building successful agricultural value chain finance
DESCRIPTION
Presentation Fin4Ag S21 by Calvin MillerTRANSCRIPT
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S21 Working Session
Building Successful Agricultural Value Chain Finance
Calvin Miller, FAO Senior Officer, Agribusiness and Finance
Revolutionising finance for agri-value chains conference
14 – 18 July, 2014
Nairobi, Kenya
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An agricultural value chain includes all actors from producers, processors, suppliers, wholesalers, retailers and consumers, as well as supporting services to a particular group of final consumers.
A value chain defined by its particular market segment
Successful ACVF depends on the actors
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1. End market/consumers
2. Operating environment
3. VC partner cooperation
4. Support services - finance- technical assistance- business services
5. Upgrading
Factors Influencing VC Competitiveness
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Strengthening coordination, addressing weaknesses and tailoring finance
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Flo
w o
f p
rod
uc
e, s
erv
ice
s &
in
form
ati
on
Consumers
Retailers/wholesalers
Processors
Growers
Input suppliers
Fin
ance
Res
earc
h &
De
velo
pmen
t
Flo
w o
f ord
ers, pre
fere
nc
es &
info
rma
tion
• Inputs, production and processing are demand driven.
• Continuous flow of information.
• Market oriented.
• Reap competitive advantage.
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Analytical framework
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Identification of:
Structure of the value chain: all individuals and firms that conduct business by adding value and helping move the product toward the end markets
External framework, or the broader legal / national context in which the chain operates
Dynamics of the value chain: individual and firm behaviors and how these affect the functioning of the chain
Trends and future risks and opportunities in the chain and its participants
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Agri-finance value chain approach
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AgVCF is an approach with application of selected instruments and adaptions based upon:
• A chain focus – looking at all actors, processes and markets of the chain
• A transaction focus – product and cash flow and its opportunities and risks
• Risk mitigation and efficiency – lending on the strength of those with stronger backing
• Direct and indirect financing -- according to efficiency, often with in-kind disbursements and payments at point of sale
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Comprehensive financial assessment
Character
Capacity
________
Capital/collateral
Cash flow
Conditions
Producers/SMEsOrganizational
reliability
• Management• Technical • Human & physical
• VC contract & transactions
• Markets & relationships
• Loan terms
• Debt Capacity• Security
5 C’s
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Value chain assessment Financial assessment Securing agreements
Understand the value chain – the market potential and chain risks, the inputs and stakeholders.
Identify the AgVC model, its sustainability and sources of financing, to provide a framework for analysing the following processes.
Identify the interests and relationships of participants, their inter-dependence, commitment, coordination and relationships
Loan assessment (5 C’s) of potential borrowers
Assess the operating environment – macro risks, regulatory constraints and potential support from the Government or other entities
Determine actual and critical points of finance – the current flows of funds and then what is needed and in what point in time.
Analyse and compare financing options, and relative strengths, risks and costs of financing for each level of participant in VC
Develop VC linkage and finance agreements – tailor-design financing according to the best option(s) to fit the chain and draw up contracts.
Identify the transaction processes – the value added in the various levels and the flows of the product within the chain.
StepsStepsSteps
Analysis of AgVCF– key issues
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Four types of AgVC business models:
1.Producer-driven
2.Buyer-driven
3.Facilitator-driven
4. Integrated
And adapting to the
VC environment
Building from the business model
Farmers Buyers
Pledged Note
Finance
Product
Contracts
Payment
Payment
Trade co./ co./warehouse
Bank
Product
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Producer-driven Models
ASOPROF Producer-owned Model
Farmer Coops
ASOPROF Bean Association
National Buyers
International Buyers
Producer Organizations
Farmer Coops
Producer Organizations
Farmer Coops
ASOPROF Services:• Seed production• Technical
assistance• Processing• Marketing/export• Member profit
share• Financing linkages
(not direct financing)
Individual growers
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1111
Purchase Order Model - ‘Palmito’ AgVC
Sale of product
Loan repayment
K + i
Fund transfer agreement
Individualcredit
US$2,000
FABOPAL / INDATROP /BOLHISPANIA
Importer
Buyer Order(Contract)
Producer
Processors
FIE Microfinance Bank
12
43
5
6
7
Local merchant
Micro-credit
Lead firm (contract) model – with MFI
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The LAFISE Integrated Model
Crop production
Far
mer
s’o
rgan
izat
ion
s
Value chain stage Service provider Service provided
Harvest
Collection
Processing
Storage
Marketing
LAFISE Agribusiness
BANCENTRO
LAFISE Insurance
• Credit screening• Technical assistance to
NGOs• Quality certification• Credit provision• Fiduciary & fund
management • Insurance
LA
FIS
E G
rou
p
• Corp collection partnering farmers’ organizations
• Value addition through processing• Storage
LAFISE Agribusiness
LAFISE WarehouseManager Company
BancentroLAFISE Insurance
• Warehouse certification• Warehouse receipt management• WR finance and insurance
LAFISE Trade
LAFISE Group Network (10 countries)
• Identification of markets & buyers• Product placement (export &
national)• Payment collection• Producer payment & loan collection
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AgVC Financing InstrumentsProduct-linked finance 1. Supplier and trader finance
2. Marketing / Trade Finance3. Lead firm contract farming finance
Receivables finance 4. Bill discounting5. Factoring and reverse factoring6. Forfaiting
Physical asset collateralization
7. Warehouse receipts8. Financial leasing9. Repurchase agreements
Risk mitigation products 10. Forward Contracts11. Futures hedging 12. Insurance
Structured financing 13. Credit guarantees14. Equity finance and joint ventures15. Islamic finance
Adapting financial instruments to the Ag VC
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Summary lessons in AgVCF
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1. A comprehensive approach
2. Use of insider knowledge
3. The weakest link
4. Forward focus
5. Re-focused 5 C’s assessment
6. Embedding finance for access and efficiency
7. Financial risk reduction can be achieved by financing through
the strongest chain actors
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Summary Lessons (cont.)
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7. Innovation is important
8. Chain diversification is important
9. Multiple models and applications
10. Emulates stakeholder participation or mutual interest in
banking
11. A struggle for policy makers and Central Bankers
12. AgVCF does not replace traditional finance – it can enhance it
and increase its efficiency, but both are needed.