Agricultural Value Chain Financing Guide for Ghanaian Credit Unions

Transcription

1 Date January 20, 2013 Agricultural Value Chain Financing Guide for Ghanaian Credit Unions By Graham Owen Senior Value Chain Finance Consultant Irish League of Credit Unions Foundation West African Credit Union Programme against Poverty (WACUPP)

2 Acronyms Agricultural Value Chain Agricultural Value Chain Finance Credit Unions Supply Chain Management AVC AFCF CUs SCM

3 Table of Contents I. Introduction II. Characteristics of emerging smallholder farmers III. Relevance of Agricultural Value Chain Finance to Ghanaian Credit Unions IV. Comparative advantage of Credit Unions V. Key principles in doing agricultural value chain finance. a. Durable Strategic Partnerships b. Timing of credit and input supply c. Quality of inputs and cultural technics d. Role of the agricultural value chain credit officer VI. Smallholder partnership models. VII. Guidelines in analyzing agricultural value chains VIII. Guidelines in developing products for value chains a. Introduction b. How to make investment decisions? c. Key Steps before making the investment-the warehouse example VIII. Some different agricultural value chain products a. Warehouse receipt financing b. 3rd party warehousing product c. Purchase hire product d. Leasing product IX. Guidelines for credit underwriting, risk and portfolio management

4 X. Systems development and risk management a. Policies, procedures and MIS system b. Monitoring Agricultural Value Chain Loans XI. Steps to be taken by CUA to develop an AVCF training program a. Introduction b. AVCF training strategy development c. Steps to develop CUA s AVCF strategy d. Training Materials and Resources

5 I. Introduction Historically, smallholder farmers, and projects in agriculture, have focused on production rather than markets. This approach resulted in farmers getting lower prices for their production due to their lack of knowledge of and access to markets and a lack of sustainable linkages between farmers and other agricultural value chain (AVC) members. This lead to an integrated approach called Supply Chain Management (SCM) with a particular focus on market relationships/linkages. SCM is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. SCM spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption (supply chain). From the credit union members & league perspective, coordination and collaboration with channel partners which can be suppliers, intermediaries, third-party service providers, and customers is of critical importance. In the case of Ghana s eastern corridor, there are a number of agricultural value chains (AVC s) including soya, rice, corn, peppers, and yams and small animal husbandry. In these AVC s there are producers primarily smallholder farmers, service providers (inputs suppliers, tractor plowing services, financial institutions such as credit unions (CUs), transporters, retailers market women, aggregators, wholesalers and processors). Credit unions (CUs) and their associations & federations seek to finance different businesses in the AVCFs including smallholders, and other market participants (buyers, sellers processors and service providers.) There are a variety of different risks which need to be taken into account and address as much as possible by CUs and their associations. These risks include but are not limited to: i.) acts of nature (drought, flooding pests) ii.) focus on one crop lack of diversity over a region or area ii. government intervention, iii. Development projects and NGOs which to not apply best practices iv. weak capacity of smallholder groups v. communications lack of ownership Each value chain (VC) participant can benefit from knowledge sharing and improved access to technical knowhow 1, better access to inputs and services, better quality products, better prices 1 Smallholder farmers can learn about new inputs and how to apply then correctly and how the business of agriculture works.

