ICO 4th Consultative forum

I joined the ICO 4th Consultative forum on coffee sector finance in London yesterday as an observer with a view to better understand financing for coffee producers. Despite decades of effort the vast majority of producers and their families, that’s 125 million people, remain desperately poor, barely covering their costs or not at all. Indeed a conference of this kind would not be necessary in a healthy industry! The contributory factors to this situation are many and varied but not the subject of this post. The consequence of being unable to surmount this mess is that in some countries Arabica coffee production is under threat. Colombia has returned to production levels (1) not seen since the sixties. For example young people see no future in coffee production because of the poor returns. The average age of a Colombian coffee farmer is now 54. In contrast the average age of a Vietnamese producer, a country producing vast amounts of Robusta, is 30. Long term, examples such as these this can only mean higher prices for speciality coffee in Hong Kong (2). So how can finance play its part and what challenges do institutions face when they attempt to distribute money? 

 

Some background

 

ICO was created in the sixties under the auspices of the UN with a mandate to administer the International Coffee Agreement. This is a mechanism through which countries agree on export quotas – with the aim of steering market price in favour of the industry. It also acts as a platform to share knowledge and information for its members and beyond. Financing for producers is either pre or post-harvest. Pre harvest finance is credit made available once a contract has been signed so that producers may purchase inputs (fertilizer/ pesticide / land) for the coming year. Post-harvest financing is made on the basis that the commodity has been delivered into a warehouse.

 

The forum day

 

The proceedings involved discussions at an international level.  There were 4 main stakeholder groups present;

1. Members were comprised of representatives of national coffee boards such as Colombia, Brazil, Vietnam and Holland eg both exporters and importers

2. Multilateral Banking Institutions were comprised of representatives of organisations such as the World bank and the Asian Development Bank .

3. Multilateral Development Agencies were comprised of representatives of national organisations USAID, CBI (Netherlands), IAO (Italy)

4. Various Social lending Institutions were representedsuch as the Neumann Foundation (Germany) , Rabobank Rural Fund (Netherlands)

 

2 panels were invited to speak about their industries and their relationship with coffee. The forum was recorded should you want to watch it. For this post I have focused on some of the recommendations that emerged;

 

1. Aggregation - One of the recurring themes was the need to manage risk in order that investors feel confident in getting a return. A number of factors work against the sector in this regard. The industry is largely made up of smallholders involved in a largely manual process. Local banks have an aversion to invest as a result.  Without aggregation (producers forming institutions such as cooperatives) risks cannot be spread and producers cannot apply for loans. This explains the existence, to some extent, of cooperatives and the Fair trade model. Individual farmers are too risky a prospect for investment. Direct trade Companies selling speciality coffee tend to work with a number of farmers for the same reason, acting as the aggregator.

2. Partnerships - A number of speakers on the panel expressed the importance of partner ships between supply chain actors which makes the sector more investable. This again seen as a sensible policy to mitigate risk.

3. Technical assistance Financing must be coupled with technical assistance and collaboration with government to build infrastructure. Public / private partnerships were advocated both to spread risk and get essential infrastructure built.

4. Track record Producers must build a solid track record. For this they need to produce quality as well as deliver consistently.

5. Whole supply chain - There is recognition that investment needs to be made across the whole supply chain to make the sector more attractive as a whole. There are initiatives to combine government and the private sector in order to share some of the risks (public/private partnerships). Infrastructure such as roads are vital.  

 

The challenges faced

 

1. Local banks in producer countries have an aversion to investing in coffee seeing the proposition as too risky or not lucrative enough.

2. The industry needs to recognise the importance of gender and youth. In regions at war for example, it is women who run things whist men are away fighting.  Youth have to be encouraged to participate in the production side to keep the industry alive and innovating.

3. Smallholders typically have less than 5 hectares. Is it reasonable to earn a living from such small scale production? How can smallholders that do not want to aggregate be helped?

4. Governments are reluctant to get involved with development agencies unless the prospect of tax collection is demonstrable.   Again risk plays a large part in this. Governments can also be very corrupt, hampering the efforts of these agencies.

5. Speculative trading of commodities destabilizes pricing which undermines efforts.

6. More work needs to be done by financial institutions to quantify risk in order that they may invest

 

Assumptions – questions I have.

 

1. Growth is the underlying model here. Do we need growth or just consolidation and better quality?

2. The response to climate change is talked about in terms of adaptation not mitigation. Why?

3.  What constitutes and who decides on the nature of technical assistance?

 

Conclusion

 

It seems to me that the majority of finance witnessed in the coffee industry is a symptom of its instability. There is a reluctance to make long term investments due to risk but without them it cannot be mitigated - forming a vicious circle. All the while external factors such as climate change, crop disease, aging plants and the emergence of more lucrative alternatives only serve to make the business less stable.  There is positive news. Speciality coffee is becoming more popular and is seen as a growth sector which is investable. There is access to long term finance from certain kinds of investors such as FAST. Governments will get involved if the right kind of Public/Private Partnerships are presented. So at what level can we be involved? Support your local speciality cafes and roasters. Lower your ecological footprint.  Lend money to micro finance institutions. Build quality relationships across the whole supply chain. Support Coffee Kids.  Any more thoughts?

 

1. Search the FAOSTAT database for coffee ,green / Colombia / 1961-2013

2. (>80/100 on SCAA scale)

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