havemann t financing options for smallholders and mitigation july 2011

Tanja Havemann | [email protected] | +41 78 664 27 90

Smallholders:

(Possible) finance & risk perspectives with respect to agricultural climate

change mitigation interventions


• Who are ‘smallholders’?

• Why are they important?

• Why should they care about climate change?

• What makes them more likely to care?

• How can we identify those that are most interested, and how can we engage them?

• How do we identify those that are most important in terms of mitigation (or most at risk)? How can we engage them?

Some questions


Some perspectives


Defined by:

• Socio-economic characteristics: livelihoods, gender;• Resources (rather than area).

For the purpose of financing, there are significant variations:

• Subsistence vs. commercial;• Aggregated vs. not aggregated;• Proximity & sale; Domestic vs. local urban centers vs.

international .

A smallholder is…


Categories & Sources of financing

Categories • Domestic vs. foreign• Dispersal mechanism (direct, through various instruments / intermediaries)• Short term vs. long term• Informal vs. formal

Sources• Self-financed & controlled• Informal sources: friends & family (inside and outside country)• Domestic & government supported banks • Microfinance• Trade & value chain finance• ODA, NGO, philanthropy• Carbon finance / other PES


Business perspective

Possible Assets

• Land - size, fertility, proximity

• Animals• Infrastructure, tools• Labor – household• Inputs• Savings• Contracts

Revenues

• On farm sources• Off farm sources

Possible Liabilities & Risks

• Debts, other liabilities• Contracts• Production risks• Farmer risks• Institutional & governance

risks

Costs

• Fixed, initial• Recurring

Sources & mechanisms for financing?

How to minimize / better manage?

Size, timing, quality, variability, certainty of:


Initial thoughts on potential sources of funding (1)

Source Pre-requisites? Pros? Cons?

Self-financed • Liquidity• Savings• Confidence

• Fully invested, LT• No collateral• No aggregation

• Risk, high discount rate

• Small amount

Informal • Liquidity• Confidence

• Re-investment• No collateral• No aggregation

• Disputes• Favoritism• Enforceability

Domestic & government (inc. NAMA, REDD)

• Scale• Commitment• [Financial literacy]• [Collateral]• [Data]

• Policy landscape• Coordination• Subsidized • May be longer

term

• Aggregation• Policies• Linked to economic

landscape & donor trends

MFI • Ability to pay back / plan

• Banks• [Collateral]

• Direct• Size appropriate• Risk appetite• Reach

• Density-based• Pay-back• Term• History


Initial thoughts on potential sources of funding (2)

Source Pre-requisite Pros Cons

Trade / value chain

• Commercial• [Aggregation]• Confidence• Support

Usually accompanied by increased support & knowledge, incl. reduced risk

• Quality & quantity• Farmers as price-

takers• [Term]

NGOs, Donors, Philanthropy

• Access• Business plan etc.• [Aggregation]

• No repaymentrequirements

• Usually support

• [Distortions]• [Elite capture]• Appropriateness• Longevity

Carbon / PES markets

• Aggregation• Data• Meths• Demand

• Complementary• ‘Co-benefits’ e.g.

free inputs, TA

• Upfront costs• Meths• Uncertainty• Transparency

AGGREGATION….


Risk management

Farm / household Community'Market'

Diversify, reduce consumption, re-allocate labor, savings, sell assets

Family, coops, buffers, jointly owned infrastructure

Indemnity, index, ‘combined’


Aggregation models - financing & risk

Model Sub-model

Driven by smallholder

Farmer-controlled institutions

Associations, trusts, enterprises, coops, farmer owned companies

Contract farming Leases

Driven by third-party

Contract farming Highly centralized

Nucleus estate

Multipartite

Informal

Intermediary

Tenant farming / share cropping

N/A


CARBON & PES

‘MARKETS’

CSR, SHARE HOLDERS

GOVERNMENT POLICIES

AGRI-INVESTMENTS

(direct)

SMALLHOLDERS

'AGGREGATORS'

UNFCCC UNCCDBRETTON WOODS WTO

No silver bullet… Mechanism has many parts @ multiple scales

COMMODITY MARKETS (2ndary)


Mechanisms – initial thoughts

• “Know your client” • Aggregation • Risk appetites: ‘Hard’ & ‘soft’ instruments• Availability of long term capital with high risk

appetite – creative PPPs• Shorter termed financing - Track record, collateral• Lack of data – financing, mitigation opportunities• Identifying synergies

RESEARCH (‘CUSTOMER BASE’)POLICY & REGULATION

FINANCE & RISK MANAGEMENT DESIGN


Thank you!


