Unlocking Finance in Coffee Value Chains of Myanmar
This piece was written by Timothy D. May of Winrock International.
For smallholder farmers in Myanmar’s remote highland communities, gaining access to many basic necessities can be a struggle, whether it’s medicine, mobile phone networks or new machinery for growing food more efficiently and profitably. Historically, accessing loans or pre-season working capital was no different. Most smallholders have little-to-no documented credit or sales history, lack land titles or other collateral, and can’t wrangle the kind of pre-sales contracts or other commitments that might convince bankers to do business with them.
But gradually, the scales are tipping thanks to the remarkable success of motivated smallholder coffee farming communities in Myanmar’s Arabica production epicenter, supported with agronomic advice, market connections and new finance options facilitated by USAID’s Value Chains for Rural Development project, part of the Feed the Future global food security initiative.
Pa’O and Danu farmers in southern Shan — the geographic heart of Myanmar — grow a wide range of food including grains, vegetables and fruit like mangos and oranges. Women there traditionally cultivated coffee on small plots around their homes, usually without investing much time or care, selling it for a few hundred kyats per kilo (around 30-40 cents per pound) to local traders when in need of cash for the household. Beginning in 2015, after attending intensive trainings delivered by a community-based extension organization aimed at improving quality (and attracting better-paying customers) by harvesting only ripe coffee cherries, careful sorting, sun-drying coffee on raised tables and monitoring moisture, farmers discovered they had a surprisingly profitable crop right in their own backyards.
As coffee communities got organized, hatched procurement plans and learned to operate collaboratively as aspiring small and medium-sized enterprises (SMEs), global specialty coffee cultivation and trade experts from USAID’s project provided technical advice and introductions to importers able to offer premiums for higher-grade coffee. USAID and private sector partners including the Myanmar Coffee Association (MCA) worked together to organize a (now annual) nationwide coffee “cupping” competition to create media buzz and buyer interest. The competitions, combined with hard work by coffee farmers and an increasingly engaged domestic specialty coffee sector, resulted in rising export sales of Myanmar Arabica (from about 100 tons in 2016 to more than 250 tons in 2017), helping smallholders net prices up to three times higher than previously.
Over the past two seasons, roasters and importers from countries including the U.S., Switzerland, Australia, Japan, South Korea, United Arab Emirates, Singapore, England, Canada, and even Russia and Iceland have entered orders or queued up for scheduled “buyers’ tours” and a taste of Myanmar’s coffee. As a result, local growers are facing new challenges, including finding pre-season working capital or loans to run their processing stations, maintain quality control and keep enough cash on hand to purchase cherries as they are harvested.
At the onset of the project’s work with coffee farmers, national banks were hesitant to engage with farmers who lack collateral working on mountainside micro-plantations of 0.5 to four acres apiece. But after invitations to meet the increasingly better structured producer groups, along with a slew of reports about Myanmar’s valuable specialty coffee in national, international, trade and social media, a few intrepid loan agents made the trip to Shan to check things out. In the meantime, a half-dozen domestic coffee companies got involved, noticing that serious and well-connected buyers from the U.S., Europe, Australia and other countries/regions were moving quickly to lock up agreements with the communities after buyers’ tours and cupping competitions. The specialty coffee landscape in Myanmar was changing fast.
In the absence of firm, early commitments from national banks to address the financing gap and foster local market linkages, USAID and community partners arranged the first Smallholder Coffee Financing and Business-to-Business events in Ywangan Township, southern Shan. Forward-thinking specialty coffee entrepreneurs like Wai Phone and his brother Zaw Phone, owners of the successful Coffee Circles roasting, supply and café businesses in Yangon, and Javier Phua, a young Singaporean owner of a pair of specialty cafes in the city, were eager to meet directly with motivated coffee smallholders in Shan.
