Loan Program Stirs Hope for Poor Mexican Coffee Growers

The peasants of the La Trinidad organic coffee cooperative who farm the steep hills of this tiny village in Oaxaca state face the same problem as most small businesses in poor countries:

They need loans to boost production, but banks aren’t interested in dirt-poor peasants with no credit history.

Enter William Fulbright Foote, once a Lehman Bros. investment banker who roamed Latin America handling billion-dollar deals. He now runs EcoLogic Enterprise Ventures Inc., a nonprofit “green” loan fund for small rural businesses that encourage biodiversity. It is backed largely by private U.S. philanthropic groups and “socially responsible” investors.

With the help of a California importer, Foote and the growers devised a way to use the coffee crop itself as collateral for an initial $40,250 loan approved Oct. 26. The cash will not only let the growers avoid flogging their crop in advance for poor prices, but will let them make small investments toward much-needed productivity gains.

It’s the kind of financing for small business that President-elect Vicente Fox would like to see more of. Fox is banking on small business as the key to 7% annual economic growth--and as a tool to spread opportunities to Mexico’s poorest, remotest regions.

The coffee co-op’s dilemma is typical of small operators.

Jorge Cuevas, 27-year-old manager of the co-op’s export arm, Rainforest Trading Co., said the co-op needed cash each year to finance the organic growers’ pre-harvest costs.

The company also needed financing for the small coffee-processing plant it is building on the outskirts of the state capital, Oaxaca city. The plant will process coffee for export to U.S. buyers such as Sustainable Harvest Coffee Co. in Emeryville, Calif. But nobody was rushing to lend Cuevas money.

Pondering the coffee cooperative’s dilemma, Foote and Cuevas thought they saw a solution. But a meeting with the growers was required first.

After a perilous ride up a mountain track in an old truck, Foote was presented to Lazaro Jacinto Perez, secretary of the coffee growers, and several dozen curious co-op members who had trudged in from the surrounding fields. The farmers and their wives, many wearing brightly embroidered Zapotec Indian blouses, gathered under the portico of the simple village hall for the meeting.

Foote later tramped through the fields and inspected the head-high coffee plants, which grow on a sheer 70% grade and under the shade of wild banana and spice trees, to satisfy himself that the co-op was sound.

The shade-grown coffee from this verdant part of Mexico is among the country’s finest, U.S. importers agree. Named Pluma Hidalgo after a nearby village, it commands a ready export market.

The farmers have been exporting organic coffee since 1995, but most years they have run short of money to plan for the next harvest and to make simple investments that would raise their meager output per acre.

Cuevas struggled to come up with the capital needed to give each co-op member a $100 advance twice a year, money intended to get them to the harvest without having to sell their crop in advance or borrow from loan sharks.

At best, the farmers earn the most modest of livings, as little as $600 a year per grower. More than 90% of coffee growers in Mexico work plots of less than five acres. And the world coffee price is at record lows, about $75 per 132-pound bag, the standard trading measure.

Cuevas said the chief problem is obvious but not easy to resolve: Productivity per grower is just one-third that of comparable coffee plantations in Costa Rica.

“Our real bottle-neck is in the field,” he said. “We need more production from the growers.”

After the 230 co-op members stopped using chemicals and fertilizers entirely in recent years to be certified as organic growers, production fell somewhat.

“It’s like a drunk who stops drinking,” said farmer Justino Juarez. “You shake for a while until you get stronger.”

Organic coffee production is now climbing in Mexico, up from just 27,000 bags in 1994 to 126,000 last year. And organic beans command a 30% premium over non-organic coffee.

Organic coffee still makes up less than 5% of Mexico’s total coffee exports, but the potential market is considered enormous. Foote noted that specialty coffees rose to $6.2 billion in sales last year in the United States alone.

To keep their organic certification, the farmers’ daily workload has shot up. Fields need to be cleared of weeds twice a year, and all the work is manual because the fields, on the southern slopes of the Sierra Madre, are far too steep and delicate for machinery.

The money Foote will provide is intended partly to improve output.

“To improve our harvest, we need to replace old plants and we also need to grow more trees to give better shade,” grower Jose Juarez Martinez said.

Juarez Martinez has already replaced 200 plants on his lush four-acre patch. He has painstakingly shaped mini-dams around each plant to catch rainwater, which has helped make his bushes heavy with berries ahead of the November-to-February harvest.

Foote, grandson of the late Arkansas Sen. William Fulbright, sees in such operations precisely the kind of growth opportunities that the new Mexican administration wants to exploit.

“There is a capital gap,” Foote said. “There is $100 million in socially responsible venture capital sloshing around Latin America, ready to be invested in environmentally friendly projects. [But] nobody is making the $10,000 to $200,000 loans.”

Foote’s EcoLogic, based in Cambridge, Mass., aims for that niche. It has lent money to cocoa farmers in Costa Rica, spice growers in Guatemala and coffee farmers in Chiapas.

Cuevas and Foote came up with a triangular solution for the La Trinidad co-op: The California buyer, Sustainable Harvest Coffee, would make payments for coffee deliveries not to the co-op, but directly to Foote’s fund. In this way, the growers would pay off the first year’s loan installment of $40,250. If the arrangement works, the revolving loan could grow to $75,000 by the third and final year of the deal. The cost is not cheap: The interest rate is 14%.

David Griswold, founder of Sustainable Harvest, said supporting the Oaxacan project ensures him a steady supply of some of Mexico’s best coffee. And he said it also helps meet a crucial need.

“Farmers are really at the mercy of the banks--if they’re that lucky--and if not, the coyotes,” the name given to those who pay fire-sale prices to cash-desperate farmers.

For a rural organic cooperative, the payback from such financing is dramatic, Foote said.

“The community keeps its forests intact; they are exporting a labor-intensive, eco-friendly product; and they are doing it profitably for the first time because of the rise of environmentally conscious consumers in the U.S. who are willing to pay more for these products.”