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The Financial Landscape and the Cocoa Sector
February 4, 2016 Michaël de Groot
Challenges, risks and solutions in farm financing
Not all agri production is bankable in developing countries
2
bankable
non bankable
Corporate farmers
Emergent farmers
Subsistence farmers/small holders
Cocoa production is for 90% concentrated in the lower part of the pyramid
Features per farmer segment
3
Corporate farmers
Emergent farmers
Subsistence farmers/small holders
Cocoa production is for 90% concentrated in the lower part of the pyramid
• Land title/collateral
• Access to finance
• Financial literate
• Good financial documentation
• Sometimes land title
• Some collateral
• Moderate financial literacy
• Developing financial documentation
• Some access to formal finance
• No land title/collateral
• Land use rights
• No financial literacy
• No financial documentation
• No access to formal finance
Financing of 500 million smallholders
• Informal credit from family/neighbors/local shopkeepers
• Informal credit from middle-men/ off-takers
– Lack of bargaining power
– Barter deals: inputs against crop
– Or cash under high interest rates
– Lack of transparency
– Creates dependency on middle-men
• Semi- formal credit from producer organizations, co-operatives
• Sometimes state bank programs
No or very little access to formal bank credit
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Financial services
5
NGOs, Governments
Microfinance services for MSEs
Standard financial services for SMEs
High
Middle
Low income
Economic active poor
Extreme poor
Official poverty line
More sophisticated financial services for MCEs
Grants
Commercial banks
Development banks, Agricultural banks,Savings banks
MFIs, Credit unions, Credit cooperatives
NGOs, Self help groups, Moneylenders
Main obstacles to formal credit to individual farmers
Farm level• Lack of collateral/land title/capital
• Lack of financial documentation
• Lack of track-record
• Lack of understanding bank requirements
Institutional level• Government policies
• Lack of supporting legislation (e.g. warehouse receipt laws, enforceability of
collateral)
Bank level• Lack of understanding of agriculture markets
• Large distance between bank branch and farmers
• Mismatch in financial products and sector needs
• High risk in financing agriculture
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What are the main risks associated with agriculture?
• Commodity price risk
• Quality differences, perishable goods
• Crop risk (weather, diseases)
• Weak repayment discipline / cash diversion / theft
• Lack of collateral and is difficult to liquidate
• Political risk (government interventions, legal enforceability of rights)
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What are the credit needs of the individual farmers?
• Mainly working capital finance / seasonal credit
– Planting materials
– Farm inputs (chemicals & fertilisers)
– Labour
Lack of credit is resulting in low use of inputs, no replanting resulting in low productivity and quality
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• LT loans for renewal plantations / productivity / equipment
Our view on how to address these obstacles for the individual farmer
• Create bargaining power via:
– Creating economies of scale !!! (size)
– Integration in the value chain !
– Organise “what you can do better together”
– Knowledge transfer (extension services)
– Marketing
– Input supply
– Finance
Most common solution to this is a cooperative organisation and integration in the supply chain
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Sector analysis cocoa and chocolate Industry10
The cocoa and chocolate value chain…
Co
nsu
mers
InputsCocoa
farming
Cocoa
sourcing
Trading/
shippingProcessing
Choc.
Manufac-
turing
Food
service
Food
retail
Institutions
Branded
choc.
Food
companies
Cocoa industry Chocolate industry
De-coupling point
1st transformationGrinding
from cocoa beansto cocoa liquor
2nd transformationPressing
from cocoa liquor to cocoabutter and cocoa powder
Current financing options for coops are limited in developing countries
Financing needs Which parties are active?
• Investment finance (medium/long-term):
land, warehousing, equipment,
transportation, cost of certification, etc
Scarce equity and foreign direct investment
Governments
Social lenders
• Input financing: to finance the purchase of
inputs on behalf of the members
middle men, (Inter)national traders
• Stock financing: to finance the beans stored
at the coop warehouse before delivery
Expensive due to lack of warehouse receipt
systems and enforceability
local banks
Risk of double pledging
• Pre-(export) finance of harvest: to bridge
period between purchase from members
and payment by off-takers
Available at competitive rates
main provider international traders and
local banks
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Which interventions are needed to improve the situation?
Cooperatives/ SME should be better prepared for their tasks by
• Cooperative Institutional Capacity building
• Implementation of a proper capitalization structure
• Improving member loyalty
• Access to markets and information, agronomic support, exchange of best practices
Banks should be better prepared to financing the cocoa sector
• Knowledge transfer to local banks (training of agri credit skills, understanding of agri markets and cooperatives)
• Temporary credit enhancement through risk sharing instruments/guarantees (by governements/mulitlaterals)
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Rabobank Rural Fund business cases
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Farmers Coops Processors Traders
Asset Finance
• Input financing
• Raw Material
Collection Financing
• WHR financing
• Cooperative capacity
building
• Save For Loan
• Credit score cards
• Outgrower schemes
• Emerging farmer
programs
• Working Capital
• WHR financing
• Trade & Commodity
Finanance
Working capital
Thank youMichaël de Groot Rabo Rural Fund
email: [email protected]