USING THE VALUE CHAIN IN

FINANCING AGRICULTURE

Dr N B Shete

National Institute of Bank Management, Pune

PRESENTATION APPLYING AGRI VCF

AN EVOLVING AGRICULTURE

DEFINING VALUE CHAIN FINANCE

THE USE OF VCF

AGRI VALUE CHAIN - STAKEHOLDERS

VALUE CHAIN – ANALYSIS FRAMEWORK

VALUE CHAIN – ANALYSIS FRAMEWORK

FLOW OF PRODUCTS AND FINANCE ALONG VC

EXAMPLE : FLOW OF FINANCE IN RICE

VCF : DEMAND SIDE

VCF : SUPPLY SIDE

VALUE CHAIN – BUSINESS MODELS

EXAMPLE : FACILITATION MODELS

LAFISE INTEGRATED VCF MODEL

AGRICULTURAL VCF TOOLS/PRODUCTS

VCF TOOLS

TRADER CREDIT

VCF TOOLS

FACTORING

VCF TOOLS

FIELD WAREHOUSE RECEIPTS

VCF TOOLS

TOOLS TO MITIGATE MARKET RISKS

VCF TOOLS

RISK ANALYSIS : INCORPORATING NEW ELEMENTS

BANKS : NEW PERSPECTIVE FOR AGRI FINANCE

SUMMARY – KEY FACTORS FOR CONSIDERATION

GOVERNMENT : POLICIES TO SUPPORT VC FINANCE

CONSIDERATIONS : STRUCTURAL FACTORS

NEED : FOOD SECURITY CHALLENGES

Agricultural Value Chain Financing

- Established in 1966

- As a Specialized Financial Institution

- State Enterprise under the Jurisdiction of the Ministry of Finance

BAAC Historical Background

To promote the improved social and economic well-being

of Thailand’s farming population through the provision of financial assistance for agricultural production, investment and

marketing purposes.

Objectives

BAAC Vision

“To be a secured rural development bank with modern managerial technology focusing on the uplift of small-scale farmer’s quality of life.”

“Standing side by side and Recognizing the Value of People”

Value

Mission• To render integrated credit services to enhance farmers’

opportunity for effectively improved productivity

• To streamline social development regarding agriculture-based learning for the improved quality of life of farmers so that they will be valuable human resource assets and worthy members of society

• To administer funds in such a manner that the cost is kept at the appropriate level reflecting the banks key mission with emphasis on liquidity and stability

• To develop new areas of services to effectively and productively meet farmers needs on the strength of high-caliber staff with sound judgment

AMC

BAAC Financing on Value chain

Financial Service

Learning Support

Activities

Risk Mitigation Support

Activities

Domestic Consumption/

Export

Agricultural Produce

Processing

Agricultural Activities

BAAC’s Model in Agricultural Value Chain Financing

• Agricultural value chain financing would be successful if following aspects are well addressed:

- supervised credit management

- productivity enhancement supporting : productivity increasing and production costs reduction

- marketing channel creation:

group formation, stop selling to middlemen

- knowledge supporting to be self-reliant : capacity building

- providing of safe guard against risks

From farm to MouthRice value chain

15.45 15.82

5.91 6.115.57

5.27

2.65 2.531.93 2.04

1.41 1.520.83 0.74

1.14 1.09

3.413.59

0

2

4

6

8

10

12

14

16

Mil.Person

Farmer Manufacturing Construction CommunityService

Others

Labour Force Survey As of August 2010

Year 2009

Year 2010

Farm Households Serviced by BAAC, FY 2005-2009

5.54

5.68

5.91

6.07 6.10

5.205.305.405.505.605.705.805.906.006.106.20

2005 2006 2007 2008 2009

Million Unit

Rice Cultivation Area in Thailand (Rai)

 

 

 

 

 

