Money and Finance

Farm Finance and Resilience – Musharakah part 1

By Bob | September 6, 2015 |

I keep hearing that “Access to Land” is a key challenge for folks who want to do well by the soil. That the high cost of farmland and the consolidation of farms into mega-operations over the last few decades make it really difficult for younger farmers especially, to get onto the land and employ practices that care for the land, build resilience and sequester carbon.

So we bought a farm.

We bought it, in part, to be a sort of sandbox to work on the problem of land access for diversified, small (family) scale, sustainable agriculture. And the learning continues.
For several years now when not engaged in keyline projects or just getting the infrastructure repaired, I’ve been exploring farm finance options. In the course of that I came across the word “musharakah” which denotes a practice in Islamic finance used for large purchases – in fact, in the USA more than 2 billion dollars worth of homes have been financed this way. What I have learned so far intrigues me and may offer a pathway to land access with key differences from conventional financing.

What is musharakah? As I understand it, musharakah is a specialized form of partnership in which someone with capital partners with someone with energy in order to establish a joint enterprise. There are several variations on this in Islamic finance, but the one that intrigues me is often termed Declining Musharakah. The key feature of this form is that the intent of the partnership is the long-term transfer of ownership from the partner with capital (who I’ll call the funder from here on) to the partner with expertise (the farmer).

How it works: A musharakah is a partnership established between two (or more?) individuals who agree to enter into business together with joint ownership. Importantly, in a declining musharakah partnership the ownership is unequal and changes over time. Initially the funder puts up most of the capital and owns most of the business. For example if the partnership buys a farm for $100,000 and the funder provides $95,000 and the farmer provides $5,000 – then the funder owns 95% of the business and the farmer 5%. The purpose of a declining musharakah is for those percentages to change so that the farmer eventually owns 100%. To accomplish this, the partners agree that the asset (farm) has a rent value, for example $1000 per year. This rent is to be paid by the user of the asset (the farmer) to the partnership which then distributes it according to the ownership percentage: initially $950 to the funder and $50 to the farmer. Should the farmer earn more than the rent, that is hers to keep – or to use to purchase from the funder an additional percentage of the farm. The key concept here is that over time the farmer is expected to purchase additional ownership from the funder whose ownership interest in the farm declines over time thus this is a ‘declining musharakah’.

For me, one of the key features of this concept is the understanding that the value of the asset may change over time and that ownership is always a percentage of the value at any point in time. If there has been a substantial change in value for reasons external or internal then the price of any percentage changes accordingly (details in a later post). This means that both partners have a powerful concern for the value of the farm which makes this approach radically different from conventional finance in that the goals of the farmer and investor are aligned rather than in opposition. By and large, conventional banks want their interest and how you get the money to pay that isn’t their concern. You can exhaust the soil, pour it full of chemicals, do whatever – they don’t care as long as they get paid. But in musharakah both parties have a stake in the value and stewardship of the farm and incentive to care for and, if possible, improve it.

This notion of value changing over time is, to me, important in another way. It appears to me (and to every banker I’ve asked) that the problems that led to 2008 have not really been fixed, i.e. there continues to be enormous systemic risk in the global financial system. Some other event – probably different but certainly negative – is in our collective future. What it will look like and when it will happen I can’t predict, but thinking in Transition terms, I want my nest egg to be resilient in order to survive whatever the next event turns out to be. If I share ownership in my farm with a farmer and the real estate market crashes – or skyrockets – I don’t really care. I have an ownership interest in a productive asset that could be valued in dollars, euros, cowrie shells or bushels of wheat. The intrinsic value of the asset remains regardless of the market, interest rates, currency devaluations, inflation, deflation or whatever.

So that’s a quick overview of some of what I’ve learnt about musharakah. I am unaware of this being used for agricultural finance in the USA, but it seems like an idea with an existing body of practice (the 2 billion dollars worth of homes in the USA!) and enormous potential.

All questions and comments welcome!


