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Case Study: The "Financing Gap" for Sustainable Coffee

The calculations here attempt to estimate at a very broad level the amount of trade financing required by the sustainable trade coffee sector. Please note that a number of assumptions have been used to generate the estimated amount of the financing gap. These assumptions were made in areas where specific data is very difficult to access and are outlined at the end of this study. The overall figures however, are believed to be credible indicators for the amount of total financing required by the sustainable trade coffee sector. The estimated figures are quite conservative and likely understate the total production of sustainable coffee and the associated financing requirements.

The Numbers

  • Fairtrade - In 2005, 33 991 metric tonnes of fairtrade certified coffee was sold equating to around 74.7 million lbs. Assuming year on year growth of 40%, this would give a total volume of fairtrade certified coffee exports from the developing world for 2007 of 146.6 million lbs. with an export value of USD $190.6 million. Assuming that only 30% of fairtrade certified producer cooperatives coffee sales are fairtrade orders that suggests that they sold another USD $448 million worth of coffee, which should also be classed as sustainable.
  • Non-certified producer cooperatives - Assuming that there are an equal amount of cooperatives operating without certification, a reasonable assumption, we can estimate that there is another USD $564.6 million of exports from this group of producers.
  • Rainforest Alliance Coffee Production - In 2006, 500 000 bags of coffee, at 60kgs per bag, were sold as Rainforest certified coffee. Assuming a very conservative 40% growth in sales for 2007, 700 000 bags of coffee were exported as Rainforest certified in 2007. This suggests that total export values of Rainforest Alliance coffee came to USD $120 million.
  • Utz Kapeh Coffee Production - In 2006, 600 000 bags of coffee were sold as Utz Kapeh certified coffee. Assuming 40% growth in sales for 2007, 840,000 bags of coffee were exported as Utz Kapeh certified in 2007. This suggests that total export values of Utz Kapeh coffee came to USD $144 million.

Total Export Values of Sustainable Coffee:

Producer Type

Value of Exports (USD $)
Fairtrade Certified Sales 190.6 million
Fairtrade Certified Producers - Non Fairtrade Sales 448 million
Non-certified Producer Sales 564.6 million
Rainforest Alliance Sales 120 million
Utz Kapeh Coffee Sales 144 million
Total Sustainable Coffee Export Sales

1.467 billion

 

Financing Required by Sustainable Trade Producers
Assuming 60% of the sales / export value is required for pre-finance, these figures suggest that there is a total requirement for USD $880 million in financing.

The Financing Gap
At the present time, it is very difficult to estimate exactly how much access to finance producers receive from local banks, coffee buyers and coffee traders. In addition, many small producers may benefit from borrowing funds pre-season or post-season from local cooperative lending associations and microfinance groups (SACCOs).

What we do know is that in 2005/6 the total amount of available funding from socially oriented lenders / alternative lenders based in Europe and North America totalled just under US $100 million. The significant financing gap is clearly apparent when comparing the estimates. The requirements of sustainable trade producer organisations to grow their sustainable businesses amounts to nearly USD $880 million while the amount of affordable credit available is a mere fraction of what is needed.

Lending Institution Total Annual Lending in the Coffee Industry (USD $)
CORDAID FBU 2.5 million
DOEN Foundation 3.3 million
Shared Interest 4 million
GDF 3 million
Oikocredit 42.6 million
Rabobank Foundation 6.5 million
Root Capital 10 million (estimated)
Triodos 8.5 million
Twin 2 million
Etimos 5 million
Verde Ventures 7 million
Total Alternative Financing in the Coffee Industry 94.4 million

Filling the Gap by Working with Socially Focused and Oriented Lenders
In addition to the relatively small number of socially focused lending institutions that are operating across the world, there are a growing number of socially oriented lending institutions. Socially oriented lending institutions are financial service providers who have, as part of their overall activities, a program or set of activities committed to the promotion of sustainable trade finance.

FAST will aim to work with both socially oriented and socially focused lenders, so that it might have the largest impact on closing the financing gap. As such FAST will aim to recruit both socially focused and socially oriented lending institutions into the association.

Socially focused lenders agree that the financing gap will only be closed once local financial institutions are able, and willing, to provide sufficient finance to sustainable trade producers in their localities. By working with socially oriented local financial institutions, FAST will be able to assist and encourage local lenders to improve the availability of finance to their local producer groups.

Assumptions

  1. The "Sustainable" coffee sector includes Fairtrade (FLO) certified coffee producer groups (cooperatives), Rainforest Alliance certified coffee producer groups (and plantations) and Utz Kapeh producers. The figures are broken down by certification program so users of this data can remove any group should they wish to from the overall figures.
  2. There are no figures shown for the commercial organic coffee sector since the majority of organic coffee is produced by large scale commercial plantations. If figures for commercial large scale organic coffee production are included the figures of the financing gap would be much higher.
  3. Fairtrade producers are assumed to sell only 30% of their total output on fairtrade contracts, the remaining volume is sold via mainstream commercial channels. However, the producer groups, all of which are cooperatives, are by definition sustainable and as such non-fairtrade sales of fairtrade certified producers coffee has been included. The 30% figure is taken from personal experience of FAST staff when working with fairtrade producer cooperatives.
  4. Figures used are sometimes out of date as they are taken from certification and other websites. Growth of 40% has been included to take us up to 2007. This is likely to be an underestimate, especially for Rainforest Alliance which has been growing at a higher rate recently.
  5. Non-fairtrade certified producer cooperatives are also included in these figures bearing in mind their cooperative structures. A very conservative figure of production by these cooperatives, equal to the fairtrade sector, was used despite the fact that 80% of the world coffee is produced by smallholders, through non-plantation production, often organised into cooperative groups.
  6. A price of USD $1.30 per lb has been used as the export price / sale price of each lb of coffee sold. This is based on current prices and does not differentiate between organic and non-organic coffee. As such this is a conservative figure as well since much of the worlds sustainable coffee is organic and sold at a premium above the world coffee price.
  7. For convenience there is no breakdown between Robusta and Arabica coffee. This is not significantly problematic since the vast majority of sustainable coffee production is Arabica.
  8. Prefinance / trade finance requirements are estimated at 60% of the export value of an order. This is based on the FLO Coffee standards.