Elies FongersSenior Project Manager RIAS Agribusiness Advisory Services

Managing Production and Marketing Risks to enable Agricultural Finance

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Rabo Development within the Rabobank Group

Rabobank Foundation• Strengthening

Communities

Rabo Development• Financial Inclusion

Rabobank Group• Rabo International• F&A Banking

• Local Member banks• Retail banking

• Group entities• Leasing, insurance,

asset mgt.

Sustainable cooperative banking with involvement in the F&A chain

Agricultural finance: positive cash flow and risk / uncertainty are key determinants

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• Yield / ha• Soil type, soil fertility• Weather• Floods• Pests & diseases• Farming practices• Technical skills

• Post harvest losses• Price / amount

• Quality of produce• Buyer• Supply & demand relationships

(local, domestic, regional, world market)

• Business skills

• Cost of production• Inputs (o.a. seeds, ferts,

pesticides)• Labour (a.o. own labour versus

hired labour)• Energy (a.o. fuel, electricity,

solar energy)• Investments in means of

production• Animals and trees• Machinery• Irrigation• Land and buildings

• External financing• Working capital facilities• Term loans

• Own consumption / farmer income

Cash in Cash out

Since the cost structure is relatively fixed, production and marketing risks are important drivers of uncertainty

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• Good farmers can realise 10 – 20% higher yields

• Established relationships between farmers and off-takers result in secure market and reduce uncertainty

• A floor price and / or fixed price reduce uncertainty as well

-> Good farmer selection + formalised value chain relationships and/or price risk management enable agricultural finance

However, there are always risks that cannot be fully mitigated

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• Examples• Weather risks• Pests & diseases• Floods

-> Financiers need to accept these inherent risks

Key mitigants for market and/or price risk

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• Physical contracts• Fixed price• Price to be fixed• Minimum price contracts

• Crop Promissory Receipts• Combination of physical contract + pledge over crop in the field• Fixed price, price to be fixed, etc• Improved collateral position of the financiers• Different elements can be traded seperately (price, goods,

credit risk)

• Futures and options• Exchange traded: phyiscal contract and/or price risk

management tool• OTC: price risk management tools

Example I: Emerging farmer finance schemes

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• A financing approach incorporating technical assistance on business management and agronomics

• Purpose of finance is combination of mechanisation financing and working capital

• Focus is on farmers with;• Minimum three year track record• Entrepreneurial character• Growth ambitions• Adequate equity• Minimum farm size (depending on sector)

Example II: Value chain finance structure

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Coop 1

Coop 6 Coop 7 Coop 8 Coop 9Coop

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Coop 2 Coop 3 Coop 4 Coop 5

Paddy rice supplied to UCORIBU

18,000 members

BANK

UNION input loan+ acquisition loan

paddy

proceeds

Example III: WHR finance

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1.Farmer deposits grains

2.Farmer borrow against the grains

5.Exporter receives grains from warehouse

4.Exporter un-pledges grains from bank

3.Farmer Sells grain to trader

CP

CT

CT

CP

CT

LoanPayments

CP CP

Example IV: CPR finance in Brasil

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• The system was developed in the early 1970’s

• Answer to special circumstances: no collateral available plus mercantile contracts were difficult and slow to enforce

• Crop Promissory Receipts: mercantile contract, fixed quantity, fixed price or price to be fixed, easy and cheap to register and good enforceability

• Adopted by small scale and large scale farmers in well organised value chains

• Over time the market for CPRs has become more advanced

• Banks have developed advanced financing solutions

Example IV: Price risk management services through intermediaries

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-> accessible to large(r) range of clients, characteristics of insurance policy, lower operational risks, no / less cash calls

Contacts

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Rabobank

Office address – NLCroeselaan 18/28

3521 CB Utrecht

Postal addressP.O. Box 17100

3500 HG Utrecht

The Netherlands

RABO DEVELOPMENT/RIASAgribusiness

Hans BogaardHead AgribusinessT. +31 30 21 30073M.+ 31 6 515 03468J.J.Bogaard@rn.rabobank.nl

René VerberkSenior Project ManagerM. +31 6 10938714R.G.F.Verberk@rn.rabobank.nl

Pierre SchonenbergSenior Project ManagerM. +31 651001143P.G.A.M. Schonenberg@rn.rabobank.nl

Wim VerzijlenbergCooperative expertM.+31 615092978wverzijlenberg@hotmail.com

Elies FongersSenior Project ManagerM. +31 6 23976502E.M.M.Fongers@rn.rabobank.nl

Corné de LouwSenior Project ManagerM. +31 6 22239678C.M.W.Louw@rn.rabobank.nl

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Enabling environment is critical to agriculture & agri finance

Agri finance Tenor

Interest rate

Volumes

Legal & regulatory framework Contract

enforceability Land ownership Pledge systems Agri policies WHR systems CPR systems

Collateral availability Land Commodity stocks WHRs CPRs Guarantees Cash savings

Capital markets Long-term funding Hedging

Business culture Corruption Contract

performance Cooperation

Government support framework Education Research Extension services Guarantee

instruments Subsidies

Skill level Farmers Coops SMEs Banks Ministries

Infrastructure Roads Power (Cold) storage Irrigation Ports

Value chain organisation Input supply Cooperative system Integration Information Traceability Retail/fresh market

Macro:

• Trends, price info

• Market studies

• Cooperation with Universities, etc

Micro:

• Collection of technical & financial data

• Branch information system

• Benchmarking clients

Sector policies:

• Client segmentation per sector Smallholders Emerging farmers Cooperatives Commercial farmers Traders Processors

• Value chain analysis per sector

• Risk analysis per sector

• Financing guidelinesper sector

• Key technical & financial parameters per sector

Agri finance products:

• Input financing

• Raw material collection financing

• Asset financing/leasing

• WHR financing

• CPR financing

• Outgrower financing schemes

• Commodity pre-export financing

• Saving-based-loan schemes

• Cooperative financing schemes

• Agri related guarantee schemes

Internal:

• Training agri credit skills

• Training on sector issues

• Certification program for agri loan officers (Basic/Advanced)

External:

• TA to Cooperatives• TA to farmers

Universities

FAO

USDA

Sector bodies

Accountants,

Feed companies,

Integrators, etc

Emerging farmers, cooperatives

Industry partners, NGOs, consultants

Product developmentKnowledge collection

& dissiminationSector

policy makingCapacity building

AGRI Department HQ- Head Agribusiness

- AGRI (sector) Experts

BranchesAgri-loan officers &Risk management

Financing agricultural sector requires considerable investments in knowledge and know-how