The Role of Markets in Rural and Agricultural Finance

This post kicks off a special series on reaching small holder farmers through innovative finance. Over the coming weeks the series will feature a variety of voices on this topic. We welcome your participation through comments.

With more than 50% of the developing world’s population (3.1 billion people) living in rural areas and global commodity prices on the rise again, there is growing awareness of the need for the development community to work in tandem with the private sector to create opportunities to increase farm family incomes and reduce food insecurity.  Facilitating access to rural and agricultural finance is an important part of what is needed to support the development of rural and agricultural markets in the coming years.

Attracting private sector investment into rural and agricultural markets is tough. And here are some approaches we have tried at AZMJ.

Working with socially responsible investors to assess and reduce risk associated with rural and agricultural lending.

Socially responsible investors are increasingly interested in investing in rural and agricultural markets, especially if partnerships can be formed to protect natural environments and create a sustainable development impact.  AZMJ has conducted due diligence of more than 40 microfinance institutions and investment funds for socially responsible investors.

In Peru, AZMJ is working with USAID, Carana Corporation and a local NGO to develop a concept that would leverage public and private sector investments in areas where coca had been the predominant crop.  AZMJ is forging private sector alliances with impact investors, including Calvert Foundation, MicroVest, and the Inter-American Development Bank, and agribusinesses to support legitimate agricultural market development opportunities near San Martin, Huanuco and Ucayali. To attract these investors, USAID will be matching technical assistance funds and providing a credit guarantee for up to 50% of the agricultural portfolios into which they will be investing.

The local NGO will then work with the local financial institutions to place the funds, by assisting in identifying and vetting potential borrowers. To reinforce the investments, the project will also be providing business and agricultural technical assistance to strengthen productive value chains, including organic coffee and cocoa, by working with farmers, input providers, processors, wholesalers and retailers, as well as local technical assistance providers.

In this way, the project creates a “win-win” solution to a long-term development constraint.  The investors benefit from reduced transaction costs associated with conducting on the ground due diligence and reduced risks at the client and credit levels. The donor benefits from facilitating $40 million of increased investment in agricultural development for a fraction of the cost.

Collaborating with private sector agribusiness firms to improve the enabling environment for their rural and agricultural investments.

AZMJ has forged partnerships with a number of private sector international agribusiness firms, including ECOM Agroindustrial Corporation Ltd. ECOM is a global commodity trading and processing company and one of the largest coffee millers in the world. There is significant unmet need for finance and technical assistance to support growing value chains, such as cocoa, sugar and organic coffee. According to Fair Trade USA, fair trade sales of certified cocoa, sugar and organic coffee soared in 2010. Certified fair trade cocoa imports to the US increased by 67% and sugar increased by 60% from 2009 to 2010 alone! While coffee imports only increased by 1% overall, organic coffee imports to the US increased by 27% from 2009 to 2010.[1]

ECOM is working with AZMJ to increase its access to sustainable sources of product, especially organic coffee and cocoa in Latin America countries. ECOM is willing to provide cash and in-kind investments to develop the local markets for these products, including providing training and technical assistance to farmers and cooperatives on how to ensure a high quality and timely harvest. AZMJ will help organize farmers, build their financial literacy and enable them to become “credit worthy.” Participating farmers will benefit from improved market linkages, increased knowledge and access to finance, in ways that improve their long-term income potential.  

These are just two examples of the types of public-private sector partnerships and approaches that will be shared at AZMJ’s Cracking the Nut 2012 Conference, which will focus on the following five themes:

1. Expand to New Markets – identifying and working in growth markets.
2. Tap New Sources of Supply – sustainable sourcing from aggregated small-scale agricultural producers to reduce risk and stabilize prices.
3. Create Effective Partnerships – combining knowledge and resources to maximize results.
4. Make Finance Work – cost-effectively serving all levels within the value chain.
5. Forge Positive Government Support – working with governments to create enabling environments that provide proper incentives for rural and agricultural investment.

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• To find out more about the agenda and to register go to www.crackingthenutconference.com.
  
   
  [1] Greenbiz.com, 27 April 2011,  www.greenbiz.com/news/2011/04/27/cocoa-sugar-lead-surge-fair-trade-imports