A Q&A with Pablo Pacheco, CIFOR’s Team Leader for Investments, Value Chains and Finance

A lot of private sector investment today – in spite of all the capital – doesn’t seem to always reach smallholders. Any observations?

That depends whose sector we’re looking at. I think there’s a large amount of smallholders that don’t have access to capital. But there’s a small group of smallholders who embrace more commodity crops and they are more connected to companies and global markets who have some access to capital because that capital comes through the agreements that these smallholders have with companies.

And if they have access to some sources of funding or finance, often they have access to informal markets. Because in many cases it is the intermediaries who provide the capital to smallholders. But the fact is that the capital that’s coming from informal sources tends to be more flexible for smallholders. It works for smallholders in some contexts but it’s much more expensive. The money is less reliable. So they have access to capital, but it’s much more expensive.

I think the problem of smallholder finance has been how to make this access to capital more affordable.

Do you think over the years there has been improvement? In terms of private sector investment, has it managed to benefit smallholders?

That depends. I think there’s a portion of the private sector that has been able to build links with smallholders through outgrowing schemes. And I think you have companies that have been able to provide capital to smallholders, and not just capital but also technical assistance and to build the services into the links that they have for smallholders.

They have to ensure that they have enough quality of supply and stable supply coming from these outgrower smallholders. But the fact is that now companies are making commitments to source supply that is clean, that is deforestation free. And I think that’s one of the main issues that they’re struggling with is how to build these clean sources of supply that involve smallholders.

But that is going to imply for them to build some kind of agreements with these groups of smallholders that are supplying these companies. So that’s the big issue. Because the majority of smallholders are independent smallholders, like in the oil palm sector in Indonesia.

And who do you think should pay for the costs of smallholders transitioning to these more sustainable means of production?

I think what is needed is business models that are able to share those costs – share the cost, share the risks and share the benefits. Because in most of the cases you have business models that then transfer the costs to the producers that are upstream in the supply chains. So they are the ones who pay for the cost. In an ideal situation, the companies also should be able – if they are targeting deforestation free in markets – they should be able if there is some reward to transfer the rewards upstream in the value chains.

So the smallholders can also benefit or receive some compensation on the costs that they are investing in improving the production systems. But that is still an open question, and we don’t know if that’s going to work in that way.

What can the financial sector and banks do today to help the livelihoods of smallholders?

They are in a difficult position. Because even though they may have the willingness and the capital available for investing with smallholders, the transaction costs are very high for them to provide this capital to smallholders. So they really need these microfinance institutions, cooperatives, these aggregators. Channeling the money through aggregators could be a way to reduce the transaction costs of that lending.