Furthermore, there is evidence that the model can catalyze lending from other sources, such as commercial lenders. the social lender model works through

441 KB – 48 Pages

PAGE – 2 ============
ACKNOWLEDGEMENTS AND AUTHORSHIPThis study builds on the existing knowledge and research of many experts in the ˜eld of agricultural ˜nance and smallholder value chains. The ˜ndings and analysis in the pages that follow would not have been possible without the individuals from more than 50 organizations who shared data, insights, and perspectives. The authors would like to acknowledge and thank the sponsors of this workŠthe Citi Foundation and Skoll FoundationŠfor their support and ˜nancing. The authors would also like to thank the members of the project™s advisory committee. Speci˜cally, we would like to acknowledge Edwin Ou, Portfolio Team Principal at the Skoll Foundation; Graham Macmillan, Senior Program Of˜cer and Hui Wen Chan, Impact Analytics and Planning Of˜cer at the Citi Foundation; Bruce Schlein, Director of Sustainability at Citigroup; Willy Foote, Founder and C EO, and Brian Milder, Vice President of Strategy & Innovation at Root Capital; Simon Winter, Senior Vice President of Development at TechnoServe; Jane Grob, Director of Investment Advisory at TechnoServe Mozambique; and Saurabh Lall, Research Director at the Aspen Network of Development Entrepreneurs. Their generous contribution of time, direction, and energy has been vital to the success of this research. This study was authored by Tom Carroll, Andrew Stern, Dan Zook, Rocio Funes, Angela Rastegar, and Yuting Lien of Dalberg Global Development Advisors, in collaboration with Pooja Bhatia, who provided editorial expertise. Corporate Visions designed and laid out the study. © 2012 Dalberg Global Development AdvisorsDalberg is a strategic advisory ˜rm that works to raise living standards in developing countries and address global challenges. www.dalberg.com

PAGE – 3 ============
Table of ContentsExecutive Summary .1Context and Purpose 2The Need and the Market Opportunity 4Addressing the Demand .10Growth Pathway 1: Replicate and scale social lending..15Growth Pathway 2: Innovate new ˜nancing products beyond short-term export trade ˜nance .22Growth Pathway 3: Finance out-grower schemes ..25Growth Pathway 4: Finance through alternate aggregation points . . . . . . . . . . . . . .28Growth Pathway 5: Finance direct to farmer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31Next steps: A call to action ..33Annex I: Market sizing methodology .34Annex II: Social lending crop/country market selection methodology and ˜ndings 35Annex III: Recommended reading list .38Annex IV: List of interviewees 39Annex V: End notes .41

PAGE – 5 ============
1CATALYZING SMALLHOLDER AGRICULTURAL FINANCEExecutive SummarySmallholder farmers occupy an increasingly important segment of the global agricultural value chain. Multinational buyers increasingly will rely on smallholders to secure their supply of agricultural commodities and to help satisfy consumer sustainability preferences. Donors consider the world™s 450 million smallholders a linchpin in poverty-reduction strategies because more than two billion of the world™s poorest live in households that depend on agriculture for their livelihood. These smallholders also represent stewards of natural resources that are in need of sustainable management to prevent deforestation and degradation of ecosystems. But smallholder production, which generally occurs on plots of less than two hectares, is characterized by low yields, low quality, poor linkages, and little access to ˜nance. At an estimated size of $450 billion, the global demand for smallholder agricultural ˜nance is largeŠand largely unmet. Impact driven smallholder agricultural lenders such as Root Capital, Oikocredit, and Triodos (referred to in this report as fisocial lendersfl) and local state sources currently satisfy less than two percent of the demand. With $350 million in disbursements, social lenders are small, but they play a catalytic role in driving ˜nancing into untapped markets. Where deployed, the social lender model has proven successful in meeting smallholder ˜nancing needs, improving production, building local markets, and encouraging sustainable management of natural resources. Furthermore, there is evidence that the model can catalyze lending from other sources, such as commercial lenders. The social lender model works through cooperatives or producer organizations, making it an ef˜cient channel for supplying ˜nance to smallholder farmers. However, because only about 10 percent of the world™s smallholders participate in farmers™ organizations, social lenders can currently address a small portion of global smallholder demand. Meeting the broader demand will require other approaches tailored to the speci˜c characteristics of each market.This report identi˜es ˜ve primary growth pathways for deploying investment to address smallholder ˜nance demand: (i) replicate and scale existing ˜nancing models, such as the one proven by social lenders; (ii) innovate new ˜nancial products beyond short-term export trade ˜nance; (iii) ˜nance out-grower schemes of multinational buyers in captive value chains; (iv) ˜nance through alternate points of aggregation in the value chain; and (v) ˜nance directly to farmers. Each of the ˜ve growth pathways above is discrete and can be pursued independently of the others. However, within each pathway different actors are interdependent, so collaboration is required. Donors and impact investors (including bi-lateral and multi-lateral agencies) provide the foundational capital for all ˜ve pathways, but their role depends on whether they are focused on scaling proven models or innovating new models. Multinational buyers can work with lenders to facilitate ˜nancing using purchase contracts as collateral or use their relationships with farmers to originate loans, assess risk, and collect payments. Commercial lenders and social lenders must decide where to apply resources in order to match their capabilities with the most relevant need and opportunity. This report helps to frame that decision.

