Risk and Finance

About risk 

Akuapem Ridge, Ghana - A farmer walks across the lush Asili Coffee farm.

Photo by ITC

Operators in coffee global value chains face risks that influence production, sales, distribution, market entry, long-term profitability, access to finance and investments, and the overall stability of commercial relationships. Accordingly, knowledge about the risks involved is essential to help players navigate market opportunities, embark on growth trajectories and boost the resilience of the sector. Organizations and entrepreneurs face inherent risks, regardless of where they are involved on the Global Value Chain.  

General risks affect coffee operators, although impact varies from actor to actor. Beyond these, specific risks are associated with each stage of the GVC. The nature of such risks is connected to the peculiarities of production, processing, trade, roasting and marketing operations. 

General risks:  

• Environmental Risk: Climate change and biodiversity loss threaten coffee farming by affecting land suitability, driving deforestation, and degrading forests. Operators must address this to secure future coffee production. 

• Physical and Security Risk: Coffee stocks could be lost or mishandled, especially during transactions. Banks often secure these with liens or warehouse receipts but may demand extra guarantees from smaller operators. 

• Market Risk: Coffee price fluctuations can lead to losses for small farmers, traders, or exporters, particularly if prices fall below input costs or rise unexpectedly, creating risks of defaults. 

• Country Risk: Political, social, and economic instability in coffee-producing countries affects borrowing costs and may require banks to demand additional guarantees or insurance. 

• Currency Risk: Coffee, a dollar-traded commodity, faces risks when local currencies fluctuate against the dollar, impacting export revenues. Some exporters mitigate this by borrowing in dollars, but it’s challenging in countries with weak financial systems. 

• Production Risk: Coffee farmers are vulnerable to plant diseases, weather events, and lack of agricultural research and innovation. Increased investment in research and technology is necessary for climate adaptation. 

• Performance Risk: Contractual failures, like non-delivery or non-payment, can cause losses. Safeguards like collateral management and trading with authorized buyers help manage this risk. 

Two major perspectives to risk and risk management are relevant in coffee: 

• The commercial or trade perspective, which is mainly concerned with managing the physical product and its price, although performance risk also plays a role.  

• The financial or lending perspective, which is mainly concerned with performance risk. 

Performance risk materializes when a borrower does not perform. For example, an exporter or a producers’ cooperative becomes unable to refund a loan, misrepresents the company’s financial or trading position, misstates the quality of goods financed, or engages in pure speculation without the knowledge of its financial backers. However, borrowers are exposed to the risk of their buyers or suppliers defaulting. For example, unfavorable price movements can cause a supplier to renege on sales contracts, making it impossible for the borrower to fulfil its own contractual obligations, through no fault of its own.  

Because so many factors contribute to uncertainty, commodity trade finance is a highly specialized activity, usually undertaken not by the average retail bank, but rather by corporate lending or commodity trade finance banks, which lend capitals for trade, not speculation. Therefore, borrowers and financial institutions must agree on the types of transactions to be financed before they set a credit limit or credit line, to avoid every deal having to be individually approved. Usually, but not always, the borrower can then trade freely within the limits that have been agreed and needs to apply for additional approval only, for example, to increase the credit line.  

Financing the coffee global value chain  

Actors in the coffee global value chain rely on various sources of financing to sustain their operations. The diversity of credit channels available to coffee operators at the different stages of the GVC constitutes a rather complex financing ecosystem.  

Financial institutions outside the chain also supply a critical portion of the credit. More recently, developmental and impact finance have driven the allocation of external capital by impact investors and other hybrid partnerships of actors seeking to generate direct or mediated sustainability outcomes at the production and processing stages. Such sources of finance target critical sustainability issues that traditional financing does not address, mainly because of risk concerns.  

Agricultural funds, blended finance and impact investments leverage innovative financial products and strategic partnerships. They complement these with technical assistance to producer organizations and agricultural SMEs, to fund the types of investments that traditional coffee financing does not address.  

As each actor targets different coffee production stages through different financing products, the implications and challenges this raise are heterogeneous and highly specific. 

Useful tools and resources to navigate coffee’s industry 

This section provides you with essential tools and insights to effectively manage financial risks and secure funding within the coffee industry.

Major players for blended finance and impact investment in coffee and agribusiness

Impact Investors

Banking and Financial institutions

Networks

Other resources

Revitalizing Colombia’s coffee farms 

© TRADE Hub/What took you so long

The vast majority of the more than half-million coffee farmers in Colombia are smallholders. Although Colombia is one of the world’s leading coffee producers, output dropped by almost a third in 2009. This was due in part to disease and the large number of ageing farms that required renovation but were unable to upgrade because smallholders were poor and had difficulty acquiring funding for infrastructure and long-term investment.  

Nevertheless, Colombian coffee farmers are very aware of the importance of renovating and replanting their land. This is reflected in the fact that farmers carried out 40% of farm renovations without any support. 

