By Ellie Winninghoff
Looking to invest in ways that help scale the supply of fresh local food and build regional food systems?
The Carrot Project, a Somerville, Mass.-based nonprofit that specializes in small farm finance, has developed three loan funds in partnership with different financial institutions that offer operating capital to organic farmers in Vermont, Massachusetts and Maine. And RSF Social Finance, a San Francisco-based nonprofit financial services company, has two funds that include businesses that support regional food systems.
"Access to capital is one of the most challenging issues for farmers," says Gray Harris, director of sustainable agriculture at Coastal Enterprises Inc. (CEI), a community development finance institution, or CDFI, in Wiscasset, Maine. CDFIs serve minority and low-income people, and CEI has partnered with The Carrot Project to offer operating capital to Maine farmers through the Maine Farm Business Loan Fund.
In Vermont, The Carrot Project and the Vermont Community Loan Fund, a Montpelier-based CDFI, have partnered to develop The Carrot Project Agricultural Loan Fund. And in Massachusetts, the nonprofit has partnered with the state's finance and development authority to develop the MassDevelopment/The Carrot Project Small Farm Loan Program. It is launching the Greater Berkshire Agricultural Fund later this year.
These programs are open to individual investors. They don't have to be accredited, but they need to invest a minimum of $25,000. The interest rate on Carrot Project investments range from .75%–roughly the same as a market rate CD-to up to 2%.
Prime The Pump
According to a study conducted by The Carrot Project in 2007, 25% of the 700 farmers surveyed had trouble accessing loans. The problem, says Carrot Project founder and executive director Dorothy Suput, lies with both farmer and banker.
She says many farmers do not understand how to communicate with bankers or how to write business plans and thus require technical assistance before they are "investment ready." And while banks originate and service loans, they usually do not hold those loans in their portfolios. This means there is less emphasis on judgment and more emphasis on conforming to industry standards.
Suput adds that most banks do not understand the business model for small organic farms focused on sustainability. "To be sustainable, these farms are more diversified, which adds to operational and marketing complexity," she says. "Most of the farmers that are part of this new wave are focused on retail and value-added farming. They do not sell to mainstream commodity markets."
Each fund works somewhat differently. But in general, The Carrot Project does the farmer outreach, site visits and due diligence. It may even package the loan based on agreements made ahead of time and make a recommendation to its lending partner, who closes the deal. "They make the final decision," Suput says, "but we see it as more of a check. They've never turned down a loan we recommended."
A key part of The Carrot Project's role also includes technical assistance to the farmers. "That's similar to CDFIs," she admits, "and we are working with CDFIs in two states. We are focused on gap financing, and I would say we are extending their capacity."
Whereas Carrot Project funds are lent directly in Maine, they are used for collateral in Vermont and Massachusetts. This collateral ranges from 20% to 100% of the loan amount, depending on the lender, and farmers must also post collateral. Each fund has a 10% loan-loss reserve, which has been provided by donation. Farmers usually pay 6.75% to 7.5%.
In most cases, microloans are for amounts up to $35,000–or $75,000 for the Berkshire Fund. Farms obtaining loans have ranged from a berry grower/cordial maker and a greenhouse herb business to dairy farmers, grass-fed beef operations and a mussel farmer.
There a bunch of beginning farmers focused on equipment such as hoop houses, tractors, irrigation equipment, generators and sheds. "They are looking for everything from shelter and barns to all of their equipment to be movable," Suput says. "Their premise is that if they are going to farm, they will never be able to own land."
Creating Food Hub
But the production of local food is only part of the story. "Even if you have a perfect product, it's not going to work if there's not a market," CEI's Harris says. "That was a real issue [for farmers] years ago. But now we're finding that the markets have really opened up [for local food] and the issue is turning to scale and scalability so farmers can sell not just to the high end."
With respect to scale, the key issue is the infrastructure to move the food from farm to local plate, says Patricia Cantrell, a food system economic development consultant at Regional Food Systems, LLC in Beulah, Michigan. She points out that a lot of the local storage and process distribution doesn't exist anymore.
"As we centralized or globalized our food system, the avenues that farms have to travel to market are pretty large scale," she says. "The national distribution system doesn't have a lot of on-ramps between a farm and a local school, for example. So the ability of several farms to put their products together for a local school district requires starting from square one."
Financing food hubs is a big focus for RSF Social Finance, which makes direct loans to nonprofit and for-profit social enterprises. Among other things, food hubs aggregate and distribute fresh produce from local farmers to local institutions such as schools and hospitals.
According to Taryn Goodman, RSF's director of impact investing, food and agriculture businesses make up 30% of the firm's Social Enterprise Fund. In addition to companies like SPUD (Small Potatoes Urban Delivery), it includes loans to the Biodynamic Farming and Gardening Association and Common Market Philadelphia, a food hub that also works in food deserts. The fund carries a $1,000 minimum and currently yields 1%.
The firm's PRI Fund, which was designed for foundations for whom the main purpose must be charitable, to date includes investments in two food hubs: Crown O' Maine and Philadelphia's Common Market. With a $100,000 minimum and 5-year lock-up, the return is 1%. But even with the higher risk/reward profile than the firm's Social Enterprise Fund, Goodman says one individual has insisted on investing. "He wants to invest his money to build a new food system," she says.
A former investment banker and veteran financial writer, Ellie Winninghoff's work about impact investing is linked at DoGoodCapitalist.com. She can be reached at: ellie.winninghoff (at) gmail (dot) com.