6 for farmers, reduced transaction costs and risk for all participates; smallholders in particular. In the case of smallholder farmers, aggregation and strengthening of smallholder associations is of critical importance. This allows smallholder farmers and others, including financial institutions to reduce the costs of working with them and makes their production volumes more attractive to potential buyers. AVC capacity building for smallholder farmers is generally outside the abilities of financial institutions (FIs). For this reason, FIs, such as CUs, should seek out third parties, either private or public, to provide most of the technical and organizational training. II. Characteristics of emerging smallholder farmers There are several key points regarding VC s and smallholder farmers. They include: Having a marketable surplus. In order for farmers to participate in VCs and be financed by their CUs they must have a product surplus to offer in the market place and there must be a demand for the product. If the family is only producing for auto-consumption and do not sell in the open market they don t have money to reimburse loans for inputs or services. Treating agriculture as a business. While the size of smallholder farms may vary, by country, region and crop, smallholders, to succeed, in VC s must treat agriculture as a business. This means that i. they need to understand and apply some level of improved/modern farming practices and ii. be aware and comply with what the market demands in terms of product quality and type. In Ghana, poultry businesses prefer yellow corn and pay a premium for it. In the brewery business, Guinness requires a certain type of white sorghum. Treating agriculture as a business affects how smallholder farmers analyze business opportunities and make decisions including accessing loans. Gender Roles. Gender roles within African rural households are changing. However, there are some farming activities or crops which are often done by men and some that are done predominately by women. In Ghana s Eastern Corridor, yams are cultivated primarily by men. The product or revenues are used primarily for the family and may be controlled more by the husband than the wife. Since the yams are primarily for the family, this may mean that less is being sold or that the product being sold is used primarily for family needs and is not available to pay back a loan. Gardening in, many African countries is primarily done by women and often in groups and or associations. In

7 some households both the men and women may have their own fields for groundnuts, corn, etc. Gender roles and how men and women save is of critical importance in how CUs create credit and savings products and whom they target for different cultures and savings. Understanding who saves in the couple and how they save is of critical importance to CUs in product development. Aggregating and strengthening farmers groups, associations and cooperatives. In the case of smallholder farmers, aggregation and strengthening of smallholder associations is of critical importance. Regrouping farmers into associations or cooperatives potentially reduces costs for all service providers working with them including CUs. Aggregation reduces the costs of working with smallholders, and makes their production volumes more attractive to potential buyers. It allows CUs to use risk management tools such as purchase contracts and direct payments by purchaser to CUs. III. Relevance of agricultural value chain finance to Ghana s Credit Unions Why is the value chain concept important to CUs and their members? Sustainability. Most CUs in Africa have member CUs in rural areas. While there are some salaried members in these CUs the majority of potential members are in small business and agriculture. Most businesses in rural areas are linked to agricultural value chains, without a viable strategy and tools for dealing with AVC members it is very difficult for rural CUs to operate in a sustainable way. IV. Comparative Advantage of Credit Unions. African CUs and their associations often have a comparative advantage over other financial institutions in dealing with smallholder farmers. These include: Proximity to and relationship with members/clients. CUs particularly, in rural areas, are often closer to smallholder farmers than microfinance institutions and banks which tend to focus are larger towns and cities. CU national, local and regional networks. CUs and their associations can use their networks to enable partnerships and networking between urban and rural CUs and with CU members who may be operating in different value chains. For example, there may be CU members in Kumasi who are interested in buying production from the eastern corridor.

8 Lower cost structures, cost of funds and member owned. CUs and their associations generally have lower cost structures than MFIs and banks because they are member owned. This linked with CU member s ability to fix more attractive interest rates for loans and deposits is very attractive to rural value chain members and smallholders in particular. Risk Mitigation. Value chain techniques allow CUs to lower risks in finance agricultural value chains and identify strategic partnerships which are mutually beneficial to CUs and their members. V. Key principles in doing agricultural value chain finance a. Durable Strategic Partnerships. Durable strategic partnerships, preferably with the private sector, are critical to the success of smallholder VCF. Strategic partnerships are based upon the premise that each business partner in the strategic partnership benefits from the relationship. These strategic partnerships can include: those between CUs and with their association, member smallholders and their associations, service providers (input suppliers, research institutions, NGOs 2 working on strengthening and aggregating smallholder farmer s organizations), and purchasers. Strategic partnerships allow CUs to access other services often, for free or at a lower costs and to reduce their risk. Discounts, free delivery and training with an input supplier. CU (s) or a CUA of Ghana might obtain discounts for their members, free delivery, and even technical assistance/training on how to apply the products. Transparent and regular communications and fair methods for setting prices. Transparent and regular communications and applying fair methods for setting prices between smallholder farmers and buyers is critical in establishing a long-term relationship. Key areas of communication include but are not limited to setting prices and payment conditions. The Ghana Rubber Estates Limited (GREL) grows and purchases rubber from their out growers. GREL has a mathematical formula linked to world prices that has been agreed upon with its out growers and is reviewed each year. The outgrower smallholders relationship has been very successful. 2 Organizations doing this in Ghana including SEND in the Eastern Corridor, and ADVANCE Project (ACDI/VOCA TECHNOSERVE) in northern Ghana.

