Capital Markets Raise Money To Fuel Coffee’s Future

Starbucks has issued the first United States corporate sustainability bond which can create a yield for farmers and financiers.

Global Coffee Gains

Coffee shop chains grow 10 percent annually.

The Specialty Coffee Association of America found the market size of coffee reached $8.96 billion in 2003 up from $7.53 billion in 1999.

The International Coffee Organization expects the demand for coffee will increase by 25 percent globally within five years.

The chart below is from the International Coffee Organization Blog:

Coffee is seeing an increase in countries that have been traditionally more fond of tea.

China saw a double-digit increase throughout the past decade.

Companies are reported to be bullish going into the future.

Starbucks said at the investor meeting in March that they are opening one new store daily in China.

2,000 already exist within China.

Starbucks also opened it's the first store in its 71st country, South Africa.

The desire for coffee is not expected to slow.

What does that mean for the market?

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Supply and Demand

With the love for coffee consistently increasing, it makes the market seem desirable, but there appears to be a hiccup.

Coffee supplies are shrinking as the request continues to rise.

Coffee plants are considered perennial crops.

Perennial plants mean they are alive year round and consistently harvest.

The production level of coffee plants begins to decrease after roughly 15 years.

Inactive investment coupled with aging plants creates inadequate agricultural practices.

All these situations lead to pests and diseases which speeds up the process of low productivity.

Low productivity creates low income.

The low-income in-turn creates situations where farmers are incapable of investing in their land.

An example of poor agricultural practices occurred in Latin America.

Coffee leaf rust, a fungus, became an epidemic.

It spread through rural economies and farms ranging from Peru to southern Mexico.

This outbreak along with severe weather becoming more frequent, further hindered the production of coffee.

Future availability became the center question.

Starbucks Looks to Capital Markets

At the other spectrum of the supply chain, the need for resistance is being noticed.

Starbucks, Keurig Green Mountain, and Nespresso along with other major coffee companies are beginning to invest money to keep the industry alive.

Starbucks started to look to capital markets to increase finances.

On May 23rd, the company issued a bond of  $500 million.

The bond is the first of its kind.

The money raised will go directly towards helping coffee farmers fight against diseases such as rust leaf and pests.

The ten-year senior notes hold an interest rate of 2.45%. 

U.S. Securities and Exchange Commission filings show all net proceeds will go directly towards sustainability programs.

These programs help coffee supply chain management.

Starbuck's chief financial officer, Scott Maw, released a statement noting sustainable sourcing is an integral part of the company.

He mentioned that this included their strategy and finances.

Maw stated Starbucks will finance initiatives to enhance their impact within their supply chain including social and environmental.

Starbucks plans for the proceeds to go to third – party suppliers who follow their ethical sourcing verification program as well as their support centers for farmers.

Farmers to Receive Funds

Global Farmer Fund, worth $50 million, will also be supported through the bond.

Global Farmer Fund facilitates financial access for coffee growers.

Starbucks invests in farmer loans to strengthen businesses and manage risk for cooperatives.

They invested $20 million as of 2015.

Rural businesses and cooperative farmer receive said loans in the global market.

They then become main economic points within their local communities.

Smallholder farmers are then capable of selling their coffee on the global market.

They sell the product for premium prices.

The farmer is the operator and owner of her coffee farm which is a small business.

All entrepreneurs, including said farmer, need reliable finance year long to maintain the farm.

Rural businesses are a key factor here.

These companies become central gathering points for smallholder farmers.

Monitoring, making the disbursement and collection of small credits are more easily accomplished and cost-effective for the rural borrower.

It is important to invest in farmer cooperatives and rural SMEs to create a stronger agricultural supply chain.

Even though they are important catalysts, they are often overlooked.

Bank Loans

Executive vice president for global coffee of Starbucks stated in an interview with Bloomberg that local banks would be unlikely to take the necessary risk for these loans.

Often the above-stated business is deemed too risky, small, or remote for the commercial bank to fund.

The Initiative for Smallholder Finance showed sub-Saharan Africa, South and Southeast Asia and Latin America smallholder farmers are provided around $50 billion annually.

That does little to put a dent in the estimated $200 billion needed annually.

Meanwhile, programs for crop insurance and sustainable access to credit is available to farmers who reside in well-developed agricultural markets.

Farming is becoming a riskier business as time goes on.

Smallholder farmers must make ends meet on their own.

They carry the majority of the risks within the market.

What the Future Holds

Investment is crucial to keep the industry not just growing, but up to par with the ever growing demand.

High-quality coffee relies on the rural farmers across the global.

They depend on these investments for resources that protect and further develop their coffee plants.

Steps and supplies must be funded to help fend off pests and diseases.

New plants are needed to keep productivity levels up.

Coffee farming communities in remote areas of the world depend on the capital Wall Street makes.

Starbucks is reaching out in a new way as an attempt to create shared value.

This effort will run among all the coffee supply chain.

The first of its kind sustainability bond is hoped to become a staple in the coffee market.

It is a way to increase benefits for millions of coffee farmers as well as the investors.

This comes at a crucial time when the economy and climate are working against the coffee farmers of the world.