Financing Sustainable Agriculture
After more than a decade of steady decline, the UN Food and Agriculture Organization announced in September that global hunger is on the rise again. In 2016, global hunger affected 815 million people – 38 million more people than the previous year – and much of that increase was due to violent conflicts and climate-related shocks.
The need for sustainable agriculture has never been more urgent. Global demand for food has risen precipitously, even as climate change continues to upset delicate regional ecosystems, exacerbating natural disasters, pests, and diseases, and fueling increased violent conflict and human migration.
Scientists are also finding that because of the atmospheric changes, food crops are receiving more carbon dioxide, which results in higher sugar and carbohydrate content, but fewer nutrients. This means that even if a food supply is sufficient, malnutrition may remain a challenge.
Finding the money to pay for sustainable agricultural interventions has proven challenging, yet development experts see signs of hope.
According to the World Bank, about 80 percent of the world’s poor live in rural areas. Most of them – 65 percent of poor working adults – rely on farming for their livelihoods. Agricultural development is, therefore, one of the most powerful tools for raising incomes, reducing extreme poverty, and improving global food security.
The agriculture sector – especially smallholder farmers in developing countries – is in urgent need of resilient and sustainable farming practices to halt growing world hunger, reduce poverty, and mitigate climate change. Organizations and innovators are aggressively developing tools and techniques for “climate-smart agriculture.” The challenge is financing the transition.
“Farmers don’t have the money they need, and investors don’t know where to put their money,” Simone Bauch, Latin America director of the Global Canopy Programme, told Mongabay.
It’s a vicious cycle of high risk and low returns. Because these smallholder farmers are often in areas where capital markets are underdeveloped, their access to financial products such as loans and insurance, is limited. This leaves them with no credit history, no significant collateral, and no means to adopt more sustainable practices that would increase their resiliency and productivity. To potential investors, these are just more reasons they are risky.
But advocates say that financial instruments that incentivize sustainability and are tailored specifically to the needs of farmers can help transform risk into opportunity.
For example, some crops, like coffee, can take about four years before production becomes profitable. Loans with lower interest rates and longer terms – say, 15 to 30 years – can help farmers who are switching to sustainable agriculture survive these “valley of death” years that are usually characterized by high initial costs and reduced returns.
Insurance is another valuable instrument for mitigating risk. While farmers in developed countries take out insurance to cover potential losses, such policies are prohibitively expensive for most smallholder farmers in developing countries. Instead, some institutions have begun to offer cheaper index-based insurance, which protects against shared – rather than individual – risk when external factors exceed certain thresholds, like unusually high temperatures, low rainfall, or disease outbreaks.
The largest program currently offering index-based insurance is the Global Index Insurance Facility (GIIF), which is managed by the World Bank Group and funded by the European Union, Germany, Japan and the Netherlands.
Because of “co-variant nature” of the risks insured by index-based insurance, reinsurers are very helpful mechanisms to make sure a country’s economic losses from a disaster are shared with other insurance companies outside of the affected economy. All of GIIF’s programs are supported by reinsurers, such as Microinsurance Catastrophe Risk Organisation (MiCRO) in Central America, which was co-founded by Mercy Corps.
A recent report by the Global Canopy Programme listed other emerging financial instruments that can mitigate risks and incentivize sustainability as well. These include grants and subsidies, equity investments, green bonds, partial credit guarantees by non-governmental organizations or banks to compensate for smallholder farmers’ lack of collateral. Off-take agreements, in which buyers commit to purchase future production, also helps reduce risk.
Although these tools are not new, they can be combined into innovative financial mechanisms that incentivize sustainable agriculture, especially with the help of new technologies.
The World Food Program, for example, launched the Food Security Climate Resilience (FoodSECuRE) Facility in 2015. FoodSECuRE is a “multilateral, multi-year, replenishable fund” that reinforces community resilience not just during and after climate disasters, but also before they occur, using forecasts.
Forecast-based financing allows organizations to preempt disasters with early responses. Some, like Grameen Foundation’s FarmerLink in the Philippines, also disseminate forecast data and preparedness procedures directly to farmers through SMS alerts. Of course, the prevalence of mobile phones in developing countries has also created huge opportunities for financial services to reach remote farming communities.
Another emerging technology that some say has the potential to “revolutionize” the agriculture industry, especially for smallholder farmers, is blockchain. Blockchain creates a secure digital ledger system shared by all parties in a supply chain.
The transparency of a blockchain system would help farmers retain a bigger share of their crop value, as well as facilitate timely mobile payments and financing. As consumers increasingly demand organic, fair trade products, blockchain-based records would also allow producers and manufacturers to verify exact origins. Therefore, if adopted on a large scale, blockchain would also incentivize sustainable farming.
In practice, innovative solutions to financing sustainable agriculture fuse together existing resources – including financial instruments, investors, technology and human capital – to meet farmers’ needs first.
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The following Global Washington members are working on financing for agriculture, and broader goals around global food security:
At Agros, agriculture production is a true partnership between staff and farmers. While the organization’s initiatives are market-oriented and follow best productive and environmental practices, they are also based on shared risk and mutual accountability. Agros provides working capital and market connections, while the farmers provide sweat equity. If a harvest fails, both lose; if the production succeeds, both share in the success. With a good crop, working capital is repaid and profits are shared equally: 50% to land repayment, 50% to the farmers. The result? The organization’s land loan repayments are 97% in line: exponentially higher than industry standards.
