Financing Agriculture in Turkey Conference
Istanbul, Turkey
18 April, 2012
Calvin Miller
Agribusiness and Finance Group Leader
FAO, Rome, Italy
Opportunities for Financing the Agricultural Sector in
Turkey
An Evolving Agriculture
�Market integration
� Tighter supply and value chains
� Increased concentration of power of market leaders
�Open trade with intense regional and global competition
�Consumer changes
�More food processing and segmented demand
� Stringent standards, specifications and conditions
� Information and communication technology (ICT)
� access to information is easier and more important
� back-office technologies are more robust to manage data
The new context for Agriculture
Expanding high-rent markets in agriculture represent an
enormous opportunity to foster poverty reduction
Note: agro-processed goods represent an expanding market in agriculture worldwide.
Source: http://faostat.fao.org and http://comtrade.org
3
The Concept of AVCF
Where do farmers and agro-processors turn when banks or
other financial institutions are unable or unwilling to
provide them with financial services?
Exporters / Wholesalers
Processors
Local Traders & Processors
Producer Groups
Farmers
Input Suppliers
Banks
Non-bank
Financial Institutions
Private Investors
& Funds
Cooperatives /
Associations
Local MFIs /
Community Orgs
Financial Service
InstitutionsValue Chain Actors
Product Flows
Financial Flows
Technical Training
Support
Services
Business Training
Specialized
Services
Governmental
Certification/Grades
Product and Financial Flows along a VC
Financing comfort zone
Spot
market Contract
Relationship
based partnership
Capital investment
based partnershipVertical
integration
Buyer
Seller
Value Chain Relationship Structures
VC Relationships Enhance Finance
Value Chain Business Models
Business models in agriculture value chains in terms of small holders can be divided into four types:
�Producer-driven
�Buyer-driven
�Facilitator-driven
� Integrated
Financial services and the approach to their delivery
ought to be related to the VC business model?
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 chain
�Reduce costs and risks of finance
Approach: Why is Ag VCF Important?
1. It allows sellers of inputs to increase sales
2. It facilitates produce buyers to get what they want when they want it (quantity, quality, timing, & price of goods)
3. Financial institutions can learn from and engage more with value chain actors in order to develop new products and reach new markets
4. The Value Chain approach as a comprehensive approach to lending is useful for improving and expanding financial services, not just for enterprise development
If designed well, value chain finance interventions can increaseIf designed well, value chain finance interventions can increaseIf designed well, value chain finance interventions can increaseIf designed well, value chain finance interventions can increasethe competitiveness of small producers, as well as a range of the competitiveness of small producers, as well as a range of the competitiveness of small producers, as well as a range of the competitiveness of small producers, as well as a range of agricultural and agribusiness enterprises.agricultural and agribusiness enterprises.agricultural and agribusiness enterprises.agricultural and agribusiness enterprises.
Category Financing instrument
Agricultural product based
• Trade credit
• Input supplier credit
• Marketing company credit
• Lead firm financing / contract farming
Accounts receivable based
• Trade receivable financing
• Factoring
• Forfaiting
Physical asset based • Warehouse receipt finance
• Re-purchase agreements
• Leasing
Ag VC Finance Tools/Instruments
11
Type of product Financial instrument
Risk mitigation • Insurance
• Forward contracts
• Futures
Financial enhancements • Securitization
• Loan Guarantees
• Joint ventures
The instruments of agricultural value chain financing
channels are many and can be used in conjunction with
one another.
Ag VC Finance Tools/Instruments
Purchase Order Model - “Palmito” VC
Sale of Product
Loan repayment
K + i
Fund transfer agreement
IndividualCredit
$US 2.000
FABOPAL / INDATROP /BOLHISPANIA
Importer
Buyer Order(Contract)
Producer
ProcessorsProcessors
FIE Bank
12
43
5
6
7
Local merchant
Micro-credit
Lead Firm Contract Financing
Integrated Ag VCF Model
LAFISE
Trade
Network of offices in 10 countries
Identify marketsAnd buyers
Place Products
5
Collection and
payment to producer
6
Identify organizedproducers
1
Technical AssistanceQuality Certification
Productor
cosecha
3
Insurance - transport,life, fire, etc.
Financing:
* Asset management.* Warehouse receipts
2
4
Consolidation Processing
Added ValueProduct in
storage
Certification of Deposit and Warrants
Islamic FinanceIslamic Finance
Agriculture value chain finance conforms to and has many Agriculture value chain finance conforms to and has many Agriculture value chain finance conforms to and has many Agriculture value chain finance conforms to and has many
similarities to Islamic finance tools in that risk sharing and similarities to Islamic finance tools in that risk sharing and similarities to Islamic finance tools in that risk sharing and similarities to Islamic finance tools in that risk sharing and
mutual interest is part of the business modelmutual interest is part of the business modelmutual interest is part of the business modelmutual interest is part of the business model....
VC FinanceVC Finance
Al Murabaha (Markup Sale)
Selling Price = Cost + Profit (Both costs and profits have to be fixed and declared)
Product Finance (Provided the bank’s profit is fixed before hand)
Bie Al-Salam (Advance Contracting)
Price is paid upfront whereas the delivery is differed.
