By ESG Analyst Lisa Deflines
Central to the development challenge is the search for sustainable growth, for without this, there is little prospect of facing the ever-increasing difficulties in labor markets. But growth in itself is insufficient – if it is unevenly distributed, there may be little increase in welfare. Sustained economic growth can drive progress, provided it presents all actors in the market with opportunities to get work that is productive and delivers a fair income. However, inequality is growing for more than 70 percent of the global population, and the harsh realities of this deeply unequal global landscape hampering economic and social development. In the coffee industry, this inequality is evident in the shifting dynamics since the 1990s, with the approximate profit per cup of coffee paid to producers falling from over ten cents to around two cents between 1989 and 1996.
Frederic Rivard, a Specialty Coffee Merchandiser known for their expertise in the Honduran Coffee market, shared their insights on this shift in a recent interview. As my interviewee corroborates, this share is well below what is required for a living income and sometimes below the production cost. Until the breakdown in 1989 of the trade regime, export quotas had created rents for producing countries. Coffee growers and producing states retained over a third of the total income and about half of the surplus available. However, transformations in the commodity chain allowed transnational corporations based in coffee-consuming countries to capture an increasing proportion of production rents as they held down the price of green coffee while inflating the price of coffee processed for final consumption. While analysts correctly predicted “that coffee prices might slightly increase” over time, producers selling to conventional markets have been unable to claim a more significant share of profits.
In response to this decline in terms of trade, analysts have underscored the imperative for producers to engage in increasingly differentiated markets by producing coffee of higher variety and enhanced quality. The rise of alternatives to conventional global coffee value chains, such as the specialty coffee market, presents an opportunity for producers to secure better returns. However, smallholder farmers face productivity and transactional constraints that hinder their access to these higher-value market segments Keeping in line with Frederic Rivard’s experience, this article seeks to examine the challenges that Honduran smallholder coffee farmers encounter.
Honduras is Central America’s largest coffee exporter, with coffee sales representing over 22% of the total Honduran export revenues and the industry employing over one million of its citizens. Despite the economic significance of the Honduran coffee sector, investment financing to the agricultural sector has steadily dropped, with “the share of agriculture in total commercial bank lending falling from 21.6 percent in 2000 to 4.6 in 2011” In this limited credit environment, larger and more established borrowers are more likely to be able to access finance at an affordable rate. However, as my interviewee put forward, 95% of producers in Honduras are smallholders with limited access to collateral. Given the reluctance of formal banking institutions to extend credit without adequate collateral that can be realized in the event of default, smallholders lacking such collateral find themselves disproportionately excluded from access to financial services. The nature of the coffee sector also drives the differences in creditworthiness, specifically that value increases as the product progresses through various stages of processing and distribution. Value, profit, and income increase as one moves up the supply chain, allowing actors at the end of the value chain to meet the creditworthiness criteria demanded by formal institutions.
Furthermore, the financing available to smallholders tends to be short-term in nature, focusing on activities such as coffee trading (collection, processing, exporting, and importing) rather than the long-term investments needed to enhance production capabilities. To access higher-value market segments, like the specialty coffee market, sellers must optimize processing methods to meet set standards. Smallholders remain constrained within traditional, low-margin markets without long-term credit or the collateral required to secure loans. The misalignment between the type of financing available and the needs of Honduran smallholder farmers further exacerbates their inability to compete in higher-value market segments. There is room for an expansion of financing from export credit to a new form of investment financing tailored to the needs of producers if we wish to reduce the structural disadvantage observed and enhance economic outcomes.
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