"Instead, the pathway followed by many CSA schemes, starts with an informal
arrangement with a farmer, grower or landowner, and may graduate to
becoming an incorporated body that owns the distribution activities of the
CSA, and, in the longer term, enters into a tenancy agreement with the
landowner."
Community investment in CSA
Tablehurst farm
Introduction
During the latter part of 2009, the Soil Association ran two workshops on
community finance for Community Supported Agriculture (CSA). Over 50 CSA
practitioners attended these workshops, which drew on their ideas, plans and
practical experiences to explore how the financing of CSAs could be
improved. The workshops were led by Jim Brown, the principal consultant to
the government-backed Community Shares programme, and Paul Sander-
Jackson, Chief Executive of Wessex Reinvestment Trust. The intention of this
paper is explore how communities can invest in CSA, drawing on the lessons
from the workshops.
What is community investment?
Community investment can be an important source of capital for CSA
ventures. It involves members and supporters of a CSA investing money
through the purchase of bonds or shares. Bonds are a form of loan
agreement, providing finance for a specified period, after which the enterprise
repays the loan plus the agreed interest on the loan. Share capital is different.
It is a permanent or semi-permanent investment, in return for which the
investor becomes a member and part-owner of the CSA, and may receive
interest or dividends on their share capital, if the CSA is profitable.
Community investment is not new. The consumer co-operative movement of
the nineteenth century was financed by ordinary people investing share
capital. In the last ten years there has been a resurgence of interest in this
practice, with over 40 new cases of community investment in enterprises
serving a community purpose. Nearly all of these cases have used a legal
form called the Industrial and Provident Society (IPS). This legal form has
been favoured because of the unique attributes of its share capital, which
include:
• One-member-one-vote (rather than one-share-one-vote, practised in
companies), which means that the enterprise is democratically
controlled
• Limitations on the amount of interest that can be paid on share capital
• An upper limit on the amount that individuals can invest: currently this
limit stands at £20,000
• The share capital can be withdrawn by members, subject to terms and
conditions, at or below the price they paid for it, which does away with
the problem of finding a buyer when a shareholder wants their money
back
• Withdrawable share capital in IPSs is exempt from many of the
requirements of the Financial Services and Markets Act, which governs
the public offer of investment in securities such as shares. This makes
it much cheaper and simpler to make a public offer of IPS withdrawable
share capital, than it would be for a company (including a community
interest company) to make a similar public offer of share capital.
Becoming an investor, member and part-owner of a CSA venture is a
powerful way for people to engage in its future. Member-investors have a
vested interest in its success, and are more likely to become committed
customers, volunteers, supporters and promoters of the venture.
Where does community investment fit into CSA?
Community Supported Agriculture (CSA) is all about communities sharing the
risks and rewards of agriculture. It is based on building strong, mutual
relationships between farmers, growers and their local communities. Interest
in CSA has been steadily increasing in the UK for over a decade. There are a
wide variety of examples of CSA, ranging from the community ownership of
farmland, through to groups who agree to the advance purchase of a share of
the produce. Some groups allow members to volunteer their time in return for
their share, whilst other groups ask members to pay a regular subscription.
Up to now the business model underpinning CSA has largely focused on
securing and improving the revenue flows for farmers and growers, by
establishing a committed customer and volunteer base, prepared to share the
risks of the venture. Some CSA initiatives are farmer-led, others are
community-led, with some interesting hybrids that started out as farmer-led
initiatives but have subsequently become community-controlled.
But securing the revenue only goes halfway towards securing the future of
CSA initiatives. Capital investment in CSA initiatives is equally important but
often overlooked. This, in part, may be due to the different ways in which the
term “share” is used. Many CSA schemes invite people to buy a share of the
produce on a regular basis. This is not the same as share capital, which gives
ownership and control rights to the shareholder members, in return for their
investment.
Capital needs of CSA
All enterprises need capital investment if they are to thrive and prosper.
Compared with some areas of enterprise, farming and growing is particularly
capital-intensive. The capital requirements range from the purchase and
ownership of land and buildings, through to investment in farming and growing
activities that might take several years to generate a return. Farm businesses
are being encouraged to diversify their activities, but this almost always
depends on capital investment that many small farmers are unable to raise.