Summer Reading 2013

By Bob | September 5, 2013 |

Four books have dazzled me this summer. Here, for your perusal and amusement, brief explications. (Thanks, Brian Wicklund, for the nudge!).

Gar Alperovitz' What Then Must We Do? (White River Junction: Chelsea Green, 2013) starts with systemic malaise: the generalized but unfocussed recognition that the system's broke and that the means to fix it are not apparent: markets and the economy are out of control, government is for sale, climate change is happening and no one says boo . . . you get it. Alperovitz argues that this has a lot to do with not just the concentration of wealth, but also the disconnect between finance, control and the real world of jobs, families and ordinary life. He sees "democratic ownership" such as coops, mutual banks and the like as ways for communities to be more directly connected with the decisions that affect them.

The End of Money and the Future of Civilization by Thomas H. Greco, Jr. (White River Junction: Chelsea Green, 2009) covers some similar ground in the obvious (to me, anyway) critique of our disasterous financial system. He usefully notes that money at present serves three distinct purposes: 1) as a means of exchange, 2) as a measure of value and 3) as a store of value. In his view these functions can be separated and accomplished by various means such as local currencies (e.g. Berkshares) to use an obvious example. Like Alperovitz (and many others), Greco values community, localism and personal connections and provides many examples. His specific suggestion of a credit clearing scheme may be beyond our grasp at the moment, but offers fascinating food for thought.

Take Back the Economy: an ethical guide for transforming our communities by J.K. Gibson-Graham, Jenny Cameron and Stephen Healy (Minneapolis: University of Minnesota Press, 2013) argumes for localism and community as a question of ethics. By framing it's explorations with the question 'How can we survive well together?' and using illustrations and exercises the book provides thoughtful pathways to greater understanding of the ethical impact of our economic behavior. For example, they demonstrate how finance obscures the personal impact of our economic choices: when we look at a t-shirt at Target we ask "Can I afford it? Do I like it? Will it work for me?" etc. all of which seem to make sense. But we don't ask, "What was the carbon footprint of getting this here? Who was involved in making it and were they fairly compensated? Was there pollution or waste of resources in making it?" – By framing our decisions in terms of money, we simply fail to see the other costs of our choices. This is but one example of the kind of thinking they apply to work, business, markets, property and finance.

Finally, I just finished Marjorie Kelly's Owning Our Future (San Francisco: Berrett-Koehler, 2012). Kelly draws a distinction between the extractive economy and what she calls a generative economy. These alternatives are deeply connected to notions of ownership and lead to very different outcomes. She identitifes five core elements of generative ownership design invoking Alexanders ideas of pattern language as a model for her analysis. Not only did I find her ideas engaging and well presented, but many of her examples were familiar to me: Organic Valley Coop, The Wild Rumpus Bookstore here in Minneapolis and the John Lewis Partnership where we liked to do business when we lived in England.

As I've explored Transition, climate change and energy issues, I've often encountered the idea of re-localization, the notion that as present global systems change, local alternatives may well prove more resilient and appropriate. The underlying argument being that the energy and carbon cost of global business may be unsustainable. Taken together, these books offer an entirely different path to a similar conclusion based on ethics rather than limits and demonstrating repeatedly why human-scale, community economic systems rooted in personal relationships and particular places offer not just a possible way to weather uncertain times, but an attractive, positive alternative to a present system careening blindy towards destruction.

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N.B. My local bookshop, Birchbark Books, is where I knowingly pay more than the Amazon price to support a local business and community asset. If they don't have them in stock, they can get these books for you.

The Appropriate Skill Set – Farmers and Bankers

By Bob | August 19, 2013 |

Reading "Credit Skills for Lending to the Agricultural Sector" – a report prepared to help Community Development Financial Institutions (CDFIs) understand how to make loans to farm businesses – helped me see how bankers view farmers. Since most farmers need bankers, this prespective is important. And I'm starting to think it's way out of whack.

