Three years ago I was studying the fair trade movement in northern Nicaragua and the impact it was having on small-scale coffee farmers. Contrary to what most consumers think, fair trade doesn’t necessarily improve coffee farmers’ livelihoods. Despite the increased income they received, I was shocked by their continuing lack of opportunity and support. Most of them lived in remote rural areas, relied on rain-fed agriculture, and worked brutally long hours trying to support their families. I realized that for a fairer system in the coffee industry, it is not enough to make a living; it is also important to improve living conditions and to provide the farmers with the tools to exit the poverty cycle.
Since the beginning of the nineteenth century, Nicaragua has been economically dependent on coffee production. Nicaragua is one of the poorest countries in the Western Hemisphere.1 Most importantly, coffee accounts for 13 percent of total exports, with a value of USD$381 million.2 Considering that 43 percent of Nicaragua’s gross domestic product (GDP) comes from exports,3 coffee is integral to the economy. International demand for coffee has led to the country’s elite expropriating most of the suitable land from the indigenous population, and then forcing them to work in the coffee industry. The rest operate small holdings in remote areas.
About half of coffee producers—mostly family farmers—live below the poverty line.4 There are several reasons for this. Coffee only provides income during the three harvest months of the year. At the same time, most coffee producers aren’t doing the selling themselves but rely instead on middlemen, who glean profits at their expense. It is also difficult for coffee producers to get access to capital and credit. As a consequence, producers will not have money to buy the necessary inputs for the next harvest, reducing their ability to scale up and improve their harvests and resulting in negative effects such as exposure to crop diseases and a lack of quality control. Coffee plants take between three to four years of growing before they are ready to be harvested, meaning that it is labor intensive and requires many agricultural inputs without providing an immediate yield.
To try and overcome the main challenges of the coffee industry, farmers in Nicaragua have traditionally organized themselves into cooperatives to push for fairer prices. According to Crecencio Espinoza, president of the Augusto Cesar Sandino Cooperative, a member of CECOCAFEN, “if we weren’t organized in a cooperative we would be the poorest country in the world, because we wouldn’t have any source of support.”5 Cooperatives are a support system for small coffee farmers that help them negotiate better wages. For example, PRODECOOP, one of the largest coffee cooperatives in Nicaragua with 22 years of experience, generally pays members 20 to 30 percent above the national average.6
In Nicaragua, the cooperative system has an interesting connection to the past. The idea of cooperatives came from Augusto César Sandino, a guerilla leader that fought against the United States during the second occupation of Nicaragua. He became a national hero and his name was given to the revolutionary group that led the country for almost eleven years. Two of his main ideals were forming a popular party and organizing land into cooperatives led by the farmers. The motto of the Sandinista economic policy, “just, free and fraternal human life in our fatherland,” can still be seen in the walls of many coffee cooperatives in the country.7
Although cooperatives do their best to provide a better livelihood to members, they still face challenges that are hard to overcome by themselves, and most importantly, without access to financial services. In most cases, it is very difficult for cooperatives to pay the coffee producer upon delivery, when the farmer needs the money most. Historically, coffee cooperatives have had trouble accessing credit because they require loans that are too big for microfinance, but too small and risky for commercial banks, irrespective of whether their goods are sold as fair trade or not.
This group is often referred to in the development community as “the missing middle.” The good news is that impact investors such as Root Capital, Oikocredit, and Alterfn have started to fill in the gap and have recognized that it is not just money that these farmers lack, but the skills to use capital wisely. Education levels among farmers are low. To ensure that loans are successfully repaid, these organizations provide workshops on basic finance, organizational management, sustainable practices, and even literacy programs.
Another key innovation provided by impact-investing services is to cut out the middleman by linking cooperatives directly with international buyers. With direct access to the market, these organizations minimize the risk of underselling by providing farmers with accurate information on current prices and create a more sustainable selling environment for both producers and purchasers.
For example, Equal Exchange, a worker-owned cooperative that sells organic and fair-trade products, has established a long-lasting partnership with PRODECOOP in Nicaragua, with Oikocredit International and Root Capital providing access to capital. One of the knock-on effects of this has been an improvement in the farmers’ markers for quality of life, such as gender equality. Dania Alexa Marín Colindres, gender coordinator of PRODECOOP, explains why they are focusing on gender issues: “When we first started the cooperative, it was comprised of both men and women, but decisions were always in the hands of the men. We aren’t pitting men against women, but we are fighting an entrenched culture of male domination, especially in more isolated communities.”8 Impact investors often push to give women in coffee cooperatives access to credit and education.
Nevertheless, impact investing is not without criticism. One of the main arguments is that this industry is very young, and it has yet to prove its real impact. According to a current landscape assessment, more in-depth case studies on impact metrics are needed in order to improve this tool and to understand what its impact really means.9 Another criticism is that the markets where impact investing is being used are too risky due to security or corruption issues, and might lead to services being withdrawn. It’s worth bearing in mind, however, that “there’s 10 times the risk profile of a standard US venture deal without the same potential upside.”10 There are deeper issues, too, about how far impact investing can take a country suffering from poor governance. But while impact investing isn’t a panacea, it can be a crucial first step to helping coffee farmers.