Breaking the deadlock in financing agriculture and related sectors (Episode 2)

In a context of very strong financial, climatic and geopolitical constraints, discussions at the FARM Foundation international conference revealed that agricultural financing is generally unsuited to the realities and needs of production units, particularly those of family farms in sub-Saharan Africa. Current financing methods are most often undersized or unsuitable for meeting the objectives of agroecological and structural economic transformation and social sustainability in agricultural and food systems.

Episode 2 of the FARM 2024 Conference Debates and Discussions Summary

Public or private financial support for agriculture, particularly in the global South, remains insufficient and often piecemeal. This observation is unfortunately a consensus and is part of a continuum of impasses: those of financing by agricultural banks or markets, those of microfinance, but also those of public spending and, today, green finance.[1].

A (still) underfunded sector

Elina Amadhila, economist at the University of Namibia, shared figures on these funding gaps (finance gap) during the first round table of the day. According to calculations by the International Foundation for Science, in 2022, the financing gap for primary production and processing exceeded 300 billion $ worldwide. For comparison, in the same year, according to the OECD, official development assistance (ODA) granted by member countries of the Development Assistance Committee (DAC) amounted to 204 billion $. The gap is therefore abysmal between financing needs, particularly in the countries of the South, and capacities at least public actors to respond to it.

Kako Nubukpo, Commissioner for Agriculture, Environment and Water Resources at the West African Economic and Monetary Union (WAEMU) pointed out a paradox in the economies of sub-Saharan Africa. Despite the significant weight of agriculture in the African economy (33 % of GDP) and its major role in employment (60 % of the active population), it remains underfunded, with only 3 % of credits to the economy allocated to this sector, of which 80 % are limited to short-term financing. In sub-Saharan Africa, less than a third of small and medium-sized agricultural enterprises have access to credit according to the Namibian researcher, Elina Amadhila.

The various stakeholders and in particular Elina Amadhila And Jyotsna Puri, Vice President of IFAD, highlighted several factors that limit access to agricultural bank financing, including:

• low financial inclusion of rural people, barely 5 % of adults living in rural areas in developing countries have received a loan from a formal financial institution,
• high interest rates, limited reach of financial services for farms due to the territorial dispersion of borrowers, an aspect on which IFAD is committed,
• the small size of the unit amounts to be managed for the different transactions, a problem that microfinance has not managed to address[2],
• the obstacles faced by small farmers in providing guarantees and negotiating fair prices due to their lack of market power.

The two economists also emphasized climate risks, which pose an additional challenge to financing farmers due to the uncertainty they entail. Jyotsna Puri recalled that the needs to finance the adaptation of agriculture to the impacts of climate change were more than 10 to 15 times greater than current public financial flows.

“More public funding will not be enough”

Public funding is falling short of expectations to achieve the SDGs by 2030. According to a report by the FAO, UNDP and UNEP, 87% of the $540 billion in support for agricultural producers is made up of measures that are often ineffective and inequitable and cause distortions that are harmful to the environment.[3]. According to Rachel Bezner Kerr citing the work of the High Level Panel of Experts on Food Security and Nutrition (HLPE) in 2019, public investment in agroecological approaches remains extremely limited. Experts estimate it at between 1 and 1.5 per cent of total budgets allocated to agriculture.[4]. Furthermore, as shown the FARM Foundation's Public Support ObservatoryIn sub-Saharan Africa, not only is public spending very low compared to other countries in the world, but it also contributes indirectly to agricultural development and is also sometimes cancelled out by trade policies that expose farmers to competition from international markets.[5].

For his part, Jyotsna Puri recalled that increasing public funding for agriculture and sustainable food systems is necessary but insufficient to bridge this gap (gap) which continues to expand. She advocated for the mixing of public and private, concessional and non-concessional resources. IFAD intends to be a catalyst for the blended finance and France, through the voice of Christophe Guilhou, Director of Sustainable Development at the French Ministry for Europe and Foreign Affairs, intends to contribute. Paris will be one of IFAD's first contributors for the next funding cycle. Shanti Bobin, Deputy Director of Multilateral Financial Affairs and Development at the Ministry of Economy and Finance, reaffirmed the importance of the financial impetus of national or international public institutions through a leverage effect on private financing. In this regard, she mentioned the new global financial pact as well as the Paris Pact for People and Planet (4P), which responds to a desire to combine public and private funds. She also recalled the implementation of the financing component of President Macron's Food and Agriculture Resilience Mission initiative, which is led by PROPARCO and Bpi France. The initial funding of €40 million, however, is low compared to the needs. It aims to provide direct financing to agrifood companies that are experiencing difficulties accessing credit, as well as to agricultural SMEs and microenterprises. This will involve financing banking partners and microfinance institutions so that they can meet the needs of small borrowers.

The agri-food sector must therefore overcome challenges such as reconciling economic profitability and environmental sustainability, as well as the need to promote fair and inclusive business practices. This is a striking conclusion that emanates from the various sessions of the Conference, namely an increasingly strong conditionality of financing on compliance with ESG (environment, society, governance) criteria by companies and economic actors. Conditions described as a major challenge accompanied by real difficulties in reconciling these expectations with the financial performance of companies, as highlighted by Bhavin Vyas, ESG manager of ARISE Integrated Industrial PartnersThe group, based in various African countries (Togo, Gabon and Benin in particular), designs, finances, builds and operates via Public-Private Partnerships (PPPs) for integrated industrial zones. According to Bhavin Vyas, the company's objective is to increase local processing of African agricultural products, which are currently exported raw, to create economic value on the continent. Bhavin Vyas advocated for the integration of ESG criteria into PPPs for the development of agricultural production chains. According to him, with the right indicators and good measurement and monitoring-evaluation tools, this could be a lever for transforming agriculture and food systems. He emphasized two central dimensions in impact measurement: carbon and social inclusion.

Developing access to credit for producers and economic actors in the transition

Solutions were discussed throughout the day for the development of credit supply from public banks with, as highlighted Elina Amadhila, two main tracks:

• Increase the share of agricultural loans granted by "generic" public development banks, by means of incentive instruments such as subsidized interest rates, guarantees for loans granted by traditional banks or even "mandatory" instruments such as credit quotas for agriculture (the example of Crédit Agricole du Maroc, now a universal bank, is enlightening);
• Create public agricultural development banks (NABARD in India and other cases in South America) whose financial services would be dedicated and adapted to the actors of the agricultural sectors and their problems.

As an example of an agricultural bank, Hakob Andreasyan, Director General of ACBA, presented the evolution of the Armenian bank, born from the will of the European Union in 1994. Initially conceived as a microfinance institution, it is today a leading bank for agriculture. ACBA was formed on the one hand by relying on a base of 60 village associations that created credit committees and on the other hand, on farmers who, in return for a modest contribution, became administrators. Although today, it no longer has only agricultural clients, the bank has nevertheless retained its mutualist mode of operation, which allows it better risk management and almost zero default rates according to its general manager. The case of ACBA in Armenia illustrates how a microfinance institution has become a large-scale mutualist bank, with the support of public (EU) and private funds (Crédit Agricole Group in France).

Between microfinance institutions, which, due to their proximity, can finance small and medium-sized agricultural households, and banks or impact funds whose financing volumes are larger, a part of the agricultural economy suffers from a deficit of financing adapted to intermediate needs. These include agri-food processing companies or service and input suppliers. Frank Eyhorn, Director General of the Swiss Biovision Foundation explained during the conference that many companies struggle to find loans of 10 to 15,000 euros, a "grey area" that is often not filled by traditional financing providers. To meet this need, the Foundation is implementing an accelerator in Kenya and Uganda, Neycha, which specifically targets agroecological businesses with technical assistance and loans ranging from 10 to 50,000 $. With this in mind, Frank Eyhorn shared concrete examples illustrating this initiative, including the company Safi Organics in Kenya which organizes the decentralized production of organic fertilizers.

Engaging value chains and all stakeholders for a systemic transformation

Alongside the financial and banking sectors, value chain actors can also be mobilized to finance agricultural transformations. Indeed, as the work carried out by the FARM Foundation on the subject, structured and organized sectors are an essential lever for meeting the challenges facing agriculture and in particular the achievement of the SDGs.

Agricultural sectors have long been the main source of financing in some rural areas, particularly for export sectors (cotton, coffee, cocoa, etc.). Financing here is structured to benefit product marketing activities. It is offered by various actors who become financial service providers (input suppliers, buyers, processors, intermediaries, etc.). It is often presented as a solution to the difficulties faced by agricultural producers in the Global South in accessing credit and covers very different realities. Financing through value chains (value chain finance) refers to the cooperation mechanisms between the actors in the sectors allowing access to credit, in cash or in kind, granted directly or via financial institutions, in return for a commitment to sell production under conditions that are most often predefined. The organization of this financing involves contractualization, which thus allows access to inputs, credits or technical assistance. Contractualization is an important driver of agricultural transformation. Hasn't it allowed, in certain contexts, the development of the use of inputs (fertilizers and pesticides), sometimes in proportions that are harmful to the environment and human societies? But, in contrast, contractualization can also be a driver of transitions, as illustrated by the commitment of distributors or processors, even if they are a minority of producers. We will think, for example, of the commitment of downstream actors in fair trade sectors such as Ethiquable, which FARM interviewed during episode 5 of Transition(s)  the FARM Foundation's program dedicated to the challenges of agriculture around the world.

