Breaking New Ground via Partnerships between Smallholder

Farmers, Agribusinesses and Financial Institutions

Presentation: Interaction Best Practices Event

11 May 2010

Presenter: Keith Polo

 Purpose and Outline of Presentation

Purpose:

Describe the experiences, challenges and lessons learned from applying a combined
approach of Improving High Impact Agricultural Value Chains and Expanding Access to
Financial Services in transitional and deep rural contexts of Nepal, Kyrgyzstan, Central
African Republic, Somalia, and Zimbabwe

Outline:

1. Overview of Projects, Approach, and Results Summary

2. Why Combined Value Chain Development + Financial Services work?
3. Method 1: Identifying “High-Impact” Agricultural Value Chains
4. Method 2: Agricultural Value Chain Development Activities
5. Method 3: Expanding Access to Financial Services
6. Challenges
7. Lessons Learned and Recommendations
METHOD 2:
Financial Services / Access to Capital

Overview and Results

(Aug 2008-Feb 2010)
Countries: Nepal, Kyrgyzstan, Somalia, Central African Republic, Zimbabwe
Purpose of Projects: Food Crisis Response; Organizational Learning
Multiple Donors: Whole Planet Foundation, BMGF, USAID, Private donors

Cumulative Results:
• 80,686 total beneficiaries
• 35% increase in profit margin of farmers
• 30% increase in sales
• 2403 loans
• $370,852 value of loans disbursed
• $56,563 savings in CAR and Nepal
• 70% of project participants belong to disadvantaged or marginalized group
including women and youth

Cost Efficiency:
• Somalia, Nepal, CAR: $25/project participants
• Zimbabwe: $250/participant
• Kyrgyzstan: Self-financed by MFI.
 Why Combined Value Chain Development + Financial Services work?

• Discussions with farmers and field staff from over 10 countries in which
Mercy Corps is operational, highlighted that in their opinion the
combination of two elements; value chain development and microfinance, is
the most effect interventions to help farmers sustainably increase productivity
and profit.
 Method 1: Defining and Identifying “High-Impact” Agricultural Value
Chains

• Used as counterpoint to traditional focus on “high-value” commodities due to

past pitfalls:
1) Pitfall scenario A: High market margins, low farmer profit
2) Pitfall scenario B) High farmer absorption capacity, low market demand

• Defines a set of country-specific criteria for “high impact” commodity

selection that considers specific factors such as:

1) Total number of smallholder farmers growing the crop (min. 50-100k)

2) Profit potential per land unit for both prime and marginal lands
3) Significance of the commodity to the national economy
4) Ability to have positive impact on environment
5) Ability to incorporate traditionally disadvantaged groups
Method 1: Defining and Identifying “High-Impact” Agricultural Value
Chains

Costs and Return for Dry Land Maize on 0.25ha

INPUT AMOUNT COST($)
Lime 250kg 25
Seed 7.5kg 15
Fertilizer (Cpd D) 75kg 50
Ammonium Nitrate 75kg 50
Dipterex 1.0kg 10
TOTAL 150
GROSS RETURN 750kg @ $0.3/kg 250
PROFIT 100
 Method 1: Defining and Identifying “High-Impact” Agricultural Value
Chains
Potential Farmer Cash Flow for Irrigated Onions and Sweet Potatoes Grown in Conjunction with Dry Land Maize
.25 ha kg Dec Jan Feb March April May June July Aug Sept Oct Nov Dec Jan Feb Mar April
kg/unit US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$
Returns
Onions 8000 0.2 1600
Sweet Potatoes 5000 0.25 1250
Dry Land Maize 750 0.3 225 225
Capital Cost Irrigation 500
Direct Costs Onions/Sweet Potatoes (Irrigated)
Fertilizer and Lime 250 150
Seeds and chemicals 100 75
Labor 20 40 30 10 10 10 30
Packaging 80 80
Transport 264 165
Direct Costs Dry Land Maize
Lime 25 25
Fertilizer (Compound D) 50 50
Ammonium nitrate 50 50
Hybrid Seed 15 15
Diperex (StalkBorer) 10 10
Total Costs 150 0 0 870 0 0 0 384 0 255 10 10 160 275 0 0 0
Returns 0 0 0 0 225 0 0 1600 0 0 0 0 0 1250 0 0 225
Interest -2.50 -2.54 -2.58 -17.13 -13.66 -13.89 -14.12 5.91 6.01 1.86 1.72 1.58 -1.06 15.18 15.43 15.69
Cash Flow -150 -153 -155 -1028 -820 -833 -847 355 360 111 103 95 -63 911 926 941 1182
Assumptions

