Calvin MILLER , FAO. Agricultural Value Chain Finance and VC - - PowerPoint PPT Presentation

Brussels Development Briefing n.35

Revolutionising finance for agri-value chains

5 March 2014

http://brusselsbriefings.net

Agricultural Value Chain Finance and VC Business Models.

Calvin MILLER, FAO.

Agricultural Value Chain Finance and VC Business Models

Revolutionising finance for agri-value chains

Brussels Policy Briefing no. 35 Calvin Miller, FAO Brussels, 5 March, 2014

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An evolving agriculture

• Market integration

 Tighter supply and value chains  Increased concentration of market leaders’ power

• Open trade with intense regional and global

competition

• Consumer changes

 More food processing and segmented demand  Stringent standards, specifications and conditions

• Information and communication technology (ICT)

 access to information is easier and more important  back-office technologies are more robust to manage data

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What is an agricultural 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.

VCs have market-pulled value chain linkages

Flow of produce, services & information

Consumers Retailers/ wholesalers Processors Growers Input suppliers

Finance

Research & Development

Flow of orders, preferences & information

• Inputs,

production and processing are demand driven.

• Continuous

flow of information.

• Market
• riented.
• Reap

competitive advantage.

Production based on the needs of the consumers and closely linked with the processors and other market players (market Pull)-Value chain marketing

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Defining 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

Goals and drivers of value chain financing

Reduce risks Reduce costs Improve relationships

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If If de desi signed ned well, , AgVCF CF inte terven rvention tions s can increase ease th the competitivene petitiveness ss of f sm small pr produ ducers cers, , as w s well as s ag agribu business siness enter terprises. prises.

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Financial Services

Input Suppliers Growers Food Processing Industries Food Retail Industries

Business Support Services

Production Agri-food Industries

Operating Environment

Transport Storage Services Logistics & VC Services

Stakeholder Roles in Agricultural VCs

Input Suppliers

Financial Services

Different VCs in the same product

Medium/Large Contract Farmers Wholesalers

Low income Rural / urban consumers Middle / Upper Income Consumers Export Market

Input shops in the city Rural Small Producers (1 ha)/ Rural Small Producers Small shops Market agents Exporters Village input retailer Medium and high end urban retail shops

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Wholesalers Retailers Input Suppliers Producers

Middle Men

A value chain n also defined ed by its parti ticular cular market t (consumer) umer) segment

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Value Chain Business Models

The business model in the AgVC from the smallholders’ perspective can be divided into four types:

• Producer-driven
• Buyer-driven
• Integrated
• Facilitator-driven

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Example: 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

Example: Buyer-driven business models Buyer-driven AgVC

Finance from RCGC Northern Food Corporation (NFC) Input supplier Agricultural production (NFC - farmer contract) Processing Industrial buyers Northern Food Corporation (NFC)

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• 1. Farmers’ contract with NFC
• 2. Negotiate with input

suppliers by NFC 3.Receive finance from RCGC

• 4. Supply of inputs to growers
• 5. Payment to suppliers
• 6. Growers supply tomato to

processor (in this case, NFC)

• 7. Processor supplies to

industrial buyers

• 8. Buyers pay to NFC
• 9. Payment to farmers by NFC
• 10. Repayment to RCGC

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LAFISE Integrated AVCF Model

LAFISE Trade Office network in 10 countries

Identify markets And buyers Place Products

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Collection and payment to producer

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Identify

• rganized

producers

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Technical Assistance Quality Certification

Productor cosecha

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Insurance - transport, life, fire, etc.

Financing: * Asset management. * Warehouse receipts

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Consolidation

Processing Added Value Product in storage

Certification of Deposit and Warrants

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TechnoServe

Kilicafe

Coffee growers

• rganization

Banks

Small Coffee growers Small processors Large processors Marketing company

Flow of technical support Flow of finance Flow of products Flow of guarantee and product innovation

Facilitator-driven Business Models Facilitator driven model

TechnoServe

Category Financing instrument Agricultural product based

• Trade credit
• Input supplier credit
• Marketing company credit
• Lead firm financing /

contract farming Accounts receivable based

• Trade receivable

financing

• Factoring
• Forfaiting

Physical asset based

• Warehouse receipts
• Re-purchase agreements
• Leasing

AgVC Financing Instruments

16 Type of product Financial instrument Risk mitigation

• Insurance
• Forward contracts
• Futures

Financial enhancements • Securitization

• Loan guarantees
• Joint ventures

The instruments of agricultural value chain financing channels are many and can be used in conjunction with

• ne another.

AgVC Financing Instruments

Ag SME or producer

• rg. (seller)

Lead agri- business firm (buyer/debtor Biashara Factors, Ltd / DGV Capital

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• 1. Sale of products
• 2. Invoice certified
• 3. Receivables sold

(at a discount)

• 4. Notification of

factoring

• 5. Advance by

factor

• 6. Billing on expiry
• f term
• 7. Payment of

invoice

• 8. Final settlement
• A. Domestic factoring

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Example: Biashara Factoring

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Example:Informal warehouse receipts system

• In Niger – 33% increase in stock value (in 4-

6 months of storage)

• 18% of food stocks used for the lean

season

• New income from off-season cultivation

Finance institution Stock in warehouse = Collateral guarantee

Small farmer group

Physical flows Monetary flows

Market

Small Farmer Pledge Forward Contracting

Farmers Buyers

Pledged Note Finance Product Contracts Payment Payment

Trade Co/Warehouse (Serves as a conduit) Bank

Product

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Agribusiness Loan Guarantee Co. (ALGC)

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ALGC characteristics:

• Agriculture guarantee (along

the entire value chain)

• Maximum cover is 50% of loss
• f principal only and not

interest or fees.

• Maximum Loan of $200k
• Maximum loan period of 5

years

• Fees – range between 0.75%

and 1% of Guarantee limit

• Decisions on use of guarantee

are made by the financial institutions

Credit institution Guarantee Fund

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SME/Beneficiary