By Ellie Winninghoff
Fair Trade coffee from Nicaragua. Mangoes from Haiti, quinoa from Ecuador, cotton from Uganda, shea butter from Burkina Faso. Imagine connecting rural smallholder farmers in Latin America and Africa to middle-class consumers in Europe and the U.S.
Former Lehman banker William "Willy" Foote has found a way. And now Root Capital, the Cambridge, Mass.-based nonprofit he founded in l999, is scaling its groundbreaking trade finance model and seeking to adopt it to African food security.
"By moving beyond traditional approaches to collateral," Foote says, "we are proving a business case for lending to the rural un-bankable through the intelligent use of supply chains."
In 2011, Root Capital made loans totaling $111 million to 193 borrowers representing 204,000 farmer/artisans in 30 different countries. And since inception in l999, it has disbursed $389 million. Repayment rates are 98%.
"We're opening up global markets to very remote people who are improving living standards in the countryside," Foote says. "That, in turn, provides incentives to stay on the land and not migrate to overcrowded cities. It encourages sustainable farming and production and it helps preserve threatened ecosystems."
The nonprofit has two funds. The Sustainable Trade Fund, which it is scaling up, focuses on high-value (organic, Fair Trade, etc.) crops and value-added products for export. Top investors include OPIC, the Gates Foundation, and Starbucks. Returns, which are negotiated (there is no standardized product) range from 2% to 3% for one to five years. Minimum investment is $100,000.
The Innovation Fund, which was approved by its Board in June 2010, is experimenting with new models and markets. Most of the current focus is on food security and nutrition in Africa--that is, local consumption (not crops or products for export.) The Rockefeller and Lemelson Foundations, the Lundin Foundation, and General Mills have made loans totaling $2.2 million at 0%, and the fund has received grants totaling $1.9 million from the Gates Foundation, Global Alliance for Nutrition, and one individual.
Sowing The Seeds
After the Mexican peso was devalued in the mid-90s, Foote left investment banking for a two-year journalism fellowship traveling the back roads of Mexico with his wife. In the Chimalapas jungle of southern Mexico, he became close to the charismatic leader and members of a vanilla cooperative, and he witnessed how hard they toiled amidst drug traffickers to improve the lives of indigenous peoples. Despite their determination, however, the cooperative eventually failed. And that left a lasting impression on him.
"It wasn't because of the drug traffickers," he recalls. "It was because they lacked access to capital and markets and basic business skills."
Wondering what it would take to turn that type of situation around, Foote planned to attend Harvard Business School when he returned to the U.S. But he changed his mind on the drive home. "I had this growing fear that if I didn't act on my ideas," he says, "I'd lose my sense of urgency."
Re-Wiring The Supply Chain
Root Capital's model is simple, but radical. The nonprofit doesn't work with either large industrial plantations or individual smallholder farmers. Its clients are what it calls the "missing middle"--i.e. small and growing businesses, or SGBs, that are too big for micro-loans and too small and risky (and remote) for commercial banks. These small businesses, many of them farmer cooperatives and associations consisting of a few hundred to a few thousand members, require between $50,000 and $2 million.
In order to fulfill orders from buyers in the U.S. and Europe, these small businesses need working capital to buy coffee beans and other crops from the farmers. If they don't have cash, the farmers are often forced to sell to middlemen at lower prices.
No working capital, no beans. No beans, no business.
Root Capital's novelty was to accept an SGB's forward sales contract with a buyer like Starbucks as collateral. It's a financing technique that had not been applied before in this sector. In effect, it has served as a strategic lever for creating a virtuous circle
By paying the growers immediately, the SGBs have helped them avoid the cut-rate middlemen. This has taken the farmers out of crisis mode, which has allowed them to plan. And this, in turn, has allowed the SGBs to grow their businesses with buyers in the US and Europe who are assured a reliable supply.
When the buyers receive their coffee (or other crop), they pay Root Capital. The nonprofit deducts the interest it charges (between 9.5% and 12%) and remits the balance to the SGB.
"We think we have a very compelling risk mitigation strategy," Foote told the New York Times. "As long as product ships we get paid back. So we get very good at asking, 'Why wouldn't product ship?'"
Many of the SGBs have applied the Fair Trade premiums they earn to creating social services like health care or education, or building infrastructure in the community like water treatment facilities.
Supply Chain Finance
In an effort to continue pushing the frontier, Root Capital has begun experimenting with how to apply its model to advance food security and nutrition in Africa, where 35% of the population is malnourished. According to Brian Milder, Root Capital's vice president of strategy, knowledge and innovation, the idea is to offer similar short-term working capital loans to businesses in domestic value chains such as maize, rice and finger millet.
"We're working all along the value chain," he says. "We're looking at inputs, seeds, and fertilizer. We're financing primary production and [basic] processing like converting finger millet into nutritious flour for baking. And we're very interested in finding [food] handling models because 30% of grain production is lost between the farm and on its way to being processed due to improper drying and storage."
Secosen, a Dakar, Senegal-based company in the rice business, is one example of Root Capital's efforts to boost the food supply. Although there's plenty of land in northern and southern Senegal and it's already irrigated, farmers have not been willing to take the risk of purchasing inputs like seed because the market for rice has been so unreliable.
To expand production, Secosen is developing relationships with farmers by offering them 20% above market price. Ultimately, it aims to expand land under production by making loans to farmers so they can buy inputs and land so they in turn can cultivate more land not currently in use. They, in turn, will keep one-third of the rice they grow for family consumption, sell one-third to the company (thereby substantially increasing household income), and use the other third to pay back loans.
Milder acknowledges that when it comes to applying Root Capital's highly successful model to local supply chains in Africa, the risk profile changes dramatically. It's not just the added risks involving production and currency--even management. There is also more risk in terms of getting paid. "There is no way we can do due diligence [on the buyers] like we can on a Starbucks," he says.
A former investment banker, Ellie Winninghoff is a writer and consultant. More of her stories about impact investing are at her blog, DoGoodCapitalist.com. She can be contacted at: ellie.winninghoff (at) gmail (dot) com.