1. FAO Lessons with Rural Finance: Challenges, Instruments and Requirements European Commission (IPARD) Seminar Brussels, Belgium 27 January 2011 Calvin Miller Senior Officer and Group Leader FAO Agribusiness and Finance Rome, Italy

2. Presentation 1.The changing rural and agricultural scene 2.Rural financing mechanisms 3.Value chains as a business approach of rural financing 4.Lessons and policies

3. Globalization and Agriculture Rural – urban migration, especially of youth Increased international flow of –goods and information –financial capital –technology Realignment of roles –private sector –the state –civil society Technological and institutional innovations Market integration and specification Open trade with regional and global competition

4. Typologies of Agricultural Development Source: World Development Report 2008

5. Agriculture Development & Finance Markets Rural Poor/Total Poor Agriculture Contribution to Growth Locally Generated Funds/ Informal Banking Systems Nationally Intermediated Funds/ Formal Financial Institutions and Capital Market Instruments Regional and Global Financial Systems

6. Risks faced by small agricultural producers and SMEs Risks in productionRisks with assets Risks of price and market Agro enterprise – a risky business Man-made risks Weather based risks Natural hazard risks Market competitveness/access Price fluctuation Supply/demand fluctuation Financial capital Physical capital Human capital

7. Agro-enterprise Risks are Complex Phytosanitary issues Rising costs Competition from exporters Animal diseases Competing products Weather uncertainty

8. Financing Mechanisms and Incentives Conventional financing – banks, credit unions Directed financing – rediscount lines of credit through banks or special windows Credit enhancements – loan guarantees, risk sharing mechanisms Investment funds – pooled funds with target a focus and fund management structure, often foreign Value chain financing Grants and subsidies

9. Financial Services Input Industry Growers Food Process Industry Food Retail Industry CONSUMERS Support Services Agri-Production - Agri-Food Industries Operating Environment Transport Storage Service s Agri-Logistics Industries Agri Value Chain Stakeholders

10. Value chain development and financing Value chain finance – financial products and services flowing to and/or through a VC to address the needs of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within the chain. From supply-driven “how we finance” to client driven “how can we structure finance and services to address the clients’ needs and risks” Value chain analysis – looking at the structure, context, dynamics and demand and supply flow of sectors and value chains.

11. Agricultural VCF Tools/Products 1. Product Financing 2. Receivable Financing 3. Physical Asset Collateralization 4. Risk Mitigation Products 5. Financial Enhancements

12. 1. Product Financing 1.a) Trader Credit 1.b) Input Supplier Credit 1.c) Marketing Company Credit 1.d) Lead Firm Financing VCF Tools

13. 2. Receivable Financing 2.a) Trade Receivable Finance 2.b) Factoring 2.c) Forfaiting VCF Tools

14. 3. Physical Assets Collateralization 3.a) Warehouse Receipts 3.b) Financial Lease (Lease- purchase) 3.c) Repurchase Agreement (Repos) VCF Tools

15. 4. Risk Mitigation Products 4.a) Insurance 4.b) Forward contracts 4.c) Futures VCF Tools

16. Tools to Mitigate Market Risks Use of futures and options Warehouse receipt finance Market information services Contract farming Insurance Access to technical assistance Some risk management tools are more practical for agro-industries and wholesalers, but can stabilize prices and reduce risks for all producers and bankers.

17. 5. Financial Enhancements 5.a) Securitization Instruments 5.b) Loan Guarantees 5.c) Joint Venture Finance VCF Tools

18. Estonia: Rural Loan Guarantee Program Strategy: Enhance investment through use of guarantees to leverage private lending and investing into rural and agricultural businesses Provide complimentary support services Guarantee conditions  Cost of guarantee  Guarantee period  Leverage of private capital  Fund investment returns  Guarantee limit  Guaranteed loans  Agricultural guarantees  Storage & food processing  Village development  Fisheries  Other rural investments  0.5% to 6% /year (usually 3.8% - 4.6%)  Up to 10 years  1.2 – 1.5 times  €6 million profit from $40 m initial capital  80% of total loan up to Euro 2.5 million  51%  11%  10%  18%

19. Mexico: FIRA Loan Guarantee Model

20. A suitable enabling environment Governments should facilitate but not directly undertake financing; rather it is best to: Support private sector financing and investment – with technical capacity and systems upgrading – facilitation of financing windows, if required Put in place regulations which permit use of modern financial instruments Provide risk “cushion” for catastrophic risks – country risks, major disasters Private-public partnerships – joint ventures, concessions, build-operate-transfer arrangements

21. An enabling environment (2) Stable macro-economic environment, good governance, low corruption are all necessary to attract rural and agricultural investors Legal and regulatory framework –Farmer groups and cooperatives –Laws of contract –Enforcement –Regulations and institutions relating to organic, GAP, geographic origin, etc. certification; pesticide control.

22. An enabling environment (3) Infrastructure –Rural roads and storage –Power and water supplies –Port and airport facilities –Communications –Rural community services –Rural institutional development Market information and extension Market-led agricultural research

23. Four areas of support: Value chain skills and technologies Post-production institutions and services Enabling policies and public goods Financing and risk mitigation mechanisms FAO-UNIDO Agro-industry Development Framework Producer and commodity associations Agribusiness linkage facilitation Producer and SME skill building Technology development and transfer Market information Vocational and business training

24. Four areas of support: Value chain skills and technologies Post-production institutions and services Enabling policies and public goods Financing and risk mitigation mechanisms Contract farming & out- grower schemes Business incubators, hubs and clusters Product labeling, certification schemes Food safety regulations/standards Commodity exchanges FAO-UNIDO Agro-industry Development Framework

25. Four areas of support: Value chain skills and technologies Post-production institutions and services Enabling policies and public goods Financing and risk mitigation mechanisms Agro-industry strategies and plans Legal and regulatory frameworks Harmonization of grades and standards Farm-level capital development Markets and trade infrastructure and services Trade policies FAO-UNIDO Agro-industry Development Framework

26. Four areas of support: Value chain skills and technologies Post-production institutions and services Enabling policies and public goods Financing and risk mitigation mechanisms Public-private partnerships Loan guarantees and capital enhancements Investment funds Value chain financing Risk mitigation products Major catastrophe re- insurance FAO-UNIDO Agro-industry Development Framework

27. Rural &agricultural investment: a holistic approach Consumer Orientation Farmer linkages Action steps Financial Services Market Linkage Research & Extension Regulatory Reforms Strategic Infrastructure Development Credit Enhancement and Promotion Innovative Agribusiness Modeling Commodity Trading Agri Infrastructure & Logistics Market Development Price competitiveness Streamlined supply chain Production Handling & Mrktg. Handling & Mrktg. Processing Wholesaler Retailer Insurance as needed at various stages

28. »FAO Agricultural Department www.fao.org/ag/ags »Rural Finance Learning Centre www.ruralfinance.org Useful Websites Thank You