The Permanency Sustainability and Future programme was launched to help coffee farmers rejuvenate their farms. This programme, led by the Federation of Coffee Producers in collaboration with the Ministry of Agriculture and local banks, supplies loans and grants for farm renovation. It provided more than 216,000 loans to smallholders to renovate 184,000 hectares of land in five years. This represented about a quarter of the country’s total coffee-growing area. 

The importance of know-how 

The Federation of Coffee Producers also supplied targeted farmers with certified seeds and seedlings, as well as agronomic and business advice. 

To make the scheme more financially feasible and more attractive for smallholders, repayment was scheduled over seven years, with the first two years given as a grace period. Other lessons learned from the programme include the importance of long-term political commitment and the need for expert presence in the field to help farmers make the most of their investments. 

After an initial drop in output during the replanting period, the Permanency Sustainability and Future programme helped boost coffee exports as of 2012. It has also improved the livelihoods of the farmers who benefited and enhanced the longer-term viability and sustainability of the targeted farms. 

Source: International Trade Centre 

Adapting to the here and now of climate change 

The Intergovernmental Panel on Climate Change and climate scientists warn of the consequences of global warming over the coming decades. However, the effects of climate change are already being felt on the ground. 

This is the case for farmers in general and coffee growers in particular. They must contend with the increased frequency of extreme weather events, including storms, droughts, heatwaves and cold spells.  

For example, heavy rains and winds can blow coffee flowers off trees, affecting fruit production. Longer droughts adversely affect the growth and development of coffee cherries. 

ACToday for a better tomorrow 

This means that, in addition to long-term action to minimize climate change and mitigate its effects, we need adaptive strategies to help farmers cope with the here and now of global warming. 

ACToday seeks to help farmers in four coffee-producing countries – Colombia, Ethiopia, Guatemala and Viet Nam – adapt to climate variability. The initiative, led by Columbia University’s Columbia World Projects, brings together experts from different disciplines, including climate scientists, social science researchers and agricultural experts. 

Fruits of knowledge 

ACToday is developing tailored strategies for each country. The project aims to ensure that relevant and useful climate information and forecasts reach farmers so they can anticipate and prepare for extreme weather events and favourable weather conditions. 

By narrowing the information gap, ACToday empowers smallholder coffee farmers and cooperatives to improve their climate risk management strategies and, with them, their long-term investments, productivity and income in uncertain times. 

Source: J. Nicolas Hernandez-Aguilera, a member of the ACToday Ethiopia team, discusses climate events and their potential consequences for the production cycle with coffee growers in the Gedeo Zone, Ethiopia. 

Blended finance helps Uganda find the right policy blend for coffee 

Photo by ITC

Despite rapid development and significant rates of economic growth over the past two decades, Uganda still has a long road ahead. This is reflected in its position in the Human Development Index: 159th out of 189 countries (2019). 

To tackle this, the Nile Basin country launched Uganda Vision 2040 in 2013. Given the importance of farming to the national economy (nearly 23% of gross domestic product) and the fact that most Ugandans are employed in agrarian activities (72% of employment), agriculture makes up a key pillar of Vision 2040. 

As a central component of its efforts to reform and modernize its agricultural sector, Uganda has embarked on an ambitious strategy to bolster both the quantity and quality of its coffee production.  

The country is the second-largest coffee producer in Africa and the seventh-biggest in the world. Coffee accounts for nearly 12% of Uganda’s export earning, bring in some 20%–30% of its foreign exchange. Coffee production is dominated by small-scale coffee farmers, who account for 85% of total output.  

Uganda produces 4.7 million bags of coffee a year (2018), 80% of which is Robusta, which is exported unprocessed as a commodity. The Government aims to boost output to 20 million bags by 2030. 

Capital problems 

To achieve its goals for the coffee sector, Uganda seeks to boost the productivity and output of farmers. The Government intends to do this by improving the quality of planting materials and inputs, expanding the acreage set aside for coffee production by 20% and enhancing yields by a factor of three. 

Half of Uganda’s coffee is produced by subsistence farmers who regard it as a sideline activity, and 85% of producers are not affiliated with any kind of collective. This means access to finance is one of the top obstacles facing the sector. 

Although private sector lending to agriculture has grown significantly in recent years (from nearly 8% in 2013 to more than 12% in 2018), funding still remains a challenge, especially when it comes to processing and modernization. 

Blended solutions 

Blended finance is being explored in Uganda because of its great potential to leverage funds. One major player is SAFIN, which brings together governmental and intergovernmental development agencies, financial institutions, philanthropic foundations and social lenders to scale access to financial services. 

SAFIN’s partners in Uganda include the International Trade Centre, the European Commission, the International Fund for Agricultural Development and the Uganda Agribusiness Alliance. In its prospectus, SAFIN offers two main options for investment in the Ugandan coffee sector: dry coffee processing and Robusta coffee grading facilities. 

Source: International Trade Centre (2021)

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