Managing Production and Marketing Risks to enable Agricultural Finance

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Presentation Fin4Ag S43 by Elies Fongers

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Managing Production and Marketing Risks to enable Agricultural Finance

  1. 1. Elies Fongers Senior Project Manager RIASAgribusiness Advisory Services Managing Production and Marketing Risks to enable Agricultural Finance
  2. 2. 2 Rabo Development within the Rabobank Group Rabobank Foundation • StrengtheningCommunities 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
  3. 3. Agricultural finance: positive cash flow and risk / uncertainty are key determinants 3 • 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
  4. 4. Since the cost structure is relatively fixed, production and marketing risks are important drivers of uncertainty 4 • 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
  5. 5. However, there are always risks that cannot be fully mitigated 5 • Examples • Weather risks • Pests & diseases • Floods -> Financiers need to accept these inherent risks
  6. 6. Key mitigants for market and/or price risk 6 • 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
  7. 7. Example I: Emerging farmer finance schemes 7 • 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)
  8. 8. Example II:Value chain finance structure 8 Coop 1 Coop 6 Coop 7 Coop 8 Coop 9 Coop 10 Coop 2 Coop 3 Coop 4 Coop 5 Paddy rice supplied to UCORIBU 18,000 members BANK UNION input loan + acquisition loan paddy proceeds
  9. 9. Example III: WHR finance 9 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 Loan Payments CP CP
  10. 10. Example IV: CPR finance in Brasil 10 • 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
  11. 11. Example IV: Price risk management services through intermediaries 11 -> accessible to large(r) range of clients, characteristics of insurance policy, lower operational risks, no / less cash calls
  12. 12. Contacts 12 Rabobank Office address – NL Croeselaan 18/28 3521 CB Utrecht Postal address P.O. Box 17100 3500 HG Utrecht The Netherlands RABO DEVELOPMENT/RIAS Agribusiness Hans Bogaard Head Agribusiness T. +31 30 21 30073 M.+ 31 6 515 03468 J.J.Bogaard@rn.rabobank.nl René Verberk Senior Project Manager M. +31 6 10938714 R.G.F.Verberk@rn.rabobank.nl Pierre Schonenberg Senior Project Manager M. +31 651001143 P.G.A.M. Schonenberg@rn.rabobank.nl Wim Verzijlenberg Cooperative expert M.+31 615092978 wverzijlenberg@hotmail.com Elies Fongers Senior Project Manager M. +31 6 23976502 E.M.M.Fongers@rn.rabobank.nl Corné de Louw Senior Project Manager M. +31 6 22239678 C.M.W.Louw@rn.rabobank.nl
  13. 13. 17 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
  14. 14. 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 guidelines per 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 development Knowledge collection & dissimination Sector policy making Capacity building AGRI Department HQ - Head Agribusiness - AGRI (sector) Experts Branches Agri-loan officers & Risk management Financing agricultural sector requires considerable investments in knowledge and know-how

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