The document discusses the potato sector in Bangladesh and identifies opportunities and challenges. It summarizes findings from a study of potato farmers, traders, processors, and retailers. Key points include: 1) Small farmers have limited access to formal finance and rely on informal sources, remittances, and credit from cold stores. 2) There is potential to increase contract farming and private sector involvement in processing to help finance the value chain. 3) Export potential exists but challenges around quality, varieties, and price volatility need addressing through investments in storage, processing, and market integration.

1. Finance of Agricultural VC
– Potatoes in Bangladesh
- K.A.S. Murshid and Kazi
Iqbal
(SMDF/BIDS)

2. Agricultural Transformation in BD
• Transformation: Moving up value chain (def.)
• Green Revolution 1: Frontier has been reached
– further potential is quite limited, esp. in rice
• BD needs to gain significant ground to exploit
higher value chains in livestock, fisheries, dairy
and non-rice crops
• Potatoes could be a very useful addition to the
basket in promoting further transformation.

3. Potatoes in BD
• 8th ranking producer globally, producing over 8
m. MT (China 86m, India 45m)
• Second most important crop
• Popular crop (profit, yield, intercropping)
• Comparative advantage (low DRC); Gr. rate in
recent years high (recent:5-10%);
• Exports: 29.2% gr. Area: 8.3%;

4. Role of potatoes..(contd)
• 11% rural HHs involved in potato farming
• Mainly grown in northern districts
• Strong demand as an important vegetable (3%
of total food expenditure)

5. Characteristics of Market
• Price Variability: Very High & of acute public
policy concern
• Seasonality also considerable: Peaks (March,
Oct) and Troughs (Feb, July).
• Potato seasonality and rice price seasonality
are inversely correlated – good for food security
• Price risk dominates production risk.

6. This Policy Brief: Based on a Study on SCP and VCF Needs
 Pseudo panel data on 16 villages (in four districts) in the North (top
potato growing regions): Periods: 2013-14 and 2007-08 – ‘the
reference period’;
 Household data on 252 hh (16-17/village) with a lot of detailed
information on the hh economy
 Data on 205 traders (located in/near the producing zones) including
small and medium traders, wholesalers, and aratdars.
 And 61 trad. retailers, 16 Supermarkets (MR)
 Plus case studies of Agri-biz, Financial houses.

7. UPSTREAM (producers)
Input Credit
The sources of credit in 2013-14:
• ‘Friends and Relations’ (>50%);
• MFI - 30 %
• The rest are drawn from informal lenders or
banks.
• Interestingly, wholesalers/ input traders not
important.

8. LABOUR COSTS
1.The manual activities (labor costs) increased to BDT 21062 (29.7%) from 16,
234 per farmer, over the reference period. Costs related to land preparation,
fertilizer and pesticide application, and irrigation went up relatively faster.
2. Costs due to mechanized activities rose from BDT 8011 to 10,952 (37.7%)
per farmer, land preparation being the most important.
Both are indicative of robust expansion in labour demand. Credit/loans for
such activities hardly seen.

9. Machinery and Equipment
Significant penetration of capital machinery appears to have taken
place. The most common piece of equipment owned is spraying
machines for application of pesticides, owned by 243 farmers out of
252.
A poor second is ‘tractors/tillers’ owned by 65 farm households (26%).
In addition, a host of other machinery ownership has been reported .
Apart from capital deepening as seen from above, we also note a clear
trend towards a newly developing equipment rental service. The
income from renting out machines can be significant (Tk. 44893/HH).

10. Irrigation Costs
• The sample farmers reported owning 11 pumps
in 2007, which went up to 25 in 2013-14. Most
farmers not interested in buying pumps.
• Only 9 cases reporting loan for buying pump
• Irrigation access through rent – 67% did not
require credit to pay charges; 19% paid in kind;
only one case of bank borrowing reported.

