Fed Reserve Report, Installment 2: Investing in Human Capital through Food Systems

By Dar Wolnik, FMC Senior Researcher | darlene@farmersmarketcoalition.org

In recent months, FMC has been taking a closer look at the recent landmark study, Harvesting Opportunity The Power of Regional Food System Investments to Transform Communities in a series of blog posts. [Click here to read our first installment on Infrastructure] The book-length report documents the sustained growth of the local food sector, which is projected to increase to more than $20 billion by 2019. The report’s contributors include FMC Board member Gary Matteson, along with more than a dozen current and former USDA and Federal Reserve officials, economists, and business leaders.

In this post, we highlight how the report stresses the importance of investing in human capital when building regional food systems. Human capital refers to the stock of knowledge and habits necessary to produce economic value and is a key component for any creative or “people-centered” sector of the economy. By encouraging investments in more labor-saving devices for farmers and by supporting the addition of skill sets for business owners and for workers, investors are finding better ways to grow the crop of food businesses serving the U.S. The report provides case studies of targeted interventions interspersed with advice from experts in lending or program structure to aid investors and program managers with finding ways to locate and expand these benefits.

Chapters including The Importance of Inclusion in Local and Regional Food System Efforts emphasize how “local and regional food system organizations and ventures are already working to incorporate better labor practices and inclusive opportu­nities for disenfranchised workers along the food supply chain.” This outlook stands in sharp contrast to the industrial food system, which bears the lamentable distinction of being home to seven of the ten lowest paying jobs in the American economy. The chapter authors’ use of three case studies—Los Angeles’ Good Food Purchasing Program, Cincinnati’s Our Harvest Cooperative and Detroit’s COLORS Restaurant—demonstrate how institutional purchasing policies, innovative business models and investments in training can help to ensure that the benefits of the growing market for local and regional food are shared by all.

Recovery

Providing immediate and tangible assets to entrepreneurs in communities impacted by disasters not only allows them to have a stable presence for potential customers but also tells producers that others believe in their talents and in their future even in a time of uncertainty.  In southern Alabama,  JPMorgan Chase Bank was approached by a small rural community to support the development of the Coastal Alabama Farmers and Fishermen’s Market (CAFFM). CAFFM was developed in response to the severe impact to local farmers and fisherman caused by the 2010 Gulf of Mexico oil spill and the regional drought of 2010 to 2013. The city’s public facilities cooperative provided nearly $6 million of debt financ­ing, which was combined with nearly $2 million of federal New Markets Tax Credit subsidies to support the development of a public market as well as a regional warehouse and distribution center for wholesale. That development is designed to straddle the marketing and the storage needs for undercapitalized producers while reducing their individual risk in a disaster-prone zone. Without funders like this project attracted, leveraging both private and public investment dollars, these projects would likely never materialize, especially in rural coastal areas of the US.

Channel choice

One of the trickiest decisions that farming businesses must make early on is choosing which channel(s) that they will market their output. New producers often gravitate to the most well-known, or the newest outlets currently getting the publicity without judging if that outlet is suitable for their needs. Farmers markets and food hubs have many shared characteristics but the differences are also important to understand.The latter is meant to chiefly satisfy a new type of retail and institutional demand and as a result, running them successfully requires expertise.  In Getting the Margin to Meet the Mission: Food Hub Financial Viability, James Barham and James Matson analyze the shared and unique characteristics of different models such as wholesale, direct-to-consumer and hybrid food hubs with their impacts in terms of worker output:

“Highest-performing hubs pay more for their labor but get even more perfor­mance for that labor, with the typical food hub full-time worker equivalent gen­erating sales of $387,204.” (1)

The authors also offer practical advice to hub operators with 10 key lessons:

  • As socially driven businesses look to secure both economic and social benefits, it is easy to lose focus of the economic bottom line in efforts to maximize the social mission. As such, it is essential for a hub to secure its own oxygen (i.e., profit margin) before assisting others with their oxygen (i.e., community benefits).
  • Don’t sell commodities
  • Sweat the small stuff
  • Be there all year for your customers
  • Get buyer commitment
  • Think farmers first
  • Make friends
  • Don’t buy what you don’t need
  • Put food safety front and center
  • Never forget “supply, supply, supply”

Good advice for any small business.

Incubation

Infrastructure and acumen are also linked in Chapter 15 by the director of Rural Development at the American Farm Bureau Federation who outlines the pluses and minuses of kitchen incubators, business competitions, and food accelerators. In case the last term is a new one to you, accelerators focus on rapid growth strategies and speeding-up the learning phases of a business.

The other strategies are likely better known: The business competition trend is now embedded in popular culture with television shows like Shark Tank where entrepreneurs pitch ideas to a panel of well-known business leaders who vie for the chance to make an investment in the businesses in return for equity stakes. Food-centered competitions (also known as “pitch fests”) often focus on encouraging a specific disadvantaged audience, such as women, Native Americans or at-risk youth. The primary drawback for these head to head competitions is that they offer limited business development training and are usually over completed with a short time.

By contrast, incubators offer a longer arc of support to their clients and may also have loan programs that are able to be repaid in ways that are appealing to a new farmer. One such program is The Main Street Project, which developed a farm incubator that provides support for Latino farmers living in Minnesota. Participants in the incubator are also offered a loan of approximately $9,000 to cover the cost of purchasing a flock of 1,000 birds, and the loan can be repaid in chickens!

Building the span of food systems depends wholly on increasing the number of farmers. Jill Auburn, the  National Program Leader USDA National Institute of Food and Agriculture takes up that idea in her chapter Investing in the Next Generation of Farmers. The NIFA program, Beginning Farmer and Rancher Development Program (BFRDP), funds organizations to provide education, mentoring and techni­cal assistance to new farmers and ranchers. From 2009 through 2016, the pro­gram made 256 awards totaling more than $126 million. That program requires a 25 percent matching of federal funds with non-federal resources, either in-kind or cash which often takes the form of private for-profit and nonprofit entities are often the partners in education and mentoring programs.  More information on financing options for new farmers and ranchers, along with production, marketing, legal and other technical information has been gathered in a national clearinghouse, Farm Answers (https://farmanswers.org).

Highlighting the unique return on these investments that increase knowledge and skill or reward unique innovations is stressed in Chapter 5 by authors Ariel Kagan and Kathleen Merrigan: “Too many analyses compare these local food systems to large-scale agriculture in terms of yields and productivity. That lens does not acknowl­edge the other important aspects of the local and regional food system landscape… Local and regional food systems create social capital through job training, market access and community development. These contributions are real, measurable and worthy of further study.”


(1) Farm Credit East, Wallace Center at Winrock International, Morse Marketing Connection and Farm Credit Council. 2014. Counting Values: Food Hub Financial Benchmarking Study. http://ngfn.org/resources/ngfn-database/knowledge/Food Hub Benchmarking Study.pdf.