Value Chain Financing, a concept of consequence

Tags: Worldwide, Small Producers Agency

I lived for some time among the farmers in the uplands of the Philippines. Most of them grew hybrid maize, destined for the pig industry around Manila. A major feature of dally life was the constant indebtedness of the farmers with the local traders that supplied the farmers with credits for the seeds and fertilizer, in return for a high interest rate and obligatory delivery of the whole yield to the trader. Some farmers were trying to escape from the debt trap by returning to white maize, a traditional subsistence crop that can be grown without costly inputs and independent from markets.

Now, working for the knowledge program on smallholder agency, I have learned that what the traders were doing was a form of Value Chain Financing, a quite popular concept that, contrary to the experiences of the maize farmers, generates much hope for the future of smallholders worldwide. But good or bad, a concept of consequence it certainly is, with great relevance for the very basics of rural life.

A discussion paper is produced by the MicroNed and Agri-ProFocus taskforce joined by professionals from HIVOS, Cordaid, Finance Alliance for Sustainable Trade (FAST), KIT, Agriterra, MicroNed, ICCO/Terrafina, Agri-ProFocus. In this publication, the relationship between the maize growers and maize traders is called ‘embedded financing’, and the risk of dependency is mentioned in that connection. All other forms of value chain financing do not carry this big risk, however. The publication provides an overview of types of actors in the value chains (input suppliers, growers, traders, processors, retailers, consumers), types of financing agencies connected to these actors and forms of financing, such as trade loans, leasing, embedded financing, contract farming or equity financing. With that, the publication supplies a good first overview of the subject.

On a more critical note, it would appear that the publication misses out the options for more innovative financing that employs the relationships between actors in the chain. One such idea is that large retailers may vouch for their suppliers (say, a smallholder cooperative) and with that, help them towards a good bank loan.

Savings are also mentioned among the financing mechanisms. Savings do not have a wide range of application in the sense that one cannot easily imagine that large investments by smallholder groups can be self-financed. Look too, however, at the maize farmers of my field work. Self-financing of the yearly inputs is clearly possible. Doing so, the farmers would always be free to choose the lowest bidder at the input side and the highest bidder for their yield. And that, in turn, might enable them to move out of poverty, a perspective that is completely lacking in the present situation. The traders, however, do not wish to act as an informal savings bank; supplying loans is what maintains their position. Other institutions that invite saving behaviors are nowhere to be found in the villages. Moreover, a self-financing strategy would require a persistent capacity of individual farmers to not consume the savings, e.g. supported by strong social norms. And that is not Philippine culture.

Further discussions, emerging lessons and policy implications are expected during the Strategy meeting on Value Chain Finance, 19 November 2009 , 13.30 - 17.00 hrs. Location: ICCO, Utrecht. Below you find the link to the discussion paper.