9 In WA, lack of clear communications between white sorghum value chain participants including smallholder farmers producing for Guinness led to mistrust and misunderstanding during the pilot phase (See Annex I FAO case study). Long payment terms, by the processor, (90 days) were another challenge that needed to be addressed. Principles of organizing coops and zonal cooperatives. While CUs and other service providers to smallholder associations may assist smallholders to network with service providers such as input suppliers and buyers they should never do this for the smallholders. Otherwise in the event of problems they will be blamed. b. Timing of credit and input supply. Timing of credit and input supply is critical in AVCF. It is even more so in zones such as northern Ghana where there is only one growing season. The timing and operational aspects of the credit officers work mean that access to transportation is also critical. If the farmer s coop does not receive their loan in time they cannot adequately prepare their land and the whole production may be jeopardized which in turn puts the CU loan (s) at risk. c. Quality of Inputs and cultural technics. The quality of inputs and their proper application are critical factors. If the seed does not germinate or has a poor germination the harvest will be minimal. The difference in what the farmer may harvest can vary 2 to three times or more between the use of traditional seed, certified or hybrid seed. If farmers do not know how and when to apply inputs the results can be catastrophic. From the CU perspective, helping smallholder members to gain access to proper inputs and to apply to apply them properly in a timely manner is very important. c. Role of the agricultural value chain credit officer. The role of the AVC credit officer is dramatically different from the role of a traditional credit officer in an employee based CU. In the later, the CU officer may be meeting the client primarily at the CU. In the case of AVCF, the AVC credit officer needs to go towards the client from the beginning and throughout the process. He/she needs to spend time in the field meeting with smallholder farmer organizations and other VC members, ensuring that logistics issues are addressed, from start to finish. This includes but is not limited to i. smallholder clients receiving their inputs on time, ii. selling their crop at a good price and monitoring. If a CU does not embrace and commit to this principle they should not engage in AVCF. VI. Small Holder Partnership Models. There are a variety of different partnerships models including, but are not limited to,

10 Outgrower schemes. Outgrower schemes generally work very well in commodities such as cotton, sugar cane, palm oil and rubber. Since there are not many opportunities to side sell 3 to another business revenues can be secured through the processor. This may be linked to a processing plant and or a main plantation with smallholder outgrowers, in the surrounding areas, who sell their product to the processor. In this model, the main plantation provides technical assistance 4 and equipment services plowing etc. Financial institutions such as CUs can provide production loans to outgrowers. Payments are assured by a tripartite agreement with the processor who transfers payments through the CUs. Tripartite agreements for the purchase of produce. This could be a tripartite agreement between one or more CUs or CUA on behalf of its members, smallholder cooperatives or apex associations, and an aggregator such as Safari X or a processor such as Prime Foods in Kumasi, Ghana. Under such an agreement, farmers agree to provide the aggregator or processor with a certain amount and quality of product usually at an agreed upon price and quality. The CU provides credits to the farmers for inputs. Upon delivery of product the aggregator pays the money, due farmers, to the CU which deducts and places the remainder in their accounts. Please note that while an apex body or cooperatives may negotiate a purchase agreement with one buyer it is important to have contacts with a variety of buyers in the event of difficulties with one buyer 5. Lead farmer/aggregator model. The lead farmer 6 /aggregator model is a model that is being used in northern Ghana. In this model, a lead farmer and or aggregator, who usually has tractors and other equipment, such as shellers and harvesters, rents tractor and equipment services to groups of farmers. The lead farmer takes a loan from an FI to pay for smallholder farmer s input needs. The smallholder farmers in turn agree to sell through the lead farmer or aggregator. VII. Guidelines in analyzing agricultural value chains The first step in analyzing a value chain is. The situational analysis in the context of the value chain analysis is a tool to be used to examine the current state of affairs of the various players that form the value chain as well as detailed analysis of the type of value-added activities 3 Side selling means not selling to the intended client. 4 Cultural techniques including proper application of inputs. 5 The ADVANCE PROJECT in northern Ghana has started organizing producer purchasers forums twice a year (pre-harvest and harvest). This is a very good initiative and one which could be continued by The Credit Union Association (CUA) of Ghana. 6 The lead farmer is someone who is doing agriculture on a larger scale, more than 30 hectares, applying modern agricultural and business techniques.

