show me the money s c a a symposium 2009 draft presentation jason potts and roy parizat ...

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SCAA Symposium 2009

Show me the Money New Financing Models at Origin


Presentation Overview

The need for finance by specialty and sustainable coffee producers

The existing barriers to the provision of sufficient finance for the coffee sector – the “financing gap”

Overcoming the financing gap – ways of increasing the availability and flow of lending

A Proposal: Consumer Driven Guarantee Fund


Brief Introduction to SCI & FAST

Sustainable Commodity Initiative (SCI): Partnership of IISD and UNCTAD Focused on building an enabling infrastructure for

sustainable consumption and production technical assistance; impact assessment; financing and policy

support In 2006 partnered with the Social Venture Network in the

formation of FASTThe Finance Alliance for Sustainable Trade (FAST) Membership based trade association focussing on

improving access to finance for sustainable trade producers by: Reducing transaction costs and risk Improving investment and economies of scale


Why Financing Matters for Sustainable Coffee

Key Barriers to Market Entry and Continued Growth of Sustainable Coffee Producers:

Poor Market Information Inadequate Physical Infra-structure

Under-developed Management Capacity Low Savings and Capital

Finance is a vital element for overcoming these “natural” market barriers


Financing Issues and Experiences at Origin:

Views From the Floor


Financing Needs of SME Coffee Businesses

Pre-financeto cover inputs into production prior to harvest

Trade credit to enable SSMEs (producer organizations) to buy on

credit to produce and sell on international markets

Term loans to enable SMEs (and farmers) to invest in

infrastructural improvements


Domestic Bank Financing for Agriculture

Country Agricultural Share of GDP (%)

Bank Lending to Agriculture

(%)

Burundi 34.9% 10.7%

Kenya 27.9% 6.4%

Malawi 37.8% 15.2%

PNG 34% 4.5%

Uganda 32.7% 6.8%

Zambia 18.5% 9.3%

Local / Domestic Banks are reluctant to lend to their agricultural sectors


Causes of Low Levels of Financing to SME Agricultural Producers Historical Issues with lending to the agricultural sector –

high(er) default rates (due to price and weather volatility)

Lack of bank understanding of agricultural enterprises Perception that smaller agricultural enterprises are

higher risk than larger enterprises Perception of higher returns with lower transaction costs

for urban sector lending Perception of poor management in SME agri enterprises Lack of collateral available for banks to secure lending

against Issues with reclaiming lending following defaults, the

inability to seize assets used to secure loans


Impacts of the Coffee Financing GapImpacts on coffee producers:

restricting infrastructure improvements increasing risky behaviour due to sub-optimal coping

techniques preventing new entrants into sustainable and specialty

sectors Raises costs, reduces quality of production

Specific Impacts on Roasters: May be forced to provide direct financing to secure supply

(threat to own balance sheets) May be forced to buy through importers who can provide

financing Higher risk of default Less choice in supply


Alternative Sources of Finance for Coffee Producers

Local / Domestic Banks

Local Intermediaries (Coyotes) Microfinance Institutions Multi-national Traders Importers / Roasters Socially Oriented Lenders


Systemic Challenges Facing Alternative lenders in the Coffee Sector

•Intermediaries:•Higher interest rates•Low $$$ capacity•Only pre and short term financing

Traders:•don’t have lender expertise•have limited capital and are non-neutral•Don’t have proper infrastructure of managing risk and due diligence

•Buyers and Roasters:•Same as traders with added challenge of smaller size and greater distance from producers (higher risk management costs)

•Social lenders:•Rely on social investment small capital base•Additional transaction costs of international lending


The Scale of the Financing Shortfall in Sustainable Coffees

Estd. Value of Sustainable Coffee Exports:

Estd. Trade Finance Requirement:

Estd. Domestic Bank Financing:

Estd. Socially Oriented Lender Financing:

Estd. Importer / Buyer / Trader Financing:

The (Trade) Financing Gap:

$2.11 billion

$1.26 billion

$400 million

$210 million

$200 million

$450 million


The Financing Gap is Now Affecting All Global Trade

The current crisis provides us with the opportunity of raising awareness of the harm that the sustainable trade financing

gap is causing to the growth of global sustainable trade.

“The credit crunch adds an additional squeeze [to the global

recessions reduction in global trade], thanks to an estimated shortfall of $100 billion in trade finance, which lubricates 90% of

world trade.” (Economist March 28th)


Agricultural Lending in Honduras Honduras provides an interesting case study of the agricultural sector

and the reasons behind the lack of financing for the sector by local banks

39.2% of the country’s labour force are employed in agricultural production, yet only 11% of bank lending is made to the agricultural sector

Reluctance to lend rose dramatically following Hurricane Mitch in 1998 and this reluctance has remained

Hurricane Mitch brought excessive rainfall, major flooding and extreme winds, which greatly damaged agricultural production.

