Financing the Agri value chain -knowledge is key

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1 Financing the Agri value chain -knowledge is key March 15, 2007 Agri Revolution 2007 Mr. Arindom Datta Director, Strategic Advisory Rabo India Finance Pvt. Ltd.

2 RABOBANK: Global Financial Powerhouse Focused on Food & Agri (F&A) business Headquartered in the Netherlands; rated safest bank in the world 108 year old Co-operative bank with current membership of almost 1.5 million Amongst the world s largest banks with approx. Euro 550 bn in assets Over 50% of international activities are Food & Agribusiness related Knowledge driven banking services in Food and Agribusiness supported by sector studies and dedicated research teams, across the world 2 Rabo India Finance

3 Agenda Section 1 Agricultural Finance: Overview Section 2 Paradigm Changes Section 3 Innovative Products Section 4 Key Messages 3 Rabo India Finance

4 Agricultural Finance: Overview 4 Rabo India Finance

5 Agriculture is Integrated Agribusiness 5 Rabo India Finance

6 Agriculture & Agribusiness Agribusiness Agribusiness Land, Labour farm inputs Farm production Trade & distribution Processing Wholesale & trade Food retail Food service Consumers Non Food Agribusiness: Before & after the farm gate Contribution of Agriculture & Agribusiness to GDP US: Agriculture - 1%, Agribusiness 14% Brazil: Agriculture 9%, Agribusiness 38% In India however, the value addition to GDP by agribusiness is only 2% 6 Rabo India Finance

7 Myth: Agriculture Risks are Traditional Crop Risk Price Risk Risk Farmer Payment Risk Diversion of of Funds Yield Risk Risk Non Non Delivery of of Crop 7 Rabo India Finance

8 Reality: Agribusiness Risks are Complex GMO & Phytosanitary issues Competing exporters Weather uncertainty Animal diseases Rising costs Competing products 8 Rabo India Finance

9 Myth: Agricultural Lending Risks are insurmountable Price Risk Conventional measures Asset accumulation Buffer Stocks Experience Unsustainable Loss to State Treasuries Crop/Weather Risk Traditional Crop Insurance Farm level risk mgmt. Low risk, low yield crops Community Level risk mgmt. Needs high subsidies No economies of scale Not possible as being correlated systemic Risk not diverse enough Collateral Risk Hypothecation and mortgages Void contracts Enforcement issues State interference State owned institutions have attempted to step-in but face major NPAs 9 Rabo India Finance

10 Reality: New Mitigants are Required Price Risk Measures Use of market based price instruments Methodology Couple with Loan Agreement Hedge own portfolio or each Loan Use microfinance institutions International Banks and brokerage houses to be partners Capacity building programs Crop/Weather Risk Index based Weather Insurance Rely objectively on specific weather events Compares measurable, objective, correlated risk to yields Conducive policy and regulatory environment a must Collateral Risk Use innovative structures Capture cash flows Use organized intermediate agencies TA providers have to play in key role in importing innovative successful practices 10 Rabo India Finance

11 Myth: Banks should just Invest Funds Reality: Banks should Invest Knowledge in Business 11 Rabo India Finance

12 Paradigm Changes 12 Rabo India Finance

13 Need to Review entire Value Chain Growing Consumer needs and demands Primary Production Processing Value Adding Wholesale Retail Consumers The challenge to maximize value chain efficiencies to meet growth in demand A focus on the entire value chain Enhancing the capability to supply market needs Creating economic value in the system Improving rural prosperity Ensuring market access Maintaining funding mechanisms for growth Logistics and Procurement 13 Rabo India Finance

14 Innovative Products Creativity is thinking up new things. Innovation is doing new things. 14 Rabo India Finance

15 Global trends in Agriculture Finance Structured Commodity Finance (SCF) Commodity Risk Management Traditional financing looks at Agriculturists are exposed to a flow of funds & sources of variety of income uncertainties money. SCF looks at flow of goods & their origin These products help manage the risks associated with Lender s risk assessment is commodity trading using related to the client s ability to futures contracts and hedging produce & deliver commodities products. These products can help producers plan cashflow Facilities can be structured so more accurately and control that commodity trading houses their margins, as well as gain easy access to capital for reduce the uncertainty everything from procurement associated with monitoring of the agricultural inputs and/or price movements commodities on overseas to the commodity exchanges ultimate sale to end users and the realisation of sale proceeds Instruments available include swaps, call/put options, option Commodity swaps are also structures, exotic options becoming popular 15 Rabo India Finance

16 Structure 1: Off-take Based Farmers Financing Company Company Offtake Agreement Farmers Farmers Agency Arrangement Rights Assigned To Subsidiary Bank Bank SPV SPV Loans to farmers based on certain parameters: Correct documentation Credit Limits Linked to farmers notes Not beyond expiry of Agency Agreement Loans over a specified amount referred to Bank for approval Audit of systems and records twice during the season Additional Comfort to the Agri Company in case of breach of terms and conditions Monthly reports 16 Rabo India Finance

17 Structure 2: Collateral Management Global Global Trading Trading Company Company Sells edible oil Malaysian Malaysian Subsidiary Subsidiary Enters into a selling / distributive contract SPV SPV Guarantees purchased of all unsold oil at a formula determined price to cover all volatility Bank Bank Finances Stored in tanks under Collateral Management Pays off Bank Sold in small lots against cash 17 Rabo India Finance

18 Structure 3: Channel Financing ABC ABC 1.Goods on Credit (ownership transferred) 2. Original sale invoices Bank Bank 5. Repayment of Loans 6. Discharge of credit risk 3. Loans / Credit Limits Designated Designated Bank Bank Account Account Master Agreement Agency services by ABC Partial Recourse to ABC First Loss Guarantee 4. Collection of payments by ABC on behalf of Bank Rabo India Finance

19 International Models Fertilizer manufacture Agricultural & Veterinary Chemical manufacture Fertilizer Agricultural & Veterinary Chemicals Seeds Wool & cotton warehousing & marketing Livestock marketing Domestic & offshore Feed mills Seed companies Rural merchant Finance & Insurance Farmer Grain marketing Rural merchant Flour mills Spinners Fuel Real Estate Fuel Fresh produce marketing Meat processors Other processors Finance Other farm supplies Property sales Source: Rabobank, 2004 Rural Merchants supply & advice on products and services including merchandise, finance, insurance, agency and trading services 19 Rabo India Finance

20 Key Messages 20 Rabo India Finance

21 Key Messages Knowledge is is Key Risk Identification is is a Science Risk Management is is an an Art Financing the food sector is is profitable 21 Rabo India Finance

22 Thank you! The financial link in the global food chain. 22 Rabo India Finance

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