Why Does Local Food Matter for Investors?

Local food seems to be all the rage these days. Chipotle Mexican Grill  (NYSE: CMG  ) recently announced that it will purchase more than 20 million pounds of locally grown produce in total this year, up from 15 million pounds in 2013. Whole Foods Market  (NASDAQ: WFM  ) prides itself on supporting local vendors with a variety of products, noting, among other things, the positive environmental impact of buying local by reducing "the environmental impact and costs of transporting the products." 

Is local food all it's cracked up to be, or do companies like Chipotle and Whole Foods need to reorganize their priorities? Let's have a closer look. 

The potential problem with conventional produce 
When you sit down for dinner tonight, how far do you think that food will have traveled before arriving on your plate? The Worldwatch Institute estimates that food in the U.S. typically travels between 1,500 and 2,500 miles from "farm to table," a distance increase of as much as 25% over the past 20 years. 

"The economic benefits of food trade are a myth," contends Brian Halweil, Research Associate at Worldwatch and author of "Home Grown: The Case for Local Food in a Global Market." As opposed to food that is shipped across the country, local food, says Halweil, is "harvested at the peak of ripeness and doesn't have to be fumigated, refrigerated, or packaged for long-distance hauling and long shelf-life." 

The Le Cordon Bleu College of Culinary Arts encourages people to eat fresh and raw foods, claiming that a "raw food diet has been credited with lowering blood pressure, obesity[,] and even the chance of developing diabetes." Indeed, research published in the Southern Medical Journal in 1985 found that a majority raw foods diet helped patients lose weight and reduce hypertension. 

In light of growing awareness regarding the environmental and health benefits of eating fresh foods, it is not surprising that consumer trends are following suit. 

Consumer trends 
It would make little sense for businesses to focus on obtaining and selling local foods unless there was a clear need or demand from customers. The trends in this area are striking and reiterate the initiative taken by businesses such as Chipotle and Whole Foods. The organic food market as a whole in the U.S. is expected to grow at a 14% annual rate through 2018. Additionally, the National Restaurant Association's annual chef survey identified the top 10 menu trends for 2014, of which the top three were:

1. Locally sourced meats and seafood

2. Locally grown produce

3. Environmental sustainability 

Hyper-local sources (such as restaurant gardens), sustainable seafood, and farm/estate-branded items also rounded out the top 10 menu trends this year.

Similarly, the National Grocery Association's 2014 Consumer Panel found that 32.1% of shoppers desired "more locally grown foods." This was second only to price/cost savings. 

In a report published in March, the United States Department of Agriculture expanded on some of these key trends. "Today's consumers," says the USDA report, "are more interested than ever in what they eat and where their food comes from." 

Capitalizing on consumer demand 
As of 2011, more than half of local food sales -- $2.7 billion to be exact -- came from farms selling directly to regional distributors, grocers, and restaurants such as Chipotle and Whole Foods. 

Chipotle defines local produce as anything within 350 miles of the restaurant in question. While 350 miles may seem like a hefty distance to consider "local," remember that it's significantly less than the typical 1,500 to 2,500 miles food travels from farm to table in the U.S.

Chipotle purchased 5 million pounds of local ingredients in 2010, equating to approximately 4,600 pounds of local ingredients per restaurant in 2010. That number is slated to grow to more than 20 million pounds of local ingredients -- well beyond 11,400 pounds of local ingredients per restaurant -- this year.

With its stores Whole Foods tends to define local as within state lines -- except for big states such as California -- and each Whole Foods store is encouraged to find and support local vendors. Taking it a step further, Whole Foods is providing up to $25 million in low-interest loans to "independent local farmers and food artisans" through its Local Producer Loan Program, supporting the cultivation of local vendors and products. 

Foolish bottom line 
There is little doubt that there are significant health benefits that come with eating fresh produce in addition to minimizing the environmental impact with less transportation and storage. These factors are now conjoining with crystal clear economic trends supporting an ever-growing advance to fresh, local products. Innovative companies -- such as Chipotle and Whole Foods -- have already benefited from clear consumer trends toward local foods.

Companies that don't adjust their focus to local foods are not only ignoring the health and environmental consequences but are resisting significant consumer and economic trends toward local food. Expect more companies to follow the lead of Chipotle and Whole Foods and support locally grown produce in the years ahead. Those that don't, in my opinion, will be unlikely to reward investors with market-beating returns over the long haul.

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David Kretzmann

David started investing in stocks when he was 12 years old and has been a Fool ever since. He is a graduate of Berea College and the Motley Fool's Analyst Development Program, serving as an analyst in Rule Breakers and Supernova. Follow David on Twitter @David_Kretzmann.

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9/2/2015 12:52 PM
CMG $720.70 Up +13.99 +1.98%
Chipotle Mexican G… CAPS Rating: ***
WFM $32.24 Up +0.11 +0.34%
Whole Foods Market CAPS Rating: ****