This year, the world will consume more coffee than ever before. And industry projections point to growing demand in the years ahead, especially in emerging markets. Take China, for example. During its annual investor meeting last month, Starbucks highlighted that it’s opening the equivalent of one new store in China every day. The problem, however, is that this rising global demand for coffee cannot be met with a dwindling supply.
Coffee is a perennial crop that becomes less productive over time, with yields beginning to decline after 10 to 15 years. According to World Coffee Research, more than 50 percent of coffee trees in regions of Eastern and Central Africa are over 50 years old. In Honduras, 60 percent of coffee trees are older than 20 years. Similar statistics can be found in countries throughout the equatorial coffee belt.
Without active and ongoing management, the combination of aging plants and poor farming practices creates an environment in which farms are more susceptible to pest and disease attacks. This in turn starts a vicious downward cycle of low productivity and low income and as a result farmers are unable to invest in their land.
Look no further than the coffee leaf rust crisis that is devastating the livelihoods and land of smallholder farmers from Mexico to Peru. The epidemic has been the worst seen since coffee leaf rust disease first appeared in the region three decades ago. During the height of the outbreak in 2012/13, it was estimated that more than half of the region’s total coffee-growing area had been affected.
More broadly, aging plants that are increasingly vulnerable to pests and disease are now common across many value chains. For example, in Ghana, where diseases like black pod have ravaged cocoa production, an estimated 23 percent of cocoa tree stock is more than 30 years old, according to a representative of the country’s cocoa board.
In order to maintain healthy and productive yields, periodic renewal of tree crops is essential. This practice, known as renovation, is the topic of our latest report: “Financing Farm Renovation: How to Build Resilience Using a Blend of Capital.”
Commissioned by IDH, The Sustainable Trade Initiative, the report shares initial learning from the design of our Coffee Farmer Resilience Initiative and the first two years of its implementation. It features details on how Root Capital structures long-term renovation loans, conducts due diligence, and combines credit with technical assistance. It also offers five recommendations on how financing for crop renovation can be further scaled to benefit more of the world’s farmers.
“There is a strong case for investing in renovation,” writes Lucian Peppelenbos, director of learning and innovation at IDH, in a foreword to the report. “But the long-term and relatively high-risk nature of such investments means that there are few financial institutions willing and able to take action.”
For many commercial and semi-commercial farmers, renovation is simply business as usual. It is a standard maintenance practice that is conducted on an ongoing basis. Think: orchards, vineyards, and plantations. Since small sections of trees are replanted on a gradual, rotational basis, overall production remains consistent over time because existing plants are more healthy and productive. This also means more consistent cash flows.
But it’s an entirely different situation for many smallholder farmers. In addition to agronomic knowledge and the ability to make significant upfront investments in crop renovation — average renovation costs in Latin America range from $3,000 to $5,000 per hectare — these farmers must have alternative sources of income to bridge the period of time between when old trees are uprooted and when new trees become productive. For households that rely on coffee farming as their primary livelihood, income is severely reduced during this two- to three-year period. That loss of revenue is one of the reasons why producers are reluctant to place a bet on renovating their farms.
This is one of the many constraints Root Capital seeks to address through our Coffee Farmer Resilience Initiative, which has mobilized a blend of capital from leading coffee companies along with the public sector, private foundations, and pioneering impact investors. Although it is modest in scale relative to the overall need, we hope that the initiative can provide insights to inform other models for building farmer resilience and prosperity in the coffee sector as well as other agricultural supply chains.
To learn more, download the full report:
