Understanding agricultural value chain finance

By Bob Aston

The term “value chain finance” (VCF) refers to the flow of funds to and among the various links within a value chain. It relates to any or all of the financial services, products and support services flowing to and/or through a value chain to address the needs and constraints of those involved in that chain.

VCF is an approach that recognizes the entirety of the chain and the forces which drive it and responds accordingly to the specific requirements for financing them. It is a tailor made approach which is designed to most efficiently meet needs of the businesses and particular nature of the chain.

Participants following proceedings during the Fin4Ag conference

The role of value chain finance is to address the needs and constraints of those involved in that chain. This is often a need for finance but can also include; financing production or harvest, purchasing farm inputs or products, financing labour, providing overdrafts or lines of credit, funding investments and reducing risks and uncertainty.

The increasing importance of agricultural value chain finance led to various stakeholders meeting in July in Nairobi to attend Fin4Ag Conference: revolutionising finance for agri-value chains. The international conference brought together decision makers from both public and private sectors with an aim of building a modern and high performing agricultural financing system.

Various instruments are currently being used in agricultural value chain finance. They include product financing, receivables financing, physical asset collateralization, risk mitigation products and financial enhancements. Key participants in a VCF include; producers, agri-input dealers, aggregators, wholesalers and retailers.

Value chain finance can help chains become more inclusive, by making resources available for smallholders to integrate into higher value markets. It can help meet the growing need for agricultural finance and investment in response to consumer demand for more processed or value-added products.

Value chain finance offers an opportunity to expand financing for agriculture, improve efficiency and repayments in financing, and strengthen or consolidate linkages among participants in value chains.

Farmers planting

 It can also improve quality and efficiency in financing agricultural chains by: Identifying the financing needed to strengthen the chain, tailoring financial products to suit the needs of the participants in the chain, reducing financial transaction costs through the direct discounting of loan payments at the time of product sale and using value chain linkages and knowledge of the chain to mitigate risks.

In recent years, organizations like the Technical Centre for Agriculture and Rural Cooperation ACP-EU (CTA) have been working at promoting agri-value chain finance in Africa, Caribbean and Pacific (ACP) countries. CTA is also working with various stakeholders, notably, the African Rural and Agricultural Credit Association (AFRACA), in building capacity and sharing knowledge on agri-value chain finance best practices as well as on the design of policies that will help to scale up success practices.

Value chain finance as an approach takes a systemic viewpoint, looking at the collective set of actors, processes and markets of the chain as opposed to an individual lender-borrower within the system. It can be instrumentalised to promote inclusive economic growth as it allows the identification of specific leverage points along a chain, reducing the average cost per unit by increasing the number of units produced.