A change in the organic pipeline?

The bankruptcy of Pipeline Foods, an early leader in the effort to build out US organic ag, will influence the approach of investors now seeking profit in the same market.

The three years needed to convert farmland from conventional to organic production is only the most tangible of many challenges that make it impossible to satisfy US demand for organics domestically. The growth of organic production has also historically been held back by uncertainty around regulation, skepticism about price premium durability and a simple adherence to tradition.

As those challenges have gradually faded in the years since it was established in 2017, AMERRA-backed Pipeline Foods has been among the most prominent actors working to speed growth in US organic supply. The company connected buyers and sellers for organic grains and oilseeds while offering other services to farmers – that was until July, when Pipeline filed for bankruptcy after suppliers’ complaints of late payment prompted several states to revoke its operating licenses.

The company stressed the impact of covid-19 – consumer packaged goods companies stalled new product development and travel to approve Pipeline’s new manufacturing facilities became unworkable, the bankruptcy filing notes. But Pipeline’s fate was sealed by a more complex set of factors. Executive focus, trouble raising capital and widespread concerns about fraud in supply chains across the wider organics market all helped doom the effort, according to sources familiar with the company.

Pipeline’s downfall may ultimately prove specific to the company itself and the strategy driving its operations. But the decision to liquidate rather than restructure suggests AMERRA could not see a path to profitability in a troubled market anytime soon (AMERRA declined to comment for this piece).

Having started with processing and distribution infrastructure to facilitate organic exchange among producers, traders and manufacturers, Pipeline went on to acquire an ancient grains business and established financing and marketing units that suggested a comprehensive role for itself in the US organics market.

One source familiar with Pipeline estimated AMERRA’s investment at $50 million and stressed a fundamental mismatch between the scale of the company’s ambitions and its ability to raise capital.

Another source familiar with Pipeline labeled the company a valiant effort that came 20 years too soon. A combination of misinformation, instances of genuine and accidental fraud in the industry and competition from Eastern European imports has created, according to the source, widespread suspicion about the validity of US organic supply.

“The cost of carrying an early concept just became overwhelming in the light of fraudulent activity in the category,” they told Agri Investor. “We’re at a junction in that movement [organics], and I think it could be fading.”

Time will tell whether Pipeline’s failures had more to do with broad headwinds relating to fraud and trade in the wider organics market than its own challenges of maintaining capital and focus while assembling and operating a complicated new supply chain during a period of unprecedented disruption.

Pipeline’s assets have attracted interest from at least five parties. The ultimate buyers of its organic storage and processing infrastructure will be instructive. Sources anticipate the assets will go to multiple buyers, which many familiar with the market expect to be a combination of industry and financial parties already active in ag.

The years since Pipeline’s creation in 2017 have certainly convinced incumbents of the strength in demand for organics and the need to respond to it, as doubts about its durability have faded.

In the aftermath of its bankruptcy, a private equity-backed effort to duplicate Pipeline’s vision of itself as a vital node in the organic supply chain, which might ultimately be exited through integration into one of ag’s giants, seems unlikely.

Instead, Pipeline’s failure seems more likely to nudge investors away from the very infrastructure facilitating US organic ag trade and toward the ‘picks and shovels’ of resource management, fraud protection and certification needed to foster its growth.