New finance models for smallholder tree crop plantations

12 Nov 2015 To improve agriculture, business practices and productivity, IDH, convened civil society, corporate and finance organizations in coalitions with the aim of creating new financing models to fund smallholder farmer perennial crops (Cocoa, Coffee, Tea).

With the R&R Innovation Forum as a premier, 110 corporates, civil society and finance organizations got together to discover new ways of financing smallholder tree crops, and how they can join forces. In addition, they discussed rehabilitation and renovation (R&R) projects, recent innovations across geographies and crops and main bottlenecks. Some 7 million smallholder farmers and about 14 million hectares of land harvested by smallholders for cocoa, coffee, palm oil and tea worldwide would benefit from R&R. To address the underlying demand for R&R in these four crops today a $20bn of financing would be required, rising to $100bn to fully fund these projects over the next 25 years, according to IDH the Sustainable Trade Initiative.

Tree crops decline in productivity over time and need periodic renewal to maintain yields. They are also vulnerable to pests, diseases and climate change, and require ongoing maintenance. Such maintenance and renewal requires upfront investments that can be followed by a period of reduced or no income, and returns to such investments only arise after a period of several years.

R&R aims to improve and upgrade the long-term productivity of these crops so they will generate significant returns. However, delay in returns of both renovation and rehabilitation creates a gap in income that most smallholders can not overcome.

Joost Oorthuizen, executive director at IDH, the Sustainable Trade Initiative said: “To bring rehabilitation and renovation of smallholder tree crops to the next level we will need to start building coalitions with parties that normally don’t sit around the same table. It is encouraging to see these organizations together at our forum, teaming up and creating ideas. Now we need to select regions and farmers, create the alliances to reduce risks and just go.

“As a convener of public-private partnerships, we also believe there is high potential value in accelerating the learning process about R&R projects. Smallholder farmers are an important part of global production for many agricultural commodities, with 30-40% accounting for the palm oil supply, 60-70% for tea and coffee and 85-95% for the global cocoa supply. Demand for these commodities will grow significantly over the medium term which means that failure to undertake smallholder R&R at scale will have substantial farmer livelihoods and environmental implications, as well as commercial implications when supply fails.”

In coffee and cocoa, smallholders are struggling with low productivity due to aging trees, depletion of soils, the effect of climate change and disease outbreaks like La Roya and swollen shoot. In palm oil, Indonesian regions of large-scale planting in the early 1990s are in need of replanting, as trees grow too high to be harvested and are beyond their productive life cycle. In tea, smallholder yields are low and often need infilling and replanting with more productive varieties.

For prospect investors, renovation involves a long-term financing (10 to 15 years) that may involve a grace period of several years. Rehabilitation financing is shorter, typically with a tenor of 5 years or less, and often does not require a grace period.

The content for the Forum was co-developed with our knowledge partners Rabobank, Root Capital and Dalberg. IDH plans to continue to engage stakeholders around this topic, through convening crop focuses working groups in producing countries. Deeping the knowledge and commitment on the ground. The first reengagement of this kind will be at the next African Fine Coffee and Tea Association (AFCA) meeting in Tanzania, February 2016.

A final report of the Innovation Forum in Amsterdam is available for download in English and French.

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