11. Storage
• Most HH reported use of modern storage (72%)
• Marginal: 22% stored
• Storage rate increased sharply (150%) with
large farmers expanding storage 3-4 times
• Few HH reported taking credit for storage (not
even by marginal)

12. Family Loans
• Number of HH taking loans doubled over ref.
period (17% to 34.5%)
• However, average loan size declined by 26%
(Tk. 46,000 in 2013-14)
• 66.7% loans were deployed for ‘productive
purposes’ (mainly inputs – seed, fertiliser,
pesticide)

13. Role of Remittance - FGD
• Each ‘kani’ (.42 acres) requires Tk.100,000 cultivation
cost (Munshiganj)
• Own capital plus loans used to finance
• Remittance is an important source of finance for potato
cultivation
• Source of borrowing: other farmers, NGOs, cold
storage, Krishi Bank and private banks
• Formal sector loans – need to pay commission (up to
10%)
• Dislike taking loans from NGOs (installment problem)

14. Social Capital
- Almost 100% of respondents reported that they could borrow
up to BDT 5,000 in any given week if there was an emergency,
and 87% reported that they could borrow BDT 10,000 if
required in a week.
- 98% of respondents reported owning a mobile phone, with
each having 146 contacts on average in 2013-14;
- Even the ‘marginal’ group reported significant mobile
intensification and expansion with 109 contacts each spread
about equally between relatives and friends.

15. MIDSTREAM: TRADERS
Profile
There are a total of 205 traders in the sample spread across five districts and
four categories (Small, Medium, Aratdar, Wholesaler). The overwhelming
majority (over 95%) are sole owners with around 85% being officially registered
(i.e. have a trade license) at the local (union) level.
•
Traders
Type
Number and percent of Traders
Nature of Business
Commission Wholesale Retail
Total
res.
Total
sample
Small 2 51 17 70 53
Medium 11 49 2 62 49
Aratdar 50 17 1 68 53
Wholesaler 32 27 4 63 50
Total responses 95 144 24 263 205
Note: Total responses (percent) can be more than 100% due to multiple
responses.

16. Broad Characteristics
• Traders wear multiple hats: All small traders
engage in wholesaling but a significant subset
(32%) also does retailing.
• 94% of aratdars are commission agents
although 32% are also wholesalers. 64%
wholesalers report doing commission work .
• More than 76% of sample traders own a
wholesale stall in the local market. 12%
reported investing in cold store; 9% own a retail
outlet - suggests considerable investment in
fixed assets.

17. Procurement
Much of the procurement was channeled from
small farmers (15-30%) depending on the season,
big farmers (24-30%), cold storages (18-38%) and
other wholesalers (17-20%).
Profitability
• Seasonal arbitrage is profitable (generally):Tk.
343 per bag (2013-14)
• If low season, thenTk. 20 per bag; High season
(harvest): Tk.4/bag.
• Average initial investment: $1000-3000 – mostly
own money

18. Trader Finance
• 12% traders reported borrowing to fund initial
investment (few).
• 70% expanded business with 50 % of new
capital borrowed (455 loans reported by 205
traders)
• Loan sources: CB 37%; cold stores 41%; NGO
7%

19. Midstream: Cold Stores
• Bulk of supplies obtained from local traders (faria)
and farmers – about equal shares
• Sold to local aratdars (54%) and outside traders
(33%)
• 57% CS gave farm credit/advances (up 15% from
2007)
• 74% CS gave credit after storage
• Both farmers and traders received credit – (T>F in
vol.)

20. Cold Stores..
• 43% farmer-clients took advances before
storage
• 41% took credit after storage (potato as
collateral)
• Loan per bag: $4.5
• 30% default!!
• CS reports profit rate at over 20% (Reardon 9%)

21. Cold Stores..
• Access to bank finance costly: high r/i (14-18% but
compunds to 22%)
• Energy cost “excessive”: 6 times increase in last 4-5
years; load shedding is a big problem
• Price volatility spikes default
• They finance farmers/traders credit with bank loans
but cannot finance capital costs
• Declining advances to farmers ahead of storage
• New Tech: CIPC (foam spray) can reduce energy
bills?