Following the hurricane many agricultural enterprises were unable to repay their bank loans and the government implemented a debt forgiveness program, leaving banks with significant levels of non-performing loans on their balance sheets

As a reaction to this high level of agricultural bad debts banks started focussing their lending onto other economic sectors, primarily retail and commercial property and industry


Honduran Bank Survey

A survey of Honduran banks (2007) identified the following six reasons (in order of prominence) for their reluctance to expand lending into the agricultural sector.

1. Weather Risk / Climate2. Price Risk (Agricultural Price Volatility)3. Politics4. Technical Capacity / Administration5. Plagues and Disease (affecting crops)6. Culture of non-repayment

Source: World Bank CRMG/AHIBA


Bank Concerns about Agricultural Lending

Source: World Bank CRMG/AHIBA


Weather Risk Rainfall (and other weather) variability leads to major

differences in production and yields year to year – coffee yields are dependent on rainfall, sunshine and other climate variables

The Malawi Maize Index, 1962-2008

0

20

40

60

80

100

120

140

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007Harvest Year

MM

I Valu

e

Malawi Maize Index, MMI


Coffee Price Volatility

Coffee Prices (international and local) are highly volatile


Existing Mechanisms and Tools for Agri-Lending

Coffee Coop /SME

Warehouse

Coffee Transported

WarehouseReceipt Bank

Credit


Benefits: The coffee in the warehouse provides realizable security to the

banks, increasing their willingness to lend, even to clients that would normally not meet their “due diligence” standards

Provision of lending is related to need – i.e. as volumes of coffee grow lending increases

Disadvantages / Limitations: Potentially higher transaction costs for borrowers (fees and

storage costs) Banks may offer low % lending against stocks – and/or use a

$/lb valuation that is unrealistically low Timing can be problematic with borrowers timing their

transactions based on their lending requirements not on optimal market conditions

Useful for harvest finance and trade finance, not for pre-harvest / pre-season finance

Warehouse Receipt Based Lending


Contract Based Lending – Socially Oriented Lending

1.order

2.credit

3.delivery

4.payment

5. Payment (minus loan &

interest)

Buyer(1) Places order with Producer Org

Social Lender(2) Provides credit based on order volume and value

Producer(3) Delivers coffee to Buyer

Buyer(4) Pays full value to Social lender

Social Lender(5) Pays order value minus loan amount and interest to Producer Org


Contract Based Lending – Socially Oriented Lending Benefits

Security is based on the value of the contract and the relationship between producer, buyer and lender

Often amounts of lending are higher per contract due to the sustainable premiums included in the contracts

Repayment is simplified as fully payment arrives with lender first

Disadvantages / Limitations: Occasionally lenders demand contracts have fixed prices – raising

price risk unnecessarily for producers Rates and fees can be relatively high due to high transaction

costs Available funding can be limited due to size / scale of socially

oriented lenders Requires strong relationship between buyers, producers and

lenders – not always possible Lending may not be available for coffee production that is sold

outside of certified schemes, even when the producer is certified


Existing Mechanisms - Summary The socially oriented lenders exist due to the unwillingness of local

banks to provide sufficient lending to producers Warehouse receipts are a mechanism for providing security for

banks lending to producer organizations that they arguably don’t fully trust as credible clients

Contract based lending is great for producers that have large volumes of sustainable orders but as a result is often focussed on the strongest (not weakest) of sustainable producer groups

Both forms of lending may influence the trading behaviour of producer organisations resulting in sub-optimal trading patterns based on the need for financing rather than the maximization of income

Neither fully addresses the underlying problems that are restricting sufficient domestic credit being accessed by producers

Neither of the existing primary mechanisms provides opportunities for longer-term lending for infrastructural investment


Overcoming the Financing Gap

Existing Initiatives for addressing the financing gap include:

Limited Term Lending based on Long Term Contracts

Guarantee Services to Encourage Local Banks to Lend long term

Pre-Finance built into Sustainability Programs (fairtrade contract)

Expansion on leasing services in developing countries


Term Lending based on Long Term Contracts Some socially oriented lenders will provide long term

loans for infrastructural investment Infrastructure funded includes:

Washing stations Warehouses Trucks Investment in converting production methods to meet

sustainability requirements and improve quality Requires long term relationship and contracts with a

buyer, who commits to pay for their coffee purchases via the socially oriented lender

Main issue: limited scale and limited number of loans


Guarantee Services The Rabobank Sustainable Agricultural Guarantee Fund

(SAGF) provides a guarantee for local banks providing new finance to sustainable coffee producer organizations

The fund charges an annual fee which is met by the producer

The fund provides local banks with protection against default by the borrower

The guarantee level diminishes each year (over 3 to 4 years)

By the end of the fourth year the bank will know the client well and be able to continue lending

The guarantee is based on coffee contracts and hence is suitable for trade finance rather than long term investment

The size of the fund limits the number of loans possible


Pre-Finance Built into Sustainable Programs The Fairtrade Coffee Standard suggests that fairtrade

buyers provide 60% pre-finance on signing of the contract

This financing has been calculated to be the minimum amount of finance that a coffee cooperative trading business requires to adequately fulfil the orders

The finance can be provided by the importer / buyer or provided via a lending institution

However the requirement is voluntary and not all fairtrade buyers will provide finance

As fairtrade penetration grows and more commercial entities start purchasing fairtrade coffee the provision of pre-finance may reduce


Overcoming The Financing Gap

What else can be done to assist coffee producer organizations in overcoming the financing gap?

