Calvin Miller -Calvin Miller - Senior Officer, Senior Officer,

Rural FinanceRural Finance Holder of M.S in Agricultural Holder of M.S in Agricultural Economics, currently Senior Economics, currently Senior Officer for Rural Finance in FAO, Officer for Rural Finance in FAO, has over twenty-five years of has over twenty-five years of worldwide experience in economic worldwide experience in economic development, in the design, development, in the design, implementation and evaluation of implementation and evaluation of financial services programs and financial services programs and institutions, production and institutions, production and marketing, and institutional marketing, and institutional development. development.

Has extensive experience in Has extensive experience in agricultural value chain agricultural value chain development and finance for both development and finance for both national and international national and international markets.markets.

Has worked as the Country Has worked as the Country Manager of MEDA in Bolivia and Manager of MEDA in Bolivia and carried out many international carried out many international consultancies consultancies

Mr. Miller provided leadership Mr. Miller provided leadership and technical support for over 200 and technical support for over 200 CARE micro and small enterprise, CARE micro and small enterprise, and agriculture and natural and agriculture and natural resource projects in over 40 resource projects in over 40 countries. countries.

He also founded and developed, He also founded and developed, MicroVestMicroVest

Perspectives of Perspectives of Value Chain Value Chain

Finance in AfricaFinance in AfricaAgri Forum: Value Chain Finance

Conference

Nairobi, Kenya 16 – 18 October, 2007Calvin MillerCalvin Miller

FAO Rural Finance Senior OfficerFAO Rural Finance Senior Officer

Rome, ItalyRome, Italy

Presentation ProfilePresentation Profile

1.1. The changing The changing agricultural sceneagricultural scene

2.2. Using strategic Using strategic alliancesalliances

3.3. Value chains as a Value chains as a business approach business approach financefinance

4.4. InnovationsInnovations

5.5. Addressing riskAddressing risk

6.6. Lessons and policiesLessons and policies

New Agriculture Driven by New Agriculture Driven by Dynamic MarketsDynamic Markets

World Dev. Report: DeJanvry

1.1. An Evolving Agriculture:An Evolving Agriculture:Supermarket vs Subsistence Supermarket vs Subsistence

FarmingFarmingwith Open Markets and Cell with Open Markets and Cell

PhonesPhones Market integration and specificationMarket integration and specification Conglomeration of market leaders Conglomeration of market leaders Open trade with international y regional Open trade with international y regional

competitioncompetition Segmented demand with stringent Segmented demand with stringent

standards and conditionsstandards and conditions Instant access to informationInstant access to information

But also,But also, Subsistence agriculture, food aid and Subsistence agriculture, food aid and

HIV-AIDSHIV-AIDS

Stages of Agricultural Stages of Agricultural FinanceFinance

Agricultural Credit EraAgricultural Credit Era(1950 a 1985)(1950 a 1985) Directed production Directed production

creditcredit Subsidized creditSubsidized credit High transaction costs of High transaction costs of

lendinglending High loan lossesHigh loan losses Government and donor Government and donor

refinanced lines of credit refinanced lines of credit through agricultural through agricultural banks and othersbanks and others

Informal family and Informal family and trader finance for small trader finance for small farmersfarmers

Donor Microfinance Era Donor Microfinance Era (1980 a 2000)(1980 a 2000) Rapid, small working Rapid, small working

capital loanscapital loans Group lending Group lending

approachesapproaches Focus on non-Focus on non-

agricultural activitiesagricultural activities Forces groups savingsForces groups savings Separation of financial Separation of financial

services and business services and business support services.support services.

High cost of High cost of microfinancemicrofinance

Stages of Agricultural Finance Stages of Agricultural Finance (cont.)(cont.)

