Following my previous post, I wish to look at the concept of Value Chain Financing in agricultural value chains. This involves a comprehensive approach which looks not only at the direct borrower but rather analyzes the value chain and those within it, and their linkages in order to best structure financing according to those needs. This approach is preferred by many financial service providers as it provides better understand the market and its supply and demand dynamics. Actors with highest value, shortest tenure and lowest risk are the most ideal for supporting financing.
The agricultural value chain entails the following players: Input suppliers, Producers, Transporters, Wholesalers, Retailers and then Consumers. All these players play an important role within the Value Chain in order to make it strong. Financial needs also vary and these players are eligible and can only access certain services providers subject to their terms. The different service providers are the Commercial banks, Cooperative societies, Micro Finance Institutions.
Financial needs along the VC
- Input suppliers: they may need cash flows to stock Seeds, fertilizers, pesticides, livestock feed, agro-chemicals, drugs, farm equipments etc
- Producers: Purchase of farm inputs, Investment in assets, farm structures, breeding stock, labor costs, marketing costs.
- Storage & warehousing: Capital for storage facilities for grains, fruits, vegetables; cold chains & logistics.
- Processors: Capital for processing plants, packaging facilities etc.
- Retailers & wholesalers: Financing for inventory, trading & marketing.
- Exporters: Financing for pre & post-shipment commitments
I gathered that Value Chain financing under the different business models use different tools which can be broadly categorized as follows:
- Product Financing: Include trade credit, input supplier credit, marketing company credit, lead firm financing etc
- Receivable Financing: Trade Receivable Finance, factoring, forfeiting
- Physical Asset Collateralization: Warehouse Receipts, Financial Lease (Lease-purchase), Repurchase Agreement (Repos)
- Risk Mitigation Products: Insurance, Forward contracts, Futures
- Financial Enhancements: Securitization Instruments, Loan Guarantees, Joint Venture Finance etc
These are the things we need to understand to enable us tap into the financial opportunities along the Value Chains.