LDN Fund and LDN TAF Case Study

Business Model:

Cocoa and coffee agroforestry

Financing:

Profit-sharing loan for capex/opex,
and expansion on degraded land
through community partnership

Projected impacts

  • 4,000 hectares of land,

    and up to 10,000 hectares of land now projected to contribute to LDN

  • 2,100 community members

    receiving benefits from the project, of which at least 35% are women

Context


The North Caribbean Coast Autonomous Region (RACCN) is one of two autonomous regions in Nicaragua. 76% of the RACCN consists of indigenous territories with communal property and being geographically isolated has a unique history and culture. The area was originally densely forested, but has experienced severe land degradation caused by cattle ranching, timber harvesting by private companies and illegal loggers, and extreme weather events. Another factor is land conflict, which especially takes place between indigenous communities and Mestizo ‘colonists’ occupying and clearing lands within the
community’s territory.

In 2007, after Hurricane Felix devastated northeastern Nicaragua, the founders of Cacao Oro had the opportunity to purchase 3,000 hectares in the country’s northern Atlantic Caribbean coastal region with the purpose of extracting the fallen timber. This was also the genesis of Cacao Oro’s relationship with the neighbouring Awas Tingni community.

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Background


Cacao Oro de Nicaragua was subsequently founded in early 2014 to produce sustainable and certified agroforestry-grown cocoa and coffee on those 3.000 hectares of degraded land. The company targets international markets, primarily the United States and Europe. The current farm operations are divided into 5 Productive Units of approximately 400 hectares, each headed by a head technician who is responsible for all operational aspects on their Productive Unit. The idea behind the work in farm units is to instill a sense of teamwork and ownership of the results between all the workers in the Unit.

From the start, the cocoa-farming operation was developed under an agroforestry model to help the restoration of the landscape and promote the diversity of the region’s flora and fauna. With 2,000 hectares planted by the end of 2018 – and approximately 1,000 hectares of the farm are considered natural reserve and protection zones for waterways and will not be developed – , Cacao Oro started to explore expansion options in the region.

Through an investment by the LDN Fund, the company aims to consolidate its current operations, as well as expand its current production area. Alongside a 100 km road from the farm to the port, a smallholder-focused expansion project is being designed with potential to impact an additional 50,000-100,000 hectares under sustainable land management. In addition, the company is exploring a partnership with the Awas Tingni indigenous community. This project would allow for restoration of the community’s degraded land through cocoa and coffee agroforestry, supporting a resurgence of native biodiversity and improved livelihood opportunities for the community, also through infrastructure improvements that enable better access to markets. In addition, the project may indirectly form an incentive for government support in conflict resolution between the indigenous community and the colonists, in line with the legislation.

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Flow of Capital and Services


Business Model


Cacao Oro operates a large-scale, UTZ certified cocoa plantation in Nicaragua developed using a full agroforestry model intended to also rehabilitate severely degraded land. Operations began on a 3,000-hectare farm, located in the municipality of Rosita on the Atlantic coast, and more than 2,000 hectares have been planted to date. The first crop was harvested in 2017, and total annual production is expected to grow to approximately 4,000 metric tons by 2022. In parallel, a permanent nursery under sunshade cover is being operated by the company and which has production capacity of 1,500,000 plants per year.

Towards the future, Cacao Oro intends to expand its production area through an outgrower program, and is also exploring an innovative partnership with the Awas Tingni indigenous community, to replant part of the degraded and unproductive land owned by them with agroforestry, combining indigenous and commercial tree species with coffee and cocoa crops.

An important condition for this project to be realized is a strong free, prior and informed consent (FPIC) process in place, and confirmed consent of the Awas Tingni community for the project, in accordance with IFC performance standards and the VGGT regarding indigenous peoples and in line with the Nicaraguan government’s FPIC protocols.

Investment

Purpose:The LDN Fund investment in Cacao Oro is along two investment lines meant for capex/opex and to allow Cacao Oro to engage in the wider landscape and implement the outgrower scheme.

Type and amount: Profit-sharing loan up to US $15 million. The financing will be released in several tranches, starting with strengthening the operations of current plantations. Meanwhile, technical assistance is being used to prepare for release of subsequent tranches for farm expansion, potentially in partnership with the indigenous community.

Duration: 10 years

Risk Management


Key risks are managed as follows:

 

Technical assistance


  • Initially, the LDN TAF supported a scoping mission with an experienced consultant to contextualize the project and to help identify the most pressing technical assistance needs. Based on this, an independent third party consultant was contracted to map the potential to achieve FPIC with the indigenous community and colonists residing on the land. This initial confirmation was instrumental to a positive investment decision by the LDN Fund.
  • Moving forward, the LDN TAF will support Cacao Oro as well as a third party independent expert supporting the indigenous community with the preparation and planning stages of the FPIC process. Depending on the outcomes, the FPIC process will be further developed and supported by the LDN TAF.
  • Finally, an LDN baseline and subsequent monitoring plan will be established.

Projected Impact

  • LDN
  • Gender
  • Community Livelihoods
  • Forests
  • Climate

LDN

4,000 hectares contributing to LDN with potential to expand up to 10,000 hectares At national level, the Nicaraguan government is fully committed to the UNCCD and LDN, and has stated voluntary goals in this regard. This project in part contributes to the country’s ambition.
In addition, the project provides proof of concept for other country initiatives, such as the National Reforestation Crusade, an initiative to enable reforestation of 30,000 hectares per year, and the ENDE-REDD+ Strategy.

Gender

Cacao Oro has always promoted gender equality in its operations. From field labor through management positions, women represent approximately 35% of the workforce. In key operations, such as in nurseries, women represent over 70% of the workforce, including all management positions.

Community Livelihoods

At least 500-600 employed community members receive social security benefits. Pending additional investment, the community is expected to also be positively impacted through the benefitsharing model, currently comprising approximately 360 families or 2,100
individuals.

Forests

The planted area acts as a barrier against colonists and livestock grazing, and helps to protect forests and waterways.

Climate

Not yet known.

Theory of Change


Key Lessons for Stakeholders


The business and investment case for agroforestry systems exists, but it will require extensive on-the-ground experience from a project developer that has the local know-how in place to operate an agroforestry plantation. It should ideally be based on proven pilots under the same climatic and local conditions as the planned expansion/growth.

Agroforestry is a good way to connect with local communities and have them take ownership.

If the project operator does not have a technical farming background, and lacks a proper understanding of the local context, the project will not work.

If an agroforestry project is succeeding in one location, it does not mean that it can be easily replicated to another context. Although lessons learnt can be applied, it would still require a thorough understanding of the local context, climatic conditions, and an experienced project operator.