Value Chain Finance: Key to Agricultural Productivity

Published on 22nd July 2014

The world population on 1 July 2014 was estimated at 7.244 billion people, and each day, a quarter of a million people are added. People are growing richer, demanding more and better food, thus increasing pressure on farmland. At the same time, farmland is being lost, to urbanization and erosion – over the past 150 years, half of the planet's top soil has been lost. Food demand will continue increasing while production will struggle to keep up, creating the risk of price increases and a certainty of high price volatility.

In many ACP countries (Africa, Caribbean and Pacific), agriculture is the main source of rural livelihoods. The Food and Agriculture Organization of the United Nations (FAO) reports that close to 80% of those living in rural areas rely on farming for their livelihoods. The majority of them are small-scale farmers, who farm on less than 5 ha of land on average. In recent years, there has been a global focus on smallholder farmers that has seen experts devise innovative methods to improve their productivity, and companies strive to better integrate smallholders in global value chains.

However, in order to improve smallholder revenue, all levels of the agricultural value chains must be strengthened. Production, processing, storage and marketing, all require upgrading so they can collectively sustain a growing food economy. Unfortunately, improvements in value chains have been slow compared to the rate at which the demand for food continues to rise. National and international efforts have been focused on the beginning and the end of value chains (production, and market access), with too little efforts made to improve the part between farm and fork – which remains characterised by large post-harvest losses and massive inefficiencies.

There is scope for a much more systematic value chain approach to link farmers to markets, and access to finance issues would have to play an important role in such an approach. For example, if farmers are to really benefit from training on better agricultural practices, they should at the same time be linked to sources of credit/finance that will help them improve their production methods – after all, profitable farmers are likely to reimburse their loans. Currently, the tendency by most governments in ACP countries is to overlook these issues, as agricultural finance tends to fall into an institutional gap between Ministries of Agriculture and of Finance, while (unlike western Central Banks in the past) ACP Central Banks are unwilling to play the active role in agricultural finance.

On a global scale, estimates show that more than two billion of the world’s poorest live in households that are solely dependent on agriculture. At a minimum, the global demand for smallholder agricultural finance is estimated to be US$450 billion. Less than 2% of this demand for agricultural financing is currently being met. This evident limitation presents an opportunity for financiers willing to learn about agricultural value chain finance.

What is agricultural value chain finance?

Agricultural value chain finance is a structured way of financing agriculture that links stakeholders operating within the value chains and lending institutions, and reduces the risks that are commonly associated with traditional agricultural financing. It permits lending institutions such as banks to diversify their investment portfolio and create a win-win scenario. With value chain finance, value chains can be transformed, unlocking economic growth in rural areas. In essence, agricultural value chain financing acts as a catalyst for driving economic growth in rural areas. It helps to increase household incomes for a large proportion of the population, and results in poverty reduction and guaranteed food security. It helps women, who account for the major part of production but who often do not own the traditional collateral (land) on which banks tend to rely, to raise finance on the back of their ability to supply into a value chain. But for this to happen, efficient diversified financial structures must be in place. They must meet the needs of the full spectrum of actors along the value chains. Financiers must understand agriculture (and agricultural methods) in order to be effective at designing their financial products.

How do we achieve this?

Limitations to agricultural value chain financing include, but are not limited to, unfamiliarity of financiers with agriculture and agricultural value chain financing mechanisms; weak value chains,  with farmers unable to deliver the produce that buyers want (so this produce is imported instead), and/or large inefficiencies in farm-to-fork infrastructure; inefficient production structures (difficulties for farmers to invest because they don’t own their land; fragmented land holdings; lack of farmer organisation); and disabling government policies. Large-scale finance will only start flowing into agriculture if these limitations are addressed systematically – in other words, when governments, with the support of development partners and in cooperation with the private system, creates an ecosystem that is conducive to change – an ecosystem that nurtures innovations incorporating  transformations in scientific research, institutions, markets, financial systems, policies and regulations, and culture.

Equipping financiers with the necessary knowledge of agricultural value chains and helping them to mitigate any risks with which stakeholders may be faced will help bring value chain finance to the fore. Sharing of past successes and failures can be an entry point. By focusing on models in agricultural value chain finance that have been tested in other places, we can adopt, replicate and scale them to our advantage.

By Lamon Rutten,

Programme Manager, Technical Centre for Agricultural and Rural Cooperation (CTA)

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