Distinct Financing Phases
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How can we get more financing into Russian Agriculture
Russian agriculture and its place in the world: challenges & opportunities 6 September 2010
Distinct Financing PhasesPREHARVESTPOSTHARVEST
What can the farmer provide as security?Pre-Harvest:Land & buildingsMachineryFuture CropPost-Harvest:Same as pre-harvest+Crop
What is the security value for banks today?Pre-Harvest:Land & buildingsSomebut difficult to enforce and value is volatileMachinerySignificantgood second hand marketFuture CropLimiteddifficult to perfect, enforce and monitorPost-Harvest:CropSignificanttransparent and efficient market
How can this be improved?By increasing the value of the farmers assets which he/she can provide as security, through clear and specific legislation, which allows for these assets to be provided as security and should problems occur, are easy to enforce for the Banks
What is EBRD doing?EBRD is assisting the Russian Grain Union in preparing specific warehouse receipt legislation which will:Strengthen the title document to agricultural commodities stored in warehousesProvide for certification of warehouses and as a result improve standardsCreate an indemnity fund to cover the fraud risk at the warehouses
Increased access to financing as warehouse receipts are easier to enforce, compared with current moveable pledge
What else would EBRD like to do?Introduce specific legislation which enables farmers to use their future crop as security, as it is being successfully done in Brazil today
Brazils ExperienceLending against future crop, based on specific legislation introduced in 1994, have increased steadily and today annual financing exceeds $5bnFinancing is provided by:Input suppliers - in return for purchasing their goodsOff-takers to secure future deliveriesLocal banks small to large scale farmersInternational banks pre-export financing from growing, through to storage through to export
Key Pillars of Future Crop Legislation1. Inspection RightThe lender or its agent shall have full access to the farm and fields during the life of the loan. Experience from Brazil is regular monitoring throughout the growing phase and 24 hour inspection during harvesting.
2. Longevity of pledgeThe pledge remains in force until the debt is fully repaid, i.e. if the production from the coming season does not repay the debt, the pledge (and its ranking) remains in place for future seasons.
Key Pillars of Future Crop Legislation3. Acts of God or Force MajeureCan not be used as an excuse to not repay the debt
4. PriorityClear priority to proceeds from enforcement should be identified and should preferably be (1) court enforcement costs; (2) bank debt (in order of registered priority); (3) unpaid taxes of owner; and (4) owner or owners estate.
5. Central RegistryOne registry for registration of all Crop Receipts with on-line access to check priority and existing pledges
Key Pillars of Future Crop Legislation6. Easy EnforcementThe key success factor from Brazil is the easy enforcement, whereby enforcement decisions are reached within 24 48 hours and there is very limited (if practically no) ability of the borrower to object.
ConclusionAlthough the above instruments are clearly not the ultimate answer to farmer financing, we strongly believe that these instruments will greatly enable increased liquidity for the food chain