At the heart of my work as an impact associate with Root Capital is analyzing our clients’ social impact data collected by our loan officers. Aggregated, this data gives us a bird’s eye view of how clients across our portfolio likely impact farmer and employee livelihoods. For example, we know that in 2013, 62 percent of our client enterprises paid farmers a higher price than the local market price and 86 percent provided agronomic technical assistance.
Recently, I had an opportunity to step away from my Excel spreadsheets in Cambridge, and headed south to arid and sweltering Piura, Peru. There, I spent two days visiting organic banana associations with Cecilia Yañez, an investment analyst with Root Capital’s South America partner ACCDER, and ACCDER’s financial analyst Ana Lucia Trujillo.
We were in Piura to assess financing needs of existing and potential clients – a diverse set ranging from capital-constrained businesses tucked away at the end of dirt roads, to those boasting large warehouses and strong bargaining power. Eight of the 12 associations we visited the week prior had attended a workshop on internal controls hosted by our Financial Advisory Services (FAS) team; our prior engagement with them served as a springboard for discussing an integrated approach between FAS training and finance.
I approached these conversations as an opportunity to go beyond the social due diligence metrics and further our understanding of how organic banana associations, aggregating between 80 and 500 small-scale producers, are benefiting rural livelihoods. What I learned was that banana producers, many of whom own less than two hectares of land, rely on these businesses for stable income year-round (banana production isn’t cyclical as with most crops in our portfolio). As members of these associations, producers receive access to reliable markets and payment in full for their bananas, as well as access to productivity-boosting resources such as fertilizer.
Despite these organizations’ high potential for impact, they also, as I learned in the visits, face considerable challenges.
Here’s what I gleaned from conversations with association managers and board members:
- Production costs are high. Despite steady sales, smaller banana associations find it difficult to generate and maintain profits because of high production and commercialization costs. In the Peruvian organic banana industry, the average cost per box (18 kg) of bananas for the enterprises is $12 USD. One half constitutes direct payment to the producer, while the other half covers logistics, materials and transport costs. Several larger associations are evaluating their internal control systems and investing in their own infrastructure to reduce dependence on expensive contractors for the transport of bananas to port.
- Increasingly erratic weather can have devastating effects.Due to this year’s anticipated El Niño event, banana associations in the region could face a drop in production as low as 10 percent and as high as 90 percent, depending on the extent of flooding. Such an event could have devastating consequences for producer livelihoods. While several associations have invested earnings from fair trade premiums to prevent damage to roads and irrigation channels, many others are not taking preemptive measures to mitigate these risks because they lack resources or underestimate the potential damage.
- Productivity is a challenge for associations to effectively compete with private farms.Banana associations face growing competition from private farms in the region, which have economies of scale from larger landholdings, more resources to invest in productivity and good farm management practices to combat diseases. To compete, banana associations are working to help farmers boost productivity by offering training and credit, which facilitate use of yield-enhancing inputs like organic fertilizer.
However, some association managers believe existing internal credits funds for producers are not sufficient because they are either too small or used for personal expenses instead of on-farm investment.
- Limited access to finance may jeopardize income gains for producers in the long term.
Associations prioritize immediate and full payment to producers each time they deliver bananas. These weekly payments ensure year-round income for producers.
While able to pay producers on a regular basis, many associations are limited in their ability to invest in infrastructure and materials needed to boost yields and potential income gains in the long run. Local banks charge prohibitively high interest rates upwards of 20 percent, making their financing unfeasible. Many of the banana associations do not know where to look for alternative sources of financing – this is where social lenders, including Root Capital, may be able to play a valuable role.
In light of this visit, it’s clear to me that the banana associations, while eager to seize on the potential for growth, face key challenges. These are the types of challenges that Root Capital and others need to understand – beyond topline reach metrics – to effectively engage. In my role of using social due diligence data to understand businesses’ impacts on producers through the services they provide, it is energizing to see what these impacts look like on the ground, especially for new industries we are exploring.