10 years ago, Virginia started an agriculture grant program to support small businesses. Here’s how it looks now.

In 2018, craft beer was booming in Virginia, and Chaos Mountain Brewing was ready to expand.

The Franklin County brewery, which had opened about four years earlier, was getting ready to spend $250,000 and hire a handful of new employees. Some of the money would go toward updating production equipment, some toward launching a second tasting room in Natural Bridge.

It was a big deal for Chaos Mountain, but it wasn’t anywhere close to the hundreds of jobs and millions of dollars of investment that generally attract economic development incentives.

But a small state program intended to boost Virginia’s agriculture-related businesses gave an assist both to Chaos Mountain’s project and, owner Joe Hallock believes, to the larger craft beer industry. And the program could be poised to double in size if the General Assembly, which convenes this week for its 2023 session, agrees with the governor’s spending priorities.

Hallock received an $8,000 grant from the Governor’s Agriculture and Forestry Industries Development Fund, commonly called AFID, plus a matching amount from Franklin County. To qualify, he had to meet modest spending and job-creation numbers, but he also had to pledge to buy ingredients from Virginia producers – a practice, he believes, that has helped build the kind of supply chain that the state’s craft beer industry desperately needed.

“I think it actually got a lot of us in the industry to basically push the agricultural side, to give them the opportunity,” Hallock said, standing in his brewery and tasting room near Callaway. “We’ve actually been increasing our use of Virginia products every year.” 

When it was launched 10 years ago, the AFID program was different from any of the state’s other economic development programs.

It was created to foster growth in the state’s agriculture and forestry sectors, which have consistently ranked among the largest economic drivers in Virginia but had largely been shut out of economic development programs because they’re populated by businesses that are too small to qualify for traditional incentives.

In the decade since another Franklin County business, Homestead Creamery, received the very first AFID grant, $12.1 million in state money – matched by an equal amount of local funding – has been awarded to 125 business projects across the state in amounts of up to $500,000.

Another $1.1 million in AFID funding has gone to localities in the form of planning grants, while a new AFID program that provides money to help localities improve their local food systems has so far awarded almost $750,000 in grants, also matched by local dollars.

AFID is a small piece of the state’s overall economic development spending, which over the past decade has amounted to $3.2 billion, according to a study released last month by the Joint Legislative Audit and Review Commission.

But Gov. Glenn Youngkin has signaled he’d like to see it grow. Youngkin’s proposed budget amendments include a near-doubling of funding for AFID over the next two years, from $2.75 million to $5.25 million.

“It is a fairly modest program when you look at the economic development tools overall,” said former Del. Steve Landes, R-Augusta, who carried the legislation to create AFID during the 2012 General Assembly session. Sen. Bill Stanley, R-Franklin County, was the patron in the state Senate.

But modest awards can make a significant difference to small businesses – and, Landes said, to the rural communities where most AFID recipients are based.

“Rural areas don’t generally have the huge employers, so they’re dependent on the small businesses that are there,” he said. In addition to the dollars that go directly to the grant recipients, AFID’s in-state purchasing component creates a ripple effect throughout Virginia’s farming communities, he said. 

One of those is Floyd County, population 15,566, which has received four AFID grants. 

“Small businesses are always lifeblood, but for us they are truly foundational,” said Lydeana Martin, the county’s community and economic development director. In Floyd County, AFID grants have contributed to a new meat processing facility, helped a longstanding business open a new storefront in the heart of downtown Floyd and provided funds for the county to boost its agritourism efforts and offer microgrants to very small businesses.

“We’re trying to maintain that rural feel, the reason that we’re all here, but at the same time people need to make a living,” Martin said. “It’s part of that balance.”

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Source: Virginia Department of Agriculture and Consumer Services

Creating another tool for localities to build their own economic strength

As Todd Haymore tells it, potato chips were key to the creation of AFID.

