Innovative agricultural finance

and risk management

Strengthening food production
and trade in the transition region

FAO INVESTMENT CENTRE

WORKING PAPER

FAO INVESTMENT CENTRE

Innovative agricultural finance

and risk management
Strengthening food production
and trade in the transition region
Lamon Rutten
Agricultural Finance Expert

WORKING PAPER
prepared under the FAO/EBRD Cooperation

European Bank
for Reconstruction and Development

Food and Agriculture Organization

of the United Nations

This paper is a product of the staff of the Food and Agriculture Organization of the United Nations (FAO).
The findings, interpretations, and conclusions expressed in this paper are those of the authors and do not
necessarily reflect the views of FAO.
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FAO 2012

TABLE OF CONTENTS
Acronyms

Acknowledgments 8
Executive summary

Introduction

17

1. How innovation in agricultural finance and risk management can enhance food
production, processing and trade in the transition region
1.1 Agriculture in transition economies a brief overview
1.2 The rise of international farm investment in transition economies
1.3 Input finance in a liberalized environment

19
19
23
25

2. Reducing the vulnerability of food producers to weather and market risk

2.1 Risks in the agricultural sector in transition countries
2.2 Dealing with weather risk through index insurance
2.3 Dealing with price risk

28
28
31
37

3. Building institutions for agri-finance, trade and risk management

3.1 Commodity exchanges in transition countries
3.2 Warehouse receipt systems
3.3 Possible new approaches that merit international support

40
40
44
47

4. Boosting finance for food production, processing and trade

52
4.1 Providing capacity-enhancing facilities to local banks
52
4.2 A closer look at instruments and structures
54
4.3 Pre-harvest finance
56
4.4 Post-harvest finance
61
4.5 Possibilities for replication and innovation tools for and lessons from the region 65
4.6 Linking commodity exchanges and agricultural finance
68
Conclusion

72

References

76

Acronyms
ADB

Asian Development Bank

ACBA

Agricultural Cooperative Bank of Armenia

AGLED

Agricultural, Livestock and Enterprise Development

ANBIMA Associao Brasileira das Entidades dos Mercados Financeiro e de Capitais

BBM

Bolsa Brasileira de Mercadorias

BIP

Base Insurance Product

BM&F

Bolsa de Valores, Mercandorias & Futuros

BMC

Mercantile Exchange of Colombia

BNA

National Agricultural Exchange

CAP

Common Agricultural Policy

CARD

Center for Agribusiness and Rural Development

CDCA

Certificates of Agribusiness Credit Rights

CDM

Certificado de Depsito de Mercancias; Certificate of Deposit

CFC

Common Fund for Commodities

CIDA

Canadian International Development Agency

CIDT

Compagnie Ivoirienne pour le Dveloppement des Textiles

CIS

Commonwealth of Independent States

CME

Chicago Mercantile Exchange

CPR

Cdula de Produto Rural

DCA

Development Credit Authority

DRP

Disaster Response Product

EBRD

European Bank for Reconstruction and Development

EC

European Commission

ECA

Eastern Europe and Central Asia

EPA

Export Prepayment Agreement

ESU

European Size Unit

EU

European Union

EWR

Electronic Warehouse Receipt

FCC

Food Contract Corporation

FIDC

Fundo de Investimento em Direitos Creditrios

FMC

Farm Management Company

FSU

Former Soviet Union

GCC

Government Catastrophic Coverage

GDP

Gross Domestic Product

ha Hectare

IFAD

International Fund for Agricultural Development

IFC

International Finance Corporation

ITFC

Islamic Trade Finance Corporation

L/C

Letter of Credit

LIIP

Livestock Insurance Indemnity Pool

LRI

Livestock Risk Insurance

LSA

Livelihood Service Adviser

LSP

Livelihood Service Provider

MCC

Millennium Challenge Corporation

MFI

Microfinance Institution

MICEX

Moscow Interbank Currency Exchange

NAMEX National Agricultural Mercantile Exchange

NGO

Non-Governmental Organization

OECD

Organisation for Economic Co-operation and Development

PPP

Purchasing Power Parity

SAS SugdAgroServ
SECO

Swiss Secretariat for Economic Affairs

SGM

Standard Gross Margin

SME

Small and Medium-Sized Enterprises

SPV

Special Purpose Vehicle

TAFF

Tajik Agricultural Finance Framework

TFP

Trade Facilitation Program

UNCTAD United Nations Conference on Trade and Development

USAID

United States Agency for International Development

USDA

United States Department of Agriculture

VAT

Value Added Tax

WA

Warrant Agropecurio

WHR

Warehouse Receipt

ACKNOWLEDGMENTS
This report was prepared by the Investment Centre Division of the Food and
Agricultural Organization of the United Nations (FAO) at the request of the European
Bank for Reconstruction and Development (EBRD), under the cooperation between
the two institutions. It was financed by EBRDs Special Shareholders Fund and FAO.
Its main author is Lamon Rutten, Agriculture Finance Expert, who worked under
the overall guidance of Frank Hollinger, Rural Finance Specialist, FAO, and Heike
Harmgart, Senior Economist, EBRD. The report also benefited from useful comments
and suggestions by Peter Bryde, Deputy Director, Agribusiness, EBRD; Emmanuel
Hidier, Senior Economist, FAO; and Hannah Levinger, Economic Analyst, EBRD.

Innovative agricultural finance and risk management

Executive summary
Ensuring that food production keeps up with population and income growth, changing
dietary patterns and climate conditions in the decades to come is but one of the
challenges currently facing developing and advanced countries around the globe. The
worlds population is expected to stabilize at around 9.1 billion people in 2050, a 30
percent increase from current numbers, but demand for food will grow by 70 percent.
To keep up with the pace of demand growth, yields need to improve drastically, yet
there is little scope to expand acreage. Transition countries, some of which face
food security problems of their own, can play an important role in achieving global
food security as yields can be improved. Countries such as Kazakhstan, the Russian
Federation and Ukraine, which have been net grain importers up to the late 1980s, can
emerge as the worlds leading grain exporters.
In order to meet rising food demand, significant investment from the private sector
will be required in these transition countries. Such investment needs to be catalysed
through supportive policy and regulatory, legal and institutional frameworks.
International financial institutions, in turn, can facilitate the creation of these
frameworks in transition country governments. This paper focuses on one particularly
important action area: how can various agricultural finance and risk management
products, mechanisms and institutions that are relatively new to the transition region,
enhance the regions food production, processing and trading systems? These
products, mechanisms and institutions include: market-based price risk management,
weather index insurance, structured finance and other innovative forms of finance,
warehouse receipt (WHR) systems and commodity exchanges. The paper aims to
identify how international financial institutions such as the European Bank for
Reconstruction and Development (EBRD) can most effectively leverage their
investments and technical assistance programmes to boost the adoption and scalingup of such products, mechanisms and institutions.

Transition countries diverse agricultural systems

There is a broad span of agricultural sector structures in transition countries and, to a
large extent, optimal solutions are country-specific. Nevertheless, for the purpose of
analysis, it is useful to group transition countries into three broad categories:
Group A: current and aspiring European Union (EU) members;
Group B: large economies of the Commonwealth of Independent States (CIS); and
Group C: small, relatively poor economies with a large commodity sector.
The group of current and aspiring EU members is fairly diverse, generally with a
high per capita gross domestic product (GDP) and a diversified economy. As in other
transition countries, the dismantling of state controls and liberalization of input supply,
marketing and credit provision seriously disrupted agriculture. In some countries,
smallholder producers came to dominate agricultural production. In others, large
farming corporates emerged as a major mode of production. In many countries,
strong value chains were created with agricultural processors and, to some extent,

trading companies providing inputs to farmers on credit and buying their crops.
Agriculture in large economies like Azerbaijan, Belarus, Kazakhstan, the Russian
Federation and the Ukraine went through a major crisis after the break-up of the
Soviet Union. Many agricultural subsidies disappeared, input prices increased sharply
and marketing systems collapsed. Many farms became unprofitable, millions of
hectares (ha) were taken out of cultivation and production fell precipitously. The
five countries affected responded differently to the crisis. In Azerbaijan, most stateowned land was distributed for free or at very small cost to rural residents, including
farm members, resulting in a smallholder farming structure. In Belarus, very little
changed, except for the conversion of a number of collective farms into corporate
entities. In Kazakhstan, the Russian Federation and Ukraine, the agricultural sector
was restructured starting in the late 1990s. This restructuring ultimately resulted
in a system where individual farm households operate alongside huge farming
enterprises, some of which are owned or operated by international firms or funds.
The former often specialized in high-value crops and livestock; the latter, in grains and
oilseeds.
In the final group, composed of the low-income transition countries, a very large part
of the population is employed in agriculture. During the 1990s, most countries in this
group saw widespread liberalization and a radical restructuring of land ownership. A
few, however, retained a strong measure of government control, particularly on the
cultivation and trade of export commodities. Foreign investment in agriculture in these
countries remains low, and the infrastructure for agricultural production, trade and
finance, weak.

