Presentation by Lamon Rutten (CTA) at social reporting workshop before Fin4Ag conference

1. Why is the time ripe for a revolution
in agri-value chain finance?
Lamon Rutten
CTA

2. Overview
• Value chain finance – why now?
• Chain-linking farmers to finance
• Forms of value chain finance
• What is needed to make it happen?

3. Value chain finance – why now?
Push ……….. and pull
•The need to secure
supply (in terms of
quality and quantity) of
the commodities that a
fast growing and
increasingly competitive
market requires.
• Declining risk capacity
• Consumers demand
proper value chains
• ICT makes VC finance
easier
• Traditional financial
sector barriers are
disappearing

4. The push…
0
10
20
30
40
50
60
70
80
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
SSA EastAfrica CentralAfrica SouthernAfrica WestAfrica
African urbanisation rates as % of total population
Source: AFRACA/CTA/Ecobank, Opportunities for value chain
finance in Africa’s intra-regional food trade - forthcoming

5. The pull...
Exchange
Investor
Farmer
Chicken
processing
plant
2. Forward contract
1. Due diligence
3. Cession of the rights to payment
under the forward contract
4. Confirmation of
assignment of payment
5. Repo: sale of the
forward contract,
with obligation to
buy back after 90
days
6. Purchase of
the repo
(through a
broker)
Broker
7. Funds
8. Funds
9. Funds
Capital market investors are looking for
new ways to invest their funds. And
they are growing in size and
sophistication, including in many ACP
countries.

6. But push and pull factors only create
potential
SME financing requirement in Sub-Saharan
Africa, 2012 – appr. US$ 80-100 billion/year
23%
77%
Available financing Financing gap
Source: IFC.
Finance for agriculture has to
increase by at least half.
Currently, 90% of finance going
into agriculture comes from the
farmers themselves.
So, either farming should
become much more profitable,
or external financing for
agriculture has to increase
radically.

7. But risk perception has to
change
A bank tends to make
only small margins on
loans. One deal that
goes bad can wipe out
the profits of dozens of
deals that went well.
Thus, banks tend to stay
away from deals that
they perceive as risky.

8. Is subsidizing agri-loans a solution?
No. Schemes to provide agricultural loans at subsidized
interest rates were prevalent in the 1960s and 1970s, but
they largely failed (but they still exist, in countries like the
USA or Nigeria, and politicians continue asking for them).
The common position now is that subsidies for agri-finance
should be indirect:
- To help financiers manage risks: weather risk insurance,
credit guarantee schemes
- To develop supportive institutional, regulatory and policy
frameworks (eg, for warehouse receipt finance, investment
funds)
- To build capacity and improve KM.

9. Is more micro-finance a solution?
Not in its traditional form:
- group-lending and heavy monitoring is too expensive
(paying 1% interest on a 5 day loan permitting a small-
scale processing operation with a 10% profit margin looks
OK; paying 40% on a 180 day loan doesn’t)
- small loans and regular repayment don’t fit with the
agricultural season.
So, MFIs need to adapt their methods to engage in agri-
finance. Eg, micro-leasing, VC finance.

10. Bank
Borrower
Will the borrower
earn enough, and
reimburse?
Bank
Borrower
Will the borrower
be able to
perform
Risk
mitigation
mechanism
H
o
w
?
From credit risk to performance risk
Value chain finance permits financiers
to shift their risks

11. Value chains require a structuring of the link of producers to
consumer demand. Producers need to be enabled to meet
changing consumer demand. A proper value chain approach
therefore cannot focus exclusively on farmers.
Linked to a number of global developments (sustainability,
food safety, etc.), many companies have an interest in acting
as enablers. In many cases, NGOs, government bodies and
development agencies can be facilitators. This should give
rise to a new kind of development project, including
farmer-business-NGO partnerships, and PPPs.
Seller Buyer Seller Buyer
From supply chain….. to ….. value chain
Value chain  supply chain

