1. Risk management strategies for financing the agricultural value chain Johannesburg 1 st -3 rd April 09 Presentation By Subhash C Jindal Vice President – BASIX Group

2. Financiers have a risk-return trade-off If risk is mitigated, more funds would flow to agriculture Income (Imax, Rmax) (Imin, 0) Risk

3. Type of risks in Agri Value Chain The types of risks faced are: –Yield Risk – short-term (e.g. weather) and long-term (due to climate change) –Price Risk – short-term (intra-season fluctuations) and long-term (due to severe swings in commodity prices) Yield risk in the short-run can be managed through physical methods such as protective irrigation & GAP, as well as through insurance. Long term yield risk due to climate change can be mitigated by steps like afforestation, financed by carbon credits, or it can be insured through catastrophic bonds.

4. Type of risks in Agri Value Chain Price risk in the short-run can be managed through –support price mechanisms as well as through –Fair market mechanisms –commodity derivatives (futures/options) Long run swings in commodity prices require shifts in the production structure of the economy which only governments can pay for.

5. Risks faced at different stages of agri value chain Pre Germination stage Crop growth stage Selling raw produce Processing Reaching to consumer

6. Pre Germination stage (1/2) Risk factors Cause of risk Roles of stakeholders for Risk Mitigation Type of risk Conservati ve plans for agri production process Lack of financial track records of farmers Financial inclusion for track transaction for more financing Yield Risk Access to finance and other resources deepening of micro/ agri finance Inadequate irrigation better assured irrigation or at least protective irrigation Yield Risk Price Risk Inadequate storage of seeds farmer friendly warehouses/receipts

7. Pre Germination stage (2/2) Risk factors Cause of risk Roles of stakeholders Types of risk Improper seed quality pushed by vendor/ money- lender lack of knowledge, Advisory services by NGO, Farmers Call Center, Price risk on seeds lack of control system by Govt Stringent penalty system lack of access to market options Proper backward linkages by NGO/ processors Yield risk on seeds lack of access to finance to buy quality seed Deepening of micro/ Agri finance (inc. of savings)

8. Crop growth stage Risk factors Cause of risk Roles of stakeholders Types of risk Improper (qnty/qlty) Agri inputs Lack of access to finance, resources, know. deepening of micro/ agri finance and advisory services Price risk on inputs Access to Agri Implements Lack of finance, renting option leasing to reduce burden of depr. mal functioning AMC; Warranty; Insurance Price risk Yield risk theftInsurance Lack of GAP lack of knowledge, Advisory services on IPM, micro irrigation, timely and right inputs etc

9. Selling stage Risk factors Cause of risk Roles of stakeholders Types of risk risk of distress selling Pre sold to money lender deepening of micro/ Agri finance Price risk Lack of proper storage facility Access to ware house facilities. lack of holding capacity Access to loan against Warehouse receipt etc risk of lower price lack of access to market options Proper market linkages. Access to price hedging products and services Price risk

10. Reaching to consumer stage Risk factors Cause of risk Roles of stakeholders for Risk Mitigation Types of risk market off take risk added competition (locally or globally) Proper market linkages including distant buyers/ market place through net Wider distribution Price risk change of trend (locally or globally) keeping track of consumer preferences logistical costs risk quality loss in transit / storage proper packaging and insurance Price risk transit riskTransit / Marine insurance

11. BASIX Strategy – The Livelihood Triad IDS  Organize  Functional Linkages  Formalize : the legal status  Enabling systems: operations,HR & MIS-IT  Revive : defunct community organizations Ag/BDS  Productivity enhancement  Risk mitigation (non-insurance)  Local value addition  Alternate Market Linkages - Input supply, output sales LFS  Savings, Credit (short-term as well as long-term)  Insurance, for lives and livelihoods  Fund transfers  Commodity derivatives

12. How does the Livelihood Triad mitigate risk? IDS  By organising farmers into groups/cooperatives, IDS reduces price risk on both input and output side by increasing their bargaining power. Aggregation also enables participation in commodity derivative exchanges. Mutual learning takes place Ag/BDS  By offering risk mitigation advice through proper agronomic practices like deep ploughing, timely sowing, selection of right varieties, pest control etc. and vaccination of livestock, instant solution through FCC ( SBI and AXIS bank have asked us to provide) LFS  By offering insurance, for lives and livelihoods and by offering credit so that farmers can invest in risk mitigation measures like irrigation and financing livestock insurance

13. Our Partners in Insurance BASIX Equity for Equity Life Insurance -AVIVA Health Insurance, Livestock Insurance & Micro-Enterprise Insurance -Royal Sundaram Rainfall Insurance- ICICI Lombard

14. BASIX lessons in micro insurance Micro-insurance is a must along with microcredit, for ensuring that the poor do not get into a debt trap after they take a loan and suffer an adverse event. In the long run, the crop insurance program should switch from crop-cutting based yield determination to satellite imagery based yield determination or to a weather index or a combination of these two methods. Mutual insurance to play larger role, with adequate reinsurance cover against large covariant risks of farmer households

15. Our Pilot in Commodity Price Risk Mitigation BASIX Equity for Equity Trading platforms National Commodity and Derivatives Exchange (NCDEX) Multi commodity Exchange (MCX) Safal National Exchange (SNX) Aggregator - Koutla B Farmers’ Cooperative Warehousing - NCMSL – National Collateral Management Systems Ltd

16. BASIX lessons in commodity derivatives Farmers prefers options to pure futures. They are willing to pay a fee for having the choice to get a better price, while locking in the floor price (a typical option contract). Most farmers in India are too small to directly get into contracts or trade on exchanges, so they need aggregators, of which cooperatives are a good example. Another infrastructure that is needed is a network of warehouses with assaying agents, offering negotiable warehouse receipts, which can be traded on exchanges.

17. Successful & scalable experiences of BASIX Weather insurance Live stock insurance on fast track Health Insurance for Rural Poor Rural BPO to speed up services Farmer Call Center for instant advisory Price Options services to farmer Access to distant buyers through CEx Ware House Receipt prod to small farmers Value Chain facilitation at each linkages Centers for AI + Vet care + Insurance on sustainable mode

18. New methods for risk mitigation To meet new challenges like climate change there are new methods: –Carbon Finance –Catastrophic Bonds BASIX has attempted to aggregate micro certified emission reductions (AMCERs) though group company CTRAN Major swings in commodity prices can only be handled by governments through financing long- term changes in the production structure of the economy.

19. Conclusion If farmers are offered all these methods of risk mitigation, then the “perceived risk” in financing agricultural value chains will come down This will lead to an enhancement of financing by private sector, which is much more efficient than old style government financing (which have to waived) or persistent subsidies

20. Thank You scjindal@basixindia.com