Agricultural Value Chain (07/ 2014) International Advisory Services. (Sustainable Rural Development Competence Center)

Transcription

1 Agricultural Value Chain (07/ 2014) International Advisory Services (Sustainable Rural Development Competence Center)

2 Agricultural Finance- Concepts High operational costs and risks reduce incentives for financial institutions to serve the agricultural sector. As a consequence a considerable part of small and medium farmers remain without access to finance. However, the increasing demand for agricultural commodities as well as rising competition in the urban areas has lead financial institutions to look this sector as a potential area of expansion. 2

3 Agricultural Value Chain (AVC) Modern value chains can help to reduce costs and risks of agriculture lending and to increase access to finance for small farmers. AVC Finance is considered a promising approach to agrilending but is still being more used by other actors rather than financial institutions (FIs). FIs willing to go deeper into agricultural and livestock finance are starting to look to the links of the chain to develop their financing schemes. 3

4 Agricultural Value Chain Finance- definition AVCF refers to the flow of funds to and among the varios links within a value chain. It touches any or all of the financial and support services and products flowing to and/or through a value chain to address their needs and constraints: access to finance, secure sales, procure of products, reduce risk and/or improve efficiency. AVCF helps to consolidate linkages an to share risks among participants of the chain. (FAO, 2010) 4

5 Agricultural Value Chain - Actors Financial services Banks MF Banks Non-bank Fis Cooperatives/ Associations Private Investors LocalNGO s/ Community organisations Value chain Suppliers Exporters/ Wholesalers Processors LocalTraders & processors Producer groups Farmers Input & Equip. suppliers Supporting Services Certification agencies Technical training Extension services Business training Specialized services(wh) 5

6 Agricultural Value Chain key factors To know and understand the agricultural business by partnering with stakeholders directly involved in the VC To have a systemic approach, looking at all actors of the chain. Inputs $ Farmer Save for loans, outgrower schemes, emerging farmer programs Coops Input financing, raw material collection Processors Working capital, WHR finance, trade & $ financing, WHR $ commodity $ financing, coop finance capacity building Traders $ $ $ Working Capital & Asset Finance Financial Institution 6

7 Example: AVCF in Tajikistan Motivation for Establishing an AVCF Scheme Tajikistan is a small, open, landlocked economy with a narrow economic base dominated by the production of aluminium, cotton and electricity. Agriculture contributes with 24% of GDP, 66% of employment and 26% of exports. Almost 2/3 of the population depends on agriculture for their livelihoods. Cotton makes a critical contribution to both the agricultural sector and the national economy: 60% of agricultural output, supporting 75% of the rural population, and using 45% of irrigated arable land. Growth in the cotton sub-sector was much lower after civil war ( ) than in other crops and livestock, mainly due to low productivity, low on-farm profitability and excessive debt. 7

8 Tajik Agricultural Finance Framework (TAFF) TAFF I: launched in 11/2007 by EBRD to support the restructuring and diversification of Tajik agriculture, including the cotton sector Rationale: Many farmers work with < 5 ha and remain economically vulnerable due to: Lack of resources (including finance) Lack of know-how Poor access to processors and markets Why Value Chain Finance (VCF) in Tajikistan? 8

9 TAFF II: focused on enhancing the competitiveness of the agricultural sector and the capacity of the private sector as a whole (EU financed 02/ /2013) based in three pillars. Pillar I Agricultural lending Pillar II Value Chain Development Pillar III Diversification and promotion of agricultural products Rationale: The agricultural sector requires specific financial products going beyond individual loans to small-scale farmers to further increase their access to finance 9

10 TAFF Value Chain Finance PFIs Facilitate access to seasonal loans TA Providers Supporting the development of a service oriented and selfsustainable TA structure (TAG) Input Suppliers Integrate input suppliers, mechanization contractors and buyers into the concept Traders Transparent and fair off-take contracts for cotton PFIs provide loans according to production cycle and by applying individual client assessment (financial, ALES, character) Agro business processor/international commodity trader working under procurement contracts with farms provides the financing PFI with its corporate guarantee or with the off-take contract Farmer agrees to pay Technical Assistance Groups (TAGs launched in 2011) to substantially increase yields and adhere to Better Cotton Initiative standards Production is sold to the agro business processor/international trader under fair conditions with the farmer receiving his money timely and in cash 10

11 Benefits from VCF in TAFF Benefits of strengthening the ties between the linkages of the VC are manifold: Farmers benefit from: improved production, reliable off-takers and favorably priced finance Off-takers build a stronger and more loyal client base Partner Financial Institutions (PFIs) received from EBRD Funds for onlending and Technical Assistance (TA) PFIs establish a stronger and more reliable client base Lower costs and lower risks for PFIs, as off-takers take over client screening and work only with reliable clients Off-take contracts and corporate guarantees can serve as a collateral for the PFIs when lending to the farmers This together with a thorough client assessment leads to high quality portfolio (PAR > 30 days + restructured loans: 1,12% of the total portfolio) 11

