Why value-chain finance is key to food security
If we want to eliminate hunger and malnutrition in our lifetime we need to increase financing and investment into agriculture to meet the food security needs of the world as well as to increase economic growth and family income especially in rural areas. Our main focus are the poor, the majority of whom are food insecure and live in rural communities. Let’s not forget that around 800 million people, or 1 in 9, are still suffering from hunger and 2 billion people are estimated to suffer from micronutrient deficiencies. Fighting hunger means we need to look beyond measuring food security in terms of gross output and metric tonnes. Instead, we need to adopt a holistic foods systems approach that allows us to examine how finance and investment affects all those in the system from the farmer to the consumer and their communities. We also need to look at the impact on the environment and the impact on the poor. FAO does not see development finance as a goal or stand-alone activity, but rather as an integral part of the broader development agenda. FAO is actively engaged in promoting sustainable value chains that are inclusive to all, including small-scale farmers, women, youth and disadvantaged households. Appropriate financing instruments and services are important for inclusion of such households into competitive value chains. No one can be excluded from financial resources if sustainable development is going to be achieved. But financial resources themselves are only a part of the investment needed. The most important investment is in people. We all must invest in people through capacity development, education and social services. For many small farm households, successful use of finance comes only when it is combined with capacity development to improve their opportunities and results of finance and investment for them and those providing financing. This involves management training, production and marketing capacity development and organisational development. We must also invest in research and technology along with extension programmes to share and apply the learning in order to become or stay competitive in today’s world economy. At the country and regional level FAO works with its member countries in strengthening the skills of technical officers within the ministries of agriculture, forestry, fisheries and other ministries with regard to formulation and implementation of their agricultural development programmes and in the development of their agricultural investment plans. We know that small farmers and small and medium agribusinesses lack access to finance. A big part of the problem of financing smallholder farmers is that their economic life is informal, often not competitive and too small to be viable to commercial financing institutions. For that reason we advocate for solutions that build their competitiveness in production and marketing and are adapted to their reality for financing. This involves working with governments, banks and development agencies on several fronts, including:
  • technical training such as with Farmer Field Schools;
  • development of farmer organisations and cooperatives;
  • strengthening management skills;
  • moving from traditional financing to a value chain financing approach; and
  • identifying and promoting the required infrastructural investment in not only roads, storage facilities and irrigation, but also information and communications technology (ICT) platforms for research and technology.
In using ICT, FAO and the Grameen Foundation have joined forces to use the Grameen mobile phone platform for agricultural extension and technical advice to small farmers to improve their practices and loan repayment capacity. A big challenge for all of us is to help provide training and capacity development for subsistence farmers helping them operate more competitively. We promote and advocate for building approaches and networks and using technologies that make information, training, markets and finance accessible to all households. The future holds special opportunity and an obligation to reach youth who can benefit the most from ICT. In agricultural value chain development we partner with public and private sector agencies to develop ‘green’ value chains that are environmentally friendly and sustainable while also being inclusive of smallholders. In FAO we have championed approaches and instruments for agricultural value chain finance which opens new opportunities. We recognise that financing needs multiple delivery channels to fit the needs of clients and their contexts. For example, often it is not efficient to provide small, single loans for farmers, but by channelling funds through value chain managers like traders one can alternatively make use of value chain partners. In the case of the Mexican parafinanciero model, the financing goes from the government banking institution of FIRA (Fideicomisos Instituidos con Relación a la Agricultura) to agribusinesses that on-lend to farmers and farmer associations. Much of the lending is in kind through inputs the companies provide. They secure their loans through purchase contracts, close monitoring and technical assistance. For the farmers, this approach is simpler and it is cheaper to borrow this way and they receive technical support and market linkages. FAO has worked in agricultural and development finance since its founding in 1945. In 2014, our Investment Centre celebrated 50 years of work with development finance institutions. Through our collaboration with the regional and global development banks, such as the Inter-American Development Bank and the World Bank, we co-share the costs of developing financing programmes and research. For nearly 40 years we have also had a technical unit dedicated to rural and agricultural financial services. Through our investment centre and technical divisions we also promote ways to address collateral constraints for financing. This includes improved warehouse receipt systems, often linked with commodity exchanges as well as the lesser-known crop receipts systems (Cedulade Produto Rural (CPR) as they are known in Brazil.) With a crop receipt, a farmer can access finance and credit for his/her crop being produced. These innovations, generated by pioneer financial institutions and agricultural value chain actors, are being analysed, adapted and disseminated among FAO’s partners engaged in the implementation of field programmes across Africa, Latin America and Asia. However, these types of interventions do not address the lack of long-term financing which is one of the largest challenges in agriculture and rural development. Investment in reducing the effects of climate change and disaster mitigation is among those major challenges. Such longer-term investment requires public and private collaboration in order to address the risks and stimulate the investment needed. Insurance, guarantee systems and investment incentive programmes are required, especially in order to reach the more challenging regions and lower-income rural households. Improving investment and promoting investment in new frontiers and difficult environments is an area where FAO is well-placed to provide guidance and support to governments and development finance agencies to develop the appropriate mix of investment incentives and policies to address these challenges.
*José Graziano da Silva is the Director-General of the UN Food and Agriculture Organization (FAO)
By José Graziano da Silva*
Photo: FAO