S21 Working Session

Building Successful Agricultural Value Chain Finance

Calvin Miller, FAO Senior Officer, Agribusiness and Finance

Revolutionising finance for agri-value chains conference

14 – 18 July, 2014

Nairobi, Kenya

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An agricultural value chain includes all actors from producers, processors, suppliers, wholesalers, retailers and consumers, as well as supporting services to a particular group of final consumers.

A value chain defined by its particular market segment

Successful ACVF depends on the actors

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1. End market/consumers

2. Operating environment

3. VC partner cooperation

4. Support services - finance- technical assistance- business services

5. Upgrading

Factors Influencing VC Competitiveness

Strengthening coordination, addressing weaknesses and tailoring finance

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Flo

w o

f p

rod

uc

e, s

erv

ice

s &

in

form

ati

on

Consumers

Retailers/wholesalers

Processors

Growers

Input suppliers

Fin

ance

Res

earc

h &

De

velo

pmen

t

Flo

w o

f ord

ers, pre

fere

nc

es &

info

rma

tion

• Inputs, production and processing are demand driven.

• Continuous flow of information.

• Market oriented.

• Reap competitive advantage.

Analytical framework

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Identification of:

Structure of the value chain: all individuals and firms that conduct business by adding value and helping move the product toward the end markets

External framework, or the broader legal / national context in which the chain operates

Dynamics of the value chain: individual and firm behaviors and how these affect the functioning of the chain

Trends and future risks and opportunities in the chain and its participants

Agri-finance value chain approach

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AgVCF is an approach with application of selected instruments and adaptions based upon:

• A chain focus – looking at all actors, processes and markets of the chain

• A transaction focus – product and cash flow and its opportunities and risks

• Risk mitigation and efficiency – lending on the strength of those with stronger backing

• Direct and indirect financing -- according to efficiency, often with in-kind disbursements and payments at point of sale

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Comprehensive financial assessment

Character

Capacity

________

Capital/collateral

Cash flow

Conditions

Producers/SMEsOrganizational

reliability

• Management• Technical • Human & physical

• VC contract & transactions

• Markets & relationships

• Loan terms

• Debt Capacity• Security

5 C’s

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Value chain assessment Financial assessment Securing agreements

Understand the value chain – the market potential and chain risks, the inputs and stakeholders.

Identify the AgVC model, its sustainability and sources of financing, to provide a framework for analysing the following processes.

Identify the interests and relationships of participants, their inter-dependence, commitment, coordination and relationships

Loan assessment (5 C’s) of potential borrowers

Assess the operating environment – macro risks, regulatory constraints and potential support from the Government or other entities

Determine actual and critical points of finance – the current flows of funds and then what is needed and in what point in time.

Analyse and compare financing options, and relative strengths, risks and costs of financing for each level of participant in VC

Develop VC linkage and finance agreements – tailor-design financing according to the best option(s) to fit the chain and draw up contracts.

Identify the transaction processes – the value added in the various levels and the flows of the product within the chain.

StepsStepsSteps

Analysis of AgVCF– key issues

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Four types of AgVC business models:

1.Producer-driven

2.Buyer-driven

3.Facilitator-driven

4. Integrated

And adapting to the

VC environment

Building from the business model

Farmers Buyers

Pledged Note

Finance

Product

Contracts

Payment

Payment

Trade co./ co./warehouse

Bank

Product

1010

Producer-driven Models

ASOPROF Producer-owned Model

Farmer Coops

ASOPROF Bean Association

National Buyers

International Buyers

Producer Organizations

Farmer Coops

Producer Organizations

Farmer Coops

ASOPROF Services:• Seed production• Technical

assistance• Processing• Marketing/export• Member profit

share• Financing linkages

(not direct financing)

Individual growers

1111

Purchase Order Model - ‘Palmito’ AgVC

Sale of product

Loan repayment

K + i

Fund transfer agreement

Individualcredit

US$2,000

FABOPAL / INDATROP /BOLHISPANIA

Importer

Buyer Order(Contract)

Producer

Processors

FIE Microfinance Bank

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43

5

6

7

Local merchant

Micro-credit

Lead firm (contract) model – with MFI

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The LAFISE Integrated Model

Crop production

Far

mer

s’o

rgan

izat

ion

s

Value chain stage Service provider Service provided

Harvest

Collection

Processing

Storage

Marketing

LAFISE Agribusiness

BANCENTRO

LAFISE Insurance

• Credit screening• Technical assistance to

NGOs• Quality certification• Credit provision• Fiduciary & fund

management • Insurance

LA

FIS

E G

rou

p

• Corp collection partnering farmers’ organizations

• Value addition through processing• Storage

LAFISE Agribusiness

LAFISE WarehouseManager Company

BancentroLAFISE Insurance

• Warehouse certification• Warehouse receipt management• WR finance and insurance

LAFISE Trade

LAFISE Group Network (10 countries)

• Identification of markets & buyers• Product placement (export &

national)• Payment collection• Producer payment & loan collection

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AgVC Financing InstrumentsProduct-linked finance 1. Supplier and trader finance

2. Marketing / Trade Finance3. Lead firm contract farming finance

Receivables finance 4. Bill discounting5. Factoring and reverse factoring6. Forfaiting

Physical asset collateralization

7. Warehouse receipts8. Financial leasing9. Repurchase agreements

Risk mitigation products 10. Forward Contracts11. Futures hedging 12. Insurance

Structured financing 13. Credit guarantees14. Equity finance and joint ventures15. Islamic finance

Adapting financial instruments to the Ag VC

Summary lessons in AgVCF

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1. A comprehensive approach

2. Use of insider knowledge

3. The weakest link

4. Forward focus

5. Re-focused 5 C’s assessment

6. Embedding finance for access and efficiency

7. Financial risk reduction can be achieved by financing through

the strongest chain actors

Summary Lessons (cont.)

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7. Innovation is important

8. Chain diversification is important

9. Multiple models and applications

10. Emulates stakeholder participation or mutual interest in

banking

11. A struggle for policy makers and Central Bankers

12. AgVCF does not replace traditional finance – it can enhance it

and increase its efficiency, but both are needed.