4. Mitigation – Some Observations

• Activities designed within the farmers existing livelihood context of smallholders (including women)

• Bottom-up approaches both in financing (allocating funding according to the plan elaborated with stakeholders and farmers) and project arrangements

• Promoting coordination and association amongst smallholders • Literature review and review of case studies highlight the value of carbon finance

linked to measurable output rather than related only to land ownership. • Gender considerations are important in mitigation project configuration (including

benefit distribution and land tenure rights)• Products from carbon credit projects could be used by smallholders as collateral • Project standards should work toward streamlining procedures and reduce

transaction costs• Opportunities for setting up carbon insetting activities by building the costs of

ecosystem services into supply chains (e.g. by means of a scheme like Plan Vivo).


2. Global farming systems

• FAO Farming Systems work

• Global trends affecting farming systems:• Environmental / physical• Economic• Socio-political• Technologies

• Gender

• Representation of smallholders in production & forms of representation• Fundamental difference: Subsistence vs. selling • Smallholder driven: Coops, leasing• Non-smallholder driven: Contract (centralized, nucleus, multipartitie,

informal, intermediary), tenant / share cropping


2. Global farming systems: Observations

Regional perspectives

Lat Am: Smallholders tapping international markets through premium labeled commodities. ‘Least’ favored.

Asia: Huge pressures & importance of adaptation in major crops (rice)

SSA: ‘Donor darling’, commercial aginterest & urbanization

Observations

• Smallholder-relevant data: weak but evolving

• ‘Supermarketization’ & tech provides opportunities for vertical and horizontal integration and coordination

• Holistic government policy formulation critical


5. Opportunities for engaging smallholders


State of flux


4. Mitigation – c-credit monetization opportunities

Potential opportunities:• Conservation ag• A/R & silvopastoral systems• Improvement management• Compost• Bio-energy• Organic farming• REDD• Eco-labeling

Current opportunities for developing countries to sell units of mitigation:International: UNFCCC CDM, VCMs (under standards & non-standard offsets)Regional: US markets (California)National & sub-national: China (?), S. Korea (?), official REDD+ and NAMAs (?)


Global mitigation schemes

Pros for smallholders Cons for smallholders

CDM • Well established mechanism• Recognised at the global and national level

• High transaction costs• Long time lag• Only A/R land use activities• LDCs poorly represented

VCS • Wide range of terrestrial mitigation activities• Innovative buffer approach

• High transaction costs

GroupedProjects/PoA

• Lower transaction costs• More flexibility and streamlined procedures• Credits become bankable earlier• Possibility to include underrepresented countries

• Still in an experimental phase• Few or no land based projects

CCBS • Community based projects• Guarantee to investors for high quality projects• Pro-poor and adaptation gold level• Improvement in smallholders access under evaluation

• It has to be combined with a carbon standard

• High quality credits might mean more complexity

Plan Vivo • Long experience with smallholders• Equitable carbon sharing• Tailor-made to community/smallholder needs• Possibility to have PES along the value chain• Improve access to financial instruments (e.g. bank loans, microcredits)• Plan Vivo certificates can be also issued ex-ante• Gender inclusive

4. Mitigation – c-credit monetization opportunities


• GmbH start-up : May 2010

• International, national & project level work

• ‘Theoretical’ & real

• Carbon finance & non-carbon finance

• Business planning & development

• Cynical optimist

Who am I?

havemann t financing options for smallholders and mitigation july 2011

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