11 (examples of value added activities can include parboiling rice, shelling, extracting oil from soybeans) that occur along the chain. The starting point for developing strategies is the situational analysis (or position audit). It is like asking the question: where are we now? This question has to be answered in respect of all the players on the value chain and, more importantly, the corresponding value-added activities that take place along the whole chain for each key player. This auditing of the current position is an internal appraisal tool. Value chain analysis makes two distinctions between production, processing and selling process as primary activities and support activities such as input and equipment sellers (Please see annex X) for an example from the corn value chain. When the map and characteristics of the different value chain actors is in place an analysis is needed to identify where the financing opportunities are. This is done by looking at returns at different levels such as farmer, aggregator, wholesaler, processor etc. In addition to this, one can look at the cost, profitability and returns of different technologies and equipment, for example, equipment for flaking and drying manioc for transport, or for milling the cassava. What is the cost and the return for flaking cassava compared to the cost and return of milling. This will define if the activity is profitable enough to allow the owner to prepay his or her loan. VIII. Guidelines in developing new products for agricultural value chains a. Introduction. To develop new products CUA and member CUs need to assess client needs and priorities and how to see how they might respond to these needs. Is he demand there? On the CU side it costs money to develop new products. This includes the costs of research, product piloting and rollout including, training of personnel in the new product and marketing. If CUA and member CUs are going to develop a new product they need to be sure that there is a potential demand which will allow their members to generate revenues from the product. CUA and members need to see if the product characteristics and alternative forms of collateral, such as secured payment in a tripartite arrangement, will help mitigate their risks. b. How to make investment decisions? Before making a decision about an investment such as a warehouse, or tractor purchase, CU management and boards supported by CUA of Ghana need to help members to identify their needs, priorities and capacities resulting in an investment/credit plan. Without this process, CUs or their member cooperatives can make bad decisions driven, for example, by a donor who is offering a partial grant for tractors or a warehouse. In this case, the tendency is to react to the offer or whether to make one type of

