Can blockchain help bridge the financing gap for Fairtrade farmers? 

Six years ago in Lonya Grande, a district nestled in the Peruvian foothills and close to the Amazon border, a group of young, next-generation farmers came together to form a cooperative and improve their chances of thriving as a business.

Norcafé now counts nearly 480 producer families across the north and western regions of Peru, and sells their Fairtrade and Organic certified coffee to roasters in countries including Switzerland, Germany and the United Kingdom.

The majority of the world’s coffee is grown by smallholder farmers like these. In Peru, where coffee is one of the country’s main agricultural exports, around 223,000 producer families earn their livelihood from the trade.

However, the costs that come with producing coffee are high. Volatile prices, increasing climate-related risks, and competition from larger coffee corporations are just some of the challenges they face. So is access to financing.

The period between the harvest and the delivery of the coffee to contractors months later is when producers typically feel the squeeze. Traditional lenders often set tough, inflexible conditions which, even for farmers with a stable business and operating under the Fairtrade label, can be difficult to meet.

“In Peru, all the banks need a guarantee - and production is often not enough. You need a house or assets to secure the loan against and the price of the loan is expensive,” Carla Livaque, commercial manager at Norcafé, told Geneva Solutions.

“If someone from Switzerland wants a container of coffee for October, I start thinking about how I can pay for the coffee now? My producers are coming to me and I have to pay them before the customers pay for that contract. So this is why financing is so important for us,” she added.

Many impact investors have been working to overcome some of these challenges and over the years successful models like microfinance and even crowdfunding have emerged.  Yet huge gaps still remain, particularly for accessing flexible working capital to cover these crucial periods between harvests and to ultimately be able to invest in growth.

FairCapital, a Swiss investment firm that provides financing solutions to Fairtrade producers in Latin America and working with Norcafé, is now looking to bring a new alternative to the table - one that connects farmers directly with the people buying their products.

The company, with funding from Switzerland’s innovation fund Innosuisse, is collaborating with Zurich University of Applied Sciences (ZHAW) to develop a blockchain-based model that will allow Fairtrade producers like Norcafé to obtain financing from consumers.

How it works.  The idea is that consumers would buy a utility token, through which they would effectively be paying for the farmers’ future production. They will also be able to use the token to buy Fairtrade products in stores.

Fairtrade and other sustainability labels have experienced steady growth over the past years, with Swiss customers forking out a record of nearly CHF865m for products such as coffee, fruit juices and chocolate, in 2018. The label guarantees smallholder farmers a minimum price for their product, which is intended to cover the average costs of sustainable production and improve their living conditions.

Christoph Gosdenoz, founding partner at FairCapital, says these same consumers who are ready to pay more for a socially responsible product are also potential future investors.  “For Fairtrade, we believe that the most important element of success is the willingness of the consumer to purchase a product at a premium price.  The same people who are willing to pay a premium price are also potentially interested in making a small loan to pre-finance a harvest,” he told Geneva Solutions.

To do this, the company has launched a consumer-controlled cooperative on the Swiss registry of commerce, with 11 members including Gosdenoz and other “responsible consumers” including employees of Max Havelaar Foundation (Switzerland), a Fairtrade organisation. FairCapital will support as an administrator and investment manager but will not control the governance, he says.

The cooperative, called Fair2C, will act as the “market maker” and control, at least in the beginning, the buying and selling of tokens. However, the idea in the longer-term, he says, is to move to a more “scalable, decentralised” blockchain-based financial solution comprising all actors along the supply chain.

FairCapital believes that with tokens it could raise at least $1m in a first year and more than $10m in the years after, based on the success of Kiva, a peer-to-peer crowdfunding platform in the US which raised similar amounts in its first two years from Americans willing to lend amounts as small as $25.

The concept will only work in the long run, however, if you also increase the number of people buying - and retailers selling - Fairtrade goods, Gosdenoz says. “If we finance investment projects of producers, but that expansion doesn’t result in additional sales, it’s a bad investment from our perspective because it doesn’t really help them.  They will have just invested in additional infrastructure without the increasing revenues.”

Ironing out the kinks.  With its small group of founding members, the cooperative still has a long way to go to raise significant financing for farmers. “For that you need a few thousand members and this is where we want to go; we want to make this an accessible organisation to all kinds of people,” he said.

That also includes ensuring that the platform is also accessible and easy to use for the cooperatives issuing the tokens.

Academics at ZHAW are still fine-tuning the workings of this blockchain-based system. To ensure there is enough liquidity, for example, and that consumers don’t spend their tokens at one, there will likely be a vesting period for newly issued tokens.

Beat Affolter, head of ZHAW’s corporate performance and sustainable financing centre, and the leader of the project, said determining the value of the token, and potential risks attached, was another important question to solve. But since the token is backed with real delivery contracts these questions have been solved in a transparent way, he says.

His team, which includes eight other academics from different fields such as finance, legal, engineering, have spent over nine months developing the economic modelling, performing simulations and testing the mechanics, with the support of a CHF250,000 grant from Innosuisse. The next part is winning over consumers and ensuring they can understand the concept.

Blockchain in agriculture: a growing trend. Blockchain-led innovations in the agriculture market have been rapidly gaining traction, in particular in helping to bring increased transparency and traceability of products along the supply chain, with companies like Nestle adopting blockchain-led tracking systems to ensure it uses clean sources of raw materials like palm oil.

New initiatives are also being piloted across agricultural insurance, land-registration, manufacturing and energy. Affolter said that while the technology the project is based on is not new, the concept of enhancing producer financing and connecting it with consumers  in a scalable way was something he had yet to see in the market.

“We are not reinventing blockchain, not reinventing a secondary market, or an emission process for such a token. In the end, we will rely on many existing subsystems and partners. But the key is to have a robust system where all parties have trust, because there is transparency and they can see, for example, how many contracts there are, and what the value of the token is, based on those contracts,” says Affolter.

The aim is to be able to issue the first tokens later this year. For now though, consumers can invest in a more traditional way, by buying shares in the cooperative for a minimum of CHF 5,000, with a dividend of around three per cent.   Every member has one vote, no matter how many shares they buy.

In the end, the cooperative is about “creating a bridge between fairtrade producers and the consumers of Fairtrade products” says Gosdenoz and helping small agricultural producers overcome the gap in financing they need to grow. He is confident that the power of the Max Havelaar brand in Switzerland, combined with a growing appetite among consumers to invest where they can make an impact, and a transparent blockchain-based model, the cooperative has the ingredients it needs to take off.