tools, are not substantially different from one region to the next. For example, a global fi nancial institution does not change the way it undertakes fi nancing of a value chain nor does the application of warehouse receipts or trader fi - nance differ signifi cantly by region, even though, as was seen, the relative im- portance of who provides the fi nancing within a chain may change by region and commodity. The level of development of a country’s fi nancial markets is quite important in determining which fi nancial tools can be used, either be- cause the regulatory environment supports its use, or there is an increased use of particular types of value chain fi nance as an alternative precisely because conventional fi nancial markets are weak. The presence and use of commodity exchanges, which are most active in larger, developed countries for certain commodities, are important determinants for the use of some of the value chain fi nance instruments. There is also heterogeneity related to the nature of the product chain as some chains lend themselves to higher levels of value ad- dition and integration (e.g. sugar cane) whereas with others (e.g. maize) there is more diffi culty consolidating chains. However, the value chain fi nancing approach – comprehensively assessing and knowing the chain and structuring fi nancial interventions accordingly – is applicable in all regions.
Many challenges remain. Side-selling and other forms of contract breaking re- main a formidable hurdle to overcome in fi nancing through value chains.
Successful models of value chain fi nancing at the beginning of the chain have often required up-front support in organization, training and confi dence building for ensuring strong linkages and commitment among the actors in the chain. Payment of those support services, especially for small farmers and small agribusiness companies, is an ongoing challenge for both the public and private sectors.
recommendations. The recommendations in this section coalesce this learn- ing and offer a summary guideline.
Recommendations regarding fi nancial institutions These recommendations are designed to inform:
• Lending institutions that endeavour to take value chain dynamics into account when providing loans to specifi c businesses or types of business within a given chain.
• Financial institutions that aim to support the development of value chains, potentially at multiple levels, through appropriate loan prod- ucts and possibly other fi nancial instruments.
• Facilitating organizations that work with fi nancial institutions to either strengthen the institution or to extend fi nancial services to under ser- viced agricultural sub-sectors.
Confi dence in market demand. Market driven value chains have proven to be the most effi cient ones. Agribusinesses that seek fi nancing need, at minimum, an understanding of market demand and how their outputs are positioned to respond to that demand. In the case where greater value chain integra- tion exists, businesses may be linked to a lead fi rm with a reliable market or established market linkages. Although lending institutions may not have the competence to assess market demand, they should have confi dence in the capacity of the borrower to do so.
Leverage the knowledge of value chain businesses. Value chain fi rms themselves are often the best source of knowledge regarding the functioning of the chain and the various businesses within it. This knowledge enables such fi rms to re- duce risks, and to make decisions about internal value chain fi nancing versus formal agricultural lending. By leveraging the knowledge and experience of successful value chain fi rms, fi nancial institutions are better situated to make wise fi nancing decisions.
Contribute to value chain strengthening. Financial institutions have the po- tential to contribute to the strengthening of value chains through building knowledge and supporting the development of needed services. Rather than investing in one component of the chain, the fi nancial institution can grow expertise in the chain, share this knowledge, and provide fi nancing to support services. This not only benefi ts clients, but also expands lending opportunities while lowering risks.
Multiply fi nancial products to meet needs. Value chains require a variety of loan products as well as other fi nancial services such as savings and insurance. In order to strengthen businesses, reduce risks, and create a healthy fi nancial system, it is important to investigate the fi nancial needs of value chain fi rms from farmers to retailers. Unorthodox products, tailor-made adaptations and
innovative approaches may hold the greatest promise for developing the chain and supporting fi nance.
Strengthen risk assessment and lending criteria. Value chains offer a structure and relationships that have great potential to reduce the risk of agricultural lend- ing. It is incumbent on the fi nancial institution to evaluate risk and to take into consideration conventional criteria along with new criteria that encom- pass value chain knowledge and functioning. These include:
• knowledge of actors and market;
• risk management systems;
• transaction costs of delivering fi nancial products;
• governance systems;
• observance of contracts;
• capacity to establish alliances;
• availability of inputs, services and other supports.
Realize that fi nance is not enough. Finance is often one of many needs in a busi- ness. Even though fi nance is often a necessary requirement in successful value chains, fi nance alone is generally not suffi cient. The business development services associated with value chains or market development may be more important to success than the fi nancial inputs. Being aware of the gaps and opportunities in a value chain, and promoting partnerships and ways to address hurdles that go beyond the capacity of the fi nancial institution to resolve can improve the results of the value chain partners and those who fi nance them.
Investigate the application of new technologies. New technologies offer lower cost solutions for hard-to-reach clients, as well as methods to form networks, ex- change information and monitor fl ows of money. This is common in micro- fi nance and other fi nancial services as well; what is less evident is that new technologies in food chain industries can also quickly affect specifi c sectors and be a barrier to those who cannot react to the new demands.
Recommendations regarding value chain stakeholders These recommendations are designed to inform:
• Agribusinesses such as lead fi rms that participate in a value chain, and need to evaluate lending and borrowing opportunities from a holistic perspective.
• Service providers who support a value chain – e.g. transporters, tele- communications, packagers, equipment suppliers – who would like to understand the viability of the chain, and therefore the risks involved in offering credit to value chain businesses or taking loans to service the chain.
• Facilitating organizations that work with smallholder farmers, agribusi- nesses, service providers and other stakeholders to strengthen the value chain in general.
Understand market demand. This is the primary consideration for any value chain stakeholder or facilitator. As noted earlier, market-driven value chains have proven to be the most effi cient ones. Value chain businesses must under- stand market demand and how the chain’s outputs are positioned to respond to that demand. A lead fi rm has the unique opportunity to not only under- stand this demand, but to convey it to others in the chain to ensure respon- sive production and value-adding activities.