Haymore, who grew up in Pittsylvania County, became commissioner of agriculture in 2007, under then-Gov. Tim Kaine. He and his staff had been talking up a new study that showed that agriculture and forestry were the largest private-sector industries in the state, and they had been working on building a global trade infrastructure to serve those sectors. 

The team had started thinking about how to help homegrown companies when they got a call from the owner of Route 11 Potato Chips in Shenandoah County. She was going to expand, hire more people and buy a lot of Virginia potatoes, and she was wondering: Could the state help her with some kind of incentives, as it had helped so many other growing companies?

“Well, guess what? She qualified for nothing,” Haymore said last month at an event at Homestead Creamery marking AFID’s 10th anniversary.

“Route 11 Potato Chips – homegrown, family-owned and -operated company – qualified for nothing. Why? Because it was too small,” he said. “The investment was too small, the amount of jobs that were created was too small. Now think about it. … Ten jobs? A million-dollar-plus investment? I’m sorry, where I’m from, in Shenandoah County, in Rockingham County, that makes a difference, right?” 

And then, adding insult to injury: In short order, a multinational company got a state incentive package to invest and create jobs.

It galvanized his team.

“I figured if we could incentivize big, we should certainly figure out a way to incentivize small,” he said.

He started to put a plan together, until the Great Recession put a halt to new spending for several years. But the next governor, Bob McDonnell, appointed him as secretary of agriculture and, Haymore said, told him to run with the idea.

The legislation unanimously cleared both chambers of the General Assembly, without either partisan or geographic divide.

Landes recalls talking about AFID with urban colleagues whose districts were unlikely to benefit from it, and finding them supportive. A lot of economic development money already had flowed to those areas, and they seemed to understand, he said.

“I think they realized they were getting their fair share,” Landes said. “This was one additional tool that would really help rural communities.” 

And, indirectly, urban ones, he pointed out. The more successful rural areas are, and the better they can take care of their own economies, the less the state has to help, leaving more state funds to spread around.

The concept of focusing on small businesses in rural areas, and bringing localities on board as equal financial partners, dovetailed with the earlier work of the Rural Prosperity Commission, which had been instructed by the General Assembly in 2000 to “undertake a detailed analysis of rural Virginia economies and recommend flexible but targeted state policies which, combined with local efforts, will help foster sustainable economic growth in Virginia’s rural areas.”

The commission’s report, and the work of the subsequently created Center for Rural Virginia, emphasized that rural Virginia’s economic challenges weren’t all going to be solved in Richmond, said Landes, who was involved with both efforts.

“It was clear that the solutions were going to come out of the localities,” he said.

“There wasn’t going to be a one-size-fits-all solution from Richmond that was going to make a difference in every locality,” he said. Yes, there would be some things that the state could do, and some policies it could set from Richmond that would help all rural localities.

“But we realized that the rural parts of Virginia are so diverse, just like Virginia is, and what happens on the Northern Neck or the Eastern Shore is very different than what’s going to happen in Southwest Virginia, or the Shenandoah Valley,” Landes said.

The AFID grants are another tool for counties to solve their own problems, he said. The awards require a 100% local match, which forces local governments to set priorities and establishes local buy-in. But the grant amounts are usually small enough that localities can afford the investment; while the program currently caps awards at $500,000, the average size is $50,000 to $75,000, said Stephen Versen, who has managed the AFID program since its inception.

Even so, coming up with a match can be a challenge for rural places and can require some creative thinking, Martin said. Floyd County was able to use a grant from the Virginia Tobacco Region Revitalization Commission as part of its match for an AFID award that supported the construction of a much-needed meat processing facility, she said. Additionally, the family-owned Firehouse Farms, which opened early this winter, had won several thousand dollars in a county-sponsored business plan contest, which also counted toward the local match.

“We try to be creative within the bounds of what the funders will support,” Martin said.

As with other state incentive programs, AFID grant recipients must commit to creating a certain number of jobs and investing a certain amount of money in a new or expanded operation. They also must source at least 30% of their raw materials from Virginia.

That mandate was no hurdle at all for Phoenix Hardwoods, which this fall opened a new gallery in downtown Floyd with help from a $10,000 AFID grant and a match from the county. 

The company’s craftsmen turn wood – mostly maple, walnut and cherry – into housewares and custom furniture. Jeff Armistead, who owns the business with his wife, Annie Armistead, said he was already sourcing all of the wood from in and around Floyd County; many of the knotty and gnarled pieces are rejects from local sawmills that only want perfect boards. 

“We want the funky-looking wood,” he said.

For others, it can present a greater challenge. 

Parkway Brewing Co. in Salem received $150,000 from the state and a local match in 2017. The brewery desperately needed a modernization – “We’d been bottling beer on a bottling machine that was built in 1965,” general manager Mike Pensinger said – and wanted to add a pilot system to increase the number of beers it was brewing for in-house pours. 

They had to get creative to meet the locally grown threshold, he said, because the brewery needs more grain than Virginia growers can produce. Parkway has made a couple of beers that were 100% Virginia-sourced, but the brewers mostly use local ingredients for small-batch beers that are poured in the taproom, not for its canned and bottled beers.

“We just don’t have the capacity in Virginia to grow malt like that,” he said. “So we started looking at other things, and that’s where the Rappahannock thing popped up for us.”

Parkway had been buying shellfish from Rappahannock Oyster Co. for its periodic oyster roasts. The brewery started offering the oysters for sale on its website; Rappahannock would ship them to Salem, and customers could pick them up at Parkway every Friday. It turned out to be a real boon during the pandemic, Pensinger said, and they’re still doing it, even though Parkway is no longer bound by the AFID requirements.

“Helps them, helps us,” he said. “We would probably never have thought about that … but sometimes you’re looking outside the box to figure out, ‘OK, what can I do?’ ”

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Measuring AFID’s success

AFID awards are relatively small compared to other state economic development incentives, but they’ve been efficient in their creation of new investment and jobs, according to the recent JLARC study, which looked at the performance of the state’s economic development incentive programs.

The study found that AFID spent the least of any of the state’s grant programs to create new capital investment or additional spending – just $5 in grant money per $1,000 of new investment, compared to the average of $39. The highest: an award related to Amazon’s HQ2 that spent $3,516 in grant money per $1,000 of new investment.

Measured by job creation, AFID grants spent $2,906 per expected job; the state average was $6,832. The lowest: less than $1,000 per job for grants through the Virginia Jobs Investment Program and Small Business Jobs Grant Fund. The highest: $63,291 per job through a grant to Micron.

Although AFID grants are designed to have lower investment and job-creation thresholds than awards from programs like the Commonwealth’s Opportunity Fund, not every project that is approved for a grant has been able to keep the money.

One dramatic example that’s well known in Western Virginia: Oregon-based Deschutes Brewery in 2016 announced it would spend $85 million to build its East Coast operations in Roanoke after much social media hoopla. It was approved for a $250,000 AFID grant. But then market conditions changed and Deschutes pulled the plug on the project. 

In situations where a grant recipient doesn’t hit its targets, it must repay some or all of the AFID grant.

According to the JLARC report, 12% of AFID funds awarded between fiscal years 2012 and 2021 had to be paid back. 

Michael Wallace, a spokesman for the Department of Agriculture and Consumer Services, said he couldn’t provide a dollar total for the returned money because it was unclear how JLARC had compiled its report.

But he said that three projects that were approved for AFID grants and never got off the ground account for 32% of all returned funds. Another 46% came from five projects that fell well short of meeting their targets and had to repay their entire awards, he said.

The rest of the money represents partial paybacks from projects that might have met some of their goals but not others.

The JLARC report counts 103 AFID grants given between fiscal years 2012 and 2021, with 39 of the projects marked as completed. (Agriculture Department statistics show 125 grants awarded since the program’s inception in 2012; Wallace said the JLARC numbers don’t include any 2022 grants or most of those awarded in 2021.)

