Equal Exchange/Carly Kadlec
More Funds For Fair Trade Farmers Trying To Expand – Forbes
Demand for fair trade products is growing, but small-scale farmers face a big obstacle when it comes to supply chain funding. Loans of 8-to-12 months or so in duration for growing crops aren’t hard to get, but capital expenditure financing for facility and equipment needs, not so much. That means farmers in places like Peru and Mexico can’t make large-scale upgrades to processing facilities and equipment they need to expand.
The folks at RSF Social Finance, which provides access to capital for organizations committed to fair practices and improving economic conditions, became aware of that problem years ago. But meeting those needs was out of their usual purview. Then, about a year and a half ago, they developed an approach called the Fair Trade Capital Collaborative, a way to make loans to fair trade suppliers relying on “trust underwriting”–working with borrowers with whom they have long-standing relationships and who, in turn, can provide loans to their suppliers. “We trust the borrower, which vouches for its partner,” says Kate Danaher, senior manager, Social Enterprise Lending & Integrated Capital at RSF.
Why is it so hard to get this funding? Small-scale farmers who need on the order of $400,000 to $500,000 generally don’t have access to local banks specializing in small enterprises. Plus financial institutions don’t like to make loans of that size in any case, since they take as much time as bigger deals with much less payoff. When farmers get loans, they have to pay double-digit interest rates, something that’s not a viable alternative over a period of three to five years.
With trust underwriting, RSF can avoid some of the usual due diligence process–for example, sending a representative to a remote part of the world to assess the level of risk– and provide loans at more affordable rates of around 5%. It also has the ability to fund technical assistance. In the pilot phase, RSF is working with a philanthropic fund, the better to allow it to take more risk than it could with its main investment pool.
Key to the approach is for borrowers themselves to identify the biggest needs. “A lot of development funding is top down, with project design that is not local,” says Carly Kadlec, green coffee buyer at Equal Exchange, a West Bridgewater, Mass.- based RSF borrower since 2014, which provides fair trade organic coffee, chocolate, cocoa and other products, working with more than 40 small farmer co-operatives in 25 countries.
One of three borrowers involved in the pilot, Equal Exchange met with representatives of three of its farmer cooperatives in Chiapas, Mexico, a year and a half ago to pinpoint their greatest funding need. Turned out it was all about coffee leaf rust, an epidemic that started in 2012. A fungus that creates rust-like patches on coffee plant leaves, the disease can kill the crop. The most effective weapon is replanting with rust-resistant varietals and improving soil management.
What happened? RSF ended up lending $130,000 for replanting. Plus, it provided $60,000 in technical assistance grants, so agronomists could teach farmers soil management techniques. Equal Exchange guaranteed a small portion of the loan. Farmers were able to choose repayment schedules of 12 to 36 months. Thus far, one cooperative has paid back its loan, while two others have 12 to 24 months left.
Other borrowers involved in the pilot phase include Indigenous Design, which works in the fair trade apparel industry, for wool producers in Peru, and Guayaki, which sells tea, to help build a new drying and milling facility in Brazil.