FINANCING SMALLHOLDER FARMERS – A VALUE CHAIN PERSPECTIVE

1. FINANCING SMALLHOLDER FARMERS – A VALUE CHAIN PERSPECTIVE Authors: Kweku Yeboah Koranteng Prof. Meshach Aziakpono Presentation by Kweku Koranteng

2. Disclaimer This paper and presentation is the sole opinion of the authors and not necessarily that of the Industrial Development Corporation. Kweku Koranteng is an employee at the Industrial Development Corporation.

3. PROBLEM • According to the UN population statistics, 61 per cent of Africa’s population is in rural areas (UN, 2007). Although declining, 57 per cent of income in rural areas is from farming; therefore an increase in agriculture productivity can play an important role in relieving poverty (Llanto, 2006). • The importance of smallholder farming in Africa is highlighted in the fact that 95 per cent of agriculture production is from smallholder farming (Seymour, 2010).

4. FINANCIERS CHALLENGE WITH SMALLHOLDER FARMERS Using research done on the South African fresh produce market in KwaZulu-Natal, Eastern Cape and the Western Cape, De Wet (2004) cited in Boonzaaier (2009: 44), noted that there is “significant difference in quality and yield distribution of small scale emerging farmers compared to commercial farmers with most of the harvested produce of emerging farmers only of processing grade and local markets”. The study attributes the difference to lack of knowledge, skills, experience, equipment, infrastructure and other factors.

5. Value Chain Perspective • Links that contribute to bring the produce from the producer to the consumers plate • Relevance of the chain - Information asymmetry - Barrier to entry for producer to access market • Technical Expertise • Access to Finance Producer Agribusiness Exporter Importer Retailer Consumer

6. Challenges of Small Producers • Technical expertise (right yields, export quality, disease, climate) • Market access (retailers dealing with small producers) • Financial access (link to the above – lack of security, feasibility of financing small farmer with debt)

7. FINANCIERS CHALLENGE WITH SMALLHOLDER FARMERS • Perception of higher risk • Lack of security • Higher transaction cost • Information asymmetry and moral hazard

8. Contract Farming FARMER AGRIBUSINESS

9. Contract Farming Dynamics • Partnership between farmer and agribusiness • Introduce farmer into value chain • It establishes linkages between supplier, financier, buyer, extension and technical service provider

10. Contract Farming (Value Chain) Financing FARMER FINANCIER/DFI AGRIBUSINESS

11. Contract Farming (Value Chain) Financing Contract farming mitigates against the risk for financiers as it establishes linkages between suppliers, financiers, output buyers, extension and technical service providers so that the financiers can invest confident that the complementary services that the farmers need to make profits are available (Poulton, Dorward, Jowett, Peacock & Urey, 2004).

12. Contract Farming Advantages and Disadvantages • Advantage for financier - Improve yield and productivity (Anim, Raphala & Mandleni, 2008; Saigenji & Zeller, 2009; Kumar and Kumar, 2008; Sharma, 2008) - Lower risk of financing - Lower transaction cost • Disadvantage for financier - Unequal power relation (Kirsten & Sartorius, 2002; Sivramkrishna and Jyotishi, 2008) - Race dynamics - Lack of ownership of project by small farmer

13. Introducing IDC The IDC is self-financing national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in Africa and to the economic empowerment of the South African population, thereby promoting the economic prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the building of competitive industries and enterprises based on sound business principles. Mission Objective Support industrial capacity development • Facilitate sustainable direct and indirect employment • Regional equity (including development of the rest of Africa) • Growing the entrepreneur and SME sector • Expansionary and/or broad-based black economic empowerment • Environmentally sustainable growth • Grow sectoral diversity and increase localisation Outcomes

14. IDC KAT RIVER SCHEME

15. IDC KAT RIVER SCHEME • Kat River Valley – Fort Beaufort (Former Ciskei) • 9 Farmers • Black citrus producers • Part of 534 ha allocated to black farmers by the then Ciskei government • Average size 25 ha

16. INTERESTING DYNAMICS TO CONSIDER • Citrus – long term crop • Rural population • Differing levels of poverty and income requirement • Differing level of technical expertise • Differing levels of education/ record keeping /understanding financials • Export crop (Information asymmetry) • Only two packhouses in the area

17. EMPIRICAL RESULT • Marketing Assistance - Being provided - Lack information (How the market returns are calculated) - Lack of transparency (Mistrust, grades, market returns) - Lack of record keeping by farmers

18. EMPIRICAL RESULT • Technical Assistance - Have access to technical expert from Riverside - Strategic technical made between IDC and agribusiness – Minimal input of farmers - Feeling underpowered (junior partner) (Black and white dynamics)

19. EMPIRICAL RESULT • Financing Structuring - Go through financing structuring - Farmer claim they check invoices to items delivered on farm – Agribusiness state otherwise (Apathy, lack of sense ownership, understanding financials) - Most farmers don’t understand link between monthly invoices, monthly statement annual financial statement, amount utilised and amount paid - Think they are repaying loan

20. EMPIRICAL RESULT • General and dealing with IDC - They don’t feel mistreated but underlying feel of lack of control and autonomy - Sufficiency of salary long term nature of finance • Rural context dependent on reliance on farming income • Consider household income • Lack of incentives for good performing producer - Fear of challenging agribusiness

21. Recommendation and Conclusion Repayability Maximisation of Return FARM FARMER EFFORT AGRIBUSINESS

22. Recommendation and Conclusion • Maximising the farmers effort -Ownership - Transparency - Incentive

23. Recommendation and Conclusion • Maximising the farmers effort (Ownership) - Understanding the big picture - Understanding the strategic direction - Farmer taking ownership (not quasi employee) - Farmer should be able to understand the nature of scheme before joining

24. Recommendation and Conclusion • Maximising the farmers effort (Transparency) - Finance - Marketing - Farmer keeping record • Simplified statement that can be understood • Check on agribusiness - Education Suspicion Repayment problems

25. Recommendation and Conclusion • Maximising the farmers effort (Incentive) - Improves ownership status of farmer - Consider bonus for above average crop - Consider sufficiency of income – long term crop • Other source of income - Farmer should be able to understand the nature of scheme before joining • To develop an asset for the future

26. Recommendation and Conclusion • Maximising the farmers effort - Independence and Ownership - Better chance of survival after IDC exit - IDC achieves it objective and creates a sustainable business after exit