Agricultural value chains Concepts – mapping – markets and finance S Dwivedi

Some concepts Markets – Local markets – Terminal markets Prices – Spot, futures, options Price discovery – Information –arrivals, prices at alternate markets – Analysis (fundamentals/Technical) and projections – dissemination- electronic, Value added services(vas),Print

Value addition In Agricultural value chains value addition can come from – Business Processes Aggregation, segregation,logistics – Productivity Man, material,money, input, output – Warehousing Space, costs,logistics – Processing Own vs. toll crushing (out source) – Products Whole foods to processed foods to derivatives – Prices – Risk mitigation – Administration and Institutional All these result in cost reduction or revenue maximisation

Farmers 3500 Rs/Quintal Local Trader 250 Rs/Quintal Anaaj Mandi 8 Rs/Quintal Dal Mill 650 Rs/quintal Whole Seller 300 Rs/ Quintal Consumer Rs/Quintal Value chain mapping Process - Identify markets, survey, interview, research, quantify value addition at each stage

Cotton Value chain Case one

Seed Production Parent Seeds Hybrid Seeds Contract Farming Commercial Production Soil testing GAP Fertiliser/ Pesticide Mgt Intercrop ping INM etc Harvesting Post harvest Picking Cotton Clean Cotton Storage Transport Mandi / Market Mechaniz ation Commodit y Exchange Terminal Ginning Ginned Cotton Baling Cotton seed with lint Lint Separatio n Animal Feeds Cotton Bales - spinning mills Spindles Yarn Cotton Seed – Oil Mills Oils Refined Oil Packing Distributi on Textiles Cloth products Direct Supply to Garments For Sale as cloth Furnishing Blending Ready Made Garments Cloth – ready made Cloth – tailors – garments Distribution Cloth Ready made garments Industrial Cotton Value Chain

Groundnut value chain Case Two

Groundnut value chain seed, inputs, GAP pest and micronutrient management production watermanagement mulching to save water weeding and improved farm practices Pre harvest drying of the groundnut with shell good storage practices bagging and selling of groundnut with shells post harvest selling of groundnut shell/husk as byproduct Bagging of groundnut pods for commercial use ie crushing to get expeller out part of it for grading and sorting for HPS( Hand picked and Selected ) for table purpose decortication -shells -pods groundnut expeller oil for the local market in small bottles - as a premium product expeller cakes for the loal market for feeds and to solvent mills depending on the demand expeller mill can be owned by the producer company or out sourced custom milling. Baby expeller unit for crushing the pods grade the groundnut pod for uniform pods for table purpose HPS groundnut for table and export further processing in to roasted /salted / spiced ground nut pods Grading and sorting for HPS for tablepurpose Packing the groundnut seeds in to small packs for table and house hold consumption distributing tthrough retails channesl. -Branding if required pack for the retails chain ground nut expeller oil small packs also can be either branded and packed for retail chains. Micro packing and distribution

Identificatio n of the stake holders and mapping existing value chain Soil testing -soil health card Technology disseminati on Input Purchase seeds fetllisers pesticiede s micronutr ients Pre- production prepartio n of land seed treatment Resource Conservat ion technolog ies efficinet water managem ent commercial productn. GAP crop manange mnt pest managem ent micro nutrient inter cropping weed managem ent Harvesting Post Harvest Post harvest Picking Clean produce Storage Transport Mechanisati on Commodity Exchange Terminal Ware housing Aggregatio n -farmer groups -Producer 's organisation - aggregation centres -Grading and sorting warehouse receipts Bulk packing for wholesale rs retail packing for distributio n to local marktets Bulk storage for further processing market intelligence &price discovery Prices of commodit y at three markets Price tickers of daily market price Price trends in future Developing own brands Brand the product Retailing in local market supply chain for large retilers Components of value chains All agricultural commodities do not offer same level of value addition

Value Chain Finance as an approach – Takes a look at the collective set of actors, processes and markets of the system 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. – That means in order to offer Agriculture VCF, knowledge of the agricultural system must be known.

Key issues for consideration in VC financing Strength of the value chain- its opportunities and challenges Risks Technical,business and financial services and support Business Model for VCF (Mwangi 2007) In essence process involves combination of VC assessment, financial assessment and securing agreements.