Many CSA initiatives address the short-term financing needs of farming and
growing by guaranteeing an income over the coming season or year. By
subscribing a regular amount, members can ease the cashflow and provide
some security of income for the year ahead.
But for farming and growing to be really successful, long-term planning is
essential, and this means securing long-term capital finance. Community
investment gives CSA the scope to consider a wide range of long-term
investments such as:
• Ownership of land and buildings
• Conversion of land to meet organic certification standards
• Wind farms, heat pumps and other sources of renewable energy
• Community-based domestic bio-fuel heating schemes
• Combined heat and power schemes, where the heat is used for
growing or food processing
• Composting and local waste anaerobic digestion schemes
• Woodland management, coppicing, pollarding and charcoal production
• Water-harvesting, irrigation and water management
• Hedgerows and fencing
• Growing facilities such as polytunnels and glasshouses
• Food storage facilities
• Orchards and other long-term fruit and nut crops
• Organic livestock production facilities
• Farm-based food processing, such as dairy, butchery or food
preservation
• Local food distribution systems, transport, and shop or market outlets.
Land tenure
Long-term investment in farming and growing ultimately depends on land
tenure. Purchasing the freehold ownership of land through community
investment may, in theory, be an ideal starting point for a CSA initiative, but in
practice this is rarely the first step, because the entry costs are simply too
high.
Fordhall Community Land Initiative is an interesting exception: it raised over
£750,000 in IPS share capital to purchase the freehold of a tenanted organic
farm where family succession was threatened by the sale of the land to
private developers. The fate of this farm, and the family’s proposal to take the
farm into community ownership, caught the attention of the national media.
Over 8,000 people across the country and abroad became member-investors,
enabling the land to be purchased, and leased to the family.
Tablehurst and Plaw Hatch Farm is another example of community
investment in CSA, but instead of owning the land, the money, raised through
IPS share capital, was used to purchase the farm business. Over 1,100
people have become members, investing more than £112,000 in the
enterprise. In this case the land is owned by a charitable trust, which was
bequeathed the land by Emerson College, a teacher-training centre in
biodynamic farming, on the condition that it was used for community
purposes.
http://www.tablehurstandplawhatch.co.uk/About.html
Video of their open day in 2011 here
http://vimeo.com/28277968
Both these examples are products of special circumstances. In neither case
does the CSA own both the land and the farm business; which would be the
ideal combination for long-term investment by the community.
Instead, the pathway followed by many CSA schemes, starts with an informal
arrangement with a farmer, grower or landowner, and may graduate to
becoming an incorporated body that owns the distribution activities of the
CSA, and, in the longer term, enters into a tenancy agreement with the
landowner.
In 2001 Stroud Community Agriculture (SCA) started out as an
unincorporated community-led organisation, and rented a one-acre walled
garden. In 2002 it was incorporated as an IPS co-operative and moved to a
23 acre site owned by Hawkwood College. It rented a second, 25 acre site in
2006. SCA has a one year rolling tenancy on the land owned by Hawkwood
College; both parties must give one year’s notice to terminate the agreement.
It has a three year lease on the second site, also with one year’s notice of
termination. SCA is negotiating with both landlords for ten year leases, which
would allow it to plan and invest for the long-term.
The Agricultural Tenancies Act 1995 introduced a new form of agreement
called the Farm Business Tenancy, which protects the tenant’s interests
through the following statutory provisions:
• Rent reviews every three years, which can go to arbitration
• Fixtures and fittings (with certain exceptions) that are provided by the
tenant remain the tenant’s property
• If the tenancy is terminated, the tenant is compensated for any
improvements they have carried out with the prior consent of the
landlord. If consent is unreasonably refused by a landowner an
arbitrator can impose it.
Because of these statutory conditions, and the need to cover every possible
eventuality, the negotiation of a farm business tenancy agreement tends to be
complex and lengthy. Finding a landowner who is sympathetic towards CSA
can greatly assist in subsequent negotiations over farm business tenancies.
Relationships between stakeholders
There are three key business elements to every farming venture: the land, the
farming or growing activities on that land, and the sales and distribution of the
produce. These three elements could be separate business entities: a
landowner with a tenant farmer who sells through a CSA distribution venture.
