Understanding their place in value chains help farmers become more productive
By Gerhard Mukuahima, Head of Agribusiness at Standard Bank Namibia
The way in which people and organisations interact with the food chain is undergoing a profound shift. It is essential therefore, that farmers understand that they are a link in a much larger series of activities than simply beneficiating the basic product that leaves the farm.
The ultimate pay-off of the value chain should be agriculture-for-development. It is a natural but so far unexploited cycle that starts with the farmer through primary production and that ultimately benefits the farmer again, along with everyone else in the country.
Agriculture remains a strategic sector as it supports above 70% of the Namibian population and employs about a third of the working force. The importance of the sector in addressing food security and livelihood is acknowledged.
Sustained efforts have continued to move the country from an exporter of live animals to an exporter of value-added agricultural goods. Other aspects of agriculture have evolved in the direction of sustainable development but the potential within the agricultural value chain has yet to be fully explored.
This is beginning to change and to participate in the benefits, farmers need to take the trouble to understand how the chain works now as well as the ways in which it will evolve.
Value chain finance
One area to keep an eye on is value chain finance. Banks have always taken a risk averse approach to the range of variables involved in agricultural operations, the unpredictability of the impact of weather on primary production, and the equally difficult to predict fluctuations in prices. As a result, the need for industry players to access finance, secure sales, procure products, reduce risk, and increase efficiency has been met via conservative means that are either internal or external to the value chain.
Internal mechanisms involve players offering one another finance, usually in the form of an input provider offering a farmer terms or a lead firm advancing funds to a market intermediary. External mechanisms take the form of loans and insurance products from banks. Both the internal and external options address value chain needs in a fragmented and sporadic way and tend to be exclusive of smaller or inexperienced operators. Certainly, they don’t meet the needs of the modern agricultural value chain.
Opportunity in change
In response to changes in consumer expectations and environmental and human rights concerns, the agro-food sector is moving to models of production and marketing based on demand rather than on producer-defined agricultural goods.
The sector is also adapting to a global, liberalised, and compartmentalised marketplace with little seasonality and high product diversity. Food safety and traceability requirements and higher quality standards coupled with the enforcement of basic environmental regulations are driving new operational approaches.
In addition, there is an accelerating concentration of control in the sector with globalisation, economies of scale, and ever increasing vertical and horizontal integration enabling multinational and other interconnected agribusinesses to dominate.
As usual, there is opportunity built into this change. The fact that value chains are becoming more coherent and interdependent gives banks the confidence to expand financing options, proactively aim for improvements in financing efficiency and repayments, and help consolidate value chain linkages among participants in the chain.
Strengthening the chain
Standard Bank approaches value chain financing with the goal of a deep, accurate understanding of who the players are and where the linkages are, and can create finance products and services that will strengthen the chain.
Finance can be tailored to fit the needs of participants and structured to support new entrants and reduce the risk for smaller players of getting into their value chains. Financial transaction costs can be reduced through direct discount repayments and delivery of financial services. Also value chain linkages and knowledge of the chain can be used to mitigate risks within the chain, including those arising from participants themselves.
Ideally, however, farmers should not be dependent on other players in the value chain including the bank, to help them exploit the opportunities that are inherent in the chain’s evolution.
This does not mean that farmers need to become economic or finance specialists. It does mean staying aware of opportunities and requiring your industry body to keep you up to date on the implications of shifts in the chain. What you should aim for is to use the value chain for your own development, knowing that if you develop, so will the value chain. All of which will make you more sustainable and turn agriculture into a vehicle for real transformation.
Farmers, government, and financial institutions should be using the industry’s value chains to better manage risk for players and increase food security for everyone.