Prefinancing

One of the most important, and most ignored, pieces of Fair Trade is prefinancing the harvest. In the months leading up to harvest, small-scale coffee farmers' financial reserves from last harvest often fall short, impinging their ability to see their crops through or feed their families. In Latin America, for example, coops usually distribute their last payments to the farmers in July, and that distribution has to pay for labor, rents, tools, processing - not to mention school, food for the table, health care and cooking oil. When farmers run out of money before the early crop payments in September or so, they have no choice but to turn to local banks or money lenders that often charge exorbitant interest rates, and the loans are secured by the coming harvest. So even for farmers receiving Fair Trade prices, much of that money may have to go to pay the banks or the coyotes. Many farmers have told us that prefinancing is often more important than the price, since the money is so desperately needed for living.

Fair Trade addresses this problem through what is called prefinancing, whereby purchasers pay in advance a percentage of the price (up to 60%) to the grower to help them bridge the financial gap until harvest. Unfortunately, hardly any Fair Trade licensees know about prefinancing or actually do it. Through our two importers, Cooperative Coffees and Royal Coffee, we prefinance about sixty percent of our purchases.

Sometimes prefinancing comes right out of our pocket (I had to take two home equity loans out to prefinance Nicaragua and Papua-New Guinea in the last two years!). But usually, it goes through one of the few organizations out there set up to do it. The best of them are Willie Foote's EcoLogic Finance and Green Development Fund. These organizations loan the money to the farmers, secured by our payment for the coffee later. This is a growing international movement in which we are proud to be early participants.