Analyzing and Financing Value Chains Richard L. Meyer

Figure 1. Value Chain Concept End users/consumers Marketing Production Inputs Capital equipment Infrastructure Human resources Services

Figure 2. Paprika Subsector in Zambia Commercial Paprika Farmers Irrigated N = 2 Vol = 2,220 tons Exporter Market World Vol – 150,000 tons (Zambia = 5,000 Rest of SADC = 25,000 tons) Private Exporters N = 7 Vol = 2,600 tons Channel 1a Rainfed Smallholders Channel 1b Irrigated Smallholders Channel 2 Commercial Production Export Grading Assembly Farm production Seed and fertilizer Rainfed smallholders N = 1,500 Vol = 1,100 tons Y/ha = $700 Irrigated smallholders N = 500 Vol = 1,500 tons Y/ha = $1,500 Source: Haggblade

Figure 3. Zambia Cassava Supply Chain Channel 1 Subsistence Production Consumption Processing Trade Soaking, drying Farm production Channel 2 Marketed Fresh Cassava for Human Consumption Channel 3 Processed Cassava for Human Consumption Channel 4 Livestock Feed Channel 5 Industrial Uses Subsistence households Volume = 920,000 tons Cassava traders, dried chips Vol = 45,000 tons (fresh equivalent) = 15,000 dry weight Farmers Traders Fresh Vol = 35,000 tons Industrial users Vol = 500 dry Exports Vol = 4,000 dry Purchases for human consumption Livestock Vol = 500 dry Food Processors Vol = 10,000 Industrial processors Feed companies & livestock farmers

Topics being analyzed 1.Vertical coordination 2.Competition 3.Dynamics 4.Governance 5.Income distribution 6.Interventions

Financial analysis of value chains

Types of value chain finance Self-finance Direct informal within chain finance Indirect formal financial services from outside the chain

Common problems of suppliers Information asymmetries (can and will borrower repay) High operating costs

Common credit functions to be performed Client screening Client monitoring Contract enforcement

Five analytical components of a financial lens Identify informal and formal financial relationships Outline key features of contracts Analyze how credit functions are performed Analyze legal systems, infrastructure, and social norms Identify possible interventions

Three examples of a financial analysis of value chains

Functions Supermarkets US and Europe Retail Wholesale/ Export Processing Production Input distribution Inputs Extension Services Viru, Agromantaro, TALSA, Procesadora Misti – fertilizers; Bayer – pesticides Seed and Plant Sellers Formal Financial Links General Mills, Green Giant, etc. Local Supermarkets Local Wholesalers Small FarmersLarge Farmers Independent Distributors Plants Banks, NBFIs MFI’s; Rural Banks Banks, NBFIs Key: Financial links: who finances whom Participant in value chainBroken line indicates skipped function Figure 4. Artichoke Value Chain, Peru Source: USAID

Table 1. Financial Patterns and Potential Demand for Finance, Artichoke Value Chain, Peru Value Chain Level Within Chain FinanceFinance from Financial Institutions Potential Demand Retail Receive supplier creditBank loans, outside PeruNone Wholesale/ Export Offer supplier credit to retailers Offer contracts to processors Bank loans, outside PeruNone Processing Contracts and advances for wholesalers Offer supplier finance and technical services to producers Short-term bank loans, 12% interest, 100% collateral Medium and long-term investment finance for expansion Production Supplier finance and technical assistance from processor and input distributor Short-term NBFI loans, some facilitated by contracts, 2.5 to 3.5% per month Medium to long-term credit or leasing to acquire fixed assets Input Distribution Offer supplier finance and technical services to producers Receive supplier finance and volume discounts from suppliers NoneShort-term finance Input Supply Offer supplier finance to input distributors and large producers Short-term bank loans, 12% interest, 100% collateral None Extension Services Processors and input distributors offer technical services to producers None Source: Campion

Figure 5. Sunflower Value Chain, Uganda Source: DAI/USAID Smallholder Farmers Retail Wholesale Processing Production Inputs Functions External Sources of Finance Consumers Retailers Mukwano Processing Plant Retailers Mukwano Wholesaler Mukwano Buying Center RetailersWholesalers Small/Medium Mills Rural Consumers Household Use Rural RAM Press Mukwano (hybrid seed) Stockists (non-hybrid seed, fertilizer) Rural Traders Mukwano Corporation finance to Mukwano buying and processing channel UOSPA Credit Program (failed) Finance flows Product flows Finance flows Product flows Key:

Local Sugar Retailers Local Sugar Wholesalers Functions Local Alcohol Retailers Local Informal Alcohol Wholesalers Retail Wholesale/ Export Processing Production Extension Services Input Jaggery Mills Sugar Estates UNAIDED Outgrowers Sugar Estates Household Loans from MFI’s Participant in value chain Broken line indicates skipped function Key: External Sources of Finance Rehabilitation loan from GOU, WB & ADB Commercial Banks Madhvani Corporation Finance flows Product flows Input Suppliers Non- Contract Farmers AIDED Outgrowers Figure 6. Sugar Value Chain, Uganda Source: DAI/USAID

Issues Raised Enforcing contracts (warehouse receipts) Alternatives for aiding small farmers Partnerships, alliances and linkages Capacity to sustainably reach large numbers (estimate profitability, cash flow analysis)

CONCLUSIONS Value chain analysis focuses attention on priority interventions Encourages financial systems analysis as the logical next step