Opportunities for Financing the Agricultural Sector in Turkey

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1 Opportunities for Financing the Agricultural Sector in Turkey Financing Agriculture in Turkey Conference Istanbul, Turkey 18 April, 2012 Calvin Miller Agribusiness and Finance Group Leader FAO, Rome, Italy

Conference Istanbul, Turkey 18 April, 2012 Calvin

2 An Evolving Agriculture Market integration Tighter supply and value chains Increased concentration of power of market leaders Open trade with intense regional and global competition Consumer changes More food processing and segmented demand Stringent standards, specifications and conditions Information and communication technology (ICT) access to information is easier and more important back-office technologies are more robust to manage data

and segmented demand Stringent standards, specifications and conditions Information and communication

3 The new context for Agriculture Note: agro-processed goods represent an expanding market in agriculture worldwide. Source: and Expanding high-rent markets in agriculture represent an enormous opportunity to foster poverty reduction 3

4 The Concept of AVCF Where do farmers and agro-processors turn when banks or other financial institutions are unable or unwilling to provide them with financial services?

5 Product and Financial Flows along a VC Financial Service Institutions Value Chain Actors Support Services Banks Non-bank Financial Institutions Private Investors & Funds Cooperatives / Associations Local MFIs / Community Orgs Exporters / Wholesalers Processors Local Traders & Processors Producer Groups Farmers Input Suppliers Technical Training Business Training Specialized Services Governmental Certification/Grades Product Flows Financial Flows

Orgs Exporters / Wholesalers Processors Local Traders & Processors Producer Groups Farmers Input Suppliers

6 Buyer VC Relationships Enhance Finance Value Chain Relationship Structures Spot market Contract Relationship based partnership Capital investment based partnership Vertical integration Seller Financing comfort zone

Relationship based partnership Capital investment

7 Value Chain Business Models Business models in agriculture value chains in terms of small holders can be divided into four types: Producer-driven Buyer-driven Facilitator-driven Integrated Financial services and the approach to their delivery ought to be related to the VC business model?

Producer-driven Buyer-driven Facilitator-driven Integrated Financial

8 Defining Value Chain Finance 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. Objectives: Align and structure financial products to fit the chain Reduce costs and risks of finance

finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within

9 Approach: Why is Ag VCF Important? 1. It allows sellers of inputs to increase sales 2. It facilitates produce buyers to get what they want when they want it (quantity, quality, timing, & price of goods) 3. Financial institutions can learn from and engage more with value chain actors in order to develop new products and reach new markets 4. The Value Chain approach as a comprehensive approach to lending is useful for improving and expanding financial services, not just for enterprise development If designed well, value chain finance interventions can increase the competitiveness of small producers, as well as a range of agricultural and agribusiness enterprises.

Financial institutions can learn from and engage more with value chain actors in order to develop new products and reach new markets 4.

10 Ag VC Finance Tools/Instruments Category Agricultural product based Accounts receivable based Physical asset based Financing instrument Trade credit Input supplier credit Marketing company credit Lead firm financing / contract farming Trade receivable financing Factoring Forfaiting Warehouse receipt finance Re-purchase agreements Leasing

supplier credit Marketing company credit Lead firm financing / contract farming

11 Ag VC Finance Tools/Instruments Type of product Risk mitigation Financial enhancements Financial instrument Insurance Forward contracts Futures Securitization Loan Guarantees Joint ventures The instruments of agricultural value chain financing channels are many and can be used in conjunction with one another. 11

Securitization Loan Guarantees Joint ventures The instruments of agricultural

12 Lead Firm Contract Financing Purchase Order Model - Palmito VC 2 5 Buyer Order (Contract) Sale of Product 1 Producer Individual Credit $US Fund transfer agreement FABOPAL / INDATROP / BOLHISPANIA Processors Loan repayment K + i 6 7 Importer Local merchant Micro-credit FIE Bank

2.000 4 3 Fund transfer agreement FABOPAL / INDATROP / BOLHISPANIA

13 Integrated Ag VCF Model 1 Identify organized producers Technical Assistance Quality Certification 4 2 Financing: * Asset management. * Warehouse receipts 3 Productor cosecha Consolidation Processing Added Value Product in storage Identify markets And buyers Place Products Insurance - transport, life, fire, etc. 5 LAFISE Trade Network of offices in 10 countries Certification of Deposit and Warrants Collection and payment to producer 6

* Warehouse receipts 3 Productor cosecha Consolidation Processing Added Value Product in storage Identify