12 investment rather than to go through the process of what type of investment (s) may be the most useful and adapted to members needs at a particular time. Thus, for example, one coop or group of smallholders main priority may be to get their produce to the roadside. For this, the coop or member (s) of the coop may be interested in taking loans for a three wheeler. While the cooperative or apex body may want to purchase a tractor to offer plowing services to members this may not be the cooperatives main priorities and may also not correspond to the management capacity of the apex body 7. c. Key Steps before making the investment-the warehouse example Before a CU (s) board and management even thinking about laying the first brick, a warehouse feasibility study needs to be carried out. The feasibility study needs to focus on: What is the demand for the particular services which will be offer? Assessment of the demand for this type of service is critical. This involves looking at the demand on the smallholder coop side, members and nonmembers, including potential external clients, as well as the demand on the buyer s side. Within what area can the warehouse effectively draw clients? It may not be cost effective for farmer s coops or groups which are far away to transport their goods to a central warehouse. If buyers are use to operating out of a large market town they may not be willing to come to a smaller town where the CU is located. What is the market ie. the different clients 8, and types of revenues for the warehouse? Who are the buyers and sellers? Where are they located? What do the buyers want products, quality and time of the year? Where do they buy (e.g. market towns)? Where do buyers and wholesalers aggregate their stocks for transfer to cities or large clients?are the buyers willing to buy from a CU warehouse in a particular location? To whom and where do the buyers sell what they collect? While the market may currently work one way in the Eastern corridor of Ghana, for example, if there are new roads put in in the short to medium term this may change how the market works and where the buyers are purchasing farmers products. These factors need to be taken into consideration since one the warehouse is built it can t be moved. 7 Due to the ownership issue it is much more difficult for an APEX body to decide when different members will receive plowing services. If there are not enough tractors to satisfy all members this may very quickly lead to friction between members. 8 This can include the creation of a simple questionnaire and going out and interview members and non-members.

13 Often local collection infrastructure is the constraints. Funding smaller warehouses located closer to key villages can be used to channel product into a central warehouse or market. This may be a better strategy. What are the historic cost and margins for the crops which will be stored at market and six months after harvest 9? What will be the expenses and personnel, equipment 10 necessary to operate the warehouse? How will the warehouse be managed 11? While there may be a CU oversight committee with a clearly defined policy and oversight role it is not realistic to think that such a committee can effectively manage the warehouse activities. A manual needs to be developed and personnel trained in management and operations. While CU s may want to manage their own warehouse it is possible to have the warehouse managed by a 3rd party. This could be a buyer or a business person. What s the strategy short term ->medium term? To develop the strategy, CU management and boards need to see how the market works currently and how this may change in the near to medium term if key roads are paved or built in the Eastern corridor. Where should the warehouse be located? While CU boards may want the warehouse to be located within the CU (s) premise, this may not be the best location from a business or investment perspective. Particularly, if it doesn t correspond to a location which buyers traditional come to. One of the potential advantages of locating the warehouse in a market town/center is that there will be more trading going on. Cereal purchasers or wholesalers may be willing to manage, or rent the warehouse while providing collateral/storage of cereal for which the CUs have provided credit. If at some point in time the CU prefers to sell the warehouse they can find potential buyers. VIII. Some different agricultural value chain products. 9 The north has one rainy season and the south two. Since the second growing season in the south starts, for some crops, right after the harvest in the north it may not pay to keep product stored for too long. 10 Equipment includes cleaning, humidity measuring, drying equipment and most often palates so that the bags are not placed on the damp floors. 11 If the revenues are not enough to pay for a full time manager and staff the CU will need to us some of its staff and board members which may not be very effective.

14 a. Warehouse Receipt Financing Warehouse receipt finance is a form of secured lending 12 to owners (farmers, traders, processors) of non-perishable commodities (corn, soya, and rice etc.), which are stored in a warehouse 13 and have been assigned to a financial institutions such as CU (s) through warehouse receipts. Warehouse receipts give the CU (s) the security of the goods until they have been sold and the proceeds collected. Given the limited collateral available to support farmers financing needs, such post-harvest commodities represent a liquid form of collateral against which CU (s) can lend. When a well-functioning warehouse receipt system is in place, farmers have a choice in deciding whether to sell immediately after harvest (when prices are often lowest) or to store in a licensed warehouse and to apply for a short-term credit (thus enabling farmer to sell at a later date, when prices may be higher). Warehouse financing also enables aggregators and processors to secure their source or products throughout the year. However, there is significant upfront work required to create, operate, and monitor a full warehouse receipt system. Necessary preconditions for a warehouse receipts system in which smallholder farmers can participate are many: A legal environment that ensures easy enforceability of the security, and makes warehouse receipts a title document Reliable and high-quality warehouses that are publicly available A system of licensing, inspection and monitoring of warehouses A Performance Bond and/ or Indemnity Fund FIs that trust and use the system Agricultural market prices that will cover the transportation and storage costs Supportive public authorities 1212 Thus for example, the CU may provide loans for 60% of the current market value of the product. This allows coop members to get immediate cash which they can use for household needs as well as planting the next crop while not being forced to sell when the market price is low. 13 The warehouse may be owned by the financial institution but is most often owned by a third party preferable one who has experience in managing such a facility which includes proper cleaning, drying and weigh and storing and selling of product. In the event that the facility is owned by a third party there may be a system of double locks (one lock for the CU and a second for the manager owner.)

