Appendix A

Must Access to Capital Lead to Product Adulteration?

A deeper dive describing the problem and opportunity to bring a path to operating capital for high integrity producers:

A significant market opportunity exists in the area of food production, generally described as “organic food” and “regenerative farming”. For the last decade, these food products have been the fastest growing segment of the US food economy. Simply put, American consumers have become aware that there is something gravely wrong with conventional food offerings, and are gravitating towards options which represent healthier and more sustainable food. They are also becoming increasingly suspicions and savvy in differentiating food integrity from “greenwashing” and marketing tricks.

Unfortunately, there are significant market forces which create barriers to new food companies effectively entering the marketplace to provide the desired alternative options to the mass market. When such products and companies emerge, they are immediately subject to the competition of products produced by competitors which have increasingly used marketing methods to present their products a “natural”, but which are the products of consolidation and vertical integration of food production.

This competition does not even have to employ unethical practices (though it often has) to present near insurmountable barriers to entry to companies which are not well supplied with starting capital, whether or not they are profitable at inception.

These new companies are then faced with a very difficult choice. Stay out of traditional distribution and grocery ecosystems, or bring outside capital to bear on the problems of scale, marketing, and price competition in order to gain market access. In the latter case, most companies will rapidly enter a cycle which inevitably trends towards a build-operate-transfer approach. Either through the loss of control to new stake holders, or because the founding producer is soon to exit the industry, the final result is almost always the same: adulteration of the food product which was the purpose of the enterprise in the first place.

Legacy distribution systems (grocery chains, distribution companies, food brokers) are an integral part of this cycle. Slotting fees, holdbacks, disadvantageous contracts, and hidden costs make these systems particularly difficult to navigate for new food producers, who are often the very innovators who are most enthusiastically received by consumers. The problems faced by high integrity food producers are then compounded by a final near-insurmountable challenge; lack of access to working capital. Even successful contracts with distribution companies and grocers does not ease this particular pinch.

These agents of the system are notable chary of providing anything like a binding sales contract to a small scale producer, the only potentially useful tool to assist small producers in securing bank finance to be able to successfully meet the accelerating capital demands of this systems. This quickly forces most producers into the BOT cycle, which leads to adulterations and an ultimately unmet consumer demand, hence a market opportunity.