Mobilizing Private Sector Investments Can Stabilize Vulnerable Supply Chains

December 4, 2014

[Editor's Note: Root Capital is participating in the Skoll Foundation's Social Entrepreneurs Challenge. Support Root Capital and learn more here.]

Late last year, Root Capital, a nonprofit agricultural lender, devised a multistakeholder response that mobilized private sector, public sector, philanthropic, and nongovernmental (NGO) actors to pair financial management training and agronomic assistance with long-term loans. These loans are for farm renovation, income diversification, and other resilience investments for smallholder farmers across Latin America. To complement philanthropic funding for technical assistance, we also created an innovative mechanism for coffee companies to invest in their supply chains.

Last year brought tremendous challenges to the coffee industry. Coffee market volatility and extreme weather in Latin America exposed the longstanding vulnerabilities of smallholder coffee farmers: historic underinvestment in agriculture, aging coffee trees and farmer populations, emigration, and other factors. The erratic weather—abnormal rains and extended dry periods—set the stage for a coffee fungus called coffee leaf rust, or roya, to take hold, and it ravaged its way through the coffee lands of the Americas, leaving major economic disruption in its wake and threatening the stability of global supply chains reliant on production from this region.

Like many smallholder farmers, 52-year-old Maria Eufemia Maldanado, member of the Peruvian coffee cooperative and Root Capital client UNICAFEC, watched helplessly as almost all of her coffee trees died from the devastating spread of roya. “My coffee was beautiful,” she said. “And then it all dried up. It never matured, and it lost all its leaves.” After a substantial harvest, just one year prior, the majority of her coffee trees were completely lost.

In response to the crisis, Root Capital launched the Coffee Farmer Resilience Initiative (CFRI), a multifaceted approach to help its clients—small and growing agricultural businesses— invest in coffee farmers like Maria at the base of the value chain. The CFRI was launched in November 2013 with a $2 million loan to SOPPEXCCA, a woman-led, 650-member coffee farmer cooperative in Nicaragua. Since then, Root Capital has approved $8 million in long-term loans for coffee farmers to replace affected coffee trees with stronger, fungusresistant varietals under the CFRI in Peru and Nicaragua, supporting farmers who must replace vulnerable coffee trees with stronger ones that can withstand the challenges of a changing climate.

As the coffee industry took stock of the effect of roya on farm families and supply chains, Root Capital also started hearing from companies that were looking for ways to get involved— motivated by both moral obligation and recognition of the need for investment to secure their long-term supply of quality product. Many industry partners gravitated toward Root Capital’s CFRI but wanted a way to engage beyond one-time charitable gifts; they were seeking an investment approach grounded in capital markets, value chains, and long-term supply-chain sustainability.

To complement philanthropic funding and create a mechanism for coffee companies to invest in their supply chains, Root Capital created the Coffee Farmer Resilience Fund, a value chain innovation and funding mechanism housed within the CFRI. The Resilience Fund directs private sector dollars from leading coffee roasters—matched with funding from the public sector and philanthropic sources—to value chain investments with farmer organizations affected by roya. In contrast to more common philanthropic or corporate social responsibility projects (which often do not address the need for longer-term, market-based solutions), the Resilience Fund offers a “shared value” approach that appeals to coffee traders and roasters—specialty companies focused on sustainable and ethical sourcing, and multibillion dollar brands alike. Essentially, this is an investment in the supply chain from the supply chain.

Private sector investment in agricultural supply chains is critical to promoting economic development, and Root Capital’s CFRI is an innovative model involving the private sector in a way that goes beyond philanthropy, creating commercial viability for companies and sustainable livelihoods for producers. As Root Capital and its strategic private and public partners continue to respond to immediate needs in the coffee sector, they will use the CFRI as a blueprint for resilience that can be replicated in other value chains—like cocoa, cashew, and shea—and scaled with other private sector actors who have a desire to invest in their supply chains and smallholder farmers around the world.

[Editor's Note: This article originally appeared in Global Economic Empowerment: Private Sector Solutions at Each Stage of Development.]