Managing Production and Marketing Risks to enable Agricultural Finance
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Transcript of Managing Production and Marketing Risks to enable Agricultural Finance
Elies FongersSenior Project Manager RIAS Agribusiness Advisory Services
Managing Production and Marketing Risks to enable Agricultural Finance
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Rabo Development within the Rabobank Group
Rabobank Foundation• Strengthening
Communities
Rabo Development• Financial Inclusion
Rabobank Group• Rabo International• F&A Banking
• Local Member banks• Retail banking
• Group entities• Leasing, insurance,
asset mgt.
Sustainable cooperative banking with involvement in the F&A chain
Agricultural finance: positive cash flow and risk / uncertainty are key determinants
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• Yield / ha• Soil type, soil fertility• Weather• Floods• Pests & diseases• Farming practices• Technical skills
• Post harvest losses• Price / amount
• Quality of produce• Buyer• Supply & demand relationships
(local, domestic, regional, world market)
• Business skills
• Cost of production• Inputs (o.a. seeds, ferts,
pesticides)• Labour (a.o. own labour versus
hired labour)• Energy (a.o. fuel, electricity,
solar energy)• Investments in means of
production• Animals and trees• Machinery• Irrigation• Land and buildings
• External financing• Working capital facilities• Term loans
• Own consumption / farmer income
Cash in Cash out
Since the cost structure is relatively fixed, production and marketing risks are important drivers of uncertainty
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• Good farmers can realise 10 – 20% higher yields
• Established relationships between farmers and off-takers result in secure market and reduce uncertainty
• A floor price and / or fixed price reduce uncertainty as well
-> Good farmer selection + formalised value chain relationships and/or price risk management enable agricultural finance
However, there are always risks that cannot be fully mitigated
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• Examples• Weather risks• Pests & diseases• Floods
-> Financiers need to accept these inherent risks
Key mitigants for market and/or price risk
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• Physical contracts• Fixed price• Price to be fixed• Minimum price contracts
• Crop Promissory Receipts• Combination of physical contract + pledge over crop in the field• Fixed price, price to be fixed, etc• Improved collateral position of the financiers• Different elements can be traded seperately (price, goods,
credit risk)
• Futures and options• Exchange traded: phyiscal contract and/or price risk
management tool• OTC: price risk management tools
Example I: Emerging farmer finance schemes
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• A financing approach incorporating technical assistance on business management and agronomics
• Purpose of finance is combination of mechanisation financing and working capital
• Focus is on farmers with;• Minimum three year track record• Entrepreneurial character• Growth ambitions• Adequate equity• Minimum farm size (depending on sector)
Example II: Value chain finance structure
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Coop 1
Coop 6 Coop 7 Coop 8 Coop 9Coop
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Coop 2 Coop 3 Coop 4 Coop 5
Paddy rice supplied to UCORIBU
18,000 members
BANK
UNION input loan+ acquisition loan
paddy
proceeds
Example III: WHR finance
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1.Farmer deposits grains
2.Farmer borrow against the grains
5.Exporter receives grains from warehouse
4.Exporter un-pledges grains from bank
3.Farmer Sells grain to trader
CP
CT
CT
CP
CT
LoanPayments
CP CP
Example IV: CPR finance in Brasil
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• The system was developed in the early 1970’s
• Answer to special circumstances: no collateral available plus mercantile contracts were difficult and slow to enforce
• Crop Promissory Receipts: mercantile contract, fixed quantity, fixed price or price to be fixed, easy and cheap to register and good enforceability
• Adopted by small scale and large scale farmers in well organised value chains
• Over time the market for CPRs has become more advanced
• Banks have developed advanced financing solutions
Example IV: Price risk management services through intermediaries
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-> accessible to large(r) range of clients, characteristics of insurance policy, lower operational risks, no / less cash calls
Contacts
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Rabobank
Office address – NLCroeselaan 18/28
3521 CB Utrecht
Postal addressP.O. Box 17100
3500 HG Utrecht
The Netherlands
RABO DEVELOPMENT/RIASAgribusiness
Hans BogaardHead AgribusinessT. +31 30 21 30073M.+ 31 6 515 [email protected]
René VerberkSenior Project ManagerM. +31 6 [email protected]
Pierre SchonenbergSenior Project ManagerM. +31 651001143P.G.A.M. [email protected]
Wim VerzijlenbergCooperative expertM.+31 [email protected]
Elies FongersSenior Project ManagerM. +31 6 [email protected]
Corné de LouwSenior Project ManagerM. +31 6 [email protected]
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Enabling environment is critical to agriculture & agri finance
Agri finance Tenor
Interest rate
Volumes
Legal & regulatory framework Contract
enforceability Land ownership Pledge systems Agri policies WHR systems CPR systems
Collateral availability Land Commodity stocks WHRs CPRs Guarantees Cash savings
Capital markets Long-term funding Hedging
Business culture Corruption Contract
performance Cooperation
Government support framework Education Research Extension services Guarantee
instruments Subsidies
Skill level Farmers Coops SMEs Banks Ministries
Infrastructure Roads Power (Cold) storage Irrigation Ports
Value chain organisation Input supply Cooperative system Integration Information Traceability Retail/fresh market
Macro:
• Trends, price info
• Market studies
• Cooperation with Universities, etc
Micro:
• Collection of technical & financial data
• Branch information system
• Benchmarking clients
Sector policies:
• Client segmentation per sector Smallholders Emerging farmers Cooperatives Commercial farmers Traders Processors
• Value chain analysis per sector
• Risk analysis per sector
• Financing guidelinesper sector
• Key technical & financial parameters per sector
Agri finance products:
• Input financing
• Raw material collection financing
• Asset financing/leasing
• WHR financing
• CPR financing
• Outgrower financing schemes
• Commodity pre-export financing
• Saving-based-loan schemes
• Cooperative financing schemes
• Agri related guarantee schemes
Internal:
• Training agri credit skills
• Training on sector issues
• Certification program for agri loan officers (Basic/Advanced)
External:
• TA to Cooperatives• TA to farmers
Universities
FAO
USDA
Sector bodies
Accountants,
Feed companies,
Integrators, etc
Emerging farmers, cooperatives
Industry partners, NGOs, consultants
Product developmentKnowledge collection
& dissiminationSector
policy makingCapacity building
AGRI Department HQ- Head Agribusiness
- AGRI (sector) Experts
BranchesAgri-loan officers &Risk management
Financing agricultural sector requires considerable investments in knowledge and know-how