How can we get more financing into Russian Agriculture

Russian agriculture and its place in the world: challenges & opportunities

6 September 2010

Distinct Financing Phases

Harvest

PRE

HARVEST

POST

HARVEST

What can the farmer provide as security?

Harvest

Pre-Harvest:

- Land & buildings

- Machinery

- Future Crop

Post-Harvest:

- Same as pre-harvest

+

- Crop

What is the security value for banks today?

Pre-Harvest:

- Land & buildings Some but difficult to enforce and value is volatile

- Machinery Significant good second hand market

- Future Crop Limited difficult to perfect, enforce and monitorPost-Harvest:

- Crop Significant transparent 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 warehouses

- Provide for certification of warehouses and as a result improve standards

- Create 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

Brazil’s Experience

Lending against future crop, based on specific legislation introduced in 1994, have increased steadily and today annual financing exceeds $5bn

Financing is provided by:

• Input suppliers - in return for purchasing their goods

• Off-takers – to secure future deliveries

• Local banks – small to large scale farmers

• International banks – pre-export financing from growing, through to storage through to export

Key Pillars of Future Crop Legislation

1. Inspection Right

The 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 Legislation

3. Acts of God or Force Majeure

Can 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 Legislation

6. Easy Enforcement

The 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.

Conclusion

Although 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