Agricultural Value Chain Finance

Agricultural Value Chain Finance
Praise for this book

This book makes a useful contribution to the rapidly expanding literature on
value chains by clarifying the myriad methods, some old, some new, used to
finance actors in agricultural value chains.
Richard L. Meyer, Professor Emeritus, Ohio State University
I recommend the publication to be read by all stakeholders in the agriculture
sector.
N.V. Ramana, former CEO, BASIX, India and Chairman,
Indian Society of Agribusiness Professionals, India
This is a must read for anyone interested in value chain finance. The
authors have moved forward our understanding by presenting a conceptual
framework, supported by an extensive use of case studies, which makes this
book indispensible for those involved in financing as well as policy makers.
Kenneth Shwedel, agricultural economist
An insightful and complete analysis of agricultural value chain financing. An
essential reference for anyone interested in improving access to agricultural
credit in developing countries.
Mark D. Wenner, Inter-American Development Bank
Agricultural Value Chain Finance

Tools and Lessons
Calvin Miller
and
Linda Jones
Published by
Food and Agriculture Organization of the United Nations
and
Practical Action Publishing
2010
Practical Action Publishing Ltd

Schumacher Centre for Technology and Development
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FAO, 2010
ISBN 978 1 85339 702 8
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Contents
Boxes
vii
Figures
ix
Tables
About the authors

Acknowledgments
Preface
1. Introduction
Defining value chain finance
Why is there interest in value chain finance in agriculture?
Overview of content
xi
xiii
xv
1
2
3
3
2. Understanding agricultural value chain finance

Context
The concept of agricultural value chain finance
Agricultural value chain finance as an approach
Enabling environment
Standards and certification
Regulation and enforcement
Macro-economic and social context
Value chains and diversified livelihoods
5
5
8
14
17
19
20
21
23
3. Value chain business models

Producer-driven value chain models
Buyer-driven value chain models
Facilitated value chain models
Integrated value chain models
Case Study 1. Farm Concern International:
commercial village approach
27
29
30
36
40
4. Agricultural value chain finance instruments

Product overview
Product financing
Trader credit
Input supplier credit
Marketing company credit
Lead firm financing
Receivables financing
Trade receivables finance
Factoring and forfaiting
55
55
55
58
60
62
64
67
67
69
45
vi
AGRICULTURAL VALUE CHAIN FINANCE
Physical asset collateralization

Warehouse receipts
Repurchase agreements (repos)
Financial lease
Risk mitigation products
Crop/weather insurance
Forward contracting
Futures
Financial enhancements
Securitization
Loan guarantees
Joint ventures
Bringing it together
Case Study 2. Producer-driven financing of farm inputs: Niger
informal inventory credit
Case Study 3. LAFISE Group: integrated financial instruments
and value chain services
72
72
82
83
84
84
85
87
89
89
90
93
95
100
108
5. Innovations
Value chain innovations
Financial innovations
Technological innovations
Management systems
Networks and exchanges
Mobile phones and mobile banking
Infrastructural innovations
Policy and public sector innovations
Case Study 4. DrumNet and technological innovations
Case Study 5. Integrated agro food parks: avenues for
sustainable agricultural development in India
115
115
117
120
120
121
122
123
124
126
6. Lessons learned and summary recommendations

Lessons learned
Summary of recommendations
Recommendations regarding financial institutions
Recommendations regarding value chain stakeholders
Recommendations regarding policymakers
147
147
153
154
155
157
List of conferences
159
References
161
Index
167
137
Boxes
2.1 Value chain definitions
11
2.2 Flower chain financing, Mexico
14
2.3 Five Cs of lending applied to value chain financing
17
2.4 Financial flows within the rice industry
23
3.1 Cacao producer association, Peru
29
3.2 Buyer relationship credit-worthiness, Costa Rica
31
3.3 Formal contract agriculture, Philippines
34
3.4 Failure of contract farming in tomato production in Brazil
35
3.5 Success factors for contract farming
36
3.6 Facilitating chain development in Malawi and Tanzania
38
3.7 Facilitating artichoke chain development and finance in Peru
40
3.8 BRAC integrated services model for agriculture, Bangladesh
42
3.9 National Agricultural Cooperative Federation, Korea
44
4.1 Small-scale farmer capacity and competitiveness, Kenya
58
4.2 Trader finance in Latin America
59
4.3 Input supply credit, Myanmar
61
4.4 Input supplier credit, Bangladesh
62
4.5 Processor finance for agave farmers, Mexico
63
4.6 Marketing company finance, Costa Rica
64
4.7 Lead firm finance and assistance in Central America
65
4.8 Factoring in Serbia
70
4.9 Formal agri-fishery warehouse receipts, Philippines
75
4.10 Informal warehouse receipts, Tanzania
76
4.11 Field warehousing, India
77
4.12 Publicly controlled warehouses, Philippines
78
4.13 Agricultural warehouse receipts in the wider system, India
78
4.14 ACE and global risk mitigation
80
viii AGRICULTURAL VALUE CHAIN FINANCE
4.15 Warehouse receipt challenges and solutions, India
82
4.16 Warehousing livestock, Mexico
82
4.17 Using futures in price risk management, MCX, India
88
4.18 Livestock securitization, BNA, Colombia
90
4.19 Public-private contract farming, Thailand
93
5.1 Kisan credit cards, India
120
5.2 Integrated information management, BASIX, India
121
5.3 Electronic network for fruit and vegetable trade, India
121
5.4 E-choupal information centres, India
122
5.5 Transportation innovation in the Philippines
123
5.6 Value chain approach to agricultural services, Costa Rica
124
5.7 Agri-export zones in India
125
5.8 Warehousing of nomadic farmers honey in northern India
140
Figures
2.1 Product and financial flows within the value chain
10
2.2 Interlinked cereal lending
12
2.3 BASIX livelihood services model
24
3.1 Different ways to coordinate and structure the value chain
27
3.2 Artichoke value chain
41
3.3 Rabobank integrated agriculture finance structure
43
3.4 Commercial village approach for African traditional vegetables
47
3.5 Market access financial service flowchart
50
4.1 Pre-export receivables finance basic scheme
68
4.2 Pre-export receivables finance scheme
69
4.3 HDFC Bank warehouse system
73
4.4 SACCO Cooperative warehouse storage
76
4.5 Brazil rural finance note finance
86
4.6 Para-finance guarantees in Mexico
91
4.7 Financing with future receivables
92
4.8 Value chain financing: shrimp industry model
94
4.9 Capturing the agri-food value chain
95
4.10 Poverty production cycle
101
4.11 Inventory credit flow chart
106
4.12 Traditional cost structure in Nicaragua
109
4.13 LAFISE Group partner model of intervention
110
4.14 LAFISE Group integrated service model
111
5.1 A stylized value chain
116
5.2 Inter-connected value chains in a subsector
116
5.3 The DrumNet actors
129
5.4 Process flow
132
5.5 A holistic perspective: agricultural value chain approach
140
5.6 Integrated agricultural food park model and activities
142
5.7 Customized financial products for edible oil processing value

chain stakeholders
143
5.8 Non-financial services favouring credit recovery
143
5.9 Integrated dairy at IAFP: information, product and financial flow
144
6.1 Farmer-centric ecosystem services
149
Tables
2.1 Kenyan Government Interlinked Cereal programme
13
3.1 Typical organizational models of smallholder production
28
3.2 Hortifruti financing models
32
3.3 Sales in target sites (MarchAugust 2008)
51
4.1 Description of agricultural value chain finance instruments
56
4.2 Benefits and limitations of product financing
66
4.3 Benefits and disadvantages of receivables financing
72
4.4 Benefits and challenges of inventory finance and warehouse

receipts
81
4.5 Financial lease considerations
83
4.6 Summary analysis of agricultural value chain finance products
96
4.7 Price increase gained from inventory credit
103
5.1 Performance indicators
135
About the authors

Calvin Miller is an agricultural economist, with a specialization in rural
finance. He is Senior Officer and leader of the Agribusiness and Finance
Group of Rural Infrastructure and Agro-Industries Division, FAO (Food and
Agriculture Organization of the United Nations).
During his career he has worked in agriculture and financial development
in more than 50 countries, with 15 years of global experience in technical
assistance, project management and research in rural and agricultural
development finance and marketing. He gained direct field experience working
for 16 years in Latin America in agricultural and rural finance, agricultural
value chain development and agro-enterprise development.
He is also the founder of MicroVest, a private sector social investment fund
for microfinance, and a co-founder of the Rural Finance Learning Centre,
a multi-institutional resource centre managed by FAO. He has published
manuals and other documents on agricultural finance and value chain finance.
Linda Jones is an international consultant specializing in inclusive market
development and a technical adviser for sub-sector/value chain development
programmes, particularly in agriculture. She has hands-on project management
and consulting experience in Eastern Europe, Middle East, Africa and Asia.
Linda is a recognized contributor to best practice and advancement of the
field of enterprise development, and is a member of the Editorial Committee
of Enterprise Development and Microfinance journal.
Linda was formerly Chair of the SEEP Board of Directors, the founding Chair
of WAM (Women Advancing Microfinance) Canada, and Technical Director of
MEDA . She has been a trainer for the Microenterprise Development Institute
and ILO for many years, and has published widely on enterprise development,
value chain analysis and development, and agricultural value chains.
Acknowledgments
The concept of Value Chain Finance is broad, and the term is used to describe
varying aspects of the approach and its supporting tools. Therefore, a nuanced
understanding of value chain finance is best derived from the learning of
many who are experts in one or multiple aspects of financing the value chain.
This volume brings together the experience of many such experts.
This collection is built upon the expertise and contributions of a multitude
of persons and their institutions and businesses. It is not always feasible to
provide footnotes and references to all these people and their presentations,
papers, discussions and other contributions. The presentations and papers can
be accessed on the Rural Finance Learning Centre (RFLC) at www.ruralfinance.
org/id/48273 and publications at www.ruralfinance.org/id/1813. The authors
appreciate this valuable information and the rich insights, which can now
be shared with a wider audience. The volume also draws from two articles by
one of the authors published in the Enterprise Development and Microfinance
journal, Vol. 13, Nos. 2 and 3 and Vol. 19, No. 4.
The authors are extremely grateful for the input of nearly 90 papers and/
or presentations made by experts and practitioners in this field from around
the world. In particular, the authors would like to acknowledge the persons
who made valuable written contributions through publications or summary
documents from international conferences organized by FAO on this topic.
These include: Rodolfo Quirs and Claudio Gonzalez-Vega in Latin America,
Yogesh Ghore in Asia, Mumbi Kimathi and Jonathan Campaigne in Africa,
Larry Digal in Southeast Asia and Michael Winn in Eastern Europe. The case
studies in the text have been graciously drafted by Grace Ruto, Farm Concern;
Jonathan Campaign, DrumNet; Kalyan Chakravarthy and Raju Poosapati,
YES Bank; Enrique Zamorra, LAFISE; and Emmanuelle LeCourtois and ke
Olofsson, Rural Infrastructure and Agro-Industries Division, FAO.
In addition the authors would like to note the insightful contributions
made by Richard Meyer, Anita Campion and Mark Wenner in providing their
expert review comments.
Finally, strong recognition is given to FAO, and in particular the Rural
Infrastructure and Agro-industries Division, for its support for the international
conferences on the topic and allocation of the time and resources needed
for developing this volume. Special thanks also go to FAO colleagues who
contributed research and review to the publication, including Doyle Baker,
Prasun Das, Eva Glvez-Nogales, Ivana Gegenbauer, Martin Hilmi, Maria
Pagura, Carlos da Silva, Andrew Shepherd, and Tigist Woldetsadik.
Preface
This volume provides a global review of experiences and learning on the broad
subject of value chain finance for agriculture in developing countries. Value
chains in agriculture comprise a set of actors who conduct a linked sequence
of value-adding activities involved in bringing a product from its raw material
stage to the final consumer. Value chain finance, as described in this volume,
refers to the financial flows to those actors from both within the value chain
and financial flows to those actors from the outside as a result of their being
linked within a value chain.
The purpose of this book is to provide an understanding of the emerging
field of agricultural value chain finance. Key questions include:
What is value chain finance, how is it applied and what can it offer to
strengthen agricultural development?
How can financial systems, governments and services be prepared for
the demands of financing modern agri-food chains?
How does agricultural value chain financing affect inclusion, especially
for small producers and what can be done to make these systems more
inclusive?
What can governmental and non-governmental (NGO) agencies do to
support increased and more effective agricultural financing through
value chains?
These issues are addressed through examination of a wide array of experiences
and illustrations of large and small organizations from around the world that
are participating in or linked to agricultural value chain financing. The central
concern of the volume is not to take a stand on the virtues and weaknesses of
value chain finance, but rather to describe how the various types of value chains
are being used to strengthen and extend financial products and services to the
agricultural sector. Many of the value chain finance instruments and processes
are not new; however, what is new and noteworthy is the extent to which
value chain finance is being utilized by financial institutions, agribusinesses
and farmers. Noteworthy are the variations across applications, the range of
organizations that are facilitating value chain finance in innovative ways,
the emergence of integrated value chains as a widespread global model, and
the increasing diversification, intensification and combination of financial
mechanisms. Quite often, tools and models of value chain finance that were
first developed by larger agribusinesses are now being adapted to include small
farmers and small-to-medium scale agribusinesses. Therefore, the cases and
learning collected here do not have a specific small-farmer emphasis although
xvi AGRICULTURAL VALUE CHAIN FINANCE
there is increasing application of value chain finance mechanisms for the

benefit of smallholders, as illustrated in many of the examples.
The volume represents the extensive experience of many organizations, with
the learning presented through case studies and descriptive analysis, followed
by lessons learned and recommendations. The information is primarily drawn
from a rich collection of documents, presentations and discussions that took
place at international conferences on the subject that were organized by FAO
in Latin America, Africa, South Asia and Southeast Asia during 2006 and
2007, and research work in Eastern Europe and Central Asia in 2008. These
conferences were organized in partnership with regional organizations on
each continent. The information is augmented by learning from the research
and case examples of multiple organizations who are working in this field.
The objective of the conferences was to learn more about practical experiences
and approaches to value chain finance across countries. The conferences
enabled a diverse set of participants to share and obtain information on best
practices with the goal of increasing the supply and efficiency of financial
services for rural producers, marketers and processors. Businesses active in the
agricultural sector (including producers, processors, marketers and exporters)
met together with leaders from financial institutions, technical assistance
providers and policymakers to discuss this subject. Each region and country
brought forth specific issues related to agricultural value chain finance, and
these are noted in this volume. Overall, however, the concept and application
of agricultural value chain finance has been shown to be consistent across
regions.
An important part of each of the conference discussions was to analyse
relevant policy issues: policy constraints, ways to improve policies, how to
best perform in environments which lack desired policies for financing in
the sector, and so on. These policy issues were reviewed from the distinctive
perspectives of the many and varied types of stakeholders within a value chain,
including those who provide the financing, investment and regulation.
We hope that this volume will serve as a practical primer on value chain
finance for business and financial leaders, policymakers and practitioners,
extension agents, universities and training institutes. We have strived to offer
a rich learning opportunity by collecting, consolidating and presenting an
array of relevant experiences from around the world.
CHAPTER 1
Introduction
Agriculture continues to be a fundamental instrument for sustainable development and poverty reduction (World Bank, 2008: 12); yet, financial
constraints in agriculture remain pervasive, and they are costly and inequitably distributed, severely limiting smallholders ability to compete (ibid.: 13).
Sudden and dramatic changes in food prices have exposed the vulnerability
of agricultural production in meeting global demand and call for increased
investment in agriculture at all levels. The question is how the right amount
of investment can be acquired, particularly in a challenging milieu where
financial uncertainty causes a reduction in available resources along with increased fear and scrutiny of risk. An answer to addressing these constraints
goes beyond conventional measures since agriculture has always been difficult
to finance through formal financial institutions and approaches.
The environment for agricultural finance is further influenced by the growing concentration of control in the agricultural sector. Driven by gains from
economies of scale and globalization of the food chain along with access to resources, multinational and other interconnected agribusinesses have a greater
impact in a sector that is characterized by increasing vertical and horizontal
integration. The consequences of tightening integration are profound, especially for smallholders and others who are outside of the interlinked chains.
In short, agriculture is evolving towards a modern, extremely competitive system driven by consumer demand for higher value, more processed products,
and consistent quality and safety standards. Hence, enhancing smallholders
productivity, competitiveness and their participation in these global value
chains have been noted as priorities of the agriculture-for-development agenda
(World Bank, 2008).
Agricultural value chain finance offers an opportunity to reduce cost and
risk in financing, and reach out to smallholder farmers. For financial institutions, value chain finance creates the impetus to look beyond the direct
recipient of finance to better understand the competitiveness and risks in the
sector as a whole and to craft products that best fit the needs of the businesses
in the chain. Naturally, this more comprehensive approach to agricultural
financing is not unique to value chain finance; some leading financial organizations in the sector employ such a focus in their loan assessment processes
but this is more often not the case. In fact, much of the finance available to
value chains is not from financial institutions but rather from others within
the chain. At the same time, value chain finance can help the chains become
more inclusive, by making resources available for smallholders to integrate
into higher value markets. Finance that is linked with value chains is not
new and some types of trader finance, for example, have been around for
millennia; what is new is the way it is being applied more systematically to
agriculture, using innovative or adapted approaches, tools and technologies.
Examples of their application and innovation from around the world are
shared and discussed in the following chapters.
Defining value chain finance

In our fast-paced development context, value chain finance is an evolving
term that has taken on a range of meanings and connotations. The flows of
funds to and among the various links within a value chain comprise what is
known as value chain finance. Stated another way, it is any or all of the financial services, products and support services flowing to and/or through a value
chain to address the needs and constraints of those involved in that chain,
be it a need to access finance, secure sales, procure products, reduce risk and/
or improve efficiency within the chain. The comprehensive nature of value
chain finance, therefore, makes it essential to analyse and fully understand
the value chain in all aspects. The authors use the term here in reference to
both internal and external forms of finance that are developing along with the
agricultural value chains that they serve:
1. Internal value chain finance is that which takes place within the value
chain such as when an input supplier provides credit to a farmer, or
when a lead firm advances funds to a market intermediary.
2. External value chain finance is that which is made possible by value
chain relationships and mechanisms: for example, a bank issues a loan
to farmers based on a contract with a trusted buyer or a warehouse receipt from a recognized storage facility.
This discussion of value chain finance does not include conventional agricultural financing from financial institutions, such as banks and credit unions,
unless there is a direct correlation to the value chain as noted above. Inevitably, there will be some grey areas in any such definition, and we recognize that
financing approaches are often continuums through which an arbitrary line
must be drawn for practical reasons of analysis and discussion.
An example of internal value chain finance is the case of input supplier
credit in Myanmar where agro-input retailers offer deferred payment sales
to smallholder farmers (Myint, 2007). A typical case of external value chain
finance is exemplified in Kenya where small fruit and vegetable growers are
able to access bank finance for agro-chemicals thanks to their export contract.
The exporter pays the farmers through the bank, which deducts the scheduled loan payments before releasing the net proceeds to the farmer group
(Marangu, 2007).
Value chain finance in agriculture must be seen in the light of the larger
context, not only of the value chains proper but also the business environment of each country as this impacts value chains and the financial systems.
INTRODUCTION
For this reason, the following two chapters provide background on the approach and the business models which have been developed around value
chain finance. These chapters are followed by descriptions of financial instruments and innovations in value chain finance.
What is the interest around value chain finance in agriculture?

Value chain finance offers an opportunity to expand the financing opportunities for agriculture, improve efficiency and repayments in financing, and
consolidate value chain linkages among participants in the chain. The specific
opportunities that financing can create within a chain are driven by the context and business model and the relative roles of each participant in the chain.
As stated by Campion (2006), finance often looks different when provided
within a value chain than from a financial institution. Not only is the nature
of the finance often different, but so are the motives. Nyoro (2007) notes that
in Africa value chain actors are driven more by desire to expand markets
than by the profitability of the finance. Traders, for example, commonly use
finance as a procurement facility while input suppliers often employ it as part
of a sales incentive strategy. For financial institutions, it offers an approach to
lower risk and cost in providing financial services. For the recipients of value
chain finance, such as smallholder farmers or those purchasing their products,
value chain finance offers a mechanism to obtain financing that may otherwise not be available due to a lack of collateral or transaction costs of securing
a loan, and it can be a way to guarantee a market for products.
Understanding value chain finance can improve the overall effectiveness of
those providing and requiring agricultural financing. It can improve the quality and efficiency of financing agricultural chains by: 1) identifying financing
needs for strengthening the chain; 2) tailoring financial products to fit the
needs of the participants in the chain; 3) reducing financial transaction costs
through direct discount repayments and delivery of financial services; and
4) using value chain linkages and knowledge of the chain to mitigate risks of
the chain and its partners. As agriculture and agribusiness modernize with
increased integration and interdependent relationships, the opportunity and
the need for value chain finance becomes increasingly relevant.
Overview of content
This book is built around actual case studies that were presented at a series of
FAO conferences, which took place in Asia, Africa and Latin America in 2006
and 2007, as well as additional work in Eastern Europe and Central Asia in
2008. As a result of using real world examples, descriptions of specific financial models and instruments are often teased out of a complex system that
exhibits a range of financial, agricultural, institutional, regulatory and sociocultural variables. As much as possible, illustrative cases have been streamlined to focus on a particular aspect of the system, and elaborate the topic
under discussion. In some instances, a project or case may be used in more

than one section to exemplify a relevant point.
The second chapter of this volume attempts to convey the current understanding of value chain finance as presented by practitioners and theorists
in the field. The chapter begins with a section describing the contemporary
agricultural context that is rapidly changing from fragmented and informal
relationships to integrated and structured agribusiness systems. Based on an
understanding of this context, agricultural value chain finance receives deeper
analysis and definition in the next section. This leads to a discussion of value
chain finance as an approach, not just a series of financial instruments, and
ends with an examination of enabling environment issues including regulation and business and socio-economic contexts.
The third chapter elaborates four broad value chain business models producer-driven, buyer-driven, facilitator-driven, and integrated that provide a
framework for understanding and analysing the structures and processes of
agricultural value chains, and therefore the various applications of financing
mechanisms that apply in different situations. Within these models specific
mechanisms, such as contract farming which is growing rapidly in the developing world, are explained as they provide supportive structures through
which value chain financing is often applied.
The next chapter, the fourth, provides a classification, definitions and examples of value chain finance mechanisms and tools from traditional products such as trader credit, to more complex instruments such as factoring. This
core chapter of the volume explains the range of value chain finance tools
and mechanisms, and illustrates them with a cross-section of mini-cases from
highly differentiated agricultural systems around the globe.
Chapter five highlights and illustrates successful innovations in the application of models and financial tools. These include technological innovations
as well as organizational and policy sector ones.
The final chapter looks at both general lessons and those for key applications
and settings. Then it presents a set of recommendations, organized according
to those for financial institutions, agribusiness firms and policymakers.
CHAPTER 2
Understanding agricultural value chain

finance
Context
After many years of declining investment, there is renewed interest in agricultural financing. The rapid rise in food prices and a shortage of basic commodities experienced in 2008 has motivated increased attention from the public
sector; the higher prices and consequently increased opportunity for profits is
generating interest from the private sector. Investment decisions require placing much more emphasis on assessing the future trends and market potential.
In addition, in an era of global markets, local supply and demand has less effect on prices as products more readily flow across borders, thus changing the
nature of price risk within those markets.
The agro-food sector has undergone changes that have influenced new
models of production and marketing involving a focus on demand rather than
on producer-defined agricultural goods; a global, liberalized and fragmented
marketplace with little seasonality and high product diversity; food safety and
traceability requirements; and higher quality standards in conjunction with
the enforcement of basic environmental regulations. This evolution requires a
better understanding of the whole set of transactions within each value chain
and that of the agricultural sector within which it operates. Integrated chains
are able to do this most effectively. This information is important for making
financial decisions.
Despite the changes in agriculture and agribusiness, the typical offer for
financial products and services for agricultural and rural production has been
deficient and not particularly innovative; financial intermediaries still lack
much depth in rural areas, and producers, especially smallholders, are still
underserved. Conventional thinking is that the agricultural sector is too costly
and risky for lending. Yet, major banks in the sector such as Rabobank and
Banorte, large financial institutions in the Netherlands and Mexico respectively, both express the view that agricultural credit is profitable if producers
are well integrated into a viable value chain (Shwedel, 2007; Martnez, 2006).
It is recognized that increases in finance and investment are needed at all
levels of the food chain, with special interest in increasing the access to finance
by those agricultural households and communities who are most vulnerable to
food insecurity and poverty. As such, although this book deals with agribusinesses of all sizes and types, significant consideration is given to the effects on
small farmers and small agribusinesses that have the most to gain or lose in
todays rapidly changing agricultural and economic environment.
Increasing finance and investment in a sustainable manner is not easy.

Financing agriculture continues to be perceived as having high costs of operation, high risks and low returns on investment. Despite good intentions
for directing credit to agriculture, the results of the agricultural lending programmes in developing countries commonly have unsatisfactory results with
low rates of repayment in spite of (or often partly because of) high subsidies.
Agricultural development banks have been slow to innovate, often due in part
to governmental directives given to them. Commercial banks have traditionally shied away from this sector because of uncontrollable and systemic risks,
higher costs and fear of the unknown for bankers not familiar with the sector
and setting. The cost of directly lending to farmers, especially smaller ones, in
hard-to-reach rural areas with less-educated and low-income populations is in
fact generally prohibitive to most formal financial institutions. Microfinance
institutions do reach some of these low-income households but at a high cost,
with short-term loan products that are generally not able to address the full
range of agricultural needs.
Even more important than the operational costs for transacting a loan or
securing investments is the systemic or correlated risk in agriculture. This risk
stems from both price volatility as well as from changeable weather patterns
that can affect whole regions at a time, making repayment uncertain. In conventional lending, collateral is used to mitigate risks to the lender but the typical mortgage type of collateral commonly required by the banks is often not
available or feasible in rural areas. This is due largely to land tenure restrictions
and/or other requirements that are often designed to protect the livelihood assets of the community, but in doing so effectively limit their use as collateral.
Hence, collateral is a major constraint to access to finance in agriculture not
only from banks, but also from credit unions and other financing institutions.
Central Bank policies can often exacerbate this constraint by requiring high
reserves or imposing other restrictions which in effect penalize uncollateralized lending. Furthermore, the collapse of the global financial markets in 2008
and ensuing caution for financing activities with unknown and/or uncontrollable risk has led to financiers and investors requiring more assurance of
markets, prices and controls.
Agriculture has been changing rapidly from one of fragmented production
and marketing relationships toward integrated market systems, or chains.
Driven by gains from economies of scale and globalization of the food chain,
multinational agri-enterprises increasingly dominate the sector with more
and more vertical and horizontal linkages or integration. The changes are also
being driven by the marketplace and responsiveness to consumer interests,
including stricter compliance, timeliness and quality standards. Agriculture,
as with many other sectors, is now a global marketplace driven by competitiveness, which demands certain levels of efficiency and productivity. The future
of farmers, traders and agribusinesses in the food or agro-industrial chain and
therefore the quality of their loan or investment depends upon both their
ability to compete in the marketplace and/or to adapt to markets in which
UNDERSTANDING AGRICULTURAL VALUE CHAIN FINANCE
they can compete. Further, success depends upon the collective competitiveness of everyone involved in the particular chain. In Kenya, Mrema (2007)
notes that adoption of a value chain approach to agriculture begins with an
attitude change by thinking in terms of we instead of me and focusing
on harmonization of use of resources and interventions. Hence, the linkages,
structure and overall health of the whole chain become much more important
than ever before. Non-integrated, independent farmers, traders and businesses
in a food system will likely become broken links in fragmented chains, unable
to survive competition in the future.
Meeting the challenges of consumer trends and the demand for more processed or value added products requires increased investment in equipment,
working capital, and skills and knowledge. Such investment is not only costly
for individual value chain businesses, but can only be undertaken if there is
an assurance from elsewhere in the chain for supplies, produce or markets.
This creates the need to strengthen the links and commitment amongst value
chain players, often through contracts. Agricultural transformation in the globalizing marketplace therefore not only creates new challenges but also new
opportunities for using that integration to increase competitiveness and access to finance. Since more finance for agriculture is critical in meeting this
challenge, it is hoped that financial institutions and policymakers can learn
from and engage more with value chain actors in order to develop new products and to reach new markets.
Gonzalez-Vega (2007) raises a series of questions that a transformation and
consolidation of agriculture would pose for finance:
1. Are financial systems in the countries prepared to meet the new
demands for financial services arising from the growth of modern
agro-food value chains? Will financial intermediaries be equipped to
meet these demands and support the rapid growth of production and
productivity triggered by the opportunities of globalization? To what
extent will the success of the chains depend on progress toward widening the choice and access of rural financial services in these countries?
2. How much will the transformation of agriculture and the development
of modern value chains shape the processes of financial access and delivery and the ability of financial intermediaries to meet resulting demands?
Does the development of agricultural chains contribute new means of
support for modernizing the financial system and how much does the
emergence of contractual relationships among stakeholders benefit a
countrys financial development and outreach?
3. Will the supply of financial services that develops in response to these
processes benefit all kinds of farmers? Which will be included, and
which may not? How much will conventional financial systems be able
to ease the incorporation of small- and medium-scale farmers into modern agricultural chains? Will the lack of access to financial services become an insurmountable barrier to entry for many traditional farmers?
What financial service options will be available to producers who are

not served by formal financial service providers?
This second set of questions in particular highlights the interplay between
agricultural development and the outreach of a countrys financial systems.
In rural areas, there is a correlation between the number and development of
agribusinesses and financial institutions and vice versa. As agricultural value
chains become more sophisticated with responsive production to guaranteed
markets, financial institutions are able to act with reduced risk to increase
their services and further support the expansion and upgrading of agricultural
activities.
The effects of the growing integration of value chains also have important social implications as well as financial ones. It is therefore important to
analyse the effect of the vertical integration and market driven demand on
low-income producers, traders and processors. Enhancing their level of competitiveness and their participation in dynamic and profitable value chains are
two priorities of the agriculture-for-development agenda. With the fact that
the majority of the worlds poor are in the agricultural and rural sectors, this
is an important development factor. Finance is important to value chains but
by itself is of little value. Even the most well-intentioned financial services
directed to agriculture will not be successful in the long run unless the producers and agribusinesses are competitive, not only today, but as the markets
evolve.
The concept of agricultural value chain finance

The value chain concept allows integration of the various players in agriculture production, processing and marketing. It defines the various roles
of players while at the same time, scope and purpose of partnerships that
can be established.
Equity Bank, Kenya (Muiruri, 2007)
The introduction of this book offered a definition of agricultural value chain
finance that takes into consideration the two broad aspects of its financing. It
is defined as both internal finance that takes place within the value chain and
external finance that is made possible by value chain relationships and mechanisms. This definition is enlarged in the following section, providing a detailed
examination of the term and its applications. It is also useful to note here that
the terms value chain and supply chain are often used interchangeably with
supply chain being used most frequently in industrial chains. For agriculture,
the term value chain is most appropriate for highlighting the value addition,
i.e. transformation of the inputs and products as they pass through the chain.
However first, we begin with an explanation of value chains proper.
The concept of agricultural value chain includes the full range of activities
and participants involved in moving agricultural products from input suppliers to farmers fields, and ultimately, to consumers tables. Each stakeholder or
process in the chain has a link to the next in order for the processes to form a
viable chain. At each stage, some additional transformation or enhancement
is made to the product ranging from simply moving the product from point
a to point b (a common value addition of traders for example) to complex
processing and packaging. Hence, a value chain is often defined as the sequence of value-adding activities, from production to consumption, through
processing and commercialization. Each segment of a chain has one or more
backward and forward linkages. A chain is only as strong as its weakest link
and hence the stronger the links, the more secure the flow of products and
services within the chain.
The farm to table integration of a chain can increase efficiency and value through reduction of wastage, ensuring food safety, preserving freshness,
decreasing consumer prices, and improving farmer prices and incomes. Efficient value chains normally reduce the use of intermediaries in the chain,
and strengthen value-added activities because of better technology and inputs, farm gate procurement, upgraded infrastructure (such as cold chains),
improved price opportunities through demand-driven production, and facilitation of more secure procurement for food processing and exports.
The flows of funds and internal and external financial arrangements among
the various links in the chain comprise what is known as value chain finance.
Stated another way, it is any or all of the financial services, products and support services flowing to and/or through a value chain. This can be internal financing directly from one value chain actor to another or external from a
financial institution or investor based upon the borrowers value chain relations and activities.
The role of value chain finance is to address the needs and constraints of
those involved in that chain. This is often a need for finance but it is also commonly used as a way to secure sales, procure products, reduce risk and/or improve efficiency within the chain. The comprehensive nature of value chain
finance, therefore, makes it important to understand the nature of each chain,
its actors and their interests. Some successful financial institutions have done
this in their lending operations but many have not. Even fewer have multiparty financing arrangements in agriculture which is common in value chain
finance among producers, suppliers, wholesalers and others.
A conceptual framework is useful for understanding value chain finance.
This is important because value chain finance is both an approach to financing as well as a set of financial instruments which are utilized to expand and
improve financial services to meet the needs of those involved in the value
chain. Many of the instruments are not new but are often applied more broadly and frequently in combination with others. Most importantly, value chain
finance is as an approach to financing that recognizes the entirety of the chain
and the forces which drive it and responds accordingly to the specific requirements for financing them the producers, traders, processors and others in
the chain. It is a tailor-made approach which is designed to most efficiently
meet the needs of the businesses and particular nature of the chain. These
10
mechanisms and tools can be applied to: 1) finance production or harvest; 2)

purchase inputs or products, or finance labour; 3) provide overdrafts or lines
of credit; 4) fund investments; and 5) reduce risk and uncertainty. Therefore,
value chain finance as an approach takes a systemic viewpoint, looking at the
collective set of actors, processes and markets of the chain as opposed to an
individual lender-borrower within the system. This is described in more detail
in the next section.
Figure 2.1 presents a simplified framework for understanding value chain
finance. As described above, it illustrates that finance is provided by those
within the value chain itself, as well as by various types of institutional financing entities who provide financing to the chain. Products flow in one direction through the chain with varying levels of value addition at each level.
Within the chain the finance flows in two directions, depending upon the
particular value chain and/or region and the dynamics of the companies and
participants involved. For example, in the rice industry, large wholesalers often finance traders who advance financing to the producers. At the same time,
many processors receive unprocessed rice from farmers and producer groups
Financial services
Value chain suppliers
Supporting services
Exporters /
wholesalers
Banks
Processors
Non-bank
financial institutions
Private investors
& funds
Cooperatives /
associations
Local MFIs /
community orgs.
Local traders
& processors
Technical
training
Business
training
Producer
groups
Specialized
services
Farmers
Governmental
certification /
grades support
Input suppliers
Product flows
Financial flows
Figure 2.1 Product and financial flows within the value chain
Source: Adapted from Fries (2007) and Miller (2007a)
11
with only a partial payment with the understanding that final payment will
be made after the rice is processed and sold. In this case the farmers are financiers to their rice millers.
It is noted in the figure that those within the chain can be both recipient
users of finance as well as suppliers of finance. For example, an input supplier
often receives financing to purchase inventory and sells the inputs on credit.
Farmers may receive inputs on credit, they may receive advances from processors (directly or through their associations) and they may also provide in-kind
finance, such as through delayed payments for their produce from millers,
supermarkets or even governmental warehouses.
Box 2.1 highlights brief definitions of three interrelated value chain concepts. While the concept and approach of value chain finance may be quite
new, the key components are not. The concept and practice of value chains or
supply chains have been present for millennia, but in todays world of heightened market requirements and just-in-time delivery, the chains become ever
more important. Similarly value chain analysis is a successor to the term subsector analysis and remains an important way of diagnosing a chain for determination of areas of weakness and intervention. It can also be noted that
value chain finance and its increasing importance builds from the combination of value chain analysis, tailor designed financing, increased market integration in agriculture and the application of improved financial instruments
and information technologies. It commonly involves multiple parties, each of
which have a vested interest in the success of the others in the chain the
more each have to gain or lose from the partnership, the stronger the value
chain. These relationships can be formal or informal. They can involve simple
financing agreements such as with the traditional farming on shares where
Box 2.1 Value chain definitions

A useful starting point for understanding value chain financing in agriculture is with three
general definitions:
1. Value chain the set of actors (private, public, and including service providers) and
the sequence of value-adding activities involved in bringing a product from production
to the final consumer. In agriculture they can be thought of as a farm to fork set of
processes and flows (Miller and da Silva, 2007).
2. Value chain analysis assessment of the actors and factors influencing the performance of an industry, and relationships among participants to identify the driving
constraints to increased efficiency, productivity and competitiveness of an industry and
how these constraints can be overcome (Fries, 2007).
3. Value chain finance financial services and products flowing to and/or through value
chain participants to address and alleviate driving constraints to growth (Fries, 2007).
To summarize, the key aspects of the value chain definitions for agriculture are:
o
o
o
Value chains multiple, linked actors and sequential, value-adding activities.

Value chain analysis assessment of actors, relationships, constraints and opportunities.
Value chain finance finance to address the constraints and opportunities, both
through the value chain, and to and/or because of the value chain.
12
costs, inputs and returns are shared. In this case, through informal or contractual arrangements, a farmer typically receives inputs such as seeds, fertilizer and
technical guidance, in exchange for a share in the product with a business partner who may be a neighbour or an agribusiness wanting to secure produce for
their mill or business.
A study by the Temeo Institute demonstrated that in Kenya, as in many
parts of Africa, the use of value chain finance has been a common part of
the production and marketing systems of major commodities, both in the
tea plantations that were set up centuries ago and in more recent structures.
For example, the last century saw governmental schemes involving marketing
boards, inputs and directed credit lines. The latter started in the 1930s with the
creation of the National Advances Board which made available public funds
for lending to farmers and for supervision of lending. These advances were
made against land and the crop that was financed as collateral. The Kenya
case in Figure 2.2 shows the inter-relation of the governmental Agricultural
Finance Corporation (AFC) providing inputs through the Kenya Farmers Association (KFA) and cash to farmers who in turn sold their production output
to the governmental National Cereals Produce Board (NCPB).
The NCPB discounted loan payments owed to the AFC and the remaining
funds were repaid back to the farmers. During this time in Kenya, the AFC
was in effect the only government organization that provided finance in agriculture. The AFC was financed by the government and grants and loans from
international donors. Although costly, the government offered both credit
and complimentary supportive services to farmers as shown in Table 2.1. The
combined effect produced both stability and stimulus to growth in the agricultural sector. However, in the post reform period of agricultural finance, the
integrated system began to decompose with some of the changes and effects
noted below.
Payments
AFC
NCPB
Output
Irrevocable
order
Cash
Payments
FARMER
Inputs
KFA
Figure 2.2 Interlinked cereal lending

Source: Nyoro (2007)
13
Table 2.1 Kenyan Government Interlinked Cereal programme

Interlinked Cereal programme lending and services Effects
Governmental financing in agriculture for:
o capital purchases, including land;
o farm machinery;
o seasonal credit.
Subsidized inputs;
Market access and price controls;
Extension services;
Infrastructural development.
High economic and agricultural growth

rates of 6 per cent per annum;
Comparatively the highest adoption rates
for hybrid seeds and fertilizers;
Local income growth;
High cost to national budget to maintain
AFC.
Kenyan post reform agricultural finance

Changes
Effects
Elimination of price controls for commodities;

Discontinuation of integrated credit
programmes;
Break-down of interlinked credit;
Political interference on lending and recovery.
Producers exposed to price risks;

High default rates on lending by AFC;
Side-selling of agricultural commodities;
Withdrawal of commercial banks from
rural areas.
Notwithstanding the many valid reasons for the discontinuation of the

former governmental approach to integrated chains in agriculture used in
Kenya, there are two important features to note. First, the full-service approach and the stability of prices promoted growth in income and use of
technology, albeit at high cost. It also provided security for lending and for
marketing procurement. When these were no longer available with the discontinuation of the interlinked programme, the result was an increase in
lending default and breach of sales contracts (side-selling).
A similar situation resulted with the breakdown of the Soviet Union. When
the state-controlled integrated value chains, often extending between countries, were severed, markets became unreliable and financing became unavailable. Only when value chain integration began to be developed by the private
sector, did financing begin to flow again, often using value chain finance
approaches and instruments as a way to access financial resources.
It is also important to note that value chain finance is not a replacement for
mainstream financial service providers such as banks and credit unions. These
remain very important for providing finance and other financial services to
the chain actors. The approach and tools used in value chain finance build
on and enhance informal credit and conventional, collateral-based financing
through banks and other financial institutions to offer a full complement of
financing products. For example, traders commonly provide finance to farmers for harvest, inputs or other needs both related to the agricultural chain or
household during the production cycles such as advances to cover emergencies. Many of these traders in turn receive finance from millers and processors
who in turn may be financed by banks and/or wholesalers or exporters who
are farther along the supply or value chain. Although they often use conventional financing institutions, rural producers, processors and retailers are
14
receiving increasingly large injections of resources from other entities with

which they maintain trade ties.
The amount of funding that flows upward in the value chain should not
be underestimated since it is significant. Agro-input suppliers providing seeds
and inputs on credit, farmers who deliver products to warehouses or processors with delayed payments and wholesalers who sell to supermarkets on consignment or with delayed payments are among the most common examples.
Agricultural value chain finance as an approach

Value chain finance can be viewed as a series of tools and mechanisms, yet,
most importantly it is an approach that takes a systemic viewpoint, looking at
the collective set of actors, processes and markets of the chain as opposed to
an individual lender-borrower within the system. Decisions about financing
are based on the health of the entire system, including market demand, and
not just on the individual borrower. This means that in order to offer value
chain-based finance, knowledge of the agricultural system is required.
In other forms of finance, whether internal financing within the chain,
such as traditional trader credit, or financing originating externally, such as
conventional banking finance, the view is less comprehensive, and therefore
incorporates significant risk. The additional risk is due in large part to uncertainty; not being able to fully understand the risks and consequently not
being able to assess and mitigate against those risks. Uncertainty also leads to
a higher perception of risk causing conventional lending to the sector to be
reduced.
Shwedel states, Chain-based financing requires the banker to see and understand the business in its entirety. It demands adjustment to new market conditions, more accurate pricing, a better understanding of risk, and consequently,
a greater willingness to take risk (2007: 22). In his work as value chain finance
specialist for Rabobank Mexico, he has learned that with a holistic understanding of the chain, there is potential to reduce risk and open up the doors to
finance based on systemic knowledge.
Box 2.2 Flower chain financing, Mexico

