Chocolate shortage by 2020? How mini loans could save the day

Value Chains

Chocolate shortage by 2020? How mini loans could save the day

Luxury crops increase livelihoods but only farmers can obtain the necessary capital.

Demographic trends are leading to an unprecedented demand for food globally. Food consumption worldwide is expected to increase by at least 30 percent above 2005 figures by the year 2018. Foods most affected will be non-staple cash crops, often referred to as luxury crops: tree nuts, cocoa, cashews, coffee.

A 2012 Dalberg report warns that unless smallholder farmers recieve an influx of capital, certain luxury foods could become incredibly scarce.

Despite past initiatives to provide more funding to smallholder farmers, the drafters of the report fear that expected demand will surpass supply in several smallholder-dominated cash crops. Cocoa consumption illustrates their concern. Due to the world's love of chocolate, consumption has spiked over the last decade. This has resulted in massive fluctuations in worldwide production, with several countries actually reaching a plateau in cultivation. The Financial Times is expecting this to result in a large cocoa deficit by 2020.

Many large buyers are beginning to realize the value of investing in smallholder farmers, some even considering it imperative to securing future supplies and continue business as usual. To eliminate the predicted food shortage, large companies are focusing on the finance models already employed by social lenders. This raises the question however: Why are social lenders not able to keep up with demand?

Because social lenders' loans either aren't small enough to benefit individual smallholders, or don't last long enough to solidify a smallholder's growth.

Social lending--the sort practiced by Root Capital and TechoServe--can be defined as impact-driven, smallholder farmer lending, a combination of both market returns and positive social impact. Such loans generally deliver lower-than-market rates of return but bring about greater social changes by improving livelihoods and environmental stewardship.

Over the past decade, social lenders have made strides in cultivating an effective model for financing smallholder farmers, but two important limits persist.

First, in order for the social lending model to reach its full potential, farmers must be aggregated into producer organizations. However, only about 10 percent of smallholders worldwide belong to such organizations. Second, a major flaw in social lending is its focus on short-term export trade finance. Approximately 90 percent of all existing social lending involves only short-term deals. This is hindering growth, because many smallholders and producer organizations also require long-term financing to become more stable in the international marketplace.

In 2011, disbursements from social lenders totaled $345 million, encompassing about 90 percent of smallholder financing. Local lending, largely from government banks, provided an additional $5 billion to $9 billion in financing. Despite these efforts, there is still a shortage of at least $13 million in smallholder finance in order to feasibly meet worldwide demand of cash crops. Hence, if the social lending model could be replicated and expanded by larger commercial buyers such as Nestle, Hershey's and Starbucks, then more farmers could assemble into producer organizations, access more finance and increase productivity. Everyone involved would benefit.

The need to boost financing in smallholder agriculture should be approached on multiple levels. In addition to social lenders and large corporate buyers, private donors, commercial banks, governments and technical assistance providers can also work to fill the estimated $450 billion gap needed to meet food production requirements and lift millions of smallholder farmers out of extreme poverty. This could prove to be a win-win scenario: not only would farmers greatly benefit from the influx of capital, they would help meet the demand for luxury crops people crave.

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