15 Well-trained market participants Even with the necessary preconditions, there remain risks in Warehouse receipt systems, including: fraud or collusion; Credit and counterparty risk; Storage risk and misappropriation by warehouse operator Price risks, given volatility in agricultural commodity prices and government price intervention; Marketing or buyer risks; Legal risks concerning perfection of security, registration of prior claims, and enforceability. b. 3 rd Party warehousing product In a 3 rd party warehousing product a financial institution such as a CU may pay a fee to a business person with a warehouse to store some portion of the CU s client s grain. There are two locks on the door. The CU manager has one and the warehouse owner another one. Based upon some percentage of what the client has stored he/she may obtain a short-term loan. The advantage of this product is that a client can get a loan for the next production cycle or for family s needs without having to immediately sell his/her product. The main danger is in the event that prices do not go up enough to cover the additional storage and transportation expenses. c. Purchase hire product. A purchase hire product for equipment such as tractors, rototillers and small mills may be more adapted to CU needs and requirements than a leasing product. In a purchase hire product the title of the equipment belongs to the CU until the loan is reimbursed. This means that if the equipment is not being properly maintained or the loan is not being reimbursed the CU can take possession of the equipment without going through the courts. d. Leasing Product

16 A lease is a contractual arrangement between two parties whereby a party that owns an asset (the lessor ) lets another party (the lessee ) use the asset for a pre-determined time in exchange for periodic payments. Leasing can be used for agricultural equipment such as tractors and harvesters. There are a number of advantages to this product including providing an alternative form of collateral to allow someone who otherwise might not qualify for a loan to obtain to get one. Reduction in taxes is another reason which motivates car companies to lease automobiles. In this case the leasing company benefits from reduced taxes because legally the automobile still belongs to the company. Leasing uses the lessee s ability to generate cash flow from business operations to service the lease payment, rather than on the balance sheet or on past credit history. This explains why leasing is particularly advantageous for young companies, as well as small and medium businesses that do not have a lengthy credit history or a significant asset base for collateral. Furthermore, the lack of other collateral requirements (such as land) offers an important advantage in countries with weak business environments, particularly those with weak creditors rights and collateral laws and registries. Because the lessor owns the equipment, it can be repossessed relatively easily if the lessee fails to meet lease rental obligations; this is particularly advantageous in countries where secured lenders do not have priority in the case of default. The leasing entities that do have a focus on the agricultural sector are often linked to manufacturers or distributors of agricultural equipment in one or another way. Lease financing only partially overcomes the typical constraints to credit financing. Leasing firms often take additional collateral from rural clients in developing countries; this practice is different from the typical lease transaction in developed economies in which the leased asset itself is considered adequate security. The security deposit or down payment required tends to be higher than typically demanded in developed economies. (ARD 2006.) IX. Guidelines for credit underwriting There are a number of techniques that need to be taken under consideration when underwriting loans for smallholder farmers they include: Looking at overall family revenues and expenses. Traditionally, FI have only looked at the profitability of the farmer s specific crop for which he or she is asking for a loan. This technique has not provided good results. CU credit staff needs to consider all revenue sources and expenses for the household, and family size when they are assessing the credit application to insure the borrower can reimburse the loan from another source