Dealing with agricultural sector risk

Farmers, processors and traders in transition countries are exposed to the same
kind of risks that are prevalent in agriculture everywhere, in particular weather risks,
price risks (both for inputs and crops), political risks and risks related to poor support
infrastructure. Even if exposed to such risks, farmers may face incentives to trade off
insurance, and consequently reduced risk, against likely short-term gains. In the event
of loss, absence of insurance not only hurts current income and consumption but also
investment and hence future income and growth.
In some transition countries, farmers and processors have a level of coverage against
such risks. The different safety net and support programmes of the EU were extended
to the new EU member states, and EU support programmes helped to create similar
safety nets in aspiring EU countries. Large, relatively rich countries like Kazakhstan,
the Russian Federation and Ukraine were able to maintain heavily subsidized crop
insurance programmes. But in the larger number of low-income former Soviet
Republics, as well as Mongolia, governments could not afford such largesse, and
farmers were mostly left to their own devices.
Market-based instruments can provide alternatives to subsidized insurance
programmes. For example, index-based weather insurance instruments provide an
alternative solution at lower operating cost, avoiding many of the transaction costs
and moral hazard risks inherent in multi-peril crop insurance. The insurance would
initiate a payout to the insured party such as the farmer when an index reaches a
certain trigger level. Indexes could, for example, represent rainfall during certain
days, maximum daytime or night-time temperature or lifestock mortality. The payout

10

Innovative agricultural finance and risk management

is not based on the specific loss that the insured party suffered, but on a specified
weather event; for example, rainfall as measured by a nearby weather station. While
this method may be far from perfect it may have rained where the weather station
is located, but not on the farmers fields, for instance it is cheap to administer and
payments can be made very soon after the weather event occurs.
Progress with the introduction of weather risk index insurance in the region has been
weak to date. While Mongolia successfully adopted such insurance for its livestock
producers, a pilot project in Ukraine failed. Lack of progress is largely due to existing
institutional and technical bottlenecks including an insufficiently dense network of
professionally managed weather stations; insufficient data on past production and
weather patterns; absent technical expertise for designing and pricing weather index
products; improper insurance regulations; and difficulties in linking weather index
insurance and agricultural finance. Technical assistance can help address these
bottlenecks. It can also help create affordable and reliable mechanisms to distribute
weather index insurance over intended beneficiaries, particularly by bundling it with
other products such as microfinance or input supply. New technologies such as
the use of mobile phones to collect premiums and affect payouts can support such
efforts. Demand for index insurance is high in many countries, and in some countries
the financial sector is sufficiently developed to successfully test new approaches.
Price risk can also be managed through the use of market-based instruments. In new
and aspiring EU member countries as well as for sectors such as cotton and dairy this
management has taken the form of fixed forward prices offered within agricultural value
chains. In many cases, the buyer not only commits to fixed-price purchases at a certain
time in the future, but also to provide inputs, extension services and finance. Certain crops,
such as those that pass through natural constriction points like centralized processing
plants, are particularly well suited for the value chain approach in price risk management.
In countries where value chains are not yet well organized (i.e. most of the low-income
transition countries), international agencies can be catalysts for their development.
For other crops, like grains, which do not have such natural constriction points, fixedprice forward contracts carry large contract default risks. In these cases, futures and
options provide better price risk management tools. However, agricultural futures and
options are still poorly developed in transition countries. Despite efforts undertaken
by many countries, there are no functioning, liquid agricultural futures contracts in
the region. At the same time, the use of the leading global grain and oilseeds futures
market, the Chicago Mercantile Exchange (CME), is challenging, not only because the
logistics of using an overseas exchange can be cumbersome, but also because local
prices in transition countries do not necessarily move in tandem with CME prices.

Improving commodity exchanges and warehouse receipt systems

in transition countries
There are many commodity exchanges in transition countries. Two out of three
countries have at least one exchange, but most have little organizational and financial
strength and play an insignificant role in their economies. The total size of commodity
futures trade in the region is very small. But while agricultural contracts are of little
significance for most of the large exchanges, there is good scope for growth, either
through national contracts or through regional initiatives. For example, the role of the
large CIS countries such as Kazakhstan, the Russian Federation and Ukraine in world

11

grain and oilseed trade has developed to such a level that successful Black Sea grain
and oilseed futures contracts attract avid international interest.
One of the key characteristics of functioning commodity exchanges is that they
create a bridge between futures and physical markets. For this link to work, a
certain legal, financial and technical infrastructure is needed. WHR systems allow
collateralization of agricultural output, and hence borrowing against it. With these
systems in place, producers can physically deposit their output after the harvest in
licensed warehouses and present the receipt to a financial intermediary as security.
The stored grain serves as collateral, giving farmers access to seasonal finance. In
addition, WHR systems reduce agency and information costs from intertemporal
contracts. The storage option allows farmers to wait for market prices to improve
before selling their output after the harvest, thus preventing market saturation
and stabilising prices. WHR systems form a strong link between the physical grain
sector and paper trade in fungible grain contracts. Efficient WHR systems not
only boost the chances for successful local futures contracts, but also offer new
post-harvest financing opportunities.
A number of WHR projects have been started by international agencies with EBRD
taking the lead. These projects have been by and large successful, but there is still
considerable scope for improvement. Local banks generally remain unwilling to
explore the possibilities of WHR finance, inter alia because of ongoing and often
justified concerns about the reliability of local warehouse operators. Legal and
regulatory reforms frequently stall. Warehouse operators are not keen to contribute
to fidelity funds. Some projects were oriented at replicating western WHR systems,
such as that of the United States of America, but were insufficiently adjusted to the
specific conditions of emerging market commodity sectors; hence, they failed to
recognize the possibilities to leapfrog by adopting new technologies such
as electronic warehouse receipts (EWR). There has been an overemphasis on the
creation of a legal and regulatory framework while much less attention has been paid
to supporting concrete operations solutions on the ground. These include collateral
management/credit support, which is the vehicle for most WHR finance in emerging
economies, and value chain finance.
Developing successful exchanges is a challenging task and many constraints are yet
to be addressed in transition countries. The legal and regulatory framework is often
ambiguous, incomplete or even counterproductive:
The rules governing investment in exchanges may hinder exchange development
by limiting the maximum permitted individual shareholdings, or by defining
exchanges as not-for-profit enterprises, for example.
Exchanges may not be fully empowered to self-regulate their operations. For
example, the decisions of their arbitration panels may be difficult to enforce or can
easily be overturned by a court of law.
It may be difficult to operate an efficient delivery mechanism. In some transition
countries, efforts to create a strong link between futures and physical markets
were undermined by the absence of strong WHR regulation and a proper grading
system, and the concentration of warehouse ownership.
To move forward with commodity exchange and WHR projects in the region, the
following suggestions could replace traditional approaches:

12

Innovative agricultural finance and risk management

First, look at potential deals and structure them around legal constraints, then work
to improve the legal and regulatory framework for WHR finance.
Promote innovation towards the development of a secondary market of tradeable
WHR instruments.
Consider instruments beyond agricultural futures and options, which target the
needs of physical trade and/or finance such as repo contracts or project bonds.
Then, work with potential partners to introduce instruments one by one.
Make full use of available technology to develop cost-effective approaches,
tailormade for transition countries.
Make EWR systems the basis of WHR projects, and use this technology to attract
new participants to the sector.

Moving beyond warehouse receipt finance

WHR finance is just one of the many tools to provide larger financing at better
conditions to participants in agricultural value chains in transition economies. EBRD,
International Finance Corporation (IFC) and other development agencies have, in
different ways, been supporting the financial capacity of local banks and non-bank
financing institutions to lend to entities in the agricultural sector, both for shortterm and longer-term purposes. These programmes are useful. They build on and
strengthen the capability of local banks to finance smaller projects, with a likely
catalytic impact on the target sectors. But there is room for broadening their scope
and enhancing their influence.
In particular, most of these programmes now focus on teaching bankers how to
identify and quantify risk. However, credit scoring does not eliminate the risks
associated with external factors such as price developments or weather events,
not to mention those related to government policies or commercial counterparts.
Empowering banks not just to quantify, but, more importantly, to manage such risk
using a variety of structured finance tools is critical to enhancing their capacity to
lend to agriculture. A broad condition for successful lending is that agriculture or,
at least, the supply chains that a financier targets is profitable from farm to fork,
from producer to final buyer. Banks should be taught how to build loans around the
strength of the transaction structure which they themselves can also reinforce rather
than on the strength of prospective borrowers.
This approach is advisable not just for conventional banking, but also for microfinance.
Microfinance programmes exist throughout the transition region, generally run
by non-governmental organizations (NGOs). They tend to rely on a combination of
credit scoring, group guarantees, and assessment of business plans. International
experience shows, instead, that the microfinancier can directly address the
borrowers main problems: unmanaged risk, low productivity and unfavorable terms
in input and output market transactions. New product offerings such as weather
insurance, veterinary and extension services, capacity-building programmes for
farmers groups, support to contract farming schemes and price information can
systematically mitigate these problems, and thus positively impact the ability of
borrowers to reimburse loans.
In this agenda, financiers will be helped if credit support institutions can be
strengthened. There are many transaction structures where a bank is best off relying
on a third party because the required skills are specialized, and an additional level of

13

checks and balances is in place. International organizations may consider setting aside
a part of the funds that they wish to provide to local banks to develop credit support
institutions, such as logistics agents and collateral managers.
Furthermore, banks work best if they are part of a more complete financial
environment, ideally operating alongside investment funds of various stripes as well
as a multi-asset exchange where they can refinance themselves and recalibrate their
risk exposure. International organizations should consider how they can support
proposals from private sector groups to form agricultural investment funds and trading
platforms to complement their ongoing commitments to local banks.
While copying a structure from one commodity sector to another or from one country
to another may not work in all cases, structures that do work well in particular settings
should provide inspiration to others. Globally, as well as in the transition countries,
one can find many examples of deal structures that, if properly adapted, may work
well in certain transition countries and can provide practical solutions to the financing
needs of commodity producers, processors and traders. Given that international
banks tend to concentrate on large-scale transactions and that many of the financing
needs in the agricultural sector are below their usual threshold, it falls largely on local
and regional banks in transition countries to learn from international experience to
structure financing solutions for their own regions.
Globally, there is a wealth of experience with innovative agricultural finance that
can inspire financiers in transition countries. This knowledge ranges from Australias
experience with agricultural project bonds to Chinas linking of agricultural finance
and hedging; from Brazils rural bonds issued by farmers giving rise to a whole range
of secondary capital market instruments to repo contracts traded on Colombias
commodity exchange. International organizations can bring these practices and
related expertise to the region.
In transition countries, experience with structured commodity finance has not always
been positive. Structured commodity and trade finance is considered a low risk area
by financiers. Thus, it is particularly suited to borrowers in higher-risk environments,
provided that the financing structures are competently engineered. This has not
always been the case, however, and in several instances when this competence has
been absent, financiers found that their structures failed because of an incomplete
management of risks. In particular, insufficient attention was paid to creating
the necessary incentives for the various participants in value chains to continue
performing optimally.
The scope for expanding structured finance is probably most limited in the
transition countries that have become EU members, where lending risks, both
real and perceived, have declined, and the need for tight financing structures is
reduced. Aspiring members are going through the same process. Banks in these
countries are now, to a large extent, owned by western European and, to a lesser
extent, American banks, and these should not be prime targets for international
support. Legal and regulatory conditions have also improved considerably, and are
included as part of the EU accession process. Major companies have built up track
records, which now give them access to balance sheet finance. Finally, there have
been many western European investments in the agricultural and agro-processing
sectors in these countries so that, by and large, agriculture has become well
organized.

