Why so many coffee farmers can’t secure working capital

  • Many coffee farmers find it difficult to secure lines of credit
  • A 2020 UN report showed that climate-related disasters have increased by 83% since the 20 years previous
  • Unpredictable weather makes it difficult to secure loans, and means that interest rates are often extremely high

THE SEASONAL nature of coffee production means that most farmers are paid once a year when they harvest and sell their coffee. After receiving this one lump sum, they then have to manage it for up to a year. However, should their yields be lower than expected, this can be challenging; similarly, unforeseen expenses or investments can arise in the period between harvest season. Altogether, this means that many farmers often require some form of finance.

This is particularly the case for smallholder coffee farmers who often live harvest to harvest and don’t accumulate substantial profits to see them through the year. They often also lack the collateral to secure loans with more favourable interest rates – which can make credit unattainable or unaffordable.

To ease this situation, some smallholders join co-operatives. These can help to share the cost of expensive inputs such as fertiliser and pesticides. Lenders are also often more willing to finance larger groups of producers rather than individual smallholder farmers.

But for most smallholder coffee farmers, the challenges in securing working capital are not as easy to resolve as joining a co-operative. Whether or not they are part of a producer network, any number of obstacles can get in their way.

Financial literacy and geographical location

The process of accessing finance or capital is far from simple for coffee farmers. There are a number of barriers, chief among which is financial literacy. This is understandably a pervasive issue for many rural smallholder coffee farmers.

“It is very difficult for producers who are not organised to receive financial support,” says Camilo Enciso, general manager of ASOPEP in Planadas, Colombia. “Here, they sell wet coffee; whatever they collect, they sell, and this market pays very little because the buyer has to invest in drying, and quality is not assessed. Traceability is zero; they don’t even provide an invoice.”

This means that many rural smallholder farmers not only lack the financial literacy to borrow – they also don’t have a credit history upon which banks can base a risk assessment.

In addition, some farmers may not even have documentation stating that they own the land they farm. In some regions, social issues further complicate access to finance – such as women not being able to own land.

“It’s land titles and it’s historical information, and a lot of people don’t keep records,” says coffee production researcher Dr Taya Brown. “They need to have a land title and will also often need to show the last five or ten years of their harvests – and they don’t have that.”

As such, implementing financial literacy programmes and establishing effective documentation management practices are key strategies to enable more farmers to access loans. 

Camilo emphasises the importance of co-operatives adopting systems to support farmers in gathering and organising the required documentation and data for lenders.

Not so easy on the ground

Indeed, farmers often turn to co-ops and exporters for data on previous harvests. However, this solution isn’t as straightforward as it seems. Supporting individual farmers to access finance independently may mean compromising their positions as lenders themselves.

“Farmers will go and ask their previous lender about their past production volumes and those lenders won’t give them that information,” says Taya. “I’ve seen it take farmers up to two years to get information on their own production from the groups that have historically done the lending because they don’t want to give up that position.”

In turn, Taya explains how some producing communities have established a system of mutual borrowing and lending. Both during the off-season and harvest, farmers support each other through loans, shared capital and labour, and so on.

Consequently, these communities have developed a system of interdependence. However, this also means that the economic conditions behind access to working capital have social implications. Introducing loans or some other mechanism for providing capital could disrupt the collaborative systems that have traditionally tied coffee-growing communities together.

“When we have these conversations, we often boil them down to being very simple,” says Taya. “But there’s a lot of social implications to the way resources exist, grow, and move through a network of people.”

As such, strategies or projects that look to support farmers with accessing working capital should consider more than just the direct economic benefits – it can clearly be more complicated on the ground.

Coffee farmers struggle to access working capital

Market volatility and climate change

Market volatility over recent years has led to increased uncertainty over the income a farmer will receive from their harvest. This, in turn, impacts their perceived risk to lenders as it affects their ability to repay loans.

At the same time, climate change has amplified the risk of crop failure. Pests and diseases have become more common, and increasingly erratic weather means that lenders have become less willing to finance coffee farming, or they do so with eye-wateringly high interest rates.

As an alternative, some farmers turn to supply chain partners for help – either through some form of pre-financing arrangement, or even direct investment in farm infrastructure and equipment.

However, that’s easier said than done. Costs for roasters are now higher than ever thanks to global inflation, and many are increasingly delaying their payments. Similarly, for traders, record-high interest rates and falling coffee prices create a perfect storm – leaving many in a precarious financial situation.

This means that previously supportive supply chain partners have become less capable of providing finance. With interest rates expected to remain high for several months at least, this is unlikely to change any time soon.

A broken system?

From a broader perspective, it could be worth examining why loans have become such an ingrained part of the coffee industry and a necessity for farmers to sustain their operations.

“If the system that you live in is dependent on getting a loan and you can’t get one then that really is a problem,” says Taya. “But I don’t think we should necessarily agree without questioning that farmers should always need a loan, should be able to get a loan, and just need a better way of getting a loan.

“If we’re talking about maintaining that system and maintaining people’s dependence on an external player, I think we’ve missed something along the way.”

In response, it’s straightforward to argue that the industry should focus its efforts on improving financial education to remove any continued dependence on external finance. But this isn’t always a realistic approach. Change of that magnitude is slow to take effect, and many farmers need access to working capital immediately. 

Ultimately, in the short term, focusing on strategies that improve the accessibility of finance in rural areas remains exceptionally important. Financial literacy is just one of the many causes of this systemic issue – and addressing it has arguably never been more important.


Coffee Intelligence

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