The Need for Producer Financing
As markets for sustainable agricultural products grow, the availability of finance tools has demonstrated itself as a key factor in determining the overall effectiveness of producer participation. In addition to the traditional need for pre-harvest finance faced by many small producers, participation in sustainable supply chains requires additional administrative, training and transition costs which existing producers' capital bases typically cannot cover. Meanwhile, the majority of small-scale rural enterprises are too poor and under-capitalized to be regarded as bankable by local financial institutions. The only local credit sources are often local merchants who double as moneylenders, and who may charge unreasonably high monthly interest rates. Known in many parts of Latin America as "coyotes" because of their exploitative practices, these intermediaries use the scarcity of credit and geographical isolation to secure products at extremely low prices. The cycle of poverty worsens and environmental degradation continues in the absence of viable economic alternatives to unsustainable land uses such as slash-and-burn agriculture, unregulated logging and cattle ranching.
Current State of Producer Financing
"Socially oriented lenders" is a term that relates to both European and North American lenders and local commercial banks and credit institutions across the developing world that have made explicit commitments to work with SSME producer groups to fill the financing gap. Unfortunately, the availability of producer trade finance has not kept pace with the growth of sustainability initiatives. Commercial lenders often lack commitment to finance as well as the capacity to perform due diligence activities with cooperative producers in developing countries. Meanwhile, specialized financial intermediaries that have the mandate to support sustainable producers still have limited financial resources. There is a growing sector of "socially oriented" lenders entering the field to fill the credit gap, but their efforts to date have remained fragmented, uncoordinated and inadequate to meet demand.
Existing research on the finance of sustainable trade in North America and Europe suggests that one of the principal barriers to the increased access to finance for SSME producers is the perceived risk and the transaction costs associated with dealing with such producers. Another major barrier stems from the high level of exposure to market and climatic volatility which small producers face. While there is anecdotal evidence that the adoption of better management practices associated with sustainability standards can lead to improved and more stable output as well as more stable trade relationships, the absence of documented evidence keeps farmers from being able to leverage their participation in a sustainability scheme for better financing terms. Notwithstanding any risk-reducing characteristics which standards compliance may bring, small farmers nevertheless tend to remain highly exposed to volatile market conditions of the international commodity markets. Despite the existence of a wide range of specific financial instruments for reducing risk among traders in the agricultural supply chains, farmers typically have neither the infrastructure nor the capital necessary to benefit from the advantages of reduced risk which such instruments can provide.
The primary finance needs of sustainable trade producer groups revolve around trade credit lending (pre-harvest/pre-production and export credit) and longer term lending for infrastructure investment. Both these types of lending schemes are of vital importance to the sustainability and growth of producer groups.
Where there is local commercial provision of finance to sustainable producer groups the costs of lending can vary considerably, depending upon their location, size and financial situation. Cooperative producer groups can often be quoted rates that are economically crippling. This costly lending reduces the profitability of the enterprise and hence the value added to individual farmers, and prevents expansion by pricing since investment becomes more difficult.
An explicit goal of all socially focused lenders is to challenge high interest rates that are predicated on the illusion that sustainable producer groups are inherently riskier than less sustainable concerns. By lending to producer groups and experiencing low levels of lending defaults, many of the socially focused lenders have been able to prove to local commercial lenders that lending to cooperative producer groups is profitable and makes good business sense.