Briefly, the report argues that to evaluate a farm business as a potential borrower a lender should focus on the things lenders normally consider: the "Five Cs": Character, Capacity, Capital, Collateral, and Conditions. From a lender's standpoint this is typically square one. As the report goes on to flesh out each of these criteria, it implies a set of values and behaviors that a lender should require of a farmer. These include cash flow analysis (broken down by "enterprise" such as poultry, corn, CSA or cheesemaking) and lifestyle expectations (the report casually mentions that 'Farmers generally live a very modest lifestyle, which appears to be well below the poverty line, and they usually have little or no cash fall-back position', an indictment of the place of food and farming in our economy IMHO, but that's an aside). Also required are 'Business Management Skills' and a whole range of skills related to marketing. This goes on in detail for pages.

But I wonder, are these requirements realistic? Reasonable? Appropriate?

A few years back I had a wonderul conversation with Lenny Russo of Heartland Restaurant. He lamented that so many farmers came to him asking what he wanted them to grow. In his mind that was backwards. Lenny wanted farmers to come to him with whatever they grew – but only because no matter the product it was was better than anyone else's. He didn't want to specify what a farmer should grow, he wanted the farmer to use her skill to figure out the best crop for her soil, climate, crop rotation etc. in order to produce a superlative product. Think about what's required to do that. Lenny didn't want good marketing, he wanted good veggies. To grow the best eggplant takes a lot more than a spreadsheet of inputs, outputs and profits, it requires deep understanding and skills that aren't mentioned anywhere in the CDFI report. Great farming that produces the very best products in harmony with the earth requires a vast skill set that bankers don't acknowledge – or possibly even see.

As I read that report, I couldn't help but think that the time and energy required of a farmer to satisfy these loan critera would pretty much exclude any time for actually farming. It's as if the bankers (who are, after all, the high priests of contemporary Euro-American society) and, by default, the rest of us put the cart before the horse: get your numbers right and do all this manangement and accounting stuff then maybe you can do some farming!

I've only been at this a short time, but I'm certain of this: a farmer's knowledge of crops, soil, water, weather, animal husbandry, forestry, conservation, biology and so on is overwhelmingly complex and valuable. And I'd rather have a farmer thinking about how to best sustain the land and produce healthy food than devote hours and hours to a marketing plan.

But that doesn't seem to be how the bankers see it.

A “Family-scale” Farm

By Bob | July 17, 2013 |

What name can I give to the vision I have of a farm enterprise that is ecologically resilient and economically viable? I’ve been using a string of adjectives to describe the farm(s) I’d like to finance: small-scale, sustainable, diversified, etc. Perhaps I’m overly romantic, but the notion of “family farm” nearly hits the mark – but not quite. This is partly because of land consolidation into industrial farms which may be owned by a ‘farmer’ who tends the enterprise from a computer screen with a keen eye on crop insurance and federal subsidies and where the cash flows are well beyond kitchen table accounting.

On the other side of the coin are the vast majority (numerically, though not in acreage) of farms for many of which the farm income must be supplemented by one or more off-farm jobs. According the the USDA’s Economic Research Service, though 88% of US farms (by number) are considered small (sales of $250,000 per year or less), the remaining 12% of farms produce 84% of agricultural output. They conclude that, “For the most part, large-scale farms are more viable businesses than small family farms” (emphasis in original. Note that the significance of government price supports, crop insurance and the like which disproportionately benefit large farms are not mentioned).

Farming today, at least as reported by the USDA, is concentrated at two ends of a spectrum and what is sometimes called “Agriculture of the Middle” is today relatively rare. Still, I’d like to support efforts towards the idealized “Sweet Spot” I wrote about a while back: farms that can support a family, steward the land and provide safe, healthy food – without relying on off-farm work for income (or health-insurance coverage). Is a family scale farm even possible today? I know there is tremendous creative energy from the National Young Farmers Coalition, the Greenhorns and others. I think they’re going to figure this out.

And I’d like to help.

