Calvin Miller

Group leader, Agribusiness and Finance

Food and Agriculture Organization of the

United Nations (FAO)

Rome, Italy

INTERNATIONAL BANKING FORUM 2015

Brescia, 11-12 June 2015

How finance

can foster the

food chain

2 2

Presentation focus

I. Food security and imperative for food growth

II. Changing role of agriculture

III. Agricultural credit and potential

IV. Agricultural value chains and AgVC finance

V. Addressing the risks

VI. Meeting the needs and opportunities of small farmers and SMEs

VII.Investing in food value chains

3 3

Source: FAO, 2015

Agriculture is profitable; the trends are right; risk is manageable

4 4

Urbanization – growing need for food transformation

UN Department of Economic and Social Affairs, 2014

5 5

Sustainability – a growing investment challenge

• Water scarcity

• Bio-tech

• Land use and ownership conflicts

• Food vs fuel

• Animal rights

• Indigenous rights

• Conservation and recycling

• Deforestation

• Energy consumption and renewal

6 6

Value Added Gap & Investment Opportunities

200000

100000

0

300000

400000

800000

700000

600000

500000

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Low income

Lower middle income

Upper middle income

High income

Agriculture value added by year and income levels

7 7

Financial services must be inclusive to address food security

8 8

Agriculture Share of Credit by region, 1991-2013

0

2

4

6

8

10

12

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Ave

rag

e A

gri

cu

ltu

re S

hare

of

To

tal C

red

it, %

Africa Asia & Pacific Europe

Latin America & Caribbean Other Developed World

9 9

Private investment is increasing

Agricultural capital stock in Asia, LAC and Africa (in millions of 2005 USD)

Latin America and the Caribbean

820000

800000

780000

760000

740000

720000

700000

680000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Asia 2200000 2150000 2100000 2050000 2000000 1950000 1900000 1850000 1800000 1750000 1700000

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Africa 600000

500000

400000

300000

200000

100000

0

Source: FAOSTAT

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

10 10

Private and public investment in agriculture

Components of agriculture investment for a sample of 31

developing countries

Source: ODI, 2012

11 11

Where do we invest in the VC?

Inp

ut

Su

pp

ly

Production Processing Wholesale Retail

Co

ns

um

er

11

12 12

Basmati rice value chain map in Pakistan

12

13 13

Defining Value Chain Finance

Value chain finance – financial products and services

flowing to and/or through a VC to address the needs of

those involved in that chain, be it a need for finance, a

need to secure sales, procure products, reduce risk

and/or improve efficiency within the chain.

Objectives:

Align and structure financial products to fit the VC

Reduce costs and risks of finance

14 14

A food systems approach

Financial Services

Input Suppliers

Growers

Food

Processing

Industries

Food

Retail

Industries

Business Support Services

Production Agri-food industries

Operating Environment

Transport Storage

Services

Logistics & VC services

Input

Suppliers

Financial Services

VCs are transformational, not just transactional

15 15

Understanding the risks

Growing Storing

Production

Price

Operational

Financial

Institutional

Infrastructure

Quality control

Technology

Logistics

Seasonal glut

Processing Marketing

Infrastructure

Storage

Price

Product loss

Govt. policy

Technology

Procurement of

produce and

goods

Human resource

Product quality

Input

Supply

Quality

Availability

Infrastructure

Knowledge

Financial

16 16

Addressing risks

Key risks Risk mitigation Risk mitigation Risk tools

• Improved and resistance seeds

• Input supply financing

• Leasing and equipment financing

• Irrigation and long-term financing

• Cash flow based tailored lending

• Warehouse receipt financing

• Crop, animal and other insurance

• Index-based weather insurance

• Value chain linkages & contracts

• Market information

• Credit bureaus

Production

practices

• Price and

market risk

• Weather risk

• Production

risk

• Collateral risk

• Human risk

• Competitive-

ness risk

• Price and

market risk

• Weather risk

• Production

risk

• Collateral risk

• Human risk

• Competitive-

ness risk

Market

management

Financial

innovation

and tailoring

Client/

business

assessment

• Hedging and forward contracts

• Futures and options

• Buffer stocks

17 17

Using food price monitoring for food security and

investment risks and opportunities

FAOstat data

18 18

Pakistan Crop Information Portal

• Agriculture Information System project – building

capacity of provincial governments to timely collect,

analyze and report agricultural information.

