All-inclusive support for smallholder Nicaraguan coffee producers
At a time when foreign investors are fleeing Nicaragua and local banks are reducing their exposure to coffee in particular, Mercapital continues to support this fragile sector.
We have therefore provided two US$ 5 million long-term loans to strengthen the company’s financial profile, so it can continue to support smallholders and capitalize on growth opportunities as other financial institutions retrench.
Nicaragua has Latin America’s second-lowest GDP per-capita (US$ 2,028). Rural populations suffer lower educational and development standards than urban Nicaraguans. Rural poverty rate is nearly 50%, three times that in urban areas. Arabica coffee production takes place in the country’s mountainous regions, on small plots run predominantly by small and medium-sized coffee producers.
These producers face three main barriers to financial security: First, the highly volatile price of coffee (in 2019, arabica coffee hit a 15-year low of US$ 0.9/lb, in 2011 it was at US$ 2.9/lb) makes it difficult for producers to plan their crops or manage their investment risks. Secondly, limited access to affordable long-term financing to invest in new plantations or to renew their existing ones. And finally, lack of access to export markets and, in particular, premium markets for distinctive coffees.
At FMO, we look to support agribusiness companies that provide an integral solution to the challenges of complex value chains, connecting smallholder farmers in an efficient, transparent and fair manner to final consumers. As the financial arm in Nicaragua of the leading global coffee merchant Mercon Coffee Group (MCG), Mercapital is a key component in this integral solution.
Mercon has been operating in Nicaragua for nearly 70 years. Mercapital provides pre-harvest and long-term financing to over 2,700 local coffee producers, 75% of whom farm less than 5 hectares. While CISA Exportadora, also part of Mercon and our client, provides producers with seedlings, purchases their coffee and offers technical support through LIFT, a 3-year program that trains farmers in best practices to improve their productivity in a social and environmentally manner. The program also provides farmers with the tools to obtain certifications with which they can get access to various markets.
We supported Mercapital with two long-term financing facilities: in 2018, a US$ 5 million senior loan and the following year an additional US$ 5 million subordinated loan. The loans give Mercapital the stability to continue supporting producers with long-term finance. The subordinated loan, which creates a larger capital buffer that will entice other lenders to support Mercapital, was one of the very few foreign long-term transactions of its kind in Nicaragua in 2019.
One innovative feature of these loans is a sustainability margin reduction: following a pre-defined schedule, if Mercon continues to train farmers through the LIFT program and export more LIFT-certified coffee, Mercapital will receive a reduction on its interest rate. We have done this because we believe the LIFT program not only adds value for farmers, but also improves the risk profile of their farming activities and Mercapital itself.
We have also supported Mercapital/Mercon with various capacity development initiatives in Nicaragua. These include a Client Protection Principles assessment to ensure industry standards are being met; a socio-environmental evaluation of the impact of introducing Robusta coffee to a region in East Nicaragua; and a pilot project in two different coffee communities to incentivize rural youth to remain in the coffee industry and increase productivity. The key point being, as always, that interrelated complex challenges call for an innovative and multifaceted response.