- Farm Business Management: budgets/cost and returns
- Sustainable Communities: new business opportunities
The Carrot Project seeks to create financing services to narrow financing gaps confronting smaller, limited-resource farmers in the Northeast. Farmers can’t find the financing they need because they live in an area – such as the Northeast — without agricultural lending expertise, don’t have the property to secure a loan, have a non-traditional business plan, or are simply looking for too small an amount to be considered by traditional lenders. Examples of this problem have been recognized by agricultural professionals, Jon Jaffe of First Pioneer Farm Credit, ACA, and a member of The Carrot Project Advisory Board, states that “farmers who lack equity need first- or second-position liens to provide adequate collateral to receive financing.” John Harker, Maine Department of Agricultural Resources, states, “I know too many people who can’t find farm financing.” A USDA FSA study of on-farm cheese makers in Vermont found that insufficient financing was an obstacle to 63 percent for start-up, and up to 20 percent for operations and expansion. The Self Help survey of North Carolina sustainable farms showed a definite need for smaller loans; it extrapolated that demand for smaller loans could reach $3 million. While modest operating loans or lines of credit are one key financing obstacle, “securing capital for appropriate land acquisition is another major gap,” according to Kathy Ruhf, Land For Good, Inc. Today’s farmers face unprecedented challenges. Anyone farming today is at the crux of an urgent, complex, and fascinating situation that offers pitfalls and opportunities. The American farm population is aging; with their exit, a new generation of farm operators is struggling to keep – or make – farm businesses viable. Global competition along with increasing costs of production such as land, labor and fuel make it more difficult for the Northeast farmer to compete in a market where price is the single most important factor. On the lending side, tightening regulations, reactions to farm foreclosures in the 80’s, the savings and loan debacle, limited USDA-FSA budgets, and consolidation of lending institutions have resulted in fewer lenders with agricultural expertise or mandates. Community development finance institutions (CDFI) finance many small businesses. However, they were pioneered to address urban issues and typically have little or no agricultural expertise. While agricultural lenders such as Farm Credit and the USDA Farm Services Agency – known as the lender of last opportunity – do offer credit, neither adequately serves farm operators who are perceived as higher risk because they are start-up, have “alternative” enterprises, or are poorly collateralized. At the same time, the public’s growing interest in local food production and awareness of our energy dependencies offer support for a regionally focused agriculture consisting of a variety of types and sizes of farms. There are people and organizations that want to invest in enterprises that foster their values of localism, sustainability and land conservation. Socially responsible investing, which grew to $2.29 trillion in 2005, according to the Social Investment Forum, could be an effective response to the farm lending gaps identified above. Presently, however, “Dedicated investment vehicles do not exist for investors seeking community investments in this area,” reports Eric Becker of Trillium Asset Management and a member of The Carrot Project Advisory Board. This suggests a win-win strategy that brings diverse community members’ socially progressive values and motivations to address a crucial gap in farm lending.
Project objectives from proposal:
The Carrot Project is working to make loans and guarantees available to smaller limited resource farmers and exploring equity solutions. The Carrot Project’s model pulls together and takes advantage of the intersection of farmers’ needs, their limited access to lenders, and sources of appropriate capital to both increase the amount of financing available to farmers and increase their access to financing.
• Need: Small- and mid-sized sustainable farmers with viable businesses who are unable to find adequate financing to maintain or improve their businesses, or who need a stepping stone to work with existing lenders.
• Access: Lenders are primarily interested in new business generation. They are either commercial lenders interested in community economic development, community development financial institutions (CDFI) that have a limited agricultural portfolio, or agricultural lenders who require second position financing for deal completion.
• Capital: Both individual and institutional investors interested in sustainable agriculture lack an appropriate investment vehicle.
The Carrot Project’s concept is innovative in two important ways. We are working to narrow (or eliminate) financing gaps by facilitating financing, and by working to change the system so that an organization like The Carrot Project is no longer necessary. The Carrot Project’s approach to addressing financing gaps is unique and has the potential to be effective because we are bringing new community partners, investors, to the issue and strengthening the involvement of lenders while emphasizing the needs of smaller, limited-resource farmers. The Carrot Project’s focus is not only on debt financing, but also on building equity models that work for farmers and investors. No other organization is solely focused on using financing to support both farm operations and farmland so that the social, environmental, and economic benefits of smaller farms using organic or other sustainable practices are realized.
What we learned from CEI, Inc., Western Mountain Alliance, NOFA-VT and others in the Northeast as well as organizations around the country, is that various non-profit and government programs assist farmers with financing. However, little of this funding is focused on smaller sustainable farms or is available to those with limited resources. Many of the programs are restricted by organizational and geographic focus as well as the terms offered. Existing programs are not focused on changing access to financing or establishing dedicated investment vehicles. Neither are they set up to both explore equity options and attract investors.
The project for which we seek support, the Pilot Investment Project, is a critical component of our work. In addition to the two farmers that will benefit from the pilots, the Pilot Investment Project is needed to inform the design and the creation of The Carrot Project’s business model. While the Farmers’ Financing Needs Assessment, which NESARE is currently funding, will help us better understand and describe financing gaps, and ultimately market our programs, the Pilot Investment Project is necessary to determine the best model for debt financing. Working with two farmers will allow us to test the farmer application process, establish relationships with lenders, and gain credibility with investors. We have already learned significantly from our first Pilot Investment in Maine (for a description, see Attachment A) and will continue with two new pilots in 2008.