How can agri-finance feed a country?

One of the most important factors in agri-finance is the segmentation of farmers.

A relatively small group of ‘commercial farmers’ is responsible for a large part of a country’s agriculture production and exports. Usually, these farmers are the only ones with access to bank financing.

A large group of ‘subsistence farmers’ hasn’t sufficient repayment capacity for bank loans. These people rest at the bottom of the pyramid.

The group between the ‘subsistence farmers’ and the ‘commercial farmers’ consists of: Farmers of ‘small cash-crops’ (i.e. rice, cotton, sugar, coffee, etc) with a low annual marketable surplus and the ‘emerging farmers’ who have the potential to grow into ‘commercial farmers’ but lack both the financing and farm-management expertise.

Financing small ‘cash-crop farmers’ is only feasible through a supply-chain approach. These small-holders should be financed indirectly via contract farming. Under such schemes, the farmer commits to supply 100% of a particular crop to a specific buyer, while the buyer commits to buy 100% of the farmer’s product but pays that money directly to the bank, thereby allowing a direct repayment. Under these structures, the repayment risk to the individual farmers is converted into performance risk to both the farmer and the buyer. Also, cases involving warehouse receipts can provide additional financing to ‘cash-crop farmers’.

‘Emerging farmers’ justify a customized approach since they have the potential to develop into ‘commercial farmers’ with corresponding growth of financial services needs. Strict criteria need to be established regarding minimum size, sufficient entrepreneurial spirit, basic understanding of business planning, and farm-management skills. With a combination of financing and technical support, these farmers have good chances to succeed. Banks, in order to finance “emerging farmers’ need to hire agri-finance specialists who understand farming and have the ability to appreciate the particular risks associated with it (i.e. climatic, disease, and price risks).

A major issue in financing agriculture is the unpredictable or unreliable government behavior and interference in the agricultural sector (especially with regulations in prices and export/import activity).

Banks’ approach must be strongly focused on the value chain, as ultimately the farmer (who runs the price risk, to a large extent) will only be able to get a fair price when the whole chain operates effectively. The success of agricultural development depends on the creation of a large group of professional local farmers producing high volumes of marketable output at a consistent quality. This will have a positive effect on reducing the transaction costs throughout the whole value chain.

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