In the case of flower producers in Mexico, Rabobank finances their needs for working
capital, equipment and technology. Closely aligned with this, Rabobank also finances the
equipment distributor who provides needed technology to the farmers. The bank finances
the farmers because the bank knows them and understands their marketing system. In
fact, the farmers send their products to an auction market in Holland, and Rabobank
finances the auction market and many of the buyers in the market. In this way, the bank
has locked up the financing of the whole chain and has intimate knowledge of the chain
production factors, equipment suppliers, and buyers. The bank also knows that the farmers receive their money as it is deposited in a Rabobank account, so that the bank can
directly debit their accounts for loan payments.
Source: Shwedel (2007)
15
An example of the Rabobank approach is highlighted in Box 2.2 that describes the financing of flowers which are considered a specialized, high-risk
sector in Mexico.
As in the Rabobank case, a lender is more likely to give a loan to a farmer
when that farmer is connected to a viable buyer, and when the buyer in turn
has solid market access. Most businesses and financial institutions do not have
the global reach of Rabobank, but through strong linkages among partners
and follow-up of flows of product and funds, they can achieve the necessary
understanding and control needed to minimize risks and have competitive efficiency in their value chain financing. In the past, without such value chain
knowledge and interconnectivity, the farmers or small processors and traders
may have been more readily refused a loan and therefore unable to finance
their operations to take advantage of a market opportunity. The familiarity of
the players in a specific chain with each other supports the promotion and development of effective arrangements that facilitate financing. The main purpose is sharing risks among various actors, transferring defined risks to those
parties that are best equipped to manage them, and as far as possible, reducing
costs through direct linkages and payments.
Since value chain finance is built not only upon physical linkages but also
through knowledge integration, a key to success for financial institution is to
know the business. Those who know the business the best are those persons
and companies directly involved in the value chain. Having and using specialized knowledge of the chain, financiers and investors can understand the
risks and work to mitigate them more easily than a conventional banker who
works with all types of businesses and clients. This ability and commitment
to analysing and using the value chain, enables financial institutions to tailor
appropriate financial products and services to the participants in the value
chain. Success in this field depends upon making use of this collective body of
knowledge followed by subsequent tailoring or structuring of traditional and
non-traditional financial mechanisms and tools to fit the value chain. The
main purpose is sharing risks among various actors and transferring defined
risks to those parties that are best equipped to manage them. Hence, the value
chain finance approach is a process of building and using knowledge to determine financial services and interventions. The actual financing can be either
direct from one chain partner to another, indirect by a third party financial
institution or cascading, meaning financing enters the chain to partners at
multiple levels according to the activities in the chain.
Whereas, conventional financing relies heavily on the creditworthiness of
the client and business, value chain financing focuses more on the payments
to be received from activities, such as production and value-added transactions. This allows for increased access to finance for those without sufficient
collateral but with predictable flows of goods, and strong partners in the
chain. Moreover, in many cases, the transactions can be structured such that
the repayment of a loan is automatically made via the transaction proceeds.
This direct form of loan repayment, reduces both repayment risk as well as
16
transaction costs of loan repayment. Each participant in a value chain has a

different capacity to obtain financing and the conditions vary accordingly.
Their common interest is in obtaining finance easily under favourable conditions; whether it comes from a bank, supplier or trader is not important. If, for
example, a major buyer can obtain financing and advance funds to others in
the chain at less overall cost, everyone benefits.
Following a value chain finance approach, the loan analysis for a specific borrower comprehensively considers the many aspects and processes
of the value chain, including who within the chain is best placed to be the
borrower(s), and what are the flows of funds and from whom. Kariuki states
that the key issues for consideration in value chain finance in the Cooperative
Bank of Agriculture are: 1) the strength of the value chain and its opportunities and challenges; 2) the risks; 3) the technical, business and financial services and support, and 4) the business model for value chain finance (Mwangi,
2007). In essence, the process involves a combination of value chain assessment, financial assessment and securing agreements. A few key steps that can
be employed by such an institution are:
1. Understand the value chain:
o Enabling environment international, regional and domestic enabling environment, regulatory constraints and opportunities for
support;
o Vertical and horizontal relationships linkages between levels of
the chain and competitors and with those on the same level, their
interests and commitment;
o Support markets and services financial and non-financial services,
and input supply markets;
o End market market potential, consumer demands and chain risks
(adaption from Coop, 2008).
2. Identify the value chain model that currently exists lead actors, business model and sustainability strategy;
3. Identify the transaction processes value added in the various stages of
the product up the value chain;
4. Determine actual and critical points of finance the current flows of
funds and their sources of financing, what is needed and in what point
in time;
5. Analyse and compare financing options their relative strengths, risks
and costs of financing for each level of participant in the chain;
6. Design financing according to the best option(s) to fit the chain draw
up agreements for financing between parties.
While much of the emphasis in a value chain finance approach is on the
health of the chain and its value-adding transactions and linkages, a wellrounded assessment of all borrowers is still critical. This borrower assessment
can be undertaken by looking at key areas commonly called the 5 Cs of loan
assessment. These refer to: 1) character; 2) capacity; 3) capital; 4) collateral;
17
Box 2.3 Five Cs of lending applied to value chain financing

1. Character Suppliers, producers, purchasers and others in a value chain who interact regularly can assess the character and management savvy of each
other better than a banker, with whom they have infrequent interaction.
2. Capacity Assessment is broadened from the borrowers individual capacity toward
a focus on the health and growth potential of the value chain and the
competitiveness of those involved in it; also an individuals borrowing
capacity can be strengthened because they are integrated into a strong
value chain.
3. Capital
The capital of the borrower alone is less emphasized in value chain
finance, as increased attention is given to the capitalization within the
whole chain.
4. Collateral Cash and commodity flows which can be predicted from past relations
or contracts can replace or enhance traditional collateral; also in tightly
integrated chains the collateral of the strongest partners can be used for
attracting finance, which can also be a benefit to others in the chain.
5. Conditions Conditions for financing are more adapted to the chain; tailoring finance
to fit the specific needs becomes paramount to its success and can
improve bankability of the clients.
Source: Miller (2008a)
and 5) conditions (Miller, 2008a). Banks have typically given highest priority
to collateral and in microfinance the focus of priority is to character and capacity. These remain important in loan assessment but, as shown in Box 2.3,
their relative level of importance changes as does the breadth of the assessment to go beyond that of the immediate borrower.
In value chain finance, increased importance is given to the conditions of
both the market outlook and the fit of the financial requirements to the needs
and flows of the chain. The fit of the financial conditions and cash flows to
those clients within the chain is critical and assessment of the risks of breakdowns in the chain form part of the analysis. The cash flow of the value chain
must be sufficient and in total synch with that of the loan conditions. The
capacity of the partners as well as the borrower is also importance. Hence, a
risk assessment moves well beyond client credit risk and requires assessment
of the risks of market, price and production.
Does this mean that the bank or financier must assess and fully understand
everything in the value chain? No, most do not have such capacity except in
the chains with which they are dealing closely, but rather they can often rely
in part on the strength and reputation of the strongest actors in the chain.
Most often these are larger businesses farther up the chain with strong credit
histories who are experts in the chains in which they operate.
Enabling environment
The collection of institutions, policies, attitudes and support services that define
the setting where enterprises operate is known as the enabling environment, or
18
business climate. The constituting elements of an enabling environment in any

given economy are multi-faceted, covering themes such as the rule of law, public sector governance, overall macro-economic conditions, infrastructure and
regulations affecting business, and socio-cultural context among others. Governments and international organizations are now paying increased attention
to the assessment and promotion of reforms of enabling environments, having
acknowledged that a conducive business climate is an essential pre-requisite for
investments in new enterprises and for the sustained growth and competitiveness of the existing ones. The World Bank Doing Business survey (World Bank,
2009) has been established as an authoritative benchmark in this area of concern, generating country rankings that have been instrumental in engendering
business climate reforms worldwide.
The application of value chain finance depends upon the environment
in which it operates. As with all finance, the starting point is to have the
conditions for profitable business activity with some level of stability. Within
finance, some financial instruments can only be applied if certain regulations
or compliance is in place. Macro-economic instability or erratic policies adversely affect risk perceptions and undermine the potential of value chain
financing instruments. Yet, at other times, value chain financing serves as a
method of alternative finance when conditions for loans and services from
conventional sources such as banks are not in place. For this reason the business models for value chains and their financing are developed according
to the operating conditions and the characteristics of those involved in the
chain.
More often than not, work on building an enabling environment requires
interventions on multiple levels in order to be effective. For example, in
Tanzania, IFAD found that reforms were needed on three levels described by
Cherogony (2007) as follows:
Macro level is the policy level that creates an enabling environment

(warehouse receipt act, taxation and marketing policy);
Meso level takes into consideration private sector intermediaries (insurance, collateral managers, commercial banks);
Micro level involves various local and grassroots institutional forms
from farmer associations and community based microfinance institutions (SACCOS).
Some of the elements of enabling environments that are of particular relevance for the successful design and implementation of value chain financing
initiatives are briefly discussed in the next section. Interested readers will find
additional information on this topic in the series of documents prepared by
the Rural Infrastructure and Agro-industries Division of FAO on enabling environments for agribusiness and agro-industries development (see FAO website,
www.fao.org/ag/ags/subjects/en/agribusiness).
19
Standards and certification

Among the elements that constitute an enabling environment, quality and
safety standards appear as an item of increasing relevance. Indeed, a major driver in the integration of agricultural value chains has come from the
introduction of quality and safety standards and the demands for strict compliance by buyers of agro-food products. In modern agro-food systems, chain
linkage has become a requirement in many sectors, due to consumer requirements for higher standards for food quality and safety and year-round availability. The unorganized chains cannot meet those demands.
Standards for food products are in two categories: 1) those relating to food
safety, which may require certification to demonstrate concurrence of meeting the minimum standards; and 2) those relating to the intrinsic value of
the product. The latter include quality, variety, size, shape, etc., as well as
brand which is normally determined by the industry norms and companies
themselves. Timeliness of delivery is another company-imposed standard to
meet market demands. Niche market characteristics that include their own set
of standards, such as for organic produce and regional specific branding (e.g.
French Champagne), are also becoming more important and have demonstrated an opportunity for some operators.
Tracing, to track the origin of products and their pathway through the value chain, has been shown to be of increasing importance for both safety as
well as branding. This can only be feasible through well-structured and linked
value chains. For small producers, such changes in the marketplace requirements make it increasingly difficult to compete unless they are well organized
and linked with or integrated into strong agricultural value chains. Many of
these changes which started with export agriculture are now being introduced
at the local level. The following illustrates the importance of standards and
their formalization in Kenyan horticulture markets:
Recognizing the importance of standards and certification for competitiveness in the fresh produce industry, The Fresh Produce Export Association of
Kenya (FPEAK) coordinated efforts to develop Kenya GAP standards. With
its emphasis on quality standards, food safety and traceability, customized
to Kenyan conditions for both large and small-scale growers, it also reduces
risk to all in the value chain as well as financiers since all are vulnerable if
unsafe or low-quality products affect the market. (Wairo, 2007)
Finance and investment from banks and other financial institutions to producers or agribusinesses face a major risk if there is not adequate attention
given to the standards of quality and safety of the products. This involves not
only their clients who borrow, but also the compliance to standards among
all participants within the value chains of their clients. Everyone is affected
positively or negatively by the actions of their chain partners.
Financing within the value chain from one partner to another can have
the effect of providing incentives or penalties for achievement, or not, of
20
the targets for specified standards. To encourage improved product quality

or timeliness, for example, finance can be advanced for irrigation, improved
packaging and storage or improved inputs. For those who do not meet standards, advance financing can be withheld and/or payment delayed, reduced
or refused.
Regulation and enforcement

Regulation for supporting value chain finance is two-fold: having proper regulations and enforcing them. Governments play an important function in setting the guiding principles for agriculture and agribusiness, as well as for the
rules that govern finance. In value chain finance the product-related standards
noted above must not only be set for countries and globally, they must be enforced in order to ensure transparency, consistency and compliance. Not only
is the reputation of the product and the countrys product at stake, but there is
also the need for consistency in order to provide the ability to trade effectively
and co-mingle products. Standard sized bags or weights, standard grades and
regulated processes for insuring safety, for instance, must be enforced in order
for value chains to be efficient.
Regulation and enforcement are both a public and private issue. In many
food sectors such as fruits and vegetables, private companies and their industry
associations impose regulations which are much stricter than governmental
ones, either to meet international or supermarket requirements or to maintain
a quality standard. They may also be in a position to enforce the regulations
better than the state judicial system because of a mutual interest among partners in the chain to maintain good working relations for the future.
In value chain financing arguably the most difficult area for regulation and
enforcement is contract enforcement, which is critical for ensuring followthrough of commitments. It is noted, for example, if farmers are allowed to
break contracts and side-sell to outsiders when the price is better, or if buyers
are allowed to renege on purchases (or provide other control barriers) when
their price contracted is disadvantageous, then the systems fail and all in the
chain are affected. In Uganda, for example, it was shown that governance
structures that encourage long-term interdependent relationships generally
facilitate increased access to finance (Johnston and Meyer, 2008). The same
holds true for countries which can shut off imports and cause problems or
even failure for those actors in value chains dependent upon their market.
Banking regulation is often geared toward conventional, collateral-based
lending and regulation that can address the less common forms of loan security such as product-based financing security. This is often lacking, thus
limiting the use of some of the value chain financial products. Yet the required
regulation can be developed. When considering the example of microfinance
for which new regulation was developed, a similar expansion of regulation
can be expected to meet the requirements of value chain financing. Moreover,
many of the key issues relating to regulation are not unique to agricultural
21
value chain finance. This is illustrated here in the summary of the key value
chain financing issues to be addressed, as identified by the African bankers
and central bankers at the AFRACA Agribanks Forum in 2007. Of these priority
issues, only the first two are unique to value chain finance:
Financial regulation:
Expand the policy environment for agricultural and rural finance to
cover the emerging financial products and technologies;
Assess and improve policies aimed at enhancing warehousing services
and warehouse receipt financing.
Business environment:
Prioritize increased expenditures on research and rural infrastructure in
the agricultural sector;
Improve financial sector policies for economic and exchange rate
stability;
Improve the environment for private financial investment, including
tax policies and concessions when appropriate to strengthen profitable
farming systems.
Equality:
Enhance smallholders access to markets;
Enforce transparency and fair treatment of all players;
Build capacity for value chain clientele to meet standards and regulations.
Macro-economic and social context

As indicated previously, one of the main considerations for agricultural financing and value chain development is the overall environment. Some
international organizations, such as the World Bank, consider the policy
environment above all other factors (Tiffen, 2006). For example, in some
economies a particular value chain that aims at international markets might
be weakly developed, but can be rapidly expanded if the general macroeconomic environment under which it operates improves, perhaps by reforms
in exchange rate or trade policies. In others, well functioning chains might
lose competitiveness if affected negatively by misguided interventions in areas
such as taxes (fiscal policy) or interest rates (monetary policies) that distort
competition among sectors or between countries.
Other variables in the general business context are important and wideranging for financing of agricultural value chains to be effective or even feasible. Questions such as the following can elicit important information in value
chain development: Is the private sector vibrant? Are there regional disparities
to be considered? Are there a range of services and infrastructure available to
support agricultural value chain development from inputs to transportation
and packaging? What is the outreach and availability of financial products for
addressing value chain needs?
22
Financing to agriculture has always been susceptible to political interests.

In many instances, loans have been made for political motives, collection has
been difficult due to the inability or reluctance to prosecute those unwilling
to repay, and loans have been forgiven or granted moratoriums on repayment, all of which lead to an unwillingness to lend to agriculture. Value chain
finance is less affected by loans being forgiven or politically dictated interest
rates, since these are commonly embedded into the marketing contracts and
payment is often secured by product. However, it is not immune to political
intervention and as noted in the previous section, the social and political
context for dealing with contract breaking, such as side-selling, is arguably the
most important issue that can limit the use of value chain financing.
Socio-economic factors of the country as a whole and the particular characteristics of each value chain also play an important role in the nature of
financing within and to agricultural value chains. Issues such as gender, ethnicity, class, caste and religion can impact the role and status of players, their
ability to access services including finance, and the way in which services can
be offered. In some countries, for example, fruit and vegetables and dairy are
value chains managed largely by women while major commodities and livestock are managed by men. Some products may also be more recently introduced and more readily organized as modern chains, while others are age-old
commodities and can be more difficult. For example, in Bolivia, beans as a
commercial crop were introduced less than 20 years ago and local marketing
and export use standard weights and grades, have a well-organized National
Bean Producers Organization (ASOPROF) and integrated value chains, much
of which is exported to established buyers. Potato marketing, on the other
hand, uses a centuries-old system of weights, no standard grading system and
has a fragmented marketing structure of many small buyers, spot-market prices and insecurity of payment. In this regard it is much more difficult to apply
value chain finance when the chain is not organized or standardized.
In Muslim countries, Islamic finance is often practised and specific financial products have been developed accordingly. Some of the Islamic finance
products have equivalent features to some of the principles and products of
value chain financing in that the borrowers in Islamic banking transactions
are considered business partners who can jointly bear the risks and profits.
For example, Islamic Murabaha lending is similar to trade financing with buyresell contracts. Ajaar lending involves lease-purchase agreements and Muajjal
involves advance sales with deferred delivery contracts (Miller, 2007b).
The context of each value chain is distinct. For those with less stringent
requirements (as is often the case for unprocessed, durable commodities such
as beans and rice) the level of organization of the value chain and its business
context have less effect than is the case for the export foodstuffs such as fruits
and vegetables. These have strict needs and without adequate assurance of
facilities for moving the product to market, these products will spoil. If there
is not delivery compliance and secure payment systems, the opportunities for
extending finance of any type will vanish.
23
Box 2.4 Financial flows within the rice industry

Asia
Latin America
Africa
Farmers
Farmers
Farmers
Buyer/millers
agent
Buyer or
agent
Buyer or
agent
Millers
Millers
Wholesalers
Wholesalers
Wholesalers
Millers
Retailers
Retailers
Retailers
The most significant differences in value chain financing are not between regions and
countries but rather across sectors and their value chains. However, each region and country does have specific differences. This is noted, for example, in who is the lead firm within
a value chain, and how finance plays an important role in their taking a lead. For example,
Glvez demonstrated that FAO case studies in the rice chain found that millers played the
central financing role for rice in Asia and wholesalers were central in financing within the
rice chain in Africa.
Source: Glvez (2006a)
Moreover, the structure of a value chain and the roles of its actors in
the same sector may vary within regions. An example of this is shown in
Box 2.4.
Value chains and diversified livelihoods

In a global economy, livelihoods are no longer simply dependent upon what
one produces, but also how that production fits with competitive chains in the
market system. The emphasis on global systems that has developed is useful
in the context of understanding the intricacies of each chain even at the local
level. Even so, from a livelihood perspective as well as a financial viewpoint,
it is important to understand the status of a chain from the vantage of each
participant within a chain. Diversification of activities among multiple chains
is noted as important to both farmers, agro-processors and traders to reduce
not only product and market risks but also to level seasonality requirements
for labour, equipment and capital as described by Medlicott in Honduras who
24
notes that diversification puts producers in a more sustainable position by

reducing market and production risks. Yet at the same time it permits them to
maximize resources and activities on a year-a-round basis, thus incrementing
their income, reducing fixed costs and providing continuous employment.
(Medlicott presentation, in Quirs, 2007)
For agro-processors, an overdependence on a particular chain can also be
detrimental if not hedged or diversified adequately. For financial institutions,
it may seem counter-intuitive to say that an agricultural value chain finance
approach looks beyond the chain, but this is not the case for several reasons.
First, the value chain approach helps to understand the risks and diversify
lending portfolios accordingly to reduce systemic risks change production,
price and even political. Secondly, a careful understanding of a sub-sector
helps to assess the potential for those involved to move across chains as the
market changes and/or to adjust to these market changes. For example, the
linkages between farmer organizations, warehouses and financing systems can
be used for maize as well as beans and other products.
As shown in the diagram below, value chain development and its financing
can be integrated into a comprehensive livelihood model. For small farmers
in India, this was found to be important for insuring sustainable and profitable farming and hence loan repayment. Finance is one of several value chain
services required to enhance competencies, increase outreach, reduce transaction costs and reduce risk for farmers and stakeholders. In the BASIX model,
these include inputs supplies, output markets, research and technology, group
Basix livelihood triad
IDS
LFS
Livelihood Financial
FinancialServices
Services
Livelihood
Savings and credit
Insurance for lives and livelihoods
Fund transfers
Commodity derivatives
Financial development
Figure 2.3 BASIX livelihood services model
Institutional
Development Services
Organize producers
Establish market linkages
Facilitate know-how linkages
Formalize the legal status
Help set up operational systems
Strengthen community organizations
Ag/BDS
AgriculturalBusiness
Business
Agricultural
Development
Dev.
Services Services
Productivity enhancement
Risk mitigation (non-insurance)
Local value addition
Alternative input and sales linkages
25
organization, training and extension services as well as financial services

(Ramana, 2007a).
Agriculture is the livelihood of the majority of the worlds poor and is an
important development concern. Both private and public sector intervention
needs to be addressed. These include:
Pre-harvest: 1) quality agricultural inputs; 2) updated knowledge; 3)

contract farming; 4) future price options; and 5) crop risk mitigation.
Post-harvest: 1) warehouse receipts linked to loans; 2) local value addition; 3) linkages to markets; 4) aggregation; and 5) farm-to-end-user, i.e.
value chain linkages. (Ramana, 2007a)
Models that are supportive of value chain financing are described in the following chapter. In all such models, the diversity of activities and services used
in one value chain are often applied to multiple chains within a business or a
farm in order to reduce overdependence on one chain.
CHAPTER 3
Value chain business models

For an enterprise, the term business model refers to the way it creates and captures value within a market network of producers, suppliers and consumers,
or, in short, what a company does and how it makes money from doing
it (Vorley, 2008). The business model concept is linked to business strategy
(the process of business model design) and business operations. For a value
chain, the use of the phrase business model refers to the drivers, processes and
resources for the entire system, even if the system is comprised of multiple
enterprises. If finance is to be successful, the value chain must be viewed as
a single structure, and the model of this structure provides a framework for
further analysis.
Understanding how a value chain is structured and coordinated can reduce
risk and hesitancy of financial intermediaries to lend to the agricultural sector.
Figure 3.1 describes different value chain structures, defined in terms of the
relationship between two stakeholders: buyer and seller. The buyers are agricultural processors, exporters or distributors, or in some cases, supermarkets.
Sellers are the producers or traders who sell their products to these buyers
along the chain.
The relationship between these two stakeholders, buyer and seller, can be
described through five types of linkages: 1) the instant or spot market, where
producers come to sell their commodities, and prices fluctuate; this is the most
risky in terms of setting market price; 2) a contract to produce and buy, known
more generally as contract farming; 3) a long term often informal relationship characterized by trust or interdependency; 4) a capital investment by one
of the buyers for the benefit of the producer, characterized by high levels of
Buyer
Spot market
Seller
Contract
Relation-based
partnership
Capital investmentbased partnership
Comfort zone
Figure 3.1 Different ways to coordinate and structure the value chain
Source: Wenner (2006)
Vertical
integration
28
producer credibility and dependence; and 5) a company that has achieved full
vertical integration. When production and marketing is dependent upon a
spot market with fluctuating prices and demands, financiers are uneasy; they
prefer a contractual or partnership structure in a value chain where the market
risks can be more controlled. This is their comfort zone.
As noted in the introduction, although agricultural value chain finance
deals with a range of agribusinesses and other chain partners who are both
large and small, value chain finance is particularly useful in helping link small
farmers and agribusinesses into effective market systems. With models that
promote economies of scale and reduce risks for lenders and buyers, smallholder farmers are more viable contributors to modern agricultural systems.
Because smallholder production is important in many value chains for both
economic and social considerations, special emphasis must be given to models which allow them to fully participate in value chains. The following table,
adapted from Vorley (2008), illustrates the typical organization of smallholder
production and marketing that is, the relation of farmers to the market and/
or the larger system. This analysis offers a basis for value chain business models, and the accompanying finance, which is expanded upon in the following
sections.
The following sections elaborate on this categorization, providing descriptions and illustrations of each model. The models are characterized by the
main driver of the value chain, and its rationale or objective. For example,
it was noted earlier in Box 2.4 that millers are often the drivers of the rice
chain in order to assure supply and increase volume, typical characteristics of
a buyer-driven model.
Table 3.1 Typical organizational models of smallholder production

Model
Driver of organization
Rationale
Producer-driven
(Association)
small-scale producers, especially

when formed into groups such as
associations or cooperatives;
large scale farmers.
access new markets;

obtain higher market price;
stabilize and secure market
position.
Buyer-driven
assure supply;
increase supply volumes;
supply more discerning
customers meeting market
niches and interests.
processors;
exporters;
retailers;
traders, wholesalers and other
traditional market actors.
Facilitator-driven NGOs and other support agencies; make markets work for the poor;
national and local governments.
regional and local development.
Integrated
lead firms;
supermarkets;
multi-nationals.
new and higher value markets;

low prices for good quality;
market monopolies.
VALUE CHAIN BUSINESS MODELS
29
Producer-driven value chain models

Producer associations are a critical component of many value chains. In certain cases, the association becomes the driver for value chain development
providing technical assistance, marketing, inputs and linkages to finance. In
other cases, the association may have a financial base, such as Credinka in the
following example, whereby a savings and loan association signs a contract
with farmers to guarantee sale of their product. Credinka is part of a much
more complex system of interrelated associations that support the cacao value
chain in Peru, providing contractual arrangements, finance, processing, market access, inputs and training.
Producer-driven models are driven from the bottom end of the chain. They
can be successful but face two major difficulties. First, producers may not understand the market needs as well as those in the chain who are closer to the
end user. Secondly, producers often struggle for financing unless they can find
strong partners and/or can get assistance for financing (such as the case of
Box 3.1 Cacao producer association, Peru
INDACO, or Industria Alimentaria La Convencin, was founded in 1994 as a business
initiative of Critas, an outreach organization of the Roman Catholic Church. The partners
are a consortium of public and private institutions interested in furthering agroindustry
development in the region. Aprocav is a 3,500 member cacao farmer association that is
the majority shareholder of INDACO. Aprocav consolidates the crop, lends technical assistance and sells the harvest to INDACO, which processes it into cacao butter, cacao powder
and glazes. INDACOs largest project, the cacao plant, embodies an investment of over
US$1.5 million and was built with support from the Inter-American Development Bank.
Credinka is a Rural Savings and Loan Association (CRAC) founded in 1994 by the federation of coffee cooperatives in Peru. After two or three years, INDACO and Aprocav joined
the savings and loan association, and today are the second largest group of shareholders.
The savings and loan association is under the supervision of the Superintendence of Banks
and is a member of Perus formal financial system. It has equity worth approximately US$2
million, making it the fifth largest of the 12 CRACs in Peru. It has four offices, more than
US$11 million in deposits and nearly US$14 million in loans. Credinka provides agricultural supply loans of up to US$3,000 for farmers who are members of producer associations. Specifically, in order to receive their credit, farmers must be members of Aprocav or
Ecomusa (another farmer association that functions as a community enterprise), and have
the backing of either of these institutions. Loans are guaranteed by the farmers sponsoring institutions and are regulated by means of a report that is prepared and submitted by
the technical personnel of the different associations, stipulating the amount to be lent to
each farmer.
In order to obtain their loan guarantee, farmers must sign a contract with the association, pledging to sell the entire cacao crop in exchange for an above-market price that pays
a premium for production quality. Aprocav and Ecomusa sell the crops to INDACO to be
processed and marketed. Finally, the associations repay Credinka for the loans to farmers, and the balance is deposited directly in the farmers account with the rural savings
and loan. For processing and marketing, INDACO has set up a fund with resources from
Credinka, the United Nations, the Inter-American Development Bank, private banks and
its own equity.
Source: Melosevic in Quirs (2007: 7476)
30
Credinka) and fore-linking to reliable and competitive markets and partners.

While the start-up years are particularly difficult for these and other reasons
e.g., lack of capacity and economies of scale with time and support, producer models can become strong and begin to access financing based upon
the strength of their transaction flows and market partners. The many strong
coffee cooperatives in Costa Rica and other countries are an example of such
success over time.
Buyer-driven value chain models

Buyer-driven models form the foundation for many of the applications of
value chain financing. It is often in the buyers interest to procure a flow of
products and use finance as a way of facilitating and/or committing producers,
processors and others in the chain to sell to them under specified conditions.
Most often, when financing is involved, the conditions are binding through
contracts. Whether these are formally registered or not, the agreements can
still form the basis for loan recovery.
Contract farming is the most common buyer-driven value chain model. As
the name suggests, it involves farm-level or farmer association-level contracts
but these contracts usually originate from one or more levels further along
the value chain. The contracts can be formalized in the legal system or can be
informal, but binding agreements.
Agro-food chain coordination can be exercised in a number of ways, ranging from tight vertically integrated operations, with full ownership and control by a single firm, to more fragmented coordination arrangements, where
there are no formal but rather ad hoc transactions between producers and
their buyers. Contract farming is a modality of chain coordination whereby
transactions between producers and other chain stakeholders are governed
by pre-established agreements that can be more or less formal. Indeed, some
forms of contract farming can even be seen as outsourced production, often
called outgrower schemes, typically by an estate, processor, exporter or other
chain agent, to a pool of producers. The contract (formal or informal farming
agreement) may involve advancing inputs, funds and/or technical support, or
it might be limited to product sales conditions, such as prices, quantities and
delivery dates (Winn et al., 2009).
The interest in contract farming as a chain governance strategy has grown
considerably in the recent past, probably because of the trends affecting agrofood systems, which are leading into more tightly aligned supply chains (da
Silva, 2007). As a result, increased opportunities have emerged for contract
farming arrangements to be promoted as conduits to leverage access to financial resources across agro-food supply chains.
Contract farming has some of the characteristics of a lead firm model, where
a large processor, exporter or retailer provides buyer credit. However, contract farming often involves stricter terms that specify the type of production,
quality, quantity and timing of agricultural product delivery. Finance and
31
technical assistance provision, if needed, may be part of such an agreement. The

commitments between the farmer and buyer whether contractual or verbal
provide bankers with a signal of security and seriousness, and a type of delegated
screening described in Box 3.2 (Miller, 2007b). In fact, as a result of the existence
of contracts, funding can be provided to farmers directly by an agribusiness firm
or by a third party, such as a bank. In the first situation, agribusiness firms, such
as agro-processors, will have their operational risks reduced, because access to
raw materials is safeguarded by the contracts established with producers. This
improves a firms credit rating and allows it increased access to finance. The
funds obtained by the firm are then channelled to farmers, often in the form of
farming inputs and technical assistance. In the second case, since banks tend to
consider producers to be more creditworthy if they have a guaranteed market
for their products, the participation in a contractual relationship can serve as a
form of virtual collateral. Acceptance or not of such collateral depends upon the
lending organization and also upon the lending requirements of each country.
However, in either case, contract farming is often an important mechanism supporting value chain financing.
Contracts may or may not be strictly formal. The Hortifruti case outlined
in Box 3.2 below demonstrates the power of a verbal contract with a known
Box 3.2 Buyer relationship credit-worthiness, Costa Rica

Hortifruti is an institutional buyer that consolidates products from many different smallscale farmers who are its suppliers and sells the bulked produce to supermarkets. Although
there is normally no formal contract between the farmer and the buyer, banks observe the relationship, and infer information about the farmers credit-worthiness. This is a form of delegated screening of borrowers in which the informal contract linking the institutional buyer
to the producer is the signal that tells the bank: go ahead and lend, because this is a good
prospect. The bank has confirmation of the farmers ability and willingness to repay based
on the institutional buyers need to work with efficient, responsible producers, and market
risk is lessened by the guaranteed volume of sales obtained through the relationship with
the institutional buyer. This same relationship reduces price risk and, because guaranteed
sales to the supermarket chain are continuous all year long, it also protects the farmer from
losses of liquidity. Thanks to a staggered planting and sales programme, based on instructions from the institutional buyer, farmers have liquidity throughout the year. With technical
assistance, market information, and other non-financial services offered by the supermarket
chain, farmers are able to mitigate productivity risks, environmental risks and quality problems that could lead to product rejection, while at the same time broadening their horizons,
increasing investment and promoting innovation. A seemingly surprising note on Hortifruti
suppliers is how heterogeneous they are and their most important distinguishing features
are not easily visible. For example, producer size is relatively unimportant. In Costa Rica, the
average farm size for Hortifruti suppliers is nine hectares. This is not a huge producer and
others were even smaller. It was found that some farmers owned no land at all, but met their
Hortifruti commitments on rented property. Even lacking land, they were able to find financial intermediaries willing to give them loans on the strength of nothing more than rented
property and a contract and ongoing relationship with Hortifruti. They did not require land as
collateral; a verbal contract with Hortifruti, an exceptionally strong and well-known company,
was enough to make them creditworthy, at least for working capital financing.
Source: Quirs (2007: 4565)
32
buyer, as a result of which farmers are able to access finance directly from a
financial institution, even if they are raising crops on rented land.
Hortifruti also offers an example of a complex set of financing mechanisms that work together to support a value chain. The agreements between
Hortifruti, farmers and processors enable the latter two to access finance from
banking institutions.
Hortifruti also directly provides financing and/or guarantees in various
other value chains as shown below in the case of rice and bean growers and
processors. The table illustrates the structure and various types of finance that
come into play in these chains.
Table 3.2 Hortifruti financing models
Bank financing for rice
growers
Non-bank financing for rice

and bean growers
Non-bank financing for rice

and bean processors
1) Hortifruti: Guarantees
purchase of crop under
contract; contracts
provide assurance to BAC
San Jos bank for
financing of rice growers.
1) Hortifruti:
1) Hortifruti: Advances
a) Guarantees purchase of
payment against future
crop under contract;
delivery of processed
contracts provide
goods; buys industrial
assurance to BAC bank for
equipment of raw
financing of rice growers.
material.
b) Finances farmers directly
using company resources
(30% of production cost);
charges no interest (pays
advance on purchase of
the crop).
2) BAC San Jos: Finances

60% of production costs;
requires no collateral
pledge; requires crop
insurance policy.
2) Supply houses: Deliver

inputs to farmer
(agrochemicals, seeds,
and small equipment).
2) Processor: Pays loan

gradually by processing
products; signed contract
with Hortifruti provides
access to credit;
guaranteed stable, longterm commercial
relationship.
3) Processor: Upon receipt

3) Processor: Upon receipt
3) Farmer: Signs pledge to
and payment of rice,
and payment of rice,
deliver crop.
discounts farmers debt to
discounts farmers debt to
pay the bank and supply
pay the bank and supply
houses, with part of the
houses, with part of the
value of the crop.
value of the crop.
4) Supply house: Provides
in-kind financing of 35%
of the production costs,
via inputs.
4) Supply house: Provides

in-kind financing of 35%
of the production costs,
via inputs.
5. Farmer: Signs pledge to

deliver crop to rice mill;
thus becomes more
creditworthy with BAC
San Jos.
5) Farmer: Signs pledge to

deliver crop to rice mill;
thus becomes more
creditworthy with BAC
San Jos.
Source: adapted from Cavalini in Quirs (2007)
4) Working capital and

inputs: Delivered to the
farmer based on advance
payment for crop.
33
Thus, the Hortifruti-linked rice and bean producers avail of financing both
to and through the value chain to the chain from BAC San Jos with funds
made possible because of their chain relationship and through the chain from
both suppliers and Hortifruti.
In the many cases where contracts are more strictly formalized than the
above example, they typically involve binding legal agreements that specify
the roles and responsibilities of the producer and the buyer. On the production side, there are commonly terms regarding timing, volume, and quality of
outputs. On the buyer side, commitments are made regarding inputs, technical assistance, purchasing and financing. A case from the Philippines (see Box
3.3) describes one such formal arrangement that channels funds from a bank
through a processing firm to small-scale tomato farmers.
For financing, the benefit of contracts between producers/sellers and buyers is evident since contracts reduce uncertainty and risk of the unknown.
However, before embracing buyer-driven models such as contract farming it is
important to fully understand the models: What is the value to each party involved? What is the negotiating power and equity of each, especially between
smallholders and large companies? What is the commitment and what is the
risk of not honouring contracts, through side-selling (selling to others rather
than the contracted party) or buyer refusal to buy under specified conditions,
especially when market conditions change? Also, in what sectors are contract
farming models most common and why?
Based upon its experiences with linkages and financing, Hortifruti is convinced that the contract farming model is a dynamic agent capable of promoting and facilitating social change in the agricultural sector of Central America.
To take advantage of the model, Hortifruti recommends that the government,
the NGO and companies work together to incorporate more producers in the
countries of the region into the Hortifruti-type of business model and foster
the concept of sustainability in production models used by small-scale farmers (Cavalini in Quirs, 2007: 7374). Yet, how does a model such as this go
to scale with a large number of producers? From the examples presented at the
four regional FAO conferences, it was clear that the experiences of contract
farming have most often been with limited numbers of producers. One reason
noted was that a majority of farmers are not ready to meet the requirements,
hence the recommendation to governments and development organizations
that they support producer capacity development not only technical capacity but also organizational capacity and commitment.
In order to best understand the potential for increasing the use of contract
farming as a model for facilitating financing it is useful to understand both the
benefits and weaknesses.
Benefits and weaknesses of contract farming. Contract farming, whether formalized or informal, is a viable model to incorporate small-scale farmers into value chains and through the contractual arrangements enable them to access
34
Box 3.3 Formal contract agriculture, Philippines

Northern Foods Corporation (NFC), Philippines, is an agri-based firm which produces tomato paste and other agri-based products from indigenous crops. It received financing
from the Rural Credit Guarantee Corporation (RCGC). NFC serves as an industrial link
for small farmers who are contracted to produce tomatoes to be processed into tomato
paste. The supply chain involves a Production Supply and Marketing Agreement between
the NFC and tomato farmers, which guarantees NFC a continuous and adequate supply
of fresh tomato for processing. To ensure quality of produce, the company provides input
supplies and gives technical support to the farmers in accordance with Contract Growing
Agreement. The tomatoes produced are then processed in compliance with Good Marketing Practices (GMP) and eventually distributed to various end users such as fish canners,
processed sauce and ketchup manufacturers and major burger chains.
NFC contract-linked
finance in the tomato chain
ACPC
finance
Northern Foods
Corporation
Input supplier
Agricultural production
(NFC-farmer contract)
Processing
Buyers
The implementation of this initiative brought out several benefits among the stakeholders
within the value chain: 1) eliminated layers in the value chain since farmers are directly
linked to the buyer/processors; 2) provided farmers with updated technical assistance,
input supplies and protected floor prices; 3) reduced post-harvest spoilage since products
are immediately forwarded to the buyers/processors; 4) assured supply of raw materials for
processing; and 5) minimized dependency on imported tomato paste.
Source: Digal (2009)
35
credit and other services. Key among the many benefits and the challenges
and risks of this system are:
Benefits:
Access to secure markets and prices for producers.
Access to appropriate input supplies in timely fashion.
Increased access and reliability in procurement of product of desired
quality for agribusiness buyers.
Opportunity for lower input costs due to improved planning and economies of scale.
Enhanced access to credit despite a lack of collateral.
Support in the development and achievement of quality standards and
certification.
Provision of market-focused technical training and assistance that outlives contracts.
Are often enforceable contracts which gives buyer a level of comfort.
Potential advancement of positive relationships and increase in trust.
Challenges and risks:
Reliance on a single buyer that could fail or lose interest in the relationship (loss of their buyer, market changes, bankruptcy).
Side-selling by farmers, particularly if prices go up.
Cost of management for buyer.
Enforcement of contracts by either party.
Regulatory environment for contracts and their enforcement.
Tendency to favour larger farmers, at the expense of small farmers, due
to lower transaction costs and a stronger initial asset base.
Lack of technical capacity to understand and intentionally develop
viable value chains, especially those involving small farmers.
In spite of the potential benefits to the participants of a contract farming agreement, not all contracting initiatives will be successful. The risks of
failure are associated with a number of well-known reasons, chief of which is
the opportunistic behaviour that might arise when pre-established conditions
Box 3.4 Failure of contract farming in tomato production in Brazil

In North-eastern Brazil a contracting initiative among agro-processors and tomato growers
in a major agro-industrial project failed even though the companies pre-financed farmers
with the provision of inputs and technical assistance. Although farmers had agreed on a
pre-set price, during harvest time the market prices offered by traders in the region were
so much higher that very few farmers fulfilled their delivery commitments, selling instead
outside the contractual relationship and not repaying the companies for the pre-financed
inputs and services. Because of this episode of contractual hold-up, the agro-processors
decided to start importing concentrated tomato paste from Chile to meet their raw material
needs, abandoning the contracting farming scheme.
Source: da Silva (2007)
36
change. If market prices rise above the agreed level and if alternative buyers exist for the agricultural products grown under the contract, then farmers
might be enticed to renege on their contractual obligations and sell to the
highest bidder as shown in Box 3.4.
Although not specifically documented, it is noted that contract farming
has been most prevalent in sectors and market niches where side-selling is less
of an option. This is the case, for instance, with sugar cane where the cost of a
sugar mill and transport are so high there are few alternatives for side-selling
by producers. The same can hold true for market niches, especially when the
price premium is high compared to alternative markets. On the other hand,
commodities such as maize with multiple producers and buyers and high price
competition pose more risks of side-selling, hence the use of contract farming
is not prevalent in these sectors.
Much can be done to help achieve the success factors indicated above. Development agencies can be instrumental in not only promoting capacity building
and improved legislation, but in order to reduce risks in contract farming, they
can support the building of transparent, equitable and well-functioning value
chains. The form of risks will be different according to the context, and therefore risk mitigation strategies must adapt to fit the needs of the value chain and
its stakeholders. As this facilitating role by implementing agencies is so important and growing in prevalence, it is treated as one of the business models for
value chain development as described in the following section.
Box 3.5 Success factors for contract farming
Critical success factors for contract farming include the following:
Mutual benefit for both parties there must be a synergy, mutual trust and reciprocal
dependency among partners.
Creation of an enabling environment.
Transaction costs and bottlenecks of dealing with multiple contracting parties must be
minimized this could be done by working with groups and BDS providers/facilitators.
Appropriate consideration of production and marketing risks in the design of contracts.
Careful selection of enterprise high value, processing and exports-related enterprises
have shown most success.
For micro- and small-scale producers to be financed efficiently, transparent partnerships among stakeholders with a shared interest are important.
Clear quality standards which must be understood at all levels e.g. farmers need to
understand what is expected of them beforehand, and not after their crops are already
half-grown.
Mechanisms for providing fast, direct or rapid financing to the micro- and small-scale
businesses in the chain when necessary.
Source: adapted from da Silva (2007)
Facilitated value chain models

In many countries there is almost a dual agricultural system in which a developed agro-industry coexists alongside marginalized producers who are living
37
at subsistence levels. Facilitation by development organizations, both NGOs

and government agencies, has demonstrated that external support can open
up opportunities for smallholder value chain integration and financing.
Larger buyers and wholesale chains often seek out large-scale suppliers due
to a number of factors that are challenging when dealing with small-scale
farmers who:
May not be well organized.

Have not demonstrated commitment.
Require higher transaction costs to be served.
Often pose increased risks such as side-selling.
Lack both technical capacity and the technologies to reliably produce
the high quality and quantity required in a consistent manner.
Tend to lack organizational capacity and resources to deliver the required products in a timely fashion.
Consequently, the costs of organizing and training small producers can be

deemed too high to be taken on by a large company.
Development agencies and others with a social mission can provide support
to facilitate the integration of small famers and agro-enterprises into commercial value chains. Successful facilitation models for value chain development
have been developed around the world. With proper organization and training, incomes can be improved, for example:
In Uganda, ARUDESI has been able to work with 8,000 farmers to organize
600 farmer groups consisting of 30 farmers per group. These farmers were
able to market a total of 1,200 metric tonnes of green coffee in the last 3
years, increasing income of an average of 40 per cent over equivalent green
coffee at farm gate price. (Mrema, 2007)
Many contract farming or other value chain linkage models which involve
small producers are able to thrive in part due to the facilitation and/or services
provided or initiated by not-for-profit or government agencies. In some cases,
the agencies facilitate relationships including those between producers and financial institutions. In others, the agencies themselves enter into contractual
arrangements (including guarantees), and provide direct technical services
and finance. TechnoServe, a not-for-profit development agency that works in
agricultural value chains around the world, demonstrates how an external
agency, acting as a market developer, can facilitate the development of a chain
through interventions at various levels. See Box 3.6.
A guiding principle of TechnoServe facilitation in all of their development
activities is to incorporate a private sector focused business model as a means
of building sustainability. In financing, this involves such things as direct
involvement of banks, commercial investors and private equity funds for asset finance needs. For working capital needs, financing from banks and buyers
can be available if there is customized technical assistance. This is especially
the case for start-ups and early stage expansion of agribusinesses.
38
Box 3.6 Facilitating chain development in Malawi and Tanzania

TechnoServe utilizes various business models to enhance smallholder incomes through
processing business, supply business and out-grower models. In Malawi, TechnoServe is
facilitating the seed industry value chain in response to severe financing gaps in agribusiness in southern Africa which is characterized by asset finance needs and working capital
needs. The reasons for a lack of access to finance, especially by start-up seed businesses
and early stage expansions, have mainly been shortage of risk capital and poor business management capacity. TechnoServe developed the following three-pronged business
model to address the needs in the seed chain:
Processing businesses facilitating enhanced value addition and farmer linkages.