22. DOWNSTREAM: TRADITIONAL RETAIL
• This section is based on the findings from 61
traditional potato retailers from the capital and
four major potato growing districts of the
country, namely Rangpur, Rajshahi, Bogra and
Munshiganj.

23. Capital Usage
• Working capital: $300-340
• In 2013-14, 33% used electronic scale and a
mobile phone; 15% had a vehicle for business
use. Although still low, these figures are
significantly higher compared to the starting
year.

24. Performance of Traditional Potato
Retail
Costs of Traditional Potato Retailers
• Transportation costs constitute the largest element
(60.2%) of the variable costs.
• The next largest item is packaging, 24.2% (price of
package and labor used in packaging)
• The variable cost per ton of potato was $10.3 for
2013-14
• Operating expenses was $ 443/annum (incl.
electricity, communication, maintenance, market
fees and loading/unloading expenses).

25. Traditional Potato Retailers and Value-
Chain Finance
• None of the retailers report having a contract
with their suppliers. Only 4% of them paid
advances to suppliers while about 12% made
delayed payments.
• During sales – no credit in any form

26. DOWNSTREAM: MODERN RETAIL
(SUPERMARKETS)
• Supermarkets in Bangladesh - (2% of total retail
sales in 2012 – but growing fast).
• Dominated by 3 players: Meena Bazar (operated by
Gemcon Group), Agora (operated by Rahimafrooz
Superstores Ltd.) and Swapno (operated by ACI
Logistics Limited). The superstore owners of the
country also have an association titled ‘Bangladesh
Supermarket Owners' Association (BSOA)’.
• This study relies on the findings from 14 outlets

27. Value Chain Financing: Role of the
Supermarkets
• None of the supermarkets reported making any
advance payments to their suppliers nor were they
found to make delayed payments.
• Sales - the supermarkets do not receive either
advance or delayed payments from their
customers.
• Emerging value chain? Agri-business already
supplying 22% of volume; Direct purchase via
agents from wholesale markets or registered
vendors
• Need for bulk orders having an impact on VC

28. Selected Case Studies
• Large Processor
• Potato Exporter (GARI)
• Contract Farming for Potatoes (EJAB Group)
• United Finance and IDE Rural Credit
Programme
• BRAC Bank-USAID DCA

29. Processors
• Two large processors engaged in producing granules
and flakes
• One engaged in starch production
• Few engaged in making fries, chips, frozen foods for
supermarket
• Few large players, high value-addition, greater
degree of vertical integration
• We interviewed one making flakes/granules
(exports and domestic market)

30. Processor..
• Capital self-financed but facing severe
energy/gas/diesel/water treatment issues (fully
automatic)
• Bank rate 17-18%, ‘unaffordable’
• Trying to obtain ‘franchise’ loans from World Bank
• Some bank finance used for WK (Tk. 5 cr.)
• >70% processed flakes exported (20% cash
incentive)
• Local sales – vat 15%
• Good prospects for both exports and domestic
market

31. Constraints faced by Processors
• No established export market and no long term
contract with buyers as price volatile
• They need to ensure bulk supplies and need
adequate storage (50,000MT) – but not easy
financing storage costs
• Vertical integration with cold stores (owns 11 cold
stores) and Trucks (5 ten-tonners).
• Suitable varieties for processing is not sufficient
• Quality (size, dry matter) is a problem

32. GARI: Potato Exporter
• GARI exports fresh potatoes in bulk quantities
within 3-4 months after harvest.
• Procured through contract farming
• GARI provides contract farmers with inputs -
mainly potato seeds
• 10,000 farmers are connected to GARI through
contract farming