1. Expansion of guarantee services2. Improved domestic bank education in the coffee

industry – better risk assessment3. Improved risk management for coffee producers–

both price and weather4. Improved financial management training of

sustainable coffee producer groups5. More support for pre-financing by the sustainable

coffee programs and their buyers


The Need to Get Banks Lending Ultimately sufficient financing for coffee producers is

dependent upon local banks, in their countries, providing sufficient lending services

This requires all in the coffee industry to start assisting their producers in improving their attractiveness as clients to the banks, by improving their managerial skills and risk management practices and processes

This requires banks to start better understanding the coffee sector and lending to well-managed coffee producers

This requires the socially oriented lenders to focus more on educating local banks in how to lend successfully to coffee sector clients – moving from talk to action


Honduran Example Work is being undertaken that directly targets the underlying

causes of insufficient bank lending to agriculture

Barrier to Lending

Activity Being Undertaken

Weather Risk Development of Index Based Weather Insurance

Price Risk Risk Management Training (Banks and Agri SME’s)

Political / Regulatory

Identification of Regulatory Barriers

Agri SME Mngt. Training and Capacity Development

Culture – Non-Repyt.

Reducing Agri Gtee’s and Marketing Campaign

Agri Knowledge Training of Banks in Agri Lending


Risk Management Training for SME’s WB online training course enables a coffee sector SME to

be: introduced to price risk develop the systems and processes required to identify and

monitor risk learn about the means for controlling risk (financial

instruments and through physical contracts) receive direction in establishing price risk management

programs into their businesses CRMG is currently looking for institutions who would be

interested in rolling out the course to coffee sector SME’s CRMG will be demonstrating the online training course

for interested institutions on Sunday at 10:30 – 11:30 am room A406.


What FAST is DoingLeading collaborative projects involving coffee supply chain participants that directly improve access to finance, including:

Financial Literacy Training Toolbox for Sustainable Commodity Producer Organizations

Expanding Access to Guarantee Services for Sustainable Producer Organizations

Assisting Socially Oriented Lenders in Raising Additional Capital and Expanding their Lending e.g. Social Impact Assessment

Assisting Producers with Finding both Local and International Lenders through the Online Lending Marketplace

Advocating with Development Agencies and Technical Support Groups to Increase their Focus on Provision of Finance

The coffee financing gap is a global problem that requires collaborative multi-stakeholder solution.


What Roasters Can Do A few initial suggestions:

Work alongside socially oriented lenders to raise their profile with coffee drinkers who are potential investors

Offer hedging services to SMEs Work with social lenders and FAST directly on producer’s behalf Work with NGOs and development agencies to secure training

and education for their producers so that they can become better

Consider providing financing (or guaranteeing financing) for their smaller producers who are struggling to gain access to necessary funds

Advocate with national agencies and sustainable certification agencies to put more focus into raising the availability of finance for sustainable producer organizations

Any others?


A suggested practical step…….. Establishment of a new consumer-driven guarantee

fund for smaller sustainable coffee producers

Guarantee fund created through the financial investments of North American and European roasters, consumers and other stakeholders

Roasters invest in and publicize the fund to assist the growth of new sustainable and specialty coffee producer groups

Guarantees used to secure lending for trade finance for new entrants into the sustainable coffee sector


Consumer Driven Guarantee Fund

Coffee Roasters

Consumers

Investors

FAST Guarantee

Service

SME

Lenders

(including Lending Buyers)

Coffee Buyers /

Importers

$ investment

GteeFee

Gtee

Payment

OrderCoffee

TradeFinance

Outstanding

payment



Benefits for Investors (Roasters, Consumers and Others)

Preferential access to apply guarantees preferred producers (based on level of investment)

Guarantee facility helps ensure secure, quality and sustainable supply

Secure investment (but low or no returns)



Prerequisites of the Guarantee Fund:

Sufficient interest of the roasters (and consumers) in investing in and promoting the fund

Sufficient willingness to invest in the fund without a financial return – only a social return

Low cost operations to minimize interest charges to SME beneficiaries

Marketable publicity for investors


For more info on financing options at origin, please visit www.fastinternational.org

Thank You!

show me the money s c a a symposium 2009 draft presentation jason potts and roy parizat ...

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