Those 39 projects created $651 million in new investment and 586 jobs, the report said. But just four met all of their project-specific goals, and less than a quarter met job creation or investment goals, the report says. 

Attainment rates varied widely across the state’s incentive programs, the study found. Looking at all grant programs, 65% of completed projects met or exceeded their goals for capital investment or other spending, while 26% met their job creation goals.

Taken collectively, AFID’s projects had a better showing, meeting 35% of job creation goals, 78% of investment goals and 121% of average wage goals, according to the study. This was true of a number of grant programs, the study found, likely because some projects exceeded their targets and helped pull up overall performance.

Wallace said that while the numbers cited by JLARC are accurate, the report “doesn’t fully capture the program’s success.” 

AFID performance agreements require businesses to achieve 90% of their program targets to avoid losing any of the money, he said, and some companies may submit only enough documentation to show that level of achievement.

“While these projects would not show as fully meeting their requirements, they are considered successfully closed out,” he said in an email.

He said that many companies “overestimate the number of jobs they need to implement their business plan,” and that buying enough Virginia-grown raw materials to meet their targets may be difficult “due to start-up or expansion delays and sourcing issues related to weather or local supply.”

“Despite these issues in the specific period of performance of the grant contract, companies may still operate successfully, thus creating ongoing market opportunities for farmers and forestland owners, as well as bringing economic benefits to their communities,” he wrote.

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More money, new areas of focus might be coming

As the program enters its second decade, changes are ahead.

In addition to seeking more money for AFID, Youngkin has proposed steering some of the new funding toward agriculture technology projects.

Of particular interest to the governor, according to Secretary of Agriculture Matt Lohr: so-called “controlled environmental agriculture” – indoor vertical farming operations like the one opened in Pittsylvania County this year by AeroFarms, which grows leafy greens in what it has called the largest aeroponic farm of its kind in the country. The project received a $33,000 AFID grant and matching local money. 

AFID funds already have supported a handful of other indoor farming operations, including $500,000 to Plenty Unlimited, a California company that in September announced it will build a $300 million indoor farming campus in Chesterfield County; $100,000 to Beanstalk Farms, which last year opened an indoor farm and distribution facility in Herndon; $15,000 to Fresh Impact Farms, which planned to double production at its Arlington County indoor farm.

“The indoor growing of food is such a growing part of Virginia’s economy,” said Lohr, speaking at the Homestead Creamery event. He sees it as both an economic boon and as a hedge against relying too much on food grown in California, where droughts and wildfires have so often disrupted the supply chain.

A decade ago, there was some question about whether such businesses should even qualify for AFID grants, Haymore recalled in a conversation just before Christmas. The AFID team had talked up the program to the General Assembly and agriculture groups as a way to support businesses that were buying from local producers – from “Joe and Sally Farmer,” as Haymore would call them during those early discussions. 

Once they got into the weeds of writing the program’s guidelines, they had questions about whether indoor farming operations fit that mission – whether Haymore’s “Joe and Sally” would benefit. But they also saw it as a chance for Virginia to be at the forefront of an emerging agricultural business, Haymore said. Landes and other legislators signaled their support for including indoor farming, he said, and the team wrote it into the regulations.

“It was not a debate, by any stretch of the imagination,” Haymore said. “But there was a lot of discussion about whether or not that sector should be included.

“And I’m really glad of the decision we finally came up with.”

It also could clear the way for AFID grants to support another agricultural sector that’s growing rapidly, just not yet in Virginia: cannabis. 

While the state has yet to set up a retail marketplace for marijuana, Haymore said he has “no doubt” that at some point there will be opportunities for cannabis growers – many of whom cultivate their crops indoors – to tap AFID to help pay for their operations.

Landes, who applauded Youngkin’s push to increase funding for AFID, suggested that the decade mark provides a good opportunity to assess the program’s performance: Have businesses encountered any problems when applying for the grants? How has the locally sourced products requirement been working? Should the award cap be increased in certain instances?

