Table 4.6 Summary analysis of agricultural value chain finance products
Instrument Benefits Limitations Application potential
A. Product financing
1. Trader credit • Farm-gate finance • Non-transparency • ‘Middleman’
with ease of of true market traders will remain transaction. value. important but as
• Culturally accepted • Often informal with chains integrate and well known at potential for side- will lessen in all levels. selling. importance.
• Secures sale/ • Quality and • Tendency of purchase and price quantity uncertain traders towards of seller and buyer. when given pre- acting as agents of
harvest. wholesalers.
2. Input supplier • Buyers obtain • Input costs may be • Focus on reducing credit needed inputs. excessive. administration and
• Suppliers secure • Lack of security in risk with multi- sales. repayment. party links with • Lack of competitive banks; produce
suppliers in many buyers are
regions. promising for
direct payments
from sale.
• Quality and safety
are growing
concerns.
3. Marketing • Secures quantity • May not be directly • Value chain control company credit and price. accessible to small through contract
• Funds advanced as farmers. farming is growing needed; payments • Credit advances in importance.
often discounted increase financial • Value chain directly. outlay and approaches reduce
• Eliminates need administration. transaction costs for trader. • Compliance of and risks.
• Contract terms for contracts is often finance, price and not respected.
product specs.
4. Lead firm • Secures market • Less access for • Growing use and financing and price. small farmers. strong potential to
• Technical guidance • Restricts price rise provide access to for higher yields gains to producer. markets, technical and quality. • Cost of assistance and
• Less side-selling management and credit.
options due to enforcement of closer monitoring. contracts.
• Enforceable contracts reduce side-selling.
• Lead firm can often hedge price risk.
Instrument Benefits Limitations Application potential B. Receivables financing
5. Trade receivables • Reduces finance • Requires a proven • Is used for import- finance constraints for track record. export transactions exporters and eases • Not suitable for by companies for repayment urgency perishable major
from importers. products. commodities.
• Can be cheaper • Is most suitable for • Increasingly used than bank loan large transactions. for input suppliers,
alternatives. equipment dealers
and major
commodities.
6. Factoring • Provides a means • Complex and • Less common but of capital for requires a factoring is growing in use operations. agency, which is in agriculture for
• Facilitates inter- only an option for processors and national business some countries input suppliers and finance by and commodities. where product passing collection • Lack of knowledge flows and accounts risk to a third and interest by are stable.
party factor. financial markets.
7. Forfaiting • Like factoring, it • Forfaiting requires • Less common but frees up capital to selling the similar to be used elsewhere accounts at a factoring.
in the business discount. • Invoice and takes care of • Complex and instruments are collection risks requires the negotiable but and costs. presence of complex, limiting
• Can be selectively specialized their application used for specific agencies. potential.
accounts.
C. Physical asset collateralization
8. Warehouse • Uses inventory as • Commodity traded • Common and used receipts collateral to must be well at all levels with
increase access to standardized by high interest and financing. type, grade and growth potential.
• Where organization quality. • Currently is used and trust are built, • Increases costs. for durable can also work on a • Often requires commodities but less formal basis special legislation. with increased without the official processing and WR legislation in improved storage,
place. the range of use
can expand.
9. Repurchase • Can reduce • Complex and • Limited potential agreements financial costs and requires in near future and (repos) has proven success- commodities to be used infrequently
ful in selected stored with by exporters for commodities with accredited some commodities.
well functioning collateral managers commodity and requires exchanges. commodity
exchanges.
Instrument Benefits Limitations Application potential 10. Financial leasing • Allows more loan • Requires • High potential use (lease-purchase) security and ease coordination of for equipment if
of asset seller, buyer and legislation allows.
repossession in financier.
case of default. • Only feasible for
• Especially good medium to long- where legal system term purchases of for loan collection non-perishables.
is weak. • Often requires
• Often tax benefits. insurance.
D. Risk mitigation products
11. Insurance • Reduces risk for • Costly, requiring • High interest by all parties in subsidy, when many donors and value chain. applied to governments
• Commonly used agricultural increasing use.
and easily applied production. • Growth without for fire, vehicles, • Insufficient data subsidies will be health and death limits weather modest for insurance. indexing use in production
• Crop and livestock insurance. insurance until
insurance is sufficient risk data
increasing. is available.
12. Forward • Companies can • Requires reliable • Frequently used by contracts hedge price risk, market information. larger companies
thus lowering • Commodity traded and for major financial risk and must be well commodities.
cost. standardized by • Potential to
• Can be used as type, grade and increase collateral for quality. significantly
borrowing. wherever reliable
• Not dependent market information
upon commodity is available.
exchanges.
• Benefits can flow though chain when one party forward contracts and can offer forward or fixed prices to others.
13. Futures • Used globally in • Commodity traded • Growing use and agricultural must be well potential in commodities to standardized by countries with hedge risk. type, grade and functioning
• Futures serve as quality. commodity price benchmarks • Requires a well exchanges.
for reference trade. organized futures • Use is limited to
market. large producers,
processors and
marketing
companies.