on agritourism, a commercial kitchen, a retail market and cafe, and educational programming.3 In this section, we estimate each enterprise’s change to final demand in Cumberland County and how that change impacts the regional economy. We also estimate the economic impact of ILFSI’s construction investments. 1. Crop and Livestock Farm The ILFSI proposal centers on a four-and-a-half-acre Crop and Livestock Farm that will sell its products to Saint Joseph’s College and local consumers. It will both produce and market crops and livestock for meat. The Farm will also serve as an educational resource for students and the agricultural community. Once operational, the Farm will benefit the regional economy primarily through import substitution; 2 “The Economics of Local Food Systems: A Toolkit to Guide Community Decisions, Assessment, and Choices,” U.S. Department of Agriculture, Agricultural Marketing Services, March, 2016. Available at: https://www.ams.usda.gov/sites/default/files/media/Toolkit%20Designed%20FINAL%203-22-16.pdf 3 The hydroponic farm, commercial kitchen, and retail market are part of the larger Food Venture Center. 3 45northresearch.com that is, by reducing the amount of money that the College and local consumers currently spend on food produced outside the region and increasing the amount of money spent on locally grown food. The Farm may also benefit the regional economy by increasing the amount of food exported to consumers outside of Cumberland County. Final Demand Changes ILFSI will sell its agricultural products to three primary outlets: the College’s dining services; communitysupported agriculture (CSA) shares; and local farmers’ markets. The business plan contains projections of sales to each of these outlets (Table 1). Working with ILFSI leaders, we assume that 90% of sales will be new to the region and 10% will be replacement sales. Ninety percent is an aspirational benchmark but reasonable because the Farm’s overarching mission is to strengthen the local agricultural economy and project leaders have stated their desire to complement local production rather than compete with it. The percentage of replacement sales will depend primarily on the types of products that the Farm sells. If it specializes in products that are currently unavailable in the region, then the replacement rate will be lower and the economic impact will be higher. Increasing sales to customers outside the region will also lower the replacement rate. Table 1 shows that the final demand change expected from the Farm’s operations is equal to $285,000. Table 1: Crop and Livestock Farm: Sales and Final Demand in 2021 Farm Sales Replacement Rate College/Wholesale CSA Farmers’ Markets Other TOTAL Source: Saint Joseph’s College $224,000 $60,000 $24,500 $8,000 $316,500 Change in Final Demand ----10% ----$285,000 Economic Impact The Final Demand Change calculated above represents new economic activity that flows to the region because of a fully operational Crop and Livestock Farm. Table 2 shows that a final demand change of $285,000 results in an economic impact of $463,000 in output, 4.5 jobs, and $118,000 in earnings. Table 2: Crop and Livestock Farm: Economic Impact in 2021 Final Demand Change = $285,000 RIMS II Multiplier Total Economic Impact Impact on…. Output Jobs Earnings Source: RIMS II multipliers for farms 4 1.63 15.73 0.41 $463,000 4.5 $118,000 45northresearch.com 2. Hydroponic Farm ILFSI’s proposal includes a quarter-acre Hydroponic Farm that will focus on delivering fresh fruits and vegetables to market year-round and providing a lab and classroom for education. Its focus will be on crops with high demand in New England markets, but which currently have a heavy carbon footprint as they are sourced from California, Mexico, or South America. IFLSI staff projects growing 20,000 pounds of strawberries between September and May, a time in which almost all strawberries are currently imported from out of state. An additional $50,000 in other crops will be grown hydroponically in offseason months to reduce any competition with other local farms. The Farm will be positioned to help entrepreneurs across the region scale up small greenhouse pilot programs into larger operations, preparing them for transition to stand-alone, for-profit businesses, and will also produce significant crop yields for retail distribution. Like the Crop and Livestock Farm, the Hydroponic Farm will benefit the regional economy primarily through import substitution from end-users like restaurants, retailers, and direct consumers. Additional economic benefits will come through increased exports from local farmers as more farmers use the facilities and expertise of the Hydroponic Farm to extend their growing season and yields. Final Demand Changes Once fully operational, ILFSI’s business