14

Innovative agricultural finance and risk management

The large economies of Kazakhstan, the Russian Federation and Ukraine have many
large structured finance deals, mostly on the back of major export flows. The legal
and regulatory framework is favourable, though not yet perfect. Several banks in
the region have reasonable experience with various forms of structured finance for
agricultural commodities. By the early 2000s, some of the banks had developed
reasonable in-house capacity that they used to initiate their own transactions. EBRDs
programmes to promote WHR finance and, to a lesser extent, its trade facilitation
programmes have been effective in promoting such forms of structured finance.
However, those bankers who became knowledgeable in structured finance focused
on the large oil, metal and grain sectors. Fewer efforts have been made to target less
traditional sectors. Targeted support could help change this trend. A good starting
point would be to focus on integrated commodity chains and non-traditional sectors.
The economies of Armenia, Georgia, Kyrgyzstan, Republic of Moldova, Tajikistan,
Turkmenistan and Uzbekistan are small and vulnerable. They pose a sub-investment
grade risk to international lenders. The financial sector is underdeveloped, with few
large local banks and virtually no international ones. Local interest rates are high.
Agricultural production is fragmented, with very few large farms. Governments have
often retained strong control over agricultural sectors seen as strategic, and many
rules and regulations such as those on exports hinder their proper development. The
infrastructure for physical trade, including warehouses and grading laboratories, is
deficient. The legal and regulatory regime is weak and corruption is rife. Practices in
commodity trade are unsatisfactory, with contract defaults a common occurrence.
There is a lack of trust among the various players in the commodity sector. All these
factors complicate commodity finance. Structuring techniques can help mitigate
the risks, but possible deal sizes are, in general, too small to be of much interest
to international banks, while local banks do not have the required expertise. The
international community could provide support for specific sectors, such as cotton,
milk or poultry.

Conclusion
Governments and international agencies can broaden and deepen the agricultural
finance and risk management approaches developed both in the region and globally.
Approaches that have demonstrated success in some transition countries and some
sectors may be extended to other countries and sectors. And it is possible to adapt
related experiences from other parts of the world. Possible actions can be divided
in three areas: institution-building, developing instruments, and legal and regulatory
improvement.
There is vast scope of institution-building in transition countries, focusing on organized
trading platforms that can link agricultural trade, finance and risk management; on
chain integrators that enable goods to flow efficiently in agricultural value chains;
and on the capability of banks to originate and manage innovative agricultural financing
transactions. The EBRD and other international financial institutions can support each
in a distinct way. For example, trading platforms, in the form of commodity exchanges
or EWR systems, should be designed as vehicles for innovation. In transition
countries, innovation is likely to be needed not just in price risk management and
counterparty risk management, but also in finance, including repos, products based
on Cdula de Produto Rural (CPRs) and bonds for commodity projects. More could

15

be done to strengthen local banks understanding of the commodity sector and of

structured finance tools, and even of simple tools like factoring and leasing. A good
starting point would be to do value chain audits, which identify support entities
that can form constriction points in the chain (i.e. commodities are likely to pass
through these entities) and which, when properly organized, can form the anchor
for structured financing. This starting point can be followed by the development of
blueprints for financing different sectors.
Innovation in instruments depends, in part, on institutional innovation. Trading
platforms are vehicles for innovative instruments. With an EWR system, capital
market investors can directly invest in stocks of physical commodities. Repo finance
becomes possible. On exchanges, project bonds for agricultural projects can be
listed. A weather index derivatives contract can be introduced, which will facilitate the
growth of the weather risk management market. Nevertheless, designing appropriate
instruments can be complex, and the result does not benefit from copyright
protection; successful innovators can be easily copied. Hence, there is a good
argument for public support of the development of new instruments. Instruments
that merit special attention include index insurance, in particular, for weather risk;
repo contracts, as traded on the Colombian agricultural futures market; capital market
instruments, such as Brazils CPRs; and project bonds, as traded in Australia, which
can permit new, professional managers to become engaged in agriculture.
Governments need to create a policy, legal and regulatory framework that enables
efficient use of modern financial instruments. For commodity exchanges, this
framework includes the absence of negative actions such as unpredictable
interventions in markets, and the provision of a supportive framework in terms of
grading and quality control, contract enforcement, taxation, etc. If governments want
to improve finance along the supply chain, they have to take into account the legal
environment with respect to ownership rights, enforceability of contracts, bankruptcy
and the transferability of WHRs, contracts and export licenses. While this work area
should not be the main thrust of their programmes, donor agencies should support
government efforts. If governments are not engaged in this development, then the
focus of donors should be on making specific transaction structures possible. This
should be the focus because certain groups will benefit and are, therefore, likely to
support it; and because, following the transaction support, the readily identifiable
benefits will help overcome government reticence to support modern financial
instruments. In addition, given the mistrust of markets that still prevails among certain
policy makers, an advocacy role of the international community remains warranted.

16

Innovative agricultural finance and risk management

INTRODUCTION
World population is expected to grow from 7

new to the transition region2 (e.g. market-

billion in 2012 to 9.1 billion in 2050, a 30 percent

based price risk management, index insurance,

increase. Food demand will grow faster because

structured finance and other innovative forms of

of accelerated urbanization and richer populations,

finance, WHR systems, commodity exchanges,

and to meet this demand, food production has

etc.) can enhance the regions food production,

to increase by about 70 percent. This increase

processing and trading systems, resulting

involves an extra production of 200 million

in better food security in the region and an

tonnes of meat and 1 billion tonnes of cereals

enhanced contribution to global food security. In

(the equivalent of the current world production of

doing so, it aims to identify how the EBRD can

wheat plus the production of maize in the United

effectively leverage its investments and technical

States of America).

assistance programmes to boost the adoption

and scaling-up of such products, mechanisms and

FAO estimates that 90 percent of the necessary

institutions.

production increases will have to come from

increases in yield and cropping intensity, and

Chapter 1 starts with a broad description of

the remaining 10 percent from the expansion

the agricultural sector in transition economies,

of arable land. The transition region can play a

describing changes in farm structures that

significant role in meeting the global challenge.

occurred over the past two decades, and

CIS countries have 13 percent of global arable

discussing the rise of international farm

land, but grow only 6 percent of global crops and

investment in the region. It also discusses how

farm only 2.6 percent of global meat. Contrary to

innovative instruments fit within these different

the rest of the world, yields in transition countries

structures, using the example of how input

have stagnated since the 1970s. Estimates

finance has evolved post-liberalization and how it

are that yields in the transition region could be

could be further enhanced.

increased by 75 percent within a decade, and

an additional 40 to 60 million ha of extra land

Chapter 2 describes agricultural risk exposure,

could be brought into production. To realize this

and the market instruments that permit the

potential, however, requires an investment of

management of such risks, with a particular

over USD 75 billion in upstream agriculture, of

focus on market-based instruments for

which two thirds would have to come from the

managing weather and price risk. The conditions

private sector.

for the development of these market-based

instruments are described, and experience in the

In order for such private investments to be

region is analysed, with a case study of the less-

mobilized, policy, legal and regulatory conditions

than-successful introduction of weather index

must be favourable, and a conducive institutional

insurance in Ukraine as an illustration.

environment needs to be in place with respect

to agricultural production, trade, finance and risk

Chapter 3 discusses two important institutions

management. This paper sets out to discuss one

that can anchor the sustainable growth of

part of this equation1: how various agricultural

agriculture in transition countries, namely,

finance and risk management products,

mechanisms and institutions that are relatively

1 Other aspects, not covered in this paper, include land

tenure issues, public/private investments in infrastructure, land
acquisition policies, research and extension, domestic and regional food security concerns, international trade policy issues,
adjustment of production systems to high energy costs and
climate change-related risks and opportunities.

2 As defined by EBRD, and categorized for the purpose of

this study, as follows:
Current and aspiring EU members: Albania, Bosnia and
Herzegovina, Bulgaria, Croatia, Estonia, the Former Yugoslav Republic of Macedonia, Hungary, Latvia, Lithuania,
Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia
and Turkey.
Large economies: Azerbaijan, Belarus, Kazakhstan, the
Russian Federation and Ukraine; and
Small, relatively poor economies with a large commodity
sector: Armenia, Georgia, Kyrgyzstan, Mongolia, Republic of Moldova, Tajikistan, Turkmenistan and Uzbekistan.

17

commodity exchanges and WHR systems. It

parts of the world like Brazil and Colombia, and

describes the current situation with respect to

discusses lessons that can be learned from other

both, and suggests possible ways to enhance

regions in terms of replicating experiences within

their roles in the region, including making

the transition region. The annexes contain longer

greater use of technology such as EWR systems

case studies.

and regional exchange initiatives, and by

boosting certain new approaches like collateral

The concluding chapter summarizes programmes

management.

and projects that EBRD and, by inference,

other international financial institutions, may

Chapter 4 describes how various financing

wish to consider in order to improve the use of

approaches and instruments have been used in

new agricultural finance and risk management

transition economies to bring loans to the agri-

products. It is hoped that these conclusions and

value chain, with a particular focus on the past

the preceding discussions will also be useful for

and potential role of international organizations.

national governments and the private sector.

Annex 14 illustrates, using the example of

18

Armenia, the broad range of international support

The annexes provide tables illustrating the

to agricultural finance. The chapter starts with a

volatility of production and prices in the region, an

discussion of the various international support

overview of the commodity exchanges operating

programmes to enhance the agricultural lending

in the region, discussions on some of the

capacity of local banks. It then discusses

technical aspects of WHR finance and structured

possibilities and experience with pre-harvest

commodity finance and a series of case studies,

finance, including leasing, and post-harvest

including experiences with innovative finance in

finance. It also summarizes experiences in other

other parts of the world.

