Agricultural Value Chain Finance Innovations•Factoring and reverse factoring •Forfaiting Physical asset based •Warehouse receipts system •Re-purchase agreements •Leasing

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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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

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GDP Share (left-axis) AOI - C2A (right axis)

Agriculture Orientation Index (AOI>0.5) vs Agriculture

Value-Added Share of GDP, 2008-2012 Averages

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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

6

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.

7

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

8

Where do we invest in the VC?In

pu

t

Su

pp

ly

Production Processing Wholesale Retail

Co

ns

um

er

9

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

11

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

13

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

14

5 Cs and a big C of AgVCF Loan Analysis

15

• 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

16

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

17

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

10

Contracts

Flow of products

Flow of funds

Technical assistance

9

7

8

65

4

3

1

2

9

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

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www.ruralfinanceandinvestment.org

Useful Websites

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