Greece and US Debts

By Bob | June 29, 2011 |

I read, the other day, a comment about the situation in Greece that got me thinking. The comment ran something like “The ordinary citizens of Greece are wondering why after going to work and paying their taxes all their lives suddenly they’re being asked to accept brutal ‘austerity’ measures and to sell off national assets in order to qualify for a European ‘bailout'”. That seems a sensible question to me. Is it, perhaps, parallel to the question Americans could be asking along the lines of “After working and paying my taxes all my life, why am I being asked to sacrifice my retirement or healthcare for my parents?” in both cases, it seems to me, there is a disconnect between the demands made of workers/taxpayers and the responsibility for the fiscal problems that prompt those demands.

I suppose one could argue that fiscal problems result from the electoral choices of the voters both in Greece and the USA, that is, that the voters elected the politicians who made the mess. Certainly there are those that would say “Those lousy tax and spend Democrats ran us into debt” (deftly ignoring the Bush Tax Cuts, his two unfunded wars and other inconvenient data). But I wonder if it’s time to go beyond this simple trope.

You can’t have debt without two participants: the borrower and the lender. As the media hypes ‘Greek default’ one is tempted to think of deadbeat borrowers and assume it’s all their fault.

But wait a minute. What about the other side of the transaction? If we agree that mortgage originators in the US who sold liar’s loans to folks who really didn’t qualify were partly responsible for the 2008 crash, and by extension the banks who encouraged them to do so, then the situation in Greece – and the US – may not be so simple.

In this moment when bank profits and bonuses are beyond belief (and greater than before the 2008 crash) the (well-mananged?) perception is of  noble creditors and lousy debtors. I am not so sure the creditors are all that noble. TARP may well have been an institutionalization of moral hazard: why be responsible about making loans when you know the federal government will bail you out no matter what you do?

At this moment, it’s safe to assume that the money in the banker’s personal accounts is well protected: we’re not getting it back – it’s gone down the rabbit hole. It’s also safe to assume that the banksters and their minions in government aren’t going to change things anytime soon. So what’s an ordinary citizen to do?

The most recent news I saw suggested that the Greek Parliament had voted to accept the ‘austerity’ measures demanded by the banks. You can read about them here. I wonder how (if) that will play with ordinary citizens. And I wonder what lessons we might draw if, as Jon Stewart noted, each Greek citizen owes $44,000 but each American owes $45,000.


How Economies Grow and Peter Schiff

By Bob | July 7, 2010 |

Ok as far as it goes . . .

Peter Schiff’s How an Economy Grows and Why it Crashes offers a gently amusing introduction to his take on Austrian School economics by allegorically representing the United States as an island with an economy based on fish. While the book effectively presents his views and offers useful insights into the current economic morass, I want to mention two of its significant weaknesses. First are the inherent contradictions of Schiff’s biases and second are the enormous gaps left by realities not measured by economics.

“The Market” is Schiff’s demigod: its magic solves all problems and leads to the highest and best use of all resources. If Government would just get out of the way, The Market would take care of everything. Unfortunately, there are several problems with this view. Most obvious to many folks today is that the present Government is effectively a subsidiary of the businesses that comprise The Market. Look at the astonishing speed with which the Government decided to lend trillions to private banks with effectively zero oversight. Consider the revolving door between business and Government brought to new heights under Bush II and barely touched by Obama. It’s a complicated mess to be sure, but at this point in our history, Government primarily serves rather than hinders business (permits for Deep Water Horizon . . .). The massive debt problems of such great concern to Schiff expanded because The Market persuaded The Government to stop regulating just as Schiff would advocate. Sadly, reality doesn’t match the tidy absolutes of Schiff’s allegory.

But there is a deeper weakness to Schiff’s work and it starts at the beginning of his tale: Schiff’s island has an unlimited supply of fish. Ask a Canadian fisherman about the Grand Banks: resources deplete. Would Deep Water Horizon exist if there was an easier way to get the oil? Resource limits are absent from Schiff’s world, but not ours, alas.

Why an Economy Grows provides a pleasant introduction to aspects of economics, and a valid critique of our unsustainable financial ways, but ultimately, something smells fishy – and I hope some of the reasons are now a bit clearer.