Innovative agricultural finance and risk management

Chapter 1: How innovation in agricultural finance and risk

management can enhance food production, processing
and trade in the transition region
1.1 Agriculture in transition
economies a brief overview

households. In other countries, the Soviet model

prevailed: most land was cultivated collectively,
on cooperative and state farms measuring

There is a broad span of agricultural sector

thousands of hectares. Only a small percentage

structures in transition countries. Table 1 gives

of the land was cultivated by individual

an overview of countries population levels, the

households, who nevertheless supplied up to one

prevalence of poverty, per capita GDP, and the

fifth of total food production. Marketing channels

percentage of the labor force active in agriculture

and prices for both inputs and crops were

as compared to the share of agriculture in GDP.

controlled by the state. Agricultural credits were

To facilitate discussion, in several sections of this

channelled through administrative instructions,

paper transition countries are grouped into three

and the under-pricing of inputs was often the

broad categories:

vehicle for considerable government subsidies.

Group A: current and aspiring EU members;

In the countries where the Soviet model had

Group B: large economies of the CIS; and

a longer-lasting impact, the dismantling of

Group C: small, relatively poor economies with a

state controls and liberalization of input supply,

large commodity sector.

marketing and credit provision seriously disrupted

agriculture. The general response was two-

1.1.1 Farm structures in current and aspiring

pronged. On the private sector side, agricultural

EU members

processors and, to some extent, trading

The group of current and aspiring EU members

companies often stepped into the shoes of the

is fairly diverse, generally with a high per capita

former government agencies, providing inputs to

GDP and a diversified economy. Some of the

farmers on credit and buying their crops; foreign

countries of the former Yugoslavia, which have

investments in agriculture and agro-processing

been ravaged by war, are an exception. The

facilitated this process. On the government side,

agriculture and finance sectors of many of these

a radical reorganization of agriculture was initiated,

countries have already become integrated with

with land divided among individual households

those of the EU, and others will follow.

both farm workers and former land owners who

received restitution or compensation for earlier

The structure of the agricultural sector in most

nationalization. Some of the new owners became

of these countries has gone through a major

smallholder farmers as in Latvia and Lithuania, but

change over the past two decades. As of the

others in the Czech Republic, Slovakia, Estonia

early 1990s, only in Poland, Turkey and the former

and, to a lesser extent, Bulgaria and Hungary, soon

Yugoslavia was farming centred around individual

started renting out their land to

Table 1
Countries with economies in transition some key data
Country

Population
(million, July
2011 est.)

% of population
GDP/capita
below poverty (USD purchasing
line (2008 or
power parity
latest year)
(PPP), 2010 est.)

Share of
agriculture in
GDP (%)

% of labor force
in agriculture

Group A
Albania

3.0

12.5

8 000

18.9

47.8

Bosnia and
Herzegovina

4.6

18.6

6 600

6.5

20.5

19

Country

Population
(million, July
2011 est.)

% of population
GDP/capita
below poverty (USD purchasing
line (2008 or
power parity
latest year)
(PPP), 2010 est.)

Share of
agriculture in
GDP (%)

% of labor force
in agriculture

Bulgaria

7.1

21.8

13 500

7.1

Croatia

4.5

17.0

17 400

6.8

5.0

Estonia

1.3

19.7

19 100

2.5

2.8

Hungary

10.0

13.9

19 000

3.3

4.7

Latvia

2.2

N.A.

14 700

4.2

12.1

Lithuania

3.5

4.0

16 000

4.3

14.0

FYR Macedonia

2.1

28.7

9 400

8.7

19.9

Montenegro

0.7

7.0

10 100

NA

2.0

Poland

38.4

17.0

18 800

4.0

17.4

Romania

21.9

25.0

11 600

12.8

29.7

Serbia

7.3

8.8

10 900

12.6

23.9

Slovakia

5.5

21.0

22 000

2.7

3.5

Slovenia

2.0

12.3

28 200

2.4

2.2

Turkey

78.8

17.1

12 300

8.8

29.5

Group B
Azerbaijan

8.4

11.0

10 900

5.5

38.3

Republic of
Belarus

9.6

27.1

13 600

9.0

14

Kazakhstan

15.5

8.2

12 700

5.4

28.2

Russian
Federation

138.7

13.1

15 900

4.2

10

Ukraine

45.1

35.0

6 700

9.8

35

Armenia

3.0

26.5

5 700

22

46.2

Georgia

4.6

31

4 900

11

55.6

Group C

Kyrgyzstan

5.6

40

2 200

24.6

48.0

Mongolia

3.1

36.1

3 600

15

34

Republic of
Moldova

4.3

26.3

2 500

16.3

40.6

Tajikistan

7.6

53

2 000

19.2

49.8

Turkmenistan

5.0

30

7 500

10.2

48.2

Uzbekistan

28.1

26

3 100

21.2

44.0

Source: CIA World Factbook, 2011

large-scale cooperative or corporate farms. In all

Romania and Slovenia, small farms control more

of these countries, many cooperative and state

than half of farmland; in Poland, this number is

farms were not disbanded, but reformed into

48 percent. With an economic size of less than

corporate farms.

EUR 9 600 and with no or only a small surplus

available for sale, these farms can be considered

Table 2 gives an overview of the farm structure

smallholder or semi-subsistence farms.

that has resulted in the respective countries. In

20

Bulgaria and Slovakia, a small number of large

Farms with an economic size (i.e. estimated

farms, with an economic size of more than EUR

gross margin) of less than one European size

120 000, control more than half of total farmland,

unit (ESU) are often not classified as farms

and Hungary and Estonia follow not far behind.

at all, rather, they are plots of land farmed

Farms in these countries can be considered

by households as a secondary activity. If

corporate farms. In contrast, in Latvia, Lithuania,

one excludes these microfarms and only

Innovative agricultural finance and risk management

considers farming households with an ESU of

and many of the collective and state farms were

more than one, then it is worth noting that in all

reorganized. The ownership of the land was

of these countries, the vast majority of farms

transferred to workers and pensioners, but the

(the lowest number is 78 percent, in Poland),

farms continued to be operated as a whole.3

have an economic size of less than EUR 9 600.

But the process of reform was not smooth. As

Most of these farms mainly produce for self-

in other former Soviet Union (FSU) countries,

consumption. Mid-sized farms, many of which

many agricultural subsidies disappeared and input

are commercially-oriented family farms, account

prices increased sharply. Many farms became

for 1521 percent of the total number of farms

unprofitable, millions of hectares were taken out of

in Estonia, Hungary, Poland, Slovenia and the

cultivation, and production fell precipitously during

Slovakia, but are generally less than 10 percent in

the 1990s. However, yields and acreage expanded

the other countries.

again in the 2000s. Combined with a large fall in

local livestock production, and hence much less

1.1.2 Farm structures in large economies

use of locally produced grains and oilseeds for

Azerbaijan, Belarus, Kazakhstan, the Russian

cattle feeding, the result was that Kazakhstan, the

Federation and Ukraine are geographically large

Russian Federation and Ukraine emerged as major

countries, with relatively high per capita GDP;

grain and oilseeds exporters.

(Ukraine has the lowest, at USD 6 700). These

countries have an agriculture sector that may still

The details of the process of land reform differs

employ a large part of the population, but that has

between countries. In Azerbaijan, most state-

become small in terms of its contribution to GDP.

owned land was distributed for free or at very

small cost to rural residents, including farm

In Soviet times, farming in these countries was

members, resulting in a smallholder farming

dominated by large collective and state farms.

structure.4 In Belarus very little changed, except

These coexisted with small household plots (of

that collective farms were converted into

about 0.4 ha) which were largely subsistence-

corporate entities. In Kazakhstan, the Russian

oriented, and specialized in vegetables, fruits and

Federation and Ukraine, starting in the late 1990s,

livestock. In the process of land reform of the

huge farming enterprises were created, at times

1990s, the household plots were made much

larger by land allocations from the state, new

3
4

commercially-oriented family farms were created

Lerman and Sedik, 2009a.

Giovarelli and Bledsoe, 2001.

Table 2
Farm structure in Eastern Europe, 2007
< 1 ESU

1-2 ESU

2-8 ESU

8-100 ESU

>100 ESU

Farms
(%)

Area
(%)

Farms
(%)

Area
(%)

Farms
(%)

Area
(%)

Farms
(%)

Area
(%)

Farms
(%)

Area
(%)

Bulgaria

76

13

28

0.3

55

Estonia

46

23

21

14

35

1.4

38

Latvia

59

21

20

11

16

21

30

0.3

16

Lithuania

63

21

20

11

13

21

30

0.2

18

Hungary

77

11

37

0.4

45

Poland

53

10

15

10

22

28

10

39

0.2

12

Romania

78

31

16

18

13

21

0.0

17

Slovenia

18

16

25

41

38

15

39

0.3

Slovakia

77

12

21

1.4

71

Source: Author, calculated from the statistical data extracted from www.eurostat.org. European size unit (ESU), is
a standard gross margin of EUR 1 200 that is used to express the economic size of an agricultural holding or farm.
For each activity or enterprise on a farm, the standard gross margin (SGM) is estimated based on the area used
for the particular activity (or the number of heads of livestock) and a regional coefficient. The sum of all such margins
derived from activities on a particular farm is its economic size, which is then expressed in European size units (by
dividing the total SGM in EUR 1 200, thus converting it to ESU).

