Monday, February 19, 2024

115. Analysis of Rwanda Cherry Price 2024 and the "credit vs cash" issue

Feb. 19, 2024

NAEB's 2024 farmgate price was announced last week at 480 rwf/kg cherry which seems high compared to the 410 rwf/kg cherry of last year. However, when the two are adjusted for the decrease in the value of the Rwandan franc vs the dollar they are practically equal. The strain of inflation is real in its own way, though, of course.

The real, undeniable upward price pressure for Rwanda this year will come from increased competition due to the removal of the zoning policy. This is a huge relief for me and for farmers. NAEB has finally ended its experiment with this unsustainable law which was jeapordizing Rwanda's long-term future as a supplier of top-quality specialty coffee. The zoning policy, simply put, forced farmers to sell to only one washing station in the name of traceability.  

Now all washing stations will have to compete for cherry, bringing market forces to the markets in which farmers sell their cherry, which is a good thing to the extent that markets work in this agricultural sector. For those that may not know, washing stations in Rwanda have three basic ownership structures. There is private and coooperative owned, cooperative owned meaning the farmers themsevles operate it and keep the profits. Among the privates, there are Rwandan private owners and multinational private owners.

In the short term, removing the zoning policy may seem to be a disadvantage for cooperatives versus their multinationals competitors with lots of cash reserves. However, this disadvantage existed before and during the zoning policy. As recent as the 2022 season, we saw site collectors being disloyal to their employer (a cooperative board), because the coop offered them credit while those owned by multinational corporations (MNCs) offered cash. The MNCs offered the same "price", but cash instead of an IOU to be paid in three months after the season ends. In other words, the zoning policy did not correct this market imperfection.

In the forseeable future, we can see solutions to the credit vs. cash issue, which seem more likely to happen if there is no zoning policy restricting farmer choice. For one, cooperatives might do a better job communicating (or "advertising") the advantages of cooperatives for farmers and the community vs. the 'cold cash' that an MNC buyer offers. Cooperatives are there year-round, in the community, offering services like school fee loans, help for the elderly, jobs for the young, women's groups for solidarity and training, and of course, the second-payment that cooperatives try to pay their members. That second payment comes because the coop is farmer-owned and operated. They can emphasize what a difference that is compared to what an owner who lives in Switzerland is doing with the profits on a coffee sale.

A second, clearly helpful solution would be for the government of Rwanda to advocate even more for appropriate agricultural financing for cooperative and Rwandan-owned post-harvest processing organizations. Access to pre-harvest capital is an imperfect market, or said differently, an uneven playing field. MNCs have access to low-cost capital with which to buy cherry and cooperatives have high interest costs (I've heard as high as 24% when the rest of the market was at 16%) and sometimes are denied any access at all. There are high risks, of course. There are good reasons for banks to charge high interest rates and refuse to lend. But there are also innovations in financing that should be accessed on behalf of cooperatives. For example, could financing for several cooperatives in one region be bundled and offered to a lender with average risk over a longer period than what might be offered to a single entity?

On the issue of traceability, we hope that the governmenet of Rwanda continues its good efforts to enhance traceability of Rwanda's specialty coffee. Instead of regulating farmers, it would seem more feasible from the government's perspective, to regulate operators of large transport trucks. Rwanda is a small country with a limited number of paved roads. Is it possible to post enough police checks in each coffee region during peak season to make sure no one is transporting tonnes of southwestern Rusizi cherry to Rwanda's less productive eastern province? I don't know. I hope the experts in NAEB are considering their options to be sure confidence is maintained in the traceability of Rwandan coffee.

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