Often the farmer or grower will also be the landowner, and sell part of their
produce through a CSA. Under these arrangements the CSA is a sales and
distribution business, with no ownership or control over the farming business
or the land.
The land
The farming business
The sales and distribution business
A few CSAs operate in a different way, with the CSA owning the land which is
rented to a tenant farmer. This is the case for Fordhall Farm, where the
community invested in the land, which is rented to the Hollins family, who are
the farmers and distributors.
In theory, a CSA could combine all three business elements in a single
corporate entity that owned and controlled the land, the farming business and
the distribution. In practice however, few CSAs have gone beyond owning the
farming and distribution elements. This is partly due to the cost of purchasing
land on top of the cost of developing a farming and distribution business. But
another problem might be developing sufficiently strong relationships between
farmers, growers and communities.
There is a strong tradition of independence amongst farmers and growers.
They accept full responsibility for the risks of their trade, and in return expect
the freedom to decide how to run their businesses and the benefits of their
success. But as the capital costs of farming continue to rise, more farmers
may have to forgo their independence to secure the investment they need. An
increasing number of farmers and growers are becoming employees of large
corporations, with little or no influence. Is it better to turn to institutional
investors, who are primarily interested in profits, or to community investors,
who may also be their customers and the biggest supporters of progressive
farming practices?
The question of who should own and control the land, the farming, and the
distribution mechanisms, lies at the heart of the debate about the future of
CSA. Community investment could be the key to answering this question.
Co-operative or community benefit society?
The IPS legal form is an excellent vehicle for community investment, although
it has some disadvantages too. These include: higher registration and annual
fees than most forms of company; the costs associated with maintaining large
memberships; and the difficulties of finding lawyers and accountants familiar
with IPS requirements. Before choosing a legal form for a new CSA venture, it
is strongly advised that professional legal advice is obtained. There are
alternative legal forms to IPSs that can issue share capital, including
community interest companies, although they do not have the same
exemptions from regulation under the Financial Services and Markets Act as
IPSs.
Even if community investment is not high on the immediate agenda, it is
recommended that longer-term ambitions are taken into account. It is possible
to convert most forms of company into an IPS, except for community interest
companies.
There are two types of IPS: a co-operative and a community benefit society.
They differ from each other in two important ways. A co-operative can pay
members a dividend, whereas community benefit societies cannot. A
community benefit society can opt for a statutory asset lock, which is not
available to a co-operative. Dividends and asset locks have a significant
impact on the financial affairs of an IPS, so it is important for any organisation
considering registration as an IPS to understand how these features work.
In a co-operative, dividends are based on the level of members’ transactions
with the enterprise. For a CSA, where the members are also customers, the
dividend will be based on members’ purchases. If the CSA is profitable, some
of the profit can be returned to members in the form of the dividend payment.
This encourages prudent financial planning. Members will usually prefer to
pay a bit more, and get their money back in the form of a dividend, than pay
less and run the risk of the CSA making a loss and getting into financial
difficulties.
An asset lock is a legal device, also found in charities and community interest
companies, that prevents the assets of the organisation being distributed to
members. This means that members do not privately benefit from the growth
in value of the venture, and that there is no private incentive to sell the
venture or its assets. This in turn may encourage public bodies and grant
givers to fund an asset-locked organisation. It also underlines the social
nature of the investment to members and may encourage them to accept
lower financial returns. IPS community benefit societies can choose whether
or not to have a statutory asset lock, and although there is no statutory
provision for an asset lock in an IPS co-operative, this type of organisation
can write a voluntary asset lock into its rules.
Shares or bonds?
This paper has focused on raising investment capital in the form of shares
rather than bonds. From a business point of view, share capital has a number
of advantages over bonds. Unlike shares, bonds have to be redeemed at an
agreed date in the future and usually carry a fixed interest rate. Bonds do not
give membership or voting rights to the investor, and are consequently less
effective at engaging investors in the affairs of the organisation. But bonds do
have some advantages. Potential investors might find bond offers more
certain and secure; they know when they will get their money back and how
much interest they will receive. And there are no limits to how much an
individual can invest in bonds, in contrast to the £20,000 limit for individual
shareholdings in IPSs.
Sharing the risk and returns
CSA is about engaging people in sharing the risks and rewards of agriculture.