21

owned or operated by international firms or

off.8 Land shares9 were distributed among the

funds (see next section). Ukraine was the only

workers, who sold their shares or converted them

country among the three where a fairly large

into shares in corporate farms.10 In the 2000s,

smallholder sector emerged. For example, in

large investment groups became active, buying

2010 there were 2 984 operators farming at least

stakes in such corporations and integrating them

2 000 ha; the 85 largest among them operated

into large agro-holdings with tens of thousands

more than 6 million ha of land; the 30 largest, 4.7

or even hundreds of thousands of hectares under

million ha (13.6 percent of total cultivated land).

their control. Agro-holdings consist of a mother

In the Russian Federation in 2010, 80 percent of

enterprise responsible for planning and financial

farmland was controlled by large corporations;

management, and for recruiting the managers of

the 30 largest holdings controlled 6.7 million

the subsidiary farming enterprises. While family

ha, or 5.5 percent of the total surface under

farms were created, these remained of little

cultivation. Several very large agro-processing and

importance, accounting for only four percent

trading enterprises have emerged over the past

of arable land; household plots accounted for

decade.6 In Kazakhstans southern cotton-growing

another nine percent.11

region, smallholder growers took the place of

the former large collective and state farms; but

In Ukraine, collective farms were divided into

in the northern wheat-growing regions, massive

small plots and distributed to the collectives

agri-business groups were created, the largest

members, state farm workers and pensioners.

of which, the Ivolga Holding, came to control

Some 6.5 million people received land shares.

800 000 ha in Kazakhstan and 700 000 ha in the

They generally leased their plots to companies,

Russian Federation.

often created by the collective/state farms

managers, with local or international financial

These large corporate farms came into being

backing that had access to input finance, farm

in different ways. In Kazakhstan, land was

equipment, and processing, transport and storage

privatized, with the rural population receiving land

infrastructure.

certificates. But many of them quickly gave up

these certificates, sometimes under coercion

1.1.3 Farm structures in poor, agriculture-

and at very low prices, allowing the more savvy

dependent transition countries

managers of farm enterprises to build up large

This third group is comprised of relatively small

land banks with support from urban investors.

low-income countries. Except for Mongolia, all are

members of the FSU where agriculture played

In the Russian Federation, the government

and continues to play a major role. In this group,

wished to minimize rural unemployment by

per capita GDP tends to be below USD 6 000,

protecting the former state and collective farms,

with the exception of Turkmenistan, where

stimulating them to create corporate structures

natural gas exports boost average income levels.

and providing them with large loans at soft

Population size is generally less than 7.5 million

conditions. These loans, too, were often written

people with the exception of Uzbekistan, with a

population of 22 million people. A large part of
the population of these countries is employed
in agriculture. Poverty is widespread, as Table 1

5 World Bank, 2011.

6 Some of these have become multinational enterprises.
For example, the Sodrugestvo Group, established in 1994, is
Europes largest independent soyabean crusher, with operations
in the Russian Federation, Ukraine and several other countries.
To secure its supplies it has become a large operator in Brazil,
acquiring Liders Armazens Gerais S.A. in August 2011, the
largest Brazilian private company engaged in the storage and
transshipment of grains.
7 But Ivolga may well be broken up, as unhedged price exposure in 2008 and 2009 caused it major losses: the company
bought fertilizers when the market was at its height in 2008,
and then sold its wheat after the price collapse of 2009, leading
to its default on a USD 300 million loan (Richard Orange, Ivolga
puts worlds biggest farm up for sale, The Telegraph, 13 February
2011).

22

8 But this assistance was not always enough. The Russian

Federation energy firms, for example, became large farm owners in the 1990s because farms were unable to pay their energy
bills.
9
Land shares were not necessarily associated with specific
plots. The distribution of a farmland over hundreds of land shareholders by the demarcation of individual plots has often been
difficult.
10 At times, these sales occurred under pressure from local
authorities and others. For example, in the Krasnodar region,
authorities imposed a rule that farmers needed to have at least
300 ha before they were permitted to start a farm, forcing
individual land owners to either sell or group their land shares
(Visser and Spoor, 2011).
11 Osborne and Trueblood, 2002.

Innovative agricultural finance and risk management

indicates. Every country in this group has at least

In Tajikistan, the process of land reform was delayed

26 percent of its population below the poverty

by its civil war, but the end result in the late 1990s

line. Another indication is the high percentage

was a farm sector in which, at least on paper, new

of household expenditures on food: almost 80

peasant farms controlled most of the land. The

percent in Tajikistan and Uzbekistan, and 58

remainder was distributed between corporate farms

percent in Kyrgyzstan.

12

Rainfall is often scarce.

and household plots that already existed in the old

For example, more than 80 percent of arable

Soviet Union, and which continued supplying the

land in Kyrgyzstan, Tajikistan, Turkmenistan, and

major part of marketable surplus. However, at least

Uzbekistan is irrigated, and in Mongolia livestock

one third of Tajikistans peasant farms in practice

farming is the predominant form of agriculture.

are not individually farmed; rather, they are part of

The countries in this group tend to be cereal

collective partnership or dekhan farms which, in

importers, with all of the Central Asian countries

many ways, are the old collective farms cosmetically

buying from Kazakhstan.

reorganized.17

The approach of the CIS countries to farm sector

Other countries reformed farm structures with

restructuring varied from country to country.

a shift from state and collective farms to private

The majority saw large-scale liberalization and

family farms,18 but retained a strong measure of

a radical restructuring of land ownership, with

government control, in particular on the growing

smallholder subsistence and semi-subsistence

and trade of export crops. The centrally planned

family farms becoming the norm. In Armenia

mechanism remained nearly unchanged in

in 1991, the land of its 840 state and collective

four major sectors of Turkmenistan agriculture:

farms was distributed to rural residents; 88

the so-called strategic crops of grain, cotton,

percent of the 282 000 new family farms had a

rice and sugar beet. Nearly all the tools of the

size of less than two ha, and the remaining 12

Soviet economy have survived in these sectors:

percent was not much larger, together accounting

mandatory output targets, prices fixed by the

for only 23 percent of arable land.

13

Georgia did

State, State input supply at privileged (subsidized)

the same with most of its state land, but kept

prices, and privileged credit.19 The same can be

more than a quarter for lease to larger, market-

said about Uzbekistan where state control over

focused farming companies. With an average of

prices and exports is used to extract significant

18 ha, these are still much smaller than the farm

rents for the government.

companies of Soviet times.14 In the Republic

of Moldova, a comprehensive agricultural debt
restructuring programme also led to a large
number of individual farms, although as in other

1.2 The rise of international farm

investment in transition economies

countries, many of the new farm owners leased

their land back to their former collective farm

The restructuring of the agricultural sector

managers. In Kyrgyzstan, from 1995 to 2000,

in transition economies opened enormous

500 state and collective farms (averaging over

opportunities. Kazakhstan, the Russian Federation

2 500 ha) were split into more than 60 000

and Ukraine became the next frontier in terms

individual farms. Mongolia, where 68 percent

of their untapped potential for food production.

of livestock was cooperative- and state-owned

Fertile land that had been allowed to fall fallow

in 1990, started privatization of its herds in 1992;

and could be returned to productive use, yields

and by 1999, 96 percent of livestock was owned

on existing farms could be raised through

by herder households. The few remaining state

improved management and basic infrastructure

farms as well as agro-processors were also

such as elevators and internal transport systems

privatized during this period.

was in place. The infrastructure for large-scale

15

16

exports was weak, however, as these countries

12 Sedik et al., 2011.
13 Urutyan et al., 2006.
14 Giovarelli and Bledsoe, 2001.
15 Anderson and Swinnen, 2008.
16 Shagdar, 2002. The state farms were reorganized into
around 100 private farms of 50 to 60 ha each, mostly growing
vegetables.

were not traditionally exporting to the world

17 Lerman and Sedik, 2009b.
18 With Turkmenistan forming an exception to the normal
pattern of land privatization: instead, land was given in long-term
leasehold to individual farmers (Lerman and Sedik, 2009a).
19 Serova and Prikhodo, 2010.

23

market. In other transition countries, enough

it out, benefitting from lease income as well as

leeway was generally left for large-scale farming,

from an appreciation in land value. To quote from

but local operators remained hampered by credit

the brochure of a fund that uses this model:

constraints and lack of expertise in commercial

BPT Farmland is offering an opportunity to

farming.

invest in a unique real estate product: Farmland

and related operational buildings in the new EU

These opportunities did not go unnoticed by large

countries (80 percent), as well as in Russia and

international investors. The recent upswing in

Ukraine. By using a structure which is separating

food prices has only added to the attraction of

land ownership from farming operations the risk

the sector. Climate change, which will open up

management and transparency is significantly

large new areas of land in the Russian Federation

improved compared to traditional agricultural

and Ukraine for grain farming, is also providing

investments. BPT Farmland combines a potential

a further boost. Many large European agro-

upside of an agricultural investment with the risk

industrial firms expanded into Eastern Europe,

profile and transparency that are known from

rapidly taking over much of the sugar sector.

more traditional real estate investments.22

Individual farmers from countries like France,

Germany, Italy, The Netherlands and the United

Second, one can lease the land from a third

Kingdom also bought farms in Eastern Europe.

party and farm it, which implies exposure to both

Chinese firms started investing in farming in

production and price risks. The investors will

Kazakhstan and Siberia. Also, in the second

generally invest heavily in farming equipment

half of the 2000s, many funds were set up to

and infrastructure. Investors can be individual

channel investor appetite for farming in transition

or in partnership with local agricultural firms. In

countries, and a number of existing investors,

Ukraine, for example, foreign companies can only

including sovereign funds, have added the sector

lease land as there is a moratorium on land sales.

to their asset allocation.20 After the 20072008

The lease contracts extend only for relatively

global food price hike, Middle Eastern investors

short terms of from five to 25 years. Contracts

have also become active. These funds have been

are legally weak, since there is little possibility for

investing primarily in productive agricultural land

legal recourse if a local farmer decides to break

in Eastern Europe, Kazakhstan, the Russian

the lease contract. So, in order to create the

Federation and Ukraine. The other CIS countries

large-scale farming operations that are essential

have been ignored to date.21

for efficient farming, it is necessary to sign lease

agreements with many small local owners and

Similar to the practices in the international

maintain good relations with them.23 In such

hotel industry, there are three main investment

conditions, a partnership with a local entity can

models. First, one can buy the land and lease

be highly beneficial. Faced with these constraints,

many investment funds have preferred to buy into

20 See Gaia Capital Advisors, 2008. Among other examples,

the Libyan government had secured 250 000 ha of farmland
in Ukraine in a countertrade deal (against oil supply); Morgan
Stanley acquired leases for 40 000 ha of Ukrainian farmland,
but its results were disappointing and it sold its land bank again
in 2009; Renaissance Capital, from the Russian Federation,
has acquired leases for 300 000 ha which it scaled back to 60
000 to 70 000 ha after the 2008 financial crisis; Black Earth
Farming, from Sweden, has acquired 333 000 ha of farmland
in the Russian Federation, and Alpcot-Agro, also from Sweden,
has acquired 128 000 ha there; Landkom, from the UK, has
acquired leases on 74 000 ha in Ukraine. Typically, each hectare
would involve USD 1 000 to USD 2 000 in investments. Another
example is Trigo Agri, from Denmark, which has invested in 144
000 ha in Estonia, the Russian Federation and Ukraine. For a
broader overview of international investments in agricultural
assets in emerging countries see GRAIN, Seized the 2008
landgrab for food and financial security, Grain Briefing, October
2008, with an updated October 2009 table in http://www.grain.
org/m/?id=266. Visser and Spoor, 2011, analyse the developments in Kazakhstan, the Russian Federation and Ukraine. For
details on some of the funds, see Luyt, 2010.
21 Some investments have been discussed, for example in
wheat production in Uzbekistan and the Republic of Moldova,
and maize production/sheep rearing in Georgia (Visser and
Spoor, 2011).

