The short answer: It is a law that allows you to make certain types of food from your home kitchen, and then legally sell them at certain venues.
The long answer: In 1993, the first federal food code recommended that food made at home should not be sold in a commercial food establishment. Almost all states adopted that ruling to some degree, and since then, most have had a firm stance prohibiting the sale of homemade foods. In the late 90’s and early 2000’s, a select few states adopted laws to override that prohibition, allowing certain kinds of home food products to be sold — these were often known as “baker laws” or “pickle bills”.
Starting in 2007 and throughout the Great Recession, many more states started adopting such laws to help give their citizens an easier way to make some income, with the side-benefit of helping local economies. Many of the more recent laws used the term “cottage food”, and the name stuck, thereby creating the unofficial “cottage food industry”. The term “cottage food” helps describe many of the small and local home-based food businesses (also known as “cottage food operations”, or CFOs) that are cropping up throughout the country.
As the local food movement has become more popular, more states have added or improved “cottage food laws” to allow these home food businesses to exist legally. Cottage food laws are different in every state, but each law allows home food sales in some way. Most cottage food laws have limitations such as what types of products are allowed, where a business can sell, and how much they can sell in a year. You can learn more about each state’s cottage food laws here.