Share knowledge. In traditional systems, knowledge was often not shared due to fear of losing market competitiveness. In today’s global markets, knowledge is key to maintaining one’s position in the market. In the past, traders were often very secretive and kept information away from farmers at the bottom of the chain, preferring to reduce risk and ensure profi t by squeezing prices rather than building markets. Now, when producers understand what is demanded, and how to respond to market trends, the chain and therefore the lead fi rm, intermediaries and service providers are all in a better position to succeed.
Be aware of value chain needs. As a stakeholder in a value chain, it becomes necessary to understand the needs of the chain, and not just those of one’s own business. Constraints may be fi nancial or non-fi nancial, and they may af- fect many or just a few. Understanding these issues and how one can mitigate risks is essential. This knowledge can lead to increased cooperation with other stakeholders, and bolstering of the value chain in general.
Develop business alliances. The capacity to develop lasting relationships that are mutually benefi cial is a characteristic of durable value chain businesses.
In forming relationships, one must consider the incentives for all parties con- cerned to participate in the relationship – both fi nancial and non-fi nancial – and how an alliance fi ts into the overall functioning of a value chain.
Develop competitive industries through cooperation. Globalization has put greater pressure on individual businesses to be part of competitive industries. Build- ing on shared knowledge and cooperation, value chain businesses can develop solid market linkages, long-term buying relationships, agreed upon standards, brand recognition, and access to appropriate technical skills and technologies.
Without this type of collaboration, businesses are likely to fail in the face of stiff competition from other better functioning value chains.
Build associations and other supports. One mechanism noted for developing a competitive industry was through an industry association. Associations pro- vide a structure for sharing information, promoting best practices, access- ing markets (e.g. trade fairs), lobbying for policy change, forming alliances, developing brands (e.g. Egyptian cotton) and other forms of collaboration.
Associations may consist of sub-groups like exporters or producers, or have
broad-based memberships that welcome those who support the industry such as marketers, accountants and consultants.
Recommendations regarding policymakers These recommendations are designed to inform:
• Policymakers who are interested in supporting the development and competitiveness of value chains and the businesses within those chains.
• Value chain stakeholders and fi nancial institutions that seek to infl u- ence policymakers by providing reliable information on value chain functioning, success factors and results.
• Facilitating organizations that are developing value chains, supporting the stakeholders, or building related fi nancial systems, and endeavour to infl uence the enabling environment.
Infrastructure is a critical need. Agricultural communities often lack the infra- structure that would enable them to thrive and contribute to a nation’s food security and/or exports. Too often, there are gaps in basic services: inadequate electricity for operating machinery and processing equipment, lack of storage facilities to ensure product quality, undeveloped road systems to promote fast delivery and reduced spoilage, no greenhouse structures to prolong seasons and increase yields, and insuffi cient water and technologies for irrigation and other farm activities. It is costly and policymakers must make agriculture a priority to overcome these obstacles.
Support legislation. Policymakers have a critical role to play in the creation of enabling environments. Legislation may target fi nancing issues from the regu- lations that govern microfi nance institutions to those that support the devel- opment of managed warehouses that enable collateralization of inventory.
Alternatively, legislation can support the certifi cation of agricultural inputs, the registration of agribusinesses, the development of industry standards, the opening of domestic and international markets, and a host of other sup- porting regulations for agricultural sub-sectors. For value chain stakeholders, facilitators and policymakers, understanding the regulatory bottlenecks, and how to overcome them, can result in signifi cant changes in legislation and the enabling environment.
Consider a value chain lens in agricultural development. In delivering governmen- tal support to agricultural development – for example, expansion of exten- sion services, investment in agricultural research, development of wholesale markets – it is useful to employ a value chain lens. Too often, well intentioned government initiatives are disconnected from the reality on the ground. Such efforts can be enhanced by building suitable public and private alliances for planning and implementation, as outlined in the next point.
Build supportive alliances. With the intensifi cation of agricultural value chains, there are new alternatives for developing the agricultural economy. It is im- portant to bridge the gap between public and private sector plans and strate- gies, involving all actors from farmers, to agribusinesses, traders, fi nanciers and government. At the same time, there is a need to complement the gov- ernment extension machinery; this second agriculture revolution needs active participation from all actors, besides the government. Policymakers can take an active role in leading this collaboration.
Contribute to risk mitigation. Policymakers that aim to invest in their country’s agricultural development can utilize funds to assist in reducing risk in fi nanc- ing agriculture and agro-industry. For example, government funds can be used to support guarantee funds, agricultural insurance or incentives for start-up.
Each of these has to be assessed in light of the agricultural goals of the country, the nature of the funds and the long-term impact and viability; using funds in this way may catalyse agricultural fi nance and investment and promote the development of competitive agricultural value chains and effi cient fi nancial markets which support them. Introduction of legislative innovation, such as the rural product notes in Brazil, that provide access to advance funds on for- ward contracts and allow that disputes can be rapidly settled in out-of-court settlements, can be considered as an example of increasing access to fi nance and reducing risks of moral hazard.
Training and capacity building. The concepts and many of the instruments of value chain fi nancing are not well understood. Universities, bank training in- stitutes and development organizations must be encouraged to develop the training and teaching curricula needed to build the capacity required.
Understand the limitations of value chain fi nance. Two cautions must be under- stood. Firstly, value chain integration may not be good for all those involved.
The least powerful in the chain may become marginalized in certain value chains. Value chain fi nance cannot address inequities that may be inherent in some value chain relationships. Governance through policies and enforce- ment is required. Secondly, value chain fi nance can only address fi nancial needs related to the chain; the conditions for promoting broad-based fi nancial services to all households and businesses must also be pursued.