1) Farmer household will be able to provide 60 days of labor a month at no cost. Labor requirements above this are costed in at $1US per day.

2) To minimize energy input from October to November, cropping has been reduced to the minimum.

3) Maximum use of on-site produced compost will be made.

4) Cash flow assumes the funding will be in place by October to enable initial farmer selection and training.
Method 1: Defining and Identifying “High-Impact” Agricultural Value
Chains

http://www.mercycorps.org/lab/nepalmapping/index.html
 Method 2: Agricultural Value Chain Development Activities

•Map out the interrelationships between buyers, sellers, producers, and end
consumers (Value Chain Analysis)
• Determine the business bottlenecks in the market and determine solutions to
resolve these problems with stakeholders via respective stakeholders (public,
private, farmers)
•In food insecure areas, best to target dual food/cash crops.
•Strengthen farmer groups
•Create business linkages
•Provide Technical Assistance to Improve Production and Profitability of High
Impact Value Chains
Method 2: Agricultural Value Chain Development Activities
(Example: Ginger in Nepal)
 Method 3: Expanding Access to Financial Services

•Conduct a Supply and Demand analysis for financial services amongst

participants and within geographic area.

• Conduct an institutional capacity assessment of short listed Financial

Institutions

•Design and pilot new savings and loan products, such as loan guarantee,
access to on-lending capital, VSLAs, loan capital needs of Financial Institutions.

•Foster linkages between farmers and Financial Institutions.

•Financial literacy training

EXAMPLES: CAR, Nepal, Zim, Kyrg, Somalia

 Method 3: Expanding Access to Financial Services
(Example: Farmer Irrigation Pump Financing-12 months)

Product Name Asset Financing

Product Description These are loans advanced to the business or individuals for the purchase of equipment
needed to improve operating efficiency and capacity of the business.
Target Market Individuals.
Micro Entrepreneurs.
Groups and Associations.
Customer Segment The product will be made available to small scale farmers to acquire irrigation equipment.

Purpose The product will ensure increased production efficiency and capacity of farmers.

Documentation required Valid identity particulars & Proof of residence.

Application must have in-depth understanding of the business and records to show
proof of trading.
Grace Period 2 months maximum where necessary.

Repayment Frequency To depend on cash flow, for farmers repayments will primarily be made after
marketing of produce.
Maximum Tenure 12 months

Security Guarantee.
Group Guarantees.
Cession/Lien over crops and Livestock.
Vested Article (Special pledge over asset acquired using facility).
Pricing/ Fees/ Commission 5% Administration fee
2.5% Interest
Maximum Amount per transaction $500
.
Challenges

1. Bridging the gap between Ag Development and Financial Services

Practitioners can be time consuming.

2. Lack of collateral by farmers is a persistent problem that cannot be

overcome without creative, open-minded problem-solving by all parties

3. Lack of reliable contract law can be an impediment to forming reliable buyer-

seller agreements and investments into MFIs/Banks

4. MFIs/Banks interested in expanding to rural, lean markets to provide ag

finance, but often do not have operational liquidity to cover initial costs or
on-lending capital.
.
Lessons Learned and Recommendations

1. Solid market research, enterprise budgeting and value chain analyses is

critical.

2. Having clear, social, economic, and environmental criteria for selecting

value chains is important

3. Conducting a solid financial services assessment of ag financial services in

tandem with point 1 is also necessary.

4. Dialoguing with agribusiness at their speed and in their language is

important, thus, having staff on board that have private sector experience
key.

5. Clear articulation to donors to offer flexible support to 1) Technical

Assistance and 2) Funds to financial institutions repayable to a trust fund.