12. Value chain financing 
Financing the value chain

13. Value chain financing 
Financing the value chain

14. Chain-linking farmers to finance
1
2
3
Farmer produces for a
specific offtaker
Off-
taker
Farmer produces to a set
standard and sells in such
a way that his market is
secure, but competitive
1
2
E.g., warehouse receipts,
auctions, commodity exchanges
E.g., contract farming

15. Chain-linking farmers to finance
1
2
3
Farmer produces for a
specific offtaker
Off-
taker
Farmer produces to a set
standard and sells in such
a way that his market is
secure, but competitive
1
2
E.g., warehouse receipts,
auctions, commodity exchanges
E.g., contract farming

16. VC finance directly counters the two
main risks of agri finance
Inability to reimburse.
Agriculture is risky.
Dependency on weather,
prices, availability of
markets, condition of
roads, rural insecurity…
Unwillingness to
reimburse. Past practices
often discouraged farmers
from honouring their
obligations.
Make sure loan is used to
improve farmer’s revenue.
Build risk management
tools into the loan.
Ensure that the
reimbursement is not by the
farmer, but is made through
a stronger link in the value
chain.

17. Forms of VC finance
• Warehouse receipt finance (at
different parts of the chain)
• Processor-centered finance
• Financing traders through the
monitoring of their value chain
operations
• Final buyer-centered finance (eg.,
factoring)
• Pushing pre-export finance up-
country
• Full supply chain financing (from
inputs to final buyers)

18. Warehouse receipt finance
The concept: turn commodities into gold
Vault
Bank
Borrower
Deposit gold
in bank vault
… and get
an ‘easy’
loan
Showing your wealth isn’t
enough – the bank prefers to
take it under its own control
(to take possession).

19. Warehouse receipt finance
The concept: turn commodities into gold
Vault
Bank
Borrower
Deposit gold
in bank vault
… and get
an ‘easy’
loan
“Vault”
Bank
Borrower
Deposit
commodities
in bank
“vault”…
… and get
an ‘easy’
loan

20. Four possible relationships between the
bank and its “vault”
The Latin/
Turkish model
1
Banks can set up
arms-length collateral
management
subsidiaries. Still
prevalent in Latin
America and Turkey;
was once quite
important in the US.

21. Four possible relationships between the
bank and its “vault”
The Latin/
Turkish model
1
2 Collateral
management

22. Four possible relationships between the
bank and its “vault”
The Latin/
Turkish model
1
2 Collateral
management
Public
warehousing
3

23. Four possible relationships between the
bank and its “vault”
The Latin/
Turkish model
1
2 Collateral
management
Public
warehousing
3
The Indian
model: collateral
manager takes
over warehouses
for use as public
warehouses
4

24. Warehouse receipt finance – an
example of SME financing
Warehouse
Printer
Financier
Sale at
beginning of
school year
Continuous
printing of books
during the year
Schools
Paper
supplier
Collateral
manager
Working
capital
finance
Payment of
invoices
Reporting
Control
Delivery of paper
(imported)
Weekly
releases of
paper

25. Port of loading (Black Sea)
Bulky fertilizer (Beira, Dar)
Bagging
Central distribution warehouses
Distribution
warehouses,
Zambia
Distribution
warehouses,
Malawi
Buyers
trucktruck
truck
train
train
trucktruck
vessel
truck
Financing of an import operation, e.g.
fertilizers – the bank starts with
control over the goods as they are
being loaded, and then retains control
as they move down nearer to the
buyers. Goods are only released
from the warehouses once the bank
has received an appropriate payment
or guarantee.
The advantages of this are two-fold.
International finance (at low cost) can
be brought to the buyer’s factory gate;
and large, cost-efficient volumes can
be combined with low working capital
needs for the buyers.
An import financing using collateral
management

26. And an export operation…

27. Processor-centered value chain
finance
Smallholders
Finance the offtaker, who will take full
responsibility for the production
process…
Off-
taker
Contract
Bank
Young animals;
veterinary services
Mature animals;
milk
For example, contract
farming…

28. Farmers Off-
taker
Contract
Bank
Young animals
Mature animals;
milk
Veterinary
services
Assignment of
receivables, and
payment
Contract
Insurance ContractDue diligence
Processor-centered value chain
finance (a more complex form)
Funding

