agricultural value chain finance innovations•factoring and reverse factoring •forfaiting...
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www.fao.org/ag/ags
Agricultural Value Chain
Finance Innovations
Calvin Miller
FAO, Rome, Italy
Agriculture Value Chain Finance WorkshopADB, Manila,
May 27-28, 2015
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1991
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2011
2012
2013
Ave
rag
e A
gri
cu
ltu
re S
ha
re o
f To
tal C
red
it, %
Africa Asia & Pacific Europe
Latin America & Caribbean Other Developed World
Agriculture Share of Credit by region, 1991-2013
Other Developed refers to Australia, New Zealand, Japan and North America
Agriculture Orientation Index (AOI<0.5) vs Agriculture
Value-Added Share of GDP, 2008-2012 Averages
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0.0
0.1
0.2
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0.4
0.5
0.6
0.7
Guin
ea
-Bis
sau
Buru
nd
i
Nig
er
Benin
Lib
eria
Do
min
ica
Alb
ania
Papu
a N
ew
Guin
ea
Rw
anda
Egypt
Antigua
and
Barb
ud
a
Sene
gal
Mo
nts
err
at
Kenya
Ca
mbo
dia
Ug
and
a
Vanu
atu
Ho
ndu
ras
Eth
iopia
Gre
na
da
Bots
wan
a
Sain
t Lu
cia
Arm
enia
Nig
eri
a
Bang
lad
esh
Aru
ba
Un
ite
d R
epub
lic o
f T
an
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nia
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an
d H
erz
eg
ovin
a
Kyrg
yzsta
n
Surin
am
e
Ag
ricu
ltu
re O
rie
nta
tion
In
de
x (
AO
I) fo
r C
redit
Ag
ricu
ltu
re V
alu
e A
dde
d S
hare
of G
DP
GDP Share (left-axis) AOI - C2A (right axis)
Agriculture Orientation Index (AOI>0.5) vs Agriculture
Value-Added Share of GDP, 2008-2012 Averages
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Me
xic
o
Gua
tem
ala
Iraq
Jord
an
Isra
el
Tun
isia
Burk
ina
Faso
Trin
ida
d a
nd T
obag
o
Guyan
a
Ma
laysia
Syri
an A
rab R
epu
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Kazakhsta
n
India
Na
mib
ia
Serb
ia
Ru
ssia
n F
ed
era
tion
Co
sta
Ric
a
Ecu
ado
r
Phili
ppin
es
Aze
rbaija
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Beliz
e
Un
ite
d S
tate
s o
f A
meri
ca
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Seych
elle
s
Ukra
ine
Zam
bia
Czech R
epu
blic
Pana
ma
Do
min
ican
Rep
ublic
Sri L
anka
Boliv
ia (
Plu
rina
tio
nal…
Hu
nga
ry
Re
pub
lic o
f M
old
ova
Esto
nia
Ma
ldiv
es
Gab
on
Iran
(Is
lam
ic R
ep
ublic
of)
Uru
guay
Tajik
ista
n
Bra
zil
Arg
entina
Ca
nad
a
Ita
ly
Bela
rus
Fra
nce
Austr
alia
Germ
any
Ne
w Z
eala
nd
Ag
ricu
ltu
re O
rie
nta
tion
In
de
x (
AO
I) fo
r C
redit
Ag
ricu
ltu
re V
alu
e A
dde
d S
hare
of G
DP
GDP Share (left-axis)
1. Successful private investment entities tailor their approach to the socio-economic context
2. Most use some combination of the financial tools and risk mitigators
3. The process of identifying the most pressing constraints for agribusiness investors and producer groups is crucial
4. The approach, tools and relationships are also crucial for enabling inclusive financial services and agribusiness growth
What is needed in investment?
5
Vulnerability Constraints
• Systemic Risk
• Market Risk
• Credit Risk
Operational Constraints
• Low and slow investment returns (historically)
• Low levels of assets and investment
• Low levels of knowledge of agricultural lending
Key Challenges for Rural InvestmentOvercoming the constraints
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What is a 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.