PAGE – 6 ============
CATALYZING SMALLHOLDER AGRICULTURAL FINANCE2Context and Purpose Population growth and rising incomes have created unprecedented global demand for food. To satisfy this demand, multinational companies are increasingly relying on a new source: smallholder farms. From Coca-Cola to Cargill, companies are tapping into smallholder value chains to secure a sustainable supply for their products. In response to consumer preferences for ethical and sustainable sourcing, traceability, and quality, companies have also made bold sustainability commitments that implicate smallholder value chains. For instance, Unilever has committed to sustainably source 100 percent of its tea by 2015Šan amount that currently represents 12 percent of the world™s black tea supply. 1 As a result, the world™s 450 million smallholder farmers, 2 most of them in Africa, Asia, and Latin America, occupy an increasingly important segment of the global food market. They present a compelling opportunity for buyers, lenders, and other actors in the agricultural value chain. But tapping the smallholder opportunity will require addressing many obstacles. The chief obstacle is perhaps the largeŠand largely unmetŠneed for formal value chain ˜nance. Over the past decade, impact driven smallholder agricultural lenders such as Root Capital have pioneered models for lending to smallholders through producer organizations. Increased access to ˜nance combined with support from technical assistance organizations has increased smallholder productivity. Furthermore, commercial banks and multinational buyers have experimented with models to provide ˜nancing to smallholder farmers who are tightly integrated into sourcing value chains. These models have been successful, but they currently reach only a tiny portion of smallholder ˜nance demand.This report examines the scale, scope, and need for smallholder ˜nancing, with a view to expanding ˜nancing for smallholder farmers and better incorporating them into more formal value chains. In mapping pathways to growth, this report explains the roles different actors BOX 1: A NOTE ON METHODOLOGYThis study examined the smallholder ˜nance market from multiple perspectives. Research began by interviewing impact driven smallholder agricultural lenders to assess their existing asset base within the broader global agricultural ˜nance market. The team next surveyed crops and country markets for smallholder ˜nancing and identi˜ed the most promising, based on accessibility and attractiveness (see Annex II for the detailed analysis). Separately, the team examined ˜ve crop-country markets, chosen to represent a mix of ˜nancial maturity level, geography, and crop characteristics. The markets included:Coffee in PeruCocoa in IndonesiaDairy in ColombiaMaize in KenyaRice in NigeriaBased on learnings in this micro-assessment of ˜ve crop- country markets, the team extrapolated an estimate of the global demand for smallholder ˜nancing (approximately $450 billion). The ˜gure is a directional estimate, not an exhaustive one. The team interviewed 15 individuals involved in global buying of agriculture commodities to understand how they engage smallholder farmers and their outlook on sourcing needs. Direct interviews were accompanied by an exhaustive review of annual reports and public information from the 20 top multinational buyers of the 10 largest smallholder- dominated commodities. In addition, the team conducted a wide-ranging literature review, relying especially on data from the UN™s Food and Agriculture Organization (FAO), Calvin Miller and Linda Jone™s Agriculture Value Chain Finance, and reports from various organizations involved in technical assistance, such as TechnoServe and USAID.Although the research focused on ˜nancing models of impact driven smallholder agricultural lenders and multinational buyers, the team quickly realized that the majority of the world™s smallholders who are involved in production for local trade are not aggregated and cannot be reached by these two types of actors. Thus, the report includes a brief discussion on alternate pathways to reach non-aggregated farmers (included in the sections on growth pathways 4 and 5); however the research on this topic is not exhaustive.A list of recommended sources for additional reading is in Annex III.

