Agri-Financing Made Easy!

Financial support for farmers and agribusinesses is poorly understood, however at the Global Conference for Agricultural Research in Johannesburg recently, Calvin Miller, Group Leader of the Agribusiness Finance Group at the UN Food and Agriculture Organization (FAO), presented some  recommendations for all actors in the value chain that may just make agri-financing accessible.

Worldwide, agriculture is a major source of income for the rural poor, and agricultural growth has been shown to help reduce rural poverty.  Access to finance is one way to achieve this growth. Mr Miller says that agribusinesses that look for financing must understand their market demand and how their outputs respond to that demand. Since the lending institutions do not have the competence to assess individual market demand, the burden is on the borrower to do so. Because the market is at the one end of the value chain and the farmer is at the other,  solutions to access to finance depend on the actors in the value chain.

Financial institutions and investors must consider cash flow based lending which is best suited for “un-bankable” business owners that have a regular cash flow but have personal credit issues. In this scenario, loans are based on the cash flow of the business instead of the credit rating of the owner and usually do not exceed a certain percentage of  annual cash sales. Any smallholder farmer that keeps a record of his/her transactions can then qualify.

Insurance providers have to target obstacles to secure farmer income, as well as integrate insurance with other development interventions, Mr Miller says.  For example, weather risks are very specific in a given value chain, whereby too little or too much rain at specific stages of the development of a crop can be disastrous. Verification of the actual losses of production is costly and difficult, so a growing trend is to adapt weather insurance products to catalogue specific weather conditions to determine compensation for loss.

Mr Miller also advocated for exploring public-private sector partnerships to establish data infrastructure to get reliable, quality market and funding information simultaneously. These partnerships can also be useful in establishing smart agricultural insurance subsidy schemes to create a balance between efficiency and fiscal sustainability.

To develop value-chain financing solutions, agro-enterprises must also involve financial institutions early in their business planning. According to Mr Miller, this reduces risk and maximizes success because the role and responsibility of all parties are clear and  the financial institution can incorporate enablers as part of their support.

Donors have to consider technical training and product development in their criteria to ensure the farmer has capacity and is market-ready. Donors must include all the support services required by the farmer to ensure an uninterrupted value-chain to achieve profitability. These support services include: innovations, development of national weather services, infrastructure, data-systems, research, impact studies, digital platforms; and monitoring/ evaluation plans.

Mr Miller says farmer organizations, and their supporting organizations, must focus on services that benefit their members such as access to inputs, technical assistance, storage, commercialization, soft-skills development and access to finance.  They should also ensure their management team has sound managerial capacities, to facilitate information flow to small farmers as well as negotiate partnerships with value-chain actors that are mutually beneficial.

Target groups such as women, youth and minorities must be included in the development plans and operations of the agro-enterprise, to ensure buy-in from the community. These groups form a significant part of the value chain and present untapped opportunity for attracting investors, donors, subsidies and for qualifying for finance.

The ultimate goal of any business – especially in the agricultural sector –  is increased productivity. The take-home message from Calvin Miller’s presentation was that this can be greatly improved through better and innovative access to financial instruments that are tailored to the needs of farmers, farmer organizations and agribusinesses.

Blogpost by Olivia Pitt-Manonga, #GCARD3 Social Reporter – ogmanoka(at)gmail.com
Picture courtesy Wikipedia

This post is part of the live coverage during the #GCARD3 Global Conference in Johannesburg, South Africa, 5-8 April 2016. This post is written by one of our social reporters, and represents the author’s views only.