in farm financing February 4, 2016 Michal de Groot Not all agri - - PowerPoint PPT Presentation

The Financial Landscape and the Cocoa Sector February 4, 2016 Michaël de Groot

Challenges, risks and solutions in farm financing

Not all agri production is bankable in developing countries

2

bankable non bankable

Corporate farmers Emergent farmers Subsistence farmers/small holders

Cocoa production is for 90% concentrated in the lower part of the pyramid

Features per farmer segment

3 Corporate farmers Emergent farmers Subsistence farmers/small holders

Cocoa production is for 90% concentrated in the lower part of the pyramid

• Land title/collateral
• Access to finance
• Financial literate
• Good financial documentation
• Sometimes land title
• Some collateral
• Moderate financial literacy
• Developing financial documentation
• Some access to formal finance
• No land title/collateral
• Land use rights
• No financial literacy
• No financial documentation
• No access to formal finance

Financing of 500 million smallholders

• Informal credit from family/neighbors/local shopkeepers
• Informal credit from middle-men/ off-takers

–

Lack of bargaining power

–

Barter deals: inputs against crop

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Or cash under high interest rates

–

Lack of transparency

–

Creates dependency on middle-men

• Semi- formal credit from producer organizations, co-operatives
• Sometimes state bank programs

No or very little access to formal bank credit

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Financial services

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NGOs, Governments Microfinance services for MSEs Standard financial services for SMEs

High Middle Low income Economic active poor Extreme poor

Official poverty line More sophisticated financial services for MCEs Grants Commercial banks Development banks, Agricultural banks, Savings banks MFIs, Credit unions, Credit cooperatives NGOs, Self help groups, Moneylenders

Main obstacles to formal credit to individual farmers

Farm level

• Lack of collateral/land title/capital
• Lack of financial documentation
• Lack of track-record
• Lack of understanding bank requirements

Institutional level

• Government policies
• Lack of supporting legislation (e.g. warehouse receipt laws, enforceability of

collateral)

Bank level

• Lack of understanding of agriculture markets
• Large distance between bank branch and farmers
• Mismatch in financial products and sector needs
• High risk in financing agriculture

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What are the main risks associated with agriculture?

• Commodity price risk
• Quality differences, perishable goods
• Crop risk (weather, diseases)
• Weak repayment discipline / cash diversion / theft
• Lack of collateral and is difficult to liquidate
• Political risk (government interventions, legal enforceability of rights)

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What are the credit needs of the individual farmers?

• Mainly working capital finance / seasonal credit

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Planting materials

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Farm inputs (chemicals & fertilisers)

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Labour

Lack of credit is resulting in low use of inputs, no replanting resulting in low productivity and quality

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• LT loans for renewal plantations / productivity / equipment

Our view on how to address these

• bstacles for the individual farmer
• Create bargaining power via:

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Creating economies of scale !!! (size)

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Integration in the value chain !

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Organise “what you can do better together”

– Knowledge transfer (extension services) – Marketing – Input supply – Finance

Most common solution to this is a cooperative organisation and integration in the supply chain

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Sector analysis cocoa and chocolate Industry 10

The cocoa and chocolate value chain…

Consumers Inputs Cocoa farming Cocoa sourcing Trading/ shipping Processing Choc. Manufac- turing Food service Food retail Institutions Branded choc. Food companies

Cocoa industry Chocolate industry De-coupling point

1st transformation Grinding

from cocoa beans to cocoa liquor

2nd transformation Pressing

from cocoa liquor to cocoa butter and cocoa powder

Current financing options for coops are limited in developing countries

Financing needs Which parties are active?

• Investment finance (medium/long-term):

land, warehousing, equipment, transportation, cost of certification, etc Scarce equity and foreign direct investment Governments Social lenders

• Input financing: to finance the purchase of

inputs on behalf of the members middle men, (Inter)national traders

• Stock financing: to finance the beans stored

at the coop warehouse before delivery Expensive due to lack of warehouse receipt systems and enforceability local banks Risk of double pledging

• Pre-(export) finance of harvest: to bridge

period between purchase from members and payment by off-takers Available at competitive rates main provider international traders and local banks 11

Which interventions are needed to improve the situation?

Cooperatives/ SME should be better prepared for their tasks by

• Cooperative Institutional Capacity building
• Implementation of a proper capitalization structure
• Improving member loyalty
• Access to markets and information, agronomic support, exchange of best

practices

Banks should be better prepared to financing the cocoa sector

• Knowledge transfer to local banks (training of agri credit skills, understanding of

agri markets and cooperatives)

• Temporary credit enhancement through risk sharing instruments/guarantees

(by governements/mulitlaterals)

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Rabobank Rural Fund business cases

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Farmers Coops Processors Traders

Asset Finance

• Input financing
• Raw Material

Collection Financing

• WHR financing
• Cooperative capacity

building

• Save For Loan
• Credit score cards
• Outgrower schemes
• Emerging farmer

programs

• Working Capital
• WHR financing
• Trade & Commodity

Finanance Working capital

Thank you

Michaël de Groot Rabo Rural Fund

email: michael.de.groot@rabobank.nl