Investing in Small Farm Renovation: The Business Case

  • Author Hélène Roy

    Principal
    AVENIR Impact Investing Solutions
  • Author Paul Macek

    Vice President of Programs
    World Cocoa Foundation

In a relatively short period of time, we have witnessed how the destructive combination of climate change, low productivity, and poverty impacts the livelihoods of West African cocoa farmers. This is especially true in Côte d’Ivoire and Ghana, which together account for more than 60 per cent of global production. Smallholders are faced with the challenge of improving productivity while working with aging tree stocks, changes in climate and the need to grow more cocoa on less land. Thankfully, we see the emergence of a business case and associated financial tools that can help channel investments into smallholder farms.

Threats to Farmer Livelihoods

According to the Ghana Cocoa Board, cocoa swollen shoot virus (CSSV) affects 17 per cent of Ghana’s cocoa trees. CSSV is also a serious threat in Côte d’Ivoire. In its most virulent form, CSSV can reduce yields by about 70% and cause the death of a tree within 3 years. Protective measures include pruning, use of disease free planting material from known sources, and the planting of barrier crops. Coffee, for instance, can prevent the mealybug, which carries CSSV, from reaching cocoa trees. Once the virus spreads, the only way to eradicate it is to cut down in trees and to replant using control strategies, isolating the newly planted farms with a boundary of immune crops.

The West African cocoa tree stock is also aging. On many farms, trees have exceeded their optimal productive age and productivity is steadily declining. Cocoa trees are most productive when they are between five and 30 years old, according to ICCO. Various reports suggest that about 20 to 25 per cent of West Africa’s cocoa trees are more than 30 years old. Replacing aged trees requires a renovation approach, such as taking advantage of existing root systems and grafting new plant material onto old tree stock. This can reduce the time between renovation and first harvest from five years (for replanting) to between two and three years (for grafting). However, renovation of this nature should only be done with planting materials that are confirmed to be free of diseases, including CSSV.

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Photo by AVENIR Impact Investing Solutions

Higher Incomes through Farm Replantation and Rehabilitation

Farm replantation and renovation (R&R) is an opportunity to reshape farming systems, fight disease, intensify production and adopt climate smart practices, such as adding shade trees or improving water management. With the appropriate set of practices in place, newly planted trees will produce higher and more sustainable yields, which help reduce the likelihood that farmers will seek additional land on which to grow cocoa. In some cases, R&R may incentivize farmers to diversity the crops that they grow, thereby generating additional revenue and achieving household income.

Figure 1: Profit and loss of replanting a 2.8ha farm affected by swollen shoot over a 4-year period (25% per year).

However, upfront R&R costs can be very high. When adopting R&R, farmers may need to wait several years before they again break even financially. Medium and long-term financing is scarce. The good news is that with the right financial support including partial compensation for loss of income and the introduction of food crops for income, farmers who are able to replant can reap enormous rewards from increased productivity that often kicks in years three to five (see Figure 1). By using high-yielding cocoa varieties, a typical farmer may see his output double or even triple once the new trees enter their productive life. The food crops can help offset the loss of cocoa income during the initial years after R&R.

Several financial analyses have been conducted to show the long-term economic benefits of R&R at farm level, which have helped us model project or landscape-level investments. These models demonstrate that, with innovative financing, good quality planting materials and proper practices, cocoa farming can be profitable even for smallholders.

Emerging Financing Models at the Service of Smallholder Farmers

Through recent work done in collaboration with the Rainforest Alliance, we identified three scenarios that represent typical farm profiles in West Africa.

The first type was a farm heavily infected by CSSV and entirely replanted over a four-year period. This aggressive scenario translates into a substantial loss of income to the farmer in the first four years (Figure 1). The second and third farm types were not heavily infected by CSSV but still needed to replace diseased or old trees. For the second type we elected to replant 60 per cent of the trees over four years, while for the third type only 20 per cent of the trees were replaced. In all scenarios, we assumed that climate smart cocoa practices and good agricultural practices were applied. These scenarios, less drastic in nature than in the first type, resulted in smaller income loss in the early years and smaller financing needs over time – demonstrating the benefits of a gradual replanting strategy.

We took these individual farm results and then modeled them at a portfolio level investment of 10,000 farmers. This approach helped us make assumptions on loan size considering financing needs and compensation for income loss to the farmer as well as loan disbursement and repayment schedules to model project level cash flows (Figure 2).

Of course, there is no one-size-fits-all solution. Cocoa farming is highly farm specific so precise prescriptions might not be appropriate for all farmers. This exercise, however, allows us to quantify investment needs and to engage in conversations with cocoa companies and investors around the magnitude of investment needed across their supply chains. The next step is to find the delivery mechanisms that work for smallholder farmers while minimizing financial and other risks. We are working with partners such as the IFC and IDH to begin considering specific delivery mechanisms.

Figure 2: Projected cash-flow and volume of cocoa produced by a portfolio of 10,000 farmers involved in replanting activities.

What is needed are financial solutions to support farmers in the early stages of R&R, when they are seeing little or no financial returns from their cocoa trees. Private sector pilots have shown that financing smallholder cocoa farm renovation and rehabilitation is possible. The Union of Cooperatives Ecookim implemented a pilot project with financing from social lender Alterfin, grant money from responsAbility Technical Assistance Facility and support from the Rainforest Alliance. The first two campaigns of loans have yielded positive results, despite the recent drop in cocoa prices, and allowed project partners to learn about loan structuration and effective ways to ensure repayment. Other smallholder finance schemes implemented by local finance institutions such as Advans in Côte d’Ivoire, or directly by traders, are also demonstrating  that it is possible to invest in smallholder cocoa farming.

But given the number of farmers concerned and the potential magnitude of financing need, we will need partners capable of leveraging multiple delivery mechanism and reasonably large ticket size. Larger-scale financing mechanisms, such as the recently launched Land Degradation Neutrality Fund managed by Mirova, offer the promise of  channeling the growing amount of funds available to achieve climate mitigation – or more broadly the United Nations’ Sustainable Development Goals – into impactful smallholder finance products. To move forward, we will need bold leadership from the cocoa sector and the commitment and cooperation of various stakeholders to take reasonable risks and explore innovative approaches.