“Any time you have a program that’s been in place that long, it’s good to just take a second look, make sure it’s performing as you hoped it would,” he said.

Jeff Bloem, owner of Murphy & Rude Malting Co. in Charlottesville, said he recently talked to Lohr about the idea of tweaking AFID’s job-creation requirements – to perhaps allow a business to create fewer, but better-paying, jobs.

Bloem, who sells to brewers across the state, including Chaos Mountain, successfully applied for an AFID grant five or six years ago, while he was launching his business.

But he decided not to take the money. To get a large enough grant to really make a difference in his opening, he said he would have had to commit to creating more jobs than he felt comfortable with. 

“It was just very nerve-wracking for me to even say that I’m going to create five jobs within three years,” he said. “I was looking at my projections going, that’s not really in the plans.” 

The decision turned out to be the right one, he said. For a while, he employed two full-time workers; now he has just one, plus himself. He wouldn’t have met the AFID requirements and would’ve had to give back at least some of the money, he said.

Now, though, he’s preparing to apply again. Murphy & Rude (the company is named after his two dogs) just completed a significant expansion, and he needs more bodies in production and in sales and marketing. 

“Now I can fathom five, six, seven jobs,” Bloem said. “Now it makes a little bit more sense. As a startup, it didn’t. I was gun-shy. I didn’t want to make promises that I didn’t think I could keep just to say I got an award, or to get the money. In the end, the juice wasn’t worth the squeeze. … That’s not to say it’s not a phenomenal program,” he said. “I think it’s a great catalyst for making people think about Virginia-grown stuff.” 

But each business owner needs to decide if the program works for them, he said.

Martin Gardner, president of Blue Ridge Aquaculture in Henry County, echoed that thought.

The company, which raises tilapia, received a $50,000 AFID grant – and a matching amount from the county – in 2016 to help fund a $5.5 million expansion that included the construction of a feed mill.

For Blue Ridge Aquaculture, as for Parkway Brewing, buying raw materials from within Virginia proved to be a challenge – there just weren’t many in-state producers who were selling what the company needed for its feed operation, Gardner said. The corn grown in Virginia, for instance, is geared toward what the pork and poultry industries need, while fish feed has different specifications. 

“It’s not just the commodity itself, but the specifications of that commodity could close the door on a few suppliers,” he said.

He advised companies who are thinking about applying for an AFID grant to first build a relationship with Agriculture Department staff, who he said have been very helpful to his company over the years.

“They want to successfully allocate these resources, and they will do whatever they can to help,” he said. “But they also have a responsibility to make sure that they’re used appropriately. So the better you understand that program, then the better they can kind of help you as you move forward, and frame your expectations.

“A lot of times if you read about the programs that are out there, you think, ‘Oh, well, it’s a slam dunk. I can fill out this one form and in a couple of weeks I’ll have my assistance given to me and we’ll cut a ribbon.’ But the timing, the process – it’s not onerous, it’s reasonable for using public funds. But working with them and talking to them prior to building the expectations or putting the awards into your financial projection – you need to fully understand what’s all involved.”

Ten years ago, Homestead Creamery took a leap on the brand-new AFID program and became its very first grant recipient. It used the $60,000 from the state, and matching funds from Franklin County, to help pay for an expansion that allowed it to expand the reach of its milk, ice cream and other dairy products, said controller Jesse Novak. 

“It really helped us to get to a point where we could grow more regionally, have the infrastructure to produce and maintain a level of production that could meet the market demand in the Mid-Atlantic region,” he said. 

Homestead currently works with six milk producers, he said; the “vast majority” of the ingredients it uses are from within Franklin County.

“Buying within the commonwealth, trying to keep Virginia first among the agriculture industry – it is a bigger partnership than just how much can this company get from the state to do what it wants to do,” he said. “We really do focus on making sure that if we can at all possible buy products from Virginia, we’ll always look here first.”