Input supply businesses facilitating improved seed, access to fertilizer and production technology.
Farmer businesses facilitating farmer integration into the seed production, processing
and marketing chain through farmer organization, training and out-grower contracts.
By addressing the whole chain, TechnoServe is able to secure a market for the fledgling
seed businesses and a more secure repayment of the financing, while stimulating income
growth and development of the small producers. This approach for assisting small farmers
is summed up in TechnoServes strategy to:
Support a service provider to provide marketing and financial linkages to farmer groups.
Identify and organize farmer groups with potential to produce quality.
Assist groups to invest in improving quality and production.
Kilicafe in Tanzania, an organization TechnoServe helped create that is now owned by

9,000 smallholder farmers, works with local and international financial institutions to
design financial products that serve those in the value chain. These products range from
short-term input credit and sales pre-financing to multi-year loans used by farmers to
invest in centralized processing facilities. Credit is guaranteed through a variety of innovative means, including private guarantee funds, warehouse receipts and forward sales to
specialty coffee buyers. These included:
Long-term financing for processing infrastructure, secured by fixed assets and marketing agreements.
Short-term financing for working capital, advance payments to farmers and agro-input
credit, secured by guarantee funds, warehouse receipts, marketing agreements and
price risk management.
However, initially the local banks did not understand the business model, the risks, nor
accept coffee as full collateral. The financial arrangements built according to the value
chain were only possible due to significant initial support from TechnoServe to both the
banks and the clients, developing business plans, monitoring performance and ongoing
operational assistance, until credit-worthiness was fully established.
Source: S. Harris presentation in Kimathi et al. (2007)
In western Kenya, DrumNet provides an example of an innovative, multistakeholder facilitated value chain which links together farmers, input
suppliers, buyers and banks through a fee-based facilitator hub that is coordinated through cell phone text messages. As facilitator, DrumNet provides
the organization and capacity building of the farmers associations as well as
the relationship and Internet linkages between the various parties involved
(Campaigne, 2007). For further illustration, a DrumNet sunflower sector case
study (see Case Study 4) is presented in detail at the end of chapter five.
39
In addition to capacity building, successful facilitator models include three

key aspects as highlighted by Odo (2007) from his vast experience in the field
of farmer organization and agricultural chain development. He states:
Start with the market and work backwards.

Aggregate producers and their goods.
Use the value chain for obtaining finance, such as buyer credit secured
by sales contracts.
A word of caution on facilitation is given by Marangu (2007) who notes

that since value chains are dynamic and complex, a facilitator must carefully prioritize interventions at key leverage points throughout the chain.
Moreover, facilitators must stay out of the supply chain and avoid direct
provision of financial services or subsidizing the cost of business. Such actions
distort commercial signals.
Facilitation models can be proactive in identifying and developing value
chains. For example, USAIDs technical assistance via the Peru Poverty Reduction Assistance (PRA) project identifies and facilitates value chain opportunities such as artichoke cultivation for small farmers in the highlands of Peru
(see Box 3.7). PRA identified market opportunities, provided information, and
brought together producers, processors and buyers to meet the needs of the
market. Worldwide demand for processed artichokes has more than doubled
over the past 20 years. Peru has been trying to capture part of the large European market and is well positioned to do so, given its labour cost advantages.
Figure 3.2 represents the value chain for Peruvian artichokes described in
Box 3.7. Arrows in the diagram indicate the direction of financial flows in the
value chain and the role of the formal financial system in financing the chain
(Campion, 2006).
As noted above, financing is both to and through the value chain for the
export artichokes. In the less structured local wholesale market and supermarkets there were no financial flows within the chain. In the artichoke value chain, inputs, secured markets, financing, as well as technical assistance
were all important ingredients a complete service package that enabled
smallholder farmers to enter the market. Finance alone will rarely result in
increased quality and sales.
With small producers, technical assistance and knowledge is often missing on how to invest in a way that will increase production of high quality
products and command higher prices. By addressing this issue and with the
demonstrated success with artichokes, the sources of finance expanded from
financing from within the chain by suppliers and buyers to access from financial institutions for those producers.
A pending issue to resolve on value chain facilitation is that of sustainability and payment of services, especially when dealing with small producers and
processors. It appears that the private sector is not willing and/or able to take
full responsibility for building this capacity. Is the required facilitation support
a public good, as are many of the universities in developing countries that will
require support from the government and development organizations?
40
Box 3.7 Facilitating artichoke chain development and finance in Peru

The retail market for artichoke is outside Peru, in the United States and Europe, making it
difficult for small farmers without facilitation support. Otherwise, representatives of wholesalers who operate in Peru work directly with processors and prefer to work with a small
number of large companies rather than many small ones, so as to assure a steady supply.
They offer a contract specifying the exact price they will pay for the largest volume of processed artichokes their suppliers can produce. Because processors have a contract and a
fixed price, they know exactly how much they can pay farmers for the product. Much like
wholesalers, they also would prefer to work with a few larger producers, but because most of
the land is divided into small parcels, processors generally must buy from small farmers.
To improve the chain and facilitate its access to small farmers, the USAID funded
project identified the market opportunity and then worked with Agromantaro a processor
to encourage it to begin artichoke processing. Subsequently, the main focus was working
with local community organizations to encourage small producers to grow artichokes and
assist in facilitating external financing.
Since artichokes are a new crop which is unfamiliar and perceived to be risky, processors go to the producer organizations to help convince small farmers to produce for them.
For this purpose, they offer:
(a) a contract; (b) a fixed price; (c) seedlings; (d) technical assistance.
The need for seedlings and technical assistance was to minimize production risks.
Farmers do not pay for seedlings until harvest, so in this sense, the processor is involved
in financing the crop. Fertilizer companies supply farmers by selling to independent distributors and offering them volume discounts and commercial credit, just as they do with
the large producers. The distributors then extend commercial credit to the farmers for
repayment a few months later when the harvest comes in. They also provide free technical
assistance on optimizing the use of inputs, which in turn reduces the risk of default.
Typically in Peru, very little formal credit goes to agriculture. However, when word got
out that this chain was working well, non-banking financial institutions began to take an
interest. In particular rural and municipal credit unions and the Edpyme Confianza started
to offer direct loans to small farmers, thus releasing processors to use their capital for
expanding their own investments.
Source: Campion in Quirs (2007)
Integrated value chain models

The fourth business model is the integrated value chain model. It not only
connects producers to others in the chain input suppliers, intermediaries,
processors, retailers and service providers including finance but it integrates
many of these through ownership and/or formal contractual relationships.
The integrated model has many of the features of the other models presented
such as strong links with multi-party arrangements, technical guidance and
strict compliance, and also incorporates an amalgamated structure of value
chain flows and services.
The first and most common integrated model involves vertical integration
within the value chain. Integration is normally sought by a large retailer or
wholesaler/importer that is focused on consumer demand, and wishes to ensure that inputs, production and post-harvest handling will result in products
that are responsive to that demand. The degree of overall vertical (and often
Functions
financial links
Retail
Supermarket US
and Europe
Local
supermarket
Banks, NBFls
Wholesale/
export
General Mills,
Green Giant, etc.
Local
wholesalers
Banks, NBFls
Processing
Production
Input
distribution
Inputs
41
Viru, Agromantaro,
TALSA, Procesadora
Small
farmers
Banks, NBFls
Large
farmers
Mfls, Rural Banks
Independent
distributors
Misti - fertilizers;
Bayer - pesticides;
Seed and plant sellers
Plants
Banks, NBFls
Extension
services
Financial link showing who finances whom
Participant in value chain
broken line indicates skipped function
Figure 3.2 Artichoke value chain

Source: Campion (2006)
horizontal) integration in the model depends upon the degree to which the individual levels are tightly linked from control of production through to retail
often by means of contract farming or other contractual buyer models. Vertically integrated supermarket value chains are a prime example of this model.
A supermarket works closely with importers or domestic wholesalers in order
to convey information about acceptable product specifications such as variety,
quality, volume, and standards relating to hygiene, traceability and residues.
Information and services are passed down the chain to producers, frequently
accompanied by quality control, technical training, appropriate inputs, record
keeping and finance. Such vertical integration particularly applies to fresh fruits
and vegetables. Horticultural value chains can be excellent for the integration of
smallholder farmers since, for many of the products, intensive labour and manual cultivation and harvesting are necessary to deliver the required output.
Coffee is a specific agricultural output that often involves vertical integration not the lower quality Robusta varieties that are subjected to extensive processing to achieve its final form, but finer Arabica coffee that relies
42
on inputs, climatic conditions and cultivation techniques. Starbucks Coffee

Company, described later in Box 4.7, offers a model of tight integration from
production to retail.
A second integrated model applied to value chains is that of an integrated
services model. One type of services model is led by a financial conglomerate
and another type is led by a facilitating entity which combines ownership
structures with their facilitation. The latter type could be led by a strong NGO,
such as BRAC in Bangladesh as described in Box 3.8, or an agribusiness services centre such as are being developed in India.
BRAC offers an important example as a financial institution that makes
direct strategic investments in the chain when it sees the financing of its clients requires this. For example, BRAC set up and owned chicken hatcheries
needed for poultry production of its clients. It also offers the required techniBox 3.8 BRAC integrated services model for agriculture, Bangladesh
BRAC, a national, private organization, started as an almost entirely donor funded, small
scale relief and rehabilitation project, and evolved into an independent, virtually selffinanced organization in sustainable human development. Currently the largest NGO in the
world, BRAC employees number more than 100,000 who work with the twin objectives
of poverty alleviation and empowerment of the poor. At the centre of the BRAC approach
are over 170,000 village organisations (VOs), each with 3040 mostly women members,
which are set up to provide social support and microfinance services. These village organisations meet weekly to receive training, distribute loans, collect repayments and savings
contributions, and raise awareness on many social, legal and personal issues affecting the
everyday lives of poor women.
Building on this model, BRAC supports a number of programmes including agribusiness. The objective of this approach is to promote agribusiness activities to generate
employment and help alleviate poverty. Specially, it (i) promotes small scale agribusiness
activities by channelling credit through three NGOs including BRAC and by providing
technical and marketing support to small scale agribusiness throughout the rural areas of
the country to raise the level of value addition and increase rural incomes; (ii) strengthen
participating NGOs and wholesale banks to ensure efficiency of the credit implementation and management; (iii) strengthen agribusiness associations for policy dialogue on
the enabling environment, agribusiness promotion and information dissemination. BRAC
also becomes directly engaged in businesses which needed to support of rural enterprises
engaged in commercial agriculture production, input supply, marketing, processing and
transportation. As an example, BRAC businesses include: 6 poultry farms for supplying
day-old chicks, 3 feed mills, 2 seed production centres, 2 seed processing centres, 15
nurseries and 12 fish or prawn hatcheries also with the purpose of strengthening the respective value chains. Together, its business model works to ensure an integrated set of
services for its clients.
Key issues in agricultural activities for BRAC are:
creation of basic awareness and provision of training to farmers;

development of village-based technical service providers;
adequate supply of quality inputs through extension workers/agents;
assurance of market access of farmers;
provision of appropriate loan packages for farmers to meet their specific demands;
development of linkages among different value chains.
Source: Salenque (2007)
43
cal assistance and can facilitate marketing channels as needed. It has also done
this for the artisan craft sector, including wholesale and retail of the crafts.
Through financial services and strategic investments directly into the value
chain, it generates employment in rural and peri-urban areas and raises the
value added of the produce of its clients.
While not widespread, integrated agricultural value chain service models
are growing in importance. Case Study 3 on LAFISE in Latin America, presented at the end of Chapter 4, describes a commercial integrated banking
and agricultural service model. A Rabobank example from India is also being
adapted and used to fit into countries in many parts of the world.
As noted in Figure 3.3, Rabobank assumes a central role in the value chain
providing financial and value chain support services throughout the chain.
By having such a central role as part of its business model, it knows the business sector and those involved. In this way, it can ensure that the linkages are
efficient and that any weaknesses among the partners are addressed so as not
to cause problems to others in the chain. Since the money also passes through
the bank, it can reduce costs by directly crediting and debiting the accounts
of those in the value chain.
Credit advances from marketing or processor businesses are often related
specifically to a single value chain since most companies, especially private
ones, work in only one or a few value chains. However, they can exist within a
complex system of interrelated agribusiness services which offer financial and
non-financial services of a comprehensive nature for multiple value chains.
In Korea, one agricultural entity, formed under a cooperative structure, has
a huge presence in the whole agricultural sector which allows it to provide
integrated value chain services in multiple value chains as in the case shown
in Box 3.9.
Supplier
Insurer
Equipment purchase contract
Insurance contract
Buy-back agreement
Rabobank
Down payment
Transfer of lease payments
Lease contract
Processor
Farmer
Long-term raw materials supply contract
Figure 3.3 Rabobank integrated agriculture finance structure

Source: Wortelboer (2007)
44
Box 3.9 National Agricultural Cooperative Federation, Korea

The Republic of Korea has been experiencing significant growth in major industries, including agriculture. The National Agricultural Cooperative Federation (NACF) has played a
decisive role in the development of the countrys agricultural industry. NACF is a national
federation of 1,187 agricultural cooperatives in Korea. The Federation and its member
cooperatives offer multifunctional services to its 2.4 million individual members. These
include: 1) banking and insurance; 2) input supply; 3) agricultural marketing and livestock; and 4) guidance and welfare services. Within the banking and insurance services,
the Federation and its member cooperatives are connected with each other for mobilizing
and providing the agricultural finance services for farmers and agri-industries throughout
the country.
The cooperative structure of NACF in Korea lends itself to perform an integrated, fullservice model of agricultural and non-agricultural services which benefit its members. Its
size allows NACF to operate across multiple chains and benefit from the synergies of services and inputs across these chains. The NACF has 22 subsidiary companies to help provide these services, which include four other agricultural marketing companies besides the
parent company NACF, a logistics service company and the Nonghyup Economic Research
Institute. It provides commercial finance, mutual finance, loan guarantees and insurance
and other services through other subsidiaries including: 1) Namhae Chemical Corporation;
2) Korea Agricultural Marketing, Inc.; 3) Korea Agricultural Cooperative Trading, Ltd.;
4) NACF Futures Corporation; 5) Korea Coop-Agro, Inc.; 6) Nonghyup Korea Ginseng Co.;
7) Nonghyup Feed, Inc.; 8) Nonghyup CA Asset management Co., Ltd.; 9) Agricultural
Cooperative Asset Management Co., Ltd.; and 10) NH Investment & Securities. It also
provides social support through subsidiaries including: 1) Nonghyup Tours; 2) Agricultural
Cooperative College; and 3) The Farmers Newspaper. In combination, the NACF and its
subsidiaries represent an integrated model which is capable of providing virtually all agricultural value chain services needed by its members.
Source: Park (2007) and authors personal correspondence with C. Choi (2009)
The NACF model in Korea and the cooperative banking model of Rabobank
are both successful models. Whereas Rabobank focuses on the integration of
financial services along the chain and linkages with the chain partners, NACF
also can participate directly in the chain. In other words, the multiple value
chain services are different from those of Rabobank in that NACF itself acts
as supplier, insurer, processor, and marketer for its member farmers and not
only as a financial services provider. For example, farmers can purchase their
farm machines from NACF with NACF loans guaranteed by the agricultural
guarantee fund, and they can sell their products to NACF operating markets
through their local cooperatives. In the same manner, the farmers money is
transferred to their NACF savings account, and later the money can be used
towards repaying their loans.
Private, non-cooperative models and in some cases integrated governmental
models have been demonstrated to be successful. However, they are complex
and much caution must be noted their success often depends highly upon the
superb management capacity and the social and economic environment within
which they were formed. More often than not, these conditions are not present.
For example, in Eastern Europe and Central Asia large integrated agricultural
45
value chains, with embedded financing, were also formed and were not sustainable over time (Winn, 2009). In Kenya, as noted earlier, the large integrated
model of the Agricultural Finance Corporation together with the Kenya Farmers
Association and the National Cereals Produce Board also failed.
Introduction to Case Study

As described in this chapter, a value chain business model can be a sophisticated, integrated model with a large bank in the centre, a bottom-up producer
driven model or one which is buyer driven. What is important is to have a
clear, business model which is competitive and is built upon a strong foundation. For this reason business models involving small producers within the
value chain often receive governmental or non-governmental development
support in building the capacity and facilitating linkages to fully integrate
them into strong value chains.
The following case study from Kenya describes the experience of a development organization in facilitating the building of an inclusive value chain and
creating a strong foundation for long-term success of smallholder farmers.
Case Study 1. Farm Concern International: commercial village

approach
Grace Ruto, Programme Administrator, Farm Concern International
Enhancing market access for African traditional vegetables was designed
against the back drop of emerging consumer demand for African traditional
vegetables. Supported by the Rockefeller Foundation, Gatsby UK, Farm Africa
and IPGRI (now Bioversity International) and implemented in Kenya and Tanzania by Farm Concern International (FCI) and the World Vegetable Centre
(AVRDC), the project sought to empower small-scale women farmers through
sustainable leafy vegetable production, seed supply and marketing of high
quality African traditional vegetables (ATV) in Eastern Africa.
The project focused on enhanced ATV commercialization, productivity skills
for smallholders, increased utilization to streamline efficiency of the value
chains, consumption linkages and improvement of health, nutrition and income of vulnerable groups. It sought to stimulate home gardening and commercial farming systems with a focus on progressive economic development
and enterprise promotion related to the mainstream activities of the target
groups and the needs of smallholder producers in Kenya.
The ATV project implementation was based on Farm Concern Internationals successful approach to smallholder commercialization the Commercial
Village Approach (CVA) a model tested across various villages and a diversity of smallholder commodities. Under the CVA, a four-pronged strategic approach for the project was designed which included: 1) ATV commercialization;
46
2) smallholder seed multiplication systems; 3) value chain development; and 4)

market development and demand creation.
At the start of the project in 2003, a baseline survey was undertaken by
FCI and AVRDC to assess ATV production and marketing status. The baseline
revealed no ATV commercialization in the target regions and neighbouring
areas, weak seed supply systems and minimal ATV awareness among target
farmers. The Nairobi market was transacting approximately 31 tonnes of ATVs
per month primarily sourced from western Kenya and transported in burlap
bags to Nairobi via night buses. By 2006 the ATV seed system was benefiting
300 smallholder women farmers in western Kenya while over 2,700 smallholder farmers are currently practicing ATV commercial farming in the central
region of Kiambu. Consumption for ATV in Nairobi increased from 31 tonnes
in 2003, with an estimated farm-gate value of US$ 6,000, to 600 tonnes in
2006, with a value of US$ 142,860 and farm-gate prices have increased by 30
per cent. The supply of 500 tonnes in 2007 is estimated to account for 60 per
cent of the demand level within the ATV distribution network that includes
supermarkets, kiosks, informal markets and street markets.
Market access financing

Effective partnerships with smallholder farmers required a wide range of business development services (BDS) like transport and credit to ensure timely
supply. However, farmers lacked resources to invest in the required BDS which
prompted FCI to develop partnerships between farmers and various BDS providers focused on leveraging resources from private sector players.
Uchumi Supermarkets, like many formal markets, procures produce on a
3060 days credit period which smallholder farmers could not sustain due to
limited resources. In order to commence a sustainable approach that would
maintain smallholder farmers in the marketplace, FCI injected a fund of approximately US$ 100,000 a Market Access Financial Service (MacFin) aimed
at discounting the credit period and settling transport bills while the fund was
gradually recovered from Uchumi payments. To enhance the producer groups
to build and maintain a fund similar to MacFin, FCI introduced a savings
component where the groups commenced with 10 per cent savings. This has
enabled some groups to be weaned off the FCI MacFin and discount invoices
from a group-managed fund. Producer groups weaned off MacFin have further
attracted microfinance institutions (MFIs) due to their savings, enabling them
to access credit for ATV commercial expansion.
MacFin, the fund created by FCI to increase smallholders participation
along value chains has the following unique characteristics:
1. It is a catalytic fund and only accessible to producer groups over a certain period (34 years).
2. It is utilized for transactional costs for assured markets, e.g. transport,
packaging materials, invoice discounting, inputs, etc.
47
3. It is accessed only by collective marketing groups.

4. It requires group savings conducted over the period of time a group is
accessing MacFin.
5. ATV collective marketing groups receive 10 per cent per sale.
6. The group leadership structure follows that recommended by FCI.
7. Group constitutions are developed to suit the particular functions of
the group.
The MacFin programme and the MacFin catalytic fund provide support and
facilitation to the bottom of the pyramid community members, most of whom
Commercial villages members
Market
support
unit 1
Market
support
unit 2
Market
support
unit 3
Commercial village coordination unit

At MSU level and CVA level
Commercial village collection centres
Business development
services providers
Input suppliers
Commercial improved
seeds and seedlings suppliers
Chemical and fertilizer suppliers
Embedded BDS
Training on safe chemical use
Training on crop production
and post-harvest handling
Community commercial empowerment
Extension services (e.g. demo plots)
Village centre services

Grading, sorting and primary
packaging
Bulking and local transporters
Purchasing by local and external
intermediaries
Market intermediaries
embedded services
Market research, transportation
Quality assurance and market
penetration services
Private sector buyers
Formal markets
Informal markets
Private sector embedded services

Market research and market
penetration services
Extension services
Transportation
Embedded services
Quality assurance and export
Certification Authorities
Figure 3.4 Commercial village approach for African traditional vegetables

Source: Farm Concern International (2008)
48
are not creditworthy, in order to trigger commercialization of community opportunities through enhanced market access and improved competitiveness. In
the last two years MacFin has helped the Kiambu farmers in enhanced access to
inputs, credit for marketing, as well as in meeting BDS costs like transport and
invoice discounting of credit. The credit is advanced at 1 per cent per month
interest and subsequently recovered from the formal and semi-formal sales.
For enhanced commercialization and bulking, FCI applies the CVA model
illustrated in Figure 3.4 through which villages are commercialized and strategically linked to markets. This model, developed by FCI offers a village platform to achieve increased participation of smallholders into the mainstream
marketing systems through financial and marketing interventions.
The MacFin fund has enabled the Kiambu Commercial Villages to pay the
transaction costs which include transportation as well as purchase of inputs
for specified range of ATVs. Upon selling their products to identified institutional buyers farmers are paid promptly as part of FCI effort to cushion farmers against long credit periods which could push them out of business. Farm
Concern International would then recover advanced monies upon maturing
of corresponding invoice.
During this period the project has managed to mobilize and establish partnership with targeted value chain players and has helped the farmers with
better access to inputs, credit for marketing as well as in meeting BDS costs
like transport and invoice discounting of credit. In summary, the rollout has
progressively persuaded the key project partners to take up roles outlined as
follows:
Farm Concern International
community mobilization and establishment of commercial villages;
development of ATV value networks;
assist commercial villages access inputs;
promote and strengthen savings and credit schemes;
private sector partnership establishment;
market access and development for commercial villages;
community capacity building and extension support.
Agro-dealers
offer credit to value chain players;
offer technical back stopping on best agronomic practices.
Commercial village members
procure seeds from identified agro-dealers;
engage in commercial production of ATVs;
service authentic orders from identified buyers in a timely manner;
collectively bulk and market ATVs.
CV Executive committee
coordinate and oversee the functions of respective market support units
(MSU);
49
organize production and supply schedule;

encourage CVA to collectively bulk and market ATVs;
collate, verify and approve input orders for MSU;
ensure group saving;
be co-guarantors to MSUs.
Microfinance Institutions
offer credit to value chain players;
offer technical back-stopping on credit management.
Farmer base
At the onset of the project four sites were selected for commercial villages establishment namely, Githiga, Lower Lari, Kahuho and Karura. The programme
has a current farmer base of 2,113 smallholder farmers distributed over 4 commercial villages, with 72 groups having an average of 30 members per producer group otherwise referred to as MSUs. The intervention was received with
enthusiasm leading to a notable increase in client base by up to 120 per cent
in the first 6 months. All the MSUs are registered with the Ministry of Culture and Social Services and operate group bank accounts. Individual members
were also encouraged to operate personal saving accounts and, as a result, up
to 50 per cent currently own and operate personal savings accounts. All the
groups are governed through elected subcommittees and one executive committee and have developed group as well as commercial village constitutions.
Collective marketing structures

Each CVA group has an average of 30 members and each is structured as a
complete management group with an executive leadership team of five (a
chairperson, vice-chairperson, treasurer, secretary and assistant secretary).
Under the executive leadership team are four other subcommittees production, marketing, finance and welfare. The structure ensures an elaborate feedback process whereby, all subcommittees report to the executive committee
through the representative of the subcommittee who sits in it. The executive
committee ensures that the subcommittees are well run and are able to handle
the group matters that relate to them.
Seed credit: Mkopo wa mbegu scheme

Under the seed credit scheme the commercial villages have been assisted in
accessing ATV seeds through identified agro-dealers. The commercial village
members usually generate a seed request list which is verified and approved by
the commercial village executive committee. The request is then forwarded to
FCIs credit officer who prepares a purchase order in favour of a pre-approved
agro-dealer. Upon presentation of the approved purchase order to the relevant
50
agro-dealer, the commercial village representative is accordingly issued with

ATV seeds as per the order. Thereafter, the agro-dealer presents to FCI a weekly
invoice for seeds issued to farmers and is paid promptly. A transaction charge
of 1 per cent is charged on the credit advanced. Commercial village members co-guarantee one another. Over 90 per cent of the target farmers in the
programme have benefited from the scheme and have dedicated a portion of
their land to production of ATVs. The advanced amount is recovered from
sales realized within the season.
Figure 3.5 illustrates highlights of the market access financing intervention.
Inputs supply
(seeds, manure)
Capacity building
and technical support
Production points
Skills and exposures
MacFin
Support
Market entry, enhancement and
retention (identification of market,
business partnership)
Market access and

linkages
Branding
Packaging
Labelling
MacFin
Support
Transport support and other business

development services
Products promotion
Products placement
Shelves
management
MacFin
Support
Invoice discounting
Improved smallholder
competitiveness and
attractiveness to private
businesses and financial
service providers
Result/Impact
Poverty reduction
and improved livelihood
Figure 3.5 Market access financial service flowchart

Enhanced
entrepreneurial drive
and commercial
orientation
51
Invoice discounting: Mkopo wa soko scheme

This financial service has been offered to the commercial villages to enable
farmers to access formal markets and at the same time help cushion them
against long periods without funds which could push them out of business.
Through this scheme about 400 new farmers have been able to access formal
markets and consistently service their orders. The fund has bolstered their
cash flow ensuring that they have sufficient funds to plough back into their
farming business, thus enabling them to save sufficient funds to cover other
market related expenses like transport and communication.
Portfolio
The average outstanding loan portfolio per commercial village is US$388.
Members repay their loans flexibly based on available cash flows which correspond to their ATV sales. The portfolio risk has been greatly reduced by tying
credit advanced to mandatory sales to identified markets, thus guaranteeing
full repayment within 90 days.
Employment creation
Most of the farmers rely solely on family labour from production to the market. This is mainly due to the small acreage under production and by the fact
that ATV production is not labour intensive.
Increased savings
Group savings and credit facilities have been established and strengthened
through training and the establishment of financial coordinating committees
at the MSU and commercial village levels, linkages to financial services providers and establishment of MacFin services. All MSUs are encouraged to establish
Table 3.3 Sales in target sites (MarchAugust, 2008)
Commercial
village
Benefiting
members
Sales (Kshs)
Sales (US$)
Target market
381
736
7,335,309
14,221,707
21,557,016
104,790
203,167
307,957
Formal markets
Informal markets
361
612
180,320
169,300
349,620
21,903,636
2,576
2,418
4,994
312,951
Local markets
Agro dealers
Fresh vegetables
Kiambu
Kiambu
Sub-total
ATV seeds
Kiambu
Kiambu
Sub-total
Cumulative sales
52
saving mechanisms through operating bank accounts as a MSU and saving at

least 10 per cent of their incomes generated from sales of vegetables. The records are kept by the financial subcommittees. Sixty per cent of the groups
have complied with the savings recommendation and some groups have
strived to save up to 15 per cent of sales realized. Several fora have been held
with financial institutions in order to expose the farmers to a range of products offered. Field days have also been organized to allow farmers to exchange
ideas with others farmers who have participated in the credit schemes.
Linkage to banks and microfinance institutions

A number of bank and microfinance institutions were identified by farmers
and FCI for partnership with the commercial villages KADET Ltd, Faulu
Kenya, Family Bank, Cooperative Bank, Equity Bank, ECLOF and Unity
Finance. A business partnership forum between commercial village leaders, a
bank representative, a savings and credit co-operative organization (SACCO)
representative and a FCI representative, was held with a view to establishing
partnership agreements. Negotiations on terms of agreement are conducted
through these fora. Eighty percent of the MSUs were exposed to financial institutions through scheduled meetings and a field day was organized which
personalized interactions between financial service providers and farmers.
Individual farmers have conversely been linked to MFIs with over 200 farmers already accessing credit from Family Bank, Unity Finance and Kagwe Tea
SACCO.
Challenges encountered:
The 2007 election campaign followed by post-election turmoil interfered with project rollout in January and February 2008.
Disrupted ATVs marketing value chain in Kiambu site and Nairobi, due
to the post-election turmoil and increased cost of transportation from
farm-gate to the markets, threatened to erode group savings.
The rising costs of farm inputs, especially manure and fertilizer,
have marginally impeded ATVs commercialization among mobilized
farmers.
Inflation has also pushed up financial institutions base lending rates
hence making credit costly and less attractive to bottom of the pyramid communities.
The intervention generated a lot of interest leading to high demand for
the financial service, thus overstretching the current fund allocation.
Lessons learnt:
It was noted that benefits to producer groups were realized through
market awareness of ATVs along the value chain once collective action
had been adopted. Collective action at production level resulted in cost
reduction through bulking of farm produce and shared transport costs
which attracted private players.
53
It was also noted that communities at the bottom of the pyramid require
financial services tailored to their needs. Such financial products could
easily be adopted by the communities through demonstration of the
interventions performance at farm level and market level. This would
be more effective if specific households successfully benefiting from the
product are used as case studies in reaching out to other farmers.
Conclusions
Market-led, pro-poor market development. Smallholder-based market development requires an increased identification of products presenting a high-tointermediate demand growth, offering the poor an opportunity to retain a
market share. Medium and large-scale farmers are noticed to push smallholders out of the market; however, to sustain smallholders in business the
approach ought to further integrate the identification of products offering
smallholders a competitive advantage e.g. ATV low cost of production is
suitable for smallholders who primarily use animal manure from their smallscale farms.
Role of collective action in market development for smallholders. Collective action
plays a vital role in increasing the participation of the poor in the marketplace.
However skills on strategic collective market entry are required to ensure a
sustained market entry, consistent market information feedback and partnerships with private value chain players. Farmers organized into MSUs have successfully adopted professional business skills that enhance their voices along
value chains and in the marketplace.
Financial services embedded to market linkages. Smallholder farmers are still highly disadvantaged by the existing mode of savings and credit which hinders the
access to credit for seasonal income earners. However, the FCI approach of
embedding financial services to market linkages through the MacFin model
has proven that credit as a stand alone product may not necessarily increase
income, but credit embedded into market access increases rural income and
contributes to increased rural savings and reduced poverty levels.
Case references
Morimoto, Y. and Maundu, P. (2006) Rediscovering a Forgotten Treasure, International Plant Genetics Resource Institute (IPGRI), Rome.
Mumbi, K., Karanja, N., Njenga, M., Kamore, M., Achieng, C., and Ngeli, P.
(2006) Viable Market Opportunities and Threats for Urban and Peri-Urban Farmers, Farm Concern International, Urban Harvest and International Potato
Center, Nairobi.
CHAPTER 4
Agricultural value chain finance

instruments
Product overview
There are many ways to categorize the modalities, and describe the various
financial products and tools that can be used. Wenner (2006), for example,
states that the main modalities of value chain financing are: trade finance, secured transactions, risk management and financial enhancement instruments.
Here we have chosen to organize the modalities differently, according to the
analysis of the practical application of the various mechanisms described in
greater detail here. Therefore, this chapter organizes instruments by product
financing, receivables financing, physical asset collateralization, risk mitigation and structured enhancements, and provides illustrated descriptions of
the most common products.
It must further be noted that the use of terms vary somewhat between
countries and even across sectors. In some contexts, a precise legal term may
be applied, but the use of the terms in agriculture may often encompass a
broader meaning and application. This broader application is used in the descriptions that follow.
Table 4.1 provides a summary overview of value chain finance instruments
both traditional forms of credit as well as more sophisticated and complex
models that are being implemented in todays environment of more tightly
integrated value chains and financial systems. Not all of these instruments
are applicable to small farmers suppliers or traders many risk management
tools, for example, are more practical for agro-industries and wholesalers.
However, these higher level tools can stabilize prices, reduce risks and/or
reduce the cost of financing, with the benefits passing to participants throughout the value chain.
Product financing
Trade-related financing is the most frequently used form of value chain
finance. These credits most often assume the form of either: 1) pre-financed
sales when credit is provided to farmers by vendors who sell farm inputs, or
2) advance payments given by buyers who purchase farm outputs. Various
forms and instruments of product financing have been used for centuries and
are often in-kind credit, such as in the form of seeds and fertilizer.
The product financing instruments described in the following sections are
not new; rather, what is noteworthy is the way an agricultural value chain
56 AGRICULTURAL VALUE CHAIN FINANCE

Table 4.1 Description of agricultural value chain finance instruments
Instrument
Brief description
A. Product financing
1. Trader

credit

Traders advance funds to producers to be repaid, usually in kind, at

harvest time. This allows traders to procure products, and provides a
farmer with needed cash (for farm or livelihood usage) as well as a
guaranteed sale of outputs. Less commonly, trader finance can also be
used upward in the chain whereby the trader delivers products to
buyers with delayed payments.
2. Input

supplier

credit

An input supplier advances agricultural inputs to farmers (or others in

the VC) for repayment at harvest or other agreed time. The cost of credit
(interest) is generally embedded into the price. Input supplier credit
enables farmers to access needed inputs while increasing sales of
suppliers.
3. Marketing

company

credit

A marketing company, processor or other company provides credit in

cash or in kind to farmers, local traders or other value chain enterprises.
Repayment is most often in kind. Upstream buyers are able to procure
outputs and lock in purchase prices and in exchange farmers and others
in the value chain receive access to credit and supplies and secure a
market for selling their products.
4. Lead

firm

financing

A lead firm either provides direct finance to value chain enterprises

including farmers, or guaranteed sales agreements enabling access to
finance from third party institutions. Lead firm financing, often in the
form of contract farming with a buy-back clause, provides farmers with
finance, technical assistance and market access, and ensures quality
and timely products to the lead firm.
B. Receivables financing
5. Trade

receivables

finance

A bank or other financier advances working capital to agribusiness

(supplier, processor, marketing and export) companies against accounts
receivable or confirmed orders to producers. Receivables financing takes
into account the strength of the buyers purchase and repayment history.
6. Factoring

Factoring is a financial transaction whereby a business sells its accounts

receivable or contracts of sales of goods at a discount to a specialized
agency, called a factor, who pays the business minus a factor discount
and collects the receivables when due. Factoring speeds working capital
turnover, credit risk protection, accounts receivable bookkeeping and bill
collection services. It is useful for advancing financing for inputs or sales
of processed and raw outputs that are sold to reliable buyers.
7. Forfaiting

A specialized forfaitor agency purchases an exporters receivables of

freely-negotiable instruments (such as unconditionally-guaranteed letters
of credit and to order bills of exchange) at a discount, improving
exporter cash-flow, and takes on all the risks involved with the
receivables.
C. Physical asset collateralization

8. Warehouse

receipts

Farmers or other value chain enterprises receive a receipt from a certified

warehouse that can be used as collateral to access a loan from third
party financial institutions against the security of goods in an
independently controlled warehouse. Such systems ensure quality of
inventory, and enable sellers to retain outputs and have opportunity to
sell for a higher price during the off-season or other later date.
AGRICULTURAL VALUE CHAIN INSTRUMENTS
57
Instrument
Brief description
9. Repurchase

agreements

(repos)

A buyer receives securities as collateral and agrees to repurchase those

at a later date. Commodities are stored with accredited collateral
managers who issue receipts with agreed conditions for repurchase.
Repurchase agreements provide a buy-back obligation on sales, and are
therefore employed by trading firms to obtain access to more and
cheaper funding due to that security.
10. Financial

lease

(lease-

purchase)

A purchase on credit which is designed as a lease with an agreement of

sale and ownership transfer once full payment is made (usually in
instalments with interest). The financier maintains ownership of said
goods until full payment is made making it easy to recover goods if
payment is not made, while allowing agribusinesses and farmers to use
and purchase machinery, vehicles and other large ticket items, without
requiring the collateral otherwise needed for such a purchase.
D. Risk mitigation products

11. Insurance

Insurance products are used to reduce risks by pooling regular payments

of clients and paying out to those affected by disasters. Payment
schedules are set according to statistical data of loss occurrence and
mitigate the effects of loss to farmers and others in the value chain from
natural disasters and other calamities.
12. Forward

contracts

A forward contract is a sales agreement between two parties to buy/sell

an asset at a set price and at a specific point of time in the future, both
variables agreed to at the time of sale. Forward contracts allow price
hedging of risk and can also be used as collateral for obtaining credit.
13. Futures

Futures are forward contracts (see definition above) that are standardized
to be traded in futures exchanges. Standardization facilitates ready
trading through commodity exchanges. Futures provide price hedging,
allowing trade companies to offset price risk of forward purchases with
counterbalancing of futures sales.
E. Financial enhancements
14. Securitization

instruments

Cash-flow producing financial assets are pooled and repackaged into

securities that are sold to investors. This provides financing that might
not be available to smaller or shorter-term assets and includes
instruments such as collateralized debt obligations, while reducing the
cost of financing on medium and longer term assets.
15. Loan

guarantees

Agricultural loan guarantees are offered by 3rd parties (private or public)

to enhance the attractiveness of finance by reducing lending risks.
Guarantees are normally used in conjunction with other financial
instruments, and can be offered by private or public sources to support
increased lending to the agricultural sector.
16. Joint venture

finance

Joint venture finance is a form of shared owner equity finance between

private and/or public partners or shareholders. Joint venture finance
creates opportunities for shared ownership, returns and risks, partners
often have complementary technical, natural, financial and market
access resources.
approach can build on and improve these instruments, because of the stronger value chain linkages, and the availability of improved information and
communication and other technologies that exist today. The names of the
four product financing instruments described are not important but rather
they are used to describe a particular way of extending financing. Each of the
four has many things in common as well as differences in application, stemming to a large extent from the driver or key actor in the financing.
Trader credit
Trader credit is a traditional form of finance that is prevalent in informal and
fragmented agricultural value chains. In these systems, traders, or sometimes
trader-farmers, play a critical role in connecting farmers to markets, while providing farmers with funds for harvest, inputs or other needs, such as family
emergencies. In many cases traders are members of the rural community who
not only have capital and often transportation, but most importantly frequently
have specialized knowledge of markets and contacts that enable them to reach
those markets. Traders are therefore able to advance funds with the guarantee
that the crop to be harvested will be available to them for resale according to the
price that is fixed at the time of financing. The funds used by local traders are
from a variety of sources their own equity, financing from banks or wholesalers, and/or they may work as intermediaries of processors or wholesalers who
advance them the funds they then use for procuring products from farmers. The
trader role in providing financing, especially to small producers is important
and well known. Less known is the pressure traders also face both in meeting
the need to finance downstream and in dealing with delays of payment that are
common from their buyers. As in Box 4.1, they are faced with many demands
on their limited available capital which impacts their operational efficiency.
In the many countries without functioning commodity exchanges, prices
are often stipulated by the trader on speculation without knowing what the
market price or the quality will be at the time of delivery. The prices offered
tend to be low to mitigate risk to the trader (who may have advanced credit
to tens or hundreds of farmers) and therefore are often disadvantageous to
farmers. This trader strategy contributes to the perception that traders are dishonest and cut-throat, and therefore they rarely receive support from development interventions. The many fair trade development initiatives to support
small producers are prime examples of alternative trade models that often
deliberately eliminate the intermediary role of traders to provide what is considered a better deal to producers.
Traders have long existed because of the critical services they provide
to farmers market linkages, finance and related services (information on
Box 4.1 Small-scale farmer capacity and competitiveness, Kenya
Bernard Maina is a trader in Kenya dealing with French beans sourced from smallholders
and with a current capacity of 30 tonnes per week. Working with 26 employees, he is able
to sell Kshs. 5 million in French beans per month as well as fresh tomatoes worth over
Kshs. 2 million monthly. The main challenges facing his enterprise include: upfront payments, equipment and transport, and post harvest losses due to lack of cold room.
Source: Minae and Khisa (2007)
59
market demand for example) so understanding the role of traders and trader
finance has the potential to provide critical information for sustainable financial and non-financial services, particularly in areas with weak formal farmer
organizations. Fries and Akin (2004) have cited the advantages of trader credit
in terms of quicker provision of credit, technical assistance and limited collateral requirements, if any. Others have found (Vorley et al., 2008) that market
linkages through traders provide a type of quasi-cooperation amongst farmers
that can be a building block for a more formal structure.
Traders may in turn receive finance from other value chain businesses such
as millers and processors who may themselves be financed from wholesalers
or exporters who are farther up the chain from production to marketing.
The chains of agreements that include rural traders tend to be informal, while
integrated and structured systems generally do not incorporate the trader role.
The next case in Box 4.2 of trader finance in Latin America examines how
Box 4.2 Trader finance in Latin America

FAO studies of trader working capital confirm the thesis that traders finance their operations from a combination of sources. Major differences were found among countries. As
shown below, owners equity is at the top of the list, making up 40 to 80 per cent of the
total. In second and third place is financing received from other agents in the agricultural
value chain, ranging from 10 to 30 per cent. This is very similar to institutional financing
available to these enterprises, obviously with higher percentages in certain countries, such
as Costa Rica. In Ecuador and Peru, a very important source of trader financing comes from
moneylenders, in some cases as high as 20 per cent. A similar result was found in Asia.
Sources of working capital
Owners equity
Commercial relations in the agricultural chain
Institutional financing (important in Costa Rica)
Moneylenders (important in Ecuador)
Family and friends
Share of total financing (%)

4080
1030
1030
1020
01
Before these findings can be used for policy actions, careful consideration must be given
to the characteristics of relevant chains and the environment in selected countries. The
first important point is the nature of the chain itself, especially the degree of informality.
Ecuador and Peru are countries where informal agricultural chains are common, and studies have shown that 25 per cent of the transactions conducted in Peru are informal. The
chains in these countries are fragmented. Peru alone has hundreds of thousands of producers, nearly 1,000 mills and 60,000 rice warehouses, standing in contrast to the chains
in Argentina and Brazil, which are increasingly concentrated and integrated. These characteristics are very important, because the participants in informal chains tend to be smaller
and have less access to financing. Argentina and Brazil also have small-scale producers,
but they are members of strong cooperative movements and generally participate in formal
systems where the modern retail trade is picking up a fast-growing share of the market.
In conclusion, the study found that trade can survive in the absence of adequate institutional or other financing, but its growth is slowed. Drawing lessons microfinance institutions, certain countries have begun to respond to the demands of agricultural traders. They
now offer financing with flexible amounts, lines of credit, alternative forms of collateral,
other financial products and above all, offices located near the traders.
Source: Quirs (2007); Glvez (2006b); Shepherd (2004)
traders are able to finance their operations and their trading with small-scale
producers.
Throughout the world, whether for export trade or local trader finance, the
most efficient method of financing for the borrower is access to open account
lines of credit that can be drawn on when needed. Timing is critical for trade
financing. By increasing the availability of financing that can be readily accessed when needed, more funds can flow into the value chain not only benefiting the traders but also those upwards and downwards in the chain who
can receive more financing if needed, and potentially higher prices due to less
rationing of the traders cash available.
From an overall value chain finance approach, trader finance is one of a
number of ways to provide financing. Its role must be understood from the
perspective of those involved as shown in the next section.
Input supplier credit

