Dutch entrepreneurial development bank FMO and Rabobank have invested €10mn each in the world’s biggest public-private impact fund for smallholder farmers in emerging markets.
The €100mn IDH Farmfit Fund aims to break the cycle of rural poverty by unlocking investment in smallholder farmers that are often deemed too risky.
The blended finance fund is facilitated and managed by the Sustainable Trade Initiative (IDH), a not-for-profit organisation based in Utrecht, Netherlands, and is supported by a unique group of partners.
These include major value chain companies such as consumer goods giants Unilever and Mondelez, and coffee company Jacobs DE, commercial banks, development banks, government bodies and development agencies from the US, UK, Denmark and the Netherlands.
“It is a good strategic fit with FMO’s impact objectives in the agricultural sector,” Bram Thuysbaert, portfolio officer agri, food and water Africa at FMO, told Impact Investor in an interview.
“One of our goals is social inclusion, and in the agriculture sector this translates into supporting smallholder farmers,” said Thuysbaert. “There is a big demand for financing in this segment, which is often insufficiently dealt with by the local banks and microfinance institutions.”
Although some 270 million smallholder farmers in Africa, Asia and Latin America produce over 70-80% of the world’s food supply, they are often poor. This is due to small-sized farms, low productivity and a lack of expertise.
Access to affordable long-term finance would allow small-scale producers of crops including tea, coffee, cotton and tea to invest in their farms, and boost productivity.
Investing in agriculture in developing countries is often seen as high risk because of unpredictable weather patterns and low yields.
“In the joint financing of a small-scale farming business, by the fund and a financial institution (such as a bank), the fund assumes the greatest risk, for example, by covering any initial losses,” IDH Farmfit Fund said in a press release.
The fund “builds a bridge between small-scale farms in Africa and our financial services,” said Marianne Schoemaker, chief executive officer of Rabo Partnerships at Rabobank. “For many banks, direct funding of small-scale farming in developing countries is a bridge too far. The chance of loans not being repaid is just too big.”
Blended finance fund
In addition, the fund offers investors a $250mn guarantee facility, made available by the US Development Finance Corporation, which covers up to half of the ‘second loss’ risk, it said.
The fund’s financial structure was “decisive” in FMO’s decision to invest, said Thuysbaert. “It offers protection for senior investors like FMO.” When asked what return FMO was aiming for, Thuysbaert said: “It is difficult, because it is of course a very high risk investment, but we do hope that the fund will be profitable.”
“What I personally like is that the private sector goes hand in hand with the public sector. It really is a partnership from different sides of society to achieve impact,” said Anton Timpers, manager agri, food and water at FMO.
Although IDH Farmfit Fund is specifically aimed at smallholder farmers, Timpers said he is seeing “more and more partnerships of this kind developing on the environmental side,” for example focusing on forestry and commodities that are cultivated without deforestation.
“You see many partnerships developing between the government, the NGOs and the commercial companies that are ultimately responsible for buying these products, and therefore also often have the best connections with the producers of these products,” Timpers said.
One of the main reasons FMO invested in IDH Farmfit is its roster of “very strong” partners, said Thuysbaert. “This starts with IDH itself, whom we have known for a very long time. They have a huge amount of experience in smallholder farmer value chains. And they have a vast network in developing countries.”
Earlier this year, FMO invested $25mn in The &Green Fund, a blended-finance fund that was also a brainchild of IDH. It invests in projects of large commercial producers of the world’s biggest agricultural commodities such as soy, palm oil, cacao, coffee, and some wood to make their supply chains deforestation-free.
The variety of investors involved in IDH Farmfit Fund was another key reason for FMO to get involved. “They all come with their own networks and expertise,” said Thuysbaert.
“There is Mondelez in the cocoa sector, DE in the coffee sector, while Unilever is active in a number of value chains, including palm oil.”
Although Africa “has enormous agricultural potential,” many countries on the continent increasingly import food, said Roel Messie, chief executive officer of the IDH Farmfit Fund, in a joint press release. “Local farmers do not have the means to develop this sustainably.” And that is what the FarmFit Fund is aiming for.
Annother new smallholder fund
The Acumen Resilient Agriculture Fund (ARAF) seeks to build an ecosystem of agribusinesses that improve farmers’ livelihoods and build their resilience to climate change, it says in a press release.
Sponsored by Acumen and anchored by Green Climate Fund (GCF), the fund is supported by the Dutch entrepreneurial development bank (FMO), the Soros Economic Development Fund, the French development institution PROPARCO (through FISEA+, the AFD Fund advised by PROPARCO), the Children’s Investment Fund Foundation, IKEA Foundation, Global Social Impact, and other investors and funders. The fund is managed by Acumen Capital Partners, a wholly owned subsidiary of Acumen.