plan estimates 20,000 pounds of strawberries will be grown hydroponically as well as other crops to be determined. Because these crops will be grown and sold offseason when there is little or no local production, we assume that all of these sales expand the local economy due to additional exports or import substitution; that is the replacement rate is 0%. Based on an average price per pound of strawberries of $6.00 and a projection from ILFSI staff of $50,000 in additional crops, this results in a change to final demand of $170,000. Table 3: Hydroponic Farm: Final Demand in 2021 Crop Yield (lb) Strawberries Additional Crops 20,000 TBD Market price (per lb) Change in final demand $6.00 TBD TOTAL $120,000 $50,000 $170,000 Source: Saint Joseph’s College Economic Impact Table 4 shows that a final demand change of $170,000 results in an economic impact of $296,000 in output, 3.7 jobs, and $93,000 in earnings. 5 45northresearch.com Table 4: Hydroponic Farm: Economic Impact in 2021 Final Demand Change = $170,000 RIMS II Multiplier Total Economic Impact Impact on…. Output 1.74 Jobs 21.75 Earnings 0.55 Source: RIMS II multipliers for Hydroponic Crop Production $296,000 3.7 $93,000 3. Agritourism The ILFSI proposal includes a focus on agritourism, anchored by an Event Center at a restored stone barn built in the early 1900s and a nearby lakeside venue. The Event Center will offer weddings, farm-to-table dinners, corporate events, tours, and other agritourism-related activities. A catering service is also included in the Event Center’s services. The economic benefits of the proposed Event Center come primarily from increased visitor spending on events, receptions, and dinners. The economic impact of the Event Center will be higher as the percentage of visitors from outside the region increases relative to visitors from within the region. However, there may also be an additional, limited benefit from local residents using the Event Center for services they will otherwise have procured outside the region (import substitution). Final Demand Changes The ILFSI business plan projects sales for events at both the stone barn and lakeside venues as well as farm-to-table dinners and catering. The marketing plan and price point for the weddings and other events are geared toward destination tourists, so it is likely that a high percentage of sales are new to the region. For farm-to-table dinners and catering, there is more likelihood of replacement sales. However, the services offered will be unique, and the few competitors in the region that offer similar services are generally sold out. We therefore assume a high percentage of sales are new to the region. Table 5: Agritourism: Sales and Final Demand in 2021 Sales Stone Barn Events Lakeside Events Farm-to-Table Dinners Private Event Catering TOTAL Source: Saint Joseph’s College $280,000 $120,000 $48,000 $106,000 $554,000 Replacement Rate Change in Final Demand 0% 0% 10% 20% $280,000 $120,000 $43,200 $84,800 $528,000 Economic Impact To estimate the impact of ILFSI’s agritourism activities, we split the final demand change into two categories based on the differing nature of the activities undertaken at the Event Center. The farm-to6 45northresearch.com table dinners and catering ($128,000) align with the Food Service industry in the RIMS II model. The stone barn and lakeside events ($400,000), of which weddings are the largest source of revenue, correspond to “Accommodation.” Table 6 shows that the Event Center’s final demand change of $528,000 results in an economic impact of $923,000 in output, 8.7 jobs, and $219,000 in earnings. Table 6: Agritourism: Economic Impact in 2021 Final Demand Changes… RIMS II Multiplier: RIMS II Multiplier: Accommodation = $400,000 Accommodation Food Service Food Service = $128,000 Impact on…. Output 1.72 1.82 Jobs 15.29 20.16 Earnings 0.40 0.46 Source: RIMS II multipliers for Accommodations and Food Service Total Economic Impact $923,000 8.7 $219,000 4. Commercial Kitchen ILFSI’s Retail Lab and Food Venture Center will aggregate, market, and sell products produced both oncampus and by local farms. It will include a Commercial Kitchen where home-based operations can scale up their production. The Kitchen will impact the local economy through an increase in the final demand for the products produced by its users. Note this is not simply the value of the services provided by the Kitchen; it is the final market value of the products produced in the Kitchen that otherwise would not come to market. The change in final demand is a function of the Kitchen’s capacity, utilization, and the final sale price of products made there, adjusted by the amount of sales that simply replace existing sales within the region. As with the other components of ILSFI, the Kitchen’s replacement sales depend primarily