• The Portal – web access for historical archive and current

crop and agro-meteorological data, integrated with

satellite based information into a GIS like environment.

National information services

19 19

Portal Outputs

20 20

Insuring catastrophic and non-catastrophic risks

Source: Adapted from Carter et al. 2014

Self-coping risk layer

Commercial risk layer

Catastrophic risk layer

21 21

Category Financing instrument

Agricultural product based • Trade credit

• Input supply credit

• Marketing company credit

• Lead firm financing / contract farming

Receivable based • Trade receivable finance

• Bill discounting

• Factoring and reverse factoring

• Forfaiting

Physical asset based • Warehouse receipts system

• Re-purchase agreements

• Leasing

Categories of AgVC financing instruments

21

22 22

Type of product Financial instrument

Risk mitigation • Insurance

• Forwards contract

• Futures

Financial enhancements • Securitization

• Loan guarantees

• Joint ventures

There are multiple agricultural value chain financing instruments

to consider; often to be used in conjunction with one another.

Financing Instruments

22

23 23

Parafinanciera

service provider

Bank/

Non-bank financial

fnstitution

Individual

producers

Family

groups

Civil Society

90 days 8 days

Financial institution - Parafinanciera

Line of credit

Parafinanciera - Producer

Individual credit

Producer

organizations

FIRA parafinanciera credit delivery mechanism in Mexico

24 24

FIRA Mexico Summary of the FIRA para-financiera system

25 25

• Receivables financing is one of the fastest growing financial services

with annual global transactions of USD 2.3 trillion dollars.

• “Reverse Factoring allows us to accelerate payments to Suppliers at

extremely fast turn-around-times, and provide timely liquidity for

entrepreneurs to build and grow their businesses ,“ Chairman,

eBiashara, Kenya, whose IT platform allows banks to offer on-line

invoice discounting services that can process hundreds of invoices

simultaneously at low cost

Receivables financing

Adapted from Financial Access

Supplier

Buyer

Ag corporate client

Factor/

Bank

Supplier Supplier

Reverse Factoring

Supplier

Buyer

Ag SME

Buyer Buyer

Factor/

Bank

Factoring

26 26

BRAC Bank

BRAC Cold Storage Potato farmers

Potato seed dealers

Wholesaler

Buyers/Farmers

Home Consumption & Seeds

Potato production

Sales by Farmers

Seeds & inputs

Financing

Financing

Financing

Financing Loan

Repayments

Payment

Payment (Service Charge)

Seed Payment

Potato production, cold storage, finance and

marketing - BRAC, Bangladesh

27 27

Finance and investment opportunity

Cold storage -- rapid development of cold stores for potatoes in

India and Bangladesh is raising farm prices and reducing

seasonality for consumers

• In western Uttar Pradesh, India from 5% cold storage in 1990,

40% start in 2000 to 73% in 2009; also now in the poor Bihar

state

• Cold storage centers are an important conduit for providing

credit to farmers

There is a “perfect storm” of cities, roads, electricity, new

varieties, irrigation and partial subsidies leading to growth in

private investment and financing n the agricultural VCs

28 28

The challenges

Warehouse capacity

29 29

The management

The challenges

30 30

Ethiopia blended approach to AgVCF Inclusion

Companies

Farmers / groups

BDS providers

MFIs

Commercial Banks

Terrafina Local

NGO

Rabo Advisory

Services

FAO & Int NGOs

Rabobank (guarantee) Rabobank (loans)

Adapted from Harms

31 31

Useful Websites

www.fao.org/ag/ags

www.ruralfinanceandinvestment.org

Grazie