24

existing local farm management companies.

Third, one can buy the land and farm it. This
practice is common for investment funds and
farm management companies that are active in
countries with a proper land market and clear
ownership rights, including many of the transition
countries that have since become EU members or
are aspiring to do so. In the Russian Federation, it
is also possible for foreign funds to buy land.
22 http://www.balticpropertytrust.com. In the case of this
particular fund, BPT Farmland owns the land, and leases it out
on commercial terms to a separate FMC in which it has a 40
percent stake.
23 For example, for a 3 000 ha farm, one may need to sign 1
200 lease agreements. For a discussion on foreign agricultural
investment and land leasing issues in Ukraine, see Frishberg,
2010.

Innovative agricultural finance and risk management

Original funding normally comes from investment

too much for the inputs and paid too little for the

funds and high net worth individuals. The

cotton, farming became highly unprofitable. But

investment fund or farm management company

official pressure on farmers to continue growing

(FMC) can be closed to the public at large,

cotton was such that most felt they had no choice

or can be listed on an exchange. Some farm

and had to continue supplying the crop, even at a

management companies, which have grown out

loss. The result, from 2007 to 2008, was a highly

of transition country farm ventures, are listed

indebted farm sector and massive loan defaults.

on the Warsaw Stock Exchange. At least one

24

fund,25 structured as a real estate investment

Nevertheless, in most countries largely effective

trust, is listed on the Bulgarian Stock Exchange,

approaches with respect to input finance were

and another26 is listed on the Moscow Interbank

established over the years. One approach,

Currency Exchange (MICEX). Several funds are

common in Kazakhstan, the Russian Federation

listed on western exchanges such as NASDAQ/

and Ukraine, sidesteps the problem of having to

OMX or LSE/AIM. The experience of funds has

deal with a large number of individual producers:

so far not been as expected. Reportedly, most

large investment groups bought or leased the

funds now trade below the original investment

land of thousands of farmers to create large-scale

value.27 The main reasons are that the anticipated

production units.

productivity gains have been largely elusive, and

working capital requirements are much higher

A second approach is to re-establish input supply

than anticipated.

and marketing systems for small growers by

strengthening producer associations. International
donor agencies often took the lead in such

1.3 Input finance in a liberalized

environment

projects. One example is the Tajik Agricultural

Finance Framework (TAFF), a USD 35 million
loan facility accompanied by a EUR 2.3 million

State-owned companies used to supply heavily

technical assistance programme financed primarily

subsidized inputs on credit to state and collective

by the EBRD and started in 2007 to replace the

farms. This system broke down in the early

futurist approach described above. TAFF aimed

1990s. New systems replaced it, but not always

to allow cotton farmers to borrow from local

successfully. For example, in Tajikistan in 1998

banks with funds provided by the EBRD rather

a Presidential Decree established that cotton

than rely on loans-in-kind from the futurists.

farmers, a state bank, Agroinvestbank, and private

In a first phase, banks provide loans to farmers,

investors called futurists were to sign tripartite

and the offtakers or ginners guarantee farmers

contracts for working capital finance. The futurists

obligations. Farmers remain tied to the ginneries

were to supply inputs, and to be paid in a certain

through offtake contracts.28 In later phases,

amount of cotton. Agroinvestbank was to supply

farmers are granted greater freedom to choose

the funds for the purchase of the inputs and

their buyers while ginneries continue to play a role

secure reimbursement through a monopoly right

in credit recovery and receive funding from EBRD

on farmers cotton sales. This system became

to provide technical assistance to farmers. This

the primary one for input finance for Tajik cotton

experiment is an interesting one. However, the

farmers; over 80 percent of them procured inputs

project did not succeed in dispelling the negative

from the futurists. However, the results were

image of agricultural lending shared by all Tajik

dismal. Perhaps because farmers were charged

banks.29 The project approach remained fairly

traditional, with a focus on individual loans and

24 In particular, Astarta-Kyiv, which has its parent company in

The Netherlands, and all its productive assets accounting for
some 15 percent of the countrys sugar production in Ukraine;
and the Kernel Group of Companies, Ukraines largest vertically
integrated agro-industrial firm, with a prominent position in the
sunflower oil market.
25 Advance Terrafund REIT, the largest owner of agricultural
land in Bulgaria after the Bulgarian State. It leases out its land to
farm companies. IFC is one of its shareholders.
26 The Razgulyay Group, active in wheat, maize, rice, sugar
and poultry.
27 Luyt, 2010.

group lending; value chain finance was just a small

component. The projects chance of success would
improve, if lessons from international experience
on structured cotton value chain finance were
incorporated. See Annex 9 for an example.

28 Cordonnier and Wendel, 2008.

29 See EBRD,2010.

25

A third approach ensures that input and other

In a final approach, many of the countries that

working capital finance are incorporated

joined the EU created successful market-oriented

into value chain structures, such as contract

farms. Local banks, which were acquired by

farming operations or, somewhat more loosely,

European banks in many cases, developed the

financing/offtake contracts with processors. In

skills (or believed they did, for experience shows

the countries where this approach has been

they were sometimes wrong), to finance these

used30 -- and examples can be found in most

farms on a corporate basis for both pre- and post-

countries -- the actual degree of structuring and

harvest needs.

31

risk management tended to remain limited, and

there was a strong reliance on the relationship

Two forms of input financing structures have

between the offtaker (e.g. the food processor)

been used in other parts of the world, but not

and individual farmers. For example, oilseeds and

yet in transition countries even though a priori

grains processors in several countries directly

they would seem of interest. First, there is

paid for fertilizers and other inputs used by

secured distribution. This structure can be used

farmers. In some cases, they paid with funding

for imported inputs, to bring cheap international

from banks. Dairy companies pre-financed feed

credit lines as close as possible to the buyer of

supply and provided loans for milking equipment.

the inputs, reducing the financing burden and

the overall input costs. The international financier,

The following accounts are a few examples

which could be a bank or a supplier, outsources

of how financing/offtake contracts have been

his risks to a credit support agency, which

used in transition countries. In Ukraine, a US

retains control over the commodities until they

farm equipment manufacturer teamed up with

are paid for. In transition countries with a good

local distributors to sell combines and tractors.

legal and regulatory environment and readily

To ensure payment, the equipment dealer was

enforceable contracts, secured distribution is

given the rights to a certain pre-stipulated area,

easy to implement, particularly if one can benefit

and the rights to harvest, transport, store and

from EBRDs counter-guarantee on a local bank

sell the grain. Slovakias largest sugar processor

guarantee on this type of finance under the

guaranteed payments for farm input purchases,

EBRDs Global Trade Facilitation Programme.34

and also provided payment guarantees for

A sound secured distribution scheme may still

other loans to farmers.

32

In Kazakhstan, a food

be possible if these guarantees do not exist, but

processor, Foodmaster, has provided pedigree

implementation will then be more complex and

cows to its best suppliers to be reimbursed

more expensive, requiring shorter transaction

through deliveries of milk. Also in Kazakhstan,

cycles.

after the land reform in the first half of the 1990s,

many independent small-scale cotton farms were

Another input financing structure that has not yet

created. In order to obtain pre-harvest finance,

been used is a full credit wrap on the value chain.

including in the form of seeds, fertilizers, fuels

From input provision to sale of the final products,

and water for irrigation, these farmers entered

into contracts with cotton ginneries, to sell their
product at a price linked to world cotton prices.33
Cotton ginneries in Kyrgyzstan entered into
similar agreements with local growers.

30 See for case studies Swinnen (ed.), 2007

31 See for case studies Swinnen (ed.), 2007
32 Examples taken from Swinnen and Gow, 2001.
33 Anderson and Swinnen, 2008. Apart from farmers selling
to cotton ginneries, one also finds in Kazakhstan many cases
of farmers toll-processing their seed cotton with ginneries, and
then selling the product (bales of raw cotton and cottonseed) to
textile companies or traders. Under this arrangement, ginneries
receive a processing fee. Farmers security interest is protected
through trust receipts (a form of WHR); the ginneries contribute
to a guarantee fund from which farmers can be indemnified in
case a ginnery does not release the processed raw cotton back
to them.

