MICHIAL SALLAETS on a $5m investment fund aimed at improving smallholders' lives as well as helping their business grow.
Getting finance for their small-scale businesses in a fair and sustainable way is one of the biggest challenge that smallholder producers in developing countries face. Fairtrade has been working with Incofin Investment Management in providing financial support to farmers in an innovative way.
With only 2% of their financing needs currently being met in the developing world* and the fact that they represent 50% of the world’s hungriest people** it has perhaps never been more apparent that smallholder farmers need support in being able to trade effectively.
Fairtrade International, a global non-profit organisation working to provide a better deal for farmers and workers, has seen the same problem among its network of more than 1.2 million farmers and workers. In a survey conducted in 2012, Fairtrade farmers in Latin America alone expressed a need for $500m (£320m) to invest in infrastructure, working capital to cover purchases such as seeds and fertiliser, and bridge financing to cover the period between harvesting and receiving payment from a buyer. In particular, the survey highlighted the high demand and lack of supply for long-term loans that allow farmers to invest in new technologies and equipment that can lead to improved efficiency and higher yields over a sustained period.
So how can smallholders receive the trade finance they need to improve their livelihoods in a fair and sustainable way?
Recognising this gap in the market, Incofin IM and Incofin cvso joined forces with Fairtrade International and Grameen Foundation, a US-based non-profit that works to help the world’s poorest by increasing access to financial services and actionable information. The aim was to establish the first fund to focus on the unmet demand among smallholder farmers for long- term loans.
In October 2012 the Fairtrade Access Fund was launched with $1.75m of capital provided by the three fund sponsors. Incofin IM is responsible for managing the fund, which is an impact investment fund designed to touch the lives of rural people by providing them with opportunities to increase their market access through financial products and technical assistance that meet the specific needs of farmers. All of its investments are designed to have a positive social effect on the lives of smallholder farmers in the developing world while delivering a fair financial return for its investors.
Working through Fairtrade-certified producer organisations, such as farmers’ associations and co-operatives, the Fairtrade Access Fund tackles the problem of lack of access to financing through a two-pronged approach. It offers a full range of loan products to meet a variety of financial needs. It will also provide technical assistance to the producer organisations as a means of strengthening their management and agricultural practices, making them better candidates for future financing from the Fairtrade Access Fund or other local and international investors. By addressing both the lack of access to appropriate funding and some of the factors that create this market gap, the fund seeks to further stimulate the development of smallholder farmers.
Choosing to focus on Fairtrade-certified co-operatives is a means of ensuring that the fund delivers a strong social return, a key objective for its sponsors. The lack of negotiating power of an individual farmer means that downward pressure on prices from large buyers can result in a farmer selling his crop for less money than he invested in producing it. The Fairtrade minimum price ensures a transparent price that allows farmers to plan ahead. By increasing access to financing for Fairtrade- certified organisations, further incentive is provided to other producer organisations to seek certification.
Since its launch in Latin America the Fund has provided seven loans for trade finance and long-term investments, totalling $3.7m, to Fairtrade co-operatives in Honduras, Peru and Nicaragua. In the case of the trade finance loans, producer organisations will use the loans to purchase Fairtrade-certified coffee from their member farmers. Without these loans, the producer organisation would not have enough cash on hand to pay their member farmers at the moment of harvest. This forces farmers to either await payment, potentially causing a shortfall in their personal finances, or look for a buyer outside the co-operative and accept a lower price in exchange for immediate payment.
The first long-term loan disbursed by the fund will be used by COCLA, a Peruvian co-operative with more than 45 years of experience and comprising 24 member co-operatives that bring together more than 8,500 small producers of high-quality cocoa, coffee and tea. The co-operative will use the money to purchase new machinery for drying coffee and cocoa. Drying the coffee and cocoa themselves allows the producer organisation to receive a higher price for their beans.
In the long term farmers also have the opportunity to access better prices and increase the volumes they can deliver to the co-operative, resulting directly in improving their household incomes. Furthermore, the investment in the new machinery of dry coffee and cocoa will generate new jobs in several links in the production chain of COCLA.
The total amount loaned by the Fairtrade Access Fund so far is $3.7m and Incofin IM is currently assessing transactions with prospects in nine countries to potentially finance coffee, bananas, honey, sugar cane, blueberries, sesame and walnuts.
Since its launch in October four new investors have entered the fund, helping it to grow to over $5m. Although investors have varying reasons for investing in the fund, from all involved there is a clear interest in seeing their investment put to use to achieve both a social and financial return. Starbucks, an early investor in the fund, provides a good example of a company that has aligned its social objectives with its business strategies by working with the Fairtrade Access Fund.
“Investing in smallholder farmers directly reflects our desire to strengthen coffee supply chains and improve the livelihood of farmers around the world,” said Kelly Goodejohn, the director of ethical sourcing at Starbucks. “By working with the Fairtrade Access Fund, we come that much closer to our goal of establishing $20m in farmer loans by 2015.”
For more information on the Fairtrade Access Fund, please contact [email protected]
*Source: Dalberg, 2012
**Source: Fairtrade Foundation