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Agricultural value chains

Agricultural value chains. Concepts – mapping – markets and finance S Dwivedi. Some concepts. Markets Local markets Terminal markets Prices Spot , futures , options Price discovery Information –arrivals, prices at alternate markets Analysis (fundamentals/Technical) and projections

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Agricultural value chains

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  1. Agricultural value chains Concepts – mapping – markets and finance S Dwivedi

  2. Some concepts • Markets • Local markets • Terminal markets • Prices • Spot , futures , options • Price discovery • Information –arrivals, prices at alternate markets • Analysis (fundamentals/Technical) and projections • dissemination- electronic, Value added services(vas),Print

  3. Value addition • In Agricultural value chains value addition can come from • Business Processes • Aggregation , segregation ,logistics • Productivity • Man , material ,money, input, output • Warehousing • Space, costs ,logistics • Processing • Own vs. toll crushing (out source) • Products • Whole foods to processed foods to derivatives • Prices • Risk mitigation • Administration and Institutional All these result in cost reduction or revenue maximisation

  4. Value chain mapping Process- Identify markets, survey, interview, research, quantify value addition at each stage

  5. Cotton Value chain Case one

  6. Cotton Value Chain

  7. Groundnut value chain Case Two

  8. Groundnut value chain

  9. Components of value chains All agricultural commodities do not offer same level of value addition

  10. Value Chain Finance as an approach • Takes a look at the collective set of actors, processes and markets of the system as opposed to an individual lender –borrower within the system. • Decisions about financing are based on the health of the entire system, including market demand and not just on the individual borrower. • That means in order to offer Agriculture VCF, knowledge of the agricultural system must be known.

  11. Key issues for consideration in VC financing • Strength of the value chain- its opportunities and challenges • Risks • Technical ,business and financial services and support • Business Model for VCF (Mwangi 2007) In essence process involves combination of VC assessment, financial assessment and securing agreements.

  12. Value Chain Business Models • For value chains and value chain financing, a business modelrefers to the drivers, processes and resources for the chain. • Four types of business models: • Producer-driven • Buyer-driven • Facilitator-driven • Integrated

  13. Five C’s of Lending Applied to VC Financing

  14. Business Model Rationale

  15. Financial Service Support Value Chain Actors Value Chain Actors Institutions Services Exporters / Wholesalers Exporters / Wholesalers Banks Technical Training Processors Processors Non - bank Financial Institutions Business Training Local Traders & Processors Local Traders & Processors Private Investors & Funds Specialized Producer Groups Services Cooperatives / Associations Farmers Local MFIs / Governmental Community Orgs Certification/Grades Input Suppliers Product Flows Financial Flows Using the Value Chain to Finance Agriculture Product and Financial Flows within the Value Chain , Source: Adapted from Fries (2007) and Miller( 2007a)

  16. Existing Agriculture VC Finance Providers

  17. Various Value Chain Finance Tools/Products

  18. Key steps that can be employed by VC Financing Institutions • Understand VC • Enabling Environment • Vertical and Horizontal Relationships • Support Markets and Services • End Market • Identify current value chain model that exists • Lead Actors • Business Models • Sustainability Strategy • Identify Transaction Processes • Value added in various stages of the product up the value chain • Determine Actual and Critical Points of Finance • Analyze and compare financing options ( for each level of participant in the chain) • Relative strengths • Risks • Costs • Design Financing Options according to the best option(s) to fit chain • Draw up agreements for financing between parties

  19. Important to Note • The Value Chain Framework is useful for expanding rural finance and for developing enterprises. • Value Chain Finance builds on business relationships and transactions to screen & monitor borrowers, enforce contracts and manage risks & costs • Value Chain Finance is rooted in buyers' and suppliers' desire to expand markets, and to secure or increase product quality and quantity. • Value Chain Finance takes a variety of forms in addition to cash lending, such as advances and off-balance sheet. • The success and limits of Value Chain Finance are tied to the quality of cooperation between actors

  20. References Miller, C., & Jones, L. (2010). Agriculture Value Chain Finance, Tools and Lessons. Warwickshire, UK: Practical Action Publishing Ltd.

  21. Thank you

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