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Analyzing and Financing Value Chains

Analyzing and Financing Value Chains. Richard L. Meyer. Infrastructure. Human resources. Services. Capital equipment. Figure 1. Value Chain Concept. End users/consumers. Marketing. Production. Inputs. Figure 2. Paprika Subsector in Zambia. Exporter Market World Vol – 150,000 tons

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Analyzing and Financing Value Chains

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  1. Analyzing and FinancingValue Chains Richard L. Meyer

  2. Infrastructure Human resources Services Capital equipment Figure 1. Value Chain Concept End users/consumers Marketing Production Inputs

  3. Figure 2. Paprika Subsector in Zambia Exporter Market World Vol – 150,000 tons (Zambia = 5,000 Rest of SADC = 25,000 tons) Private Exporters N = 7 Vol = 2,600 tons Export Grading Assembly Farm production Seed and fertilizer Commercial Paprika Farmers Irrigated N = 2 Vol = 2,220 tons Rainfed smallholders N = 1,500 Vol = 1,100 tons Y/ha = $700 Irrigated smallholders N = 500 Vol = 1,500 tons Y/ha = $1,500 Channel 1a Rainfed Smallholders Channel 1b Irrigated Smallholders Channel 2 Commercial Production Source: Haggblade

  4. Exports Vol = 4,000 dry Feed companies & livestock farmers Traders Fresh Vol = 35,000 tons Cassava traders, dried chips Vol = 45,000 tons (fresh equivalent) = 15,000 dry weight Farmers Figure 3. Zambia Cassava Supply Chain Purchases for human consumption Livestock Vol = 500 dry Industrial users Vol = 500 dry Consumption Processing Trade Soaking, drying Farm production Food Processors Vol = 10,000 Industrial processors Subsistence households Volume = 920,000 tons Channel 1 Subsistence Production Channel 2 Marketed Fresh Cassava for Human Consumption Channel 3 Processed Cassava for Human Consumption Channel 4 Livestock Feed Channel 5 Industrial Uses Source: Haggblade

  5. Vertical coordination Competition Dynamics Governance Income distribution Interventions Topics being analyzed

  6. Financial analysis of value chains

  7. Self-finance Direct informal within chain finance Indirect formal financial services from outside the chain Types of value chain finance

  8. Information asymmetries (can and will borrower repay) High operating costs Common problems of suppliers

  9. Client screening Client monitoring Contract enforcement Common credit functions to be performed

  10. Identify informal and formal financial relationships Outline key features of contracts Analyze how credit functions are performed Analyze legal systems, infrastructure, and social norms Identify possible interventions Five analytical components of a financial lens

  11. Three examples of a financial analysis of value chains

  12. Figure 4. Artichoke Value Chain, Peru Functions Formal Financial Links Retail Wholesale/ Export Processing Production Input distribution Inputs Extension Services Supermarkets US and Europe Local Supermarkets Banks, NBFIs General Mills, Green Giant, etc. Local Wholesalers Banks, NBFIs Viru, Agromantaro, TALSA, Procesadora Banks, NBFIs Small Farmers Large Farmers MFI’s; Rural Banks Independent Distributors Misti – fertilizers; Bayer – pesticides Seed and Plant Sellers Plants Banks, NBFIs Key: Participant in value chain Broken line indicates skipped function Financial links: who finances whom Source: USAID

  13. Table 1. Financial Patterns and Potential Demand for Finance, Artichoke Value Chain, Peru Source: Campion

  14. External Sources of Finance Figure 5. Sunflower Value Chain, Uganda Functions Consumers Retail Retailers Retailers Wholesale Mukwano Wholesaler Retailers Wholesalers Household Rural Use Consumers Mukwano Corporation finance to Mukwano buying and processing channel Mukwano Processing Plant Processing Rural RAM Press Mukwano Buying Center Small/Medium Mills UOSPA Credit Program (failed) Rural Traders Production Smallholder Farmers Key: Mukwano (hybrid seed) Stockists (non-hybrid seed, fertilizer) Inputs Finance flows Finance flows Product flows Product flows Source: DAI/USAID

  15. Local Sugar Retailers Local Alcohol Retailers Local Informal Alcohol Wholesalers Local Sugar Wholesalers Input Suppliers Non-Contract Farmers UNAIDED Outgrowers Household Loans from MFI’s AIDED Outgrowers • Rehabilitation loan from GOU, WB & ADB • Commercial Banks • Madhvani Corporation Finance flows Product flows Participant in value chain Broken line indicates skipped function Figure 6. Sugar Value Chain, Uganda External Sources of Finance Functions Retail Wholesale/ Export Processing Production Extension Services Input Sugar Estates Jaggery Mills Sugar Estates Key: Source: DAI/USAID

  16. Enforcing contracts (warehouse receipts) Alternatives for aiding small farmers Partnerships, alliances and linkages Capacity to sustainably reach large numbers (estimate profitability, cash flow analysis) Issues Raised

  17. Value chain analysis focuses attention on priority interventions Encourages financial systems analysis as the logical next step CONCLUSIONS

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