Growth Pathway 3. Finance Out-grower Schemes of Multinational Buyers in Captive Value Chains

Many multinational buyers have captive value chains organized around out-grower schemes that involve production contracts with farmers. These captive value chains can be contrasted with social lender value chains, in which producer groups are not necessarily contractually bound to a particular buyer beyond each individual transaction. Commercial lenders (and social lenders to a lesser extent) could provide finance to smallholders through these out-grower schemes, focusing on markets where buyers already provide finance or technical assistance to smallholders.

This growth pathway is driven by the R&D cost of developing and testing new out-grower schemes. By using existing buyer relationships with farmers, marketing and operating costs can be kept relatively low. Lenders can reduce risk-management costs by sharing risk with buyers and, possibly, farmers.

Growth Pathway 4: Finance Alternative Points of Aggregation

Aggregating farmers allows easier penetration of finance supply, but less than 10 percent of smallholder farmers are aggregated in producer or other organizations, especially in domestic value chains for local staples. Financing for these smallholders could be channeled through alternate points of aggregation in the value chain, such as warehouses, procurement networks, and input providers.

This growth pathway is one of the most expensive on a per farmer basis, because it involves the high R&D cost of new finance models and the high risk-management cost of financing small businesses. It also involves moderate marketing and operating costs related to working with small business clients. Therefore, this is an ideal pathway for donors to support if the social or environmental impacts warrant their attention.

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