Most CSA initiatives use their revenue model to share risks and rewards:
members buy a share of the produce, paying a regular weekly or monthly
subscription. The amount of produce a member receives depends on how
successful the farmer or grower has been. This reduces the risks for
producers in return for sharing the rewards of success.
Community investment takes the relationship between producers and
consumers one step further, by sharing the risks and rewards of capital
investment. Members can invest their savings, and receive a return on their
investment if the CSA venture is profitable. As members and part-owners they
can determine the policies, practices and activities of the CSA, including its
long-term investment strategies.
However, there is a limit to the amount of risk it is reasonable to expect
people to take on. CSAs should think carefully before they ask their members
to bear the risks of capital investment, in addition to the other risks they have
already accepted.
It was recognised at the workshops that members are unlikely to invest
significant amounts of capital if the financial returns are negligible. For
instance, the average member investment in Fordhall Farm, which offers 0%
interest on share capital, is less than £100, compared with an average
member investment of nearly £2,000 in Westmill Wind Farm, which forecast
an average return of 12% per annum.
CSA schemes that aim to raise significant amounts of capital need to work out
how they can offer a financial return sufficient to attract the investment. It may
mean charging members and customers more for produce.
Scale and size
Many CSA initiatives are strongly committed to the idea of providing local
food. But what is meant by local varies from group to group. For some groups
it might be just their immediate neighbourhood, village or town. There are
other CSAs that aim to serve a whole county or even a region. This will have
a major impact on the size of the CSA, its business activities, and the scope
to raise capital investment from its members. Many local CSA initiatives rely
on developing close personal relationships between members to encourage
their participation. Some CSAs have set targets for their optimal size. For
instance, Stroud Community Agriculture aims to serve 230 local families.
For any CSA planning to raise investment capital from their members, it is
important to ensure that the scale of their ambitions is consistent with the size,
or potential size, of their community. There will also be an upper limit to the
amount that individual members are willing or able to invest. These two
factors, taken together, can be used to estimate how much investment capital
can be raised for a given project or initiative.
These issues were much discussed at the workshops, with many practitioners
asking whether there was an optimum size for a CSA scheme. It was
recognised that scale and size has a significant impact on the scope of CSAs
and how they might be managed.
Smaller schemes, which cannot afford to employ a professional grower and
are wholly reliant on volunteer labour, may be liable to volunteer fatigue if they
become too large. Keeping small schemes small, with all members making
similar levels of volunteer and financial inputs, will be the best way of ensuring
the longer term sustainability of these schemes. This might mean keeping
below 20 to 30 members. The scope for raising significant amounts of
member investment will be limited in these smaller schemes, to probably no
more than £10,000 in total. Relying on one or two members to make a
disproportionately larger investment than other members can lead to
problems, even if it is done within the democratic framework of an IPS.
Larger schemes, capable of employing a professional grower, may need a
minimum of 100 to 150 members who are also paying-customers and
investors. It is more realistic for these larger schemes to raise significant
amounts of investment capital from their membership. Large investments by a
few members are outweighed by the combined total of the far greater number
of small investments.
Community building
The workshops spent a lot of time addressing the issue of community
building: how to recruit members to a community enterprise. Most people use
the term “community” to mean a geographically bounded place, with the
implication that people who live within this area share a sense of identity or
“togetherness” based on common interests.
Developing these shared interests is the most crucial part of community
building. CSA is an excellent vehicle for bringing people together with a
shared interest in local food, and for developing those interests through
practical activities. Practitioners at the workshops recognised that the best
way of attracting and retaining members was to offer lots of different ways for
people to engage in CSA; as customers, investors, volunteers, supporters and
learners, as well as committee members and experts with specialist skills of
value to the organisation, such as accountants, website designers and of
course, farmers and growers.
It is also important to keep things simple, making it easy and attractive for new
members to join in the activities, and for founder-members not to be too
overwhelmed by the work involved in developing the CSA scheme. Getting
the balance right, between long-term ambitions and short-term practical
actions, is crucial to gaining and maintaining the interest and support of
members, and building a sustainable community.