Like trader credit, input supplier credit is a common form of in-kind financing
to farmers at all levels, both in a fragmented and informal agricultural system
and in strongly linked value chains in developing and developed countries.
Input supplier credit enables farmers to realize a cash flow benefit to access
supplies or even equipment for production purposes in a timely fashion. Suppliers provide this because credit is a critical marketing tool to make their
inputs and goods more attractive for sale. Yet, the financing results in a drain
on the cash flow of their business. Consequently, suppliers often offer cash
discounts to improve their cash flow and reduce the risks of non-payment in
the future. The key agricultural inputs seed, fertilizer, agro-chemicals, equipment and fuel are commonly financed in turn by their suppliers. The supplier in turn may be financed by borrowing secured by the invoices based upon
the strength of the sales and repayment records. Nevertheless, collection and
account management can be difficult. Consequently, due to their limitations
in providing financing and in ensuring repayment, more and more input supplier credit is done indirectly through a triangular relationship in which the
input supplier facilitates finance through a financial organization so the buyers can pay the input suppliers. This has the advantage of letting financial entities handle the financing using their expertise and the systems they have in
place to do so (Miller, 2007b). It also frees up funds for increasing inventory.
Input supplier credit is relationship based, and suppliers or buyers prefer
to extend inputs to local input supply retailers or to farmers whom they have
known for a considerable time. For retailers, finance may be given directly
in-kind by advancing products on consignment or commission. For proven
clients this can work well, but for others it can be problematic. When providing inputs to farmers, it is much riskier since the products may be used in their
fields making recovery difficult if crop or other failures occur.
An advantage of the supplier providing finance to the farmer is that it can
reduce the farmers transaction costs, since interest is embedded and paperwork
61
is minimized, and it secures sales. However, this route ties the farmer to one
particular supplier and he/she is therefore unable to take advantage of what
might be cheaper offers in the market. For input suppliers, providing credit
facilitates sales. These suppliers also often know the farmers and reduce their
risks by being able to choose to whom to offer credit or not. In addition, they
have a vested interest to provide their clients technical advice since they are
dependent on the success and trustworthiness of the farmer, all of which helps
to strengthen the linkages of the value chain.
Due to a weak private sector, and poorly developed value chains, input
suppliers and to a lesser extent traders, agro-processors and agri-businesses,
play the most important role in financing to farmers in Myanmar. Historically,
input supplier credit and trader credit were often the only two options open to
farmers and remain the most important at present. However, as shown in the
Myanmar case in Box 4.3, input supplier credit, while being important, can
itself be constrained by weaknesses in the value chain.
Access to sufficient and non-expensive financing depends upon the financial services available in the country as well as the strength of the value chain.
Even though Myanmar has strong agro-industries in certain sectors, their role
in financing down the value chain is constrained by these factors. Similarly,
in Africa or Eastern Europe and Central Asia, where fertilizer is a critical input,
few fertilizer wholesalers have sufficient conventional collateral that they can
pledge against repayment of working capital loans, and banks often do not accept fertilizer as collateral for loans. Without financial links with importers or
foreign exporters who can pass input supply credit on to wholesalers, the latter are prevented from operating on a large scale and reducing costs through
economies of scale in transport and storage. For fertilizer retailers farther up
the value chain, the major challenges involve not only improving access to
credit but also developing the capacity to manage input sales on credit without high risks of default on their outstanding accounts.
Box 4.3 Input supply credit, Myanmar

The experiences of the agricultural value chain finance model in Myanmar show that
financing is an important issue for the development of agricultural value chains. The
private sector providers sell the inputs to farmers on credit, yet this supplier credit rarely
stands alone since these companies themselves lack sufficient funding. They need financing which is hard to obtain. In order to recover sales revenue quickly, their preference is
cash sales rather than selling inputs to farmers with deferred payment. Consequently,
in Myanmar, the agro-input retailers offer deferred payment sales at a high interest cost
which results in an inflated price for farmers. The farmers do benefit from at least having
access to sales on credit, but it is expensive.
Given that financing is a hindrance for both farmers and their agro-input suppliers,
more finance is required in the value chain. More financing is needed farther up the value
chain but, currently, the very limited capacity of the banks in rural areas and the fragmented nature of the value chains makes this financing unavailable.
Source: Myint (2007)
Another challenge in some regions of the world is the lack of input suppliers to meet the needs of the producers in their regions. Input suppliers are
critical to value chain development. In Africa, for example, the development
of agro-dealers is noted as critical for accelerating smallholders access to quality agricultural inputs and is a focus of development initiatives such as those
by the Rockefeller Foundation (World Bank, 2008).
As noted earlier, BRAC has developed a noteworthy approach to input
supply and credit by forming supplier businesses and linkages with external
suppliers to provide the needed input services, and then advancing loans to
farmers to purchase the needed goods.
Unlike BRAC, many input suppliers are small enterprises with limited funds
and capacity. Their ability to provide and to receive finance depends to a large
extent on the strength of the value chain and its linkages. If strong linkages
are present there are opportunities to reduce repayment risk by direct repayment arrangements with the buyers of clients products and to borrow against
the strength of the receivables. In any case, the benefits must be weighed
against the disadvantages for each party as shown in Box 4.4.
Box 4.4 Input supplier credit, Bangladesh
BRAC recognized that timely supply of good quality inputs is a major factor that affects enterprise returns and their contribution towards poverty alleviation. Since supply of inputs
for different enterprises by the local industries and/or government was not of sufficient
quantity/good quality, BRAC established input supply enterprises to supply these inputs,
thus improving the incomes and repayment capacities of its agricultural microfinance
clients. BRACs support enterprises in poultry, livestock, agriculture, fisheries and horticulture provide essential inputs to its clients as well as commercial small-scale entrepreneurs
in an effort to further strengthen and ensure the maximum return to expand their enterprises. Each of the programmes has three wings: 1) extension; 2) production of inputs
and processing; and 3) distribution/marketing. This offers a range of package support to
different categories of farmers in the agriculture sector in Bangladesh. BRAC provides agriculture support consisting of training, input supply, small and medium enterprise credit
and technical assistance.
Source: Saleque in Digal (2009)
Marketing company credit

Buyers from firms such as marketing and processing companies offer finance
that works in a similar way to trader credit at the farm level. However, whereas
traders tend to run smaller operations and act as intermediaries between farmers and upstream companies, these companies are larger concerns that are acting on their own behalf. Also, this type of credit can be advanced directly to
farmers, to farmer organizations and to local traders, as well as being used by
larger companies to advance funding to local processors and marketing companies. It is distinguished from lead firm or contract farming finance described
in the next section in that this financing is not necessarily part of integrated
63
value chains, but rather is a way of securing purchases and can be a way of
providing incentives for loyal customers and traders.
Market company finance or other types of buyer credit are normally driven
by the upstream companys product needs for its sales commitments or to
fulfil its processing or manufacturing capacity. There often is an established
relationship between the company and the producers or producer groups. For
these groups it can be beneficial to work with marketing companies since
these are closely linked with the market information and have more and often
better marketing options. In addition, marketing companies are often able to
secure advance sales prices for their commodities and therefore have a more
secure basis for setting prices of the products they offer to the traders and
producers. Marketing finance is very important worldwide, often the primary
source of funding for commodities, even though the relative roles of marketing company finance varies by region and by commodity.
Financing within processors and marketing companies can be upstream
as well as downstream. Their financing capacity is often constrained by their
own ability to secure financing. Therefore it is common to be financed from
some of the clients they buy from who deposit products without receiving full
payment until an agreed date, often after the company has had the chance to
sell the deposited products or goods processed from them.
The company may or may not directly manage the funding to their clients since they may choose to involve a bank or other financial institution
to directly manage disbursements, while collections are managed through receipt of the product. The case of agave in Mexico shown in Box 4.5 provides
a straightforward illustration of finance that comes indirectly from a bank
through a processing company to farmers.
Box 4.5 Processor finance for agave farmers, Mexico

Agave is a raw material that is grown by smallholder farmers, and is a key ingredient in the
production of tequila. Agave production is an interesting example of a value chain, since
it is a highly complex activity by comparison with the average farm commodity. It is highly
cyclical, grown mainly by small-scale farmers with little access to formal financing, and
affected by wild price swings. As such, a banker is unlikely to take on the risk of financing
an agave grower. However, the same banker is willing to consider and handle financing
for a tequila producer that will use the money to take on the six-year risk of financing a
farmer, because he/she understands the value chain and how it works. The banker does
not take the risk directly, but provides financing to a company that will take the risk of
lending money to the farmer. In other words, the banker will finance a client who needs to
guarantee his supply of raw material to keep his own business running. In particular, most
tequila producers understand the farming risk because most tequila producers also have
their own crops. In a case such as this, the financial institution understands that access
to raw materials is a critical factor for the success of the end business. Nevertheless, the
bank is not willing to take the risk of financing the primary producer. The flow of financing
takes place, in the end, because the farming risk is held by the tequila distiller, who can
manage it better than the banks.
Source: Shwedel (2006)
Box 4.6 Marketing company finance, Costa Rica

Chestnut Hill Farms market, and in some cases produce, asparagus, mangoes, melons and
pineapples from Arizona, Brazil, California, Costa Rica, Ecuador, Guatemala, Honduras,
Peru and Puerto Rico.
Its customers are supermarket chains in the United States. Over the past five years,
the company has also been selling to the fresh processed fruit and vegetable sector and
supermarket chains in Europe, as well as wholesalers. Its main objective is to add value
to production, packaging and marketing. The company handles four trademarks, including perfect melon and perfect pineapple. Consumers are given a satisfaction or your
money back guarantee. This helps remove the company from the mass market of generic
products or commodities.
The company began with pineapples in Costa Rica in 2002, when exports were running
at one or two containers per week; by 2006, it had risen to 70 containers. One reason the
company achieved this kind of growth was that it was in the right market at the right time.
There was no overproduction, and in general, both production and market risks were low.
Another reason is that the company gives financial advances. A budget is drawn up before
planting begins, and the money is disbursed gradually as planting progresses. Chestnut
Hill Farms also provide agricultural inputs and participate in investments in equipment,
infrastructure and materials. Funds are delivered against shipping documents, once products have arrived safely. Each different case requires a separate analysis before partnering
and financing. Chestnut Hill Farms is not a financial entity, but it has learned to read
signals about where it can and should take risks with the farmers.
Source: Romero (2006)
Buyer credit may also be provided directly by the company as described in

the case of Chestnut Hill Farms in Box 4.6. This is possible when the company
has ample sources of funds and it wishes to ensure that the production and
technology meets its required standards.
Credit from marketing or processor businesses can therefore be as simple as
advances from one level of a value chain to another, or integrated into a full
chain process as noted in the case of Chestnut Hill Farms agribusiness company. It can also be one of the most important places in the chain where banks
and other financiers choose to inject financing due in part to the fact that the
repayments can often be directly discounted from proceeds of the products
delivered to the marketing company.
Full service types of models for value chain participants are found in various countries. Successful models have been noted in this volume in the cases
of BASIX in India, BAAC in Thailand and LAFISE in Latin America. A strong vision, leadership, operational environment and investment have been important toward this success making the model challenging for mass replication.
Lead firm financing

A lead firm is the driver of a value chain, and is typically a large retailer, exporter, processor or distributor that is a recognized market actor. A lead firm
commonly takes the initiative to establish a contract or out-grower farming
relationship with producers. It can directly provide finance to those under
65
contract. In fact, finance is often a major incentive and binding link between
the firm and the producers in such contract farming relationships. Such
financing can be in cash advances or more commonly in-kind such as the provision of inputs. However, the lead firm can also directly or indirectly facilitate
financing to those in the chain without providing the finance itself. It can set
up connections with financing entities or frequently, based on the contractual
relationship, producers are able to access finance through a third party. The
case of Starbucks in Central America in Box 4.7, illustrates how a retailer can
reach down into a value chain and affect financing arrangements through
more formal sales contracts.
As noted in the previous chapter, lead firms often operate on the basis of
contracts, such as contract farming. Lead firm financing is a service package
and is noted as a financial instrument only because of the overarching nature
of the financial application. It combines directed credit (i.e. specific use credit), guaranteed markets, fixed price or pricing parameters, technical assistance,
and strict standards and delivery commitments. The financing can typically
be used only for the sector or for the specific use indicated in the contract,
but the source of the financing can be either from the lead firm itself or by
arrangement or facilitation with a third party such as Root Capital, noted in
Box 4.7, or from a bank or other financial entity.
Box 4.7 Lead firm finance and assistance in Central America
The Starbucks Coffee Company has more than 10,000 coffee shops around the world.
Starbucks consciously seeks out a wide diversity of suppliers, currently buying coffee in
more than 127 countries. It seeks a direct relationship with its growers who can systematically provide it with high quality products. The company has developed a detailed set of
socially responsible standards and operates supplier certification programmes both for agricultural products (C.A.F.E. practices) and for non-agricultural products (such as glasses
and napkins used in the restaurants). For small coffee producers, it finds that many follow
good practices and one of Starbucks main tasks it to help them become more organized
and orderly in their processes.
Coffee companies, like Starbucks, have found that pre-finance is important for the
coffee-growers associations to be able to pre-finance the farmers harvest and the local processing and preparation for export. It does not see its role as their banker; rather
when producers are organized and with a good product and reliable market, financing
from financial institutions and/or specialized financial funds is made possible. Starbucks
does not want to provide direct financing and decided to invest through socially oriented
commercial financing companies or organizations such as Root Capital (previously named
EcoLogic Finance) and the Calvert Foundation investment fund. Root Capital, for example,
provides pre-financing to coffee cooperatives, along with technical advice and uses the
Starbucks sales contracts as collateral. Although not necessarily cheaper than bank loans,
this credit is much more flexible. Farmers need only show their sales contract with Starbucks to be considered creditworthy. It is typically very short-term credit until harvest,
but in some cases, farmers have also been able to use credit to invest in infrastructure
and processing equipment. When the products are shipped, Starbucks pays the company
directly for interest and principal payments. Because of this model, Root Capital has been
able to maintain a repayment rate of over 99 per cent.
Source: Torrebiarte (2006)
Product financing instruments are very important, especially in the lower

end of the value chain. Yet, because of linkages these instruments can also be
useful to banks and other financial institutions that provide financing to the
chain, since they allow financing to agribusinesses higher in the chain that
can then provide financing through the chain to those further down. For example, financing the farmers indirectly through the agribusiness may be less
costly and risky. Key benefits and limitations for key groups of agricultural
value chain actors are highlighted in Table 4.2.
Table 4.2 Benefits and limitations of product financing
Benefits
Limitations
1. Producers
Market information and advice (e.g.

what to grow).
Access to inputs on an as-need basis.
Avail market linkage (both forwards

and backwards) at an agreed terms
reduces price risk.

Often lower-cost transportation of
inputs and produce.

Technical assistance.
Loans and advances are relationship
based; collateral is not required.

Quick and hassle-free funding.

May get credit for non-agricultural
needs, such as family emergencies.

Low cost of transactions due to
multiple services of technical support,
markets and finance.
Monopolistic business and farmers do not

wish to risk the relationship by seeking
other buyers.
Pricing is often disadvantageous to
farmers.
Market information may be withheld (e.g.
buyers, pricing).
Cost is often high (higher prices on credit
and high direct or embedded interest
rates).
Quality may not be reliable.
May stifle innovation and market niche
development.
Funding is usually limited to working
capital for a specific sector.
Flexibility is limited and comparative
pricing is difficult.
2. Agribusiness
Assured and increased volume of sales
of inputs and avail volume discounts.
Encourages and supports production of
desired quality/standard and varieties.
Assured supply of produce and onward
movement up in the value chains (e.g.
processors).
Guaranteed supply can stimulate

finance to firms receiving raw materials
(e.g. forward contracting).
Vulnerability of farmers from a lack of
funds may enable them to take
advantage and offer low prices.

Farmers may side-sell (this is less

common in traditional systems with tight
family and community relationships).
There are many risks related to
production, markets and prices.
Farmers may not pay or may delay
payment.
Smaller agribusinesses are often not
equipped to manage accounts receivables
finance.
Accounts receivable outstanding may limit
inventory purchases and sales.
Not all services are profitable and
multiple, diverse activities can be difficult
to manage.
3. Financial intermediaries
Economies of scale can be achieved

by lending through the agribusiness
entities.
Point of Sales (PoS) financing is

possible which can reduce the cost of
transactions.
Economies of scale only achievable in

case of higher volume of finance at a
lower rate.
IT system may not support Point-of-Sales
(PoS) transactions.
67
Receivables financing
Receivables backed financing (often for export) is a general term for financing
which is secured by accounts receivables and sales contracts. In this type of
financial product, normally a loan is made in cash or in-kind whereby security
is provided by the assignment of those receivables and the repayment comes
from the sales proceeds directly to the lender. Inventory financing, which is
described later, is similar in the sense that the future sale of a good or commodity will provide the borrower with the means to repay the financing.
Receivables finance includes bills discounting, invoice discounting and
payment protection. This finance is often tailored to meet the individual requirements of the suppliers and buyer involved, enabling them to accelerate
cash flow from sales and mitigate risks. The ultimate goal of integrated trade
based financial instruments is to mediate the way the various clients acquire,
move, monitor and pay for goods within value chains. Successful deployment
of financial supply chain solutions requires close coordination with multiple
stakeholders dealing with procurement, logistics, finance, account management, and various types of risk.
Trade receivables finance

Many names and terms are used to describe receivable financing. In regards
to agricultural value chains, the term is most commonly used in relation to
trade finance and therefore is the focus of the following section. It is used
most often in importexport finance as opposed to trade within a country or
region. The term, trade receivables finance, is defined broadly in this section
to include: pre-finance, supplier finance, purchase order finance and export
finance. It could also include factoring and forfaiting which are treated in the
following section in order to clarify their specific nature and use.
Receivables finance is a method used by businesses to convert sales on
credit terms for immediate cash flow. Financing accounts receivable is a
financial tool for obtaining flexible working capital in which the receivable
credit line is determined by the financial strength of the customer (buyer),
not the client (seller of the receivables). Receivables may be of cross border
or domestic origin. Where there is a weak credit environment, such that
collection is difficult, receivables financing has been primarily for export
receivables, especially where the buyer is from a country with a stronger
financial environment whereby default arbitration is easier. This characteristic of export receivables allows exporters to use it as an alternative source
of financing when conventional financing is difficult due to the lack of a
supportive financing environment in its own country.
Export and import financing fit within a broader category of trade finance
which is typically used for international trade. With increased use of the
Internet for information on emerging markets, suppliers are now directly engaging with their buyers in other countries. A dynamic shift is taking place
in transaction processes which increase efficiency for the benefit of both

importers and exporters. It is important to note that international receivables financing is often directly applicable only for major companies in the
value chain but its influence can be felt by participants throughout the value
chain.
In the illustration in Figure 4.1, the lending bank advances funds to a producer to provide working (and sometimes investment) finance. In return, the
bank is given an assignment of future receivables from the buyer of the goods.
Importantly, this assignment is acknowledged by the buyer, who will make
payments in line with the schedule in the commercial contact with the producer. These payments will go to a collection account in the bank, from which
they are transferred to a debt reserve account. At the loan repayment dates,
money is taken from the debt service account, in-line with the repayment obligations of the borrower. While an agreed level of reserve must be maintained
in the debt service account, any other money accruing from buyers payments
is remitted back to the producer.
One of the most critical periods for financing farmers is at harvest then
their financial reserves from the last harvest often fall short and they commonly turn to money lenders or local traders for funding at often exorbitant interest rates and/or pre-harvest sales at low prices. Many farmers have
indicated that pre-financing is often more important than the price, since
the money is so desperately needed for living or hiring labour for harvest.
However, with strong value chain linkages, pre-financing advances can be
secured by receivables of product from the upcoming harvest. This concept
of trade finance also holds true for advancing funds against products or receivable obligations elsewhere in the value chain. In summary, trade finance,
which provides funding structured around purchases and sales transactions,
guaranteed by products and accounts receivables, is very important and
Assignment of receivables
Financing agreement
Loan
Bank
Acknowledgement of assignment
Payment for goods received
Figure 4.1 Pre-export receivables finance basic scheme

Source: Winn et al. (2009)
Producer/
exporter
Goods
supplied
Export
contract
Off-taker
69
widely used. In times of financial crisis it plays an even more important role
when other funding is restricted and the overall fear of risk is heightened.
Factoring and forfaiting

Factoring is a financial transaction, in which a business sells its accounts receivable (i.e. invoices) at a discount. Factoring differs from bank loans in three
main ways. First, the emphasis is on the value of the receivables, not the firms
creditworthiness. Secondly, factoring is not a loan it is the purchase of an
asset (the receivables). Finally, a traditional bank loan involves two parties,
whereas factoring involves three. As diagrammed in Figure 4.2 the three parties directly involved in a factoring transaction are: the seller, the debtor, and
the factor (the specialized financial company). The seller (e.g. input supplier or
wholesaler) is owed money (usually for products or goods sold) by the buyer
of goods, the debtor. The seller sells its receivable invoices at a discount to the
third party, the factor, to obtain an advance payment (e.g. 7585 per cent).
Upon notification, the debtor can only legally liquidate the debt by paying
to the factor. The debtor then directly pays the factor the full value of the
invoice. When the final payment is made from the debtor, the factor then
pays the seller a final settlement payment (total sale value minus advance,
fees and interest.) Most factoring is done on a recourse basis, meaning that
if the debtor does not pay despite the efforts of the factor, the factor will have
recourse to claim payment from the seller.
Factoring can make funds available even when banks would not do so using conventional lending methods. Since factoring companies are frequently
part of banks, either as subsidiaries or divisions of banks, it allows the banks an
alternative for financing businesses with insufficient acceptable collateral. The
1 Sale of products
SELLER
DEBTOR
2 Invoice certified
R
te
rm
ry
of
of
f
ex
pi
on
g
llin
e
ad
t
un
co
s
di
t
en
Figure 4.2 Factoring finance scheme

Source: author, Miller
FACTOR
ot
ifi
at
ca
tio
ld
so
ym
pa
8
Final settlement
Bi
s
le
ac
to
r
in
g
b
va
ei
ec
e
nc
va
Ad
5
7
Payment of invoice
discount factor (cost) varies with the creditworthiness of the debtor, which is
often a well known and solvent company, rather than the seller. An agribusiness factors its invoices when it calculates that it will be better off using the
proceeds to bolster its own growth than it would be by effectively functioning
as its customers bank the return on the proceeds will exceed the discount
fees and interest costs on the receivables.
In addition to financing, the factor performs two other important services
the collection service of the accounts receivable and the assessment of the
credit worthiness of the buyer. The factoring company can be better placed for
collection and it may have a better understanding of the condition of a sellers
customer than the seller does itself and can warn if the buyers financial situation, and/or the respective value chain, is deteriorating and advise the seller
accordingly. An additional advantage of a factoring company compared to a
bank financing is that the former can purchase receivables quickly, efficiently
and with great flexibility, so as to meet customers requirements as shown in
Box 4.8.
Reverse Factoring. This offers one solution to barriers to factoring. In the case
of reverse factoring, the lender purchases accounts receivables only from specific transparent, high-quality buyers which have sufficient and trust-worthy
information to be able to adequately assess. The factor needs to collect credit
information and calculate the credit risk for selected buyers, which are often large, internationally accredited firms. Like traditional factoring, which
allows a supplier to transfer the credit risk default from itself to its customers, the main advantage of reverse factoring is that the credit risk is equal to
the default risk of the selected, high-quality customers, and not the riskier,
Box 4.8 Factoring in Serbia

In Serbia, the payments to farmers for the sale of their produce are often delayed. Factoring works well for those needing fast payment. The process is straightforward. The farmer
bills its buyers in the usual way except that farmers will be asked to stamp each invoice
with a notice of assignment indicating that the invoice has been assigned to a factoring
company. This means that the farmers produce buyer now owes the factoring company
the face value of the assigned invoice. The factoring company then advances the farmers
business approximately 75 per cent to 85 per cent of the face value of the invoices. The
reserve amount of 15 to 25 per cent that is held back is based on the quality of the accounts rather than on the strength of the farms business, i.e. the fee fluctuates according
to the creditworthiness and performance of the farmers receivables. The farmers final
payment of the reserve minus the factor fee is received after the buyer pays the factor.
The factor fee can be as low as 2 per cent of the invoice amount depending on the level
of risk involved. In summary, the benefits of factoring for the farmer are to: 1) improve the
cash flow; 2) allow for better financial planning; and 3) allow the farmer to focus on the
business and sales rather than collections.
Source: Winn et al. (2009)
71
lesser known small or medium agribusiness firms. This arrangement allows

creditors in developing countries to factor without recourse and provides
low-risk financing to higher-risk suppliers.
In Mexico, the Nacional Financiera, S.N.C (Nafinsa) development bank
does reverse factoring on a non-recourse basis using an Internet-based platform. This enables any commercial bank to participate and compete to factor
suppliers receivables. The success of the Nafinsa programme depends in part
on the legal and regulatory support offered in Electronic Signature and Security laws (Klapper, 2005).
Overall, the use of factoring in agriculture is increasing but widespread
use is infrequent in developing countries. However, there is much room for
growth for factoring with value chains due to its combined services of finance,
collection, debtor assessment and often expediency of services.
Forfaiting. This is a less well known source of financing and collection services
which has many similarities to factoring without recourse, meaning the forfaiting company assumes all collection risk. It is used for larger, medium-term
receivables and is different from the factoring operation in the sense that forfaiting is based on one or more transactions, while factoring is based upon
selling all or a quantity of its short-term receivables. For example, in forfaiting,
the company purchases an exporters receivables (the amount the importers
owe the exporter) at a discount by paying cash. The forfaitor, who is the purchaser of the receivables, becomes the entity to whom the importer is obliged
to pay its dept. By purchasing these receivables, which are usually guaranteed
by the importers bank, the forfaitor frees the exporter from the risk of not
receiving payment from the importers purchases on credit, while giving the
exporter a cash payment. It therefore allows the importer to essentially buy
on credit. When well established, the receivables can be traded as bills of exchange or promissory notes, which are debt instruments.
Summary assessment of receivables financing. The use of receivables financing is
growing in line with the growth of value chain integration and global markets. The various instruments are heavily used in international trade finance
and to a lesser extent in domestic finance within value chains. Due to its direct
relationship with trade and its short-term nature, it is impacted by financial
crisis, such as occurred in 2008 and 2009. Yet, it also showed greater resilience in repayments compared with other lending products (Subjally, 2009).
As shown in Table 4.3, it has significant potential as well as limitations which
affect its use.

Table 4.3 Benefits and disadvantages of receivables financing
Benefits
Disadvantages
Farmers
Suppliers and buyers have more financing that
can be passed to them.
Agribusiness companies
Easier access to financing based on strength of
clients and purchase/sale.
Negotiable to fit the specific nature of the value
chain.
Can reduce transaction costs of trade finance,
such as allowing more use of open trade accounts
which are less costly than secured ones.
Can improve account receivable collection
efficiency and risk.
Widely used by medium and large businesses
involved in trade.
Financial institutions
Strong business line opportunity for the bank
and clients.

Reduces collateral requirements needed for loans
while providing security.
Pricing may be higher.

Lead firms can be monopolistic.
Requires policies and regulations
that are often lacking or inadequate
in developing countries.
Risks related to production, markets
and prices still exist.
Not viable for many micro and small
agribusinesses.
Requires awareness and specialized
services and skills, such as with
factoring and forfaiting.
Risks related to production, markets
and prices.
Physical asset collateralization

A key concept of value chain financing is to use the chain and its products and
transactions for securing finance. In agriculture this involves some physical
commodity or asset. Financing secured by commodities or moveable assets can
often be achieved even when the value chain linkages are weak or fragmented.
Of course, modern, more secure value chains which have strong linkages, secured markets and/or storage, commonly accepted grades and standards, and
operate under defined contracts or well established working agreements make
physical asset collateralization easier and even more accepted by banking and
regulatory organizations. This in turn provides opportunity for obtaining additional financing, less costly financing and/or more flexible financing by reducing or replacing the need for mortgage and other conventional sources of
collateral.
Warehouse receipts
Warehouse receipts are an important instrument in value chain financing and
much emphasis is devoted to illustrating its use as an instrument of value
chain finance. It is a part of the broader term of inventory finance whereby the
inventory of a commodity or asset serves as the guarantee. In some cases, the
73
credit that is advanced is relationship based and requires no paperwork. More

commonly though, inventory credit is a form of collateralization finance
known as warehouse receipts. A warehouse receipt system provides both
secure storage and access to credit for the value chain actor that owns the
inventory usually a commodity. For example, a producer, trader or processor can store grain in a certified public or private warehouse, receive a receipt
for the deposit, and use the stored commodity as collateral against a loan
from a lending institution. Because these commodities are stored in a licensed
warehouse, the receipt proves both that the commodities are physically in
the warehouse and that they are safe and secured. This receipt serves as the
guarantee or collateral basis for financing, whereas in traditional lending, the
underlying collateral is only a secondary source of repayment that needs to be
mobilized when something goes wrong. In collateralized commodity lending,
it is the first source of repayment.
Approaches and applications of warehouse receipts. Warehouse receipts are used
extensively around the globe with examples presented here from Latin America, Asia and Africa. A typical warehouse receipt system involves a managed
warehouse that issues receipts for stored commodities, the owner of the stored
commodity acquires the receipt to use as collateral, and a financial institution
accepts the receipt as collateral and provides loans against the receipt. Figure
4.3 from HDFC Bank, India, illustrates the connections between the various
aspects of a warehouse receipt system.
In this case, HDFC Bank works with a trusted collateral management company in a three-way partnership with the farmer borrower. The management
Borrower
Procurement
Tripartite agreement
Bank
Collateral manager
Lien
marking
Control
Commodity
Warehouse
Quantity testing
Quantity checking
Logistics
Acceptance for storage

Issue of receipt
Regular monitoring
Figure 4.3 HDFC Bank warehouse system

Source: Ananthakrishnan (2007)
Acceptability
of warehouse
company holds responsibility of the warehouse management, quality control

and the issuance of receipts allowing the bank to concentrate on its direct
banking functions with the borrower. With the security of the warehouse receipts and ease of redemption in case of default, it can then provide financing
to more clients often at lower rates.
Formal warehouse receipt system. A formal warehouse receipt system is frequently highly structured and regulated to ensure its security not only product
security and quality but also that the receipt is a recognized legal document
that can be used by banks and courts. Warehouse receipts are negotiable and
can be redeemed for inventory of the same grade and value as that for which
a receipt was originally written. As such, warehouse receipts facilitate the conversion of illiquid farm product inventories into cash, and improve the tradability and liquidity of underlying commodity markets. Warehouse receipt
systems allow farmers or traders to create bankable collateral through the
deposit of non-perishable commodities in warehouses, while third-party asset
(warehouse) managers control and safeguard the quantity and quality of the
product in the interest of holders of the negotiable warehouse receipts. While
simple in concept, a well functioning warehouse receipt system requires that
commodity grades and standards be generally accepted within the trading
community and often require regulatory policies which are not present in
many developing countries.
There are many variations on the basic warehouse receipt model as well
as differences in the execution and enabling environments that are described
below. Box 4.9 illustrates a formal warehouse receipt system that results in
finance to both fisherman and farmers and the buyers/processors of their produce. In this case in the Philippines, working capital is made available through
the use of the CAR warehouse receipts. The loans are self liquidating to the
bank through discounting the loans at the time of sale of processed goods to
buyers, thus reducing cost and risk to the lender.
Informal warehouse receipt system. A well managed system does not need to be
so formal to offer more limited warehouse financing functions. Such alternatives may offer opportunities for poorer and more remote farmers to participate in warehouse receipt financing when more formal structures are not
possible. For example, FAO has found that relatively simple community level
systems for warehouse receipts can work well where there is sufficient local or
regional organizations and community interest to ensure transparency and
quality (Miller, 2007b). Regardless of informal or formal, some organizational
structures must be in place.
Figure 4.4 illustrates how Development International Desjardins (DID) has
adapted the warehouse receipt approach to work with farmers and SACCOs
(Savings and Credit Cooperative Organizations) in different parts of Africa. In
Madagascar, for example, 850 farmers participate in Desjardins warehouse receipt project with loans totalling approximately US$1 million, with a repayment rate of 98 per cent (Boily and Julien, 2007). Figure 4.4 depicts the process
75
Box 4.9 Formal agri-fishery warehouse receipts, Philippines

The Quedan and Rural Credit Guarantee Corporation (QUEDANCOR) is a government corporation attached to the Department of Agriculture, established in 1978 to support the
production and marketing of the countrys major staples rice and corn. Over the years,
QUEDANCOR financing became available for fruits, vegetables, meat, poultry, sugar and
aqua culture products. The QUEDANCOR Financing Program for Working Capital of Buyers
and Processors of Agri-Fishery Commodities (QFPWCL) was designed to help fish farmers
obtain immediate cash, and at the same time provide additional working capital for the
buyers and/or processors of the farmers produce. In effect, it provides credit assistance to
the key players in the agricultural value chain. Specifically, it adopts an inventory financing
scheme wherein the buyers/processors of agri-fishery commodities can avail of loan based
on Commodity Acknowledgement Receipts (CAR). The CAR is a document issued by the
buyer/processor to fish farmers for commodities delivered for processing.
4. Delivers produce to
Buyer/Processor
Farmers
6. Presents CAR and
requests payment
7. Pays CAR
Holder/Seller
1. Secures Working Capital

line/loan based on the
expected deliveries from
farmers/fisherfolk
2. Upon approval of line/loan,
purchases CAR Forms
9. Pays QUEDANCOR upon
sale of commodity/by
products
3. Provides inputs and

technical requirements
under CGA
5. Acknowledges delivered
produce by issuing
commodity
acknowledgment receipt
(CAR) with the
corresponding authority
to receive loan/payment
Buyer/Processor
QUEDANCOR
8. CHANGES payment made to
CAR holder/seller against the
WC line/loan of buyer/processor
First, the buyer/processor of the agri-fishery commodities applies for a working capital
loan with QUEDANCOR based on their expected delivery from farmers with whom they
have an existing contract or agreement. Upon approval of the working capital loan, the
buyer/processor purchases CAR forms from QUEDANCOR in accordance with the expected
deliveries. After the delivery of produce by the farmers, the buyer/processor issues CARs
as proof of the delivered commodity, as well as a corresponding authority to receive working capital loan authorization. The CARs can then be submitted to QUEDANCOR by the
farmer for actual payment for the delivery of produce. The buyer/processor, on the other
hand, forwards to QUEDANCOR their loan payment after the sale of processed goods to
institutional buyers. Overall, the QPWCL programme maximizes the potential of the stakeholders within the value chain by ensuring that each function is interdependent to each
individual player. Hence, growth is encouraged as smooth value chain functioning leads
to a successful outcome.
Source: Digal (2009)
Warehouse
Receipt
Warehouse
Crop delivery
Repayment
Savings account
Receipt
Farmers
SACCO
Storage
loan
Farmers
SACCO
Withdrawals
as needed
Figure 4.4 SACCO Cooperative warehouse storage

Source: Boily and Julien (2007)
for the delivery and storage of a crop by a farmer to a warehouse. Upon delivery
of the crop for storage, the farmer receives a receipt. This is taken to the SACCO
where a storage loan is given, thus enabling the farmer to receive cash and yet
be able to sell the crop at a later, and usually more advantageous, date.
In the destocking process the stored produce is sold from the warehouse
and payment is made directly to the SACCO to repay the loan. The surplus
funds from the sale are deposited into the farmers savings account in the
SACCO. The farmer is then free to withdraw funds as needed.
Desjardins has also applied this approach in Tanzania where the role of
SACCOs has continually been recognized as a farmer-owned system that can
be equipped and evolved to avail a wider range of products to its members
including warehouse receipts. This more informal context for a warehouse
receipt system based on SACCOs is detailed in Box 4.10.
Box 4.10 Informal warehouse receipts, Tanzania

Desjardin has found that the SACCOs (Savings and Loan Cooperative) proximity to smallscale farmers in Tanzania can offer better access to financial services and contribute to
improved value chain finance performance and increased incomes of rural families. The
contribution of SACCOs to the functioning of value chains has ranged from: increased productivity though access to capital for inputs and equipment; adding value to agricultural
products through loans for processing and packaging; bringing products to consumers
through loans to distributors or retailers; and enhancing provision of food security in the
community through financing storage.
The proximity and the scope offered by savings and credit cooperatives are powerful levers that can considerably facilitate, at all steps of a value chain, the transfer of
money that supports the flow of produce from the field to the end consumers food basket.
Desjardins has learned in Tanzania that this lever is much more powerful and effective
when lasting partnerships can be established between the different players who support an
agricultural system for example, agreements between buyers and producers for the sale
of crops that instil confidence in the lending organization.
Source: Boily and Julien (2007)
77
The examples in Box 4.10 work because of the level of organization, trust
and close linkages between the farmers, warehouses and SACCOs, as well as
start-up capacity building by DID. Together these compensate for the lack of a
formal warehouse receipt programme. Even so, an inadequate regulatory environment was noted as a constraint and would likely become more important
for expansion with non-SACCO members and to commodities with greater
complexity of grading and storing.
Field warehousing. A variation on a centralized warehouse receipt system is
field warehousing where inventory is maintained close to production sites,
even though the warehouse headquarters are centrally located. This reduces
transport costs and improves accessibility to warehousing at time of harvest.
However, processes for sound administration, regular inspection and quality
control are critical elements of a field warehousing system. Building on the Tanzania case, the following case in Box 4.11 outlines the National Bulk Handling
Corporations (NBHC) management approach to distributed storage facilities.
Public vs. private warehouses. Warehouses that issue receipts can be either
publicly or privately owned. While there has been much growth in private
warehousing, governments have traditionally played an important role in
this activity in some countries. Some form part of government strategies for
food reserves or to stabilize prices. In either case, the receipts that are issued
by a storage facility need to be recognized by lending institutions as worthwhile collateral. This means that the management processes described above
must be in place. Typically, even when warehouses are privately owned and
operated, the government provides standardized and recognized inspection
and certification services. However, as stated by Ramana (2007a), there is an
immense need for quality warehousing facilities and a need for their acceptability and use by the overall commodity market financing system. An example of how this operates on a public level is noted in the case of the Philippines
in Box 4.12.
Box 4.11 Field warehousing, India
The National Bulk Handling Corporation (NBHC) has found that farmers in India realize
only about 3035 per cent value of the value of their produce compared to 6570 per cent
in developed economies. It considers that the agri-produce marketing system in India is
inefficient and fragmented and that warehouses, their management, and receipts issued
by them do not enjoy market confidence which hinders the development of the industry.
Recent initiatives by NBHC to overcome this issue include collateral management agreements with eight leading banks; warehouse receipts that incorporate security features to
reduce the risk of forgery; extensive use of information technology in all operations; mobile
commodity testing; and in-house commodity protection services. As part of this programme,
NBHC field warehousing maintains custody of inventory at specific monitored locations that
are connected to the administrative control system, that in turn links to the banks. In order
to guarantee the condition and security of stored goods at field warehouses, NBHC obtains
regular audit and stock condition intelligence through an in-house team, conducts quality
testing, administers security, and manages the health of the stored goods.
Source: Choudhary (2007)
Box 4.12 Publicly controlled warehouses, Philippines

The government of the Philippines operates the National Food Authoritys (NFA) Corn Storage
Programme and Palay Negotiable Warehouse Receipt system. The former issues NFA master
passbooks to individual corn farmers who have corn stock at NFA, along with free storage.
The passbook can be used as loan collateral with specific financing institutions. Similarly, in
the latter programme, warehouse receipts are issued to palay rice farmer organizations and
may also be used as collateral for commodity loans from the same financial institutions.
Source: Mangabat (2007)
Warehouse receipts in the wider context. Warehouse receipt systems also need to
be understood within the larger context. Their application and strength goes
beyond merely being a source of collateral for financing. Very often they are
often combined with other finance instruments and non-financial services
that conjointly enable a comprehensive set of value chain services. The example from India in Box 4.13 describes a one-stop shop that overcomes barriers
in development of the agricultural sector by drawing on a range of interlinked
financial and commodity management activities.
The Indian example of combining logistics, warehousing, financing and
marketing is important for improving efficiency in the value chain. Even so,
its use is largely limited to those commodities with non-perishable products
with relatively predictable price rises. Otherwise warehousing is generally not
warranted. However, new models have been developed to apply warehouse
receipts beyond easily stored commodities such as grain. In Mexico, the use
of warehouse receipts has been expanded from non-perishables to include
Box 4.13 Agricultural warehouse receipts in the wider system, India
In order to address the current stagnation in the agriculture sector, and to address specific
farmer problems, a new agro trade, finance and risk management ecosystem is being undertaken jointly by the Multi-Commodity Exchange (MCX India), the National Spot Exchange
Ltd (NSEL), and the National Bulk Handling Corporation (NBHC), a warehouse management
company, in India. Under the ecosystem, the commodity exchanges provide a trading platform that facilitates access to credit for farmers and other value chain participants. Commodity exchanges also provide daily prices and signal changes in commodity movements,
and assist financial institutions and agribusinesses in commodity portfolio management. In
addition, commodity futures and spot exchanges provide points of reference support to make
crop and marketing decisions and up to a certain extent balance the demand and supply.
NBHC provides access to warehouse and financing services through a nationwide
network of storage and bulk handling facilities. It ensures access to and assurance of
year-round business from a nation-wide network of clients. In addition to offering secure
collateral management, NBHC provides its clients easy and low-cost finance through bank
agreements, thus reducing dependency on seasonal price variations, and saving farmers
from distressed, pre-harvest sales. It increases cost-effective financial and operational
efficiencies to clients by providing single-window, hassle-free, customized end-to-end solutions. The system increases the bargaining capacity of farmers and provides a platform
where they can sell the produce to any buyer across the country. In addition, through the
NSEL spot exchange, it allows farmers to quote their own price. Such facilitation can lead
to reduced intermediation costs and higher prices and returns.
Source: Rutten et al. (2007)
79
shrimp and livestock. Whereas grains can be stored and sold when pricing
is favourable, livestock and especially seafood have a shorter window of
opportunity. Accordingly, the importance of understanding the market is
highlighted as even more important (Martinez, 2006).
Reducing warehouse receipt risk through commodity management. In order to reduce
risk in a warehouse receipt system both for the producer and the credit institution it is critical to ensure that standards and regulations are understood
and observed, warehouses are well managed, receipts are recognized collateral,
and that transparency exists throughout the system. Specialized commodity
management companies are relatively new but are beginning to play an important role in facilitating value chain financing through the services they
provide in commodity management, risk control and financial facilitation.
With increasingly integrated value chain systems, risks anywhere in the chain
have significant consequences. These risks go well beyond the warehouse and
include the spectrum of logistics management of transport, handling, financing, contracting and communications. Commodity managers who specialize
in these services can help to make warehouse receipt programmes and value
chain financing more efficient and often more viable because of their services.
ACE is a global leader in agricultural and other commodities. Their primary
service is that of guaranteeing continuous monitoring and control of trading assets, such as commodities, which are used by businesses as collateral to
secure a working capital. Box 4.14 summarizes ACEs approach to risk mitigation. Commodity management services are simple in principle they provide
assurance of quantity, quality and timeliness of products and contractual commitments as well as assisting in arranging and facilitating finance. Warehouse
management is central, but often only one part of their larger workload.
Benefits and challenges of inventory finance and warehouse receipts. The application of inventory finance and warehouse receipts is positive-sum. This means
that available working (collateralizable) assets remain inside the chain, while
additional funds flow in from the outside, thanks to the existence of contracts
assuring commitment to the products. Contracts become an intangible security which replaces traditional forms of collateral (Gonzalez-Vega in Quirs,
2007: 52). Secure inventory contracts ensure the ability to repay which can
allow banks, SACCOs and other financiers to offer lower interest rates than
otherwise would be possible.
The most common forms of collateral-based financing use real estate as
collateral to secure a loan. Under such credit programmes, credit recipients
mortgage their fixed assets such as plantations, plants or storage facilities. These
assets are limited and often insufficient. Furthermore, they do not measure the
repayment capacity of the business. As described above, collateral may also
take the form of commodities and goods as well as livestock, forest products,
manufactured goods or input supplies deposited in a warehouse, thus expanding the options for financing. Furthermore, negotiable and transferable warehouse receipts can have a positive impact on agricultural markets and price.
Box 4.14 ACE and global risk mitigation

Warehouse receipting developed into a highly dynamic field that integrates financial services into agricultural value chains based on negotiable or non-negotiable terms. In order to
keep risk to a minimum, ACE believes it is necessary to develop systems that are based on a
stable legal framework aimed at comprehensively protecting all the players in the market.
ACE has been practicing warehouse receipting for 11 years in 73 countries and highlights key parameters for success as follows:

reliability as a key requirement for all players;

quality and weight controls subjected to all transactions;
monitoring and control services;
processes must integrate production, distribution and collection;
insurance, well established along the value chain;
financing and structuring opportunities.
Credit risk mitigation is achieved by focusing on the commodity rather than the client. The
transaction processes are guided by various models which include components such as:

contracts;
identification and verification;
pricing;
controls;
other risk mitigation methods.
Source: Soumah (2007)
Despite the perceived and often realized benefits of warehouse receipt

financing, it has remained illusive in many parts of the world. Firstly, warehouses are often not available or secure and regulation is not in place to allow banks to use receipts as collateral for financing, etc. Secondly, even for
commodities which can be easily graded and stored price cycles may not be
predictable, governmental price interventions or imports may increase risk
of storage, and other such marketing factors may also impede its use. Finally,
awareness, trust and confidence in warehouse management and fulfilment of
contracts may be lacking. A summary of the benefits and challenges is presented in Table 4.4.
Although a warehouse receipt system is advantageous to the financing of
a value chain, there are challenges and risks to be addressed in order to set up
and implement the system. This often requires support and collaboration by
development agencies and the private sector to build both the capacity and to
put in place the regulations and infrastructure required. An example of such
collaboration is shown in Kenya and Tanzania:
In Kenya, IFAD and ACE worked with the government to help develop the
Warehouse Receipt Act of 2005 and IFAD and the Government of Tanzania signed a Loan Agreement in 2002 to finance the Agricultural Marketing
System Development Programme for agricultural marketing policy development (warehouse receipt act, taxation and marketing policy). (Cherogony,
2007)
81
Table 4.4 Benefits and challenges of inventory finance and warehouse receipts
Benefits and advantages
Challenges and disadvantages
Security:
Security:
Default rates on payment of non-real

estate collateralized loans tend to be low.
The borrower (producer) repays the loan

with earnings on sale of the product.
If the borrower or depositor of the

merchandise under warrant does not pay,
the creditor can call on the warrant
company to execute the goods given as

security, normally by means of public
auction.