  > 2,000,000 1,000,001 - 2,000,000

500,001 - 1,000,000 100,001 - 500,000

< 100,000 = 0

Converted Area :1 rai = 1,600 sqm2

2.5 rais = 1 acre 6 rais 400 sqm2 =1 hectare

Thai Rice Exporting in 2009

Bangladesh

44 Tons

Pakistan 40 Tons

Ceylon288 Tons

India41 Tons

Indonesia

219,643 Tons

Philippines

156,033 Tons

Iran24,144 Tons

Germany25,604 Tons

Cambodia

42,667 Tons

Malaysia 162,437

Tons

Total : 8,592,830 TonsTotal : 5,027 Million US$

Rice Value Chain Financing

AMC network establishment

AMC network discussion

AMC : harvesting service

Transportation to AMC marketing center

Sampling for inspection

Inspection tool

Quality & price

Unloading bulk

AMC network : village collecting unit

AMC network : village collecting unit

AMC : organic jasmine rice

I Credit ServicesCredit services for individual farmers

- short term loans for agricultural production (working capital)

– loan for seasonal expenses– repayment term within 1 year (in special cases

repayment term < 1 ½ year)

- Medium and long term loans for investment– loan for investment in assets which last more

than 1 years, in special cases loan term can last up to 20 years, e.g. loan to buy agricultural land and machinery

– payment in installment, loan terms more than 1 year

Financial Services

I Credit ServicesCredit services for individual farmers

- Loans for sale postponement of farm produce : Crop Pledging Schemes: to provide funds to farmers to meet their

immediate expenses while waiting for crop prices to rise after the harvest season, avoiding thinned to sell their crops when prices are low. Repayment of this type of loan is normally due within six months.

- Cash credit lines : To provide a convenient way for clients to obtain BAAC loans. Clients can withdraw cash from his account as he needs up to an agreed ceiling and within the period of loan agreement.

- Long term loans for refinancing old debts

- Loans for farm-related and non-farm activities

Financial Services

I Credit ServicesCredit services for individual farmers

- Loans for overseas working

- Loans for quality of life- Housing- Education- Medical care

- Advanced Credit (A-Cash) -instant cash credit facility for meeting their urgent needs. The clients can obtain and repay credit amount at their convenience

Financial Services

I Credit Services

Credit services for farmer’s Institutions

- Re-lending to members

- Procurement of farm inputs and equipment

- Long term agricultural investments

Financial Services

Learning Support Activities

First Phase Self-Reliance

- change way of living- Practice of keeping detailed accounts of household expenses- abandoning gambling habit- have occupations that generate extra income,- cutting down unnecessary expenses- Form savings habit

Second Phase Inter-dependence

- Stronger community take part In planning, preparing community data and analyzing strengths and weaknesses- Conducting joint business ventures- buying and selling collectively - Acting as a group e.g. occupation, savings, resources conservation and fringe benefits

- Development of strong community to create community business network

- Advocate joint trading and setting up of an economic network at community level

Model of Sufficiency-economy-oriented CommunityProject

Third PhaseCommunity Economic

Network

- Farmer becomes confident that they will be compensated in times of drought that caused damage to their crops

- Indemnity payment is utilized to fund a repeated cultivation

- BAAC in collaboration with the General Insurance Association has rendered the weather index insurance service to maize farmers.

- Service areas currently covering 5 provinces

- Drought index is based on data supplied by eight rainfall stations under the auspices of the Meteorological Department.

Risk Mitigation Support Activities

Weather Index Insurance

- Insurance premium is fixed at 100 Baht per rai with maximum indemnity payment of 1,228 Baht per rai.

- Indemnity appraisal relies on rainfall measurement criteria as stated in the insurance policy and differs from : - degree of risk prevailing in each locality

- rainfall at each station

- starting of cultivation and crop stage, i.e. planting, growing or budding

Risk Mitigation Support ActivitiesWeather Index Insurance

- Were set-up in BAAC branch premises to support provision of

quality agricultural inputs and developing marketing channels

for agricultural products produced by client farmers.

- Crop collection: Support from AMC to collect and sell farm produce.

Crop collection is convenient way for farmers to sell their crops

directly to buyers without any intervention from middlemen at fair prices in accordance with quality and quantity.

Agricultural Marketing Cooperatives (AMCs)

Marketing Support Activities

to help client to sell paddy at fair prices and on fair terms and conditions

Marketing Support Activities

Central Paddy Markets

Agricultural Marketing Cooperatives (AMCs)

- Advantages for client farmers include:

- To purchase farm inputs at fair prices with good after- sale services

- To sell farm products through the AMCs collectively with fair prices