Organic and fair trade agricultural SMEs are expanding their markets despite the global economic downturn, and are getting a boost in the developing world through organizations like Root Capital. The nonprofit investment fund recently acquired a loan package of $4.9 million from the Multilateral Investment Fund (MIF), a member of the U.S.-based Inter-American Development Bank (IDB) Group.
Root Capital will use $3 million of the funds to expand its ability to lend to sustainable coops and agricultural SMEs in Honduras, Guatemala, and Nicaragua. Another $1.9 million will go towards a technical assistance initiative to help the organizations strengthen their financial skills.
As the organic cotton export industry in India has demonstrated, sustainable agriculture has the power to support sustainable livelihoods for small-scale rural farmers. Global demand, mostly from developed nations, for organic and fair-trade agricultural products has grown over the past few years, even throughout the global economic downturn.
And there is a developing body of evidence that shows that organic farms preserve usable farmland by preventing desertification and sustaining soil and water quality. They are also equally or more productive than “conventional” farms that use chemical fertilizers and genetically modified high-yield crops.
But, access to credit for organic farms is anything but a silver bullet for rural poverty. The hundreds of thousands of farmers in India that were mired in insurmountable debt and driven to suicide have served as a tragic, cautionary tale of what’s truly at stake when it comes to agriculture, lending, and volatile commodity prices.
Both credit and capacity building are the key missing elements to helping agricultural SMEs thrive and grow, especially in the developing world.
For smallholder agribusinesses to tap into the global market demand for sustainable produce, they need capital to invest in the necessary equipment or supplies to achieve organic certification, expand their operations, and bring their products to market. Unfortunately, these SMEs comprise what is often called the “missing middle” in finance, because while their funding needs are too large for microfinance institutions, they lack the collateral required by traditional banks to qualify for loans.
Perhaps even more crucial than credit, however, are financial planning skills and access to market information. Earning a profit in the agribusiness is a complex dance between the cost of inputs (like seeds or fertilizer), crop yields, and global demand. Often without the capacity to diversify their products or react quickly to market shifts, small farms are particularly vulnerable to commodity price fluctuations.
Coffee is an often-cited example of the industry’s risks. The crop’s price on the global market can fluctuate wildly, but a coffee plant takes three to four years to produce significantly, leaving small farmers in the lurch if prices have fallen when they finally harvest.
Root Capital tackles these complex challenges with a multi-level approach. It offers longer loan terms—often called “patient capital”—as well as market connections for the agribusinesses. Collateral comes in the form of future sales contracts with companies like Green Mountain Coffee Roasters, Whole Foods, and Marks & Spencer. Finally, it provides borrowers with training to improve their financial management skills and ensure that businesses are equipped to remain profitable and repay their loans.
Root Capital was named a winner of the Ashoka Changemakers G-20 SME Finance Challenge last year and was recognized for its outstanding innovations by G-20 officials at the G-20 Summit in Seoul, South Korea.