Awareness about the complexities of the middle of the food supply system has increased in the past three years since the Covid pandemic shone a bright light on how brittle and breakable it is. Since that time, there’s been some effort and some funding to address the challenges of developing more resilient infrastructure and supply webs to better support regenerative producers… but mostly there’s been dialogue. The fact remains that funding what some call the messy or missing middle remains complex, as a result of the complexities of projects themselves and as a result of expectations of traditional capital financers. As a result, activating capital to projects that seek to build solutions has been slow. Transformational Investing in Food Systems, or TIFS, is working to address this.

TIFS is an impact network dedicated to increasing investments in regenerative and agroecological food systems. The organization supports investments that are economically viable and deliver transformative impact and they have turned their attention to the critical role of the middle of the food system.

RFSI had the chance to sit down with Tim Crosby, chair of the TIFS initiative, and Rex Raimond, Director of TIFS, to discuss their work in the space, what they are learning, and where we are headed. Here’s what they had to say.

RFSI: What is the origin story for TIFS?

Tim: TIFS originated in the space between public, private and philanthropic players working together on scaling food systems businesses that generate positive financial and non-financial returns. TIFS originated in 2018 when two philanthropic players, Thread Fund and Swift Foundation, organized a meeting that brought together 20 North American and European foundations to discuss the notion that in order to maximize the collective impact of foundations, we must commit our endowment assets and investments to the places and issues we deeply care about while ensuring our endowments do not undermine our program work. It was clear from that meeting that ongoing efforts were needed to focus on this intersection of food, finance and philanthropy that involved more than just foundations. In 2019 we organized regular meetings to keep the momentum going and test how to apply true cost accounting to food systems investing. TIFS was launched in Jan 2020.

RFSI: What are your organizational goals and how are you putting them into action?

Rex: Our goal is to seed and scale regenerative business innovators by unlocking access to integrated capital and growing the field of systems investing. TIFS first phase of work focused on generating strategic insights (e.g., through case studies featuring companies and funds that prioritize positive returns for nature, communities, and consumers), developing methodologies and investment screening tools using a holistic outcome framework, and cultivating a network of values-aligned asset owners, managers, businesses, think tanks, and other partners. In our next phase of work, we will deepen our work to educate investors and activate capital.

RFSI: Some of your current work is focusing on the missing middle of the food system – why focus here and why now?

Tim: The Missing middle focus has emerged from TIFS’ initial design phase, from 2020-23, as a common theme of both frustration and need among varying players. To finance food systems that provide food security and nutrition for all, maintain dignified livelihoods for food producers and workers, enhance resiliency of supply chains, and contribute to a stable climate and healthy ecosystems, several challenges need to be addressed:

• Global financial markets allocate capital to companies through standardized, scalable vehicles that currently don’t match the needs of aligned businesses and solution providers.
• Producers and SMEs (small, medium, and growing businesses) that are creating solutions for a regenerative transition need access to flexible, customized capital.
• Systems data, risk assessment, and impact verification metrics are geared towards yield and scale, underestimating systemic risks and externalities.
• Government policies are currently geared to maintaining the stability of the incumbent food system.
• Infrastructure has become consolidated and specialized, while a regenerative transition needs infrastructure that can handle diversity and regionality.

The term ‘missing middle’ is expressed in different system segments in similar but distinct ways: the valley of death in financing, the midscale production volumes between small/direct and global, and the middle infrastructure positions between farmer and consumer that build resiliency in supply chains.

RFSI: What do you see as the biggest barriers to investment in the middle right now?

Tim: The first one is precedent. There have not been a lot of examples yet of how to identify and place capital into successful businesses dedicated to building resiliency in our food systems. There are positive examples that are growing and succeeding, however.. and this is point 2…  there are not yet standardized mechanisms nor understanding of how to place larger investments that prioritize these middle positions.

The third and arguably largest barrier is dedicated investor engagement, or as Lauren Manning with FS6 recently called it, the Culture of Capital. While there has been a huge growth in investor interest in food systems since the pandemic, most investors are entering the food/ag space with a sense that they can repeat returns in food/ag that they got in tech, energy or some other sector. Yes, there are huge tech needs that can generate unicorn like returns. Yes, synthetic and alt meats have IP that can be monetized for potential waterfall events. Yes there is land and other real assets that can be used to securitize deals. But if there is no processing, storage or distribution (other real assets) then regen ag producers and ranchers will not succeed in the market, will not succeed in sequestering carbon or increasing biodiversity, and will not generate healthier nutrient dense food. And these positions have positive cashflow that generates stable revenue while supporting multiple producers, ranchers, CPGs, retailers and consumers.

We understand these barriers. We equate these middle positions as being akin to the plumbing in our household walls: something you do not really think about until they don’t work, then all hell breaks loose when they fail.   

RFSI: Tim, as Principal of the Thread Fund, you are already investing in the space. Can you provide an example of how you have invested in the middle?