Contract Farming (Provided the bank allows for reconsideration of price in case of significant rise of market price)
Al – Musharakah (Partnership)A contract between two parties where in the profits are shared
Financial Lease ( Provided both the parties split profits in agreed proportion until the borrower buys back the bank share)
Al – Mudarabah (Speculation)
Partnership between provider of capital (Bank) and provider of experience and labor(Farmer)
Joint venture/Partnership
(Provided the bank’s finance is not considered as debt owed by the farmer)
Ag VCA and Islamic Finance
Producing Storing
Production
Price
Operational
Financing
Institutional
Infrastructure
Quality control
Technology
Logistics
Seasonal glut
Processing Marketing
Infrastructure
Storage
Price
Product loss
Govt. policy
Technology
Product supply
Human resource
Product quality
Govt. policy
Input
Supply
Quality
Availability
Infrastructure
Knowledge
Financing
Addressing Risks along the VC
From supplyFrom supplyFrom supplyFrom supply----driven driven driven driven ““““how we lendhow we lendhow we lendhow we lend”””” to to to to
client driven client driven client driven client driven ““““how can we structure finance how can we structure finance how can we structure finance how can we structure finance
to address client needs and risksto address client needs and risksto address client needs and risksto address client needs and risks””””
Customized Products to VC Stakeholders
Contract Seed Growers
Dealer
Seed Company
Distributor
Farmer
Contractual agreement
Credit sales
Preferred distributors
Lending against offtake contract
SEEDS
Lending against stop sales agreement
Term lending/ WC
Short term lending against liquid collateral
Crop loans
Credit
Credit/ forward contract
Farmer
Wholesaler
Village level CA
Mandi/ Warehouse
Miller
Warehouse Receipt
Warehouse Receipt
Spot market price
EDIBLE OIL
Vendor bill discounting
WR finance
Crop loan
Risk Management
in agriculture
value chain
Agri-business segmentation
Social vs. commercial insurance
Traditional farming sector
Emerging farming sector
Commercial farming sector
Agricultural risk assessment
Risk identification
Risk quantification
Probabilistic agricultural risk model
Agricultural risk financing
Risk layering
Insurance index
Insurance pool
Insurance and rural finance
Institutional capacity building
Data management
Regulatory/supervisory framework
Information and education
Technical expertise
Programme administration and
monitoring
Agricultural risk management
Why an Agribusiness Investment Fund?E
con
om
y, M
ark
et
Co
nd
itio
ns,
Sh
ock
s
Clim
ate
Co
mp
eti
tio
n,
stra
teg
yRISK FACTORS
Space for subsidized lending &grants
Low profits, high risk, but viable esp.
with support for productivity
enhancement
raw materialsIncome +
technology or
credit supportSpace for SEAF-like investment funds
Reasonable and consistent returns
(less exposed to market factors than
other sectors), but not extremely
high returns.
Kn
ow
-ho
w
� Agribusiness fund focusing on businesses that link farmers to global buyers
can complete a farm-level development strategy for emerging markets.
Space for SEAF-like investment funds
and private sector
Opportunities for high returns, based
on business strategy and ability to
beat competition.
FARMERS, PRIMARY PRODUCERS
PROCESSORS, AGGREGATORS, EXPORTERS
LOCAL & INT’L BUYERS/RETAILERS
processed goods
VALUE CHAIN PLAYERS OPPORTUNITIES
Source: (SEAF), 2009
Diversification of agricultural investment risk
ICT applications (e.g. improved MIS systems, mobile phones,
internet price & trade information) can reduce information and
transaction costs to service rural areas.
0
10
20
30
40
50
60
70
80
Africa Asia Latin America
2003
2008
Subscriptions per 100 million persons
ICT Innovation for Improved Competitiveness
Innovative Aggregator Models for Agriculture
Farmers
Aggregator at Village and Higher
Levels
ISB (Knowledge partner)
Forward contract
Input credit
Knowledg
e
sharing
Regional Call Centres (RCC)
Bank
Fund
transfer
WR financing
NBHC
MCX
NSEL
Market players
Some risk management tools are more practical for agroSome risk management tools are more practical for agroSome risk management tools are more practical for agroSome risk management tools are more practical for agro----industries and wholesalers, industries and wholesalers, industries and wholesalers, industries and wholesalers,
but can stabilize prices and reduce risks for all producers and but can stabilize prices and reduce risks for all producers and but can stabilize prices and reduce risks for all producers and but can stabilize prices and reduce risks for all producers and bankers.bankers.bankers.bankers.
• Character
• Capacity
_______________
• Capital
• Collateral
• Conditions
• Management &
technical ability
• Human labor
• Loan terms
• Production cycle
• Markets
Good Client Analysis Remains Fundamental
Five Five Five Five ““““CCCC’’’’ssss”””” for loan analysis are still important ,with a change in emphasfor loan analysis are still important ,with a change in emphasfor loan analysis are still important ,with a change in emphasfor loan analysis are still important ,with a change in emphasisisisis
• Integrity &
responsibility
Need for Good Governmental Policies and Support
� Business capacity building and market integration
� Contract farming and out-grower schemes
� Technical capacity in market norms and standards
� Commodity exchanges and active futures markets
� Insurance innovation, data collection and initiation
� Market information and access
� Infrastructural investment
� Product and service innovation and diversity
� Technology adaptation and access
Top Related