Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Wednesday, April 6, 2011

Using Re-Engineered Value Chain Financing to Enhance Bargaining Power of Small/Marginal Agricultural Producers: A Present Day Imperative…

Ramesh S Arunachalam
Rural Finance Practitioner

1.               As noted in previous posts, the mere delivery of credit and more of this standard credit (for consumption and/or small production needs), as is currently practiced in micro-finance (or as part of the financial inclusion paradigm) is not very useful, always – as low income people in many contexts, like in India, and other such Countries (Uganda and Malawi in Africa) are engaged primarily in agriculture.

2.               The focus would need to be re-engineered towards ensuring delivery of quality credit that will reduce risk and vulnerability of low income clients engaged in agriculture and give them more choices - through alternative channels that afford lower costs, have greater trust and high levels of mutual acceptance.

3.               Quality credit would therefore necessitate a greater focus on post harvest and/or postproduction financing for agriculture and related sectors that provide (or can provide) significant livelihoods opportunities for low-income people.

4.               In other words, among other things, this would call for financing of agriculture produce marketing – a very critical aspect for small/marginal producers as it has the potential to enhance choices for them in terms of buyers etc. Of course, here, the existing relationships would need to be better understood if financial products are to be developed and delivered through appropriate channels[i].  

5.               Further, the re-engineering must be such that the delivery of financial services are used to strategically to drive higher rewards, better remuneration and greater power down the value chain as shown later in Figure 1– otherwise, it will be of limited use.

6.               And again, as said before, to achieve this, one needs to better understand existing relationships, particularly in post harvest and post production marketing situation in different agriculture value chains.

7.               An example of driving power down the value chain is the delivery of finance through a simple warehouse receipt mechanism as diagrammed in figure 2 below. While there have been attempts to do the same in India, large-scale frauds in small pilots have proved to be a deterrent. These should not however force us to abandon this excellent vulnerability reducing financial service that has worked rather well in other contexts:

“Experience from around the world illustrates that warehouse receipts can make a difference to producers. By storing their goods in a reliable warehouse until the price increases while using the goods as loan collateral, producers may access funds before they sell their goods. Warehouse receipts are often administered to producer groups, instead of individuals, which helps the flow of market information. Warehouse receipts also can create price transparency. This empowers producers to make informed sales decisions rather than waiting for “gate” buyers who often offer below-market prices. Producer organizations/Microfinance institutions (MFIs) also have a strong incentive to offer warehouse receipt financing. With this system, their risk is reduced because the system has a built-in use of collateral that can retain a high commercial value and be liquidated quickly.”[ii]

8.               Thus, there must be re-engineering to emphasize delivery of financial services that can enhance the competition among middlemen and other buyers, who buy products/produce/labour from small producers. This would translate to financing marketing of agricultural produce and labor of small scale producers[iii] and it can happen in a variety of ways (through various types of aggregators and channels). Some examples are given below:
a)     Enhancing Competition Among Buyers: Direct financing of middlemen and other intermediate buyers of produce/products[iv] so that small producers have greater choice of buyers and incentivising these middlemen to procure at better prices/rates;
b)     Risk and Vulnerability Reducing Mechanisms: Warehouse receipt and similar financing for other products whereby the small producer can store their produce/products, pledge the same, receive a loan and sell when the prices are higher. An example is leasing for urban vendors whereby they can store their produce on a daily basis at a cold storage facility and not sell their perishable item at a throw away price at the end of the day, just because they have no place to store it safely and being a perishable, it could get spoilt;
c)     Creation of Post Harvest Competitive Mechanisms: Financing of other post harvest mechanisms including special depots for auction so that small producers have choices – this has happened in small scale marine fisheries and SIFFS has successfully used auctions to help the fisher folk get better prices
d)     Other Strategies: Financing of small scale producers who use labor for their livelihood through an innovative mechanism like virtual livelihoods exchange, with appropriate aggregators etc

Thus, to summarise, we need a new APPROACH to financing agriculture value chains and one that is rooted strongly in the practical realities. With all due respect to all that has been achieved, let us face it that the livelihoods of those in agrarian/rural sectors in India especially are in great shambles, even 60 years after independence - the fundamental point being that to build livelihood security of small producers/farmers, there is an imperative need to reduce their vulnerability and risks while at the same time enhancing their bargaining and staying power. And well designed financial services can play an important part in that…

And as an experienced colleague remarked, ‘Irrespective of the sector, small producers are not getting rewards/returns commensurate with their effort put in, investment made, risk taken and value created mainly because their staying and bargaining power is low.  It is therefore very important to try and promote interventions that enhance the staying power of small producers - as then it will result in their having better bargaining capacity which, in turn, will mean that they can negotiate better with market elements and get a return or price, that is due to them’. This can surely be attempted by the financial services sector and should pay rich dividends to both the service providers and clients…

Have A Nice Day!

[i] Of course, this would need to be validated specifically for a context, product and partner but these are general suggested arrangements.
[ii] Quoted with adaptation from UNTRS/FAO (2007), Arunachalam Ramesh S et al, “Enhancing Flow of Finance to Small Scale Marine Fisheries” and Bamako 2000: Innovations in Microfinance, Technical Note 5
[iii] Some of these would apply to fisheries as well, where post harvest financing would be very critical. Much of the same would be applicable for tangible goods and here again, the focus would be to create a good supply of post-production financing and creating competition among buyers of produce/products made by small scale producers. Likewise, in the case of labor, innovative financing mechanisms like a livelihood finance exchange using the web could be explored.
[iv] BASIX tried this in the initial years but again we need to study why it could not be scaled up and thereafter try and create an environment for the success of such mechanisms

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