Finance Structures in Value Chain Finance

As highlighted above, a joint characteristic of approaches in Agricultural Value Chain Finance (apart from tackling the issue of distribution costs of financial services) is that they intend to transfer defined risks to those parties in the chain that are best equipped to manage them. We will now e explore central approaches of value chain finance and discuss their designs from this risk-transfer perspective.

Receivables-Backed Finance

Receivable financing,[1] typically discussed as one approach in Agricultural Value Chain Finance, is a method to convert produce sales on credit terms into immediate cash flows thus providing the farmer with flexible working capital. The credit is determined by the financial strengths of the buyer of the agricultural produce and not the farmer or seller of the receivables. For the financial institution the address risk (in terms of moral hazard) is shifted from the farmer to the buyer.[2]

Although often tailor-made, the financing is in principle structured as follows: The lending bank advances funds to a farmer for working capital (sometimes also investment finance). As security, the bank is given an assignment of future receivables from the designated buyer of the agricultural produce. This assignment is acknowledged by the buyer who will make payments according to the schedule in his delivery contract with the producer. All payments will go to the bank (collection and debt service accounts) in line with the repayment obligations of the farmer. Any payments for the farmer beyond his debt service to the bank will be remitted back to the producer.

Receivables-backed financing is applied in agriculture using for example the contractual obligations between producer and buyer as a substitute for the bank's assessment of the creditworthiness of the farmer borrower. Risks are spread between the different parties with the buyer of the agricultural produce being the most important factor. The buyer screens the reliability of the borrower, whom he probably knows from earlier transactions, so that the information asymmetry between buyer and farmer is smaller than between bank and farmer. Through the screening of the farmers, and support to them (for instance through agricultural extension), the buyer also has the opportunity and incentive to reduce the payment risk which he may have assumed towards the bank. The specific agricultural risk typically remains with the farmer as the agricultural produce have to be sold by the farmer first.

So far, receivables-backed SF is applied in agriculture mainly in international trade finance for export receivables (mainly to developed countries) because of the good credit standing of the buyer but to a much lesser extent in domestic finance.[3] A well-known example is the Ghana Cocoa Board (COCOBOD) that since 1992 signs international syndicated receivables-backed pre-export finance facilities. COCOBOD raises this short-term finance to support cocoa purchases from local growers during the crop season and sells them afterwards internationally.[4]

  • [1] Receivables-backed finance includes instruments such as trade receivable finance, supplier finance, factoring and forfaiting. See Winn et al. (2009), p. 7, and Miller and Jones (2010), p. 56.
  • [2] See Winn et al. (2009), p.18.
  • [3] See examples of the different forms of receivables-backed finance in Miller and Jones (2010), pp. 67 et seqq. and Winn et al. (2009), pp. 17 et seqq. Winn reports a successful programme in Brazil using domestic agricultural receivables in the form of Rural Product Notes and combined with warehouse-receipt finance.
  • [4] For the 2011/2012 season, COCOBOD has raised 2 billion USD via this facility which was oversubscribed by over 20 international and Ghanaian banks. KfW Ipex Bank was among the investors. See ghana.gov.gh: “Ghana Cocoa Board Signs USD 2 Billion for 2011/2012 Cocoa Purchase.”
 
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