Access To FinanceAnd Value Chains

Who Am I

1. I am a Farmer (With accessed finance to prove it)

2. I chair the Fiji Crop and Livestock Council

3. I am an Agricultural Number Cruncher

What is the Problem

1. Interest rates to Agriculture are at a historic low (5% to 6%)

2. Government directives to banks all banks to lend 4% of deposits to Agriculture

3. Country awash with cash

1. A farm with 60% equity and only 40% debt2. With a long track record3. With stacks of on farm data4. Professional accounts5. Linked to an established market6. With appropriate qualifications

Would be turned down by most commercial banks

Long Suffering FDB

• Only one bank will lend to most farmers

• Government policies financed through FDB

• But is the system working?

What is the Problem

We can talk about issues of security, thin markets, lack of experience. We can look at Sugar with guaranteed markets and the banks get first cut of any payments but :-

I believe there is a fundamental breakdown in communication between farmers and banks to a point where most banks reject any agricultural proposal.

And they are possibly right to do so.

High Risk

Agriculture and Agri-food businesses are perceived to have high credit risk because:

Most are technically start-up businesses and have inadequate collateral to satisfy the requirements of long term loans;

Managers often lack key financial management competencies to allow the production of bankable proposals;

Managers don’t have a clear understanding of banking lending requirements.

Banks and financial service providers often lack the time and the required resources to effectively address small business finance related needs.

Efficiency

If we are going to access finance for Agriculture the Agriculture must be efficient enough to carry the cost of Finance. (and other overheads)

Historically we are too optimistic, and therefore we fail and the banks won’t fund us.

Farmers are up stream in the value chain. If they fail/are not competitive ………………..

A long Value Chain1 Farmer 2 Collection

3 Agglomerate 4 Transport to Processor

5 Processing 6 Wholesale

7 Distribution 8 Retail

9 End UserEverybody wants a

$lice

A Simpler Value Chain

Farmer End User1

$

This is the Maqiti Market (Or Domestic consumption)

A lot of our Agriculture operates in the Maqiti market because our farming is less efficient

Advantages and Disadvantages of Maqiti

Advantages DisadvantagesFarmer Gets Highest Price Can not produce at whole sale

pricesBuyer gets lowest Price Will never enter processing value

chainsCopes with inefficient production systems

Will never compete with efficient production

Keeps more people working on the land

Agricultural production will never break out of the subsistence sector

Insufficient returns to contribute to overheads such as bank loanLimited to the size of the Maqiti marketHard to produce in bulk or consistent quantities. Can’t grow.Always at risk to imports of cheaper efficiently produced products

Does not encourage production efficiency

What are we doingInternational Trade Center, working with the Fiji Crop and Livestock Council and the recently established Credit Risk Task Force are working on four solutions to rebuild confidence between banks and farmers. This is a structured approach to investment appraisal for SME’s and is designed to properly assess the RISK.

1. Developing a farm management manual that reflects the reality of farming in Fiji and will therefore be conservative in its projections

2. To introduce proven “Access To Finance” mechanisms to all stakeholders. (Support Structure, Loan Com and Training)

3. Funding the Council to improve farmer representation

4. Working with agencies (FNU, FDB, FCLC,MOA) to properly host these system after the project ends.

Farm Manual

1. Standardized format for analysis of all crops

2. Comparative analysis of different efficiency scenarios to determine how to improve

3. Assessment parameters will be agreed by all stakeholders

4. Multilayered document to cover financial and non financial aspects for better risk assessment.

5. Most importantly, data will be drawn up in Fiji by using actual data from our farmers, not research data or world best parameters

Manual Layers

FINANCIAL LAYERS

1. Enterprise specific Technical data to derive :2. Gross Margin analysis3. Full Costed Margin analysis4. Investment Appraisal analysisIncluding sensitivity analysis for risk (probability predictability with an emphasis on the impact of disasters )

SUPPORTING INFORMATION LAYERS

5. Technical summary and assumptions (building, soils, climate , production systems)6. Quality issues and defined Fiji standards7. Fiji agricultural statistics (scale, structure and location , imports and export statistics)8. Market options and risks9. Fiji soil capability Mapping10.Contacts , – suppliers, technical assistance industry players, government, agencies , FCLC?;11.Risk analysis to drive the selection of sensitivity criteria.

Manual Gross Margin Income

Gross Income              

  Oranges1 Oranges2 Oranges3

Total Yield Unit  

Tons Per Hectare Tons 10   14   18  

   

Grading  

First Grade Percent 30%  40%  50% 

Price Dollars $2,000   $2,200   $2,400  

Ton Tons 3.0 5.6 9.0  

Gross Dollars $6,000   $12,320   $21,600  

   

Second Grade Percent 30%  40%  50% 

Price Dollars $1,000   $1,200   $1,400  

Ton Tons 3.0 5.6 9.0  

Gross Dollars $3,000   $6,720   $12,600  

   

Third Grade Percent 40%  20%  0% 

Price Dollars $1,000   $1,000   $1,000  

Ton Tons 4.0 2.8 0.0  

Gross Dollars $4,000   $2,800   $0  

   

Gross Avgerage Income Per Ha 13,000 21,840 34,200  

Gross Average Income Per Ton 1,300 1,560 1,900  

               

Access to Finance Mechanisms

Loan Com :- A computer data base that asks pertinent questions about a business plan, managements understanding and ability and the financial strength of the plan to gauge the preparedness of the proposal.

The output is automatically calculated and is derived from a composite assessment of the criteria examined. It makes recommendations and identifies strengths and weaknesses and additional information required.

The system runs on a lap top or PC and can be used as a quick cheap assessment tool.

Training1. ITC will fund training and development in the

operation of these systems.

2. It will ensure the systems are supported with the appropriate IT support and backup and that they are available in accessible ways.

3. It is intended to develop a carder of support officers knowledgeable in the operation of these systems and also knowledgeable in farm operations and efficiencies

Access to Finance Support

Local Advisory Operators

Commercial Banks &

Micro Finance

Technical Assistance, Training,

Farm Manual

Structured Analysis

MSMEs

ITC

MSME Financing

Technical support

LOANCOM & other tools Finance options and Guarantees

MSME Competence

Building

Activities & Issues

1. Meet with stakeholders and establish a Task Force.

2. Determine what form of Fijian Advisers / Counsellors would work best.

3. Identify who would need to be involved in organising workshops for financial management counsellors.

4. Do Credit Risk Officers, MPI, FDB, RBF and others require coaching and advice on alternative forms of guarantees, potential financing and insurance mechanisms from ITC?

5. Identification and evaluation of feasibility of index insurance for smallholder producers and disaster relief or crop failure payments. (FCLC)

6. Resolve issues of liability when acting as an advisory body.

Conclusion

Finance of Agriculture is not working for numerous reasons.

Over optimistic assumptions for efficiency are damaging. Our farmers know best.

Structured, proven and properly funded mechanisms to improve “Access to Finance” can only be beneficial

The Council provides an opportunity to firmly root this project in Fiji by accessing knowledge from farmers who are actually growing the crop