Agricultural value chains

Concepts – mapping – markets and finance

S Dwivedi

Some concepts

• Markets– Local markets– Terminal markets

• Prices– Spot , futures , options

• Price discovery– Information –arrivals, prices at alternate markets– Analysis (fundamentals/Technical) and projections– dissemination- electronic, Value added

services(vas),Print

Value addition• In Agricultural value chains value addition can come from

– Business Processes• Aggregation , segregation ,logistics

– Productivity• Man , material ,money, input, output

– Warehousing • Space, costs ,logistics

– Processing • Own vs. toll crushing (out source)

– Products• Whole foods to processed foods to derivatives

– Prices – Risk mitigation – Administration and InstitutionalAll these result in cost reduction or revenue maximisation

Value chain mapping

Process- Identify markets, survey, interview, research, quantify value addition at each stage

Cotton Value chain

Case one

Cotton Value Chain

Groundnut value chain

Case Two

Groundnut value chain

Components of value chains

All agricultural commodities do not offer same level of value addition

Value Chain Finance as an approach

– Takes a look at the collective set of actors, processes and markets of the system as opposed to an individual lender –borrower within the system.

– Decisions about financing are based on the health of the entire system, including market demand and not just on the individual borrower.

– That means in order to offer Agriculture VCF, knowledge of the agricultural system must be known.

Key issues for consideration in VC financing

• Strength of the value chain- its opportunities and challenges

• Risks• Technical ,business and financial services and

support• Business Model for VCF (Mwangi 2007)

In essence process involves combination of VC assessment, financial assessment and securing agreements.

Value Chain Business Models• For value chains and value chain financing, a

business model refers to the drivers, processes and resources for the chain.

• Four types of business models:• Producer-driven • Buyer-driven • Facilitator-driven • Integrated

Five C’s of Lending Applied to VC Financing

Business Model Rationale

Using the Value Chain to Finance Agriculture

Product and Financial Flows within the Value Chain , Source: Adapted from Fries

(2007) and Miller( 2007a)

Existing Agriculture VC Finance Providers

Various Value Chain Finance Tools/Products

Key steps that can be employed by VC Financing Institutions

1. Understand VCa. Enabling Environmentb. Vertical and Horizontal Relationshipsc. Support Markets and Servicesd. End Market

2. Identify current value chain model that existsa. Lead Actorsb. Business Modelsc. Sustainability Strategy

3. Identify Transaction Processesa. Value added in various stages of the product up the value chain

4. Determine Actual and Critical Points of Finance5. Analyze and compare financing options ( for each level of participant in the chain)

a. Relative strengthsb. Risks c. Costs

6. Design Financing Options according to the best option(s) to fit chain a. Draw up agreements for financing between parties

Important to Note• The Value Chain Framework is useful for expanding rural

finance and for developing enterprises.• Value Chain Finance builds on business relationships and

transactions to screen & monitor borrowers, enforce contracts and manage risks & costs

• Value Chain Finance is rooted in buyers' and suppliers' desire to expand markets, and to secure or increase product quality and quantity.

• Value Chain Finance takes a variety of forms in addition to cash lending, such as advances and off-balance sheet.

• The success and limits of Value Chain Finance are tied to the quality of cooperation between actors

ReferencesMiller, C., & Jones, L. (2010). Agriculture Value Chain Finance, Tools and Lessons. Warwickshire, UK: Practical Action Publishing Ltd.

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