News & Insights
Smallholder farmer-focused investments: The next big thing in impact investing?
by Kusi Hornberger, vice president, investment research, Global Partnerships
Last October, I had the privilege of attending SOCAP15, the largest conference for social entrepreneurs and impact investors. During one of the sessions on the first day, Cathy Clark, Director of CASEi3 Initiative on Impacting Investing at Duke University, mentioned that she felt organic/fair trade agriculture impact investing was potentially the next big growth area for social lenders in developing countries after microfinance, as scalable ways to de-risk these investments have begun to emerge.
The statement was thought-provoking, as agriculture has long been a relatively risky investment. The idea that a niche sector often victim to the fluctuations of the weather and commodity prices could reach the level of investment activity we see in microfinance made me pause. I decided to look at the data, and have since concluded that Cathy may be right. Impact investing focused on helping smallholder farmers in developing countries has increased dramatically over the past few years, and Global Partnerships' rural livelihoods initiative is a big part of that growth. Many challenges remain before this type of investment can reach its full potential to help millions of the rural poor living in poverty. This post will look at the case for impact, the dramatic growth of GP's rural livelihoods portfolio and the remaining challenges in making sustainable agriculture a "mainstream" focus in impact investing.
Case for impact
Through our rural livelihoods initiative, Global Partnerships (GP) invests in organizations in developing countries that provide three services that deliver meaningful impact to smallholder farmers (which we define as farmers and their families living off of farms of less than five hectares). Those three services are: (1) technical assistance; (2) access to markets; and (3) access to finance.
By partnering with social enterprises that deliver these three services, we provide the potential for smallholder farmers to increase and stabilize their household incomes through:
- increased productivity due to better farming techniques;
- diversification of crops to distribute risk and introduce higher-income crops like coffee, cacao and quinoa; and
- higher prices for the farmer due to better (and better quality) crop yields and access to better-paying markets, including international and fair-trade buyers.
Qualitative research with GP partners like FECCEG in Guatemala and BioExport in Paraguay, along with quantitative impact evaluations, support this theory of change. Smallholder farmers supported by these services are diversifying their crops and, as a result of increased productivity and fairer prices, are also significantly increasing their incomes.
Dramatic portfolio growth
Given the results we've seen so far, GP has decided to proactively expand our rural livelihoods initiative. From two initial investments in 2008, GP has grown its rural livelihoods portfolio to include 21 partner organizations with capital disbursed in support of smallholder farmers totaling $22M as of September 30, 2015. Thanks to these investments, GP has impacted the lives of 351,000 smallholder farmers and their families.
Thanks to this growth, and in recognition of agricultural lending's increasing importance in our portfolio, GP has recently joined the Council on Smallholder Agriculture Finance (CSAF) as an affiliate member, joining eight other investors active in agriculture impact investing. CSAF saw greater than 50% growth in agriculture-related impact investments from 2013 to 2014, and expects to see that trend continue.
Despite strong growth, there are still many challenges confronting impact investors like GP before we can consider smallholder farmer-focused investments as truly "de-risked" or mainstream. Some of the key challenges facing the sector, which GP will continue to evaluate carefully as our rural livelihoods initiative moves forward, include:
- Climate change—Climate change and fluctuations in weather patterns are one of the biggest risks for smallholder farmers and thus for impact investors seeking to invest in them. Risk factors vary by crop and there is very little that can be done to fully eliminate these risks, but being prepared and knowing how to respond will be key.
- Commodity price fluctuations—As the focus in smallholder farmer-focused impact investing is largely on export-oriented crops, the income generation potential for smallholder farmers is very much dictated by international market prices, rather than by factors the farmers themselves can control. Crop diversification both lets farmers access these higher-paying specialty markets and distributes their risk so that if the price of one crop falls dramatically, the impact is limited to one segment of their income. Major price fluctuations are very hard to de-risk completely, but the risk can be moderated.
- Scope of need—Types of financing for smallholder farmers are currently fairly limited and generally focus on short-term crop cycles and/or triangulated export contracts. New ways to provide financing for longer-term needs like equipment upgrades, crop replanting/rehabilitation, infrastructure, etc. are necessary but market-sustainable solutions have yet to be identified.
Taking all of this—the case for impact, potential for growth and existing challenges—into consideration, Global Partnerships looks forward to continuing to identify and implement new ways to expand opportunity for the world's 450 million smallholder farmers and their families.