12 TAFF Value Chain Finance Results Farmer Participation Finance Technical Assistance Off-takers Capacity Building farms with a total of ha of cotton country wide Partner Financial Institutions (PFIs), 4 banks and 4 MFIs, disbursed funds >70 million USD to >10,000 borrowers Repayments of loans occurred faster and at higher rates compared to non-vcf clients 22 TAGs established and providing individual services. Yields 25% higher than the average, Better Cotton Initiative (BCI) principles included in training curriculum About 60% of farmers participating in the VCF scheme delivered their cotton to the off-taker compared to only 40% of non VCF participants TAGs increased the access of farmers to inputs, Creation of a TAG cooperative (Sarob) and informal cooperatives of machinery (TAMS) based on the French experience 12

13 Example: AVCF in Turkey Motivation for Establishing a VCF Scheme Agricultural production is neither controlled nor coordinated. There is no link between the agricultural industry and the producers which results in under or over supply of crops. Government subsidy schemes do not help either. Agriculture sector in Turkey is still under-financed (share of agriculture in GDP is 7.9% while the share of agricultural loans among total loans is only 3.5%). Lack of Collateral limits access to finance for farmers. In the absence of banks, processing companies (financed by banks) started to act as a lender which increased the financing costs for agricultural producers. Increased competition in SME sector directed Turkish commercial banks to the agriculture sector. Innovative products / schemes needed to be developed to be able to compete with the monopoly of state-owned Ziraat Bank. 13

14 AVCF Scheme in Bafra, Samsun VEGETABLE PRODUCERS UNION CONTRACT RED PEPPER PRODUCERS Price, quality conditions, input support (fertilizer, chemicals, seed), payment schedule & conditions, technical support BAFIRA: PROCESSING COMPANY BANK INSURANCE FR TA PROVIDER 14

15 AVCF Scheme in Cajamarca, Peru Cooperation agreement Agroindustry Transfer loan repayment Loan Contract Transfer rest amount to farmers account Sell production Disburses microloans for agriculture & Livestock

16 Photo by Shaan Hurley VCF for other financial services Solomon Islands Exporters Commercial plantage Large producers Bean traders Dry bean traders Wet bean traders Growers Processors Cocoa Growers Small Holders processors Dry bean traders Exporter agents Small Holders Communal groups Coops. Assotiations Churches&schools Commercial plantations

17 Photo by Shaan Hurley Financial inclusion Pays for the cocoa International Cocoa Dealers/ Brokers/ Grinders Delivers cocoa beans (1) Pays for the cocoa Exporters (1) G1 Banks G2 Gn BT GP Delivers cocoa beans Other clients Withdrawal & Save G1 G2 G3 G4 Gn BT Bean Traders & Growers GP

18 Photo by Shaan Hurley Outgrower Schemes Loan NUCLEUS FARM BANK Products Inputs, Technology Loan PRODUCER (Outgrower) PRODUCER (Outgrower) PRODUCER (Outgrower) 18

19 Warehouse Receipts PRODUCER Repays at maturity when he sell the commodities Loan BANK Has access to the commodity and sell it in case of loan default Warehouse 19

20 Photo by Shaan Hurley Agricultural Insurance IC BANK Loan PRODUCERS Increasingly common, but still at an early stage of development Mostly index based, but only limited to available historical data Diversification as an important factor for those within a chain, as well as for their lenders 20

21 Agricultural Credit Card FARMERS BANK Bank pays to the suppliers Allows agricultural producers to purchase any agricultural inputs: gasoline, fertilizer, pesticides, seed, seedling etc. Offers an interest-free period and maturity is adjusted to the harvesting Usually works in a closed circuit (the card s working pricinciple is usually defined on the bank s POS and not on the card itself). Depending on the banks risk appetite, cash withdrawal could be possible (i.e. for paying wages to laborers) 21

22 Conclusion There is no one solution Solutions need to be analized and localized based on commodities, types of farms, types of linkages in the value chain, legal environment Bundling credit into a broader array of financial and non-financial services for farmers has a greater impact Strategic alliances for technical assistance to improve farmers production and quality is important For financial institutions value chain finance can establish new markets, reduce risk and lower transaction costs 22

23 Lessons learned Test the concept in a pilot with a limited number of producers during the season and to check whether or not the parties respect their contractual obligations. Upon successful implementation, numbers increase automatically in the upcoming seasons. Ensure a especialized mechanism to estimate yield and expenses of farmers. Legal procedures take quite time at the first instance. On time and quick disbursement do not miss the agricultural season. To be objective and try to align needs and wishes of all parties involved. Check the possibility of including an agricultural cooperative or a union into the AVCF scheme to decrease operational costs. Try to convince producers to sign a contract sufficient to cover their expenses. Try to get a processing company to act as a guarantor. Monitor the scheme closely. 23

24 Vielen Dank für Ihre Aufmerksamkeit! Norah Becerra Frankfurt School of Finance & Management Sonnemannstraße Frankfurt am Main 24