17 of revenue in the case of problems with the primary VC activity. Smallholder families must also understand that even if a particular crop fails that they are still responsible for repaying the loan. Cash flow analysis. Credit officers should carry out cash flow analysis to help them determine how a loan should be structured and what the best repayment schedule will be for a particular loan product. This is very important in agricultural finance due to its seasonality and the longer periods until the farmer sells their product. (See annex Cash Flow Analysis). Most FIs schedule payment during the period after harvest so that the smallholder farmer is not forced to sell immediately after harvest. Some FIs use a third party storage facility or a ware house receipts product. Several CU moments provide a second loan to cover family expenses at harvest time so that the smallholder farmer is not obliged to sell their when prices are low. Crop budgets and potential yield information. Credit staff should develop crop budgets and obtain information from extension services and other technical sources about the yields associated with different packages of inputs and seed varieties in their region. This allows credit staff and committees a better basis on which to evaluate smallholder loan requests amounts and projections. Thus, for example, use of a hybrid corn variety with proper inputs and cultural techniques can potentially triple the yield. Use of proper cultural techniques using local or certified seed will improve harvest but not to the same extent. Each technical package has its own budget and potential returns and risks. CU credit staff can do this for two or three models of inputs use that are the most prevalent in their area. (Please see Annex X for a crop budget example). These budgets will be different depending on the region and the year and will need to be updated on a yearly basis. Crop Protocols. Credit staff should develop crop protocols for each crop that the CU might finance. A crop protocol indicates what different cultural operations need to take place and when. It provides a calendar and a basis for assessing how well the smallholder is applying best practice techniques. It can be used by the credit officer and the manager as a monitoring tool (See Annex X Crop Protocols). X. Systems Development and Risk Management a. Policies and procedures and MIS system. AVCF requires some changes or additions in terms of policies and procedures to existing manuals that CUA and member CUs use to adjust for the special requirements of AVC loans. This should cover subjects such as i. selection criteria, ii.

18 defining the geographic area can that be covered by a CU, covering additional forms of collateral and iv. how the monitoring should be done for AVC loans. Some modifications or additions may be required in the parameters that are currently used to help monitor the potential risk in a CU s AVC portfolio. To do this, additional fields are required so that CUA and a CU management and board, can measure risk by value chain (from production on up though processing and marketing). Reports should also be available to monitor different categories of loans within all AVC loans for example transportation or mills. This will allow CUA and member CUs to monitor their risk and to set limits on lending on different value chains and different products within AVCs and to adjust interest rates and fees. In the rice VC, part of the rice VC loans may be for production, and part for transformation, marketing, transportation etc. CUs and their Association need to see which types of loans perform the best. This will then help guide credit approvals/loan levels and loan conditions such as interest rates and collateral requirements. If 100% of the clients transforming rice repay their loans on time the CU board may be willing to lower the interest rate and increase the percentage of these loans being financed. CU Management and boards should decide on the levels of lending within different parts of the portfolio this includes AVCF. Successful financial institutions in AVCF have on average no more than 15% to 20% of their portfolio in AVC lending. b. Monitoring Agricultural Value Chain Loans. Monitoring loans is particularly critical in AVCF. Smallholders and their coops and associations like visits that show that the credit staff is interested in their activities and success. This helps develop a feeling of not being alone in their endeavors and makes them much more willing to repay their loans. When the credit officer only shows up at harvest time and particularly when there is a problem they are seen as an adversary. While smallholder farmers love to have visits, from the CU s perspective this needs to be balanced by finding cost effective ways of carrying out monitoring. The beauty of the ACVC concept is its focus on strategic partnerships. These strategic partnerships can be used to reduce monitoring cost for CUs. In the lead farmer or aggregator model, for example, the lead farmer and or aggregators put into place addition management tools and monitoring methods for smallholder farmers. They provide some additional plowing for some senior group members in exchange for monitoring members. In outgrower s schemes such as in one irrigation schemes in northern Ghana a commercial enterprise growing sunflowers will provide TA and equipment services to outgrower farmers.