33. GARI…
• GARI organizes free training for farmers and
provides seed at a rate lower than BADC. These
seeds are provided from GARI’s own production.
• GARI fixes price in advance
• Supply also obtained from traditional market chain
– around 300 enlisted traders work for them as
needed.
• Partnership with Syngenta Foundation and local
NGOs for contract farming and training/tech.
transfer, and link to credit suppliers

34. GARI Financing
• GARI relies on both self-financing and loans. About
Tk. 5-6 crore of working capital is self-financed;
additional Tk. 10 crore from bank;
• Corruption reported with respect to cash incentives
– banks are wary
• Contract docs for export honoured by bank for
credit advance up to 95%.
• 30% of bank loans used to finance cash advances to
suppliers (at 0%)
• Suppliers credit - paid within 20-30 days, once
export payments received.

35. Some constraints noted
• Seed varieties are limited
• Export-grade packaging; technological gap
• Markets are fluid/uncertain
• Government approval needed for tuber
exports.

36. EJAB: Contract Farming
• Ejab follows direct method for contract farming
(written contract with farmers)
• Each given loan of BDT 5000/acre and 800kg seed
per acre; plus training
• Financing: (a) seed loan from own seed project; (b)
Tk 5000/acre credit but have to pay Tk 600 as
service charge.
• 250-300 farmers covered (300 acres)
• Price announced in advance

37. Ejab…
• Other input suppliers are also in Ejab value
chain (fertilizers, pesticide dealers)
• Partnership with AFE (technical, extension,
training)
• No bank finance available – self-financed (India:
cash incentive 35%, capital loans 11% and 5
year grace)
• Export highly competitive – much more
investment in processing needed.

38. Ag-Finance: ULC-IDE/ BRAC Bank-
USAID DCA
ULC-IDE
• Rural Business Credit – collateral free, fully
supported loan model (general agri loans)
• Based on producer groups (FA) identified by IDE
(Loan size 20,000)
• Individual loans, peer monitoring, 99% recovery
• Flexible disbursements related to specific
activities through Loan Officers

39. BRAC – USAID DCA
• 3 segments:
– Ag-SME (0.2-1.0 m. taka) at 11% - directly processed
by bank.
– Small farm loans<Tk. 200,000 (in partnership with
MFIs);
– Agri loans as per BB directive @4%
• $127 m disbursed – no claim on USAID (risk
guarantee 50% of capital used/transaction)
• Loans through BRAC CROs (240 ag-biz so far) – not
so pro-poor.

40. Policy Implications
• Government attention to the potato sector is weak
(export cash incentive of 20% and direction by BB to
lend to Ag Farmers at 4%);
• Upstream: farmers have little access to formal
finance;
• Important sources are remittance and cold stores,
along with MFI; CS and large processors on-lend to
farmers/traders
• Generally “within value chain” finance has declined

41. Policy..
• The case studies reveal a growing private sector
presence in agri-business, esp. in downstream
processing and modern retail: gaps relate to
packaging, technology, energy, r/i
• Private sector can channel finance effectively – but
tendency to avoid small or marginal farmers
• Also, requires partners (IDE, FA, MFI, etc.)
• Risk of potato considered high – contract farming
model for potato however seems sustainable (EJAB)

42. Policy...
• Considerable export potential as shown by GARI
case study
• Cold stores: over-investment? New technology to
reduce energy costs would be important –some
already reported by CS Association.
• Other gaps: Seed, variety, quality – remains a
constraint
• Price volatility: pervasive risk – large investments in
processing for domestic demand and exports
suggested.

43. • Need innovative model that includes traditional
traders, cold stores, input suppliers to be integrated
through a potato exchange that can deliver on
critical gaps related to grades, quality, variety, SPS
(for exports), for inputs and outputs, technology –
one stop service for buyers and sellers through a
network of enlisted partners.
• Incorporate credit in above
• This would dynamize entire VC not just one small
segment.