Commercialization of Commercialization of MFIs MFIs

(2000 to present)(2000 to present) Formal MFIsFormal MFIs Little subsidyLittle subsidy Multiple ProductsMultiple Products Expansion and Expansion and

competitioncompetition New technologiesNew technologies Interest by capital Interest by capital

market investors and market investors and lenderslenders

Value Chain FinanceValue Chain Finance (2005 to present)(2005 to present) Strategic focus on market Strategic focus on market

potential of businessespotential of businesses Linkages among suppliers, Linkages among suppliers,

producers & marketing producers & marketing companiescompanies

Growing importance of standardsGrowing importance of standards Greater use of risk mitigating Greater use of risk mitigating

toolstools Growing integration between Growing integration between

banks and businessbanks and business Growing use of new technologies.Growing use of new technologies.

Some underlying challenges Some underlying challenges affecting rural financeaffecting rural finance

DemandDemand How to increase economic opportunities?How to increase economic opportunities? How to build farm management capacity?How to build farm management capacity? How to mitigate risk?How to mitigate risk?

SupplySupply How to cost-effectively introduce flexible How to cost-effectively introduce flexible

and longer term loan products?and longer term loan products? How to promote effective management?How to promote effective management? How to mobilise support for sound financial How to mobilise support for sound financial

markets?markets?

LoansLoans

Multiple Services; Multiple Providers Multiple Services; Multiple Providers

InsuranceInsurance

Transfer PaymentsTransfer

Payments

SavingsSavingsCredit

Unions & SACCOS

CreditUnions & SACCOS

MFIsMFIsCommercialBanks

CommercialBanks

Marketing CompaniesMarketing

Companies

Insurance CompaniesInsurance

Companies

LeasingLeasingFamily / FriendsFamily / Friends

Suppliers and Traders

Equipment Companies

InputsInputs

Overdrafts/Credit LinesOverdrafts/Credit Lines

2. Financial Linkages2. Financial Linkages

Private Banks

State Banks

Postal Banks

Insurance Cos.

Non-bank financial institutions

Investment funds

MFIs

NGOs

Credit Unions

Village Banks

Agro-processors

Input Suppliers

Marketing Companies

Leasing Companies

Warehouse Operators

Supermarket Chains

Farmers / Rural

Clients

Farmer Associati

ons

Partnering for better access, services Partnering for better access, services and efficiencyand efficiency

3. Agricultural Value Chain 3. Agricultural Value Chain Finance Finance

Linking finance with Linking finance with agriculture and agriculture and agribusinessagribusiness

Aligning and Aligning and structuring finance structuring finance with the chainwith the chain

Processors

Input Suppliers

Farmers & Producer Groups

Medium and LargeExporters and Wholesalers

Collector/Traders

Strategic engagement for common benefit

Trader CreditTrader Credit

Large Scale Trader

Inputs Importer/

Wholesaler

Input shopkeeper/ Small Scale Trader/

Farmer Organization

Bank

Farmers

Trade credit

Trade / seasonal credit

KeyProduct

salesInput sales

Exporter/ Wholesaleror Processor

Processing

Financial and Information flows

Physical flows

Inputs

Enabling business & financial environment

Production Distribution

Finance and supporting services

Value Chain Finance Flows

Consumption

4. Technology Innovation4. Technology Innovation

The Economist, 15/02/07

• Communication Technology -- M-PESA–Kenya; G-Cash--Philippines

• Purchases & salesPurchases & sales• Commodity pricesCommodity prices• Money transfersMoney transfers• PaymentsPayments

• Point of Sale Access•ATM & Smart Cards

Product and System Product and System InnovationInnovation

Risk management tools; futures, Risk management tools; futures, hedginghedging

Warehouse receipts financeWarehouse receipts finance Factoring y securitization Factoring y securitization Contact farming and outgrower Contact farming and outgrower

schemesschemes Facilitation Models (Ej. DrumNet) Integrated Models (Ej. LA-FISE)