14 Agriculture value chain finance conforms to and has many similarities to Islamic finance tools in that risk sharing and mutual interest is part of the business model. Islamic Finance Al Murabaha (Markup Sale) Selling Price = Cost + Profit (Both costs and profits have to be fixed and declared) Bie Al-Salam (Advance Contracting) Price is paid upfront whereas the delivery is differed. Al Musharakah (Partnership) A contract between two parties where in the profits are shared Al Mudarabah (Speculation) Partnership between provider of capital (Bank) and provider of experience and labor(farmer) Ag VCA and Islamic Finance VC Finance Product Finance (Provided the bank s profit is fixed before hand) Contract Farming (Provided the bank allows for reconsideration of price in case of significant rise of market price) Financial Lease ( Provided both the parties split profits in agreed proportion until the borrower buys back the bank share) Joint venture/partnership (Provided the bank s finance is not considered as debt owed by the farmer)

15 Addressing Risks along the VC Input Supply Producing Storing Processing Marketing Quality Production Infrastructure Technology Infrastructure Availability Price Quality control Product supply Storage Infrastructure Operational Technology Human resource Price Knowledge Financing Logistics Product quality Product loss Financing Institutional Seasonal glut Govt. policy Govt. policy From supply-driven how we lend to client driven how can we structure finance to address client needs and risks

Human resource Price Knowledge Financing Logistics Product quality Product loss Financing Institutional Seasonal glut Govt.

16 Customized Products to VC Stakeholders SEEDS Contract Seed Growers Lending against offtake contract Term lending/ WC Contractual agreement Preferred distributors Seed Company Credit sales Distributor Lending against stop sales agreement Dealer Short term lending against liquid collateral Crop loans EDIBLE OIL Farmer Crop loan Credit/ forward contract Farmer Spot market price Village level CA WR finance Warehouse Receipt Mandi/ Warehouse Warehouse Receipt Wholesaler Vendor bill discounting Credit Miller

Short term lending against liquid collateral Crop loans EDIBLE OIL Farmer Crop loan Credit/ forward contract Farmer Spot

17 Agri-trade, finance & risk management ecosystem Ruttan 2010

18 Agricultural risk management Institutional capacity building Data management Regulatory/supervisory framework Information and education Technical expertise Programme administration and monitoring Agri-business segmentation Social vs. commercial insurance Traditional farming sector Emerging farming sector Commercial farming sector Risk Management in agriculture value chain Agricultural risk financing Risk layering Insurance index Insurance pool Insurance and rural finance Agricultural risk assessment Risk identification Risk quantification Probabilistic agricultural risk model

commercial insurance Traditional farming sector Emerging farming sector Commercial farming sector Risk Management in agriculture value chain

19 Diversification of agricultural investment risk Why an Agribusiness Investment Fund? RISK FACTORS VALUE CHAIN PLAYERS OPPORTUNITIES Economy, Market Conditions, Shocks Climate Know-how Competition, strategy FARMERS, PRIMARY PRODUCERS raw materials Income + technology or credit support PROCESSORS, AGGREGATORS, EXPORTERS processed goods LOCAL & INT L BUYERS/RETAILERS Space for subsidized lending &grants Low profits, high risk, but viable esp. with support for productivity enhancement Space for SEAF-like investment funds Reasonable and consistent returns (less exposed to market factors than other sectors), but not extremely high returns. Space for SEAF-like investment funds and private sector Opportunities for high returns, based on business strategy and ability to beat competition. Agribusiness fund focusing on businesses that link farmers to global buyers can complete a farm-level development strategy for emerging markets. Source: (SEAF), 2009

PROCESSORS, AGGREGATORS, EXPORTERS processed goods LOCAL & INT L BUYERS/RETAILERS Space for subsidized lending &grants Low profits, high risk, but viable esp.

20 ICT Innovation for Improved Competitiveness ICT applications(e.g. improved MIS systems, mobile phones, internet price & trade information) can reduce information and transaction costs to service rural areas. Subscriptions per 100 million persons Africa Asia Latin America

reduce information and transaction costs to service rural areas.

21 Innovative Aggregator Models for Agriculture ISB (Knowledge partner) Farmers Knowledge sharing Forward contract Input credit Regional Call Centres (RCC) Aggregator at Village and Higher Levels MCX NSEL Fund transfer Bank WR financing NBHC Market players Some risk management tools are more practical for agro-industries and wholesalers, but can stabilize prices and reduce risks for all producers and bankers.

22 Good Client Analysis Remains Fundamental Five C s for loan analysis are still important,with a change in emphasis Character Integrity & responsibility Capacity Capital Collateral Conditions Management & technical ability Human labor Loan terms Production cycle Markets

23 Need for Good Governmental Policies and Support Business capacity building and market integration Contract farming and out-grower schemes Technical capacity in market norms and standards Commodity exchanges and active futures markets Insurance innovation, data collection and initiation Market information and access Infrastructural investment Product and service innovation and diversity Technology adaptation and access

24 Useful Websites FAO Rural Finance Learning Centre Contract Farming Thank You

How To Finance A Value Chain

How To Finance A Value Chain Using the Value Chain in Financing Agriculture Rural and Agricultural Finance Conference Marrakech, Morocco Calvin Miller FAO Agribusiness and Finance Senior Officer Rome, Italy Presentation Applying Agri