Tim: I am a proud investor in Cairnspring Mills, a regional scale flour mill dedicated to rebuilding local food systems. Cairnspring opened in 2016 to ensure local farmers remain financially viable while they are forced into the race-toward-the-bottom commodity system, preserve the unique agricultural heritage of the region by developing new revenue channels for existing businesses, build markets for the amazing grain produced across the Pacific Northwest, shorten the distance between farmer and customer while building soil health and sequestering carbon. Today, Cairnspring is kicking it. 2022 resulted in 54% growth year over year, with 2023 currently showing YOY growth of over 40% with net income being 36% above forecast. In the next ten years we should see a doubling of regenerative acres and a doubling of income for the producers.

My investments in Cairnspring have been both normal and unique. I have invested via a convertible debt and follow-on equity rounds. I participated in a ‘grain note’ debt mechanism that provided working capital to the mill so that they could provide a purchase order to producers at the beginning of the season, thereby securing the grain harvest towards the mill’s own operational needs. This structured mechanism heavily influenced the development of Mission Driven Finance’s Regenerative Harvest Fund. I have also provided a grant, via the DAF investment entity Realize Impact, that provided cashflow used towards the feasibility and development of the next mill. 

RFSI: We’ve talked about the lack of institutional interest and capital in funding the middle – why is this and do you know yet what might help address this roadblock?

Rex: The challenge is with the interpretation of core finance concepts of risk, return, efficiency and scale.

On risk, for instance, a trillion dollars in agriculture subsidies go out annually, but only about 1 percent goes toward supporting regenerative systems. We need policy incentives to really move the needle on risk. How do we assign risk in regenerative investment decisions so that the borrowing rate comes down.

Market rates of return in regenerative agriculture are smaller than in tech. This makes it difficult for a traditional investor to invest in this space. Plus, most investors don’t understand how holistic the regenerative agriculture space really is.

Efficiency is typically measured in linear metrics such as yield per acre. If our goal is to produce as many units as possible, those narrow metrics are helpful. But if our goals include biodiversity, culture, taste, quality, etc. — then the definition of efficiency is more expansive, more inclusive than just maximizing throughput.

Since the 1970s scale has been marketed as “get big or get out.” Today scale involves building resiliency across different markets and supply chains, and replicating good ideas through customized regional solutions that match specific landscape-level needs.

Large institutions are getting involved, so that will hopefully unblock things in good ways. USDA recently placed close to $3Billion into ‘climate smart’ ag. Tina Owens did some stellar research showing over $1 Trillion of corporate interest in regen ag, with $300 Billion already adopting internal business strategies. This is not due to consumer demand; it is due to vulnerability of supply chains using conventional practices. This interest is a different and powerful opportunity for transformation, one that is generating some intriguing activity.

People are getting food that connects them with farms; they are starting to see products that are heirloom, tasty and not uniform in size. They want that quality of food at their grocery stores. Large players are recognizing that they need to start producing larger quantities of healthy, regenerative products. Today the largest sellers of organic products are Costco and Walmart, but organic is still a fraction of the total food market. We need to get to scale with regenerative products, and the middle positions are key to that goal.

RFSI: Can you tell us a little about the gatherings you are facilitating to address the lack of funding in the missing middle?

Rex: TIFS has been working with partners to convene workshops aimed at generating ideas for closing the gap between the investment needs of regenerative businesses and the investment requirements of interested private and public investors. The workshops include producers, innovative asset managers, impact investors, investment rating agencies and advisors, government agencies, as well as small, mid-scale and global businesses. The workshops are generating concrete ideas for action, including regional pilots with catalytic investments and the design of an impact-first financing mechanism.

RFSI: What are some of the key take aways or insights that have arisen from your work in this space so far?

Tim: There is a tension between fully aligned investments that advance multiple food system goals, and large-scale interests that are ready to invest into large capital projects which are generally less aligned on overarching food system goals. What is unclear right now is why system goals and values drop away when we scale production and processing. Additionally, there is a solid pipeline of investable needs, however the lack of investor interest has limited what can be financed in a timely manner. And for those who are currently investing, there is uncertainty about which and that type of investors are there for the next round of investments that generate more than financial returns. There is exciting interest among a diverse set of players who are wanting to see real change happen, with ‘The Trick’ involving putting into action a revised understanding of risk, return, efficiency and scale.

RFSI: Where do you think we will be in addressing this 10 years from now? 

Tim: Precedent and necessity will have opened up solid paths for more dedicated mechanisms that directly address growth and the middle positions. Policies, like the current federal incentives for regional and tribal meat processing, will have branched out to support other food products. Green bonds for facilities will engage more institutional investors. Hopefully a Production Tax Credit will be utilized, similar to the how that mechanism has been used for investments in renewable energy infrastructure.

You can learn more about TIFS here.

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