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Defining agricultural 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
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Where do we invest in the VC?In
pu
t
Su
pp
ly
Production Processing Wholesale Retail
Co
ns
um
er
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Learning from the Artis (traders);
working with and/or competing with themU
sin
g an
Inte
rmed
iary
to
re
ach
th
e F
arm
er
10
Structuring Finance to Fit the Value ChainMap of Finance Flows in the Potato Value Chain
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Rural Transformation Centre
How do we organize for efficiency?
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Category Financing instrument
Agricultural product based • Trade credit
• Input supply credit
• Marketing company credit
• Lead firm financing / contract farming
Receivable based • Trade receivable finance
• Bill discounting
• Factoring and reverse factoring
• Forfaiting
Physical asset based • Warehouse receipts system
• Re-purchase agreements
• Leasing
5 Categories of financing instruments
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Type of product Financial instrument
Risk mitigation • Insurance
• Forwards contract
• Futures
Financial enhancements • Securitization
• Loan guarantees
• Joint ventures
There are multiple agricultural value chain
financing instruments to consider; often to be used
in conjunction with one another.
Financing Instruments
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5 Cs and a big C of AgVCF Loan Analysis
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• Common Cs
▫ Character – the person and family
▫ Capacity – the technical, economic and financial feasibility and past history of the person and enterprise
▫ Capital – the funds invested into the business and other assets vs. debt level
▫ Collateral – the risks and guarantees
▫ Conditions – the loan terms (amount, use, repayment requirements) and market conditions
• Big C: Cash and transaction flows
▫ Cash and process flows within the VC and the finance available for transactions as well as VC actors’ household and enterprise expenses, reinvestment and repayment
Where do we invest in the AgVC?In
pu
t
Su
pp
ly
Production Processing Wholesale Retail
Co
ns
um
er
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Value chain finance
Complements and overlaps of AgVCF
MicrofinanceSavings and
deposits
Banking services
Insurance
Term finance
Islamic finance
Guarantee funds
Trade finance
Mortgage lending
Arti trader finance
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Type of business model Case study
Producer driven
Buyer driven
Loran Rice Mill, Cambodia
Idemitsu, Cambodia
Konica, Bangladesh
Facilitated UFL, Bangladesh
Ethiopian Blended Model
Integrated
NABARD, India
BRAC, Bangladesh
FIRA, Mexico
Islamic VC finance Islami Bank, Bangladesh (IBBL)
Summary of the Case Studies
Type of financial instrument Case study
Marketing company finance FIRA, Mexico
Marketing company finance with Islamic banking
Islami Bank, Bangladesh (IBBL)
Lead firm finance (contract farming)
Loran Rice Mill, Cambodia
Idemitsu, Cambodia
Konica, Bangladesh
Factoring UFL, Bangladesh
Warehouse receiptsEthiopian Commodity Exchange
NABARD, India
BRAC, Bangladesh
Lease purchase UFL, Bangladesh
Islamic banking financial lease and partnership
IBBL
Other Islamic VCF banking practices
IBBL
Summary of the Case Studies
FIRA Mexico
Parafinanciera
Service Provider
Bank/
Non-bank Financial Institution
Individual Producers
Family Groups
Civil Society
90 days 8 days
Financial Institution - Parafinanciera
Line of credit
Parafinanciera - Producer
Individual credit
Producer Organizations
FIRA parafinanciera credit delivery intermediation
FIRA Mexico
Parafinanciera
agribusiness services
(credit, aggregation,
technology, inputs,
