FINANCING FARMING IN THE U.S.
OPPORTUNITIES TO IMPROVE THE FINANCIAL AND BUSINESS ENVIRONMENT FOR SMALL AND MIDSIZED FARMS THROUGH STRATEGIC FINANCING
By Susan Cocciarelli - C.S. Mott Group for Sustainable Food Systems at Michigan State University; Dorothy Suput - The Carrot Project; Ray Boshara - New America Foundation
Published by THE W.K. KELLOGG FOUNDATION FOOD AND COMMUNITY PROGRAM, JULY 2010Read the full Report: Financing Farming in The U.S.(PDF) Executive Summary This report chronicles the coming together of a diverse group of people from across the country over a six-month period to explore (1) the reasons for the chasm between an emerging sector of smaller-scale agriculture producers and access to capital, and (2) workable strategies to create successful farmer-lender relationships. Because this group represents individuals and groups across the country, it was our hope to promote capital access among small and mid-scale farmers nationally. The report shares the discoveries we made, and offers an invitation to others to participate in creating successful lending relationships among farmers and lenders in the years to come. This effort, conducted in six Sessions — five exploratory Sessions and a sixth dedicated to recommendations — was organized by The C.S. Mott Group for Sustainable Food Systems at Michigan State University (MSU) and The Carrot Project. Session I attempted to describe these small-scale farmers and emerging agricultural models, and generated three unifying themes: (1) these farms use organic, sustainable, or ecologically oriented production practices; (2) they produce more-diversified products to differentiated markets than do larger and/or more traditional farm operations; and (3) they are not producing mono-crop commodities (in whose markets the lowest prices are the defining factor), but are instead emphasizing localized markets, connection between farm and community, freshness, healthfulness, taste, and striving for a larger share of every food dollar. Describing this rapidly emerging agriculture sector in a coherent way is the first step in helping lenders understand the sector into which they are potentially lending. Session II identified the key obstacles faced by borrowers and lenders. Most of these borrowers have insufficient personal capital; may not be able to convey farm production knowledge or management experience; may have poor or insufficient personal credit histories; and generally lack a business plan and the ability to project a realistic cash flow. Lenders experienced in community development financing, particularly community development finance institutions (CDFIs), stressed that they have the skills to analyze and make loans to this emerging sector, but what they do not have is the ability to assess the information presented to them. Lenders want to know a viable business when they see it, to be able to understand the metrics, and to grasp the economic value of the production methods used. Session III focused on identifying the most commonly used risk management strategies as described by farmers, exploring whether those practices already in use by farmers could be a useful starting point for developing a “scorecard” or new type of analytical tool to help lenders better assess the risks associated with lending into this new sector. Their strategies were organized around five types of agricultural risks: production, marketing, financial, legal and environmental, and human resource. Session IV sought to learn from organizations that are successfully bridging the relationship and knowledge gaps between willing farmers and lenders. Each of the profiled organizations is a “hybrid” — a purposeful coalition of resources essential for farm viability — that serves as an intermediary between such resources and the farmers who need them. Generally, these hybrids share three key assets: (1) access to capital and land; (2) specific product technical assistance; and (3) farmer networking. They also share three challenges: (1) The Great Recession, or the stress on lending generated by the current slumping economy; (2) securing funding for operations and re-lending; and (3) finding enough qualified technical assistance providers and mentors for the farmers in this emerging sector. Session V was organized around meetings with two federal agencies and two national associations that participants believed could be most helpful in securing capital and providing technical assistance at the local level for smaller-scale farmers: the CDFI Fund at the U.S. Department of Treasury, Opportunity Finance Network, the Small Business Association (SBA) Association of Small Business Development Centers, and USDA’s Farm Service Agency (FSA). Research opportunities for these entities addressed questions related to accessing capital and credit, including: Where is it falling short for farmers and lenders? Who is being denied, and why? And which institutions are making loans, and which loans are successful? Presentation opportunities also emerged; especially noted was the annual Opportunity Finance Network conference for the CDFI industry, taking place in October 2010 in San Francisco. Session VI was dedicated to producing main findings and specific recommendations. The main findings from the Sessions were: (1) capable agriculture borrowers need access to specialized business support; (2) financing entities need to possess significant knowledge about newer agriculture operations; and (3) access to capital could be improved by opening up new sources and improving linkages to existing sources. Recommendations were organized into three categories: research, policy, and practice. Research questions include: quantifying the extent to which small farmers profiled in Session I are being turned down for loans, and why; and understanding what data are needed to develop a reliable “risk index” or “scorecard” to help determine loan qualification. Policy recommendations include: replicating successful public programs that address newer farmers, such as the USDA Beginning Farmer and Rancher Development Program; and the possible creation of a modest (though competitive) public fund, possibly housed at USDA, to test and replicate successful hybrid programs such as The Carrot Project, the Land Stewardship Project, and others. Practice recommendations include: facilitating the development of farmer-to-farmer lending pools; developing technical assistance specifically tied to production methods that enable wise land use and product expansion; and developing “pro-formas,” or templates, on projections, capital needs, marketing strategies, etc. for farmers’ use and then training them to use these resources. There was broad consensus that these Sessions succeeded in meeting their objective: to bring a diverse group of stakeholders together to begin to bridge the gap between this emerging sector of farmers and the capital they need to start or grow their operations. But it was also agreed that this effort achieved something much larger, as well: it tapped into and contributed new knowledge, ideas, and relationships to some of the country’s larger food-related issues, including hunger, obesity, health, water shortages, and poorly targeted agricultural subsidies. More broadly, by advancing the economic viability of these smaller and localized farming operations, the Sessions are helping to overcome some of the most significant challenges the U.S. faces at this moment in our history: creating jobs, reducing corporate consolidation, revitalizing rural America, and promoting a culture that rewards conservation and stewardship, small-scale ownership, entrepreneurship, families and local communities, and the ability to define yourself not by what you consume, but by what you produce. These challenges are significant; the potential solutions and progress on them are exciting.