During the conference, Hugo Marin Brenes, Assistant Producer Development Manager for Central America at Walmart, presented a program to support producers in the adoption of sustainable practices. The Tierra Fertil program offers financing, technical assistance and, above all, the creation of long-term business relationships. It offers two types of financing to support producers.

• Direct financing that targets key projects tailored to farmers' specific needs to protect their crops from climate hazards. The American multinational has invested $275 million in five countries to develop such projects, with repayment expected within two years. While this is a strong commitment, we can also question producers' ability to repay, for example, in the event of repeated climate hazards. It is likely that only the most resilient and resource-rich countries will be able to commit to this program.
• Indirect financing involves an agreement between Walmart and private banks, where Walmart guarantees the beneficiaries' repayment capacity.

Alongside financing, Tierra Fertil provides technical support to farmers, including agronomic advice, access to technology, and training on recycling and using farm by-products to reduce costs. It should be noted that producers, if they have a contract with the company, can also decide to sell their production to other buyers. To go further and scale these initiatives, a systemic transformation of business model distributors and the functioning of markets is necessary for better promotion of products from sustainable agriculture.

This example illustrates the need to guarantee producers access to a market and to secure commercial outlets over time, a condition sine qua non of their commitment to a transformation trajectory. This element was highlighted by Iris Vilchez Paucar, director of the Peruvian credit union Etica, intervened remotely. As she recalled, producers are economic actors and without a guarantee of a market for their production they will end up disengaging from these trajectories, particularly when there are investments, even minimal ones, to be made. Francesca Nugnes, Capacity Development and Private Sector Specialist at the Platform for Agricultural Risk Management (PARM) illustrates this with the case of Tunisia[6], where "efforts are being made in the olive and cereal sectors to promote organic production and enhance its marketing." This development approach creates opportunities in a particularly dynamic market, thus encouraging the adoption of agroecological practices and investments in this area.

The few examples developed during the conference illustrate that contract farming can facilitate the integration of sustainable practices through specifications (organic fertilization, rational use of pesticides or development of alternatives, agroforestry, etc.), while ensuring access to the inputs and equipment necessary for these practices and offering stable and decent incomes to producers, provided of course that the products meet a demand and are purchased by consumers.

The speakers during the day also emphasized the need to implement financial instruments that meet yield and productivity objectives, as well as ecosystem preservation. They highlighted the lack of well-established financial mechanisms aimed at agroecological transformation or intensification projects in the Global South. These practices or projects generally only produce their full impact in the medium or long term. This therefore requires financial actors to position themselves more actively and agree to finance sustainable projects that will often have lower returns in the short term and that could produce longer-term effects. One may therefore question the capacity of financial actors (banks but also, more generally, investment funds) to adequately support these transitions.^[7] due to their complexity. Elizabeth O'Reilly, founder of Avondale Alternative Advisors, on the other hand, argued that so-called "impact" funds, which are involved in financing agricultural systems, can be key players in these transitions due to the importance they place on extra-financial returns.

To watch the replay of the international conference and round tables, Click here.

[1] See issue 254 of the International Journal of Development Studies dedicated to the theme “Financing agricultural and food transformations”

[2] See François Doligez on this subject and Ali, 2008 “Financing agricultural and rural transitions”, in African agricultural challenges, Afd/Karthala.

[3] FAO, UNDP & UNEP. 2021. A multi-billion-dollar opportunity – Repurposing agricultural support to transform food systems. Rome, FAO.

[4] HLPE. 2019. Agroecological and other innovative approaches for sustainable agriculture and food systems to improve food security and nutrition. Report of the High-Level Panel of Experts on Food Security and Nutrition of the Committee on World Food Security, Rome

[5] Abdoul Fattah Tapsoba and Matthieu Brun. 2023. Total support for agriculture and food: a contrasting global landscape. FARM Foundation Publications (online).

[6] Bessais, R. 2024, March 1. PARM supports the Tunisian government in assessing risks for the “Olive and Cereal” value chains. Webmanagercenter. https://www.webmanagercenter.com/2024/03/01/521433/la-parm-appuie-le-gouvernement-tunisien-dans-levaluation-des-risques-pour-les-chaines-de-valeur-oleicole-et-cerealiere/

[7] Jézabel Couppey-Soubeyran and Étienne Espagne. 2022. “The ecological transition: towards a monetary and financial paradigm shift? Introduction”, Economic Review, vol. 73, no. 2.