purchases and/or other
related commercial
services)
Agri-
entrepreneurs
Services company
Distributors
Agro-industries
Distributors
Input suppliers
Producers
Types of parafinanciera agribusiness service
providers
FIRA Mexico
Summary of the Financiera System
Islami Bank, Bangladesh (IBBL)
Value chain finance
a) Bai Al-Salam (Pre-purchase or advance contracting)
b) Bai Murabaha (Mark-up)
c) Shirkatul Meelk (Financial lease and partnership)
d) Sharia Insurance
• Bai-Muajjal (sale on credit)
Agriculture Finance Products
Tohum Kart
Vegetable Agriculture Finance
Dairy Finance
Fattening Finance
Beekeeping Finance
Poultry Finance
Land Finance
Tractor Finance
Commercial Real EstateFinance
Vehicle Finance
Machinery Finance
Real Estate Finance
Loran Rice Mill, Cambodia
Business value chain and financing flow of Nikum
Presihanouk Cooperative (AC)
Collection
Production
Farmer members
of AC
Input suppliers
for seed or/and
fertilizer credit
Middlemen, small rice
mills
Banks, MFIs
and informal
moneylenders
AC
Contract
farming
Other Big
Rice Mills
Note: Financing flow
paddy rice product flow
Middlemen & small
rice mills for seed
and/or fertilizer
credit
AC support
fertilizer
credit
Processing
LRM
Idemitsu, Cambodia
Idemitsu
Loans for input supplies
($215/farmer)
Technical support and research ($157,353)
Contract farming
Financing flowCassava product flow
23 cassava
Growers
Collection
Production
Trade
Idemitsu
Banks, MFIs, moneylenders
Middlemen
Cassava chip silos
Cassava
chip
exporters
Finance and product flows for contract cassava
growers
Konica, Bangladesh
The Konica Seed Value Chain1. Seed growers contract Konica
2. Konica buys input
3. Konica supplies seed & inputs
to growers
4. Receive finance from Konica
5. Technical assistance provided
6. Growers deliver production
7. Final payment to growers
8. Konica outsources storage
9. Sale of seed and non-seed
quality produce
10. Borrowing and repayment of
finance to Konica
Fertilizer, pesticides, etc. (input supply co.)
Agricultural production (farmer contracts)
Cleaning & sorting
Storing or warehouse
ConsumersSeed buyers
Finance from banks & investors
Konica Seed Company
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Contracts
Flow of products
Flow of funds
Technical assistance
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7
8
65
4
3
1
2
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Loran Rice Mill, Cambodia
Middlemen, input
suppliers, small rice
mills
Banks, MFIs
Informal money
lender
Local Wholesalers
LORAN Rice
Mill
Processing
AC FWUC
Exporters
Input suppliers
Middlemen, small
rice mills support
seed or/and
fertilizer credit
Farmers
Contract farming
Note:
Financing flow
Production
Export
Collection
Value Chain financing for LORAN Rice Mill
Field level
monitoring
Assistance to farmers
Loan/lease
disbursement
Selection of
farmers
Value additions:
Guidance
Market linkages
Problem identification
Intervention
Association
Farmer
Bank/
Mobile
Banking
United Finance Limited – lending, leasing,
factoring
The ECX WHR Financing -lending
Ethiopian Commodity Exchange
T+1
60 (30) days
Ethiopia blended approach to AgVCF Inclusion
Companies
Farmers / groups
BDS providers
MFIs
Commercial Banks
Terrafina Local NGO
Rabo AdvisoryServices
FAO & Int NGOs
Rabobank (guarantee) Rabobank (loans)
Adapted from Harms
NABARD, India
The value chain BEFORE the intervention
The value chain AFTER the intervention
BRAC, Bangladesh
BRAC Bank
BRAC Cold Storage
Potato farmers
Potato seed dealers
Wholesaler
Buyers/Farmers
Home Consumption &
Seeds
Potato production
Sales by Farmers
Seeds &
inputsFinancing
Financing
Financing
Financing LoanRepayments
Payment
Payment(Service Charge)
Seed Payment
Potato production, cold storage, finance and
marketing
FAOwww.fao.org/ag/ags
www.ruralfinanceandinvestment.org
Useful Websites
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