19 Since they are already operating in the irrigation the company will be following up with farmers to ensure a good production and will ultimately purchase their production. A means of transportation for CU credit officers in rural areas is a critical for success factor. While in urban areas clients are usually closer to their CU and there are a variety of transportation options in rural areas the distances are much larger and the clientele more spread out. If a CU is serious about successfully financing AVCs they need to budget for this. In some areas this may mean the use of cross country motorcycles and or a vehicle. In the case of motorcycles, the best option may be to provide a loan for a motorcycle to the credit officer and then provide a stipend (gas and other expense) when the motor cycle is used for work. XI. Steps to be taken by CUA to develop an AVCF training program. a. Introduction. While CUA is developing its own AVC finance training capacities it may want to reach out and benefit from different training programs and materials that are being offered by organizations supporting value chains in Ghana. This includes, but is not limited, to the ADVANCE project for corn, soya, and rice VCs in northern Ghana, IFAD s Tuber project and the SEND project in the Eastern Corridor. b. AVCF Training Strategy Development. The AVCF Training Strategy should be based upon CUA s AVCF strategy 14 and business plan. In developing this strategy some key points might be considered: Importance of a strong field presence. While some training can be done in the classroom the most effective training is done in the field at the CU and partner level. This is particularly true for AVCF. This would indicate a regional presence with access to transportation. There is no one size fits all. While there are underlying principles and tools of AVCF something that works in one region of Ghana for one crop may not work in another region. Changing business environment. Business environments are constantly changing. A viable AVCF strategy will need to be flexible and adaptable. Currently, Ghana s Eastern Corridor is significantly constrained by the lack of viable infrastructure: paved roads, electricity and communications. The day that the main market roads are paved, how 14 CUA s overall AVCF strategy can be done on a regional basis and would identify what are the AVC which appear to be of the most interest to members prioritize them based upon some further market research and develop some basic products. CUA could provide some initial technical resources to develop a questionnaire for CUs and carry out market research.

20 buyers and processors and transporters access markets will change significantly. A town which was a market town may no longer play this role. c. Steps to develop CUA s AVCF strategy. CUA staff should; Carry out a literature search for AVCF Identify classroom and field training needs for CU staff and members iii. Select the channels and tools to be used to provide training and TA/ on the job. Enumerate human resource needs at the CUA training center and regionally (internal and external) training. Identify potential external sources of training and technical assistance in the private and public sectors. Develop training materials and guides. Create a monitoring system to measure impact and a budget. d. Training Materials and Resources. There are a lot of materials available on AVCF including those which are specific to Ghana. In addition to FAO s case study on rubber and white sorghum value chains in Ghana the FAO is in the process of finalizing case studies for several Ghanaian AVCs. The key is to identify those that are the most useful to the CU movement and to create a learning system which modifies training materials and creates case studies based upon the AVCF experiences of member CUs. Building up a permanent base of institutional knowledge which is constantly upgrading itself to reflect changes in AVCF in Ghana is critical to ensure that as staff turnover occurs that the institutional AVCF knowledge remains.

21 Annexes Example of a simple business Plan source Toolkit FAO Case studies for small holders in Ghana (Rubber and white Sorghum (WA) Examples of crop protocols rice, mais and soyabean Calendars and budgets Ghana Value chain studies (list) Annex X Primary and Support Activities in the Corn Value Chain Primary activities are: Production of maize (i.e. Farming) Processing of maize Marketing of the value-added products of maize. Support activities are those which support the primary activities: Input/equipment dealers (fertilizers, herbicides, machinery etc.) MOFA Crop research institutions

22 Ghana Meteorological Agency (weather forecast) Development partners (Donor projects etc) Financial institutions Mechanization service providers Labor suppliers Processing Capital equipment manufacturers Food and process technology institutions Transporters Marketing: Product promoters/advertiser &Market research consultants