PAGE – 8 ============
CATALYZING SMALLHOLDER AGRICULTURAL FINANCE4The Need and the Market OpportunityGrowing global demand for agriculture commodities, along with consumer preferences, have driven leading buyers to increase engagement with smallholder farmers. Meanwhile, renewed donor attention makes agricultural investment a timely opportunity for buyers and investors. Still, the smallholder ˜nancing market is in its early stages and is undeveloped, fragmented, and undercapitalized. A directional estimate of smallholder demand for ˜nancing suggests the market could be as large as $450 billion, the vast majority of which is unmet.World demographic trends point to increased global appetites. The global population continues to grow and is expected to reach 7.5 billion by 2020. 3 Most population growth is occurring in developing regions. In emerging markets, such as India, China, and Brazil, the middle class is growing. Population growth and an emerging middle class translate to increased global demand for food. By 2018, food consumption worldwide is expected to increase by nearly 30 percent over 2005 ˜gures. 4 In emerging markets, there is increased demand for non-staple crops such as cashews, tree nuts, chocolate, and coffee. Cognizant of population pressures on food supply and the environment, donors have renewed their commitment to agriculture funding. Agriculture has direct effects on foreign-aid donor priorities such as global food supply, livelihoods, and environmental stewardship. Agricultural aid accounts for an increasing share of Of˜cial Development Assistance (ODA). From 2005 to 2010, the amount of ODA devoted to agriculture grew 19 percent. Its growth rate easily outstripped both the previous ˜ve- year growth rate in agricultural assistance (˜ve percent) and the growth in ODA overall (see ˜gure 2). 5 Relatedly, the amount of private ˜nancing available for agribusiness has increased. Agribusiness funds in Africa had up to $2 billion in assets under management and fundraising in 2009.6 The growing donor and investor focus on agriculture has resulted 2.5 2.0 1.5 1.0 0.5 0.0 Capital Under Management Fundraising* $2.0B $0.5B $1.5B Total Capital in Agribusiness- focused Funds in Africa (2009, USD billions) * Mid-point taken if target fund size is a range Source: UN Department of Economic and Social Aairs, Populaon Division; FAO, fiHow to Feed the World in 2050fl; Fund manager websites; fund manager documentaon; sector literature and press; Dalberg analysis 2018 3,665 2015 3,509 2010 3,253 2005 2,882 Dairy Poultry Pork Beef Vegetable oils Oilsee ds Rice Coarse Grains Wheat Note: Categ ories not exhausve (e. g., does not include sugars) Worldwide Projected Food Consumpon (2005-2018, ‚000 kilotons) 2020 7.5 2015 7.2 2010 6.8 2005 6.5 2000 6.1 More developed regions Less developed regions CAGR 2000-2020 1.1% 0.2% 1.3% World Populaon (2000-2020, billions) FIGURE 1: POPULATION, FOOD CONSUMPTION AND AGRIBUSINESS INVESTMENT