26

34 The Programme provides different ways to give such

guarantee on a range of trade finance instruments. For example,
for an export transaction from Tajikistan to France, the exporter
may request the importer to make an advance payment. In
order to manage counterpart risk, the importer wishes that this
advance payment is covered by a standby letter of credit (L/C).
The exporter can ask his local bank to open a standby L/C. But
a L/C from a Tajik bank may not be acceptable for the importer:
he may require this L/C to be confirmed (guaranteed) by his
local bank, or a reputable international bank. It is not certain
that a French bank can be found that is willing to confirm the
Tajik banks L/C: banks tend to have tight country credit limits.
This is an example of where the EBRD can come in. If the Tajik
bank has been approved as a partner by EBRD, it can ask EBRD
to open a standby L/C for an agreed percentage (up to 100 percent) of the advance payment in the favour of the French bank.
With this additional guarantee, the French bank may be willing
to accept the Tajik banks L/C, and confirm it. The importer now
is protected by his local bank (the importer can call on the L/C if
the exporter fails to deliver), and can, therefore, safely make the
advance payment, which is routed through his bank and the Tajik
bank to the exporter. For an overview of the programme see
http://www.ebrd.com/pages/workingwithus/trade.shtml.

Innovative agricultural finance and risk management

the transaction is wrapped by a credit support

pesticides, herbicides, etc. to a third party.

agency which could be a collateral management

A baseline is established for the production

agency, or a FMC. This financing structure has

outcome that would likely result if the farmer

been used to revive Cte dIvoires cotton sector

were to continue his usual cultivation practices,

after its civil war (view Annex 9). It could be

and any surplus is divided between the farmer

equally helpful to revive agricultural sectors in

and the production quality assurance company.

transition economies where traditional input and

The latter probably has to use weather insurance

marketing arrangements were disrupted by the

to cover against the risk of production shortfalls

collapse of the planned economy or civil strife.

related to weather events.

It is particularly useful in situations where one

has to retain and support a large smallholder

Except for the last approach, several of the

agricultural sector, and to build new supply chains

structures described above are widespread, but

linking smallholders to new markets, whether

they have not by any means become pervasive.

urban or international.

There is still much scope for regional and sector

growth, and for incorporation of pre-harvest

One further approach that could be considered

financing techniques that can build on the existing

is to structure input supply as the provision

experiences. This option is further discussed in

of a service rather than of a product. The

chapter 4.

farmer outsources the application of fertilizers,

27

Chapter 2: Reducing the vulnerability of food producers to

weather and market risk
2.1 Risks in the agricultural sector in
transition countries

are overly seasonal, dropping after harvest and

rising toward the end of the marketing season.
The large difference between post-harvest price

Farmers, processors and traders in transition

and the price a few months later is the result of

countries are exposed to the same kinds of risks

information asymmetries, a lack of financial risk

that are prevalent in agriculture everywhere,

mitigation instruments and the high cost of farm

in particular weather risks, price risks (both for

financing coupled with limited on-farm storage

inputs and crops), political risks and risks related

capacities.36

to poor support infrastructure. When farmers

are exposed to such risks, they may still choose

Illustrations of weather risk, its impact on

likely gains over insurance, and hence reduced

production, and price risks are given in Figures

risk. This could be the case because insurance

1 and 2. Variability of production is, of course,

products may be expensive or do not cover

large in countries with marginal wheat production

specific losses. However, if a risk event occurs in

like Georgia and Mongolia, but even countries

absence of insurance, not only current but also

with high production, like Lithuania and Romania,

expected incomes will be put at risk.

show very high production variability. Production

for other major crops is similarly volatile (see

Weather risk is of major importance for farmers

Annex 1), as are farmgate prices (see Annex 2).

as well as those who depend on their output;

hence, not only farmers but also processors and

It should be noted that there are two major

logistics companies may find it useful to manage

aspects to volatility: first, its ex-post effect on

this risk.35 It should be noted though that the

earnings; and second, its ex-ante effect on

Russian Federation and Ukraine are better off

decision-making. In an environment of volatile,

than other countries as climate change will move

unpredictable and, in the absence of local

farmable zones northward. While more of their

commodity exchanges, largely unmanageable

territory will become suitable to crop farming,

prices, a risk-averse producer would want to

their production will likely become more volatile

reduce his exposure through strategies such as

because of more frequent heat waves.

crop diversification and reduction of input usage.

Other than crop insurance, instruments to

Otherwise, as the worlds largest farm company,

manage this weather risk are rarely available. The

Kazakhstans Ivolga group, has discovered, a

situation with respect to price risk is not much

combination of high input prices at the time of

better. Except for transition countries that have

cultivation and low crop prices at harvest can lead

entered the European Commission (EC) and can

a company into bankruptcy (see footnote 7).

benefit from the minimum price support provided

under the Common Agricultural Polic (CAP) y,
there are no effective programmes to shield
farmers from price risks either on the input or
the output side. Furthermore, if world prices rise,
governments may decide to stop exports in order
to keep consumer prices low.
Poor support systems add to both risks and
volatility. For example, in Ukraine grain prices
35 See http://www.casact.org/education/oncourses/ermlecture10-UGG-early.pdf for an example of how a Canadian
cooperative, United Grain Growers, used weather derivatives
to manage its exposure to throughput risk, i.e. the risk that
because of lower production, its logistics infrastructure would
remain underutilized.

28

36 FAO/EBRD, 2010.

Innovative agricultural finance and risk management

Figure 1:
Variability of wheat production around the five-year average, 20052009
(lowest and highest years as percentage of average)
250%
200%
150%
100%
50%

Ukraine

Uzbekistan

Turkey

Turkmenistan

Macedonia

Slovenia

Tajikistan

Serbia

Slovakia

Russia

Moldova

Romania

Poland

Mongolia

Montenegro

Latvia

Lithuania

Kyrgyzstan

Hungary

Kazakhstan

Estonia

Georgia

Croatia

Bosnia

Bulgaria

Belarus

Azerbaijan

Albania

Armenia

0%

Source: Calculated using the FAO Statistics Database. See Annex 1 for data.

Figure 2
Farmgate wheat prices in Azerbaijan, Belarus, Kazakhstan,
the Russian Federation and Ukraine 20002009, USD/tonne
300

250

200

Azerbaijan
Belarus
Kazakhstan

150

Russia
Ukraine

100

50
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Calculated using the FAO Statistics Database. See Annex 2 for data.

As for the relative importance of the various risks,

Figures 3 and 4 show responses to risk surveys
by large farmers who have farms covering an
area of 1 000 to 10 000 ha each, in the Russian
Federation and Ukraine.

29

Figure 3
Major risks as indicated by large farmers in the Russian Federation, 2010 (more than one answer
possible)
Extreme weather
Cost increases
Price decreases
Political risk
Other
No problems
0%

10%

20%

30%

40%

50%

60%

70%

80%

Source: Swiss Re, 2010a

Figure 4
Major risks as indicated by large farmers in Ukraine, 2010 (more than one answer possible)
Extreme weather
Cost increases
Price decreases
Political risk
Other
No problems
0%

10%

20%

Source: Swiss Re, 2010b

Out of the various risks, weather risk was

considered the most important. Farmers
mentioned a range of weather risks: drought
was the most frequently mentioned, followed
by frost, winter kill and hail. The average losses
from drought were estimated at 52 percent (the
Russian Federation) and 41 percent (Ukraine), and
the average losses from frost were estimated
at 41 percent (the Russian Federation) and 43
percent (Ukraine).37
The surveys also measured the risk management
response of these large farmers. It should be
noted that respondents were generally wellqualified and experienced 65 percent (the
Russian Federation) and 76 percent (Ukraine) had
university degrees.38

37 Swiss Re, 2010a and 2010b.

38 Swiss Re, 2010a and 2010b.

30

30%

40%

50%

60%

70%

80%

Innovative agricultural finance and risk management

Table 3
Risk management response of large farmers (acreage of 1 000 to 10 000 ha) in the Russian
Federation and Ukraine (percentage of total respondents)
Weather risk management
Russian Federation
use subsidized crop insurance:
35%
rely on government payouts
in the case of catastrophic
droughts: 28%
Ukraine
use subsidized crop insurance:
4050% for the various weather
risks.
non-subsidized crop insurance:
20%
rely on government payouts
in the case of catastrophic
droughts: 23%

Input cost risk management

Crop price risk management

government ad hoc payments:

22%
fuel price hedges: 21%
other input cost (fertilizers,
seeds) hedges: 10%

price hedges: 30%

state-set prices: 24%
rely on ad hoc government
payments: 15%

input cost hedges: 38 % (around

12% hedges diesel price risk,
which is the major input cost
risk)
rely on government help: 20%:

price hedges: 44%

rely on ad hoc government
payments: 27%

Source: Based on Swiss Re, 2010a and 2010b.

2.2 Dealing with weather risk through

index insurance

the payout to a farmer is not based on the

specific loss that the farmer may have suffered.
With such insurance, the farmer has some level

Traditional multi-peril crop insurance programmes

of protection against a weather event that occurs

provide coverage for farm-specific weather

in his region. This system may be far from perfect

risks. Despite their broad risk coverage, these

as it may have rained where the weather station

programmes have a number of weaknesses,

is located and not on the farmers fields,40 but it is

including moral hazard and adverse selection, as

cheap to administer and payments can be made

well as high transaction costs that make them

very soon after the weather event.

costly to operate. As a result, crop insurance is

mainly used in Organisation for Economic Co-

Weather risk management instruments include

operation and Development (OECD) countries

futures, options and a range of over-the-counter

and is often heavily subsidized. The Russian

products. They can provide coverage for a range

Federation, Ukraine and Kazakhstan have

of weather-related risks: rainfall, temperature,

followed this model and introduced large-scale

wind strength, cold days and number of hours of

subsidies for crop insurance.

sunlight, etc. Exchange-traded products are still

scarce. However, on the over-the-counter market,

Index-based weather insurance instruments

derivatives providing such coverage are, in effect,

provide an alternative solution at lower operating

available in developed market economies and

cost avoiding many of the transaction costs and

even in a number of developing countries such

moral hazard risks inherent in multi-peril crop

as India. In all of these cases, an index is created

insurance. 39

(e.g. number of millimeters of rainfall in location

X; average temperature during Y period) and

Such insurance makes a payout to an insured

people can take a position in this index. They can

party, e.g. farmers, when an index reaches a

enter into contracts that give a certain payout

certain level. Measured indices might include

based on the development of the index, in such

rainfall during certain days, maximum daytime

a way that the economic effect of a negative

or night time temperature or more exotic data

weather event is compensated by the payout of

such as vegetation indices generated through

the contracts. Payouts follow the development

satellite imagery. The insured event may even be

of the index. For example, if a farmer sells rainfall

based on an index that is only indirectly linked

to the weather, like a livestock mortality index
(see Annex 11 for a discussion of Mongolias
mortality index insurance). In all of these cases,
39 Varangis, 2001.