29. Off-
taker
Bank
Trader
Animals are moved to offtaker
Monitoring
agency Check the number and
weight of animals sold
Check the number and
weight of animals bought
Assignment of
receivables, and
payment
Loan
Spot
checks
Financing traders by monitoring
their value chain operations

30. Agent
Exporter
International
Buyers
(Supermarket
chains and
Auctions)
4- Pay within 15 days
2- Issue notes for
payment in 30 days
1- Export merchandise
3 (a)- Issue new notes with payment in 90 days INNOFIN
3 (b)- Pay immediate cash at a discount
5- Pay back after 90 days
Afreximbank
FinanceAgreement
Leveraging on the buyers…
starting with factoring

31. Applying value chain finance to
micro-finance

32. Agent
bank
International
offtakers 5. Instruction to
release funds to
farmers
1.
Tripartite
agree-
ment
7. Settlement of invoice
values
ITFC
Transit
depots
6. Release of funds to farmers’ cooperatives
4. Verify and submit
documents received
8. Final
reimbursement
Facility
manager
1*
3d#
* Sales contracts, letters of assignment of export proceeds,
letter of guarantee by Gambia government.
# Copies of invoices.
3b. Transportation
to final depot
3f. Shipping and
shipping documents
Export
depot
GGC
3e. Monitoring
(quality, quantity)
3c. Warehouse
receipts
3a. Warehouse receipts
2. Delivery
Groundnut
farmers’
cooperatives
Pushing pre-export
finance up the chain

33. Fertilizer
company 4. Hedge
Producers
Bonded
warehouses
Borrower
(exporter)
Commodity
exchange
Standard Bank
8. Coffee
2. CPRs
3. CPRs
7. Payment
1. Fertilizer
5a. Assignment of CPRs;
assignment over hedge
proceeds; warrants at bonded
warehouse.
6. Loan
5b. Performance guarantee
on producers delivering
against the CPRs.
Full supply chain financing

34. VC finance is safe and easy
Value chains generally continue
functioning over many years. Thus,
financiers can construct
standardized financing
mechanisms, where the “entry” of
the commodity into one particular
phase of the chain is sufficient to
trigger the financing.

35. What is needed to make it happen ?
• Learn from best practices
• pro-active governments and Central Banks
• supportive development partners

36. VC finance is not just a private
sector matter
Supportive legal/regulatory
environment
Central
Bank
support/
discount
facilities
Support
institutions
that mitigate
risks
Central Banks played a
central role in developing
agricultural finance in 19th
and early 20th century
Europe and USA…
providing good models for
today’s developing
country Central Banks and
Ministries of Finance.

37. Learn from history !
Collateral
manager
Bank
Commodity
owner
Central
Bank
Loan of X $
Documentation
Submission of the loan of X
$, with documentary proof
that it is a proper warehouse
receipt loan, for discounting
Loan of X $, at the official
discount rate
In 1848, the Bank of France created 49 "bonded warehouses",
which started to provide companies with warehouse warrants
for various; sub-discount banks also set up by the Central Bank
accepted these warrants as collateral, and their loans constituted
discountable paper for the Bank of France.

38. Farmer Investor
Farmer issues
a Financial
CPR, backed by cattle
Payment
Agent bank
escrow
account
Buyer
Inspection
agency
Reporting
monitoring
Payment
Payment
Assignment
Contract
Delivery
Commodity
exchange
Price risk
management
CPRRegistrar Registration
ICTs facilitate
institution-building
ICT-enabled

39. In conclusion...
• Value chain finance is a need of the day – a key
tool to get agriculture to meet current challenges –
but also, a great opportunity for banks.
• But mindsets have to change and skillsets need to
improve.
• Governments should take their responsibilities…
but not fall back in the failed 1960/70s model in
state-driven subsidized credit.
• Development partners can provide support in
several ways, from capacity- and institution-building
to the provision of risk capacity.

40. Go for it !
www.fin4ag.org