Why private equity is investing in small organic farmers

The Good Eggs distribution center in San Francisco
David Paul Morris | Bloomberg | Getty Images
The Good Eggs distribution center in San Francisco

With each passing year, Judy Lessler, owner of Harland's Creek Farm in Pittsboro, North Carolina, finds it harder to sell shares of the crops that she and a small group of other organic farmers offer to local residents by subscription.

The farms use the community-supported agriculture (CSA) model. Customers pay early in the year for shares of their crops through her group, the Durham Collaborative CSA. That way, farmers have the cash reserves to pay for seeds and other supplies.

In 2010 the Durham Collaborative CSA had 132 subscribers. That number had dwindled to 66 by last year, Lessler said.

"Getting more consumers to see the value of small, sustainable farms will ultimately require more farmers to embrace something far from the work they do in the fields: marketing."

It's not that local foodies have given up on organic produce. But increasingly, consumers are ordering through Internet platforms that provide an alternative to the usual venues that connect farmers with customers, such as CSAs and farmers' markets. Lessler understands that the Internet "bundlers" share her commitment to organic food, but still worries about how to compete with a fast-growing one that has taken off in Raleigh.

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"If you look at their growth curve and our decline curve, they'd probably have the same slope—with theirs positive and mine negative," said Lessler, a former statistician for a research institute who began farming in 2001. To make up for the lost business, she and her colleagues are ramping up their sales in local farmers' markets.

The farm-to-table movement

Going back to the land isn't necessarily a recipe for the simple life, as many local farmers discover. Some new trends, like the farm-to-table movement, have helped them. "It's creating a lot of entrepreneurial opportunities," said attorney Andrew Sherman, a partner in Jones Day in Washington, D.C., who advises businesses of all sizes. But at the same time, farmers who have relied heavily on the CSA model must now compete for customers with well-financed Internet middlemen.

Farmigo, a digital platform in Brooklyn, New York, that has raised $10 million in venture capital, enables customers in San Francisco and New York to pick up farm-grown organic produce delivered to their communities. Meanwhile, San Francisco-based Good Eggs, backed by $31.5 million in venture capital, has made inroads in San Francisco, Los Angeles, New Orleans and Brooklyn. It allows customers to order produce that is delivered directly to their homes.

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"Farmers are experiencing challenges filling their shares or have been for the past four years," said Caylor Roling, project coordinator of the Portland Area CSA Coalition in Oregon. "I definitely hear from the farmers that they are not meeting their membership goals for the year."

One reason the financial sector is investing in farming is the rising value of farmland, according to a 2014 report by the Oakland Institute, a think tank in Oakland, California. As farmers retire, investors are swooping in to scoop up the land. "Driven by everything from rising food prices to growing demand for biofuel, the financial sector is taking an interest in farmland as never before," the report says. "[A] new generation of institutional investors—including hedge funds, private equity, pension funds and university endowments—is eager to capitalize on global farmland as a new and highly desirable asset class."

Grassroots entrepreneurs

Against this backdrop, more farm owners are realizing that as leaders of their teams, they need to focus more on the business side of their operations to stay competitive.

"It seems like there's a tendency in farming not to be very entrepreneurial," said fourth-generation farmer Jamie Ager, who, with his wife Amy, raises grass-fed hormone and antibiotic free beef, as well as crops such as blueberries, at Hickory Nut Gap farm in Fairview, North Carolina, near Asheville. "You have to really be creative and figure out how to make it work on a farm. Organic is a growing market to jump into—and figure out how to do a better way."

To keep their farm thriving financially, Agers runs a CSA for meats and sells at tailgate markets and to local restaurants. He also supplies stores such as Whole Foods. The farm, which employs seven or eight people during peak periods, also plans to open a kitchen so visitors can enjoy the food grown there.

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"You have to be a business person, too," said Agers. "That's a big transition to make for a lot of farmers. You can grow vegetables or raise cattle all day long, but if at the end of the day you don't get the dollars to make the thing work, you are not going to stay in business."

Going digital to grow

It's not just technological disruption that poses challenges. In Portland, the popularity of gardening has prompted some organic-food lovers to opt out of CSA subscriptions, Roling said. "I often hear people say, `I have a big garden. I don't need weekly vegetables," she said.

Meanwhile, some farmers find that there is confusion among consumers about the difference between the agricultural methods they choose versus those used by large-scale organic farms.

"Organic doesn't mean nonindustrial," said Mark Spitznagel, a hedge fund investor who is founder and president of Universa Investments in Miami and owner of Idyll Farms, a farm and creamery located in Northport, Michigan, that raises pasture-fed Alpine goats.

Not all farmers find the trend toward digital intermediaries worrisome.

John Peterson, who runs 25-year-old Angelic Organics Farm in Caledonia, Illinois, got involved early in the CSA movement in Illinois—when there were a handful of CSAs and not the nearly 100 he counts now. He thinks digital sites can serve a purpose for some farmers.

"If you don't have a middleman, you become the middleman," he said. "You have to become the marketer and transportation system. Middlemen, for a lot of growers, are letting the growers grow and taking care of a lot of other functions."

Airdone | iStock | Getty Images Plus

That said, Peterson wishes more people would develop relationships with individual farms—something that CSAs provide. Aggregators may be skillful at customizing the boxes they deliver door-to-door, he said, "but they can't give a relationship to a farm." He loves it that subscribers to his CSA have a mental image of the barns and land when they receive the food he has grown.

"They come out here. They bring their kids out there. They see where the vegetables are growing," he said.

Getting more consumers to see the value of small, sustainable farms will ultimately require more farmers to embrace something far from the work they do in the fields: marketing.

"They have a great story to tell," said Simon Huntley, who runs a Facebook group for farmers involved in CSA as well as Small Farm Central, a Pittsburgh firm that provides Web services to farms that do direct marketing. "They have that authenticity. They need to be able to tell why it's important to support individual farms."

By Elaine Pofeldt, special to CNBC.com