on the type of products made there. The economic impact will be higher if the Kitchen’s products are unique to the region and do not directly compete with existing local producers. Final Demand Change ILFSI’s proposal calls for 1,200 square feet of commercial kitchen space. Based on similar kitchens in the region, ILFSI leaders estimate 12 companies will use the facility, each producing about $300,000 of food. Table 7 shows that the final demand change expected from the Kitchen’s operations is equal to $3.24 million. Table 7: Commercial Kitchen: Sales and Final Demand in 2021 Companies Average Gross Total Sales Replacement Using Kitchen Sales Rate 12 $300,000 Source: Saint Joseph’s College 7 $3,600,000 10% Final Demand Change $3,240,000 45northresearch.com Economic Impact Table 8 shows that a final demand change of $3,240,000 results in an economic impact of $5,681,000 in output, 57.4 jobs, and $1,437,000 in earnings. Table 8: Commercial Kitchen: Economic Impact in 2021 Final Demand Change = $3,240,000 RIMS II Multiplier Total Economic Impact Impact on…. Output 1.75 Jobs 17.71 Earnings 0.44 Source: RIMS II multipliers for Food and Beverage Manufacturing $5,681,000 57.4 $1,437,000 5. Retail Market and Café The Venture Center will also include a Retail Market and Café featuring products from the ILFSI farm and other local producers. Since the economic impact of goods produced on the ILFSI farm is accounted for in Section 1 of this assessment, only the retail margin portion of those sales (essentially, the gross profit) is included in this section. For products sold that are produced by other local farms, the value is in both retail and production. Therefore, the total economic impact includes both the retail margin and the cost of the goods produced by local farms. Like the Event Center, the economic impact of the Retail Market and Cafe comes primarily from increased visitor spending. The impact will be higher as sales to tourists increase and if the products and services of ILFSI are unique and attract visitors to the store. Final Demand Changes The ILFSI business plan projects sales for the Retail Market and Café. Working with ILFSI leaders, we assume half of sales come from products produced by the Farm, and the other half come from local farmers who increase their production because of the Market and Cafe. We assume that 90% of these sales are new to the region. Table 9: Retail Market and Café Sales and Final Demand in 2021 Total Retail Product Costs Retail Margin Replacement Sales (Sales – Costs) Rate $675,000 $337,500 Source: Saint Joseph’s College $337,500 10% Table 10: Retail Market and Café Sales and Final Demand in 2021 Purchases from Local Farms Replacement Rate $168,750 10% Final Demand Change Retail $304,000 Final Demand Change Farms $152,000 Source: Saint Joseph’s College 8 45northresearch.com Economic Impact Table 11 shows that a final demand change of $456,000 results in an economic impact of $780,000 in output, 7.5 jobs, and $198,000 in earnings. Table 11: Retail Market and Café: Economic Impact in 2021 Final Demand Changes… RIMS II Multiplier: RIMS II Multiplier: Retail = $304,000 Retail Farms Farms = $152,000 Impact on…. Output 1.75 1.63 Jobs 16.71 15.73 Earnings 0.44 0.41 Source: RIMS II multipliers for Food and Beverage Stores and Farms Total Economic Impact $780,000 7.5 $198,000 6. Educational Programming Threaded through the ILFSI proposal are educational components that will impart the skills and culture of agriculture to the community. These new training opportunities will likely generate long-term economic benefits by improving business owners’ operational efficiency, production capacity, marketing proficiency, and ability to add value to their products. However, those benefits are impossible to quantify with precision at this time. For this assessment, we use a conservative approach and only consider the impact of new tuition revenue to the College. Final Demand Change Table 12 shows projections of ILFSI’s tuition revenue from trainings and workshops. Programming will include non-credit classes for agricultural industry professionals as well as certificate programs with a focus on business skills. We assume this programming is new to the College and complementary to the region’s current offerings and does not replace any current courses or trainings offered. Table 12: ILFSI Educational Programming: Final Demand in 2021 Revenue Skills Courses Beginning Farmer & Rancher Programs K-12 Agricultural Camps Other TOTAL Source: Saint Joseph’s College 9 $600,000 $90,000 $60,000 $30,000 $780,000 45northresearch.com Economic Impact Table 13 shows that a final demand change of $780,000 results in an economic impact of $1,476,000 in output, 13.1 jobs, and $427,000 in earnings. Table 13: ILFSI Educational Programming: Economic