SOLUTIONS TO AGRICULTURAL FINANCING IN AGRICULTURE

Agricultural  financing,  in  recent  times,  has  become  a  serious  concern  in  most  developing countries.

This  is  as  a  result  of  the  significance  of  the  agricultural  sector  in  the  economies  of most  developing  countries.

The  economies  of  many  African  countries  are  growing  fast  with agriculture  accounting  for  a  third  of  Africa’s  GDP.  According  to  The  World  Bank,  poverty  is down  by  33%  in  Ethiopia  since  2000,  with  agricultural  growth  being  the  main  driver.

Also  in Rwanda,  45%  of  Rwanda’s  rapid  poverty  reduction  was  partly  due  to  growth  of  the  agriculture sector. It  is  no  news  that  millions  of  people  around  the  world  rely  on  farming,  livestock,  aquaculture and  other  agricultural  work  to  put  food  on  their  plates  and  make  a  living.

Many  of  these farmers  reside  in  rural  areas  and  barely  produce  enough  to  feed  their  family  for  many  reasons, one  of  which  is  financial  constraints.

Consequently,  thousands  of  farmers  have  quit  farming, weakening  our  supply  base  and  leaving  us  more  dependent  on  importation  of  food  when  we can  produce  ourselves.

Due  to  the  rising  world  population,  which  is  projected  to  reach  9  billion  by  2050,  all  hands  must be  on  deck  in  the  fight  against  hunger  in  order  to  boost  food  security.

But  many  farmers  are handicapped  due  to  the  cost  of  agricultural  inputs  which  has  increased  drastically,  resulting  in an  increased  demand  for  alternative  financing  in  agriculture.

Across  Africa,  growth  and  opportunity  in  the  agriculture  sector  is  constrained  by  limited  access to  capital.  Farmers  and  agro-enterprises  need  capital  to  thrive.

They  need  capital  for  short-term tasks  such  as  the  purchase  of  seeds  and  farm  inputs  on  a  seasonal  basis,  medium  term  tasks such  as  financing  of  farm  or  agro-processing  equipment,  as  well  as  long-term  investments  in capital  equipment  and  land.

Yet,  despite  the  important  contribution  of  agriculture  to  the  GDP  of  the  poorest  developing countries, the supply of financial services to farmers is still limited.

Farmers  complain  that  they do  not  have  enough  fund  to  carry  on  with  their  activities.

Banks  and  other  financial  institutions have  not  helped  farmers  as  their  terms  and  conditions  for  accessing  loans  are  not  conducive  for small-scale  farmers.

These  includes  collateral-related  challenges,  high  interest  rates  and mistrust  between  banks  and  farmers.

All these bring  us  to  one  last  option –  Innovative  financing  in agriculture.

MECHANISM FOR INNOVATIVE  FINANCING 

1.  Green  bonds:  These  are  standard  bonds  created  to  fund  projects  that  have  positive environmental  or  climate  benefits.  

Green  bonds  can  be  used  as  an  effective  instrument  to channel  capital  into  the  sustainable  agriculture  and  forestry  space,  due  to  its  exposure  to climate  change  and  contribution  to  global  greenhouse  gas  emissions.

Fibria  Celulose  S.A.,  a Brazilian  forest  products  company  and  the  world’s  largest  eucalyptus  pulp  producer,  issued  its first-ever  green  bond  in  January  2017  in  the  international  market,  which  raised  US$700  million.

2.  Grants:  Grants  are  given  to  provide  farmers  with  support  and  resources  to  start  farming  or transit  to  more  sustainable  farming  practice.

 3.  Performace  based  contracts:  The  concept  of  performance-based  contracting  means  that products  are  no  longer  sold  to  the  customer  but  instead  the  supplier  provides  and  operates them  while  the  customer  only  has  to  pay  for  performance.

For  example,  a  customer  buys purified  water  instead  of  wastewater  systems.  Performance  based  contracts  provides  more opportunities  to  win  new  customers  by  helping  manufacturers  sell  their  unique  competitive advantage.

 4.  Development  Impact  Bonds:  This  is  a  partnership  where  one  or  more  investor(s)  provide upfront  capital  for  public  projects  that  deliver  social  and  environmental  outcomes.  

If  the  project succeeds,  the  investors  are  repaid  by  the  Government  or  the  appropriate  agency.  If  the  project fails,  the  interest  and  part  of  the  capital  is  lost.

 5.  Awards  and  Prizes:  An  example  is  this  is  “The  Anzisha  Prize”,  a  partnership  between  African Leadership  Academy  and  The  MasterCard  Foundation,  which  empowers  promising  youth entrepreneurs  financially.  Winners  of  the  prize  can  invest  them  to  grow  their  business.

6.  Voluntary  contributions:  This  could  be  applied  by  consumers,  firms,  employees  and industries.  

 7.  Cryptocurrency:  Blockchain  agriculture    can  be  used  to  provide  funding  to  small  enterprises. Here’s  the  idea:  customers  buy  a  farm  share  and  then  the  farmer  delivers  produce  directly  to them  throughout  the  farming  season.  

The  farmers  receive  funding  at  the  beginning  of  the season,  allowing  them  to  invest  in  the  farm  and  stabilize  their  finances  throughout  the  year.

A good  example  of  this  is  an  ICO  called  MilkCoin  which  was  released  by  a  Russian-based agricultural  company,  Khokholskaya  Agricultural  Company.  

The  funds  received  through  the  ICO will  be  used  to  fund  their  dairy  farm,  and  in  the  same  vein,  helping  the  customers’  demand  for foodstuffs

Iyanuoluwa Olamide Aliu

References  

 Roberto  Vitón  (2017)  Green  bonds:  a  new  financing  tool  to  foster  a  more  sustainable agriculture:  Global  Ag  Investing  2017. 

Darryn  Pollock  (2017).  Agriculture  Getting  an  ICO  Upgrade  to  Boost  Production  in  Russia: Cointelegraph,  2017

 Hypko  P,  Tilebein  M,  Gleich  R  (2010).  Benefits  and  uncertainties  of  performance-based contracting  in  manufacturing  industries:  An  agency  theory  perspective.  Journal  of  Service Management  Vol.  21  No.  4,  2010  pp. 460-489 

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