How Low-Cost Credit is Improving the Livelihoods of Smallholder Coffee Farmers

TechnoServe’s projects yield a wealth of lessons that can help us – and others – improve our work. In this series, we reflect on the lessons we have learned from our programs in Africa, India, and Latin America, sharing insights from program staff.

“Engaging large buyers to provide low-cost credit to farmers and producer organizations in their supply chain can sustainably improve farmers’ productivity and product prices.” – TechnoServe’s lessons learned database

Honduras is the largest coffee producer in Central America and the fifth largest producer globally. In 2017, 86 percent of Honduran coffee was grown by small and medium producers. However, these farmers often earn low prices for their coffee and do not have access to the credit they need to re-invest in their farms, leaving their production to stagnate or decline over time.

Through the Sustainable Agricultural Improvement (MAS) program – a partnership between TechnoServe and the United States Department of Agriculture – Honduran farmers were able to access $18 million in credit to purchase quality inputs and invest in farm infrastructure. In five years, MAS benefitted more than 26,000 small-scale coffee and bean farmers. Coffee farmers who participated in the program saw a 54 percent increase in productivity, which, combined with a 55 percent increase in price, led to a 99 percent increase in coffee revenue.

What was the problem that led to the realization of this lesson?

Tomás Membreño, manager of the MAS program: Prior to the MAS program, many small coffee farmers in Honduras were getting low prices for their coffee and had no access to additional capital to invest in their farms. Loans were not easily accessible, and when they were available, interest rates were so high that most farmers could not afford to repay the loan.

At the export level, exporters were buying low-quality coffee because intermediaries were mixing high- and low-quality coffee to sell as standard quality. Mixing coffee qualities also meant that farmers lost out on the opportunity to be rewarded for their higher quality product.

The traditional coffee supply chain in Honduras favors intermediaries who receive a large portion of the profit at the expense of small coffee farmers. In addition, exporters and other key actors are often hesitant to modify their systems.

How did you develop the solution to this problem?

Tomás Membreño: The challenge was to design a marketing model that would benefit small farmers and exporters alike.

First, TechnoServe carried out a brief market analysis to better identify opportunities for small farmers to sell coffee at favorable prices. The study determined that farmers needed to concentrate on producing quality coffee to gain entry to more favorable markets.

Through the market analysis, we determined that the best way to link thousands of farmers to favorable markets is for them to sell directly to the exporter(s). However, some key actors resisted the idea of buying directly from small coffee farmers. Many people thought that because small farmers had less coffee to sell, the process would be inefficient, whereas large intermediaries would be able to supply larger quantities of coffee with each sale.

MAS took a proactive approach by demonstrating the key advantages of buying directly from small farmers, such as the availability of higher quality coffee. After several attempts, a major exporter decided to introduce direct purchases from small farmers, which was a big win.

What was the impact of this solution?

MAS coordinated marketing contracts between more than 500 producer organizations (POs),  made up of 14,000 small coffee farmers, with major coffee exporters. Common contracts included the sale of quality coffee/specialty coffee, financing for small farmers and POs, and technical assistance for small farmers to produce quality coffee in a consistent manner.

Small farmers benefited from the higher prices for quality coffee and the additional services, including favorable credit and technical assistance. In fact, small farmers who participated in the MAS program received an average price increase of more than 40 percent compared to farm-gate prices. Exporters, for their part, benefitted from being able to purchase higher quality coffee at reasonable prices, a condition that was not possible when purchasing through intermediaries.

How can this lesson apply to other development initiatives?

For six consecutive harvests (2013-2019), exporters have received 90 percent high quality coffees at reasonable prices. For the past two years, TechnoServe has promoted the MAS program throughout Latin America and the Carribbean as an example of a replicable and effective value chain development system.

MAS illustrates the importance of performing a market analysis and establishing relationships with committed partners from the very beginning. This helps us align exporters’ needs with opportunities for improvement on the farm and/or throughout the value chain. The model offers great potential for sustainability by fostering buyer buy-in. In fact, some exporters are paying for half of farmer training costs and will take on the full cost of continuing farmer training when the project ends. Buyers now see smallholder farmer training as an investment in their supply chains. The approach used in the MAS program can be replicated not only in other coffee programs, but in other commodity and horticultural value chains.

Visit our What We’ve Learned page to read about the insights we’ve gained from our programs.