The Bill & Melinda Gates Foundation seeks to increase the supply and affordability of nutrient-rich foods, reduce food price instability, empower women, and increase the levels of overseas development aid, and increase access to and use of digital financial tools. The foundation’s Level One Project and recently released, open source, Mojaloop mobile payment software, uses blockchain technology to make it easy for a variety of financial service to work together to benefit farmers everywhere.
The Global Child Nutrition Foundation (GCNF) focuses on “home-grown”, large-scale school-based nutrition programs that contribute to food security around the world. GCNF encourages governments to leverage investments in school meal programs to benefit local, smallholder agriculture–and vice versa. School feeding programs provide a predictable local market for farmers, spurring them to produce more, and to produce more nutritious and diverse crops, thus promoting economic development while also investing in children and their futures. School meal programs provide about 30 percent of children’s nutritional needs each day at school, equivalent to adding that much to a vulnerable family’s food basket.
Global Partnerships invests in impact-led microfinance organizations, agricultural businesses and cooperatives that provide smallholder farming families with high-impact products and services: improved market access, technical assistance, agronomic education, and financial services including affordable loans and financing for agricultural inputs such as seeds and fertilizer. These enable smallholder farming families to increase and/or stabilize their income due to income diversification, improved yields, and better pricing for what they buy and sell. Last year, Global Partnerships invested more than $16 million in 12 countries through its rural-centered and smallholder-focused initiatives, and impacted an estimated 175,000 lives.
Grameen Foundation’s mission is to enable the poor, especially women, to create a world without poverty and hunger. For a farmer, the journey out of poverty may begin with gaining first-time access to financial services. Grameen Foundation’s financing for sustainable agriculture comes in different forms. Financial services that meet farmers’ needs: loans, savings, insurance, payments, and the financial identity that accompanies these services can become an on-ramp for full economic activity. The foundation combines the use of digital technology, strong partnerships, and person-to-person training to tackle big, interrelated challenges: exclusion from the formal economy; lack of education and literacy; limited information on markets, agricultural practices and climate adaptation; and gender roles that limit opportunities for growth.
Since its founding, Landesa has partnered with governments, communities and other stakeholders in more than 50 countries to advance pro-poor, gender-sensitive land rights reforms using law and policy tools. These reforms have helped alleviate poverty, reduce hunger, and ease conflict over land for more than 120 million women and men. This transformation—from land insecurity or landlessness to secure rights to land—has boosted agricultural productivity in the developing world by billions of dollars per year, improved health, nutrition and school enrollment in hundreds of villages across the globe, and placed scores of billions of dollars in new land wealth in the hands of the rural poor.
Literacy Bridge helps the hardest-to-reach, non-literate, farmers learn and adopt sustainable practices using an audio device called the Talking Book. The Talking Book program empowers farmers with knowledge on topics such as integrated soil fertility management, money management, planting techniques, post-harvest loss prevention, and a range of health topics. The device also provides a channel for user feedback and usage monitoring to understand needs and interests. In partnership with AGRA, CARE, UNICEF, and others, nearly half a million people throughout West and East Africa have learned from the Talking Book new techniques to improve their health and income.
Mavuno’s mission is to develop local leaders to end extreme poverty in eastern Congo. The organization’s work in food security is geared toward a grassroots model of development. Mavuno develops local leaders through the creation of Grassroots Organizations (GO). The GO’s meet weekly, and Mavuno consults the partner communities to self-identify ways to tackle their community’s unique challenges – in ways that they choose, with tools they select. Mavuno supports the GO’s by providing financing, equipment and access to markets and quality agriculture inputs, as well as training from local agronomists. This structure fosters true grassroots leadership, giving the Congolese control of their future, along with a more stable food supply. Partner households improve their agriculture techniques, maximize their crop production and increase their incomes and food security.
To support the needs of agricultural lenders and cooperatives in its open-source community, Mifos has extended its loan product configuration engine to support a completely flexible repayment schedule, one that maps to the actual cash flows of the farmers at harvest and planting of their crops. Organizations across Africa and Latin America use these variable installment loans to adjust the amount, frequency, and due date of installments for each farmer. Partners in Mifos’ ecosystem also leverage its mobile banking and field operations apps to enable outreach into remote and rural regions that lack formal branch infrastructure.
Oikocredit is a cooperative social investor that supports over 180 agricultural partners in 35 countries. The Oikocredit cooperative has identified agriculture as a priority sector because it is one of the most effective ways of reducing rural poverty, strengthening food security, and mitigating the effects of climate change for smallholder producers. Oikocredit’s AgriUnit finances partners across agricultural value chains, including producer groups, cooperatives, traders, and other SMEs. Oikocredit supports farmers with capacity-building grants, education, and network services.
Oxfam aims to transform food systems so that small-scale farmers, food workers, and entrepreneurs realize their rights and capture more value for their work. Oxfam focuses on the people who grow and process food. The organization works to protect their livelihoods and help them claim their rights. Oxfam supports producers in accessing the tools, land, and capital they need to grow food, and helps them access the information and markets they need to sell it. The organization mobilizes consumers to challenge governments and companies to rewrite their policies and practices. Finally, Oxfam demands global action to respond to climate change.
Nguyen Thi Mai, owner of Vinh Ha Vegetable Farm in Vietnam, couldn’t get a loan for equipment to increase her production, until she applied to Thriive. Thriive helps small businesses in the developing world with equipment loans. The loans are paid forward with donations to the community instead of back to Thriive in cash. Nguyen’s repayment is training for 15 very poor small holder farmers to grow more vegetables with her donated seedlings. With the added income they’ll earn, farmers are more likely to stay on their land, instead of moving to large cities, abandoning their children to other relatives, increased poverty, and the risk of trafficking.