If anything happens to the goods on
deposit, the warehouse assumes
responsibility.

In the case of disputes between creditors,
the law generally grants precedence to a
title of ownership.
Financing:

Financing:
Financing and liquidity is increased in the

value chain due to the collateralization of
inventory.
Warehouse receipts can be negotiated and
traded.
Potential for lower cost financing due to
reduced risk and often direct loan

repayment at point of sale.
Potential for reduced transaction costs of
borrowing.
Product and pricing:
Formal systems require clearly defined

regulation.
Warehouse management needs to be
competent as well as transparent.
Regulated warehouses are not always
accessible, particularly to more remote
farmers.
Collateral management may be weak or
untrustworthy.
Costs of warehousing, security and use of
receipts may make warehouse receipts
unattractive for some situations.
Informal systems, and even some formal
ones, are not fraud proof.
Banks and other lending institutions may

not perceive the stored commodity as
viable collateral.
The flexibility of the warehouse receipt as
a financial instrument varies across
contexts.
Strong linkages between warehouse and
financial institutions, and between
warehouse and markets, are required to
enable the system to function properly.
Product and pricing:
Potential for higher returns from delayed,

off-season selling and increased ability to
sell at market price peaks.

Potential for price stabilization in
marketplace.

Incentives for improved grades and
standards.
Potential for improved food security and

reduced product storage losses.
Promotes income evening and seasonal

saving.

Poor infrastructure negatively impacts

warehouse receipt systems.
Standards for product quality must be
established.
Product price norms may not be
predictable and may decrease during
storage time.
Many products are perishable or difficult
to transport and store efficiently.
Requires capacity building for
smallholders to accept warehousing and to
realize full potential.
In India, the Central Warehousing Corporation (CWC), with considerable

experience in the field, offers its recommendations for dealing with some of
the challenges for expanding the use of warehouse receipts (see Box 4.15).
Box 4.15 Warehouse receipt challenges and solutions, India

The Central Warehousing Corporation (CWC) sees potential for making warehouse receipts
a widely accepted instrument for facilitating credit against warehoused stocks. However,
there are obstacles in the popularization of warehouse-based financing in India. Current
limitations include:
Warehouse receipts lack negotiability as an instrument.
Insufficiently trained staff at warehouses restrict extension activities.
Inadequate infrastructure is available for storage, weighing, packaging, handling and
transportation of goods.
To overcome these obstacles, CWC recommends there is a need for:
Regulation of warehousing activities by a central agency.
Provision of legal status to warehouse receipts as a negotiable instrument.
Reduction of processes involved in use of warehousing receipts.
Private sector investments in warehousing.
Uniform policies for quality control and grade specification.
Coordination with financing institutions for facilitating singly window clearance.
Increased use of information technology.
Source: Thomas (2007)
Repurchase agreements (repos)

A repurchase agreement, often referred to as a repo, is an agreement between
two parties whereby one party sells the other a product or security at a specified
price with a commitment to buy it back at a later date for another specified price.
Sales made with repurchase buy-back obligations are used to secure the loan by
owning the asset. It lowers financial risk and is therefore attractive for trading
firms to obtain access to cheaper funding due to the lower risk of loan recovery.
The commodities used in repurchase agreements are typically stored with
accredited collateral managers responsible for quality, grading and issuing receipts, which are often transferred to an exchange broker. They work best
when a futures market is in place, but only require a functioning spot market
such that the commodities can be sold when needed. One repurchase agreement programme in Mexico that deserves mention is used with a warehousing
programme as shown in Box 4.16.
Box 4.16 Warehousing livestock, Mexico
Banco Mercantil del Norte (Martnez, 2006) is a leading Mexican bank which offers a
large range of services to its clients. Its inventory programme has an innovative product
offered by no other bank in Mexico. The Banorte warehousing facility purchases the crop
and then sells it back to the producer at a later date. This service improves client operations by monetizing inventory and providing liquidity as well. It subsequently improves the
farmers balance sheet and offers a contractual guarantee that the crop will be returned
to him. Even more on the cutting edge, the Bank has applied this arrangement to shrimp
production and, more recently, livestock. Some feel it is too risky because of problems
with transporting animals; however, Banorte feels confident that it knows the market and
screens clients whose livestock is now being certified.
Source: Martnez (2006)
83
Financial lease
Another form of using the asset as security is a lease. A lease is a contract
between a party that owns an asset (lessor) who lets another party (lessee) use
the asset for a predetermined time in exchange of periodic payments. It is
not commonly noted as a type of value chain finance but is included for two
reasons. Firstly, it is an alternative financing mechanism for agriculture and
secondly, it is similar to many value chain financing instruments in that it
separates the use of the asset from the ownership of the asset. For example,
in warehouse receipt financing the commodity is used as an asset security
without a change of ownership. By not changing ownership unless full payment is made, the asset serves as the collateral. Like value chain financing,
this is particularly important when conventional security is not available or
sufficient. It is a complimentary alternative finance since, unlike other forms
of value chain financing, a lease is used for acquiring fixed assets instead of
working capital. The assets that can be used in a lease can be numerous but
in relation to agricultural value chain financing, the assets commonly include
equipment, warehouses and farm machinery.
In studies by the World Bank a financial lease, which can also be called a
lease-purchase agreement, is a viable credit alternative for agricultural equipment and durable assets. A financial lease has four common aspects:
Amortization of the asset price includes a purchase option for an
agreed amount of payments or at end of lease period.
Maintenance lessee is responsible for maintenance and all risks usually associated with ownership without actually owning the asset.
Non-cancellation the agreement is generally fixed at the time of the
contract (Kloeppinger-Todd, 2007).
A very important aspect of a financial lease is the ease of recovery in case
of default on payments. Non-compliance of agreed conditions of payment of
maintenance leads to recovery by the owner (leasing company). An application of this instrument in value chain financing is that it provides a collateral
Table 4.5 Financial lease considerations
Client
Asset serves as collateral.

Lesser credit history may suffice.

May require less down payment.

May have better prices.

Potential tax-benefits.

Source: Kloeppinger-Todd (2007)
Leasing company
Lower transaction costs.
Stronger security: ownership rights versus weaker
collateral rights with less costs of repossession.
Usually more flexible pricing: lease rates not
usually regulated.
Less costs of regulatory compliance: lease rates not
usually regulated.
Agricultural leasing can be profitable but may
require initial donor/government support.
alternative, allowing those in a value chain to acquire improved equipment

and machinery needed to meet the requirements of competitively producing
and processing their products.
Risk mitigation products

We see very little knowledge or awareness of risk management techniques
and price volatility control, such as parametric insurance and options, that
could be used to offset some of the risk in agricultural value chains. Experience has shown that there are many ways to reduce risk information,
market knowledge, chain knowledge and/or acquiring links throughout
the chain. (Tiffen in Quirs, 2007: 39)
Reducing risk is one of the most critical considerations in finance. These are
classified into three types of risk production, price, and credit (client) risk.
The value chain approach helps to reduce price risk through secured markets
and sales and production risk through improved access to seeds, farming practices and technology, and agricultural development services. Client risk is also
reduced through a better understanding of the client and his/her risks, and
through the common use of loan repayments discounted at the point of sale.
Value chain finance also includes many financial and value chain related
instruments which are specifically designed to better manage both systemic
and individual risks. These instruments, which will be described here include
physical tools for product and price risk and financial tools such as insurance
and loan guarantees.
Crop/weather insurance
While financing through an agricultural value chain can reduce many procurement, market and repayment risks, its dependence on a single chain
can also increase risk when there are external, uncontrollable problems that
affect the chain. A most common example is the weather. To a certain extent,
the value chain leaders can diversify sources of procurement and markets to
reduce risk, but even so, the risks can be significant. An increasingly common
form of risk mitigation within the value chain is that of insurance, which is
often bundled with other services, namely finance and commodity management. In the large and innovative ICICI bank in India, the insurance services
are: 1) weather risk; 2) accident; 3) theft; 4) fire; 5) critical illness; 6) life; 7)
motor vehicles; and 8) cash in transit (Hegbe, 2007).
While weather is the most unpredictable and hence most difficult risk to
insure, all are important. For example, insurance can mitigate the illness or
loss of the farmer or agribusiness leader who is indispensable for the operation
of their farm or business can cause the chain to break and losses to follow.
For commodities, one of the important roles of a commodity manager is to
ensure quality and safety of a product in storage and transit. They provide this
85
assurance not only through careful management and control of the products
entrusted to them but also use insurance products to cover their uncontrollable and unforeseen risks.
Despite the difficulties and costs, agricultural weather risk products are
growing in importance but, unless subsidized, their overall use is low and
there is a reluctance of farmers to voluntarily pay for the insurance. However,
others actors farther along the value chain may want to have such insurance
and may require it or embed the insurance cost into operational costs. The
rationale is clear; if a marketing company has binding sales contracts it is important to have secure procurement. If a crop fails not only will the crop not
be available, but neither will the loan repayments for any advances that may
have been given. Consequently the funds for purchasing from other producers, if possible, will also be lacking.
Weather risks are very specific to a given value chain and region. For example, too little or too much rain at specific stages of the development of a
crop can be disastrous. Since verification of the actual losses of production is
very costly, the use of weather insurance products which are indexed to specific
weather conditions for determining loss compensation is becoming more popular. Indemnity claims of losses due to abnormal weather events, e.g. excess/
deficit rainfall, hail, are settled based on transparent weather data recorded at
meteorological stations, thus reducing the costs of service. A lack of historical
data limits the application of this product but specialized institutions, such
as the Weather Risk Management Services Company in India, have begun to
generate weather data and forecast through a network of sensors to improve
the accuracy for those institutions providing indexed insurance services. Even
so, weather risk applications in agriculture are not universal, and as noted by
its leader, must be linked to an appropriate business model (Agrawal, 2007). Future reading on this topic can be found on the websites of the World Bank and
FAO, or those of leading insurance companies active in developing countries.
An example of weather indexed insurance being used in conjunction with
value chain financing is shown in BASIX India. In selected commodities,
BASIX found that once a pilot model developed with one insurance company,
it was quickly replicated by other insurance companies to provide services to
18,000 farmers in the following year (Ramana, 2007b). Even so, the field of
indexed insurance is still developing and requires much refining and data history before it can be applied more broadly.
It must be noted that an age-old insurance for production, as well as price
risk, is diversification of product lines. While not elaborated on in this volume, diversification is both a factor for those within a chain, as well as for
lenders and their portfolios.
Forward contracting
Forward markets, futures options are risk mitigating instruments used in agricultural marketing by producers, investors and traders. Forward contracts
obligate the parties to buy or sell a certain amount of product at a future date.
Usually, forward contracts are settled between agents who expect to receive or
make payments by units of product. The amount of product, date and price
parameters (fixed price or method for fixing price at time of sale) are set by
the agreement.
One successful programme, using forward contracting of agricultural products, has been developed in Brazil. The rural finance note, called cedula produto
rural (CPR), was created by the government for loans to agribusinesses and
producers. Basically, CPR is a financial asset applied to the value chain to
facilitate access to finance. Its mechanism is very simple since the farmer
issues a CPR, promising to deliver a given quantity and quality of product
at a given future date and locale. In exchange the buyer pays, in advance, a
given amount of money corresponding to the quantity of product specified.
The unsubsidized loans are backed by the CPR note which commits them to
the future product delivery (or to make an equivalent payment). Over US$2.3
Bank
Pledged CPR
Payment
CPR note
Trade Co/Warehouse
(Serves as a conduit)
Product
Payment
Product
Farmers
Buyers
Finance
Contracts
> Farmer signs a CPR (a note pledging the future crop), personal guarantees and/or
land in order to finance the crop production.
> Trade Company (Co) takes the CPR and lends to the farmer against it at a
discounted rate.
> If the Trade Co is borrowing funds from banks, it will pledge the CPR to those
banks.
> Trade Co replaces the CPR with warehouse receipts in order to keep loans with
banks.
> When the crop is harvested, the farmer delivers it to the Trade Co which in turn
returns the CPR to the farmer.
> Banks perform collateral audits as needed.
> Trade Co sells product to the market and pays the banks.
Figure 4.5 Brazil rural finance note finance

Source: adapted by authors from correspondence with D. Lambright, 2008
87
billion in financing has been secured by using this forward contracting programme (Alcantara, 2006).
One of the reasons for the growth is that the CPR is a protection against
price drops as well as an instrument for accessing production finance. Another important attribute of the CPR is the reduction of risks to the buyers. As
stated in the law, CPR is a bond that provides for out-of-court dispute settlements; in other words, the bond guarantees rapid execution in case of breach
of contract. This characteristic is a major incentive for the buyers of CPRs, as it
reduces risks of moral hazard and it speeds loan recovery when needed.
While the CPR is unique to Brazil, the programme offers a good illustration of how collateral can be transformed as the value chain progresses, since
the security begins with the assignment of future receivables, which is then
replaced by goods in storage, as the product is moved to warehouses (authors
correspondence with D. Lambright, 2008). Moreover, it is noted that the general use of forward contracts in agriculture is widespread and growing in use.
This instrument plays an important role in many of the value chain models.
Introduction of legislative innovation such as the rural product notes in
Brazil, that provide access to advance funds on forward contracts and allow
for disputes to be rapidly settled in out-of-court dispute settlements, can be
considered as an example of increasing access to finance and reducing risks of
moral hazard.
Futures
Futures are contracts to trade given amounts of products at a specified date.
Futures options provide the holder with the right (but not the obligation) to
buy or sell contracts of products at an agreed rate within a period of time, in
return for a fee paid to the seller of the option. The use of futures trading is
often understood to be a tool for large companies mitigating risks on major
commodities. Hedging through the use of futures is a relatively complicated
financial process. Most farmers do not understand all the nuances of futures
transactions on the commodity exchanges. While it is used primarily by larger
companies such as millers and traders, it is found that futures can and often
do play an influential role in financing within agricultural value chains. This
role is both direct and indirect and can affect producers and agribusinesses of
all sizes.
Whereas forward contracts are tailor-made according to the product and
involve the expectation of physical delivery or sale transaction of the product at the time specified in the contract, futures are packaged in standardized, readily-tradable contract lots which can be bought and sold by investors
through futures exchange markets. The value of futures in finance is two-fold:
as a price reference and as an instrument to reduce risk. On one hand, the
futures markets prices are used as a reference for calculating expected returns
and for price offerings for future deliveries. This allows both buyers and sellers
to have a point of reference, thus leading to less speculation.
The second and foremost value of futures is that they allow traders to hedge
(meaning offset or counterbalance), a position established in one market with
an opposite obligation or position in another market. For example, a trader
can purchase a product for future delivery and simultaneously hedge that purchase with a counterbalancing sale on the futures market. In doing so, it reduces exposure to price risk which not only makes it easier to obtain financing
as needed, but also by having price certainty secured allows the buyer of the
commodity to offer a better price to the seller. This was noted in the CRDB
bank in Tanzania which found that hedging helped coffee producer groups
offer a higher purchase price to farmers and gave both banks and borrowers a
better ability to manage price risk (Nair, 2007).
A third advantage for futures was noted by Ramana (2007a) who stated
that the use of commodity derivatives such as futures, not only mitigated
commodity price risk but also helped determine cropping patterns based upon
futures prices on the exchange platforms. An example of how this can support both large and small farmers is shown by the MCX Commodity Exchange
of India in Box 4.17.
The risk mitigation instruments briefly introduced above are essential to
the success of many value chains. These instruments are not needed at all
levels of the value chain and some, like futures tend to be used only by larger,
more sophisticated traders and agribusinesses but indirectly provide benefits
throughout the chain.
It is also important to note that governmental interventions can lessen
the interest and need for futures when minimum price levels are set. This is
common for some stable commodities in developed countries, such as in the
United States, and in developing countries such as India. For example, the
government of India has a minimum support price (MSP) for 24 major crops
which are announced before the start of the cropping season as a safety net
Box 4.17 Using futures in price risk management, MCX, India

In India, both large and small farmers engage in price hedging following the futures markets. Internet kiosks and point of sale information centres inform farmers and traders of
market movements around the globe. The benefits of trading in futures were:
Prices: futures provide an important clue for choosing the next seasons crop.
Risk management: farmers and traders can hedge on upcoming produce and protect
against fall in prices during harvest.
Warehouse linked risk management: produce procured from farmers can be kept in
warehouses and sold in futures market at a suitable lock-in price.
Collateral financing: a warehouse receipt can be used as collateral by farmers to obtain
loans from banks.
Price dissemination: knowing prices empowers farmers for better negotiation with
traders.
Competition: futures help to create commodity markets which enhance competition,
market information and international trade.
Source: Rutten, et al. (2007)
89
mechanism to help insulate agricultural producers against the unwarranted

fluctuations in prices (Ministry of Agriculture, Government of India, 2009).
However, such interventions, while reducing risk in the value chain, also reduce the opportunity for growth and development in the use of agricultural
futures in the marketplace.
Financial enhancements
Financial enhancements describe a wide range of often complex financing
arrangements which are meant to reduce the risk. These include structured financial instruments, guarantees and joint equity investments, among others.
In general within financial markets, structured finance instruments reduce the
risk of borrower credit-worthiness through packaging of cash flow returns
or other receivables which are subject to strict agreements to securitize their
repayment. The most critical element of structured finance is the quality of
the receivables that form part of the structure finance income streams. Ample
evidence of the negative consequences of the aggregation of mixed-quality assets and inadequate supervision and grading are evident in the collapse of the
housing mortgage securities market in 2008.
In structured finance in agriculture the performance of the transaction is
key and must be carefully evaluated and controlled. Conventional financing may be generally less concerned with the profitability of the transaction
but typically the balance sheet of a prospective borrower must be strong. In
structured finance the reliance is on the soundness and merits of the transaction (i.e. cash flow or flow of product sales to a buyer) and not the balance
sheet. Several of the instruments described earlier may form part of structured
finance arrangements.
Within the context of agriculture, it is found that highly complex structuring is not advantageous. Rather, the concept of structured finance is best
thought of as tailor-designed finance that uses the concept of market-driven,
transaction-secured financing and fits the financing according to the nature of
the value chain, its participants and transactions. Other enhancements such
as the use of guarantee funds are more widely used to promote agricultural investment and make it more attractive. Joint equity, which can involve public
investors can also reduce risk and enhance the acceptability for private investors to finance and/or invest in an agribusiness.
Securitization
Securitization is a financing technique where individual streams of cash flow
are bundled and sold on capital markets to investors, many of which are pension funds and managed funds, financial intermediaries and public investors.
Securitization has become widespread in the financing of residential housing,
automobiles, accounts receivable, commercial properties, and other types of
assets. However, it has come under intense scrutiny due to the collapse of the
financial markets in 2008 when it was found that many of the securities were
made up of poor and mixed quality investments and were misrepresented
with high ratings. The lack of proper regulation, oversight and excessive leveraging of securitization has weakened its potential for widespread use in the
near future.
Despite the problems stemming from mismanagement of securities indicated above, there are examples of its effective use in agricultural value chain financing as well as in microfinance and development finance. The potential for
the use of securitization in agriculture is limited to commodities and products
that can be readily bundled into packages of nearly identical products, which
can be traded on commodity exchanges. An example is fattening cattle in
Colombia where the livestock sector was hindered by the high cost and processes for obtaining conventional commercial financing. Through an innovative
approach, the National Agriculture and Livestock Exchange (BNA) developed
a scheme under which securities of cattle were able to be listed and sold on
Colombias stock and security exchanges, as described in Box 4.18, to raise
funds for the feeding of livestock. These are then traded on an exchange, which
also provides supervision over the entire process and all those involved.
Box 4.18 Livestock securitization, BNA, Colombia
There is a tradition in the use of securitization structures in the livestock production sector in Colombia, with the National Agriculture and Livestock Exchange (BNA) playing a
lead role. To increase financing flows to the livestock sector, the BNA developed a scheme
under which a Trust was set up to take ownership of unfattened calves and the pasturelands where the livestock is fattened. The BNA was responsible for selecting farmers to
participate in the scheme against a strict set of criteria and the selected farmers received
finance from the Trust to purchase animal feed.
The Trust issued securities on Colombias stock and security exchanges, at rates which
were determined by competition among the countrys institutional investors and this
competition ensured that the farmers in the scheme were faced with reasonable interest
charges. The ranchers fatten the animals for 11 months and at the end of the period the
calves are sold by the firm operating the process to pay the liabilities acquired with the
investors, with the remaining earnings payable to the ranchers. The scheme is based essentially on repossession (repo) arrangements, with ownership being transferred back to
the ranchers at the end of the fattening period and the marketing agent selling the cattle
into the market on behalf of the ranchers.
Key elements in the schemes success were the availability of a developed stock and
security market, sophisticated investors, technical support and regular inspection by an
independent agency to ensure standards were maintained and the use of insurance to mitigate risk for investors. Several iterations of the scheme were carried out by the BNA in the
early 2000s, resulting in tens of millions of dollars being raised for livestock farmers.
Source: UNCTAD Secretariat (2002)
Loan guarantees
Loan guarantees have been used in agricultural finance in many countries.
Their overall use has often been associated with considerable subsidies as a
91
result of high payouts in relation to the income generated and due to their
costs of operation. When guarantees are used within value chain financing, the chain linkages and close interaction and knowledge of the different
parties involved increases the opportunities for their successful application.
The following two examples display their use at the lower and upper end of
the value chain.
In Mexico, FIRA, a second tier agricultural bank, provides funds and guarantees to support agriculture and the rural sector. It works with para-finance
agents to manage the funds and guarantees of farmers who would otherwise not qualify for loans from banks. These para-agents are companies and
individuals, such as agribusinesses, processors and farmer unions, who have
commercial relationships with the producers. They select final credit recipients and manage the loans to the farmers and guarantees with the bank.
An example is shown in Figure 4.6, with the Regional Agricultural Union of
Producers (UNIPRO). First, UNIPRO, acting as a para-finance agent, contacts
FIRA to negotiate a line of credit which is disbursed through a first tier bank.
It then contacts the bank that will disburse the money and FIRA signs over to
the bank the resources it will be lending to the agent. The bank then dispenses
the money and UNIPRO distributes it to the beneficiaries. FIRA gives the bank
a guarantee and charges the costs to UNIPRO. The risk is shared. A group of
members of UNIPRO provide partial collateral as a guarantee for the money
and are required to set up a trust fund with contributions from the farmer
and the producer organization for 30 per cent of the total credit as a liquid
guarantee. The bank also carries 30 per cent of the risk of the operation. When
the producer repays the loan, UNIPRO pays the bank and the bank returns
the money to FIRA. The trust fund returns the Unions contribution, and the
Union returns the amount paid in by the producers.
Disbursement
Credit
Bank
Para Finance
Agent
UNIPRO
Guarantee
Guarantee
Producers
Production
Contributor
Funds
FIRA
(Guarantor)
Credit
Contributions
Risk
Management
Security
Savings
Capitalization
Liquid trust
fund guarantee
Figure 4.6 Para-finance guarantees in Mexico

Source: Chvez (2006)
The UNIPRO model involves multiple guarantees: the bank has loan guarantees from FIRA and UNIPRO, UNIPRO in turn has a partial farmer trust fund
guarantee and a partial bank shared guarantee, and in addition, much of the
production is guaranteed through contract farming agreements with a major
warehouse.
In a different model on a more macro level, Rabobank manages a loan guarantee fund to enhance the eligibility of farmers, agribusinesses and traders
requiring financing. In addition to sales contracts, warehouse receipts and/or
other types of conventional and value chain collateral, it is found that a partial guarantee can assist in making financing more readily available and often
at a lower cost. As shown in Figure 4.7 in the case of the Sustainable Agricultural Guarantee Fund created for developing countries, public sector agencies
may be involved in order to attract the investment of the private sector.
In addition to helping attract investment, guarantees may be needed to
restore finance and investment. In late 2008, the global financial crisis affected the availability of finance for trade, prompting the International Finance
Corporation (IFC) of the World Bank group to significantly increase its global
finance programme by providing guarantees that cover the payment risk in
trade transactions with local banks in emerging countries. It found that the
demand for trade-related risk mitigation increased significantly as a result of
the global financial crisis (IFC, 2009).
Rabobank
(Dutch Ministry of Foreign Affairs/DGIS and Solidaridad)
Fund
management
+ participation
Sustainable
Agriculture
Guarantee Fund
Funding
Guarantee (50-90%)
In case of claim
Triangular
agreement
Credit
appraisal
Eligible borrowers
(certified producers)
Figure 4.7 Financing with future receivables
Source: Wortelboer (2007)
Local
intermediary
lender
Collateral
including
off-take
contracts
Export
pre-financing
93
Joint ventures
In order to increase investment and value addition in agriculture and agribusiness, much direct capital investment is required from equity investors into the
value chains. Much of this is done directly by investors and owners within the
chain but there is an increasing interest in specialized funds for investment.
In Africa, the Actis Africa Agribusiness Fund, for example, invests in equity
and quasi-equity in selected sectors. The Actis strategy is to participate across
value chain in activities related to production and processing of, and services
related to (i.e. inputs, logistics, distribution and marketing), biological products, plant or animal, whether for food or non-food purposes. Critical success
factors noted for investment include:
Investment in value addition, market led, established businesses in free
markets.
Experienced sector specific and focused management team at fund level.
Rigorous application of the funds investment and decision making
process (Actis, 2007).
Box 4.19 Publicprivate contract farming, Thailand

Samutsongkhram and Samutsakorn provinces are shrimp producing areas in Thailand.
A collaborative partnership among various public and private stakeholders works to enable shrimp farmers to revive and secure marine farming with sustainable aquaculture
practices. The value chain involves numerous players with a range of roles, at the heart of
which is a contract farming arrangement and supporting technical services:
The Ta Chin Shrimp Farmers Cooperative selects participating farmers according to the
cooperatives principles and project requirements; manages contract farming of products to be forwarded by the cooperative members; prepares shrimp farm plans; trains
the participating farmers on shrimp culture technology and standards; coordinates adequate and timely financial sources for farmers; and arranges for a traceable shrimp
production system.
The Bank for Agriculture and Agricultural Cooperatives (BAAC) provides credit services
for shrimp culture.
The provincial fisheries offices promote shrimp culture businesses and careers that
adhere to the food safety standards and provide technology and certification.
The Coastal Fisheries Research and Development monitors food safety and certifies the
sanitary conditions of the marine products aimed for export.
The Coastal Aquaculture Station transfers technology for commercial marine shrimp
culture and diagnoses disease amongst marine shrimp.
The Ministry provides capacity building to the cooperatives in business management
and technology.
The Provincial Commerce Offices support marketing of the shrimp.
The Agricultural Marketing Cooperatives provide inputs and marine shrimp feed.
Pac Food Co., Ltd. and Union Frozen Products Co., Ltd. purchase shrimp produced according to the contract farming agreement made with the Cooperative.
Participating Shrimp farmers produce shrimp according to the regulations and
requirements.
Source: Prasittipayong (2007)
Publicprivate partnerships. Publicprivate partnerships can provide a solid

foundation to deal with the complexity of certain value chains dividing
areas of responsibility according to core competencies, resources and mission.
The case of shrimp farming in Thailand shown in Box 4.19 describes how contract farming is an integral element in a sector with many interrelated public
and private sector components.
Figure 4.8 illustrates the flow of finance within the shrimp industry value
chain in Thailand. The use of contracts between producers and the cooperative, as well as technical assistance to ensure quality and sustainability are
key consideration to BAAC in order to provide financing for the small-scale
shrimp farmers.
2 Working capital 2
Investment capital
Technical assistance
Gov't agencies
Universities
Peer farmers
Shrimp farmers
4 Post-larvae
feeds
BAAC
5 Mature
shrimp
2 Working capital
Investment capital
3 Post larvae feed, drugs
Input suppliers
BAAC*
SME Bank**
Cooperative
6 Shrimp
delivery
1 Contract
farming
2 Working capital
Investment capital
Processors & exporters

(overseas market)
Traders & processors

(domestic market)
* Bank for Agriculture and Agricultural Cooperatives

** Small and Medium Enterprise Development Bank of Thailand
*** Government Savings Bank
Figure 4.8 Value chain financing: shrimp industry model

Source: Prasittipayong in Digal (2009: 108)
BAAC
SME Bank
GSB***
95
Bringing it together
The agricultural value chain finance mechanisms and tools were presented
singularly in this chapter to highlight their characteristics and uses. However,
these are often used in combination and for this reason larger financial institutions specializing in financing agriculture offer an array of conventional
and unconventional financial tools and options, such as transactional-based
finance instruments. A sample of the agricultural value chain finance instruments offered by Standard Charter Bank in Africa is illustrated in Figure 4.9.
As noted, various financial instruments are used to finance the processes
as the products move through the value chain. In addition, financing in turn
flows from the direct recipients to others in the chain through other instruments as described earlier. A summary of the principal benefits and limitations
and how they can be applied is shown in Table 4.6.
Standard Charter Bank value chain finance instruments
A
Water
Land
Capital
Machinery
Seed
Fertilizer
Ag chemicals
Ag services
B
Production
Tolling
Processing
Consolidation
C
Transit
Port
Warehouse
Shipping
Discharge
D
Transit
Storage
Manufacturing
Distribution
E
Wholesale
Retail
Food service
Hospitality
Utility
A Grain hedge, fertilizer hedge, working capital, project finance,

structured finance, term debt.
B Pre-finance, working capital.
C SPV special purpose vehicles, repurchase agreements,
warehouse inventory.
D Structured receivable financing.
E Debtor finance, working capital, foreign exchange, derivatives, term debt.
Figure 4.9 Capturing the agri-food value chain
Source: Muiruri (2007)

Table 4.6 Summary analysis of agricultural value chain finance products
Instrument
Benefits
Limitations
Application potential
A. Product financing
1. Trader credit
Farm-gate finance
with ease of
transaction.

Culturally accepted
and well known at
all levels.

Secures sale/

purchase and price
of seller and buyer.

Non-transparency
of true market
value.
Often informal with
potential for side-
selling.
Quality and

quantity uncertain
when given pre-
harvest.
Middleman
traders will remain
important but as
chains integrate
will lessen in
importance.
Tendency of
traders towards
acting as agents of
wholesalers.
2. Input supplier
Buyers obtain
Input costs may be

credit needed inputs. excessive.

Suppliers secure Lack of security in
sales. repayment.

Lack of competitive
suppliers in many
regions.

Focus on reducing
administration and
risk with multiparty links with
banks; produce
buyers are
promising for
direct payments
from sale.
Quality and safety
are growing
concerns.
3. Marketing

company credit

Secures quantity
and price.
Funds advanced as
needed; payments
often discounted
directly.
Eliminates need
for trader.

Contract terms for
finance, price and
product specs.
May not be directly

accessible to small
farmers.
Credit advances
increase financial
outlay and
administration.
Compliance of
contracts is often
not respected.
Value chain control

through contract
farming is growing
in importance.
Value chain
approaches reduce
transaction costs
and risks.
4. Lead firm

financing

Secures market

and price.
Technical guidance
for higher yields
and quality.

Less side-selling
options due to
closer monitoring.
Enforceable
contracts reduce
side-selling.
Lead firm can
often hedge price
risk.
Less access for

small farmers.
Restricts price rise
gains to producer.
Cost of
management and
enforcement of
contracts.
Growing use and

strong potential to
provide access to
markets, technical
assistance and
credit.

Instrument

Benefits
Limitations
97
B. Receivables financing
5. Trade receivables Reduces finance Requires a proven

finance constraints for track record.
exporters and eases Not suitable for
repayment urgency perishable
from importers. products.

Can be cheaper
Is most suitable for
than bank loan large transactions.
alternatives.

Is used for importexport transactions

by companies for
major
commodities.
Increasingly used
for input suppliers,
equipment dealers
and major
commodities.
6. Factoring

Provides a means
of capital for
operations.
Facilitates inter-
national business
and finance by
passing collection
risk to a third
party factor.
Complex and

requires a factoring
agency, which is
only an option for
some countries
and commodities.
Lack of knowledge
and interest by
financial markets.
Less common but

is growing in use
in agriculture for
processors and
input suppliers
where product
flows and accounts
are stable.
7. Forfaiting

Like factoring, it

frees up capital to
be used elsewhere
in the business
and takes care of
collection risks
and costs.
Can be selectively
used for specific
accounts.
Forfaiting requires
selling the
accounts at a
discount.

Complex and
requires the
presence of
specialized
agencies.
Less common but

similar to
factoring.
Invoice
instruments are
negotiable but
complex, limiting
their application
potential.
C. Physical asset collateralization

8. Warehouse
Uses inventory as Commodity traded

receipts collateral to must be well
increase access to standardized by
financing. type, grade and

Where organization quality.

and trust are built, Increases costs.
can also work on a Often requires
less formal basis special legislation.
without the official
WR legislation in
place.

Common and used

at all levels with
high interest and
growth potential.
Currently is used
for durable
commodities but
with increased
processing and
improved storage,
the range of use
can expand.
9. Repurchase
Can reduce

agreements financial costs and

(repos) has proven success-
ful in selected
commodities with
well functioning
commodity
exchanges.

Limited potential
in near future and
used infrequently
by exporters for
some commodities.
Complex and

requires
commodities to be
stored with
accredited
collateral managers
and requires
commodity
exchanges.

Instrument
Benefits
10. Financial leasing

(lease-purchase)

Limitations
Allows more loan

security and ease
of asset
repossession in
case of default.

Especially good
where legal system
for loan collection
is weak.

Often tax benefits.
Requires
High potential use
coordination of for equipment if
seller, buyer and legislation allows.
financier.
Only feasible for
medium to longterm purchases of
non-perishables.
Often requires
insurance.
D. Risk mitigation products

11. Insurance

Reduces risk for

Costly, requiring

all parties in subsidy, when
value chain. applied to
Commonly used agricultural
and easily applied production.

for fire, vehicles, Insufficient data
health and death limits weather
insurance. indexing use in
Crop and livestock insurance.
insurance is
increasing.
High interest by
many donors and
governments
increasing use.
Growth without
subsidies will be
modest for
production
insurance until
sufficient risk data
is available.
12. Forward

contracts

Companies can
Requires reliable

hedge price risk, market information.
thus lowering
Commodity traded
financial risk and must be well
cost. standardized by

Can be used as type, grade and
collateral for quality.
borrowing.
Not dependent
upon commodity
exchanges.
Benefits can flow
though chain when
one party forward
contracts and can
offer forward or
fixed prices to
others.
Frequently used by
larger companies
and for major
commodities.
Potential to
increase
significantly
wherever reliable
market information
is available.
13. Futures
Used globally in Commodity traded
agricultural must be well
commodities to standardized by
hedge risk. type, grade and

Futures serve as quality.
price benchmarks Requires a well
for reference trade. organized futures
market.

Growing use and

potential in
countries with
functioning
commodity
exchanges.
Use is limited to
large producers,
processors and
marketing
companies.

Instrument

Benefits
Limitations
99
F. Financial enhancements
14. Securitization

instruments

Potential to reach
lower-cost capital
market funding

where homogeneous
pooling is possible.
Successfully used
in microfinance.
Costly and complex

to set up.
Adversely affected
by securitization
problems from the
sub-prime financial
crisis.
Limited potential
for agricultural
value chain
investments of
similar tenor and
cash flow.
15. Loan guarantees

Finance risk
Costly and often

reduced and/or subsidized in
the business agriculture.
venture creates
Can reduce lender
more access for responsibility and
funding. accountability.
Can facilitate
investment needed
in a value chain.
Occasionally used
as incentive for
stimulating capital
flows to
infrastructure, new
markets and
exports and
occasionally
production.
16. Joint venture

Provides equity
Hard to attract

finance capital and suitable investors
borrowing capacity. of common vision.

Reduces financial Dilutes investor

leverage risk of returns.
investors.
Hard for small

Often brings producers to
expertise and/or participate.
markets.

