Financing and the Small Regional Farmer

Presidio Graduate School’s Macroeconomics course for Spring 2012 is authoring a series of articles. The articles on this “micro-blog” reflect reactions and thoughts on news items, economic theory, and other issues as they pertain to the concept of sustainability. Follow along here.

By Ali Peman-Dupier

Over the past 100 years, there has been a drastic decrease in the number of American farmers, and a relative increase of industry concentration in agricultural production. Our food system has become characterized by large-scale mono-crop production, creating inequities of scale to the detriment of the small, regional, diversified farmer. It has become increasingly difficult for small farmers to compete, remain profitable, and access markets dominated by large commodity suppliers.

However, small farmers and their communities have responded and organized. As a result, community members are now increasingly able to support small regional farmers through the purchase of community supported agriculture (CSA) subscriptions, shopping at farmers’ markets, or buying locally-grown products at grocery stores. Consumer behavior is gradually shifting the market, but a healthy and educated evolution of the American food system is still being held back by serious barriers for small regional farmers - namely access to financing.

Farming is subject to the same financial constraints as many other types of production. Upfront capital is required to invest in infrastructure such as land and facilities, supplies, labor, and business systems, all of which are needed to bring products to market. One distinction in agricultural finance is the seasonal lag time between incurred operational costs at the onset of production, and revenue generated at the end of the seasonal production cycle. Without operational funding throughout the growing season, a farmer cannot maintain production to harvest. Unlike other types of producers who can push back target launch dates if needed, a farmer who doesn’t have the capital by a specific time of year risks losing an entire growing season.

The community supported agriculture (CSA) model has been a solution that addresses this timing issue by collecting community capital before production begins. Though the CSA model is proving to be successful, the singular approach often does not address the full scope of the issue.

The National Young Farmers' Coalition recently published survey findings which show that “lack of capital” is a top challenge for 78 percent of famers, with another 40 percent ranking “access to credit” as another great challenge. Small farmers are often busy focusing on managing production, and as a result they may not have the time required to navigate the multitude of financial resources such as loans from government programs, credit cooperatives, alternative investment funds, private lenders, or pre-payment programs. Furthermore, even once these resources are identified, farmers often face an additional barrier in meeting steep loan eligibility and reporting requirements from traditional lending institutions.

At this point, many farmers here in California turn to organizations such as Ca FarmLink or Cal Coastal, which provide financial, technical, and business management support to farmers. Both organizations address important gaps in traditional funding resources: Ca FarmLink provides capital for beginning, direct market, low resource and organic farmers; Cal Coastal focuses on Latino Central Coast strawberry growers. Fortunately, these and other mission-driven lenders are able to successfully support small farmers because of a vast wealth of knowledge required for success in an increasingly complex food system.

These financial resources are essential tools for small regional farmers for other reasons as well. As large agricultural players have taken a larger industry share, the pricing impact has been significant, leading to increased barriers to entry and growth for new, small-scale farmers. This is largely because larger farms are able to drive down their cost of production for each good as they grow, resulting in lower sale prices for consumers. Small farms often have a difficult time competing with these price points, especially at initial stages of operation, before scaling has brought down operational costs. Further exacerbating the issue is subsidy distribution in the U.S. which favors large conventional farm production. According to the Environmental Working Group, the top 20 percent of subsidy recipients receive over 80 percent of subsidies.

The good news is that community members are increasingly gaining awareness about where our food comes from and the importance of supporting small farmers and protecting our natural resources from the negative impacts of conventional farming. More and more of us are voting with our dollars, regularly shopping at farmers’ markets, purchasing CSA subscriptions, buying local products in our grocery stores, and asking restaurants about ingredient sourcing.

The combined effect of the shift in consumer spending is vital to reshaping our food system. While there is no one easy fix to the problem, perhaps we should support these efforts by fully understanding the issues and range of solutions, and taking further small steps that aim us in the right direction. We can support organizations investing in sustainable agriculture, explore the implications of the new Farm Bill, and continue to spend our dollars in ways that make a difference - by supporting our small regional farmers.

Ali Peman-Dupier is an MBA student at Presidio Graduate School, where she is focusing on business issues related to sustainable agriculture and a healthier food system.