Sunday, March 4, 2012

Investing in our food future (Part Two)

The Slow Money Alliance is an organization that promotes investment in local economies and a longer-term outlook on investment and growth. Investment should not only generate financial profit for the individual but societal profit as well. The overarching principles of Slow Money are as follows.

In order to enhance food security, food safety and food access; improve nutrition and health; promote cultural, ecological and economic diversity; and accelerate the transition from an economy based on extraction and consumption to an economy based on preservation and restoration, we do hereby affirm the following Slow Money Principles:

I. We must bring money back down to earth.

II. There is such a thing as money that is too fast, companies that are too big, finance that is too complex. Therefore, we must slow our money down -- not all of it, of course, but enough to matter. 

III. The 20th Century was the era of Buy Low/Sell High and Wealth Now/Philanthropy Later—what one venture capitalist called “the largest legal accumulation of wealth in history.” The 21st Century will be the era of nurture capital, built around principles of carrying capacity, care of the commons, sense of place and non-violence. 

IV. We must learn to invest as if food, farms and fertility mattered. We must connect investors to the places where they live, creating vital relationships and new sources of capital for small food enterprises.

V. Let us celebrate the new generation of entrepreneurs, consumers and investors who are showing the way from Making A Killing to Making a Living.

VI. Paul Newman said, "I just happen to think that in life we need to be a little like the farmer who puts back into the soil what he takes out." Recognizing the wisdom of these words, let us begin rebuilding our economy from the ground up, asking: 

* What would the world be like if we invested 50% of our assets within 50 miles of where we live?

* What if there were a new generation of companies that gave away 50% of their profits? 

* What if there were 50% more organic matter in our soil 50 years from now?

In furtherance of their cause, the Slow Money Alliance has compiled a list of funds and organizations that it supports due to their impact and approach. There are a dozen such listings on their Invest page, which are available to individual (non-accredited) investors.

These investments are quite different from the ones I described in my last post in that they are not really appropriate for retirement savings and other savings plans with tax benefits. Some of the funds can be used in a self-directed IRA, which is a type of retirement account with tax benefits. In this type of IRA, there is a middle-man who runs your investment account and, generally, charges a fee. If you already have a self-directed IRA, then adding one of these funds might work for you.

My initial research suggests that, based on my level of investment and expected return, the fees for a self-directed IRA are likely to exceed my profits from investing. For me, then, the investments I’ll describe throughout the rest of this post are more like savings accounts or CDs, with the important distinction that they do carry risk of loss. The upside, of course, is that my money is empowering small farmers, supporting sustainable agriculture, and helping to develop and strengthen communities rather than contributing to the bank’s bottom line.

Show me the money.

I read through the websites of all of the funds and organizations on the Slow Money Alliance’s list of “Funds for everyone”. Most of these investments work the same way. An investor essentially loans money to the fund for an agreed upon period of time. The fund then uses the money, along with other means of funding such as grants and donations, to loan money to people or companies that align with the fund’s principles. These loans are made at a higher rate than the investor receives, but a lower rate (or with more favorable terms) than borrowers are able to receive through banks or other conventional means. The interest paid by borrowers supplies investors with interest and helps run the fund.

This is basically the same strategy employed by banks. However, banks are federally insured. If too many borrowers default on their loans, and the bank can no longer repay investors (i.e. people with bank accounts), the government supplies the money. That makes a bank account, CD, or any other FDIC-insured holding, essentially zero risk. The following funds are not insured and do carry risk of loss.

RSF Social Finance supports people and companies that align with their principles in the areas of food and agriculture, ecologic stewardship, and education and the arts. Their Social Investment fund requires a minimum investment of $1,000 and has an investment term of 90 days, the lowest of any of the funds I read about. The interest rate changes quarterly; the rate averaged 1% in 2010 but 2.45% over the past 5 years. Investments in RSF Social Financial can be used as part of a self-directed IRA.

The Reinvestment Fund (TRF) supports community-development loans, food access, and sustainable energy through their loan program. TRF requires a commitment of 3 years to 30 years but offers a high rate of return. Currently, the annual interest rate on the minimum investment of $1,000 for 3 years is 2.25%. The highest rate, for investments greater than $15,000 for at least 15 years, is 4.5%. From what I have found, these rates greatly exceed those offered by banks, even internet banks, for the same time and capital terms.

Equity Trust, Inc. makes loans to CSA and co-op farms, land trusts, and non-profit organizations that protect land access for communities and/or promote affordable housing. Equity Trust has a $1,000/1-year minimum. Investors specify the interest rate they would like to receive up to the maximum rate set by the fund. I couldn’t find the actual value, but they say the rate is similar to a money market account. One unique option with Equity Trust is that you can make requests as to the type of borrowers you would like your money to fund.

The Equal Exchange CD offers a 0.40% APY for a minimum 1-year investment of at least $500. The Equal Exchange program promotes fair global trade for products such as coffee and chocolate.

The Carrot Project and the New Spirit Farmland Partnership focus on food, but I wasn’t able to get detailed information on investment terms through their websites. If you are seriously considering investing in our food future, you may want to contact these organizations for more information. I emailed the folks at The Carrot Project and will update this post if/when I hear back. The New Spirit Farmland Partnership posts information about specific people and projects in need of support rather than a general loan fund, so again, you have to contact them to get involved.

The Cooperative Fund of New England and the Montana CDC offer community development loans for specific regions, without a particular emphasis on food or environmental sustainability. However, if you live in one of these regions, you may want to check them out. The other investments listed on the Slow Money site either did not contain any information on investing (only donating), do not allow individual investors, or did not offer a return on the investment. If you are interested in making a donation, definitely check out these well-deserving groups!

Risky business.

As I’ve mentioned already, there is risk involved with all of these investments. RSF Social Financial reported its loan loss rate as 1.4% over the past 27 years. I’m not an expert in these things, but I think that means 1.4% of the money the fund loans out never gets repaid. Because the fund amortizes loss over all investors and maintains a buffer of money from donations and other sources, this loss isn’t necessarily passed on to investors. I couldn’t find the loan loss rate for The Reinvestment Fund, but their prospectus states that they could cover losses up to 6.5%. Because TRF invests in a lot of real estate as part of its community development interests, they report that the fund has seen an increase in defaults and late payments through the economic downturn. It’s hard to say if this investment is higher risk than any of the others, but it’s definitely something to consider carefully before investing.

Will work for food.

Based on everything I read, I am really excited to invest in some of these groups. Although there is risk, I think it is easily balanced by diversification. I can keep some money in the bank, earning low interest with no risk, and some money in these investments, which earn as much or more in interest, carry some risk, and help develop the food future I would like to see.

Edit: The folks at The Carrot Project got back to me today. They have a minimum investment of $25,000 for a 5 year term, and they offer interest rates of up to 2%. However, The Carrot Project is not currently seeking investors. That's fine for me because this is definitely out of my range.

Disclaimer: These are my opinions based on my own research. I am not a trained financial planner; I cannot tell you what you should do with your money. I do hope you will find this information valuable, but you should carefully consider your own situation before deciding to invest.