Growing potential
in globalizing
world.
Strategic
partnership,
including public
and private, is
increasingly
important in value
chains.
Introduction to Case Studies

Chapter 4 describes and Table 4.6 summarizes the many instruments that are
available in value chain financing. Some of them require relatively high levels
of sophistication, chain integration and/or enabling conditions, yet, this need
not be the case.
The chapter includes two case studies one from Niger, and a second from
Central America that illustrate the different levels of complexity that may
exist when financial instruments are utilized in the development of a value
chain. The first case study from Niger illustrates an application of one instrument, warehouse receipts, with very small farmers. The second case study
offers a view of a complex, integrated financial and value chain system in
Central America that integrates value chains from the start to finish, involving
many value chain financing products and services.
Case Study 2. Producer-driven financing of farm inputs: Niger informal

inventory credit
Emmanuelle LeCourtois, Agribusiness Development Consultant,FAO,
and Ake Olofsson, Rural Finance Program Officer, FAO
Introduction
Warehouse receipt financing, also called inventory credit, is borrowing money
against a stock of commodities stored in a warehouse as loan guarantee. It is
a common financing mechanism, most often used by larger traders. In addition to the owner of the produce and a lending institution, the mechanism
normally also involves a warehouse manager. The warehouse manager issues
a receipt that is a document that provides proof of ownership of the stored
commodities. Most warehouse receipts are issued in negotiable form, making them eligible as collateral for loans and allowing transfer of ownership
without having to deliver the physical commodity. The mechanism is known
to require special governmental policies and regulations, often involving specialized commodity management agencies, but as shown in this case, can be
applied at the community level.
Various different approaches to inventory credit exist. In most cases, the
operation is a triangular arrangement between a bank, a borrower and a warehouse operator/manager. The borrower can be a trader, a miller, a large farmer
or a group of farmers. A crucial element of inventory credit is the availability
of reliable storage facilities and storage managers/operators. The latter should
not only possess the required infrastructure and technical skills in storage
management and pest control, but should also have business skills and be independent from political pressure, which will provide a reasonable guarantee
of the integrity of the stocks.
Inventory credit is seldom used directly by producers. This case study shows
how it can be applied successfully in a relatively informal manner by building
upon the capacity of producer organizations and local financial institutions.
Background
In 1999, Food and Agriculture Organization of the United Nations (FAO),
through its project Promotion of the Use of Agricultural Inputs by Producer
Organizations, developed and introduced an inventory credit model (crdit
warrant) in Niger in which farmers, through their associations, obtain shortterm credit from local financial institutions by storing part of their harvest as a
guarantee for a loan. The immediate objective was to respond to the lack of access to short-term credit for the purchase of agricultural inputs, mainly fertilizers. Today, the model has gained a widespread recognition and is considered
by farmers organizations, financial institutions and development partners
alike, as an effective tool that can help improve food security and thereby also
reduce poverty in rural areas.
101
Small-scale producers in Niger usually lack assets and financial resources

and, in order to satisfy immediate cash needs, often have to sell off their produce immediately after harvest. Sales made at harvest, when prices normally
are at their lowest, means that they receive less revenue, which in turn impedes on their capacity to purchase inputs, especially high quality fertilizers
and seeds needed for the next cropping season. Fixed assets being the main
form of collateral acceptable to banks, farmers are normally not able to obtain
seasonal credit that would help them purchase the required inputs. The soil in
Niger being generally poor and the country being regularly struck by drought,
means that appropriate use of quality inputs is particularly important in order
to increase agricultural production.
A cycle of poverty in Niger is shown in Figure 4.10. In order to break this
vicious circle of low yields, low output prices, low revenues and insufficient
use of inputs, and in the extension also to improve the local food security
situation, the project contemplated a mechanism whereby credit could be
obtained against the deposit of agricultural produce likely to increase substantially in value over a short period of time. The repayment capacity of the
farmers would thus be linked with the marketing and sale of agricultural produce at a time when prices were more advantageous for the farmers.
The development of the inventory credit model was closely linked to, and
also dependent upon, other activities, in particular the organization of farmers into producer associations in order to offer them a stronger position when
negotiating price and quantity with input suppliers and the promotion of a
correct use of fertilizers. The latter was done in close collaboration with the
Poor soil and

rainfall
= low yields
Difficulties to
buy inputs
Low prices
Low income
and assets
Lack of credit
Lack of training
and organization
Figure 4.10 Poverty production cycle
Source: case authors, LeCourtois and Olofsson
Lack of loan
collateral
International Crops Research Institute for the Semi-Arid Tropics (ICRISAT)

that successfully experimented with adequate and, at the same time, affordable doses of fertilizers. FAO provided technical support, essential training and
capacity building to the farmers and their associations and to the participating
local banks.
The development of the inventory credit model originates from the need
to improve and strengthen the stake of producers in the agricultural inputs
value chain. The main objective of the FAO project was to identify and test
innovative mechanisms that would support the promotion of agricultural inputs usage, in particular fertilizers, by farmers and their organizations, and
to establish technical and economic standards that would guarantee the
appropriateness/reproducibility/durability of the application of inputs. This
is to assist the various actors along the value chain in the elaboration of a national level strategy, built in partnership, for improved farm input supply in
support of a more sustainable agriculture. Another objective was to contribute
to reducing poverty and food insecurity in the country by increasing productivity and improving storage facilities.
The project also created a limited number of input stores managed by farmer associations. These input stores would guarantee the availability of quality
inputs at the time they are needed. The sale of inputs is done on a cash basis
since the farmers organizations are not set up for managing sales on credit.
Storage infrastructure, existing or new, was offered to the producer associations as a grant from the government or other development projects. In the
case of construction of new storage facilities, farmer associations contributed
with labour.
The inventory credit model

In Niger, in order to respond to the opportunities and constraints of the
country, the inventory credit model was adapted to be undertaken directly
between farmers associations and local financial institutions. The first step
in this model begins at harvest time, when the farmers associations ask their
members to define the quantities of their produce they would want to deposit
in a warehouse as a guarantee for a bank loan. In some cases, the farmer associations themselves also store their own produce when they have conditions
which permit this. The farmers and their organizations in Niger are able to
store dry and durable products, such as millet, sorghum and beans, and to
a lesser extent can also store some vegetable products such as potatoes and
onions. They are interested in storing products that are subject to seasonal
surplus and that show a positive price evolution over a short period of time.
The next step is for the associations to contact a local financial institution in order to discuss the total loan amount available to them and match
this against the total potential stock. Adjustments are normally needed since
the potential stock often exceeds the financing capacity of the local bank. A
loan agreement is then signed with the bank and the association distributes
103
the total loan among the members in proportion with the relative volume
stored by each farmer. The farmers are responsible to their association and the
association, not the individual farmer, is responsible to the financial institution. This significantly lowers the transaction costs and risk for the financial
institution.
After agreements have been reached, the produce from the association is
deposited in a safe and reliable warehouse or storage space where it remains
during the duration of the loan. Once stored, the financial institution and the
producer association jointly carry out a quality control of both the stock and
the warehouse, making sure that the stock is safe and free from contamination or insects. The warehouse is then closed with two padlocks: one for the
producers organization and one for the bank, so that neither of the parties
can open it without the other one being present. During the period of storage,
the two parties carry out regular controls of the storage facility and the stored
produce.
At the expiration of the loan, the stock is sold at a price higher than that
at the harvest time, thus enabling the borrower to repay his/her outstanding
debt and to make a profit from the operation. Experience shows that stock
value tends to increase by 30 to 40 per cent 4 to 6 months after harvest when
it is released from the warehouse as indicated in Table 4.7.
Similar to the distribution process of the loans, the producer association
acts on behalf of its members and collects repayments from each individual
and transfers them in bulk to the local financial institution. The bank maintains the right to the stock until the settlement of the outstanding debt and
can in theory seize the produce and sell it to a third party. The experiences in
Niger have however shown that many producers who have used parts of their
loans to finance other income generating activities that in turn have rendered
profit, have been able to pay back the loan without having to use the income
from the sale of the stock.
The local banks normally grant credit up to 60 to 80 per cent of stock
value at harvest time (at low prices). Usually, the farmers use the loan to carry
out income generating activities such as petty trade, processing, marketing
of other products, etc. As pointed out earlier, this extra revenue often allows
farmers to reimburse their loans.
Table 4.7 Price increase gained from inventory credit

Year

1
2
3
4
5
November harvest
price (CFA/kg)
Price after six months
Percentage increase
50
50
100
110
150
175
100
245
170
200
250%
100%
145%
55%
33%
Source: FAO (2009)
Current situation
While not yet reaching national levels, the results in Niger show a rapid increase of loans granted, as well as a wealth increase among small-scale farmers
as they use the borrowed money to finance income generating activities. At
the moment, the resources and business capacity of the local financial institutions are very weak which limits them from supporting an expansion of the
system. As with any type of credit, inventory credit also requires financially
secure local banks with a high level of management capacity.
The relationship between the number of beneficiaries and the total number
of rural families, i.e. the penetration rate, went from 3 per cent in 2001 to 5.3
per cent in 2004, involving:
129 local financial institutions;
104,741 clients;
1,970,881 families.
From 1999 to 2006, it can be concluded that:
There has been a strong interest in the use of inventory credit from
producers and their organizations, development projects and local
financial institutions.
The repayment has been excellent with rates reaching 100 per cent.
A lack of resources has prevented local banks from responding fully to
the strong demand for this type of financing mechanism. It is estimated
that only 50 per cent of total loan requests were satisfied.
Interest in inventory credit was very high growing in initial years (1999
to 2003) from zero to CFA 180 million, and then to approximately CFA
1 trillion by 2006. (FAO, 2009)
Implementation of the inventory credit model was based upon a partnership between development organizations (FAO, International Fund for
Agricultural Development (IFAD), and others), ICRISAT, and local financial
institutions. In order to respond to the requirements of a supportive legal
regulatory framework, the monetary authorities, i.e. the Central Bank, were
involved at an early stage of the planning. It is important to note that the
Central Bank has since officially recognized and legally accepted stock of agricultural produce as guarantee for loans by financial institutions.
Results
According to the goals, several results, effects and impacts have been observed.
For the producer and the farmers association, the economic results of the
inventory credit (averaged over several years and different types of products
stored and varied types of additional income generating activities made possible from the loans obtained) have shown a 25 per cent average increase of the
value of the stored produce, a net profit of 8 per cent on the additional income
105
generating activities, i.e. a total increase (net of all costs) of approximately 33

per cent of the capital in 46 months. Other studies also show that on average
20 per cent of the gross margin is being spent on agricultural inputs. On average, 12 per cent of the loans obtained were used to purchase inputs and 16 per
cent of the value of the stored produce was used to purchase inputs. On average, the use of the stored produce consisted of: seeds (29 per cent), to bridge
gaps in food items between harvesting periods (18 per cent), and for sale (53
per cent). Studies carried out by CARE International and ICRISAT further confirm that part of the extra income generated from activities financed with the
inventory credit loans is also used to purchase agricultural inputs.
At the financial level, inventory credit has enabled the local rural financial
institutions to increase their loan portfolio and to reduce their credit risk by
obtaining a tangible guarantee that is easy to divide and to realize, adding to
this the positive effects of solidarity guarantee and lower cost, by grouping
small loans into one for which the farmers associations take responsibility. In
the longer perspective, inventory credit may increase the supply of financial
services to rural households by attracting new financial operators to establish
themselves in the rural areas and by offering more services, in particular savings and deposits as the farm revenues increase. As of 2009, the loans granted
under the inventory credit model have been 100 per cent repaid with interest
without experiencing significant difficulties. This has also been important in
improving the health of the lending portfolios of the rural financial institutions and increases their credibility/eligibility towards the banking sector for
accessing lines of credit for their operations.
Key issues and constraints

The main current constraint in Niger is the limited capacity, both in terms of
resources and management, of the participating local financial institutions.
Expanding the Niger experience by offering additional external resources
could seriously damage, even destroy, the system if the management capacity
of the local financial institutions is not simultaneously increased.
As shown in Figure 4.11, the farmers associations hold a crucial position in
the process. They are the link that allows both collection of produce into one
centralized place and the distribution of the bulk loan from the local financial
institution to the farmers in accordance with the quantities stored by each of
them. It also plays an important role in capacity building and supports the
farmers in their decision making. In deciding what quantities a producer will
store, it is very important that he/she understands the proper financial situation and the mechanisms that regulate the revenues. It is also important for
the individual to understand the concepts of cash-flow and savings and to
forecast the costs, prices, profit margins and self-financing, in order to plan
and take correct decisions.
Producer
organization
storage facility
Farm
Farm
Producer
organization
Local
financial
institution
Farm
Input
suppliers
Financial flows
Product flows
Loan guarantee
Figure 4.11 Inventory credit flow chart

Source: case authors, LeCourtois and Olofsson
Lessons learned
Since its implementation in Niger in 1999, the inventory credit system has
significantly contributed to reduce rural poverty. Because it enables farmers
to increase the use of quality agricultural inputs, the system has resulted in a
significant increase of yields, thereby contributing to food security in the rural
areas. In Niger, inventory credit is thus playing a key role in the fulfilment of
the United Nations Millennium Development Goal No. 1 (eradicate extreme
poverty and hunger).
The viability of the system, a guarantee for its duration and development,
depends on the interest and advantages that the stakeholders (farmers and
their associations, rural financial institutions, development projects, NGOs,
government, donors) find therein (profit, new types of loan guarantees, food
security, securitization/finance of agricultural cycles, release from debt/impoverishment, etc.). It is also determined by the willingness, commitment and
the intrinsic ability of these actors to reinforce their own capacity and that of
others in order to improve the professionalism at all levels.
In summary, the following lessons for application can be drawn from the
experience in Niger:
Establishing reliable producer organizations and building their capacity
to become important actors in the input supply and output marketing
chains is the foundation for success.
Working with local financial institutions who are close to farmers
favours feelings of partnership and ownership of the model.
Well managed resources and strong local financial institutions are key
to expansion.
Uncontrolled food aid may distort market prices on stored produce and
lower the repayment capacity of the farmers.
107
Longer-term impact on food security is possible but studies would need

to be carried out in order to determine the optimal levels of stored produce at local, national and regional levels and the possibilities of enabling efficient transfer of produce from surplus to deficit areas.
Inventory credit is one way of using the value chain for offering shortterm credit; it is not a panacea for the lack of financial services in rural
areas. Longer term loans for investment in agriculture would still require other systems.
The development process takes time; development agencies and policymakers tend to want to move too fast in extending the model, thereby
endangering its existence and durability.
Replication
Replication of the system in other regions and countries requires:
Understanding the setting, the organizations and the market conditions and trends.
Agricultural products that can be stored for a period of 6 to 9 months
without deterioration of quality.
A strong, positive price evolution on the market (local, national or regional) from harvest time to 6 to 12 months later.
The existence of adequate warehouse infrastructures.
The capacity of farmers to produce a surplus of agricultural products
that can be subject to storage.
A sufficient level of organization among producers and measures to reinforce it.
A correct assessment of the inputs procurement value chain, and in
particular fertilizers, in terms of availability, quality and price, as well
as the identification of support measures that would allow farmers to
manage their use and distribution more efficiently.
Because the inventory credit inventory credit model has shown its effectiveness in reducing poverty in rural areas in Niger, it has been selected as an
example of good practice being implemented at a regional level in Niger,
Burkina Faso, Mali and Senegal under a FAO/Belgium multilateral cooperation
programme. The experiences in Niger also continue to expand and inventory
credit forms part of a programme focusing on the establishment of boutiques
dintrants, or farm input stores, run by the farmers associations, thus building
on the experiences of the previous project in this area.
Case references
Coulter, J. and Shepherd, A. (1995) Inventory credit: an approach to developing agricultural markets, FAO Agricultural Services Bulletin No. 120, Rome.
FAO (2009) Project GCP/NER/041/BEL, http://www.fao.org/landandwater/
fieldpro/niger/default_fr.htm [accessed 4 October 2009].
Case Study 3. LAFISE Group: integrated financial instruments and

value chain services
Enrique Zamora, General Manager of LAFISE Agropecuaria, and
Calvin Miller
Introduction
The LAFISE Group in Central America plays a role at every stage of the value
chain through an integrated system of financial services and agricultural value
chain addition, including processing, commodity management, and national
and export marketing. LAFISE, headquartered in Nicaragua has a Bancentro
banking network comprised of banks and financial services in 10 countries
in Latin America and the United States, and four associated group companies
Agropecuaria LAFISE (agriculture), Almacenadora LAFISE (storage and commodity management), Seguros LAFISE (insurance) and LAFISE Trade. It also
works directly with governmental organizations and NGOs in order to provide
the services needed to meet the needs of the participants in the value chain,
with a special emphasis given to small-scale farmers.
Overview
Nicaragua is an agricultural country with the second lowest per capita income
level in Latin America. With a history of conflict, wide political shifts and
interference, and an unstable currency, investment and lending through conventional sources has been low. This is much more aggravated in agriculture
where rural infrastructure is weak, systemic climatic risks such as hurricanes
are high and political interference in prices and interest rates have been common. In addition, agricultural producers operate on a small scale without
strong organizations.
Nicaragua has the potential to be highly competitive in the marketplace
with a number of agricultural chains, including fruit, coffee, basic grains and
milk and livestock. With the opening of free trade agreements in the region,
both the opportunity for growth and the increased threat of international
competition heightened the need to create effective value chains in the agricultural sector of Nicaragua. However, in order to do so, it required organization, training and investment at multiple levels. Critical areas requiring
attention were:

dispersed production with small volumes;

poor product handling and post-harvest practices;
need for transport, storage, processing and packaging;
lack of and informality of markets, without price and market information;
price distortions;
need for financing at all levels.
109
Agricultural chain cost distribution

US$/kg
100%
2.20
30%
Retailer 30%
1.55
70%
Wholesaler 27%
Rural trader 10%
43%
33%
Agriculturist 33%
0 =
Intermediation
27%
10%
0.96
0.72
33%
0
0.00
33%
Inputs
Labour
Finance
Profit/loss
Figure 4.12 Traditional cost structure in Nicaragua

Source: case authors, Zamora and Miller
As shown in Figure 4.12, the traditional intermediation expenses and costs

of financing in Nicaragua were too high as the process was inefficient and
returns to the farmers were low. Under such conditions, LAFISE realized that
directly financing smallholder farmers in the existing system of production
and marketing was not viable the chains must be organized, shortened and
modernized.
LAFISE was well placed to provide comprehensive support to the agricultural value chain. With financial resources from its Bancentro banking
network, established in Nicaragua in 1991, it had both the financing resources and an international presence with considerable experience in capital
markets, international finance and other commercial banking instruments.
With the creation of an agribusiness company, Agropecuaria LAFISE, it could
begin to both improve and increase its lending to the sector, but also profitably begin to diversify its activities, its direct knowledge of specific value
chains and open the door to provision of additional financial services.
Working directly with small-scale producers requires more than financing and market linkages. Agropecuaria LAFISE was quick to understand the
importance of collaboration with both governmental and NGOs to support
their work in providing the technical and organizational training and capacity building needed to be able to meet the requirements of the firm. Formal
and/or informal collaborative agreements are developed with the social and/
or technical organizations and universities in a region or sector for provision
of services complementary to those of the agricultural company.
For mutual benefit, the goal of LAFISE is to convert traditional agricultural
producers into rural entrepreneurs who have the capacity and commitment

Agropecuaria
LAFISE
identification
of producer
organizations
Agropecuaria
LAFISE
partnership
design and
support
Agropecuaria
LAFISE
recovery
Almacenadora
LAFISE
market
development
NGO/Government
organizational support
Agropecuaria
LAFISE
partnership
coordination/
ongoing pIanning
BANCENTRO
fund
management
NGO/
Government
technical
support
LAFISE Partnership Model

of Intervention
Agropecuaria
LAFISE
storage,
processing
Technical
oversight
and quality
certification
Almacenadora
LAFISE
storage,
warehouse
receipts
Seguros
LAFISE
transport,
fire
Figure 4.13 LAFISE Group partner model of intervention

Source: case authors, Zamora and Miller
of market oriented, commercial agriculture. In doing so, currently with over

5,000 small-scale producers, it benefits both the farmers and its companies
with higher returns, increased investment and more security in each others
operations. By working together in all phases of production, marketing and
financing, it strives to shorten the chain between growers and consumers and
achieve its motto of a winwin relationship. LAFISE Group support begins as
soon as farmers receive their production loans and continues until they have
collected the proceeds on their overseas product sales. It includes access to the
office in Miami, which is responsible for visiting trade fairs and identifying
buyers. As soon as a good potential buyer has been identified, paperwork is
simple. The presence of Agropecuaria LAFISE helps to assure the buyer as to
product quality and speeds up operations and safeguards collection for the
seller.
As shown in Figure 4.13, the principal company for agricultural value
chains is the Agropecuaria LAFISE. It plays the central role as initiator, organizer and coordinator of the producers throughout the process, including that
of technical assistance, value addition and payment. This company works in
FARMER
ORGANIZATION
Value chain stage

Crop
production
Service provider
Service provided
LAFISE Agribusiness
Credit screening
Technical assistance and TA
brokerage with NGOs
Quality certification
BANCENTRO
Credit provision
Fiduciary fund management
Harvest
LAFISE Insurance Co.
111
Insurance (transport, fire, life, etc.)
Collection
LAFISE Agribusiness
Crop collection in partnership

with farmer organizations
Value adding through processing
Storage
LAFISE Warehouse
Manager Co.
Warehouse certification
Warehouse receipt management
LAFISE GROUP
Processing
Storage
BANCENTRO and
LAFISE Insurance
Marketing
Warehouse receipt finance

Warehouse insurance
LAFISE Trade
Identification of markets and

buyers
Product placement (national
and export
LAFISE Group
Network (10 countries)
Payment collection
Producer payments and loan
collection
Figure 4.14 LAFISE Group integrated service model

Source: case authors Zamorra and Miller
multiple chains, including dairy, beans, plantains, honey and coffee. These
include value chains in agriculture, livestock and agro-industry. In some agricultural chains, such as dairy, it offers the whole range of services from provision of inputs, collection, processing, packaging, wholesaling and retailing. In
pineapples its value added includes exporting and selling through its partner
company LAFISE Trade. In such chains, it is active in all aspects except for production. Through its partners it is also active with microenterprises, housing,
commerce and other non-agricultural activities which also can benefit those
with whom it works in the agricultural chains.
As shown in Figure 4.14, there are many specific service provision aspects
of the work. The LAFISE Group is involved in undertaking the processes at
all stages of the post-harvest and value addition, but the farmers, with their
organizations, and often with technical assistance support from partnering
development organizations, are responsible for the production and harvest.
LAFISE Group operates many different kinds of support arrangements for

agricultural value chains, from an array of financial products (credit and otherwise) to technical assistance and marketing services. Some of these are listed
below:
1. Commodity Management and Warehousing. LAFISE owns a warehouse
operation in Nicaragua where farmers can store their crops. They can
either store their full crop or receive a down payment for a maximum
of 70 per cent of the value, which is paid within two days of delivery.
As an authorized and supervised warehouse management company,
LAFISE is responsible for quality and control of the produce in storage
and in transit.
2. Agricultural Commodities Exchange. LAFISE has a seat on the agricultural
commodity exchanges in various countries of Central America. Because
these exchanges are certified by the ministries of the countries, many
producers, especially cooperatives, can use them to handle domestic
marketing of their products. Producers have price information to be
able to sell their products for the best price, and buyers know that they
are acquiring products that uphold quality standards and that have
both a certificate of origin and a quality certificate.
3. Central American payment system. Exporters have access to the network
of offices in all the countries of the region and the assurance of stable
currency conversion. As a result, they enjoy great flexibility and efficiency for receiving payment on products they sell in the region.
4. Investment fund. LAFISE handles an investment fund of US$70 million
with resources from the Inter-American Development Bank, a Norwegian investor and other European sources of financing to support smallscale businesses throughout Central America.
5. Managed Funds. The bank manages funds for 21 national and international organizations. Because of Nicaraguas banking regulations, it is
very expensive to lend money to farmers with little collateral. Therefore, the LAFISE Group began a fund-management service for other
organizations and programmes that target small-scale farmers.
6. Commodity exchange marketing support. Through strategic alliances
with USAID, Michigan State University, Inter-American Institute for
Cooperation on Agriculture, Nicaraguas Instituto de Tecnologa Agropecuaria and the Commodities Exchange, LAFISE works with producers
of various products to sell their crop through the agricultural commodities exchange.
7. Loans through food processing companies. Bancentro in Nicaragua has begun to place loans through food processing companies or consolidators,
having encountered considerable difficulty trying to reach small-scale
farmers directly. For example, using this value chain approach, the milk
collection plant serves as an intermediary for its dairy producers granting loans for purchase of inputs and animals.
113
8. Technical Assistance. LAFISE Agropecuaria provides technical assistance

directly and indirectly through facilitation of such services through
NGO and governmental agencies. It directly provides technical assistance and training on specific areas such as export management and
financial capacity building.
9. Alternative financing. Through Bancentro it provides an array of additional value chain financing services such as leasing for the purchase of
equipment and machinery, asset pledging (chattel bonds or warrants),
guarantee trusts, discount factoring and export finance.
10. Insurance. Through Seguros, LAFISE Group not only offers insurance for
both the commodities that pass through the value chain, but also the
range of insurance products needed by the clients and their businesses.
11. Export. In selected value chains, the produce is processed by Agropecuaria LAFISE and exported either within the region or to the United
States.
Lessons learned
LAFISE has proven that it can be successful in working in an integrated structure throughout value chains. It has been able to grow in a relatively fast fashion from banking to multiple services. It has incorporated other value chains
in step-wise fashion as it is able to ensure that it has the capacity, resources
and, most importantly, a competitive market in which to operate.
A second important lesson in the LAFISE model is its acknowledgement
of the value of partners. By working inclusively through partnering alliances
with organizations providing technical assistance and/or other services, it has
been able to incorporate many small-scale producers that otherwise would
have been difficult to reach directly. In the same manner, LAFISE partners
with other agribusinesses and actively works with organized producers in the
Association of Exporters.
Challenges and opportunities

The most difficult challenge facing the LAFISE Group has been neither the
competitive marketplace nor the lack of capacity of farmers or other difficulties
within chain activities; rather it has and continues to struggle with the political
uncertainty of the country, with its pressures to regulate prices, markets and/or
interest rates. While value chain finance, with its linked and embedded services,
is less susceptible to political manoeuvres, operating in such an environment is
nevertheless much more challenging.
LAFISE is a model for consideration in other countries and regions. Few
leaders have had the vision and the substantial resources to put into place
the integrated model of LAFISE Group, yet through linkages and partnerships
similar integrated models are possible. The model is also similar in many
respects to that shown in India with the agricultural service centres, many of
which are similarly initiated by a bank.
Case references
Angulo, J.E. (2007) Reflexiones acerca del financiamiento de cadenas agrcolas
de valor, Documento de Trabajo 26, RUTA, San Jos, Costa Rica.
Zamora, E., (2006) presentation at the Latin American Conference.
Zamora, E. (2008) presentation at the Asia International Conference.
Website: www.lafise.com [accessed 4 October 2009].
CHAPTER 5
Innovations
Value chain finance has been rapidly evolving from its roots in relationshipbased credit, to highly structured finance enabled by the integration of the
chain and formalization of its processes. From basic input supplier credit provided to a known producer, to mechanisms such as warehouse receipts, the
complexity and potential have grown together, as exemplified by the approaches and instruments described so far. There have been innovations in financing
approaches, and technologies, and new applications of existing technologies
that support chain development, and stimulate financial products and process
development. Finally, there have been innovations in ways of strengthening
enabling environments and support service provision. Innovation has played
a critical role in the strengthening and use of value chain finance.
Value chain innovations

Advances in value chain knowledge and experience have taken place in parallel
with the evolution of financial services, although the two have often developed as separate processes. In particular, an agricultural value chain is no longer
viewed as a single channel that tracks a product from a farmer to a market, but
as a complex chain that is impacted by relationships within the chain, enabling
environments, availability of appropriate services and inputs from technology
to raw materials, and most importantly, changing market demand.
Figure 5.1 illustrates the various structures and relationships that are understood to impact value chain analysis and development today. The arrows within
the chain representing flows of product as well as information and services.
Value chain development practitioners and theorists have contributed significant learning regarding the basic elements of the chain, as well as the complex relationships between businesses, the viability of those businesses, the
constraints and bottlenecks in the functioning of the chain, and the potential
sustainable market-based solutions that can strengthen the chains success. This
means that value chain practice involves a range of next generation approaches,
methods and tools such as producer group formation, association development,
lobbying and advocacy, and stakeholder mediation, along with fundamental
service development such as extension services, standards training, input supplies, transportation, market information, post-harvest handling and so on.
Furthermore, it is recognized that one value chain does not sit in isolation, but is part of a sub-sector or even a global industry that is generally comprised of multiple value chains. The sub-sector might incorporate a
range of products reaching different markets, crossovers between the chains,
Final consumers
Retailers
Enabling
Environment
Business
environment
(regulatory, govt)
Socio-economic
context (cultural)
Intermediaries*
Producers
Embedded services
Value chain
Support products and

services including
finance, market
linkages and transport
Input suppliers
* Intermediaries encompass buyers

and sellers, including processors.
Figure 5.1 A stylized value chain

Source: Miehlbradt and Jones (2007)
and activities in one channel that impact another channel. For example, the
provision of processed milk to domestic urban consumers through a value
chain in Bangladesh that integrates farmers, collection agents, processors,
packagers and retailers, can have an impact on and be impacted by both
the direct sale of raw milk to rural consumers and the distribution of imported dry milk throughout the country. This complexity of multiple chains
in a sub-sector is illustrated in a simplified form in Figure 5.2 depicting an
agricultural sub-sector where critical inputs that affect the various chains are
Poor, rural
consumer
Weekly market
Middle/upper
income consumer
Wholesalers/
retailers
Speciality and
export market
Market agents
Exporter/
grower/
consolidator
Smallholder farmers
Local seeds
Certified seeds
and fertilizer
Figure 5.2 Inter-connected value chains in a sub-sector

Source: Jones (2009)
Speciality seeds
INNOVATIONS
117
appropriate seeds and fertilizers. Innovation in value chain development is

wide ranging, and many publications are available on this topic (see for example, Jones, 2009 and Harper, 2008).
It is useful, however, to distinguish between value chain structures and
processes that directly encourage financing and those that do so indirectly.
In the case of direct effect, a financier will examine the mechanisms and relationships to determine if the clients are creditworthy. For example, a lender
will be concerned with market demand, relationships of borrowers to that
market demand or to those that can access markets, strength of the specific
value chain businesses, and overall functioning of the value chain. In the case
of indirect influences, underlying factors that support the development of a
healthy value chain are extension services, appropriate inputs, market information, producer groups, and industry associations and so on.
In summary, important value chain innovations in the agricultural sector
that support the financing of the chain are:
The development of models for market access such as contract farming,

lead firm buyers, vertically integrated chains, networks of producers and
buyers, and various niche markets, including organics and fair-trade.
Assessing relationships through a range of analysis techniques: for example, value chain drivers, linkages, power relationships, and value
chain control and governance.
Development of commodity management companies with end-to-end
service support options for ensuring compliance, security and quality,
as well as facilitating finance.
Commodity exchange development with rapid and accessible prices
and trade opportunities for facilitating trade, risk management and opportunities for use of new financial instruments.
The promotion of industry competitiveness through the formation of
member-led industry associations, market assessment and development
strategies, promotional tools, branding, product life cycle and product
differentiation.
Financial innovations
Innovations in value chain finance have been largely driven by the developments in value chains themselves such as integration and formalization
of relationships, the globalization of agricultural food chains, the attention
from donors, facilitators and others on the role that small farmers can play
in these chains, and the willingness of financiers to look at new ways to support them. Further, with the growth of microfinance, social investment, and
other forms of non-conventional funding, creative forms of financing are being developed, and existing financial institutions have become more flexible
and resourceful. These efforts are supported by donors who frequently offer
loans or grants, guarantees, capacity building and other forms of assistance
that can aid financial institutions in high risk, low collateral lending. With the
deepening concerns around poverty alleviation along with the growing food
crisis and the realization that even very small farmers can make an important
contribution to global food security, it is anticipated that value chain development and finance will continue to change and progress. Adaptation will spur
increased refinements and innovation in value chain financing, leading to
new products and services that are responsive to the situation and context,
and continue to mitigate risk for the lending institutions. Many of the innovations noted here are in their infancy, and continued streamlining and
enhancements are expected.
The willingness of financial institutions to examine value chain relationships and make financing decisions based on third-party agreements rather
than conventional collateral is one of the most significant innovations in expanding agricultural finance to poorer farmers and agro-enterprises. Whether
it is an understood arrangement with a buyer like Hortifruti, a formal contract
with a facilitator such as TechnoServe, or vertical integration with a global
player as with Starbucks, direct lending to farmers can be improved because
of these linkages. Financiers become more confident in the face of the secure
markets offered by the lead firms that drive the value chain and ensure an outlet for products. Furthermore, this has led to third-party lending where banking institutions will provide loans to businesses higher in the chain such as
processors knowing that the firm will lend to trusted suppliers. This reduces
the due diligence and operational costs of lending on the part of the bank,
while also mitigating their own risk.
The collateralization of agricultural outputs, and the formalization of their
value, is another significant innovation in value chain finance. With the
growth of managed warehouses both low-tech field warehouses and sophisticated supply chain management establishments lenders gain confidence
in the preservation of goods, and their sustained or increased value over time.
This is especially helpful to farmers and others in the chain that become able
to maintain ownership beyond the high season, and sell products when markets are not glutted and prices are more favourable. This leads to higher returns and enhanced ability to repay loans and be profitable, with instruments
like warehouse receipts and forward contracting being innovated as a result
of this trend.
The recognition that value chain businesses, particularly smallholder farmers, have critical financing needs beyond credit has been a noteworthy development in value chain financing. The potential to offer a range of financial
services is bolstered by the strength of value chains, and the spread of risk
across large numbers of producers and multiple chains. Innovations in weather, crop and health insurance have helped increase their use for risk reduction,
including smallholder farmers, enabling them to push the envelope on productivity and cash-cropping.
Although well established as a financing approach for the unbankable in
general, microfinance has begun to innovate ways to become more active in
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agricultural lending. Traditionally, microfinance institutions (MFIs) have focused lending on low-risk, fast-return businesses such as petty trading, but as
competition in the industry has increased, there has been greater motivation
to look at higher risk lending to farmers and agro-enterprises. MFIs have begun
to work with farmers groups and agribusinesses in the chain to understand
their needs and risks, and then to adapt loan terms, collateral and repayment
mechanisms to match the value chain and demand. In addition to adaptation
of existing loan products, MFIs have also adopted new financing instruments,
such as leasing arrangements and financing of warehouse receipts, and savings products to help smooth incomes, accrue assets for times of need, and to
reinvest into their businesses.
Price risk reduction strategies and instruments have also undergone extensive innovations with highly structured mechanisms such as national spot
and future exchanges. One significant innovation is the use of Internet and
cell phone applications to be able to not only share information on current
and futures prices much more broadly, even among small producers, but also
allow them to make use of that information for making forward contract sales.
This in turn allows the option to borrow funds against the sales contracts and
also to hedge risk of price reductions at the time of harvest or delivery of the
products.
Financing of supporting services to agricultural value chains from input
and equipment suppliers to extension services and telecommunications has
also evolved. With a firm understanding of the value chain and all its interconnectedness, indirect financing to the chain through support services and
products, and even partial grants, offers interesting options for value chain
growth. For example, the use of vouchers to stimulate equipment supply chains
(e.g. micro-irrigation technologies) are being trialled in Africa, and offer significant potential for increased productivity and profitability of businesses in
the chain. Innovation in financing of supporting services also extends to the
funding of suppliers who can provide non-cash disbursals of needed inputs to
farmers, repayable in-kind or cash at the time of sale. In some cases, the input
supplier and the buyer are one and the same, leading to tighter integration of
the chain and more secure repayment.
Timeliness and low transaction costs for accessing finance are critical areas
of financing to agriculture. The Kisan credit card (KCC) in India, shown in
Box 5.1 is an example of financial product innovation wherein the growers
can readily access financing from the financial system (commercial banks, rural banks and cooperative banks) and are covered both under crop insurance
and under health insurance at a nominal premium paid by the lender as loan
component.
A holistic household view of financing is creating new opportunities for
lenders and borrowers. Although there has been a greater emphasis on the
farm as a business, and the need for households to separate farm income and
expenses from family expenditures, there is also an enhanced understanding
of household income sources. In developing countries, a loan made to an
Box 5.1 Kisan credit cards, India

Credit products, like the Kisan (farmer) credit cards (KCC) in India, provide more accessible production, investment and consumption credit to farmers. The KCC, which has been
in operation since 1998, is implemented across the country by all public sector commercial banks, regional rural banks and cooperative banks, with an outreach of over 83 million
cards through March 2009 and a credit limit of US$ 8 billion. By providing both timely
access to loans as well as crop and health insurance, it reduces risk of not only the producers but also their suppliers and buyers. Similar products like Grameen cards, in vogue for
rural people, and Bhumiheen cards, for landless farmers/share croppers, have also been
developed and introduced in the market.
Source: Balakrishnan (2007); NABARD (2009)
individual is frequently a loan to an extended family with diverse sources of

income. So, although a loan might ostensibly be made to purchase seeds and
fertilizers, repayment of that loan might come from a range of sources such as
salaried or daily employment and from non-agricultural enterprise activities
such as trading and small-scale manufacturing. Household income is taken
into consideration in assessing the risk of lending, and offers possibilities to
families that might otherwise not be considered creditworthy.
Technological innovations
New technologies and their innovative applications have supported and
spurred the development of finance in general and value chain finance in
particular. From the use of management information systems (MIS) to monitor stored goods in a network of warehouses, to the accessing of remittances through mobile phones, the proliferation of technology has enabled the
more rapid development of affordable and accessible finance in agriculture.
Enabling technologies have been well documented elsewhere, so this section
focuses on the trends and specific applications that have been particularly
significant to recent developments in agricultural value chain finance.
The need for technological innovations has largely been driven by issues of
accessibility. Despite the global expansion of financial services, approximately
two-thirds of the population in developing countries remains unbanked or
under-banked. Since the average cost of credit in these countries is relatively
high, efficiencies stand to be gained through the application and adaptation
of technological solutions, often through non-traditional and non-banking
approaches such as value chains or remittances.
Management systems
Management information systems (MIS), along with other software packages
and applications, are critical in managing and analysing data and generating
reports relevant to value chain finance. In terms of the value chain proper,
MIS have supported the development and documentation of sophisticated
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Box 5.2 Integrated information management, BASIX, India

BASIX India is promoting the use of information management technologies in its holistic
approach to development. Their initiatives and experience focus on providing a package
of livelihood services that are both financial and agricultural. BASIX makes extensive use
of information and communication technology in its integration of microfinance, business development and institutional development services which form part of its livelihood
promotion programme. This includes value chain finance and marketing services, such as
warehousing, forward contracts and insurance, as well as loans and training.
Source: Ramana (2007a)
processes such as traceability of agricultural products, tracking of warehouse

goods, and consolidation of products for sale. With reference to finance, MIS
allow portfolio and client management, structured finance instruments, commodity trading, analysis of risk, and fraud detection and control. Thus, MIS
provide numerous facilities that increase access to needed information, support sound decision-making that encompasses analysis of client risk, product
security, potential for trade and profitability, and so on.
A second aspect of MIS that is significant is the increasing level of sophistication of the financial and portfolio management systems of both financial
and non-financial institutions to track loans, investments and cash, and inkind accounts receivable. With sufficient back-office systems of this nature,
many of the value chain finance tools and processes can now be applied.
Networks and exchanges

Developments in Internet access along with reach into rural areas have enabled the creation of networks and exchanges that benefit agricultural value
chains. This happens in two main ways: the delivery of critical information to
farming communities such as market demand, pricing and technical advice;
and the creation of exchanges that support the trade of agricultural outputs.
The example from India in Box 5.3, describes an Internet application that
Box 5.3 Electronic network for fruit and vegetable trade, India
India is the worlds second largest producer of fruits and vegetables. With the emergence
of futures commodity exchanges in India and a significant increase in telecommunications
and Internet access in rural India, the conditions for an electronic exchange became possible to better enable and connect large numbers of buyers and sellers. The Safal National
Exchange (SNX) was developed through a joint venture between Mother Dairy Fruit and Vegetable Private Limited (MDFPL), a wholly-owned subsidiary of the National Dairy Development Board of India (NDDB), Multi-Commodity Exchange of India Ltd (MCX) and Financial
Technologies India Ltd (FTIL). The exchange provides on-line price information to farmers
who then plant and sell accordingly. The trading of standardized, graded produce through
the exchange catalyses agribusiness activity, processing and export, due to the assurance
of an uninterrupted supply of raw materials. Loans, as needed, which are linked to recovery,
can be structured through banks and guaranteed with the futures contracts.
Source: Natarajan (2007)
serves both as an information network for farmers as well as an electronic

exchange for trading of fruits and vegetables.
Mobile phones and mobile banking

Luis Corrales of the Banco Nacional de Costa Rica observed, We hear much
talk these days about a gap between the info-rich and the info-poor, this
is why Costa Ricas low penetration of Internet is a critical issue. (Corrales,
2006). Indeed, Internet, mobile phones and handheld devices have been important for the adaptation of new opportunities in value chain financing. As
described in Box 5.4, India, with growing rural Internet capacity, and Kenya,
with cell phones, are among those countries leading the way for such use in
agriculture and agricultural finance.
In the case of implementing MIS solutions, mobile phone and handheld devices may be used at the point of data collection, and set up to transfer timely
information to the larger MIS. For example, in traceability applications, field
agents can track individual farmers, capture the data on a handheld device
and remotely transfer the information to a central database. In turn, this central database can track availability of compliant crops and monitor expected
volumes and time of market availability. In the other direction, information
can be pushed out from an MIS to mobile phones and handheld devices. For
example, farmers may be set up to receive alerts on changing prices for commodities and preferred market locations or buyers.
In Case 4 described at the end of this chapter, DrumNet, a project of Pride
Africa in Kenya, combines mobile phones and a dedicated management information system. The MIS, developed and managed by DrumNet, captures and
processes data on financing and transactions between players: farmer groups
and banks, farmers and buyers, farmers and suppliers. The project works with
Equity Bank and M-Pesa, a wallet service offered by Safaricom.
The fast-growing popularity of technology for use in financial transactions
is evident in Kenya where the M-Pesa service has attracted 7 million registered
users who are making US$2 million a day in transfers in a country where fewer
Box 5.4 E-choupal information centres, India
ITC introduced the concept of e-choupal, a network of IT enabled agriculture information
and resource centres. Originally created for more efficient procurement of agricultural
commodities in India, it has become a business platform from which a host of products
and services are provided, linking the farmer to global markets, building village-level capabilities and creating economic and social value for stakeholders. Some of the real-time
benefits include the enhanced decision-making power of farmers, as they know the sale
price for the produce even before it leaves the village. This is done through online realtime information which bundles knowledge and information with the transactions. This
knowledge is free of cost and once established in the villages or through mobile Internet
kiosks is able to serve large numbers of farmers not only with price information, but also
by providing a facility to forward contract and mitigate price risks.
Source: E-choupal (2008)
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than 4 million bank accounts exist (CGAP, 2009). Users can exchange cash at
a retail agent in return for an electronic record of the transaction value. This
virtual account is stored on the server of a non-bank service provider, such as a
mobile network operator or an issuer of stored-value cards. The use of cellular
devices can play a central role in both financial and value chain activities, as
when mobile phones are used for remittance transfers, loan repayments, and
other financial transactions with important identification data stored on the
phone. This innovation goes beyond the hardware itself, and includes new
kinds of relationships between banks, clients, agribusinesses and communication companies.
Point-of-sale outlets at markets or farm service centres, use of smart cards,
and Internet outlets can also be used to facilitate financial transactions for
input purchases and commodity sales. An example of such an application is
shown in the YES Bank Agro-Food (Case Study 5) at the end of this chapter.
Infrastructural innovations
A final type of innovation for improving agricultural value chain financing is
in physical infrastructure. As noted earlier, one major constraint in the use of
warehouse receipt financing is the lack of suitable warehouses. Another constraint is the road, rail, river and port infrastructure. One innovative example to
address the logistical constraints in the Philippines is described in Box 5.5.
Box 5.5 Transportation innovation in the Philippines
A flagship programme of the Development Bank of the Philippines (DBP), the Sustainable
Logistics Development Program (SLDP), that addresses the logistical needs of the distribution of goods and services within the context of the governments goals of global competitiveness, poverty alleviation and food sufficiency at the local, regional, and national levels.
The financial assistance of SLDP focuses on the physical asset requirements of a sustainable distribution system of maritime transport and related land transport. It is geared towards the development of progressive long-haul shipping to constitute the countrys national
backbone in the transport of bulk agricultural products and the development of a short-haul
ferry system to link the islands to the growth centres of the country. One component of the
SLDP is a terminal system for farmers and traders called the roll-onroll-off terminal system (RRTS). The roll-onroll-off terminals and ferry operations will be established in areas
where such services are absent or are only serviced by small wooden boats. The RRTS form
part of the national highways providing the necessary linkage and efficiency to inter-island
travel and transport. The concept is effective in archipelagos like the Philippines because
it uses the vessels to function as bridges in connecting roads on both sides of the seas.
With the RRTS in place in strategic regions of the archipelago, fast and efficient movement
of goods can enable farmers and traders to simply roll-on their vehicles to these floating
bridges, and roll-off from the vessels to their respective destinations. This can not only spur
growth in rural areas, but also reduce migration to urban centres. Working capital needs of
small farmers, traders and entrepreneurs are also assisted through DBPs micro and small
enterprise lending programmes. Larger investments in capital equipment and fixed assets,
including ferries and bulk carriers, reefers, silos and other cargo handling and storage
equipment, are supported by DBPs project financing programmes such as the SLDP.
Source: Lazaro (2007)
The RRTS system is a major investment to address a critical bottleneck in

chain development. Infrastructural development of roads, storage, ports and
other requirements are often serious constraints to value chain development
which are left unaddressed in large part because of the significant investment
costs and the slow, long-term returns on capital. In order to facilitate this
infrastructural financing, value chain financing through instruments such as
forfaiting, which are relatively innovative in the agricultural sector, can be
considered.
Policy and public sector innovations

Policy and public sector innovations for value chain financing are often subtle
and indirect. In fact in some cases, improvements have been made from simply having less governmental intervention less subsidy or price controls, for
example, that stifle strong value chain development. Public support to producer groups, market development programmes or even research will not be
effective if not linked to value chains. Innovative public interventions focus
on demand and addressing the areas of weakness in the vertical and horizontal linkages within agricultural chains, giving priority to those which are most
strategic in terms of the economy and the social outcomes (see Box 5.6).
Agri-export zones (AEZs) in India are another example of public policy innovations that promote value chains for agricultural export products. AEZs
were identified based on the availability of a particular agriculture product in
a region and the potential for further development of the entire value chain.
As noted by banking and agribusiness experts in India, innovation holds
the key for boosting growth in the agriculture sector. This is a major undertaking and is illustrated in Box 5.7. Innovations are often a result of public and
private cooperation, with policy support, which opens the doors for profitable
businesses in stronger and more secure value chains and consequently more
Box 5.6 Value chain approach to agricultural services, Costa Rica

In 2006, the Ministry of Agriculture changed its programming and extensive services toward
a value chain approach. In a major structural shift, the Ministry undertook assessment of
all the value chains within each district. After selecting priority value chains for intervention
based on the importance and the level of need for improvement in the particular chains,
coordinators were assigned at the national and district levels and extension work changed
from a multi-faceted approach to a chain focused one. Also important to the process was
an effort to significantly increase the involvement of private sector agribusinesses as well as
governmental and non-governmental organizations involved with those value chains. Financing, through financial institutions, and public investment in both physical infrastructure and
capacity development is directed towards identified needs. An evaluation of the process
showed progress and continued interest in the approach.
Source: Daz (2008)
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Box 5.7 Agri-export zones in India

The Government of India has identified 60 product-specific agri-export zones (AEZs) for
chain development. The effort is centred on a cluster approach with support activities, infrastructure and services required for development of these export-oriented value chains in
the respective geographical regions in which these products are grown. The governmental
support includes special financing packages for contract farming and fiscal incentives for
infrastructural development and support services, including financial institutions which
service the entire value chain with specially designed financial products and services.
An example of an AEZ can be seen in the onion sector of Maharashtra State which
lacked storage and financing to improve value addition. With an investment of US$85
million under a 60-40 per cent partnership investment with the private sector, the government extended training to 5,500 farmers on production and post-harvest management
for continuous flow of product, post-harvest facility and other infrastructural development
and export facilitation for agro-industries leading to the export of 55,000 metric tonnes
within two years.
Source: Das and Baria (2005)
access to financing. Key areas of innovation which need such support to be

incubated and replicated were noted as:
Enhancement and replication of Information and Communication

Technology (ICT).
Improved risk management tools (crop and weather risk insurance, futures and options).
Enhanced service provision (integration of service facilitator companies
into value chains).
Group aggregation (farmers associations and self-help group links).
Expansion of financing models (contractual farming, warehouse receipts,
collateral management, leasing, equity finance, supply and structured
commodity finance).
Greater use and inclusion of national spot and futures exchanges.
(Ghore, 2007)
Introduction to the Case Studies

