A Closer Look at FairTrade CoffeeLending
Isabel Zamora, a member of La Fem in Nicaragua, picking coffee. photo by Michael Kienitz
For more than two decades, WCCN has supported fair trade. Actually, the fair trade coffee movement in the United States had its roots in the 1980s in Nicaragua, where WCCN was strongly involved. During that time, young activists from the United States created the worked-owned cooperative Equal Exchange to oppose this government's blockade against the Sandinista revolution by importing coffee beans from coffee cooperatives in Nicaragua for sale in the U.S. market.
During those years WCCN was active in the marketing of Nicaraguan fair trade coffee. Later, in the mid-1990s, WCCN provided financing to PRODECOOP, allowing this Esteli-based well-known coffee cooperative to grow and become one of the leaders in the fair trade coffee market in Nicaragua.
More recently, WCCN facilitated the connection between producers from La FEM in Nicaragua with the coffee roaster Just Coffee in the U.S., allowing La FEM to enter the fair trade coffee market.
Until recently, WCCN's role focused mostly on educating the public about the importance of supporting fair trade by buying fair trade products. During the last several months, WCCN has taken a huge step forward in becoming an active member in the fair trade movement. From now on, fair trade financing will be part of our day-to-day work, similar to our focus on microfinance.
Why did it take us so long to be more involved with fair trade financing? The answer is simple. Until recently we didn’t have a tested financial model to follow that could make this kind of lending possible without assuming too much risk. Fortunately, a financial model has been developed by a sister nonprofit group called Root Capital. In fact, Root Capital in the U.S. and many other social funds in Europe have tested the model over the last decade, providing first-time access to financing for several hundred agricultural cooperatives in Latin America, Asia and South Saharan Africa.
Fair trade financing, or grassroots business financing, is a special arrangement among a financial organization, a producer cooperative and one of its regular buyers. Each organization should be truly committed to the transaction to make it work smoothly. After conducting a due diligence analysis of the producer cooperative and the buyer, the financial organization provides a short-term loan, typically for less than a year, to the producer cooperative. The purpose of the loan is to allow the producer cooperative to purchase raw products, such as green coffee, from their members at the time of the harvest and to cover processing and exporting costs before receiving payment from their buyers several months later. Signed purchase contracts between producer cooperatives and the buyer serve as collateral to mitigate risk in the transaction. The amount of the loan is typically only 60% to 70% of the value of their export contracts. Once the producer cooperative delivers the product and the buyer receives it, the buyer pays the value of the purchase sale to the finance organization directly. After discounting the amount of the loan plus interest, the financial organization reimburses the remaining funds (which represent 20% to 30% of the value of the contract) to the producer cooperative.
WCCN’s work on fair trade financing has begun with coffee. However, coffee is only our first step. We are expanding this work to other fair trade products such as cocoa and sesame. We will keep you informed about this very important development in our work.
By Carlos Arenas, WCCN Executive Director