4. Establish financing across the agriculture supply chain.
Agribusiness is essential for achieving global food security, and financing is a central component to the working of the entire value chain. From bringing land into sustainable production and improving productivity by transferring technologies and practices, to ensuring the best use of water and other natural resources, financing is a critical factor in supply chain development and overall food security. Financing—whether through new instruments or farmer and supply chain financing programs—can play a critical role in developing environmentally sustainable and socially inclusive food supply chains that bring safe, affordable food from producers to end consumers.
Develop financial and insurance instruments that support climate resilient and sustainable supply chains.
The increasing probability of crop failure due to changing weather patterns requires new sources and types of financial and insurance products. To ensure the sustainability of product sourcing, the costs caused by extreme weather need to be minimized over time.
Creating a financial and insurance value to risk reduction in agriculture can allow for the development of novel financial mechanisms that align the incentives of food supply chain actors (i.e. from smallholders to final buyers) that reduce the risk of agricultural production loss caused by environmental degradation and climate hazards. New supply chains should be designed to sustainably intensify food production by aligning the interests of smallholder farmers, banks, insurance companies and regional-to-international commodity buyers.
Ensuring sustainable agricultural production requires holistic risk management strategies that help to reduce, mitigate, and cope with various farm risks. Agricultural insurance can help to manage value chain risks, stabilize farm income, and promote investment in agriculture. It can also act as collateral for credit. Insurance cannot ensure food security on its own in emerging markets, but it can play a significant role in aligning production incentives, raising awareness of the importance of risk mitigation, and encouraging investment in agricultural efficiency. Farmers and producers, governments, communities, cooperatives, and agribusiness can benefit from risk management solutions offered by insurers and reinsurers at multiple levels.
Importantly, expanding agricultural insurance in emerging markets requires proactive and enabling government policies, supportive infrastructure, innovative products, cost-effective business models, new distribution channels, and advanced technology.
Develop new farmer financing programs and invest in operational capacity.
Working capital finance is needed by farmers to pre-finance inventories, seeds, fertilizers and chemicals and pay for other production costs, as incomes are available only post-harvest upon the sale of produce on a lump sum, aggregate basis.
Financing programs for farmers must be designed to accommodate the cash flow patterns of the agricultural business cycle of different crops. For farmers to continue to invest in expanding production, they must have access to financing programs that result in farming becoming and remaining a sustainable business. Problems created by unsuitable financing arrangements have led to farmer distress in many emerging markets, with severe adverse impacts on political and social stability, as well as on food security.
Farmers need continuous investment in order to maintain their competitiveness, by incorporating new technologies, investing in environmental safety (including sanitary upgrades and maintenance of food safety standards), and expanding market access. In particular, financing of environmentally sustainable and more efficient irrigation systems and equipment is an important tool for supporting the sustainability of global agriculture, which is threatened by a global decline in the supply of water.
Financing is also needed for investments in improving the climate footprint and eventually the overall sustainability of agricultural operations, including land rehabilitation and improving and managing watersheds. Additional financing is needed for special handling facilities at ports, warehouses, cold storage facilities, grain silos, greenhouses, local produce markets and commodity exchanges.
Today, many developing countries lack financing for capacity expansion for the production and supply of key agricultural inputs like seeds, fertilizers and agro chemicals and crop protection services. While the private sector is capable of making investments in these areas in many markets, other markets are simply too small to be viable for all of these products to be produced domestically. In those cases, the financing needs are more in the nature of working capital and trade financing for the import and distribution of these products.To ensure that the world’s farmers have access to high quality and environmentally sustainable inputs that can boost plant productivity or reduce water use (including seeds and plant protection services), continuous investment is needed in research and development and in commercializing promising technologies.
There is also a need for national and local governments, international organizations, agribusiness and the international private equity fund industry to collaborate more actively to forge such solutions, which are currently available only in the more advanced markets.commitments made to enable the ongoing relief work of the UN agencies, including the United Nations Development Programme (UNDP), the United Nations Refugee Agency (UNHCR), the United Nations Children's Fund (UNICEF), the World Food Programme (WFP), and the Food and Agriculture Organization of the United Nations (FAO).
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Develop financing for food sourcing, transportation, processing and retail.
The nature of the agricultural business cycle creates financing needs across different stages. Financing is needed to acquire crops at harvest, to transport them to storage locations, to retain them for the period between acquisition and sale to the processor or end consumer, and during the period between processing into usable products and their final consumption by the end user.
Innovative finance mechanisms should be developed that are suited to the needs of specialized, small scale trading and transportation operations (which perform an essential function but are not perceived as bankable risks by the traditional financial institutions, as they deal in perishable goods that can vary greatly in price) and are structured creatively to mitigate the risks involved.
Adequate agricultural processing capacity—especially at points near production, transportation hubs or consumption—is essential to ensuring a reliable and adequate supply of safe and affordably priced food products. Processing is particularly important in the case of dairy and animal protein industries, where processing is a significant component of the value chain. Agricultural processing often requires relatively capital-intensive, higher-level technology and can be a higher risk business.
There are several barriers to the financing of agro-processing investments, including the availability of the required amounts of long-term risk capital. Special investment vehicles that support financing for high priority agricultural processing investments and projects are one option that can be considered to boost financing for this purpose.
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Photo credit: flickr@ChristianSchnettelker