When Mr. Phua met growers from Ga Naing Yar Village — whose coffee earned the top smallholder score in the 2017 national cupping competition — he knew he had discovered a gem. But Phua wanted to do more than just buy local coffee to roast and serve in his chain of “Easy” cafes. So, before the 2018 coffee harvest season, he offered a pre-financing contract of a little more than four million kyats – about $3,100 – to help the community get a jump on the upcoming season and ensure they could begin to tackle their production targets of a little more than three metric tons of “green bean,” the term used to describe de-hulled coffee in its raw, unroasted state.
“Nothing beats coffee actors coming together to support other actors in the supply chain to promote and strengthen links for Myanmar as a coffee origin — something we can all be proud of and share to the world,” Phua said, explaining why he wanted to help. “It has been our intention to transit from a mere transactional (business) to a relationship-driven one, where inter-dependency is that bedrock [for us] to grow together.”
A dozen or so other local specialty coffee businesses have provided similar support to producers over the past two years, matching up with communities to help them meet procurement targets and tide them over until payments from export buyers were received. The advances were paid back on time last year, helping the communities pay drying station staff, cover the costs of equipment and material purchases, finance modest expansion plans for this year and, perhaps most importantly, creating a credit history where none previously existed.
These microfinance transactions also helped prime the pump for national banks to get involved. In late 2017, after traveling to Shan for a scoping trip facilitated by the Value Chains project, Cooperative Bank (known locally as “CB Bank”) approved a no-collateral loan of about $14,000 to a local, woman-owned specialty coffee processing business called Amayar Co. to help finance expansion and improvements at the company’s new coffee mill in Ywangan Township. The loan marked CB’s first foray into financing a smallholder-oriented agri-business.
In another deal that augurs well for the future of Myanmar smallholder financing, a global social lender called Rabobank Foundation, based in The Netherlands, guaranteed 80 percent of a $645,000 loan issued in January 2018 by Yoma Bank, to Mandalay Coffee Group (MCG), which will use the money to support 13 smallholder coffee producing communities in Shan, as well as Amayar. MCG is a partner of the USAID project and a lead processing firm that purchases from smallholders and handles transport and export arrangements for lots purchased by overseas buyers. Rabo agreed to guarantee the loan after face-to-face meetings with smallholders and processors arranged by the USAID project. Yoma signed up because most of the risk was covered under the guarantee of the international bank, with its vastly larger financial reserves to draw upon.
The Rabo/Yoma loan marks a tipping point for Myanmar’s specialty coffee industry, and U Sai Wan Maing, owner of the award-winning Greenland Coffee Estate in Pyin Oo Lwin and a board member of MCG and MCA, said the government of Myanmar, private financial institutions and producers will have to work together to foster continued growth and ensure farmers have access to the capital needed to grow their businesses.
“All sectors should contribute their effort,” Sai Wan said. “The key… to create simple procedures within the reach of small farmers and SMEs (to receive loans) is the government’s banking policy. In a few years to come, we think that private sector loans… will need to play a major role. If producers — especially smallholder farmers — aren't able to access pre-season financing they will sell their cherry to the (local) brokers or traders, missing the opportunity to produce better-quality coffee,” he said.
Standing in her coffee farm in Myaing Village, Soe Thinzar Aung, a member of the new Ywangan Specialty Coffee Producers Group, said she couldn’t agree more with that assessment. Pre-season financing of the sort provided by Yoma to MCG “… helps us to produce specialty coffee without any delay,” she said.
That’s good news for U.S. coffee drinkers. Established American roasters and importers like Blue Bottle Coffee of Oakland, CA, Atlas Coffee Importers of Seattle and Little City Coffee of Austin, TX all have entered orders again this year for more than 40 tons of specialty coffee from Shan’s smallholder communities.
“They’ve been waiting for this opportunity,” Craig Holt, of Atlas, said of Myanmar’s motivated smallholder coffee producers, adding that Myanmar “has a chance to be on par with the best producer nations in the world.”
The Value Chains project supports smallholder farmers through people-to-people engagement in commercial value chains to increase agricultural productivity. Implemented by Winrock International, the project uses a facilitative, market systems approach to increase farmer incomes and contribute to economic growth.