The Asia and the Pacific Region has emerging financial products and services for financing food security-related activities, which address the numerous market imperfections and high uncertainties due to the vagaries of weather that are constantly faced by the small-scale farmers, small and medium food service providers and other agribusiness entities in the food chain. This session of the Investment Forum, facilitated by Sana Jatta from IFAD featured case studies on mitigating risks associated with commodity price and weather volatility as well as other food security risks.
Ganesh Thapa shares innovations, good practices and lessons learned from financing food security activities
High food prices and dietary changes provided new incentives for the private sector to invest in the food sector. Despite of this, the private sector remains a minor investor in the food and agriculture sector due to limited access to finance. Credit financing for smallholders is traditionally considered a high risk business and involves high transaction and supervision costs. Innovative financing schemes show approaches and practices to address these problems.
Value chain financing responds to problems tied with access to credit by interlinking two separate transactions as a substitute for collateral. For instance, loans for purchase of inputs are linked to the sale of output as a condition for the loan. Some examples of innovative financing include:
- Warehouse receipts
- Contract farming
- Trade finance
- Other commodity-finance instruments such as repurchase agreements, export receivable financing, factoring and Islamic trade finance.
The following risk-reducing mechanisms deal with the reduction of covariate risks and indemnity against losses:
- Index-based weather insurance
- Index-based livestock insurance
- Guarantee schemes
Credit delivery mechanisms link informal financial intermediaries with formal ones is a widespread practice in many countries. Examples include: India’s self-help groups (SHG) linkage banking, Cambodia’s AMRET-village association linkage banking and improving market access through cooperative strengthening, China.
Lessons for replication and scaling up
Small producers should be given options for direct or indirect linkages with buying companies. This can be achieved by enhancing awareness and building capacity of private providers, government agencies, rural producers and farmer organizations on new lending approaches, financial innovations and instruments for risk management. Leveraging on technology investments, for instance sharing of power, telecommunications and data network facilities, can also reduce investment costs.
Policy direction should be towards creating an enabling policy and regulatory environment to promote innovative financing schemes in response to financing issues facing small producers. Governments should provide sufficient legal and regulatory environment for the development of warehouse receipts, other collateral mechanisms and supply chain financing and minimize direct competition between state-owned enterprises and private sector to entice private investment. Policies should be directed at improving current financing models through the development of new risk-reducing instruments, better monitoring and more effective regulation of warehouses, and the use of innovations in ICT to test the effectiveness of credit delivery mechanisms.
Veiverne Yuen from Rabobank International shares innovative smallholder business models for food
Rabobank is the leading global food and agribusiness bank, with presence in 48 countries worldwide, total assets of Euro 608 billion, and 59,000 employees. It offers a wide range of financial, advisory, research, and specialized products.
There are three primary ways to invest in agriculture – direct investment in commodities, investing in equities, and primary investment in agriculture (e.g., land and other agricultural assets). With governments’ increased concern on food security, private investors are become increasingly interested in investing in agricultural land.
Developing a platform for engagement should consider the following factors:
Looking at the structure of the food and agri value chain: Upstream is highly fragmented, composed of many smallholders, poorly financed, and numerous retailers. Midstream has numerous players that are rapidly consolidating and integrating systems. Downstream industries are rapidly modernizing, integrating and increasing market control.
New value chain model: Reorganizing primary production capabilities and distribution channels to achieve greater economies of scale, increasing access to competitive markets.
New pricing models driving growth is disintermediation, cutting out the middle players.
Emerging successful agribusiness models include economic clusters (e.g., Northern Economic Region in Malaysia) and food zones. An example of the latter, which involves public-private partnerships, is the China-Singapore Jilin Food production zone. The government provides logistics infrastructure for the private sector’s vertically integrated modern food production and marketing business.
Apiradee Yimlamai from the Bank of Agriculture and Agricultural Cooperatives (BAAC) presents Agricultural Weather Index Insurance in Thailand
Weather risk management is vital for Thailand because of the importance of agriculture in its economy. Also, the country is particularly vulnerable to hydro-meteorological risks. It is ranked among the top six countries most frequently affected by floods and droughts. Moreover, calamity relief becomes an increasing burden in public resources. From 2005-2008 alone the country spent US$ 450 million in ad-hoc disaster relief. Thailand’s BAAC reaches over 80 per cent of farm households and the insurance sector is growing with over 70 non-life insurance companies in the market. Lastly, the country has reliable and good weather data infrastructure.
Two tools to manage risk are the traditional agricultural reinsurance and index insurance contracts. Traditional crop insurance is generally considered a global failure, marred with moral hazard, adverse selection, high monitoring and administrative costs. The challenge, therefore, is to develop an alternative, efficient and cost-effective crop failure insurance program that can be easily reinsured and distributed to individual farmers and at the same time overcome problems associated with traditional crop insurance.
One such response is the weather based insurance programme which offers protection against weather uncertainties that result in volume/output volatility. Index insurance contracts indemnify based on the value of the “index” not on actual losses. Indexes should be highly correlated with losses but cannot be influenced by the insured. Examples of indexes include rainfall, temperature, regional yield and river levels. Such contracts overcome the supply side problems associated with traditional insurance contracts.
Thailand’s weather insurance contract based on the commodity risk management of the World Bank uses market based risk transfer products like weather index-based insurance and price risk management contracts. The World Bank model also involves knowledge transfer and technical assistance to farmers.
The open forum focused on the continuing lack of access of smallholders to financing despite the innovations reported in the session.