Interview by Melissa Krenke, Rainforest Alliance
“One of the unique aspects of this project is that 95 percent of EcoLogic’s work is in supporting direct, export market linkages and working closely with values-driven buyers, often lending against signed purchase contracts with ‘green’ companies”.
EcoLogic Finance is a non-profit organization based in Boston that provides small-business loans to support sustainable agriculture, non-timber forest products, certified timber, sustainable fisheries, and ecotourism operations that foster biodiversity conservation and grassroots economic development. EcoLogic Finance focuses on businesses that are located in and around protected areas that are unable to secure financing from conventional sources due to their small size, lack of collateral, and/or operating history. EcoLogic Finance offsets risks by requiring that any producer or organization wishing to borrow funds must have an existing sales relationship with international green markets.
Since 1999, EcoLogic Finance has financed 21 loans totaling approximately $2.1 million to rural producer organizations in Latin America.
Question: What are some examples of how EcoLogic is helping rural businesses improve?
Foote: On one hand, we offer “pre-shipment trade credit” to farmer-owned cooperatives and associations, which provides vital cash when growers need it most: when the harvest hits. If a co-op doesn’t have money to make down payments to their members at harvest time, the farmers can be so cash-strapped that they’ll sell prematurely at a lower price to local middlemen. Often an organization will lose more than half of their production as affiliated farmers are forced to sell outside of their farmer co-ops, thus sacrificing a good price for short-term liquidity. Presently, about 65 percent of our portfolio represents this kind of working capital lending, which is also referred to as “producer-export credit.” Again, I can’t overstate how important such credit is for co-ops to function in the context of rapidly growing, green consumer markets. If you sell to Green Mountain Coffee Roasters or Equal Exchange, for example, you have to bridge that cash-less gap of six to eight months between harvest time and when the buyer actually pays you for your product. The farmers must finance their operations in the meantime, and local financial institutions typically won’t do it, so that’s where we fill the gap.
We are developing a new credit product earmarked for off-season maintenance loans, which go toward individual on-farm investments to increase organic production yields of agroforestry crops such as coffee or cocoa. At the same time, EcoLogic Finance provides long-term loans for infrastructure, such as machinery, equipment, vehicles, or any investments that add value to production and enable rural producer organizations to sell their goods farther along the market chain and capture more benefits for local communities.
In Ecuador, an example of this type of fixed-asset financing is the Galapagos small boat operators we’re working with. We financed the purchase of equipment they needed to come into full compliance with SmartVoyager certification, a program of the NGO Conservation and Development, a partner of the Rainforest Alliance. That included four-stroke outboard engines, desalinization machines, and more.
Also with Conservation and Development, we are financing Rainforest Alliance Certified cocoa production. We are supplying about $30,000 in harvest financing to grower organizations that have been trained to sell to the major exporters in Guayaquil through an auction system. The end product is the Rainforest Alliance Certified Arriba Chocolate.
One of the unique aspects of this project is that 95 percent of EcoLogic Finance’s work is in supporting direct, export market linkages and working closely with values-driven buyers, often lending against signed purchase contracts with “green” companies. When we got involved with the cocoa project in Ecuador, there were no direct export market relationships. All product was being sold to local exporters in the port city of Guayaquil, with well-organized grower co-ops successfully leapfrogging local-middle men. On the Pacific coast of Ecuador, Conservation and Development had organized these farmers, pre-sorted the cocoa, organized the auction system, and were increasing the premiums that got into growers’ pockets, but still there were no direct export relationships with international buyers or signed purchase contracts against which to lend, which is how EcoLogic Finance typically manages its risk. So, together with the Rainforest Alliance, we approached Citigroup Foundation, which provided some smart subsidy to create a fiduciary trust with a local bank that would be best-suited to help manage project cash flow and lending operations. This is exciting, because we are involving a local financial institution and helping them come to appreciate what these community-based eco-enterprises can be: good business.
Specifically, we participated in crafting and creating a fiduciary trust at Produbanco, which has a strong relationship with Citibank in Ecuador. Produobanco manages the cash flow between participating co-ops, the exporters buying their pre-sorted cocoa on the new auction system in Guayaquil, and the fiduciary trust from which loan disbursements and collections are made. Thus, we created a water-tight system whereby money goes to the grower organizations on a weekly basis, based on their purchase volume assumptions. With this cash, the co-ops make down-payments to the farmers against product delivery, and then sell their product in an auction to the exporters. The exporters paying the highest price get this uniquely pre-sorted, high-quality cocoa and th en transfer the money back to the fiduciary trust at Produbanco. That triangulation repayment system through US or European buyers made us comfortable with the notion of not having the direct export linkage. We actually approved and committed $150,000 to this project, but they’ve only used $30,000 so far.
In Mexico, we are now working with four different Marine Stewardship Council-certified lobster fishing co-ops, financing four-stroke outboard engines. Located in the state of Baja California Sur, these co-ops are situated squarely inside the boundaries of the 6.2 million-acre El Vizcaíno Biosphere Reserve, the largest natural protected area in Mexico. In most cases, loan proceeds are restricted for the purchase of highly efficient 4-stroke outboard engines to power the skiffs used by member fishermen. A next-generation technology, 4-stroke motors are much cleaner and quieter than traditional 2-stroke outboard engines, which dump as much as one-third of the gasoline and oil back into the water, while producing significant air pollution. In one case, we financed an airplane for a group called Nacionales de Abulon. They live on an island that is 14 miles off the coast of Baja California, and ever since the 1940s, before the highway was built down the center of Baja Peninsula, all of the inhabitants have used airplanes to transport their products north to Tijuana and Ensanada. Nacionales de Abulon was the only co-op that still desperately needed a plane, so we financed a six-person Cessna for them. Our goal is to respond to organizations’ specific needs and develop a specific financing structure to meet those needs.
