After almost two months in Central America, our strategy for the industry is finally coming together. Our first objective was to define the challenges. To name a few, the industry lacks qualified labor, affordable inputs, farm security, skilled producers, coordination, and capital.

Recent estimates suggest that the average age of a coffee tree in El Salvador is 34 years old, more than twice the optimal age.

At first glance, the strategy is very clear; producers need to renovate their farms (ideally with high-yielding, high quality, leaf rust-resistant varieties) to lower the average age of the plants. Younger plants would lead to higher yields, more valuable farms, and eventually, more profits for producers. As coffee farms are often used as collateral for loans, higher valuations of farmland would help banks increase the amount banks lend to the sector.

With the end-goal defined, the next question that needs answering is, “How can the renovation of farms be facilitated?” Unfortunately, no industry-wide changes can occur without investment. Renovating farms requires new plants, fertilizers, fungicides, and labor – all of which require money.

This brings us to the fundamental issue holding the sector back: producers require investment, but don’t have the qualifications to access loans. This is a difficult situation for an industry, and any possible outcome has its own drawbacks. Allowing a consolidation of the industry to occur would have dire social consequences. Alternatively, forgiving existing debt through a government initiative would likely encourage moral hazard, and would be detrimental to the long-run sustainability of the sector.

I have arrived at the conclusion that a series of bottom-up initiatives can help alleviate some of the pain the industry is facing in the short-term, but that a long-term financing strategy is critical to the sector’s future. Encouraging capital to enter a high-risk market with a history of default and high debt ratios, however, will likely require the support of a development bank or government.

The Volunteer

Scott Argyres

Associate, FBG-Fund Statistics

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