Jim Brown
Principal consultant
Baker Brown Associates
www.bakerbrown.co.uk
Industrial and Provident Societies: A glossary of terms
Industrial and Provident Societies (IPS) Acts: A body of legislation that,
like company law, provides limited liability status to a corporate entity. There
are two types of society, a “co-operative society” and a “community benefit
society”. Both types of society can offer membership through the sale of
shares. There are two main types of share,” withdrawable shares” and
“transferable shares”. There is an upper limit on how much share capital a
member can purchase; currently this limit is £20,000. All members have one
vote each, regardless of how much they have invested.
Financial Services Authority (FSA): The body that registers new IPSs and
collects annual returns from existing IPSs. The FSA also regulates the
financial services industry, including the promotion of investment opportunities
to members of the public. IPSs offering withdrawable share capital are
normally exempt from these regulations.
Rules: The name given to the governing document of an IPS, equivalent to
the Memorandum and Articles of Association (Mem & Arts) of a company,
setting out the purpose of the society and how it will be governed. Rule
changes must be approved by members.
Co-operative society: This type of society serves the mutual interests of its
members. Membership is usually open to one or more of the following
categories of person: customers, workers, suppliers, or investors. They can
use some of their profit to pay “interest” on share capital and a “dividend” to
members. They cannot elect to have a “statutory asset lock”.
Community benefit society: This type of society aims to serve the interests
of the broader community, beyond its own membership. They can use some
of their profit to pay interest on share capital but cannot use profit to pay a
“dividend” to members. They can opt to have a “statutory asset lock”.
Statutory asset lock: A rule which prevents any residual assets of the
society being distributed to members. A residual asset is any money left over
after all the creditors have been paid when a society is being wound up. If a
society has an asset lock, its rules will usually specify what must happen to
these residual assets; normally they are transferred to another asset-locked
body with similar aims and objectives to the society that is being wound up.
Community benefit societies can opt to have a statutory asset lock. A
statutory asset lock is one that is backed by legislation (statute); once in place
it cannot be removed even with the consent of members. It is possible to
include an asset lock rule in any IPS, although only a statutory asset lock is
absolutely watertight. Charities and Community Interest Companies also have
statutory asset locks.
Withdrawable shares: A type of share capital unique to IPSs, where
members are allowed to withdraw their share capital, subject to terms and
conditions set out in the society’s rules. This will usually include a minimum
period of notice of withdrawal, and provision for the directors to prevent
withdrawal if in their judgement it would jeopardise the finances of the society.
Withdrawable shares do not change in value, although some societies have
rules that enable directors to offer only a fraction of the sum invested if they
deem that the society cannot afford the requested withdrawal of capital.
Transferable shares: Transferable shares cannot be withdrawn from a
society; instead the member must find a willing buyer, at a price acceptable to
both parties. Very few societies issue transferable shares, primarily because
of the problems members face when they want or need to cash in their
investment. It should be noted that companies limited by shares normally only
issue transferable shares. Large companies with many shareholders tend to
be listed on a stock exchange, making it easier for shareholders to buy and
sell transferable shares.
Interest: Interest is the term normally used to describe the share of the profit
paid to members based on the amount of share capital they have invested.
The interest rate payable by IPSs is subject to limitations; the FSA says that
interest rates should be no more than what is sufficient to attract the
investment. Interest rates are normally determined by the board of directors,
and approved by the Annual General Meeting, subject to the rules of the
society. The society may also have rules stating its interest rate policies.
Interest payments are not to be confused with “dividends”, which have a
different and specific meaning within co-operative societies.
Dividend: A dividend is the share of the profit paid to members based on their
transactions (purchases, sales, wages etc) with the society. Only co-operative
societies can pay dividends to members; community benefit societies are not
allowed to distribute profit in this way, and must instead use their profit for
broader community benefits.
Subscription: The term subscription is used in two different ways by IPSs.
Some societies charge members an annual membership fee, which they call a
subscription. The term is also used to describe the practice of members
investing a regular amount in share capital over a period of time. Societies
that charge an annual membership fee do not usually ask members to make a
significant investment in share capital, typically restricting it to a nominal £1
share. On the other hand, societies that ask members to make a regular
subscription to share capital, should state their rules covering the
withdrawability of the subscribed capital, and what would happen if a member
fails to complete the subscription.
Source MLFW notes 'Community investment in CSA'