Q: The producers’ ability to repay their loans is dependent on uncontrollable variables such as forces of nature and fluctuating commodities markets. Does EcoLogic Finance build flexibility into its repayment scheme to allow for such variables?
Foote: With few exceptions, we’re lending into industries, products, and/or services that have revenue streams in dollars. We’re signing contracts in dollars with the suppliers, so we do not have to take foreign exchange rate risks.
In December 2003, there was a cold snap in Nicaragua that brought the coffee harvest on much more quickly than anyone had anticipated. We worked with importers to have them sign their purchase contracts earlier than they would have so we could finalize the pre-financing of their contracts.
There can be delays in shipment because of things other than natural causes as well. For example, in October there was a big strike in Quillabamba in the Peruvian Andes, and no one could get product out of town. In these instances, we have a very close line of communication with the importers, so we know what the cause of the delay is. Then, we understand the context and can recast the repayment schedule based on that information, and don’t consider a co-op to be in default. This is possible because we have trusting relationships and close, continuous communication with importers and their suppliers in the field.
Q: Do you rely heavily on importers for most of your information?
Foote: No, not for most of our information, but we certainly do leverage relationships with buyers, as well as third-party certification programs, and field-based technical assistance providers, to obtain high-quality information on prospective and existing borrowers in the field. An interesting development along the way has been that some buyers see part of our value proposition as providing them with information on their suppliers. That is, we’re doing real due diligence in the field and getting to know the growers in a way that the importers don’t have the time or inclination to do. Often we know the financial information, managerial challenges, and a lot of the inside information that adds value to the supplier-buyer relationship.
I can’t imagine how else you can manage risk in this tough section of agricultural lending without working closely with all of the different actors in the supply chain.
Q: How does EcoLogic ensure that projects are not only economically viable but also foster conservation?
Foote: I think one of the keys to addressing that challenge as a conservation finance organization is that you align your evaluation of environmental and social impacts with the nature of your financing activities. In our case, we identify projects either through relationships with technical assistance providers on the ground, like Conservation and Development in Ecuador, or through well-respected certification programs like the Rainforest Alliance, TransFairUSA, organic, Smithsonian Migratory Birds Center, the Marine Stewardship Council, etc. So we seek out businesses where environmental and social certification is already in place. Of course, we take our own due diligence and tire-kicking at source very seriously.
Q: By working only with organizations that have existing relationships with green markets, do you ever draw criticism for not working more with less-developed communities that might benefit from getting support to establish such links?
Foote: We take a lot of pride in penetrating deep into recently certified or newly emerging supplies of sustainably certified products and services. Last year, we worked with three different groups in Guatemala that had just achieved organic and FairTrade certification. We were the first outside financier they’d ever had, and it was the first year they’d ever directly exported product. There are a lot of organizations out there that focus on supply and production. Often you have market demand: the importer who’s directly engaged and cutting out the middle-men, the farmers and fishermen who are directly exporting environmentally friendly products, making money for the first time in generations. But the missing link is credit. That’s where EcoLogic Finance comes in.
Q: Do you have a mechanism in place to ensure that the initiatives that you support have the capacity to continue after your support ends?
Foote: Our purpose is absolutely to work ourselves out of a job. We are trying to get investors and lenders to see these groups as bankable, where they’re otherwise not seen as such because they’re too poor or under-asseted to meet the traditional requirements for credit. We’re looking for small-scale farmers who can compete on the basis of something besides price, who have a product that meets the high quality standards that the market requires, and whose production is minimally damaging to the environment. When we find those groups and are lending into a supply chain that enables them to thrive, in spite of all of the challenges and obstacles in remote rural areas of Latin America or Africa, we’re not re-creating the whole chain, but rather strengthening that chain, so that it’s fully functional when we leave.
Often there are groups that we help to become bankable and that can manage their cash flow, and they can present their financial information so that we can convince a banker to finance them, but they’re so underdeveloped that we need to extend their support. That’s when we try to bring in other alternative investors or lenders. For instance, we’re co-investing with Calvert’s Social Investment Foundation to source, structure, and service loans to coffee farmer cooperatives on behalf of Calvert. We also are working with European alternative investors or lenders to work with some of these groups.
We’ve realized in the last couple of years that we’re often the very first organization that’s asked some of the groups we work with to provide basic financial information like cash-flow projections, balance sheets, and income statements. We’re now developing a financial capacity building program for some of these groups, which speaks to the question about how sustainable they will be after we leave. We give them the credit, but this isn’t necessarily always enough, so with very limited technical intervention, we can have a big impact by providing a bit of financial management training.
Q: Do you have staff in the field to monitor these projects and identify needs?
Foote: We have a producer-relations manager based in Guatemala. We have two full-time investment officers: one from Costa Rica and the other from Mexico. They’re based in the Cambridge office, but they and I travel all the time to the nine Latin American countries where we work. The real advantage of being based in Massachusetts is that we are close to the marketplace and can get to know the market and the importers. Over time we’re going to be nesting our loan officers in Central America. We also have a part-time investment officer based in Nairobi, Kenya. In addition to having two traveling staff members and our Guatemala representative, we gather an enormous amount of information in a cost-effective way by having very strong relationships with the importers, certification programs, and technical assistance providers in the field. The collaborative efforts of these folks have provided us with information so that we have a 98% repayment rate over the past four years. We’ve financed over 100 loans for more than $14 million in nine countries across six products and sectors. Much of this success has to do with the inherent nature of collaboration that underpins our “green” lending model.