Impact in 2021 Final Demand Change = $280,000 RIMS II Multiplier Total Economic Impact Impact on…. Output Jobs Earnings Source: RIMS II multipliers for Colleges 1.89 16.82 0.55 $1,476,000 13.1 $427,000 7. Construction ILFSI expects to spend at least $3.8 million on construction to get the six enterprises up and running. These investments are listed in Table 14. The College will likely spend additional funds to support ILFSI’s development, but for this preliminary assessment we only include the $3.8 million in construction expenditures. Final Demand Change Table 14: Construction: Investments Livestock Barn Hydroponic Farm Food Venture Center Heated Greenhouse Renewable Energy Systems Municipal Water Connection Total Source: Saint Joseph’s College Revenue $1,250,000 $850,000 $150,000 $500,000 $250,000 Economic Impact Table 15 shows that a final demand change of $3.8 million results in an economic impact of $6,496,000 in output, 40.4 jobs, and $1,629,000 in earnings. These benefits would flow through the regional economy during ILFSI’s construction phase. 10 45northresearch.com Table 15: Construction: Economic Impact Final Demand Change = $3,800,000 RIMS II Multiplier Total Economic Impact Impact on…. Output 1.71 Jobs 10.64 Earnings 0.43 Source: Saint Joseph’s College and RIMS II multipliers for Construction $6,496,000 40.4 $1,629,000 Summary Based on this preliminary assessment, Saint Joseph’s College’s proposed Institute for Local Food System Innovation will likely have a significant positive economic impact on Cumberland County. The construction phase will stimulate roughly $6.5 million in output, $1.6 million in earnings, and 40 jobs. Once fully operational, ILFIS will support $9.6 million in output, $2.5 million in earnings, and 95 jobs. Together, the total economic impact will be $16.1 million in output, $4.1 million in earnings, and 135 jobs. An important additional benefit not included in this assessment is the likely growth of agricultural start-ups and early-stage food processors who use ILFSI’s new facilities and training opportunities to expand their businesses. Also not included is ILFSI’s contribution to the larger regional goals of food security4. If the region were to achieve these goals, of which ILFSI will play an important part, the economic benefits of the restructured agricultural and food economy will be significant. Table 16: ILFSI Total Economic Impact ILFSI Enterprise Direct Impact (Final Demand Change) Construction Phase $3,800,000 Operation Phase Farm $285,000 Hydroponic Farm $170,000 Agritourism $528,000 Commercial Kitchen $3,240,000 Market & Café $456,000 Education $780,000 Operation Phase Total TOTAL Total Economic Impact Output Jobs Earnings $6,496,000 40.4 $1,629,000 $463,000 $296,000 $923,000 $5,681,000 $780,000 $1,476,000 4.5 3.7 8.7 57.4 7.5 13.1 $118,000 $93,000 $219,000 $1,437,000 $198,000 $427,000 $5,459,000 $9,619,000 94.9 $2,492,000 $9,259,000 $16,115,000 135 $4,121,000 4 Greater Portland Council of Governments; Greater-Portland Lakes Region: Maine’s Economic Engine Economic Development Action Plan for 2014-2018 2016 Update 11 45northresearch.com About 45 North Research Michael LeVert and Kate deLutio, founders and principals of 45 North Research, have over three decades of combined experience in quantitative and qualitative data analysis across a broad spectrum of industries and sectors. Our work experience includes senior research, economist, and leadership positions at large corporations, non-profits, educational institutions, and state and legislative government. We are both former Maine State Economists and have advanced degrees in economics and statistics. Michael, Principal and Chief Strategy Officer, has held leadership positions in corporate America, state and legislative government, and the non-profit sector. He has worked as an economist at Delhaize America; a statistician at L.L. Bean; a health care analyst; and Chief Strategy Officer for Jobs for Maine's Graduates. Michael served as Chief of Staff and Policy Director to the Maine Senate President in the 126th legislature and as Maine State Economist from 2009 to 2011. Kate, Principal and Chief Research Officer, was Maine State Economist from 2004 to 2009 and has held senior research and leadership positions at the University of Maine and the Maine School of Science and Mathematics. She has served on the Federal Reserve Bank of Boston's New England Public Policy Center Advisory Board and the Maine Consensus Economic Forecasting Commission. 45 North Research works with clients to develop and promote effective policies and programs by providing exceptional analysis in accessible formats. We don't produce dense, jargony reports. We offer academic quality research in compelling presentations that connect with your target audience. 12 45northresearch.com