The following two case studies are examples of moving beyond the conventional models of finance and value chain development.
In the DrumNet Case Study from Kenya, technology is applied to the value
chain finance model to facilitate the reduction of costs and improve efficiency
in reaching small farmers. The result is their integration into commercial value chains and sources of finance.
The subsequent Case Study, from India, describes how agro-food parks are
being developed to leverage economies of scale and improve efficiency. This
offers small producers and businesses the opportunity to be competitive in
commercial markets while enabling commercial banks to reach new markets
for financial and agribusiness services.
Case Study 4. DrumNet and technological innovations

Jonathan Campaigne, Founder, DrumNet and Pride Africa
Background
Agriculture represents the largest economic sector in most African countries
and remains the greatest opportunity for economic growth and poverty alleviation, both at a national and a household level. Research continues to
reinforce conventional wisdom and grassroots opinion that it is financial
and market constraints that inhibit sector growth, particularly among rural
smallholder farmers, most living at or below the poverty line. In Kenya, these
constraints are particularly frustrating because the key players required for a
vibrant smallholder agricultural sector are present commercial banks, largescale produce buyers, farm input suppliers, transporters, and the smallholders
themselves. One critical factor inhibiting development is a networking platform for intermediation of the flow of information and financial transactions
among partners engaged in the production, financing, and marketing of agricultural produce.
Bank and microfinance institution financing of farm inputs and crops have
experienced poor repayment rates, and high transaction costs. Exporters have
ventured into smallholder group extension activity and out-grower credit
schemes with mixed results to ensure reliable supplies of produce for their
core business of export marketing. Rural, mostly independent, small-scale input suppliers often sell their seeds and agro-chemicals on credit to increase
farmer demand, but in the process reduce their ability to maintain stocks or
generate profits. Finally, smallholder self-help groups and cooperatives powerful organizations for information sharing and aggregation of produce have
proven to be unreliable vehicles for basic financial services such as credit provision, payment distribution, or savings mobilization. Thus, while there is a
demand for networking services between those in the value chain, it is clear
that only an independent cross-cutting organization, focused on this niche
as the core business, can successfully deliver those services required to truly
break through the constraints that cripple the sectors development.
The organization targeting this opportunity would need to structure itself
largely as an information network, based on a standardized set of rules and processes, tracking large volumes of data and triggering disparate financial transactions, and acting as a secure gateway of data and funds for participants in the
agricultural sector. In abstract, the concept parallels existing virtual networks
such as Visa or ATM (Automated Teller Machine) networks, e-commerce exchanges such as eBay, or even equity or commodity exchanges financial intermediation platforms for structuring and executing various types of common
business transactions. These highly successful organizations have developed and
maintained a set of policies and rules, embodied in networked information technology systems that are generally sustained through retained transaction fees or
commissions. However, creating such a network in rural communities for small-
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holder farmers with minimal infrastructure support is particularly challenging

without a physical presence, thus eliminating the possibility of a completely virtual network. However, through involvement of rural organizations the chance
for such a network remains a viable and eventually a sustainable opportunity.
DrumNet
DrumNet, a pilot project of PRIDE AFRICA, was launched in March 2003 as a
new rural value chain management system targeted at smallholder farmers in
Kenya. The vision of DrumNet is a management system linking value chain
partners through DrumNet policies, processes and IT systems. The DrumNet
system facilitates a set of financial, marketing, and information transactions
which are designed to directly impact the productivity of small-scale farmers and indirectly, related stakeholders in Africa. DrumNet is currently donor
sponsored, and is developing a commercial model that will lead to an independent, self funding and sustainable African organization.
Financing farmers
In urban areas worldwide, microfinance has shown its potency to reach the
poor, and prove that the poor are bankable; however PRIDE AFRICA was not
alone in realizing that serving poor, rural farmers, who comprise over 75 per
cent of the continents population, required a different approach. The combination of higher operating costs in rural areas to serve a dispersed customer
base, infrequent sales revenues due to long planting and harvesting cycles,
and low profit margins, had excluded conventional microfinance as a solution
to low rural productivity and incomes. Without subsidies, rural finance has
proven to be commercially unsustainable.
Initially, DrumNets concept was to directly link key players along the agricultural value chain commercial banks, smallholder farmers, and retail providers of farm inputs through a cashless credit programme and integrated
marketing and payments system. This objective was revised and extended at
an early stage of the project to focus more specifically on increasing smallholder incomes. To this end the value chain was extended to include buyers of
agricultural produce and to place them at the centre of the chain.
DrumNet does not rely on high margins and fast turnover of inventory
that underpins conventional microfinance; instead, the model depends on
contracts, technology, management systems, and structured finance. The
DrumNet design and approach is to link major commercial agro-processors,
agribusiness investors and buyers to groups of poor farmers via purchase contracts and master contract frameworks that include all the members of the
farm-to-buyer value chain, input suppliers, and commercial banks. The power
of purchase contracts to drive the value chain model cannot be overstated.
With a contract in hand, and DrumNet supplying the contractual framework
and standards, farmers groups could produce and sell and avoid market risk.
DrumNet partners with other organizations to provide capacity building in

farmer group dynamics, training and certification to assure the buyer of the
quality required. As the buyer specifies the quantity, quality and price upfront,
the farmer then has the means to buy the right kind of inputs on affordable
credit terms necessary to fulfil the contract. The contractual framework is the
backbone of the DrumNet model. Not only do purchase contracts formalize
the sellbuy linkage, but they have credit value at banks due to the high credit
standing of the buyer.
On the finance side of the model, DrumNet stepped back from the traditional microfinance approach of being a supplier of credit, and concentrated
on working with a commercial bank to structure credit and banking services
to producer groups based on the sales proceeds paid by the buyer that flow
through the bank. A value chain management system is a recognized financing
model that connects members of a production pipeline as if they were departments within a single company. Supporting DrumNets connectivity between
its members is an information communication technology (ICT) platform integrating technical, telecommunication, information management, and credit structuring. The DrumNet ICT platform maps all the members, logistics,
credit flows, payments, and accounting events into an agricultural value chain
management system. In the absence of the ICT, DrumNet could not exist and
would not have existed five years ago because of the inefficiencies of paper
based data collection, accounting, and dispute resolution.
The DrumNet customers

DrumNets target clients are farmers in Kenya with land holdings of up to
two acres, typically growing a mixture of subsistence and cash crops. These
farmers live at or slightly below the poverty line. They are unable to access
formal marketing channels on an equitable basis and typically are out of reach
of commercial banks and MFIs (the latter largely focusing on urban/periurban non-farm microenterprises). DrumNet also targets female farmers who
are more vulnerable to poverty in Kenya. Sixty nine per cent of economically
active females work as subsistence farmers, compared to 43 per cent of men.
The business model

The business model is straight forward. DrumNet unites producers, large agrobuyers, suppliers and commercial banks into an efficient end-to-end finance,
production, delivery and payment process. DrumNet facilitates and brokers
services to a value chain where certified farm groups stand on the producing/
selling side, a reputable buyer on the buying side, and certified input suppliers
and a commercial bank in the middle. A large and reputable agro-processing
company, the buyer, signs a fixed price purchase contract with the farmer
groups under a master contract managed by DrumNet. The DrumNet master
contract represents the roles, rights and obligations of all parties in the value
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The model creates efficiencies and allows participants to enter markets or improve
access to partners.
Suppliers alerted to
upcoming farmer
demand for products
Full transparency
and market data for
all participants
Farmer
Farmers grow under structured

contracts with buyers
All financial transactions occur
on a cashless basis
Buyers
Suppliers
Banks shielded from

complexity of managing large
number of farm input loans
Repayment risks reduced with
connection to produce payments
Banks
Buyers access
predictable supplies
of produce without
significant field
mobilization
Disintermediation of
traditional brokers,
resellers, and traders
Figure 5.3 The DrumNet actors

Source: case author, Campaigne
chain. Subcontracts between parties define the obligations of each specific

actor. The contracts sales proceeds flow through the bank to repay all production credit and fees owed by the producer.
DrumNets ICT system provides the internal controls to monitor transactions and contract compliance and to report on all the movements of factors
and funds within the value chain. For its brokerage, administrative and transactional services, DrumNet charges fee shares from its value chain partners
and members.
The value chain model works on the basis of a series of contracts between
DrumNet and the four key players along the value chain, namely producers,
buyers, input suppliers/stockists and banks. The contracts involving buyers
and producers are at the centre of the proposition. In summary, the roles and
responsibilities of the stakeholders are as follows:
Farmers. They must belong to existing registered self-help groups as they must
be a legal entity to enter into a contract. Each farmer group nominates one of
their members as Transaction Agent (TA) to represent them in transactions.
These agents operate rural collection points, receiving produce from member farmers and facilitating grading, packing and issuance of receipts by the
buyers agent. Depending on the crop and the value chain actor requirements,
the system will be able to cater for individual farmers as well. Transaction
agents also provide basic information to member farmers. For these part-time
services, the TA is paid a small commission. Beyond this, under the contract,
the TA is responsible for all DrumNet communication, production and banking activities by his/her group.
A group is contracted to grow and produce the variety of the crop required
by the buyer and to follow agronomic practices as set down by the buyer to
achieve quality. Farmers may take production loans in-kind in the form of
inputs, provided they can supply the necessary security required by banks and
repay the loans through crop sales. Individual farmers who do not meet their
contractual obligations are ejected from the group. Each group must open a
bank account with the participating bank through which all payments can
be made, thus creating a cashless system. Each member is required to contribute to a transaction insurance fund (TIF) of 25 per cent of the value of
loans, which acts as a security for the loan, demonstrates commitment, and
begins the process of members understanding and complying with DrumNet
regulations.
DrumNet outsources the farmer group training and certification to a competent partner to impart the farming management skills required to effectively
use the seeds and input package that the buyer dictates in the contract. A critical purpose of the training and certification is to reduce the buyers risk of inferior seed quality and diminished value due to poor management methods.
At the end of the production cycle about 5 months in the case of sunflower seeds the farmer groups deliver their produce at pre-identified collection centres. The buyer verifies acceptable quality and authorizes immediate
payment, paying the farmer group through the bank, which sets up a single
purpose DrumNet cash management account to receive sales proceeds and
subtract repayment of outstanding principal and interest, DrumNet fees and
any other obligations specified in the DrumNet/farmer group contract. After
servicing all authorized obligations, the bank transfers the net balance in the
cash management account to the account of the farmers group.
The producer value proposition is higher income and liquidity than the farmer could
otherwise earn due to a contract with a reliable market/buyer and a source of finance
to take advantage of the market opportunity. The group organization is essential to
keep transaction costs manageable.
Buyer. The buyer is the pivotal actor in the network, providing the market opportunities and contracts with farmers for production, harvest and the means
of transportation and delivery of produce. The buyer:
Contracts the amounts of seed to be planted and volumes to be harvested, quality and grading standards, the prices to be paid and expected
delivery schedules, all in advance of the planting season.
Coordinates transportation of produce from identified and agreed upon
collection centres.
Provides extension services through use of DrumNet certified trainers to
the participating farmer groups to ensure that the recommended inputs
are utilized and correct farming methodologies are used.
Pays 80 per cent of the agreed price to the farmers, with the balance on
receipt at the buyers premises following quality control checks. Title to
the crop changes hands on delivery.
INNOVATIONS
131
The value proposition for buyers is predictable quantities, qualities and delivery times
due to access to trained and reliable farmers, a dedicated value chain management
system and quality control systems.
Input suppliers/stockists. DrumNet certified suppliers and stockists deliver a
buyer-defined package of seeds and inputs to eligible farm groups in accordance with the requirements set down by the buyers in the master DrumNet
contract provisions. DrumNet farmer groups pay for their inputs through the
bank on a cashless basis when a line of credit is in place. The banks payment
to the supplier is charged to the farmer group line of credit. Liquidity (immediate payment) is a large incentive to a stockist. In certain cases, farmer groups
may pay the supplier in cash when the input purchases are small.
The value proposition for input suppliers is increased sales. Input suppliers are no
longer required to take the credit risk for supply of inputs to smallholder farmers and
can increase their local market share as a trusted link in the network.
Banks. Banks provide loans to farmers for the purchase of inputs and provide
transactional banking services. They pay stockists for inputs, recover loans and
interest from buyer payments, and credit farmer accounts with the surpluses.
Banks can also offer additional financial products and services to farmer group
members but these lie outside the DrumNet network.
The value proposition for banks is net interest income, fee revenue, and an expanded
deposit base. The whole value chain model and cash management system mitigates
the banks credit risk. Access to a virtually untapped wholesale client base also provides cost-effective risk diversification.
Key DrumNet features
Inputs are available to farmer groups under contract to the buyer.

Credit limits are based on production capability determined by DrumNet analysis.
The farmer groups source of loan repayment is sales proceeds on the
buyer self-liquidating produce purchase contract.
Repayment is collected at source from sales proceeds directed by the
buyer into special DrumNet cash management account (Lockbox) at the
bank for concentration of funds and controlled disbursement. The bank
will have first claim on the sales proceeds flowing through Lockbox.
Credit risk management is based on a combination of purchase order
quality (the buyer), and cash collateral placed by farmer groups equal
to 25 per cent of credit advances, which will be in a DrumNet blocked
account (TIF) in the bank.
The software is designed in such a fashion that it can be configured to
address each licensees particular needs either from the buyer perspective, the agro-dealers requirements including both input and output
channels, the farmer group, the transporters or the bank, or from an
investor or donor vantage point.
Recruiter/
Trainers
Producers
Financier
Inputs
wholesalers
semiwholesalers
manufacturer
Agrodealers
Recruiter data - ID, payment method, location (GPRS)

Evaluate & recruit farmers/farmer groups
Provide training on the DrumNet model
Monitoring & evaluation of the crop by farmers/farmer groups
Receive data input
Communicates with DrumNet on the outcome of the crop
Report to agro-dealer
Producer/farmer/farmer group details - address, location (GPRS),

officials, mobile phone numbers, recruiter name, ID nos of
individuals, available land, payment method
Transaction agent-details (name & mobile phone no.)
Pay production contract fee
Enter into production contracts with buyer/s
Cash, full loan, part loan from DrumNet financier
Financier/contact persons details

Provides finance to farmers/farmer groups/stockist who wish
to take loans against the planting contract
Tracks principal, interest, fees, repayment rate, etc.
Tracks defaulters with credit rating
Loan recovery
Wholesale input supplier & contact persons details,

location (GPRS)
National outlets
Get aggregated data on a production contract to negotiate
best pricing for inputs
Link to bank if finance needed
Track inputs delivery to agro-dealers
Agro-dealer and contact persons details, location (GPRS)

Agro-dealer outlets
Enrol & manage recruiters
Get informed on quantity of inputs to procure
Manage inputs supply to DrumNet farmers (against loan
where applicable)
Monitor, evaluate, supervise recruiters & collection
point managers
Link to bank, if finance needed
Figure 5.4a Process flow

INNOVATIONS
Buyer
Planting
contracts
Produce
collection
Buyer
goods
received
Provides crop market, quantities required, locations

and specifications
Manage/supervises agronomy training & extension services
Can provide input specification to farmer/farmer groups
Provide packing details
Track planting contract between buyers & farmers/farmer groups,

with detail on crop, cycle, soil requirements, weather conditions,
crop specifications, required quantities to purchase, basic
agronomy information and practice, pest control
Track participating actors in the contracts
Provide both overview and details of the contract status
Require plug-ins from all actors in the contract
Produce collection points details, including GPRS

(Mother collection CP & mini-collection points)
Infrastructure details/requirements
Capacity & insurance required
Permanent or temporary. If temporary, duration & hiring charges
Tracking of produce in/out
Collection procedures & payment method
Weight & quality checks
Arrange transportation of produce from CPs

Track produce collected from mother CP and/or child CP
Insurance of produce in transit
Receive goods
Final quality checks & weight check
Process payment - either at CP or on goods received based
on payment method specified
Payment processing with deductions of loan, commissions,

fees etc.
Payment
Figure 5.4b Process flow

133
Technology
During phase one, PRIDE AFRICA designed a simple model and database to
cater for the limited transactions and serve as a basis for scaling-up to a more
robust replicable model. Work was done with farmer groups and mobile phone
transactions. A more focused and specialized database and communication
structure is now under development that will standardize and digitize information along the material and financial value chain. The goal is that each
farmer group can be linked to the other actors in the value chain in a rapid
and economical manner. The platform will be designed and implemented
as an integrated, automated system to provide interactive links and reconciliation between all actors in the agricultural value chain. This will be done
through mobile phones to Internet transmission. A database and MIS system
will capture and process the data integrating financial and transactional exchanges between the actors using a general packet radio service (GPRS) network which is an always on, and private network for data to and from GPRS
mobile devices. The DrumNet value chain management system will reconcile,
analyse, and report the chain of input delivery events, credit draw downs,
product delivery events, invoices, payments and other financial flows through
the system.
Financial arrangements
The bank extends lines of credit to the farm groups for production purposes.
A line of credit provides short-term loan advances to farmer groups to purchase seeds, fertilizers and other inputs stipulated under the DrumNet/buyer
contract. Under the line of credit, the amount of short-term advances are determined by the input value needed to satisfy specific purchase order contracts
from the buyer to the group. Inputs are supplied under contract to the farmer
groups from certified suppliers. Repayment of the credit line is collected directly from the sales proceeds the buyer pays into the dedicated DrumNet cash
management account (DrumNet Lockbox). In this structured arrangement,
DrumNet steps out from the direct lending role that PRIDE AFRICA performed
in its microfinance network.
The bank is a motivated partner. DrumNet brings an aggregate relationship group to the bank: the members of the value chain. The bank not only
achieves profitability targets and reduces credit risk, but increases its deposit
base which under banking regulations enlarges the banks lending capacity. In
addition, working with the bank, DrumNet is co-creating and testing a new
banking product to serve rural commodity producers a credit default risk
management facility as a reinsurance fund for the bank to cover bank losses in
excess of the TIF. Although the likelihood of usage is low, its role is to comfort
banks until they gain full confidence in the chain participants.
INNOVATIONS
135
The project development phases

Phase I: Pilot (20042006). DrumNets platform prototype was built during a
pilot project in central Kenya involving approximately 1,250 farmers growing
high value horticultural crops for export. Phase one, with funding from the
International Development Research Centre (IDRC), IFAD and Monsanto, saw
the completion of the research and development to build the basic model, and
create and test the ICT platform. PRIDE AFRICA created a simple model and
database to cater for limited transactions and serve as a basis for scaling-up a
more robust, replicable model. The review of the pilot project determined that
it had a positive impact on smallholder farmers, although individual farmer
transaction costs were too high. Further conclusions drawn from the pilot
phase include:
Buyer-driven linkages. It is important that linkages be driven by the demand from buyers of agricultural produce. They must be supplied with
the produce they require in terms of quality, quantity, timing, packaging, etc.
Insufficient collateral for banks. The security afforded by the TIF, group
guarantees and the presence of buyer contracts proved inadequate during phase one, which drew heavily on the DrumNet guarantee facility.
This implies the continued need for a partial guarantee facility, at least
until farmers build up a sufficient credit history. Moreover, the pilot did
not fully test the ability of banks to design a loan product that meets
the needs of seasonal agriculture.
Process and institutional linkages. It is important to involve major input
suppliers in the network to ensure agro-input stockists have the correct
products available at the right time, and to improve product grading,
quality control and delivery processes and responsibilities between buyers and farmers, to avoid problems of supply and quality.
Phase II: Commercial viability (20072010). A second project phase was introduced in August 2007 to continue work on DrumNet and investigate if its
platform could be scaled to a level that might prove commercially viable given
DrumNets operational approach. Phase two was launched in western Kenya,
in cooperation with BIDCO, Equity Bank, and Farmer Field Schools (FFS) a
nationally organized network of farmer groups originally established by FAO
Table 5.1 Performance indicators

September 2007
No. of farmers
Acres pledged
Projected kgs
Delivered kgs
288
187
140,250
11,818
March 2008
275
155
116,250
11,209
September 2008
1,365
1,300
975,000
61,876
with assistance from the Gates Foundation. DrumNet has since expanded
from Nyanza province to Nakuru and Embu, leading to substantial expansion
between the March 2008 and September 2008 growing seasons.
Phase two is the proof of concept stage, testing the commerciality of the
financial value chain management system. The project plan envisages fast
growth in the number of smallholders involved in the future. Consequently,
the team is working to refine and complete the DrumNet communications
and payments system. Concurrently, they are working with new prospective
partners to negotiate and conclude contracts in other commodities which will
significantly increase the financial and social impact and move the stage of
development from start-up to take-off.
Phase III: DrumNet high growth. Rapid expansion of farmer participation is projected by ramping up the number of buyers of agricultural commodities, the
number of banks providing a standardized value chain model structured financial product, and the number of producer groups into more markets and
countries. More transactions provide a greater degree of sustainability and
profitability. Also, by phase three, PRIDE AFRICA intends that the ICT platform will be able to standardize and digitize information that will allow a
greater level of tracking with reconciliation down to the individual farmer
unit. PRIDE AFRICA has begun the business planning process to commercialize the DrumNet value chain management system. The scalability of the approach will be a direct result of achieving the growth and financial margin
outcomes in phase two.
The working objectives during the three phases are: 1) Achieve operational self sufficiency in three years; 2) Grow to become a commercially viable
business in five years, reaching 500,0001,000,000 clients throughout eastern and southern Africa; and 3) Demonstrate that the DrumNet value chain
management system is a commercially viable proposition that can be widely
replicated.
Sustainability strategy
The most powerful drivers of its commercial sustainability will be profit margins and growth. With the ICT proven effective in phase two, DrumNet will be
capable of digitally processing a significant volume of transactions. To achieve
financial break even, it needs revenues to cover operations and fund asset
growth. DrumNet can generate revenue from license fees, membership fees,
transaction fees, credit spreads (shared with the bank), credit enhancement
guarantee fees, and brokerage fees. DrumNets aim is to charge a service fee on
every transaction facilitated by the system to enable it to share in the incremental value gained by the members. These fees are modest and competitive
as compared to agro-brokerage operations.
DrumNet, as a technology company has high operating leverage which
means that most of its costs are fixed expenses because DrumNet transactions
INNOVATIONS
137
are performed digitally through the ICT platform. Hence, volume is essential
for profitability. PRIDE AFRICA plans to grow the DrumNet network aggressively, linking smallholder farmers to commercial financial service providers,
farm input suppliers, and agricultural buyers throughout Kenya, East Africa and
eventually the entire continent. To meet these requirements, its growth must
be cost effective, replicable and scalable. As such, PRIDE AFRICA is designing
its business with a clear eye towards standards and partnerships. To facilitate
the rapid expansion, DrumNet will offer its services through a variety of channels. During the business model testing phase, DrumNet is operating small
business support centres that are embedded with other existing organizations.
Initially in Central and Western provinces DrumNet focused on farmer groups
through DrumNet field offices which proved too expensive to replicate. The
model is being enhanced to leverage agro-dealers who offer a promising business network for the input and output markets. International agencies, private
sector businesses and investors have shown interest in the model as a unique
tool to link farmers and buyers. By developing standardized service packages
and operational processes, these centres can be operated within existing cooperatives, banks, SACCOs, MFIs and other institutions. Similar to a franchise
model, these embedded centres will plug into the growing DrumNet network
and will enjoy the advantages of a large, growing network of data, customers,
partners, and shared resources.
Currently sponsored by international donor agencies, the vision for DrumNet is a wide-spread, distributed network of partners, sharing and improving
the DrumNet platform. The goal is facilitating financial, marketing, and information transactions which directly stimulate wealth creation and economic
integration of small-scale farmers, particularly women, in Africa.
Case Study 5. Integrated agro food parks: avenues for sustainable

agricultural development in India
Kalyan Chakravathy, Advisor, YES Bank, and Raju Poosapati,
Sr. Vice-President and Head Food & Agribusiness, YES Bank.
Summary
This case study identifies critical issues hampering Indian agriculture and presents key imperatives to strengthen agricultural value chains in India. It showcases knowledge-based banking and integrated financial value chain solutions
to realize higher growth trajectory for sustainable agricultural development,
while effectively addressing major deterrents and the prospects presented by
Integrated Agro Food Parks (IAFPs).
Overview: the need for innovation

Indias GDP recently crossed the trillion-dollar mark making it a member of
the elite club of the twelve countries with trillion dollar economies. Accounting for 18.3 per cent of the nations GDP, the agriculture sector has been the
means of livelihood for almost two-thirds of its work force. Though the sectors
contribution to GDP has been declining over the years, the Indian economy
is still influenced to a great extent by agricultural production, reflected predominantly by the strong correlation between change in agricultural GDP and
overall GDP. It can therefore, be safely deduced that the growth trajectory for
the economy could have been far better if the agricultural sector performed
more strongly.
The primary reason behind the alienation of the agriculture sector in Indias growth story has been the stagnation or fall of investment in agriculture
since the mid-1990s and the resultant decline of the share of the agricultural
sectors capital formation in the countrys GDP. The higher transaction costs
associated with dispersed populations and inadequate infrastructure, along
with the particular needs and higher risk factors inherent to agriculture have
resulted in an under provision of financial services in rural areas, and if available, products that are often designed without any consideration for the needs
and capacities of rural households and agricultural producers.
Irrespective of the deficiencies encountered across the agri-value chain
such as low productivity due to paltry investment and lack of technical knowhow, and critical value chain inefficiencies such as poor logistics, multiplicity
of intermediaries, inadequate marketing infrastructure, lack of focus on quality standards and minimal processing leading to post harvest losses of US$
11 billion, India could meet its demand for agricultural produce, mostly by
indigenous production. However, buoyant and rapidly increasing demand of
agricultural produce calls for immediate measures to streamline the agri-value
chains while plugging value seepage at various levels.
About YES BANK

YES BANK Ltd., a customer service driven, private Indian bank catering to
emerging India, has 117 branches, and offers customized and comprehensive banking and financial solutions to its customers, including corporate and
institutional banking, financial markets, investment banking, business and
transactional banking, retail banking and private banking.
One of the key strengths and differentiating features of YES BANK is its
knowledge-driven approach to banking for food and agribusiness as well as
other selected sectors which is the essence of all offerings to its customers. The
knowledgeable bankers offer invaluable and in-depth insights into their sectors of expertise, thereby helping clients to develop their business plans and
activities, and nurture them to fruition by sharing business ideas and creating
customized solutions for clients specific requirements.
INNOVATIONS
139
As a bank committed to rural India, it has set up the Food and Agribusiness
Strategic Advisory and Research (FASAR) division by mobilizing a team of experienced industry and banking professionals who have the necessary knowledge and skills sets in identified sectors. These food and agribusiness experts
work with the stakeholders in the food chain in various capacities to develop
risk mitigating and innovative project structures for enhanced financing of
the sector. This results in increased commercial viability and ensures sustainable development of agricultural value chains.
The fact that agriculture lending constitutes a major 23.91 per cent of the
total portfolio of US$1,924.65 million, as against a minimum of 18 per cent
of net bank credit (NBC) stipulated by the Reserve Bank of India, explains
the strong commitment to develop this sector. The percentage share of agriculture in the portfolio, that specifically directs lending to the farm sector,
has been increasing steadily since 200607. Agriculture lending has increased
from US$295.32 million in 200607 to US$460.16 million in 200809, with
US$351.69 million of direct agriculture lending and a balance of US$108.47
million of indirect agriculture lending, against US$183.51 million of direct
agriculture and US$111.81 million of indirect agriculture lending in 200607.
Further, the non-performing assets of the advances to the agricultural sector
by YES BANK are less than 0.01 per cent when compared to 3.18 per cent
national average of all banks, and reinforces the strong focus and robustness
of product offering.
The value chain forms an integral part of decision-making for any organization as the entire production of its goods and services depends on its efficiency
and effectiveness. The YES BANKs knowledge approach analyses the value
chain, works with and understands the stakeholders and their transactions and
applies integrated financial value chain solutions to meet their financial needs.
These customized products and services include letters of credit, advances,
warehouse receipt finance, bill collection, pre-finance, post-shipment finance,
factoring and guarantees. Examples wherein these products were deployed to
address specific needs of its customers occurred when Yes Bank provided:
Structured finance to about 2,000 nomadic honey farmers from Northern India, in partnership with one of the largest exporters of honey
from India, see Box 5.8.
Trade finance for the traditional craftsmen associated with a Mumbaibased NGO for exhibiting their artifacts in gateway to India exhibition
in New York.
Finance to sugarcane farmers associated with various sugar mills.
Finance to small and marginal farmers for purchasing drip-irrigation
systems under a Central Government Sponsored Micro-Irrigation Project (CGSMIP).
Box 5.8 Warehousing of nomadic farmers honey in northern India

Honey producers are now able to deposit their honey in warehouses managed by the YES
Bank appointed collateral manager who assesses its quality and quantity. The honey is
pledged as security without transfer of title or possession. The honey receipts are used
for borrowing from the bank, which will lend up to 70 per cent of the price of the honey
offered from a large honey exporter, Kashmir Apiaries Export (KAE), with whom YES Bank
has set an agreement. However, the beekeepers are free to sell to whichever buyer is the
highest bidder at the time he/she decides to sell. By not having to sell at harvest, and being able to achieve prices averaging 50 per cent higher and loans rates much lower, total
volume of sales of KAE has more than doubled to over US$17 million.
Source: case authors, Chakravathy and Poosapati
Integrated value chain development model

YES BANK believes that a knowledge-based project development approach is
needed to transform Indian agriculture thus benefiting all stakeholders including farmers, companies, government and overall the Indian society. The
key is to structure and finance bankable agribusiness projects for broad-based
development of the agricultural sector, leading to economically and ecologically sustainable development.
Given the inter-linkages between the independent value chain components
across the agri-value chain (see Figure 5.5) there is a need for an integrated and
Wholesaler
In
In
fra R
no
st eg
va
tiv Cr ruc ula
e ed tu tor
bu it re y
si de de re
ne li v fo
ss ver elo rm
m an pm s
od ce e
nt
el
in
g
Consumer
orientation
Market
linkage
Futures
trading
Warehousing
Crop loan &

insurance
Research &
extension
Farmer
linkages
Figure 5.5 A holistic perspective: agricultural value chain approach
Source: case authors, Poosapati and Chakravathy
Retailer
Market
development
Processing
Price
competitiveness
Handling
& mrktg.
Streamlined
supply chain
Production
INNOVATIONS
141
holistic approach, involving value creators and enablers bringing in regulatory reforms, infrastructure development, credit and other financial services
and innovative business structuring to maximize stakeholders benefits, to
farmers and consumers in particular, and to achieve overall development of
the sector.
Value addition, through rural service centres, offers one solution. Such centres, although relatively new in India, have been developed under various
schemes using a basic model of integrated services such as agricultural inputs,
finance, technical advice, warehousing, and marketing. Models include the
Kisan-Bandu which uses village business centres, e-Choupal employing electronic services, along with agricultural service and Hariyali Kisaan Bazaars aiming to provide all encompassing services under one roof.
The YES BANK model uses rural transformation centres (RTCs) linked to
Integrated Agricultural Food Parks (IAFP). This model provides a platform for
spatial clustering of varied agro- production chains while effectively addressing the inherent deficiencies of the corresponding system. An IAFP, with modern production and processing facilities is linked to the RTCs located in the
catchments as integral supply linkages integrating farmers with the demand side
of the food chain in an efficient manner. Technical know-how on management practices are shared with the farmers linked to the IAFP as well as stateof-the-art processing technologies made available at the park. This enhances
the quality and productivity and thereby renders increased acceptability and
competitiveness of Indian foods in international markets (see Figure 5.6). The
IAFPs also act as a linkage for agri-biotechnology companies, fruits and vegetables, grain/oil seed trading and processing companies, meat production and
processing companies and farmers/producers by working together to educate
the professionals of the future and develop food science and technology at
large.
An IAFP offers a robust framework for value chain finance by way of providing access to credit in terms of customized products, specific to the needs of
various stakeholders at different levels of the agri-value chain, thus facilitating adequate investment crucial for higher returns. The same is illustrated in
Figure 5.7 using oil processing value chain in the IAFP context.
The IAFP ensures higher returns to various stakeholders due to enhanced
productivity, better traceability, higher quality output and off-season availability. The interdependent linkages of the agri-value chain and the security
of a market-driven demand for the final product provides the producers and
processors with an assured market for their products thereby addressing issues
like distress sale which has been the major trigger for default and credit risk. It
makes it easier for various stakeholders, especially farmers, to obtain finance at
a lower cost from banks. This model helps YES BANK in financial inclusion of
farmers and leveraging ICT, and provides an opportunity to offer a basket of
services including transaction banking to various stakeholders, while spreading
risk across various stakeholders of the agri-value chain. Additionally, the IAFP
RTC
RTC
RTC
IAFP
RTC
RTC
RTC
Consolidation centre
Consumers
Production
RTC
RTC
Processing
Modern farm
Utilities &
clusters
services
Green-houses
Agro-tourism
Livestock farms
Wellness & nutrition
Mushroom nursery
Social
Food
processing
zones
R&D incubation QCL
Common
infrastructure
Agribusiness
Mgt. Trg. Inst
IAFP
Cold stores, ripening

chambers & warehousing
Convention centre
IT/Library
Training centre
Terminal markets
Commercial
complex
Commissaries &
packaging
Trade
RTC
RTC
Village
Agri clinic
Village
Property
RTC
at mandal level
Population: 5,000 - 10,000
Primary health
centre
Village
Village
Collection
centre
Food &
entertainment
Commercial rural
Mart. & office space
Mentoring
& training
Farm credit
microfinance
Smart card
Green port
Village
Figure 5.6 Integrated agricultural food park model and activities

Village
R&D
INNOVATIONS
143
Crop loan
Farmer
Spot market
price
WR finance
RTC-warehouse
Warehouse
receipt (WR)
Vendor bill
discounting
Wholesaler
Warehouse
receipt
Credit
MillerIAFP
Figure 5.7 Customized financial products for edible oil processing value chain stakeholders
offers a gamut of non-financial services, thus enhancing credit recovery by providing several non-financial services to the farmers as depicted in Figure 5.8.
YES BANK has found that the advantages of the IAFP value chain integration can work well even when producers are very small. The advantages
presented by the IAFP model are portrayed in Figure 5.9 with the case of the
integrated dairy facility of very small dairy producers. By pooling their cows to
IAFP
Knowledge banks
Training institutes
Research institutes
Technical advisory
services
Market linkage
Price information
Technical knowledge for

improving the production
Financial training
Basic business skills
Facilitating market linkage

through contract farming
Enhanced procurement
by the processing
companies
Better price discovery

through commodity
exchanges
Processor
Farmer
Increased
procurement
Enhanced
production
Figure 5.8 Non-financial services favouring credit recovery

Better realization
of produce and
improved incomes
Information flow
Retail
Veterinary services, training,
technical knowledge, market information
Product flow
Cattle+Fodder
Farmers
Payment
(Milk+fodderloan-feed)
Margin
money
Bank
Distribution
centre
Consumers
Modern
livestock
farm
Cattle
loan
Dairy
products
Milk
AFP
Domestic
market
Feed
Payment of milk
(market price)
Payment
from the market
Payment of cattle
feed (market price)
Export
market
Cattle loan repayment
Financial flow
Figure 5.9 Integrated dairy at IAFP: information, product and financial flow
form an economically competitive dairy farm, they not only achieve economies of scale but can be integrated with the services and markets to achieve
higher quality products and higher incomes for the many families involved.
By virtue of its enabling structure of IAFP, synergy between various components and participants of the dairy value chain, augmented by ready availability of inputs (improved cattle breeds and fodder/feed and equipment and
supplies for the processing units), information (technical and market information) and value chain finance (loan secured by product flow, term loans and
others), and assured off-take (forward tie-ups with the retailers and processors
in the domestic and international markets), the integrated dairy facility provides uninterrupted flows of knowledge, product and finance while impeding
value losses in the dairy value chain.
Conclusion
As explained, the IAFP is an innovative value creating business structure designed
to offer specific technical know-how, customized financial products, state-ofthe-art infrastructure and marketing solutions to its stakeholders, thus addressing major value chain inefficiencies and effectively mitigating risks associated
with the Indian agriculture. The self sustainable model, together with the government interventions of regulatory reforms, infrastructural development and
INNOVATIONS
145
financial incentives to encourage participation of agribusiness corporations,

creates a winwin scenario for all stakeholders. The model provides farmers
market opportunities, higher prices and economy of scale benefits not feasible
in isolation, thereby substantially increasing net earnings.
Successful replication of such models across strategic production hubs for key
agricultural commodities can lead to the transition of Indian agriculture and
processed food industry from an unorganized, supply-driven, low-value business scenario to an exceedingly well organized, high-tech and safe, demandled, and high-value orientation with substantial employment perspectives,
averaging an estimated direct employment of 8,000 and indirect employment
of 30,000 people per IAFP. YES BANK, along with its strategic partners, is leveraging the experience and expertise gained during implementation of the IAFP
model in India and intends to implement the unique concept in South East
Asian and African countries, with each one done after developing a tailor-made
model catering to the specific needs and requirements of the country.
While pioneering in its integrated and knowledge banking value chain approach, YES BANK remains committed to its clients across the entire agri-value
chain and contributing towards farmer empowerment and entrepreneurial
development, and thus transforming Indian agriculture to agribusiness.
Case references
www.yesbank.in [accessed 4 October 2009].
CHAPTER 6
Lessons learned and summary

recommendations
Value chain finance has been implemented in many countries across regions
at varying stages of development, and with differences in their financial systems and enabling environments. Some of the learning and recommendations
described in this chapter are drawn from specific experiences in Africa, Asia,
Latin America, the Middle East or Eastern Europe. Nevertheless, it is possible
and useful to generalize the learning for the successful utilization of value
chain finance in a range of circumstances and environments. Therefore, the
application of the lessons learned may require further refinement and adaptation depending upon the context, the characteristics of the value chain,
and the conditions that impact the borrower and lender. Although some of
the lessons learned and recommendations may appear obvious to experienced
professionals, the authors have attempted to be comprehensive to benefit new
entrants to the field who are using this publication as a primer for work in
value chain finance.
Lessons learned
Value chain finance is a comprehensive and holistic approach. First and foremost,
agricultural value chain finance is not simply a single instrument or a defined
recipe to follow. It involves systemic analysis of an entire value chain and the
relationship amongst its actors. This holistic approach enables stakeholders to
design financial interventions that may incorporate one or various financial
instruments. The approach enables lenders to better evaluate creditworthiness of individuals or groups of businesses within the chain through identifying risks and analysing the competitiveness of that chain. A value chain
finance approach is already used by some leading financial institutions that
include sector analysis and market potential in their lending programmes. It
focuses on the transactions throughout the chain which is quite dissimilar in
approach to the majority of financial institutions which offer a relatively fixed
set of loan products secured by the collateral of a specific borrower with little
consideration given to the market system as a whole.
Value chain finance can be positive-sum. The use of contractual agreements is increasingly important in modern value chains. The strength of these contracts
and the commitment of the partners to abide by them is a key determining
factor in the success of value chain financing. When contract commitment is
strong, additional funds can flow into the chain while the asset value of the
products in the chain remains. The challenge, however, is to build the understanding, capacity and regulatory environment to ensure that commitments
are obeyed.
The viability of value chain finance depends on insider knowledge. The drivers of
a value chain, who are often the businesses involved in the processing and
marketing of agricultural outputs, know the business and the other actors in
the chain in a way the financial institutions by themselves cannot. This information gap is exacerbated by lack of transparency in many countries, where
balance sheets presented to financial institutions may not be reliable and business risks are often hidden. While not resolving this underlying problem with
a chain approach, banks have more reference points for financial and technical information which can reduce risk. As a result, they may also be more
willing to lend to small farmers, traders and others in the chain about whom
they do not have enough knowledge to be confident in lending otherwise. For
example, by observing that reputable and successful processing or marketing
firms have entered into informal or contractual relationships with small farmers, financiers are reassured of the creditworthiness of the producers and are
more likely to lend to them.
Financing efficiency and risk reduction can be achieved by financing through the
strongest chain actor or actors. By financing the stronger, less risky agribusinesses, most often those near the end of the chain, the financial costs associated with risk protection are reduced. In this way, a financial institution can
lend to an established business such as a processor, and let the processor make
internal value chain lending decisions based on their first-hand knowledge of
producers or traders. In addition, the transaction costs for lending to the larger entities is generally much less for the financial institution, and the primary
borrower manages the lower cost of on-lending to multiple smaller entities.
Weakness at any link in the chain can increase financing risk at all levels. Value
chain finance decisions derive from the health of the chain or sector, including its cash and commodity flows, rather than relying on traditional collateral. This means that the level of mutual interest for the common good within
the chain can reduce risk, but only if that interest is genuine and the linkages
are strong. Even when a particular business is extremely stable and risk free,
if their behaviour jeopardizes others in the chain, then value chain financing
will not result in productive outcomes. Although this is a self-evident statement, when one is dealing in agricultural value chains that may not have
collateral as the basis for lending at the foundation of the chain, awareness of
these dynamics must be explicit in a facilitators or lenders analysis.
Industry competitiveness is a must for those within the sub-sector to receive finance.
A good client in a declining sub-sector or in one that exhibits an increasingly
obsolete technology or technical capacity is a poor investment risk. A value
chain approach makes it incumbent on a lender or investor to consider the
competitiveness of the industry. It is no longer sufficient to know that a piece of
LESSONS LEARNED AND SUMMARY RECOMMENDATIONS
149
collateral is available if the loan fails, but there is a shared responsibility to assess
the supply of resources, efficiencies in production and value addition, capacity
of value chain actors, access to technology, and economies of scale issues. If
there are weaknesses, value chain businesses may be able to fix them in a timely
fashion, or a financier might decide to move to new sub-sectors that are more
competitive and therefore the businesses within them are better credit risks. For
example, it is well known that good agricultural practices (GAP), hazard analysis
and critical control point (HACCP), traceability and other industry regulated
standards and norms have transformed the international fruit and vegetable
business. Many producers are unable to meet such standards, and the value
chains within which they operate are no longer competitive.
Value chain development depends on a range of supports and services. Understanding that value chain functioning and industry competitiveness are critical to
successful value chain finance is not enough. The actual implementation of
additional value chain development activities may be warranted in some cases.
In the integrated model presented in the introduction, holistic development
of the chain is a priority, with finance as one essential service in that process.
In particular, where the goal is the integration of smallholder farmers, a range
of services, sometimes referred to as an ecosystem, may be required, these
include: business and technical training, access to inputs, group organizing,
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building negotiation skills, dispute resolution and collective bargaining skills,

market information and access, and infrastructure support from warehouses
to transportation and communication as shown in Figure 6.1. Value chain
development goes far beyond the expertise and capacity of financial institutions, although these issues are integral to successful value chain financing
and therefore should inform financing decisions. Since financial institutions
cannot provide this range of services themselves, they may need to determine
if the required services are available and if linkages or partnerships are possible
and desirable. Frequently, it is a facilitating organization developing a value
chain that approaches a lending institution to support the overall work with
the financial component of the solution.
Agricultural value chain finance does not replace conventional finance. Value chain
financing is both to and through the chain, and therefore depends, at least
in part, on conventional sources and services of financing to the chain. The
relationship and levels of intervention of financing are often the factors that
change in conventional bank finance closer information flow and interaction, indirect financing for some clients, point of sale financial arrangements,
etc. A second point to note is that value chain financing is very focused in
its use. It is directed specifically to chain activities and is largely short-term
financing; household and agricultural needs for financial services are diverse
and multifunctional and require financial services that go beyond value chain
financing.
A well rounded, but weighted assessment of borrowers is critical. While using the
value chain to evaluate risk, it is still necessary to assess the capacity of the
specific borrowers. As described in the introduction, criteria such as the 5 Cs
of lending can be useful tools in determining the creditworthiness of clients.
However, under a value chain approach increased weight is given to the last
two Cs conditions and cash flow as opposed to the first three of character,
capacity and collateral. The health of the value chain as well as the cash and
product flows of the clients within the chain are critical for success. Thus,
risk appraisal requires assessment of these factors while taking into account
how the risk impacts the specific borrower, or set of borrowers, who are being
evaluated for a loan.
Embedding finance can increase access and efficiency. Formal loan processes can
be costly and time consuming, and this may hinder access to finance for some
value chain businesses, including farmers. Internal value chain finance allows
for the inclusion of finance in a package of inputs and/or other services that
flow through the chain. This type of embedded financial service can lead to
both improved efficiencies and repayment, although there can also be a lack
of transparency regarding the cost of funds or inputs/services that leads to
abuses. However, embedded finance is one of the oldest forms of value chain
finance, and in general the interest of the client is served through being able
to access such a comprehensive package of inputs, services and finance.
151
Technological innovation is important in financing value chain businesses. New