Value Chain Business Models For value chains and value chain financing, a business model refers to the drivers, processes and resources for the chain. Four types of business models: Producer-driven Buyer-driven Facilitator-driven Integrated

Five C’s of Lending Applied to VC Financing Character Capacity CapitalCollateral Conditions

Business Model Rationale ModelDriver of OrganizationRationale Producer Driven  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  Processors  Exporters  Retailers  Traders, wholesalers and other traditional market actors  Assure supply  Increase supply volumes  Supply more discerning customers- meeting market niches and interests Facilitator Driven  NGO’s and other support agencies  National and Local Governments  Make markets work for the poor  Regional and Local Development Integrated  Lead firms  Super markets  Multi-nationals  New and higher value markets  Low prices for good quality  Market Monopolies

Using the Value Chain to Finance Agriculture Exporters / Wholesalers Processors Local Traders & Processors Producer Groups Farmers Input Suppliers Banks Non - - bank Financial Institutions Private Investors & Funds Cooperatives / Associations Local MFIs / Community Orgs Financial Service Institutions Value Chain Actors Product Flows Financial Flows Technical Training Support Services Business Training Specialized Services Governmental Certification/Grades Exporters / Wholesalers Processors Local Traders & Processors Value Chain Actors Product and Financial Flows within the Value Chain, Source: Adapted from Fries (2007) and Miller( 2007a)

Existing Agriculture VC Finance Providers Provider TypeTypical ClientsTypical ProductsPotential Markets Commercial BanksMedium to large enterprises Short to medium-term loans, savings, others exporters and agro processors State – owned agriculture development banks Medium to large farmers and agricultural cooperatives Medium to long-term loans agricultural producers to fill gap not served by commercial banks Microfinance InstitutionsMicro and Small enterprises, small farmers and producer groups Short-term loans, Savings, payments, services etc small and micro producers and producer groups Agricultural cooperative and credit unions Rural households, micro/small producers Short, medium-term loans, savings micro/small producers, micro-savings Insurance CompaniesMostly medium to large farmers and firms Crop and Index-based insurance mitigation and transfer of risks related to agriculture Community Finance(SHGs, ROSCAS and etc) Rural households, micro/small producers Short, medium-term loans, savings micro/small producers, micro-savings Value Chain actors (Processor or whole saler) Farmers and Smaller firms linked to value chain financiers Short to medium-term loans, Savings, others producers/suppliers or distributors within growing value chain

Various Value Chain Finance Tools/Products Product Financing Trader Credit Input supplied credit Marketing Company Credit Lead firm financing Receivable Financing Trade receivable finance Factoring Forfaiting Physical Assets Collateralization Warehouse receipts Repurchase agreements Financial lease (lease purchase) Risk Mitigation Product Insurance Forward Contracts Futures Financial Enhancement Securitization Instruments Loan Guarantees Joint venture finance

Key steps that can be employed by VC Financing Institutions 1.Understand VC a.Enabling Environment b.Vertical and Horizontal Relationships c.Support Markets and Services d.End Market 2.Identify current value chain model that exists a.Lead Actors b.Business Models c.Sustainability Strategy 3.Identify Transaction Processes a.Value added in various stages of the product up the value chain 4.Determine Actual and Critical Points of Finance 5.Analyze and compare financing options ( for each level of participant in the chain) a.Relative strengths b.Risks c.Costs 6.Design Financing Options according to the best option(s) to fit chain a.Draw up agreements for financing between parties

Important to Note The Value Chain Framework is useful for expanding rural finance and for developing enterprises. Value Chain Finance builds on business relationships and transactions to screen & monitor borrowers, enforce contracts and manage risks & costs Value Chain Finance is rooted in buyers' and suppliers' desire to expand markets, and to secure or increase product quality and quantity. Value Chain Finance takes a variety of forms in addition to cash lending, such as advances and off-balance sheet. The success and limits of Value Chain Finance are tied to the quality of cooperation between actors

References Miller, C., & Jones, L. (2010). Agriculture Value Chain Finance, Tools and Lessons. Warwickshire, UK: Practical Action Publishing Ltd.

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