PAGE – 9 ============
5CATALYZING SMALLHOLDER AGRICULTURAL FINANCEin increased technical assistance to support on-farm productivity and producer organization formationŠ creating a more conducive environment for smallholder ˜nancing. Still, demand is already outstripping supply in several smallholder-dominated cash crops. Cocoa consumption has grown steadily over the past decade, driven by increased consumption in emerging markets. But worldwide production has ˚uctuated over the past ˜ve years and in many countries has reached a plateau. As a result, a large cocoa de˜cit is expected by 2020 (see ˜gure 3). 7 Similar trends appear in the cashew market, another smallholder-dominated cash crop. Global demand for cashews is growing three times faster than global supply. Consumers in China, India, and other emerging markets are driving the growth in cashew demand. To meet increased demand, buyers are cultivating smallholder sources. Conventional commercial agricultural methods, such as plantation methods, have reached productivity plateaus in some crop areas (e.g., maize and rice). Other crops are grown almost entirely by smallholder farmers (e.g., cocoa). Therefore, many buyers consider smallholder sourcing not just an alternative, but an imperative for securing supply. Smallholder production provides an avenue for buyers to diversify supply, increase quality and production, and promote loyalty in their suppliers. Already, they are engaging with smallholders directly and experimenting with new models for smallholder ˜nancing and sustainability. Preferences of consumers in developed countries for sustainably sourced foods, such as Fair Trade or organics, have also played a role in incentivizing sustainable sourcing. The examples are many: Cargill, one of the four major traders of palm oil, has committed to source all of it sustainably by 2020.8 The top ˜ve chocolate manufacturers have made commitments to sustainable cocoa.9Starbucks committed to source all of its coffee through C.A.F. E., Fair Trade, or another program by 2015.10 Notes: Total ODA CA GR calculated from OECD data on total ODA to all sectors, all donor types in me period Source: OECD stass; Dalberg analysis +19% +7% 2010 8.4 2009 8.1 2008 6.4 2007 5.3 2006 3.8 2005 3.5 2004 3.6 2003 2.4 2002 2.7 2001 3.3 2000 2.6 (200 0Œ2010, USD billions) CAGR 2000-2005 2005-2010 ODA to Agriculture ~ 7% ~ 19% Total ODA ~ 13% ~ 4% FIGURE 2: OFFICIAL DEVELOPMENT ASSISTANCE (ODA) COMMITMENT TO AGRICULTURE * Based on approximate calculaons ** Scale is dierent because demand is measured in processed ker nel whereas supply is measured in raw cashew nuts Source: fiThe World Cocoa Economy: Past and Presentfl Inter naonal Cocoa Organizaon, September 2010; World Cocoa Foundaon compiled report May 2010; FAO data; Red River Foods report 2010; ACA Strategy document 2010, Bloomberg Cocoa 3 1 2009 2008 2007 2006 2005 +6% Supply 400 200 2009 2008 2007 2006 2005 +20% Demand Global demand for cashews is growing at a rate three mes faster than global supply Tonnes ‚000 * Deits in worldwide cocoa supply have been more frequent than surpluses in recent years. The deit is projected to reach 1 million tonnes by 2020. MT ‚0 00** MT** 2020E -1,00 0 2010 -250 2009 100 2008 -150 2007 -700 2006 550 2005 -50 2004 725 2003 250 2002 -75 2001 -500 Surplus Decit Cashews FIGURE 3: SUPPLY AND DEMAND FOR COCOA AND CASHEWS

