Microcredit and Crop Agriculture: New approaches, technologies and otherinnovations to address food insecurity among the poorMicrocredit Summit, November 2011Vallaloid, Spain Calvin Miller Agribusiness and Finance Group Leader Food and Agriculture Organization of the UN Rome, Italy
Outline1. The need for action: food insecurity and rural poverty2. The new context for agriculture: the challenge to raise competitiveness among the poorest3. Business models for inclusive agriculture4. Microfinance products for agriculture5. Use of innovations for competitiveness and efficiency6. Lessons and recommendations
The need for action The population of developing countries is expected to remain mostly rural until 2020. Most of the world’s poor are concentrated in rural areas, with livelihoods that are strongly linked to agriculture.Source: United Nations, 2004 Source: Chen and Ravallion, 2007
Food insecurity and rural poverty Source: http://faostat.fao.org as cited by the World Development Report, 2008. Note: The size of the bubbles represents millions of undernourished people, being most severe in Sub-saharan Africa (SSA) and South Asia (SA). Among the world’s poor, food insecurity continues to have a significance incidence. Agriculture can play a key role in making nutritious food available and ensuring an income to purchase food.
The horizon is changing for small farmers;improved approaches, tools and innovations canaddress those challenges for a more secure future.
The new context for Agriculture Note: agro-processed goods represent an expanding market in agriculture worldwide. Source: http://faostat.fao.org and http://comtrade.org Expanding high-rent markets in agriculture represent an enormous opportunity to foster significant poverty reduction
There is a need to build inclusive agriculturalvalue chains that benefit the poor – not as cheaplaborers, but as agro-entrepreneurs with access totechnologies, markets and capacity development.
The challenge is to raise competitiveness among the poorest Note: Higher human development is associated with greater agribusiness development. Source: Wilkinson and Rocha, 2009
Significant poverty reduction will require providing thepoor with tools to compete in expanding their agriculturalbusinesses. Access to financial services can play animportant role in enabling this process of inclusion.
Microfinance and business models for agricultureMFIs have comparative advantages to service the agriculturalsector, but also weaknesses.A comprehensive approach for risk assessment is needed:• Improvements in cash flow analysis for agriculture• Terms that fit the conditions of clients given an assessment of their relations with agents in the value chain and a strategy to reduce risks (production, price, market, weather, etc.)• Diverse products and services that target not only farmers but other segments of the value chain
Using the Value Chain for Financing Agriculture Financial Service Support Value Chain Actors Institutions Services Banks Exporters / Wholesalers Technical Training Non -bank Processors Financial Institutions Business Training Private Investors Local Traders & Processors & Funds Specialized Producer Groups Cooperatives / Services Associations Farmers Local MFIs / Governmental Community Orgs Certification/Grades Input Suppliers Product Flows Financial Flows
Microfinance products for agriculture Some prominent financial products for agriculture are: 1. Bill discounting and factoring 2. Forward contracting and futures 3. Micro-leasing 4. Warehouse receipts and micro-warrants 5. Micro insurance 6. Guarantee funds for agriculture
Use of innovations for competitiveness and efficiencyInnovative ICT applications (e.g. the use of mobile phones) can reduceinformational problems and transaction costs to service rural areas. Number of Subscriptions per 100 people (millions) 80 70 60 50 40 2003 30 2008 20 10 0 Africa Asia Latin America Mobile phone’s exponential growth in the developing world represents an opportunity for MFIs to service agriculture. Source: ITU World Communications as cited by Jensen, 2009
Use of innovations for competitiveness and efficiency Innovative tailor-made strategies to enhance agricultural competitiveness require an integral view of agricultural value chains. A diverse set of services and products can be designed for: • Pre-harvest activities: e.g. input provision, updated market information, contract farming, forward contracts, insurance • Post-harvest activities: e.g. warehouse receipts linked to loans, local value addition, improved marketing agreements, product bulking
Use of innovations for competitiveness and efficiency Innovations in farmer organizations that improve managerial skills in order to promote: • Economies of scale and scope • Strategic partnerships with suppliers and buyers to secure sales • Specialized support services from private or public partners to comply with market requirements and facilitate finance • Lobby for improved regulatory framework that enable investments in agriculture
Lessons and recommendationsFor MFIs and other financial organizations:• Diversification of financial products is required to service the agricultural sector, fitting to the conditions faced by value chain agents and reducing operation costs• Partnerships with non-financial organizations may be required to provide key support services and facilitate marketing• Specialized knowledge and access to data is important to be able to assess the risks involved in agriculture• Optimal risk management requires portfolio diversification and insurance• Agriculture is important for food security, which makes the sector susceptible to political interference. This must be adequately anticipated to mitigate risks
For development agencies & policy makers:Finance is only a catalyst for growth. Interventions are stillneeded to:• Support productivity, economies of scale, farmer organizations, access to improved technologies and enhanced market linkages• Support to provide specialized knowledge to access and integrate agricultural value chain data into the financial analysis• Support can be provided for the development of new insurance products not only for farmers but also for their lenders• Develop policies which clarify land tenure and can facilitate finance to agriculture• Support an enabling environment for the development of new technologies that help bring down the transaction costs in agriculture and finance