Financing Sustainable Coffee Panos Varangis, Renate Kloeppinger-Todd, Ulrich Hess and Bryan Lewin The World Bank UNCTAD/IISD Sustainability in the Coffee Sector: Exploring Opportunities for International Cooperation---Assessment and Implementation Geneva, Switzerland, December 8 -9, 2003
Credit or Grant? • Credit appropriate for commercial activities (production, trade, etc. ) • Grant more appropriate for developmental purposes • No financing to be provided on concessional terms (no interest rate subsidies or forgiveness of principle) • A financing package, however, could consist of a grant component (equity) AND a loan on market terms, preferably from different sources
Objectives of Commercial Credit • To facilitate sustainable access (and at better terms) to investment, pre-harvest and postharvest financing
Objectives of Development Financing • Institutional development (grants) – Strengthening coops, producer organizations, sector institutes, etc. • Promotion of sustainability through TA (grants) – Technology improvements, quality enhancement, market intelligence, promotion, etc. • Product diversification (mixture of grants/loans) – Promote higher value coffee products, other non-coffee production
Coffee Sustainability and Finance: Possible Linkage • Most small farmers have little to no access to finance particularly from formal sources • However, farmers of sustainable coffee are often better able to access financing – Access to pre and post-harvest financing improves when it comes to sustainable coffees (e. g. higher prices, assured buyers and buyer quality, improved trade linkages) – Access to funds for institutional capacity building, technical/quality issues, etc. also improves when farmers commit to sustainable coffee practices
Rural Finance in Developing Countries • Faces many challenges: • Local banks reluctant to lend to agricultural sector: – Too risky (weak collateral, price and weather risks, etc), better opportunities elsewhere – High transaction costs, particularly for small loans – Projects to be financed are not sufficiently profitable – Lack of know-how about agricultural lending – Bail-outs often create culture of non-repayment • Highly selective lending (“cherry picking”)
Rural Finance in Developing Countries • Some new models/approaches are evolving based on: – Rural microfinance – Improved legal framework and innovative models regarding collateral – Potential for price/weather risk management – Supply chain financing
Production and Trade Finance for Sustainable Coffee
Coffee Financing • Investment finance---very scarce in most producing countries • Production finance (pre-harvest mainly for inputs)--available but limited to larger producers and some cooperatives • Trade finance (post harvest)---available but on a limited basis • Small producers are at a significant disadvantage
Sources of Finance • Investment finance: local banks, some DFI • Production and trade finance: local banks, international banks, socially conscious investors, foundations/NGOs, traders, input providers, informal sources
Challenges in Production and Trade Finance • Is money availability the main problem? • OR meeting the challenges of: – Developing systems/approaches to make coffee producers “BANKABLE”? – Becoming the catalyst for the private sector to increase financing? – Creating longer-term financial viability (making a business case) for lending to farmers?
Ideas to Increase Credit and Improve Access • Better collateral---e. g. sales contracts, longterm contracts, etc. • Reduce risks---price, weather/yields, delivery ---better risk management practices • Performance/reduce contract defaults • Stronger linkages between producers and the international trade/supply chain
Ideas to Increase Credit and Improve Access • Support and training for financial institutions to set up appropriate systems (MIS, credit evaluation and monitoring) thus reducing transaction costs and portfolio risk • Assist farmers to become better producers in order to present “bankable” projects • Use of partial credit guarantees?
Development Finance for Sustainable Coffee
Developmental Grants and Loans • Various developmental grants or loans exist to promote sustainable coffee production and marketing – WB/IFC (GEF, JSDF, Bio. Carbon Fund, but also regular project finance) – Other multilaterals (CFC, FAO, IADB, UNCTAD, etc. ) – Donor initiatives and projects – Private initiatives (e. g. ICP, and many others) – NGOs – Other sources • Need for better coordination, explore synergies, and scale-up where successful models are found
Challenges in Development Finance • Is money availability the main problem? • OR – Creating and identifying projects – Improving coordination of various sources of financing and amongst various initiatives and projects – Scaling-up successful models – Ensuring longer-term sustainability and continuity of projects – Leveraging resources
Role of a Partnership • Should a partnership create and manage a central/global sustainable coffee fund? • OR focus on creating an Information and Coordination Clearing House that would help: – Mobilize existing sources of funding – Identify projects – Improve coordination of various sources of financing and amongst various initiatives and projects – Identify and scale-up successful models – Ensure longer-term sustainability and continuity of projects – Leverage resources – NOT distorting financial markets
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