Brussels Development Briefing n.35 Revolutionising finance for agri-value chains 5 March 2014 http://brusselsbriefings.net Agricultural Value Chain Finance and VC Business Models. Calvin MILLER , FAO.
Agricultural Value Chain Finance and VC Business Models Revolutionising finance for agri-value chains Brussels Policy Briefing no. 35 Calvin Miller, FAO Brussels, 5 March, 2014
An evolving agriculture Market integration Tighter supply and value chains Increased concentration of market leaders’ power Open trade with intense regional and global competition Consumer changes More food processing and segmented demand Stringent standards, specifications and conditions Information and communication technology (ICT) access to information is easier and more important back-office technologies are more robust to manage data 3
What is an agricultural value chain? Value chain describes the full range of activities involved in getting a product or service from conception, through the different phases of production, transformation and delivery to the final consumer. 4
VCs have market-pulled value chain linkages • Inputs, Flow of orders, preferences & information production and Consumers processing are Flow of produce, services & information demand Retailers/ driven. wholesalers • Continuous Research & Development flow of Processors information. Finance • Market oriented. Growers • Reap competitive Input advantage. suppliers Production based on the needs of the consumers and closely linked with the processors and other market players ( market Pull )-Value chain marketing 5
Defining Value Chain Finance Value chain finance – financial products and services flowing to and/or through a VC to address the needs of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within the chain. Objectives: Align and structure financial products to fit the chain Reduce costs and risks of finance 6
Goals and drivers of value chain financing Reduce risks Improve Reduce costs relationships If de If desi signed ned well, , AgVCF CF inte terven rvention tions s can increase ease th the competitivene petitiveness ss of f sm small pr produ ducers cers, , as w s well as s 7 ag agribu business siness enter terprises. prises.
Stakeholder Roles in Agricultural VCs Operating Environment Food Food Input Input Transport Storage Growers Processing Retail Suppliers Suppliers Services Industries Industries Production Logistics & VC Services Agri-food Industries Financial Services Financial Services Business Support Services 8
Different VCs in the same product Middle / Upper Low income Export Income Rural / urban Market Consumers consumers Small shops Medium and high end urban retail shops Retailers Exporters Wholesalers Wholesalers Middle Men Market agents Medium/Large Contract Rural Small Producers (1 ha)/ Rural Small Producers Producers Farmers Input shops in the city Input Suppliers Village input retailer 1 2 3 A value chain n also defined ed by its parti ticular cular market t (consumer) umer) segment 9
Value Chain Business Models The business model in the AgVC from the smallholders’ perspective can be divided into four types: Producer-driven Buyer-driven Integrated Facilitator-driven 10
Example: Producer-driven Models ASOPROF Producer-owned Model National International Buyers Buyers ASOPROF ASOPROF Bean Association Services: • Seed production • Technical assistance Farmer • Processing Producer Coops Organizations Farmer • Marketing/export Coops • Member profit share Producer Farmer • Financing linkages Organizations Coops Individual (not direct financing) growers 11
Example: Buyer-driven business models Buyer-driven AgVC Northern Food Corporation (NFC) Finance from RCGC 2 Input supplier 5 1. Farmers’ contract with NFC 10 4 2. Negotiate with input 3 suppliers by NFC Agricultural production 1 Northern Food 3.Receive finance from RCGC (NFC - farmer contract) 9 Corporation (NFC) 4. Supply of inputs to growers 5. Payment to suppliers 6 8 6. Growers supply tomato to processor (in this case, NFC) Processing 7. Processor supplies to industrial buyers 7 8. Buyers pay to NFC Industrial 9. Payment to farmers by NFC 10. Repayment to RCGC buyers 12
LAFISE Integrated AVCF Model 1 4 Identify organized Technical Assistance producers Quality Certification 3 2 Productor Processing Product in Consolidation cosecha Added Value storage Financing: * Asset management. * Warehouse receipts Insurance - transport, life, fire, etc. Certification of Deposit and 5 Warrants LAFISE Trade Collection and Identify markets payment to producer And buyers Place 13 13 6 13 Products Office network in 10 countries
Facilitator-driven Business Models Facilitator driven model TechnoServe TechnoServe Kilicafe Banks Coffee growers organization Small Marketing Small Large Coffee company processors processors growers Flow of technical Flow of finance Flow of products support 14 Flow of guarantee and product innovation
AgVC Financing Instruments Category Financing instrument • Trade credit Agricultural product based • Input supplier credit • Marketing company credit • Lead firm financing / contract farming • Trade receivable Accounts receivable based financing • Factoring • Forfaiting • Warehouse receipts Physical asset based • Re-purchase agreements • Leasing
AgVC Financing Instruments Type of product Financial instrument • Insurance Risk mitigation • Forward contracts • Futures Financial enhancements • Securitization • Loan guarantees • Joint ventures The instruments of agricultural value chain financing channels are many and can be used in conjunction with one another. 16
Example: Biashara Factoring A. Domestic factoring 1 Ag SME or Lead agri- producer business firm org. (seller) 2 (buyer/debtor 4 1. Sale of products 6 8 5 2. Invoice certified 3. Receivables sold (at a discount) 4. Notification of 3 factoring 5. Advance by factor 6. Billing on expiry Biashara of term Factors, Ltd / 7. Payment of 7 invoice DGV Capital 8. Final settlement 17
Example:Informal warehouse receipts system Market Stock in warehouse = Small farmer Collateral guarantee group Finance institution • In Niger – 33% increase in stock value (in 4- Physical flows 6 months of storage) • 18% of food stocks used for the lean Monetary flows season 18 • New income from off-season cultivation
Small Farmer Pledge Forward Contracting Bank Payment Pledged Note Trade Co/Warehouse (Serves as a conduit) Payment Product Product Buyers Farmers 19 Finance Contracts
Agribusiness Loan Guarantee Co. (ALGC) ALGC characteristics: Agriculture guarantee (along the entire value chain) SME/Beneficiary Maximum cover is 50% of loss of principal only and not interest or fees. 1 6 Maximum Loan of $200k 4 Credit institution Maximum loan period of 5 years 2 5 3 Fees – range between 0.75% and 1% of Guarantee limit Guarantee Fund Decisions on use of guarantee are made by the financial institutions 20
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