La Montanita - Local Organic Food Cooperative

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Description

Case focusing on funding issues.

Ellie Winninghoff:

"La Montanita’s story began in the mid-80s when more stores began to offer organic food and the co-op had to figure out how to compete. After reading Jim Collins’ book, Good to Great, which urges companies to determine what they do well and take it to the next level, management concluded that its competitive advantage was its relationship with local food producers. To boost sales of local food, the co-op invested $150,000 in a strategic foodshed program.

Today, the co-op has 17,000 member-owners and serves 900 local food producers growing 1,500 local products. Revenue was $27.5 million in 2009, the most recent available figure. Of that, 20% of sales came from locally-grown food.

Producers can either sell direct to the five stores in Albuquerque, Santa Fe, and Gallup or do business through its freezer-equipped, 11,000-square-foot co-op distribution center. The co-op sends trucks six days a week to producers within 300 miles—it even delivers milk all over the state for one farmer that no longer has to take a side job. And it calls a local farm collaborative every Monday morning to determine what vegetables have been picked so it can buy them locally rather than from a national distributor.

La Montanita has also played a part in expanding the local food supply, working throughout the entire “value chain” from farm to plate. After helping ranchers form a co-op for the only grass-fed beef in the state, for instance, it now buys two animals per week and distributes the rest. And after working with a small business to renovate a mill that had been in the family since 1800, it now makes bread made from New Mexico-grown hard red winter wheat and sells flour all over the state.

To boost sales of locally-grown food to 30% by 2020, the co-op determined if needed to help current suppliers attain scale. In 2007, it began making loans up to $5,000 to New Mexico farmers and other food producers. One early loan, which allowed a goat farmer to build cheese-aging caves (there were none in the state), allowed him to increase his income because he did not have to sell all his fresh chevre during the spring glut when it’s in season. It also meant that co-op members could have New Mexico goat cheese all year round.

The idea for La Montanita’s microfinance fund came about at the first national gathering of Slow Money, held in Santa Fe in October 2009, where enthusiasm for investing in local food systems was high. People clamored to know how to do it and asked if they could invest in the co-op. But a model for local investing in local farmers did not become clear until La Montanita’s annual meeting a couple of weeks later. That’s when a presentation was made about SHARE (Self Help for a Regional Economy), a western Massachusetts-based micro-financing program.

“We thought that the micro-lending process could work really well in our community,” says Seydel from La Montanita, who notes that New Mexico is the second poorest state in the nation and has very small farms for which loans of $250 to $1,000 can make a huge difference. Defaults on the $40,000 in loans the co-op already had made, she says, totaled just $300—or less than 1%. “We felt we could trust our community of farmers and food producers” she says, “and so we just went for it.”

Last October, La Montanita raised $97,000 for its first fund, which was only open to co-op members and residents of New Mexico. Known as the LAM Fund, it consisted of “A” interests and “B” interests—interests rather than shares because they do not denote ownership; instead, investor share an “interest” in funding the local food system and building the local food economy. The co-op invested $25,000 in all the “A” interests, which are accessed first in the case of default. It offered individuals “B” interests at $250 each, with a max limit of $10,000. Those interests accounted for the remaining $72,000.

“No one investor can buy out the fund,” Seydel says. “We wanted to create a system in which grassroots people know they are invested in these local farmers and ranches, and when they walk into the co-op and see products on the shelf with the name of the farm that they know they have invested in, they will be more likely to purchase the products.”

In terms of reducing risk, this is profound. According to the offering memorandum, the ability of farmers to repay their loans depends in part on the co-op’s ability to sell their product. But consumers, as investors, are in this together with the co-op and the food producers. This is not so much about competition as it is about collaboration.

Beyond that, the co-op takes the hit up to $25,000 if there is indeed a default, reducing risk to investors. For defaults above $25,000 (possible in the case of a major weather event, for example), investors share the loss on a pro-rata basis. So, for example, if there’s a loss above the $25,000, that would be split between the other interests. That means grassroots investors would lose way less, say, than if they loaned the same amount of money individually to an individual farmer.

The LAM Fund’s five-member loan committee includes representatives from the New Mexico Federal Credit Union and the New Mexico Loan Fund, as well as a lawyer, local investor and Seydel, who runs the fund as part of her job at La Montanita. The application process for farmers is set up to be as comprehensive—but easy—as possible. Most small-scale farmers, after all, did not go to business school.

“We try to help farmers think through a business plan in really simple terms,” Seydel says. “What do they want? Where are they going? What are their strengths and weaknesses? What skills do they need? And then we try to help them access those skills.”

After the loan committee approves the loan, it’s administered by the credit union. Investors’ capital, which is deposited at the credit union, serves as collateral for the loans to farmers/food producers. Since the loans are otherwise unsecured, this means that the credit union can make these loans at a lower rate than it otherwise could for such high-risk loans.

Technically, investors are loaning capital to the credit union, which uses the money to make loans to the farmers. And because their capital is pooled, they earn more than if they deposited their funds individually for the same purpose––0.30% (for one year) rather than 0.2% at today’s rates.

Ultimately, Seydel says, the idea is for investors to share certain fees as well. “Our dream is to give investors 3%, maybe 5% on their money.”

From the farmers’ perspective, the annual interest on the loan is 5%. There is also a one-time 5% “access to funds” fee which can be included in the cost of the loan, plus $45 in other fees. To help jumpstart the program, a local philanthropist agreed to pay the access to funds fees up to $3,000.

Unlike many microfinance funds in the developing world, the fund also stands out for its flexibility. It negotiates the repayment term with each borrower based on their needs––monthly, quarterly, or a balloon payment at the end. And if, say, there’s a hailstorm and a crop is wiped out, it can choose to extend the credit term to make sure a farmer does not go into default.

“We want the farmers to build up their credit with the credit union and the larger banking system,” Seydel explains. “We’re doing this to help them build up and scale. That’s why we’re doing this.”

Due to high demand, the Fund will raise an additional $100,000, and will use the same structure as in the first funding round.

La Montanita treats local farmers like the community asset that they are, and that makes sense in an era where it increasingly pays to restore the soil and protect local foodsheds." (http://www.energybulletin.net/stories/2011-12-14/soil-capital-ground-level-investing-opportunity)