technologies have opened the door for growth in the use of value chain financing, and inclusion of even remote and small producers. Easier communication via mobile phones and the Internet facilitate sales transactions, price
information and money transfers, while better MIS systems allow for even
small financial institutions to offer the flexible disbursements and payments
needed in value chain finance. However, current availability and access to
technology is very unequal, and cannot be leveraged in all contexts. As technology development and availability are rapidly evolving, stakeholders in a
chain will benefit from awareness of changes that can lead to phenomenal
advancements in very short timeframes (e.g. M-PESA).
Diversification and other mechanisms that mitigate the concentration of risk in a
value chain activity are important. Caution is also noted regarding a singular
focus on any one sector or value chain by a financial institution. While specialization is an important ingredient in achieving competitiveness, it also
has associated risks for both the businesses within the chain as well as the
financiers who would support it. Unless risks are adequately mitigated, overreliance on a single chain or market can unduly increase the risks related to
uncontrollable factors such as global price fluctuations, industry turns and
natural disasters, including drought and hurricanes. Price hedging, insurance
and market awareness can mitigate sector risk but a need for diversification of
product lines and target markets may also be necessary. This is important for
producers and processors as well as for banks and all financiers. For the latter,
it is critical to recognize this risk both as part of their clients financial assessment as well as of their own portfolio assessment.
Business models can influence the selection and application of financial instruments.
The type and structure of the business model (e.g. producer driven, lead firm,
etc., described above) influence the selection and application of instruments
used in value chain financing. Understanding the model and its drivers can
help those providing finance be aware of the chain relationships and make
appropriate decisions regarding financing. Some instruments can be used in
weak chains but others, such as receivables finance, require models where the
linkages are strong and secure. The models are also influenced by the products
themselves, with some chains being more difficult to integrate and/or requiring more direction and control to be exerted by a lead firm.
Value chain finance reflects values of stakeholder participation. The most sophisticated financial instruments contain incentives or shared risks amongst
stakeholders. Islamic banking in some of its various forms similarly involves
borrowerlender shared risks and returns. The underlying concept of mutuality is traditional but relevant to formal financing since the higher the level
of shared risks and returns, the stronger the relationship tends to be. In this
way, for example, clear benchmark formulae for price determination based
upon the market conditions (e.g. some element of shared price increase
flexibility) result in more lasting relationships than those with inflexible fixed
prices, whereby side-selling or reneging on purchases often result when market prices change. The importance of shared interest extends beyond financing to the healthy functioning of the value chain itself.
Application of value chain finance instruments depends upon the enabling environment. The flexibility, lack of reliance on traditional collateral and evolving nature of value chain finance makes it complex for policymakers to understand
and central bankers to regulate and supervise. A weak or insufficient legal
structure legal structure in many countries means that the full range of value
chain finance instruments is not available. For example, several of the instruments described here, such as factoring and leasing, are relatively recent introductions in some countries and require new laws in order to be implemented.
Other instruments, such as warehouse receipts require regulatory revisions
for the acceptance of new forms of collateral, as well as having in place grading standards and adequate storage facilities. Public and private entities must
collaborate on research and development to understand these instruments,
and their implications for policies and supervision in their specific context.
Fortunately, lessons and examples are available, and the experiences in some
countries can serve to inform and guide the policy development in others.
Value chain finance clients need financial services beyond credit. The effective support of value chain businesses from smallholders through to processors and
retailers recognizes that finance is not just a loan. Smallholders in particular
have often been overlooked in the provision of a broad range of financial
services that include savings, insurance and lines of credit. Not all these financial services are, nor need to be, provided by formal banking institutions. For
example, savings and credit groups can play a role in financing, organizing
and empowering many smallholders to integrate into value chains. At the
same time, community-led social funds and even traders can serve the needs
of producers in times of personal or financial crisis. However, more and more
microfinance institutions and banks are developing approaches to offer agricultural insurance, health insurance and savings products, and the services of
commodity management companies are growing to provide guidance, security and support throughout the chain.
Smallholder facilitation and capacity building can lead to competitiveness. Value
chain integration and the increasingly stringent consumer requirements
exclude many small farmers, traders and agribusinesses. Yet, with sufficient
technical, organizational and/or business capacity building they can become
competitive in many markets, and thereby improve incomes and access to
financing. Often, facilitation is helpful or required to provide the support and
links into strong chains. This can come from chain operators, third party development agencies and government.
Regional differences are less important than a countrys level of development. The
applications of value chain models, as well as the accompanying financial
153
tools, are not substantially different from one region to the next. For example,
a global financial institution does not change the way it undertakes financing
of a value chain nor does the application of warehouse receipts or trader finance differ significantly by region, even though, as was seen, the relative importance of who provides the financing within a chain may change by region
and commodity. The level of development of a countrys financial markets is
quite important in determining which financial tools can be used, either because the regulatory environment supports its use, or there is an increased use
of particular types of value chain finance as an alternative precisely because
conventional financial markets are weak. The presence and use of commodity
exchanges, which are most active in larger, developed countries for certain
commodities, are important determinants for the use of some of the value
chain finance instruments. There is also heterogeneity related to the nature of
the product chain as some chains lend themselves to higher levels of value addition and integration (e.g. sugar cane) whereas with others (e.g. maize) there
is more difficulty consolidating chains. However, the value chain financing
approach comprehensively assessing and knowing the chain and structuring
financial interventions accordingly is applicable in all regions.
Many challenges remain. Side-selling and other forms of contract breaking remain a formidable hurdle to overcome in financing through value chains.
Successful models of value chain financing at the beginning of the chain have
often required up-front support in organization, training and confidence
building for ensuring strong linkages and commitment among the actors in
the chain. Payment of those support services, especially for small farmers and
small agribusiness companies, is an ongoing challenge for both the public and
private sectors.
Summary of recommendations
Value chain financing is recommended as a promising approach for increasing
financing to agriculture at all levels of the chain. More learning and a deeper
analysis is required for addressing key constraining factors. Most important
among these is research to help improve: 1) improved policies and regulation
for some of the value chain finance instruments; 2) approaches for optimal
financial inclusion; and 3) contract enforcement. In addition, greater dissemination of the experiences and learning is needed in the universities, banking
institutes and among development agencies and governments.
This volume includes case studies and analysis throughout that provides
pointers to financial institutions, value chain stakeholders, including facilitating organizations and policymakers. Additional recommendations can
be derived from the lessons learned. The authors encourage any who are
interested in pursuing agricultural value chain financing approaches to carefully review the above sections which provide the context for the following
recommendations. The recommendations in this section coalesce this learning and offer a summary guideline.
Recommendations regarding financial institutions

These recommendations are designed to inform:
Lending institutions that endeavour to take value chain dynamics

into account when providing loans to specific businesses or types of
business within a given chain.
Financial institutions that aim to support the development of value
chains, potentially at multiple levels, through appropriate loan products and possibly other financial instruments.
Facilitating organizations that work with financial institutions to either
strengthen the institution or to extend financial services to under serviced agricultural sub-sectors.
Confidence in market demand. Market driven value chains have proven to be

the most efficient ones. Agribusinesses that seek financing need, at minimum,
an understanding of market demand and how their outputs are positioned
to respond to that demand. In the case where greater value chain integration exists, businesses may be linked to a lead firm with a reliable market or
established market linkages. Although lending institutions may not have the
competence to assess market demand, they should have confidence in the
capacity of the borrower to do so.
Leverage the knowledge of value chain businesses. Value chain firms themselves
are often the best source of knowledge regarding the functioning of the chain
and the various businesses within it. This knowledge enables such firms to reduce risks, and to make decisions about internal value chain financing versus
formal agricultural lending. By leveraging the knowledge and experience of
successful value chain firms, financial institutions are better situated to make
wise financing decisions.
Contribute to value chain strengthening. Financial institutions have the potential to contribute to the strengthening of value chains through building
knowledge and supporting the development of needed services. Rather than
investing in one component of the chain, the financial institution can grow
expertise in the chain, share this knowledge, and provide financing to support
services. This not only benefits clients, but also expands lending opportunities
while lowering risks.
Multiply financial products to meet needs. Value chains require a variety of loan
products as well as other financial services such as savings and insurance. In
order to strengthen businesses, reduce risks, and create a healthy financial
system, it is important to investigate the financial needs of value chain firms
from farmers to retailers. Unorthodox products, tailor-made adaptations and
155
innovative approaches may hold the greatest promise for developing the
chain and supporting finance.
Strengthen risk assessment and lending criteria. Value chains offer a structure and
relationships that have great potential to reduce the risk of agricultural lending. It is incumbent on the financial institution to evaluate risk and to take
into consideration conventional criteria along with new criteria that encompass value chain knowledge and functioning. These include:
knowledge of actors and market;

risk management systems;
transaction costs of delivering financial products;
governance systems;
observance of contracts;
capacity to establish alliances;
availability of inputs, services and other supports.
Realize that finance is not enough. Finance is often one of many needs in a business. Even though finance is often a necessary requirement in successful value
chains, finance alone is generally not sufficient. The business development
services associated with value chains or market development may be more
important to success than the financial inputs. Being aware of the gaps and
opportunities in a value chain, and promoting partnerships and ways to
address hurdles that go beyond the capacity of the financial institution to
resolve can improve the results of the value chain partners and those who
finance them.
Investigate the application of new technologies. New technologies offer lower cost
solutions for hard-to-reach clients, as well as methods to form networks, exchange information and monitor flows of money. This is common in microfinance and other financial services as well; what is less evident is that new
technologies in food chain industries can also quickly affect specific sectors
and be a barrier to those who cannot react to the new demands.
Recommendations regarding value chain stakeholders

Agribusinesses such as lead firms that participate in a value chain, and

need to evaluate lending and borrowing opportunities from a holistic
perspective.
Service providers who support a value chain e.g. transporters, telecommunications, packagers, equipment suppliers who would like to
understand the viability of the chain, and therefore the risks involved
in offering credit to value chain businesses or taking loans to service the
chain.
Facilitating organizations that work with smallholder farmers, agribusinesses, service providers and other stakeholders to strengthen the value
chain in general.
Understand market demand. This is the primary consideration for any value
chain stakeholder or facilitator. As noted earlier, market-driven value chains
have proven to be the most efficient ones. Value chain businesses must understand market demand and how the chains outputs are positioned to respond
to that demand. A lead firm has the unique opportunity to not only understand this demand, but to convey it to others in the chain to ensure responsive production and value-adding activities.
Share knowledge. In traditional systems, knowledge was often not shared due
to fear of losing market competitiveness. In todays global markets, knowledge
is key to maintaining ones position in the market. In the past, traders were
often very secretive and kept information away from farmers at the bottom of
the chain, preferring to reduce risk and ensure profit by squeezing prices rather
than building markets. Now, when producers understand what is demanded,
and how to respond to market trends, the chain and therefore the lead firm,
intermediaries and service providers are all in a better position to succeed.
Be aware of value chain needs. As a stakeholder in a value chain, it becomes
necessary to understand the needs of the chain, and not just those of ones
own business. Constraints may be financial or non-financial, and they may affect many or just a few. Understanding these issues and how one can mitigate
risks is essential. This knowledge can lead to increased cooperation with other
stakeholders, and bolstering of the value chain in general.
Develop business alliances. The capacity to develop lasting relationships that
are mutually beneficial is a characteristic of durable value chain businesses.
In forming relationships, one must consider the incentives for all parties concerned to participate in the relationship both financial and non-financial
and how an alliance fits into the overall functioning of a value chain.
Develop competitive industries through cooperation. Globalization has put greater
pressure on individual businesses to be part of competitive industries. Building on shared knowledge and cooperation, value chain businesses can develop
solid market linkages, long-term buying relationships, agreed upon standards,
brand recognition, and access to appropriate technical skills and technologies.
Without this type of collaboration, businesses are likely to fail in the face of
stiff competition from other better functioning value chains.
Build associations and other supports. One mechanism noted for developing a
competitive industry was through an industry association. Associations provide a structure for sharing information, promoting best practices, accessing markets (e.g. trade fairs), lobbying for policy change, forming alliances,
developing brands (e.g. Egyptian cotton) and other forms of collaboration.
Associations may consist of sub-groups like exporters or producers, or have
157
broad-based memberships that welcome those who support the industry such
as marketers, accountants and consultants.
Recommendations regarding policymakers

Policymakers who are interested in supporting the development and

competitiveness of value chains and the businesses within those chains.
Value chain stakeholders and financial institutions that seek to influence policymakers by providing reliable information on value chain
functioning, success factors and results.
Facilitating organizations that are developing value chains, supporting
the stakeholders, or building related financial systems, and endeavour
to influence the enabling environment.
Infrastructure is a critical need. Agricultural communities often lack the infrastructure that would enable them to thrive and contribute to a nations food
security and/or exports. Too often, there are gaps in basic services: inadequate
electricity for operating machinery and processing equipment, lack of storage
facilities to ensure product quality, undeveloped road systems to promote fast
delivery and reduced spoilage, no greenhouse structures to prolong seasons
and increase yields, and insufficient water and technologies for irrigation and
other farm activities. It is costly and policymakers must make agriculture a
priority to overcome these obstacles.
Support legislation. Policymakers have a critical role to play in the creation of
enabling environments. Legislation may target financing issues from the regulations that govern microfinance institutions to those that support the development of managed warehouses that enable collateralization of inventory.
Alternatively, legislation can support the certification of agricultural inputs,
the registration of agribusinesses, the development of industry standards,
the opening of domestic and international markets, and a host of other supporting regulations for agricultural sub-sectors. For value chain stakeholders,
facilitators and policymakers, understanding the regulatory bottlenecks, and
how to overcome them, can result in significant changes in legislation and the
enabling environment.
Consider a value chain lens in agricultural development. In delivering governmental support to agricultural development for example, expansion of extension services, investment in agricultural research, development of wholesale
markets it is useful to employ a value chain lens. Too often, well intentioned
government initiatives are disconnected from the reality on the ground. Such
efforts can be enhanced by building suitable public and private alliances for
planning and implementation, as outlined in the next point.
Build supportive alliances. With the intensification of agricultural value chains,

there are new alternatives for developing the agricultural economy. It is important to bridge the gap between public and private sector plans and strategies, involving all actors from farmers, to agribusinesses, traders, financiers
and government. At the same time, there is a need to complement the government extension machinery; this second agriculture revolution needs active
participation from all actors, besides the government. Policymakers can take
an active role in leading this collaboration.
Contribute to risk mitigation. Policymakers that aim to invest in their countrys
agricultural development can utilize funds to assist in reducing risk in financing agriculture and agro-industry. For example, government funds can be used
to support guarantee funds, agricultural insurance or incentives for start-up.
Each of these has to be assessed in light of the agricultural goals of the country,
the nature of the funds and the long-term impact and viability; using funds
in this way may catalyse agricultural finance and investment and promote the
development of competitive agricultural value chains and efficient financial
markets which support them. Introduction of legislative innovation, such as
the rural product notes in Brazil, that provide access to advance funds on forward contracts and allow that disputes can be rapidly settled in out-of-court
settlements, can be considered as an example of increasing access to finance
and reducing risks of moral hazard.
Training and capacity building. The concepts and many of the instruments of
value chain financing are not well understood. Universities, bank training institutes and development organizations must be encouraged to develop the
training and teaching curricula needed to build the capacity required.
Understand the limitations of value chain finance. Two cautions must be understood. Firstly, value chain integration may not be good for all those involved.
The least powerful in the chain may become marginalized in certain value
chains. Value chain finance cannot address inequities that may be inherent
in some value chain relationships. Governance through policies and enforcement is required. Secondly, value chain finance can only address financial
needs related to the chain; the conditions for promoting broad-based financial
services to all households and businesses must also be pursued.
List of conferences
AFRACA Agribanks Forum: Africa Value Chain Financing, Nairobi, Kenya, 1619,
October, 2007, presentations available from: www.ruralfinance.org/id/54740
[accessed 4 October 2009].
Asia International Conference: Agri Revolution: Financing the Agricultural Value
Chain, Mumbai, India, 1517 March, 2007, presentations available from: www.
ruralfinance.org/id/48291 [accessed 4 October 2009].
Global Agro-Industries Forum: Improving Competitiveness and Development
Impact, New Delhi, India, 811 April, 2008, further information from: www.
gaif08.org/ [accessed 4 October 2009].
Latin American Conference: Agricultural Value Chain Finance, Costa Rica,
1618 May, 2006, summary of conference available from: www.ruralfinance.
org/id/54079 [accessed 4 October 2009].
Southeast Asia Regional Conference: Agricultural Value Chain Financing, Kuala
Lumpur, Malaysia, 1214 December, 2007, conference proceedings available
from: www.ruralfinance.org/id/68010 [accessed 4 October 2009].
References
Please refer to the above list of conferences to view the presentations cited in
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Index
access
to credit 315, 536, 61, 73, 78,
141
to finance 57, 15, 20, 38, 867,
150
see also market
accounts 14, 43, 61, 702, 97, 131
receivables 56, 6670, 89, 121
see also bank; savings
ACE (Audit Control and Expertise)
7980
advance
financing 10, 20
funds 16, 568, 87, 158
payment 38, 55, 69
AEZs (Agri-export zones) 1245
AFC (Agricultural Finance Corporation) 123
Africa 12, 23, 612, 73, 935, 119
see also ATV; PRIDE AFRICA
agent 23, 30, 33, 901, 123
see also transaction
aggregation 25, 89, 1256
agreements see marketing; repurchase agreements
agribusiness 35, 1820, 358, 56,
8993, 145
activities 42, 121
experts 84, 124, 13840
firm/company 31, 646, 702,
109, 153
services 423, 1247
see also LAFISE Group
agricultural
commodities 13, 79, 112, 122,
136, 145
development 68, 84, 137, 1578
lending 6, 123, 139, 1545
marketing 44, 80, 856, 93
products 36, 65, 76, 107, 121,
123
see also AFC; BAAC; GAP; IAFP;

IFAD; UNIPRO
agriculture
sector 6, 62, 78, 90, 124, 138
see ACE; sustainable
agri-export see AEZs
agro-dealers 4851, 62, 1312, 137
agro-food 57, 19, 30, 1235, 137
agro-industry 6, 356, 111, 158
agro-input 2, 14, 38, 61, 135
agro-processor 234, 31, 35, 616,
127
agronomic practices 48, 130
alliances 1123, 1558
application
of value chain finance 4, 18, 55,
83, 1515
potential 969
Asia 3, 23, 44, 5961, 73, 147
assessment 1, 11, 167, 701, 107,
117
see also loan; risk
asset 44, 57, 69, 72, 823, 86
see also CPR; fixed assets; technical instruments
assistance 29, 38, 65, 75, 117, 136
see also technical
association 19, 289, 1024, 113,
115, 156
see also ACE; CRAC; KFA;
producer
assured market 34, 46, 66, 141, 144
ATV (African traditional vegetables)
4553
awareness 42, 46, 72, 80, 84, 148
see also market
BAAC (Bank for Agriculture and Agricultural Cooperatives) 64, 934
Bangladesh 42, 62, 116
see BRAC
banking 14, 1922, 434, 724, 113,

1379
institutions 32, 105, 1089, 118,
1513
regulations 122, 134
services 12831
see also mobile; private
bank
accounts 49, 52, 123
finance 2, 14, 32, 70, 150
loan 65, 69, 97, 102
see also BAAC; commercial;
Equity Bank; non-bank; Rabobank; rural; World Bank; YES
Bank
BASIX India 24, 64, 85, 121
BDS (business development services)
24, 36, 468
benefits 335, 66, 72, 7981, 969
bills 46, 56, 67, 701
bonds 87, 113
borrowers 16, 22, 31, 88, 1179, 150
see also eligible borrowers
bottlenecks 36, 115, 157
BRAC (Bangladesh Rural Advancement Committee) 42, 62
branding 19, 50, 117
Brazil 35, 59, 64, 867, 158
brokers 82, 1289
budget 13, 64
bulk 489, 78, 103, 105, 123
see also NBHC
business models 16, 2753, 85, 128,
137, 151
see also BDS
buy-back 43, 567, 82
buyer
credit 30, 39, 634
/processor 28, 34, 7475
buyer-driven 4, 28, 303, 45, 135
capacity building 21, 4550, 81, 93,
109, 158
see also farmers; training
capital 137, 23, 58, 76, 124, 138
investment 27, 38, 40, 935
see also working capital
CAR (commodity acknowledgement
receipts) 745
cash 12, 746, 102, 11823, 128, 148

flow 17, 51, 5660, 89, 99, 105
management 1302, 134
see in-kind finance; payment
method
catalytic fund 467
Central America 33, 65, 99, 108, 112
certification 1920, 35, 65, 93,
12830, 157
see also quality; training
character see Five Cs
client 15, 49, 63, 67, 131, 150
risk 17, 804, 121
coffee industry 378, 412, 111
cooperatives 2930, 65, 88, 108
see Starbucks
collateral
based 13, 20, 79, 88, 92
management 18, 57, 73, 778,
812, 125
see also collateralization; traditional see Five Cs
collateralization 73, 81, 118, 157
see also technical instruments
collective 7, 10, 145, 479, 523,
150
commercial
banks 6, 13, 18, 43, 11920,
1258
financing 44, 65, 90, 137
viability 1359
village approach 4552
commodity
exchanges 578, 8790, 979,
112, 143, 153
management 789, 84, 108,
112, 117, 152
markets 74, 77, 88
storage 57, 735, 778, 802, 100
see also CAR; MCX
communication 51, 57, 1215,
1289, 134, 1501
community organizations 10, 18,
24, 40, 74, 152
competitiveness 11, 179, 4850, 58,
152, 1567
see also industry
conditions see Five Cs; market
consolidation 7, 95, 121, 142
INDEX
constitutions 479
constraints 12, 11, 16, 97, 105,
1236
consumer demand 1, 16, 19, 40, 45,
152
contract
enforcement 20, 153
farming 4, 2541, 5665, 926,
125, 143
see also contracting; export;
formal; forward; sales
contracting 356, 66, 79
see also forward
control see price; quality
conventional finance 7, 13, 15, 67,
89, 1503
cooperative 16, 52, 59, 934, 11920
see also BAAC; coffee industry;
SACCO
coordination 30, 47, 67, 82, 98, 110
cost
of financing 1, 35, 557, 66, 96,
150
see also transaction costs;
transportation
Costa Rica 301, 59, 64, 122, 124
counterbalancing 57, 88
CPR (cedula produto rural) 867
CRAC (Rural Savings and Loan Association Caja Rural de Ahorro y
Crdito) 2930
credit
cards 11920
risk 56, 70, 80, 105, 1314, 141
schemes 489, 52, 126, 143
unions 2, 6, 13, 40
see also access; buyer; creditworthiness; informal; input; inventory; marketing company
credit; seed; SACCO; trader
credit
creditworthiness 15, 31, 38, 6970,
89, 14750
crop
guarantees 12, 32, 82
insurance 846, 98, 11820,
125, 140
customized financial services 19, 37,
78, 1389, 1414
169
CVA (Commercial Village Approach)

see commercial
CWC (Central Warehousing Corporation) 812
dairy 22, 1112, 121, 1434
debt 32, 57, 6871, 95, 103, 106
default 40, 61, 67, 74, 83, 98
rates 13, 81
risk 70, 134, 141
deferred payment 2, 61
disbursement 634, 91, 131, 151
discount 3, 46, 56, 6971, 97, 113
diversification 234, 85, 131, 151
down payment 43, 83, 112
DrumNet 38, 122, 12532, 134-37
Eastern Europe 3, 44, 61, 147
e-choupal 122, 141
economic growth 13, 21, 45, 104,
122, 126
see also macro-economic
economies of scale 2830, 35, 66,
125, 144, 149
ecosystem 78, 149
electronic exchange 71, 1213, 141
eligible borrowers 92, 100, 131
embedding finance 53, 150
employment 24, 423, 51, 120, 145
enabling environments 169, 36, 42,
1156, 152, 157
enforcement 5, 201, 35, 96, 153,
158
Equity Bank 8, 52, 122, 135
equity finance 37, 57, 89, 93, 99,
1256
exchanges 57, 78, 90, 119, 1212,
125
see also commodity; electronic
exchange; MCX
expansion 46, 1046, 120, 125,
1367, 157
export 3941, 97, 111, 121, 135, 140
contract 2, 68
finance 678, 923, 113
market 22, 56, 108, 116, 126,
144
see also AEZs
external finance 2, 89, 40, 105
facilitation 379, 789, 125, 152

factoring 56, 6772, 97, 113, 139,
152
see also reverse factoring
farm
-gate prices 9, 37, 46, 52, 96
inputs 52, 55, 100, 1267
see also contract; FCI
farmers
capacity building 369, 77, 102,
105, 128, 152
group 2, 12834
see also KFA; smallholder;
small-scale
farm-to-end-user 9, 11, 25, 127
FCI (Farm Concern International)
458, 50, 523
fee 38, 70, 87, 129, 1312, 136
see also transaction
fertilizer 3840, 47, 52, 601, 95,
116
financial
intermediaries 7, 27, 31, 66, 89,
116
lease 57, 834
resources 13, 30, 101, 109
service providers 8, 13, 40, 502,
137
see also customized financial
services; LAFISE; MacFin; nonfinancial services; technical
instruments
Five Cs 167, 150
fixed assets 38, 79, 83, 123
food
chain 1, 56, 139, 141, 155
security 76, 81, 1001, 1067,
118, 157
see also agro-food; IAFP
forfaiting 56, 679, 712, 97, 124
formal
contract 31, 34, 40, 65, 118
market 467, 51, 128
warehouse receipt 745, 77
forward
contracting 66, 857, 118
contracts 57, 98, 121, 158
fruit 2, 22, 64, 108, 121, 149
see also Hortifruti
fund management 92, 1102

see also advance; catalytic fund;
investment; TIF; trust
futures 57, 78, 98, 11921, 125, 140
market 82, 8789
gains 1, 6, 96
GAP (good agricultural practices) 19,
149
global markets 57, 71, 122, 156
governance 18, 20, 30, 117, 155, 158
governmental support 103, 45, 88,
109, 1245, 157
grants 12, 81, 117, 119, 1023
group saving 479, 512
guarantees 327, 867, 89, 117, 135,
139
see also crop; loan
handling 40, 47, 108, 115, 123, 140
see also NBHC; post-harvest
harvest 29, 35, 56, 658, 130, 140
see also post-harvest; pre-harvest
hazard 87, 149, 158
health insurance 98, 11821, 152
high-quality 28, 37, 39, 45, 70, 101
high returns 78, 81, 110, 118, 141
holistic approach 14, 119, 121,
1401, 1479, 155
horizontal linkages 1, 6, 16, 41, 124
Hortifruti financing model 313,
118
IAFP (Integrated Agricultural Food
Parks) 1415
import see export
income
generation 81, 91, 1035
growth 13, 24, 378
see also low-income
INDACO (Industria Alimentaria La
Convencin) 29
independent 7, 402, 90, 100,
1267, 140
India 24, 423, 7789, 11925,
13741
industry 1920, 38, 77, 94, 139, 145
competitiveness 1179, 1489,
1567
INDEX
see also agro-industry; coffee

industry see dairy
informal
chains 589, 96
credit 13, 100
markets 467, 51
warehouse receipts 746
information
management 121, 128
technology 11, 77, 82, 126
see also e-choupal; market; MIS;
price
in-kind finance 11, 32, 556, 607,
119, 130
innovations 11545
see also value chain; technological innovations;
transportation
input
purchases 123, 131
supplier credit 2, 56, 602, 115
see also agro-input; farm; quality
insurance 18, 24, 434, 57, 80, 133
see also crop; health insurance;
LAFISE; TIF; weather risk
insurance
interest rates 212, 68, 79, 108, 113
intermediation 18, 78, 109, 126, 129
internal value chain 2, 14, 148, 150,
154
inventory
credit 73, 97, 1007
finance 67, 72, 75, 79, 81
investment
fund 65, 112
see also capital; private; public
invoice 6970, 97
discounting 468, 501
irrigation 20, 119, 139, 157
Islamic finance 22, 151
joint venture finance 57, 93, 99, 121
Kenya 78, 38, 456, 52, 58, 80
see also GAP; KFA; Kiambu;
PRIDE AFRICA
key players 75, 1269
KFA (Kenya Farmers Association)
123
171
Kiambu 468, 512

Kisan credit card (KCC) see credit
knowledge-based finance 13740,
145, 148, 156
Korea 434
labour 10, 3941, 51, 68, 102, 109
LAFISE Group (Latin American Financial Services) 43, 64, 10813
land 123, 312, 50, 86, 95, 132
tenure 6, 40, 128
Latin America 3, 23, 59, 73, 147
see also LAFISE Group
law 18, 81, 87
lead firm financing 23, 56, 625, 96,
117, 1516
lease 22, 43, 57, 98
see also financial
legal 33, 42, 55, 714, 104, 129
status 24, 802
system 30, 98, 152
lending
institutions 77, 81, 118, 154
see also agriculture see Five Cs
liquidity 31, 69, 74, 812, 91, 1301
livelihoods 235, 50, 56, 121, 138
livestock 44, 62, 7982, 90, 98,
1424
loan
assessment 1, 167
guarantees 44, 57, 845, 902,
99, 106
payment 2, 12, 14, 32, 75, 98
products 6, 119, 147, 154
recovery 13, 30, 823, 87, 121,
132
repayment 156, 24, 68, 123,
131, 144
security 13, 20, 31, 67, 724, 130
see also bank; CRAC; transaction
costs; working capital
lobbying 115, 156
logistics 67, 73, 789, 93, 128, 138
low-income 6, 8, 101
MacFin (Market Access Financial
Services) 4653
machinery 13, 57, 834, 95, 113,
158
macro-economic 18, 213, 92

management
capacity 38, 44, 1045
companies 73, 789, 112, 117,
152
see also cash; collateral; commodity; fund management; information; MIS; price risk; risk
market
access 135, 29, 4253, 567,
117, 150
awareness 52, 151
conditions 14, 313, 107, 151
demand 14, 59, 1157, 121,
154, 156
-driven 8, 89, 141, 1546
information 53, 636, 88, 98,
108, 144
linkages 24, 53, 589, 109, 116,
1546
opportunity 15, 40, 130
price 17, 279, 58, 81, 1434
support 478
see also assured market; commodity; export; formal; futures; global market; informal;
MacFin; marketplace; MSU;
spot market; supermarkets
marketing
agreements 34, 38
companies 44, 623, 98
policy 18, 80,
systems 12, 489
see also agricultural
marketing company credit 634
marketplace 19, 46, 53, 81, 108, 113
see global markets
MCX (Multi-Commodity Exchange)
78, 88, 121
Mexico 145, 63, 71, 78, 82, 91
MFIs (microfinance institutions) 10,
469, 52, 59, 128, 137
see BASIX India; SACCO
microfinance 20, 42, 99, 11721,
1268, 1527
see also MFIs
millers 11, 13, 23, 28, 59, 87
MIS (management information systems) 1202, 134, 151
mobile
banking 122
phones 1203, 1324, 151
mobilization 48, 126, 129
monetary 21, 104
money 14, 27, 434, 634, 689, 86
transfer 76, 91, 144, 151, 155
moneylenders 5960, 112
mortgage 6, 72, 79, 89
MSU (market support units) 479,
512
NACF (National Agricultural Cooperative Federation) 44
NBHC (National Bulk Handling
Corporation) 778
negotiations 52, 88, 150
networks 48, 117, 121, 126, 155
NFC (Northern Foods Corporation)
34
NGOs (non-governmental organizations) 28, 37, 42, 1069, 111
Nicaragua 1089, 112
Niger 99107
nomadic 13940
non-bank financing 10, 32, 123
non-financial services 16, 31, 43, 59,
78, 143
oil 1413
outreach 78, 21, 24, 29, 120
packaging 201, 4650, 89, 108, 135,
142
partners 15, 22, 36, 434, 57, 1367
see also private; value chain
payment method 57, 63, 836, 111,
1323, 144
see also advance; deferred payment;
down payment; loan; repayment
performance indicators 38, 53, 70,
76, 89, 135
Peru 29, 3940, 59, 64
Philippines 334, 745, 778, 123
planning 35, 70, 104, 136, 157
players 15, 212, 46, 80, 93, 122
see also key players; value chain
pledge 29, 32, 61, 86, 113
policymakers 7, 107, 1523, 1578
INDEX
political interference 13, 224, 100,

108, 113
portfolio 51, 78, 105, 121, 139, 151
post-harvest 25, 34, 58, 108, 111, 138
handling 40, 47, 115, 125
poverty
alleviation 42, 62, 118, 123, 126
reduction 1, 39, 50, 53, 1002,
1067
pre-finance 35, 38, 55, 658, 139
pre-harvest 25, 68, 78
price
control 13, 84, 96, 124
hedging 57, 88, 96, 98, 149, 151
information 112, 1212, 143,
151
see also farm; market; price risk
price risk 5, 13, 31, 57, 66, 845
management 38, 88, 119
PRIDE AFRICA 122, 1267, 1347
see DrumNet
private
banking 29, 138
partnerships 53, 94
investors 10, 89
sector 21, 379, 468, 802,
1245, 158
proceeds 2, 15, 64, 70, 110
see also sales
process flow 1323
processor 302, 404, 56, 73, 143,
148
finance 634
see also agro-processors; buyer
procurement 35, 67, 73, 845, 122,
143
producer
associations 29, 63, 88, 1012
groups 46, 52, 117, 124, 128,
136
organizations 40, 100, 106, 110
see also producer-driven; smallholder; small-scale; UNIPRO
producer-driven 4, 2830, 45, 100,
151
profit 37, 103, 1056, 127, 136, 156
property 31, 142
providers 36, 46, 61, 127
see also financial; service
173
public
investors 89, 124
sector 5, 18, 25, 92, 120, 124
purchases 13, 567, 6675, 82, 98,
152
see also input
pyramid 47, 523
quality
assurance 34, 47, 56, 65, 79, 86
certification 1102
control 74, 77, 802, 1305, 157
inputs 412, 1023, 106
standards 56, 1920, 356, 66,
81, 968
see also high-quality
QUEDANCOR (The Quedan and
Rural Credit Guarantee Corporation) 75
Rabobank 5, 145, 435
raw material 31, 345, 43, 636, 115,
121
RCGS (Rural Credit Guarantee Corporation) 34
receipts see CAR; formal; informal;
warehouse
reform 123, 18, 21, 1401, 145
regional 16, 19, 28, 33, 74, 120
differences 21, 1523
level 107, 123
see also UNIPRO
regulation 4, 201, 802, 90, 153
see also banking
repayment
rate 65, 74, 126, 132
risk 15, 62, 84, 129
see also loan
replication 64, 107, 125, 145
repos see repurchase agreements
repossession 83, 90, 98
repurchase agreements 57, 82, 95,
97
reserves 6, 68, 77
retailers 23, 28, 40, 601, 76, 116
returns 57, 62, 87, 99, 124, 151
see also high returns
revenue 61, 101, 103, 131, 136
reverse factoring 701
rice industry 101, 223, 28, 323,

59, 75
risk
assessment 17, 155
management 55, 78, 84, 91,
117, 125
see also client; credit; default;
price risk; repayment; risk
mitigation; weather risk
insurance
risk mitigation 245, 36, 55, 7980,
92, 158
see also technical instruments
rural
banks 401, 11920
finance 7, 21, 34, 75, 1056, 127
infrastructure 18, 108
see also CPR; CRAC
SACCO (savings and credit cooperative organization) 52, 767
safety 1, 5, 1920, 84, 88, 936
sales
contracts 13, 39, 657, 85, 92,
119
proceeds 67, 12831, 134
transactions 68, 151
see side-selling; wholesalers
savings
accounts 44, 49, 76, 91
see also CRAC; group saving;
SACCO
screening 31, 111
seasonal 13, 53, 78, 81, 1012, 135
securitization 567, 89, 901, 969,
106
security 79, 87, 110, 135, 1401, 152
see also food; loan
seed
credit 4950, 60
production 3842, 95, 130
supply 456, 141
service
model 43, 111
providers 11, 40, 42, 1556
see also agribusiness; banking;
BDS; customized financial
services; financial; LAFISE;
MacFin; non-financial services; support; TechnoServe

settlement 69, 103
shipping 64, 95, 123
side-selling 13, 22, 33, 357, 96,
1523
smallholder
farmers 13, 28, 109, 116,
1317, 149
groups 1267
producers 459
value chain 3741, 503, 152,
156
small-scale
farmers 337, 63, 1048, 112,
127, 137
producers 28, 36, 5960, 101,
10810, 113
social context 8, 213, 28, 44, 116,
142
solutions 78, 82, 115, 1212, 144,
155
see also value chain
spot market 22, 278, 82, 143
stability 123, 18, 21
stakeholders 36, 67, 93, 106, 1267
see also value chain
standards 1920, 41, 645, 724,
102, 1567
see also quality see safety
Starbucks 42, 65, 118
start-up 30, 378, 77, 136, 158
stock 778, 901, 1004
storage 20, 61, 723, 812, 957,
1112
facility 2, 7680, 1003, 106,
152, 157
see also commodity; warehouse
subsidized 6, 13, 85, 90, 989, 127
subsistence 37, 128
supermarkets 11, 14, 278, 31, 39,
46
supplier credit see input
supply chain 8, 34, 39, 67, 118, 140
support
services 167, 28, 43, 119, 125, 154
see also governmental support;
market; MSU; technical
INDEX
sustainable
agriculture 92, 102, 13740
development 1, 42, 46, 123
Tanzania 18, 38, 45, 767, 80, 88
targets 456, 501, 112, 128, 151,
157
taxation 18, 21, 80, 83, 98
technical
assistance 2931, 3340, 62,
656, 94, 1113
knowledge 141, 1434
support 30, 34, 50, 66, 90, 102
training 10, 358, 412, 149
technical instruments
financial enhancements 57, 89,
99
physical asset collateralization
557, 729, 978
product financing 557, 66, 96
receivables financing 556,
678, 712, 97
risk mitigation products 57, 84,
98
technological innovations 4, 120,
126, 151
TechnoServe 378, 118
Thailand 64, 934
TIF (transaction insurance fund)
1301, 1345
tracking 1212, 126, 1323, 136
trade finance 55, 678, 712, 78, 139
trader credit 4, 14, 5862, 96
traditional
collateral 17, 79, 148, 152
systems 55, 58, 66, 156
see also ATV
training 259, 47, 51, 62, 1135,
1215
and capacity building 1012,
1089, 153, 158
and certification 128, 1303
institutes 1424, 158
see also technical
transaction
agent 129, 132
fees 50, 126, 136
see also sales; TIF
175
transaction costs 367, 48, 119, 126,

138, 148
of loans 3, 16, 155
reduction 24, 35, 72, 813, 96,
103
transfers 24, 93, 103, 1223, 130,
151
see also money
transformation 79, 141
transit 84, 95, 112, 133
transparency 201, 74, 79, 96, 129,
14850
transportation 21, 42, 478, 82, 115,
150
cost 48, 52, 66
innovation 123, 1303
trust 27, 356, 70, 77, 80, 97
fund 902
Uganda 20, 37
unions see credit
UNIPRO (Regional Agricultural
Union of Producers) 912
up-front 58, 128, 153
usage 56, 102, 134
USAID 40, 112
value
-added 710, 156, 423, 1101,
153
addition 245, 38, 93, 125, 141,
149
proposition 130-1,
value chain
actors 3, 7, 66, 149
analysis 11, 16, 1156
innovations 1157
instruments 55114
integration 13, 37, 40, 71, 143,
1528
knowledge 15, 115, 155
linkages 3, 25, 57, 68, 72
partners 157, 1920, 28, 44,
1269, 155
players 7, 489, 53
relationships 2, 8, 118, 158
solutions 67, 1379
stakeholders 143, 153, 1557
see also application; DrumNet; internal value chain;

smallholder
vegetable production 2, 202, 41,
64, 102, 1212
see also ATV
vendors 55, 143
ventures see joint venture finance
verification 80, 85
vertical integration 1, 68, 16,
2730, 401, 1178
viability 106, 115, 148, 1558
see also commercial
village 42, 122, 1412
see also commercial
vulnerability 1, 5, 19, 45, 66, 128
warehouse
receipts 25, 38, 7286, 99100,
110, 1523
storage 767
see also formal; informal
warehousing 21, 778, 812, 112,
121, 1402
see also CWC
warrants 81, 100, 113
weather risk insurance 6, 845, 98,
118, 125, 133
weights 202
welfare 44, 49
wholesalers 910, 134, 23, 401,
5561, 132
withdrawals 13, 76
women 22, 42, 456, 137
working capital 14, 312, 56, 67, 83,
945
loans 61, 749
needs 378, 123
World Bank 18, 21, 835, 92
YES Bank 123, 13745

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Agricultural Value Chain Finance

Praise for this book

Agricultural Value Chain Finance

Practical Action Publishing Ltd

About the authors

2. Understanding agricultural value chain finance

3. Value chain business models

4. Agricultural value chain finance instruments

AGRICULTURAL VALUE CHAIN FINANCE

Physical asset collateralization

6. Lessons learned and summary recommendations

2.2 Flower chain financing, Mexico

2.3 Five Cs of lending applied to value chain financing

2.4 Financial flows within the rice industry

3.1 Cacao producer association, Peru

3.2 Buyer relationship credit-worthiness, Costa Rica

3.3 Formal contract agriculture, Philippines

3.4 Failure of contract farming in tomato production in Brazil

3.5 Success factors for contract farming

3.6 Facilitating chain development in Malawi and Tanzania

3.7 Facilitating artichoke chain development and finance in Peru

3.8 BRAC integrated services model for agriculture, Bangladesh

3.9 National Agricultural Cooperative Federation, Korea

4.1 Small-scale farmer capacity and competitiveness, Kenya

4.2 Trader finance in Latin America

4.3 Input supply credit, Myanmar

4.4 Input supplier credit, Bangladesh

4.5 Processor finance for agave farmers, Mexico

4.6 Marketing company finance, Costa Rica

4.7 Lead firm finance and assistance in Central America

4.8 Factoring in Serbia

4.9 Formal agri-fishery warehouse receipts, Philippines

4.10 Informal warehouse receipts, Tanzania

4.11 Field warehousing, India

4.12 Publicly controlled warehouses, Philippines

4.13 Agricultural warehouse receipts in the wider system, India

4.14 ACE and global risk mitigation

viii AGRICULTURAL VALUE CHAIN FINANCE

4.15 Warehouse receipt challenges and solutions, India

4.16 Warehousing livestock, Mexico

4.17 Using futures in price risk management, MCX, India

4.18 Livestock securitization, BNA, Colombia

4.19 Public-private contract farming, Thailand

5.1 Kisan credit cards, India

5.2 Integrated information management, BASIX, India

5.3 Electronic network for fruit and vegetable trade, India

5.4 E-choupal information centres, India

5.5 Transportation innovation in the Philippines

5.6 Value chain approach to agricultural services, Costa Rica

5.7 Agri-export zones in India

5.8 Warehousing of nomadic farmers honey in northern India

2.2 Interlinked cereal lending

2.3 BASIX livelihood services model

3.1 Different ways to coordinate and structure the value chain

3.2 Artichoke value chain

3.3 Rabobank integrated agriculture finance structure

3.4 Commercial village approach for African traditional vegetables

3.5 Market access financial service flowchart

4.1 Pre-export receivables finance basic scheme

4.2 Pre-export receivables finance scheme