PAGE – 10 ============
CATALYZING SMALLHOLDER AGRICULTURAL FINANCE6Meeting these sustainability commitments will require a dramatic expansion in certi˜ed (e.g., Fair Trade or organic) supply. In order for chocolate manufacturers to realize their commitments to sustainable cocoa, for instance, supply would have to grow by at least 14 percent annually until 2020. 11 Similarly, commitments to sustainable coffee would require supply to grow 17 percent annually until 2015. 12 Unless smallholder farmers can bring more sustainable product to market, buyers risk failing to meet their pledges. Smallholder ˜nancing models can help farmers reach their potential by increasing quality and yield. The world™s 450 million smallholder farms could help feed the world, but most smallholders face poor market linkages and many barriers to improving productivity. Despite some variation, the typical smallholder is poorly linked to markets and has minimal, if any, access to credit. Smallholder farming practices are not productive because smallholders typically lack access to resources for optimal inputs, such as high-performing seeds, fertilizer, irrigation, and machinery. Most rely on manual family labor. Small plots and low productivity leave smallholders more vulnerable to risk than large farmers, who can better diversify their crops and spread capital improvements over larger areas. Moreover, smallholder power to negotiate prices is limited, in part because of information asymmetries. Smallholders might overcome these impediments through producer organizations, but most smallholders are dispersed and non-aggregated. Cargill Sources and notes: Data is not comprehensive; Market sizes based on World Bank-projected commodity prices; (i) Comprised of soy industry players that account for 90% of Dutch soy market, according to IDH, the Dutch Sustainable Trade Inave; (ii) public commitments of buyers; (iii) Assumes and Nestle maintain the level of their 2012 commitments in 2020; (iv) Round Table on Responsible Soy; (v) Rainforest n Network and Cargil l company website; Dalberg analysis Kr a Nestle Starbucks Sara Lee Tchibo Cee 2015ii 2,615 1,03 5 670 527 281 102 9068Ferrero Mars Nestle Kr a Cocoa 2020iii 686 304 225 Soy 2015iv 900 3,000 13,600 Cargill Palm Oil 2020v Dutch Taskforce for Sustainable Soyi (By crop and year of commitment, USD millions) FIGURE 4: PROJECTED MARKET SIZE FOR SUSTAINABLE SOURCING OF SELECTED CROPS * Refers to quanty used as well as treatment of soil and water Source: Inter views with buyers, company websites; Dalberg analysis Defensive Play Sustainability Branding Protecng and Bu ilding the Core Business Drivers CSR, License to Operate Consumer Demand, Branding, and Sustainability Culture Sourcing Needs, Diversica, Value Chain Traceability Descrion Buyers are under pressure from external players to create a more sustainable value chain (i.e., external risk management) Buyers have sustainability ed to their mission or culture. Some may see a premium prot opportunity through sustainability branding Buyers are concerned about producy, q uality, supply security, food safety and producer loyalty (i.e., internal risk management) Core Sustainability Issues Land conversion (i.e., deforesta Labor rights Fair treatment of farmers Land and water usage* Smallholder engagement Eco-eciency (i.e., farm produc FIGURE 5: BUYER MOTIVES FOR SUSTAINABLE SOURCING

PAGE – 11 ============
7CATALYZING SMALLHOLDER AGRICULTURAL FINANCEThe vast majority of smallholders lack access to ˜nance for a variety of reasons, often interrelated. Smallholders typically lack ˜nancial literacy. Poorly de˜ned property rights often prevent the use of cultivated land as collateral. The cost of credit in developing countries is high, especially the cost of longer-term credit appropriate to capital investments. Without access to credit, most smallholders are con˜ned to sub-optimal inputs and methods, and therefore to low productivity. Smallholder farming methods often turn to survival tactics that degrade the ecosystems farmers depend on. Constrained by low productivity and an inability to invest in their property, smallholders sometimes resort to shorter-term measures such as illegal logging, slash-and- burn agriculture, and intensive monoculture that impairs the viability of the ecosystems they depend on. Access to appropriate credit could empower smallholders to help meet the growing global demand for foodŠwhile improving smallholder livelihoods, safeguarding the environment, and spreading bene˜ts throughout the value chain. Access to credit allows smallholders to participate on more equal footing with larger commercial enterprises and therefore gain better prices for their yields. Farmers who produce more consistently at higher yields with better quality will reduce upstream risks for buyers and other value chain actors. By increasing productivity, smallholders can play an important role in meeting the demand for commodities in local and global markets. Belonging to a producer organization is one way that smallholders can access ˜nance, certi˜cations, and technical assistance, and although the smallholder™s input costs increase, so do his prices, yields, productivity, and pro˜ts. An example constructed from data provided by lenders, buyers, and technical assistance providers in Peru illustrates how. BOX 3: SMALLHOLDER SNAPSHOTIn the absence of a global de˜nition of fismallholder,fl this analysis considers a smallholder a farmer who cultivates less than two hectares. By this de˜nition, there are approximately 450 million smallholders worldwide. 13 Annual smallholder income varies from about $170 to $570 per year. 14 Many smallholders farm for subsistence only; some trade locally, but less than 10 percent are currently incorporated into export value chains.15FIGURE 6: GLOBAL DISPERSION OF SMALLHOLDER FA RMERS Number of Smallholder Farms (1000s) 829Asia (developing) 361,24 3 All developi ng countries 432,75 9 Pacic (developing) Central America/Caribbean 3,69 8 South America 3,908 Near East and North Africa 12,42 7 Sub-Saharan Africa 50,65 4 World 446,11 7 Source: World Census of Agriculture, FAO and Rural Populaon, development and the Environment 2007, UNDESA

441 KB – 48 Pages