Microcredit and Crop Agriculture: New approaches, technologies and other

innovations to address food insecurity among the poor

Calvin Miller

Agribusiness and Finance Group Leader Food and Agriculture Organization of the UN

Rome, Italy

Microcredit Summit, November 2011 Vallaloid, Spain

Outline

1. The need for action: food insecurity and rural poverty

2. The new context for agriculture: the challenge to raise competitiveness among the poorest

3. Business models for inclusive agriculture

4. Microfinance products for agriculture

5. Use of innovations for competitiveness and efficiency

6. Lessons and recommendations

The need for action

Source: Chen and Ravallion, 2007

The population of developing countries is expected to remain mostly rural until 2020. Most of the world’s poor are concentrated in rural areas, with livelihoods that are strongly linked to agriculture.

Source: United Nations, 2004

Food insecurity and rural poverty

Source: http://faostat.fao.org as cited by the World Development Report, 2008. Note: The size of the bubbles represents millions of undernourished people, being most severe in Sub-saharan Africa (SSA) and South Asia (SA).

Among the world’s poor, food insecurity continues to have a significance incidence. Agriculture can play a key role in making nutritious food available and ensuring an income to purchase food.

The horizon is changing for small farmers; improved approaches, tools and innovations can address those challenges for a more secure future.

The new context for Agriculture

Expanding high-rent markets in agriculture represent an enormous opportunity to foster significant poverty reduction

Note: agro-processed goods represent an expanding market in agriculture worldwide. Source: http://faostat.fao.org and http://comtrade.org

There is a need to build inclusive agricultural value chains that benefit the poor – not as cheap laborers, but as agro-entrepreneurs with access to technologies, markets and capacity development.

The challenge is to raise competitiveness among the poorest

Note: Higher human development is associated with greater agribusiness development.

Source: Wilkinson and Rocha, 2009

Significant poverty reduction will require providing the poor with tools to compete in expanding their agricultural businesses. Access to financial services can play an important role in enabling this process of inclusion.

Microfinance and business models for agriculture

MFIs have comparative advantages to service the agricultural

sector, but also weaknesses.

A comprehensive approach for risk assessment is needed:

• Improvements in cash flow analysis for agriculture

• Terms that fit the conditions of clients given an assessment of their relations with agents in the value chain and a strategy to reduce risks (production, price, market, weather, etc.)

• Diverse products and services that target not only farmers but other segments of the value chain

Exporters / Wholesalers

Processors

Local Traders & Processors

Producer Groups

Farmers

Input Suppliers

Banks

Non - bank

Financial Institutions

Private Investors

& Funds

Cooperatives /

Associations

Local MFIs /

Community Orgs

Financial Service

Institutions Value Chain Actors

Product Flows

Financial Flows

Technical Training

Support

Services

Business Training

Specialized

Services

Governmental

Certification/Grades

Using the Value Chain for Financing Agriculture

Microfinance products for agriculture

Some prominent financial products for agriculture are:

1. Bill discounting and factoring

2. Forward contracting and futures

3. Micro-leasing

4. Warehouse receipts and micro-warrants

5. Micro insurance

6. Guarantee funds for agriculture

Use of innovations for competitiveness and efficiency

Innovative ICT applications (e.g. the use of mobile phones) can reduce informational problems and transaction costs to service rural areas.

Mobile phone’s exponential growth in the developing world represents an opportunity for MFIs to service agriculture.

Source: ITU World Communications as cited by Jensen, 2009

0

10

20

30

40

50

60

70

80

Africa Asia Latin America

2003

2008

Number of Subscriptions per 100 people (millions)

Innovative tailor-made strategies to enhance agricultural competitiveness require an integral view of agricultural value chains.

A diverse set of services and products can be designed for:

• Pre-harvest activities: e.g. input provision, updated market information, contract farming, forward contracts, insurance

• Post-harvest activities: e.g. warehouse receipts linked to loans, local value addition, improved marketing agreements, product bulking

Use of innovations for competitiveness and efficiency

Use of innovations for competitiveness and efficiency

Innovations in farmer organizations that improve managerial skills in order to promote:

• Economies of scale and scope

• Strategic partnerships with suppliers and buyers to secure sales

• Specialized support services from private or public partners to comply with market requirements and facilitate finance

• Lobby for improved regulatory framework that enable investments in agriculture

• Diversification of financial products is required to service the agricultural sector, fitting to the conditions faced by value chain agents and reducing operation costs

• Partnerships with non-financial organizations may be required to provide key support services and facilitate marketing

• Specialized knowledge and access to data is important to be able to assess the risks involved in agriculture

• Optimal risk management requires portfolio diversification and insurance

• Agriculture is important for food security, which makes the sector susceptible to political interference. This must be adequately anticipated to mitigate risks

For MFIs and other financial organizations:

Lessons and recommendations

Finance is only a catalyst for growth. Interventions are still needed to:

• Support productivity, economies of scale, farmer organizations, access to improved technologies and enhanced market linkages

• Support to provide specialized knowledge to access and integrate agricultural value chain data into the financial analysis

• Support can be provided for the development of new insurance products not only for farmers but also for their lenders

• Develop policies which clarify land tenure and can facilitate finance to agriculture

• Support an enabling environment for the development of new technologies that help bring down the transaction costs in agriculture and finance

For development agencies & policy makers:

THANK YOU! FAO www.fao.org/ag/ags Rural Finance Learning Centre www.ruralfinance.org

Calvin Miller

Calvin.Miller@fao.org