It was surreal! I heard the words forward markets, futures options and risk reduction in an agricultural event. I knew I was in trouble. Let’s face it, these are terminologies you expect to hear from stockbrokers and on trading floors, not in a conference dedicated to agriculture!
But since I wanted a deeper understanding of how to manage both production and marketing risks in agricultural finance, I sought to sit with the gurus and learn some more.
When it comes to financial institutions lending to farmers for agricultural activities, they hesitate because of the risks involved. The same fear of the risks involved in financing agriculture trickles down to insurers and farmers, who limit or under plan because of uncertainty. Mitigating these risks for the sake of the farmers and the stakeholders in the chain therefore proves to be vital for the success of the entire value chain.
Opinions
According to Elies Fongers of Rabobank, The Netherlands, it is important for financial institutions to critically select a farmer that possess entrepreneurial qualities with a good track record. The choice of crops and regions selected for planting comes into play, as well as the quality and quantity of inputs the farmer will use. Fongers notes that issuing crop promissory receipts, warehouse receipts and use of futures and options would be the best ways to mitigate most of the risks that accrue to agricultural finance. As much as I want to agree with her, there are some risks like weather or pests that are harder to manage.
She hinted at this when she posed the question, “are these risks inherent or insurable?” Frankly, I say they are more insurable than inherent. The only problem I foresee is that a smallholder farmer does not have the financial capability to insure his/her crops against the various risks.
ICT Application
With the advent of ICT in the agricultural and financial sectors, mitigation of these production and marketing risks lessens the complexities that accompany the agri-value chain finance process. For instance, Technoserve is known to use SMS bookkeeping to send key financial and stock information via wet mill accountants to the lenders which in turn lowers monitoring working capital in addition to getting real time data.
The main threat I see to the whole system is the fact that it heavily depends on mutual trust between the partners, thereby opening avenues for mismanagement (which sometimes may go unnoticed) in the process.
Although the insurance of agricultural risks remains complicated, one notable ICT solution that has stood out in Kenya is Kilimo Salama, which innovatively uses micro insurance to cover Kenyan farmers.
Final Word
At the end of the day, I felt like I had learned a lot, but with one key take away message: In as much as the financial institutions (including insurance firms) are going to invest in agriculture and meet some of the risks, the farmers also have to come out of the mentality that they will have to meet less risk or incur no risk at all. This is a symbiotic relationship, so when the farmer feels the heat, so does his/her financiers and if they reap good fruits from it, so should their lenders and vice versa.
Photo credit: C. Schubert/CCAFS
Blogpost by Gerrishom Boiyo, Social Reporter for the Fin4Ag Conference.
