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Executive Perspectives

EXECUTIVE PERSPECTIVE: Beyond the farm bill: financial reforms the world’s farmers need

Tensie Whelan

19 Nov 2013

Direct payments to farmers have become a lightning rod in the renewal of the U.S. farm bill.  The federal government now pays farmers about $5 billion a year to comply with conservation regulations like preserving wetlands, controlling runoff and keeping certain lands fallow.  We know that’s probably getting cut in the renewed bill, to the likely detriment of the environment. This will be hard to understand in Europe, where the EU spends 57.5 billion euros, or 43% of its budget, supporting farmers, most of  which takes the form of direct payments.

But the nearly trillion-dollar U.S. farm bill  is a lot more than direct payments.  It provides vital crop insurance and credit access to farmers, including some who wouldn’t otherwise qualify for commercial loans, and funds technical assistance to help farmers improve water and soil conservation – another clue that conservation is connected to financing issues.

It remains to be seen whether the new bill adequately funds financing programs like USDA Farm Service Agency guaranteed lending that can empower American farmers to improve their practices.  But as that debate plays out in Congress, we should also spare a thought for the 500 million smallholder farmers around the world, and the more than 2 billion people who directly depend on them. Unlike American farmers, smallholders typically farm less than five acres, yet they are the backbone of global agriculture and of their local economies, accounting for major shares of GDP and export in producer countries.

Although they are acutely exposed and vulnerable to risks like drought, extreme weather, pests, price volatility and other threats, few have access to credit, crop insurance or technical assistance programs that would help them cope.

Global smallholder demand for loans is estimated at nearly $500 billion.  “Social lenders” lend to smallholders who don’t qualify for commercial credit, but they can only meet a tiny fraction of the need — about $350 million.  That leaves millions of smallholders starved for credit, which keeps them from investing in improvements that could raise their yields and incomes.  Lack of credit means farmers have little ability to pay workers better, ride out a tough year, or implement sustainable farming practices that could conserve their soil, water and biodiversity.

Government assistance programs aren’t likely to alleviate these problems for smallholder farmers anytime soon.  But changing industry practices might.  A new study conducted by the Rainforest Alliance in conjunction with the Citi Foundation discovered financial institutions and farmers themselves can do much to increase lending to smallholders and make their livelihoods more sustainable.

A big part of the credit access problem, the study found, was that small farms rarely keep the kind of records that would give potential lenders the financial data they need to assess creditworthiness, like tracking production cost, income and delivery history.

That’s fixable.  Lending organizations could adjust and standardize metric templates, loan applications and producer profiles, and focus them on key indicators lenders most need to see.  Technical assistance and independent sustainability certification programs can teach producers to keep records that meet those indicators.   Sustainable certified farms turn out to be significantly better at tracking key financial metrics.  The study showed that among small coffee and cocoa farmers in Colombia and Peru, certified farms were awarded larger, more frequent loans, and had access to nearly 3.5 times the credit the non-certified ones did.

That’s an indication of the vast potential to increase the credit access for millions of smallholder farms around the world, even without the kind of government help American farmers enjoy (albeit with more restrictions under the renewed farm bill).

It also illustrates how farm financing and conservation are linked. Sustainability certification helps farmers improve management and record-keeping, which improves credit access, which in turn enables small farms to invest in practices that make them more sustainable and resilient.

Sustainability certification is market-driven phenomenon that is already growing fast – the number and acreage of Rainforest Alliance Certified farms worldwide doubled in 2012, and they now produce 4.5% of the world’s coffee, 15% of bananas, 10% of cocoa and 11.5% of tea.  As certification continues to expand, it will mean more credit-worthy small farms and more opportunities for lenders, particularly if lenders and certifiers adjust their loan applications and other practices so as to help more small farms qualify for loans.

Tackling the obstacles to financing sustainable development is a field unto itself known as sustainable financing.  There’s great unmet demand for it, and great potential for lenders to flourish in it while helping put millions of smallholder farmers on a more sustainable footing.  Realizing that potential could have huge, positive impacts on the global food system, the economies of food producing countries, and the planet.

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