Agricultural Financing: How To Boost Production, Processing and Marketing

The shift from subsistence to commercial agricultural production requires a reasonable amount of funds. This is critical for the growth of the agricultural sector of any country. In developing countries, where agriculture is a major source of livelihood, financing for investments in agriculture is scarce, even for large investors. In Africa, less than 1 per cent of commercial lending is destined for the agriculture sector (IFC, 2013). Governments are now making efforts to attract investment for agriculture, the lack of understanding of the financial risks and opportunities in agriculture, deprives the sector of much-needed funds to boost production, processing and marketing.

People that need finance in agriculture

1. Farmers and agricultural entrepreneurs

Farmers and agricultural entrepreneurs, need finance to allow them to expand production and/or diversify products. This can include, for example, finance for inputs (such as seeds and fertilizers), production (such as machinery and equipment) and marketing (such as processing, packaging and transport) (Food and Agriculture Organization [FAO] & World Bank, 2013).

2. Agro-dealers along the value chain

Agriculture entails a sequence of interlinked activities transactions in a chain that starts from the supply of seeds and fertilizers and finishes in the mouth of the consumers (IFAD, 2012). There are financial instruments specifically designed to strengthen these links between the actors along the value chain.

3. Rural infrastructure

Financing can be also concentrated on the infrastructure needed to carry out agricultural activities. The sector depends heavily on infrastructures such as rural transport systems, irrigation systems, water supply, sanitation, electricity, storage and telecommunication facilities. These projects are costly and require large amounts of financing.

Who should be responsible for finances in Agriculture

The diverse system of agricultural finance enables a wide variety of people to be financers. Farmers and small entrepreneurs (such as community savings systems) but also in more complex organizations, such as saving and credit cooperatives and unions or mutual credit guarantee schemes.

Cooperatives and credit unions play an important role in agriculture as self-help member institutions. Unlike banks, they have a non-profit status. Smaller cooperatives are well positioned to offer its members better access to financial institutions and investments.

Most private sector finance traditionally comes from local commercial banks, branches of foreign banks and insurance companies. These institutions finance small farmers and entrepreneurs directly, facilitate microfinance schemes and finance large rural infrastructure projects. However, infrastructure financing can include a combination of actors, such as private partners, financial institutions, national and local government, development banks or donors.

Aside from private sources of finance, governments are also important sources of finance for developing country agriculture.

Two major types of Agricultural Financing

1. Direct Finance

• Savings
• Traditional finance
• Credit guarantee schemes

2. Value-Chain Finance

• Internal finance: This takes place between participants along the value chain based on their relationships, such as when a fertilizer company provides fertilizers and the farmer only pays the company after they have sold their harvest.

• External finance: This comes from outside the value chain—for example, a microcredit bank will cover the costs of purchasing the fertilizer for the farmer.

Take Home Message

Access to finance is a vital part of any developed agriculture sector. Financing is not a charitable activity; it is primarily profit-driven. This necessarily means that all possible regulation and programs to attract financing must be realistic with the characteristics of the sector and the viability and rate of return. Managing the risks and understanding the opportunities of the agriculture sector is key for any successful policy or law. Thus, to attract finance and, consequently, investment in the agriculture sector, it is critical to strengthening both the agriculture and financial sectors.

Source: International Institute for Sustainable Development