5. Risk Analysis – Incorporating 5. Risk Analysis – Incorporating New ElementsNew Elements

Client /business capacityClient /business capacity Repayment capacityRepayment capacity Security coverageSecurity coverage Cash flowCash flow Market growth and riskMarket growth and risk CompetitivenessCompetitiveness

From supply-driven “how we From supply-driven “how we lend” to client driven “how lend” to client driven “how

can we structure finance to can we structure finance to address client needs and risks”address client needs and risks”

Tools to Mitigate Market RisksTools to Mitigate Market Risks

Use of futures and optionsUse of futures and options Warehouse receipts as well as Warehouse receipts as well as

warehouse storage capacitywarehouse storage capacity Market information servicesMarket information services Contract farmingContract farming InsuranceInsurance Access to technical assistanceAccess to technical assistance

Some risk management tools are more Some risk management tools are more practical for agro-industries and practical for agro-industries and wholesalers, but can stabilize prices and wholesalers, but can stabilize prices and reduce risks for all producers and bankers.reduce risks for all producers and bankers.

6. Banks: New Perspective toward 6. Banks: New Perspective toward AgricultureAgriculture

ConsultationConsultationLoans and Loans and ServicesServices

Loan Loan AnalysisAnalysis

Business Business and Loan and Loan CounselCounsel

Helping farmers & agribusinesses achieve their goalsHelping farmers & agribusinesses achieve their goals

Banks should invest money Banks should invest money && knowledge knowledge in the agribusinessin the agribusiness market trend knowledgemarket trend knowledge understanding of key risksunderstanding of key risks alliance and linkage opportunitiesalliance and linkage opportunities

ButBut Bankers are not technical advisorsBankers are not technical advisors

Reality: New Mitigants are Reality: New Mitigants are RequiredRequired

Price RiskPrice Risk• Use of market basedUse of market based price instrumentsprice instruments

• Couple with Loan Couple with Loan • Hedge own portfolio or Hedge own portfolio or LoanLoan• Use microfinance Use microfinance institutions institutions • Use international Banks Use international Banks and brokerage houses as and brokerage houses as partnerspartners

Measures Methodology

Crop/Weather RiskCrop/Weather Risk• Index based weather Index based weather insuranceinsurance

• Rely objectively on Rely objectively on specific weather eventsspecific weather events• Compares yield to Compares yield to measurable, objective, measurable, objective, correlated riskcorrelated risk• Need conducive policy Need conducive policy and regulatory and regulatory environmentenvironment

• Use innovative Use innovative structuresstructures

• Capture cash flowsCapture cash flows• Use “organized” Use “organized” intermediate agenciesintermediate agencies

Collateral RiskCollateral Risk

TA providers play a key role in ‘importing’ innovative TA providers play a key role in ‘importing’ innovative successful practicessuccessful practices

Government: Policies to Government: Policies to Support Value Chain FinanceSupport Value Chain Finance

Business capacity building and market integrationBusiness capacity building and market integration Contract farming and out grower schemesContract farming and out grower schemes Technical capacity in market norms and standardsTechnical capacity in market norms and standards Commodity exchanges and active futures marketsCommodity exchanges and active futures markets Insurance innovation, data collection and initiationInsurance innovation, data collection and initiation Market information and accessMarket information and access Infrastructural investmentInfrastructural investment Product and service innovation and diversityProduct and service innovation and diversity Technology adaptation and accessTechnology adaptation and access

Key Factors for ConsiderationKey Factors for Consideration

UnderstandingUnderstanding

AdministrationAdministration

RiskRisk

ServiceService

market and industrymarket and industry client and strategic partnersclient and strategic partners

fund the chain at most strategic fund the chain at most strategic pointspoints

insure effective and transparent insure effective and transparent partnershipspartnerships

innovate with new technologies innovate with new technologies and productsand products

take advantage of the value take advantage of the value chainchain

analyze and structure loans analyze and structure loans properlyproperly

offer timely, multiple and offer timely, multiple and flexible financial servicesflexible financial services

focus on the client and businessfocus on the client and business

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