40 This basis risk is much less in the case of insurance

against catastrophic events such as droughts whose effects
tend to be uniform across a large area than for more frequent
events, e.g. rainfall that is ten percent less than normal. This
reality is among the reasons for Skees, 2008, to advocate not
to create weather index insurance for events that occur more
frequently than 1 in 6 or 1 in 7 years.

31

Figure 5
Examples of distribution mechanisms for weather insurance
Reinsurer

Reinsurer

Reinsurer

To provide coverage for the

aggregate portfolio risk

Insurer

Reinsurer

Backup for a
disaster relief fund

Government

Payment

Households

NGO

Distributors

Aid

Aid

International
NGO

Households

Bank, cooperative
processor

To provide payouts for localized

serious weather events

Insurer
Backup for a
disaster relief fund

Built into
input supply

Input provider

Insurer

Reinsurer

Households
Sale of
policies

Micro-finance
bank/rural bank

Insurer

Reinsurer

Reinsurer

Sale of policies

Insurer

Vulnerable
households

Vulnerable
households

Source: Based on Skees et al., 2007

futures, and rainfall falls below the index, he will

Input providers can, as agents for insurance

receive X amount for each milliliter that rainfall

companies, sell weather insurance through the

has been lower than expected. Presumably,

same channels they use to sell inputs. They may

he will be compensated for all or part of the

even subsidize the premium, as one company does

production loss that he suffered as a result of the

in Kenya. They can bundle it with their product, so

rainfall deficit.41

that if the crop fails because of insufficient rainfall,

the farmer gets a free new input package. NGOs

Weather index insurance does not need to

and governments can re-insure against the risk

reach individual households directly. Figure 5

of having to face extra expenditures in the case of

illustrates different mechanisms to reach the final

catastrophic weather events by buying weather

beneficiaries.

insurance (or weather derivatives). There is not one

optimal solution for all situations.

Agricultural banks, for instance:

can act as agents for insurance companies,

Weather risk management can also be relevant

selling weather insurance through its offices

for other parties in the agricultural value

and field agents;

chain, such as owners of transport or storage

can bundle weather risk management with

infrastructure whose returns depend on the

input loan packages. For example, the part

volume of throughput that passes through their

of the input price that is ultimately paid by

facilities. In countries like Australia or Canada,

farmers is a function of the weather index; the

coverage has been written for such firms.

bank claims back any missing money from an

insurance company;

For weather risk index insurance to become

can insist that borrowers take out weather

functional, the following conditions need to be

insurance with the eventual claims payable to

fulfilled:43

the bank; or

the provision of an affordable and reliable

can insure their agricultural loan portfolio

against weather-related default risk.

42

mechanism to distribute weather index

insurance over intended beneficiaries, and
to affect eventual pay-outs. There are many
possibilities, as illustrated in Figure 5. For

41 On the other hand, if rainfall is above the index, he pays

equivalent sums for every millimetre of excess.
42 BASIX, a micro-finance NGO in India, has done this. See
Scott, 2005, and Annex 12.

32

43 Skees, Goes and Sullivan, 2006.

Innovative agricultural finance and risk management

example, insurance can be sold through the

need to be authorized by the insurance

traditional insurance agent channels. It can

regulator; and the regulator needs to accept

be bought as a package by an input supply

that banks or input providers can act as

company, and bundled with the sale of input

insurance agents. Furthermore, in the absence

packages, as has been done in India and

of proper national laws and regulations, risk

Malawi. It can be bundled with agricultural

transfer to the international market may

finance, permitting a bank to waive loans in

be difficult if not impossible. The insurance

case of adverse weather events, as has been

regulator must ensure that the insurers have

done by a microfinance bank in India. It can be

sufficient capital reserves to meet potential

sold through mobile phones, with the premium

claims (with access to reinsurance for extreme

payment as well as eventual payouts going

losses). They have to ensure that insurers pay

through the mobile phone accounts, as has

out on legitimate claims. They also have to

been done in Kenya. Reliability is important

ensure that courts do not intervene in pay-

in that insurance agents have to register all

outs, forcing insurers to make pay-outs for no

insurance sales, and they should be prevented

legitimate reason;

from pocketing individual insurance payments;

the presence of a sufficiently dense network

the capacity to design a product and a delivery

mechanism that meets willingness to pay

of professionally managed weather stations.

criteria, based on how much farmers or other

Satellite images can also be used, but for

beneficiaries are able and willing to pay for

evaluating past weather events one would

specific insurance coverage. In weather

still need weather station data. These weather

insurance as in price insurance, premium rates

stations need to perform reliably and provide

in the five to 10 percent range have generally

trustworthy data;

been found to be acceptable. However,

the provision of at least two or three decades

experience in emerging markets shows that

of weather data. These data must be properly

there is much reticence to paying premiums

archived and available to insurers at a

up front. The acceptance of index insurance

reasonable cost;

is much better if it is bundled through some

the availability of sufficiently detailed

production data over a similar time span;

a clear link between a weather index and

other service, such as input or credit supply,

and if premiums are effectively pre-financed.
Furthermore, buyers need to fully understand

loss events. The weather event has to cause

what they are paying for. They have to accept

a similar pattern of losses over a relatively

that they may suffer a loss in their physical

broad geographic area. If losses in a region are

production due to a purely local event, but

mostly due to local microclimates and isolated

not receive any payout because the index

and random events, index insurance will not

was not affected. This acceptance requires

work;
the technical expertise to relate production

considerable awareness-raising efforts; and

the ability to place the risk with parties that

to specific weather events, and on this basis,

can bear it. It has to be possible to lay off

design appropriate products and price them.

risks to the international reinsurance markets.

This process can be costly and once a good

The government has to be willing to cover

product is designed, it can be easily and

parts of the risk. Negative weather events

cheaply replicated by third parties. One can

range from frequent but not very serious

therefore argue that the development of

to rare and catastrophic. Frequent-but-not-

insurance products is a public good and should

serious events should be covered by farmers

be supported by governments and donor

themselves; insurance coverage would be

agencies;

too expensive. The occasional events with

a legal and regulatory framework that permits

serious impact are the ones on which index

the offer of index insurance products.

insurance should focus. Rare, catastrophic

Insurance is a highly regulated activity in all

events are very difficult to cover in the market.

countries. To prevent legal problems, index

If an index insurer is to remain solvent, he

products, even when they are bundled into

will limit the maximum payout under his

other products or services (e.g. inputs, loans),

policy. Although there are bond structures (so-

33

called catastrophe bonds) that can serve

banks either over-collateralize (i.e. their loan

the purpose, one would generally require a

is small compared to the expected future

government backup for such catastrophic

revenue48), or they insist on borrowers taking

risks. But the point at which the government

additional insurance against yield losses.

comes in to aid its citizens has to be carefully

calibrated. One needs to avoid situations in

The insurance market in Ukraine is poorly

which the expectation of aid reduces the

developed, and banks often set up their own

demand for weather insurance.

insurance companies. Insurance tends to be of

44

the traditional type, against specific perils causing

Since the early 1990s, international insurance

damage to specific farms. The procedure tended

companies have provided weather risk index

to be accompanied by the usual problems: in

insurance to international agricultural firms

case of a claim it required farm-level inspection

active in Eastern Europe, and some structured

of the actual yield, and proof that the decline

financings in countries such as Romania have

in yield was due to the insured peril. In 2001,

effectively incorporated production insurances.

experiments with yield index insurance were

In some of the larger transition countries, local

started (i.e. farmers received a payout when

banks have been developing production risk

yields in their area fell below a certain level),

insurance instruments using captive insurance

but the experience was not wholly satisfactory.

companies. For example, in Ukraine, banks

Indemnities were paid on the basis of regional

are increasingly structuring producer finance

yield records which at times proved unreliable,49

around future harvests. These banks require

and complicated procedures meant that

their clients to show proper insurance policies

payments were usually delayed by up to six

written by a pre-approved insurer. Most of

months.

the time, banks set up their own insurance

companies. The government is supporting

In 2003, the IFC and the World Banks commodity

this stipulation by making crop insurance

risk management group started work on

compulsory, and providing subsidies to the

developing a weather index insurance contract

sector. A World Bank-supported pilot project

in Ukraine. The process proved to be difficult.

explored the possibility of providing weather

Among other things, weather data were only

index-based insurance to farmers, but this

available in hard copy, not electronically, and were

pilot was unsuccessful and was discontinued

extremely expensive up to USD 6 500 for 30

(see the next section). Overall, other than in

years of weather data per station. This value is

Eastern Europe, the coverage is still limited.

five to 10 times the normal cost of equivalent

45

data, in electronic format, in western Europe.

2.2.1 Weather index insurance in Ukraine a

There were also not enough weather stations

failed experiment

given the size of the country; the distance

46

As discussed above, Ukrainian farmers are

between stations is over 100 km. However, the

highly exposed to weather risk. In the absence

potential seemed large given that weather index

of other collateral, banks in the country often

insurance in Ukraine, once established, would be

lend against the security of expected future

much less dependent on international reinsurance

harvests,47 and, thus, are similarly exposed to

than is the case in other countries. Whereas in

both weather and price risk. For this reason,

most cases the impact of major climate events

on agriculture is homogenous across the country,
the correlation of crop yields between eastern

44 In practice, it can be difficult to decide when the government needs to start providing compensation. What are catastrophic risks as compared to risks to which farmers have voluntarily and unnecessarily exposed themselves? For example,
government guarantees should not encourage farmers to start
production in areas where rainfall is insufficient for sustainable
agriculture.
45 World Bank, 2005.
46 Largely based on Hess, 2005b and Shynkarenko, 2007.
47 This lending is done by incorporating a pledge on the future
harvest in the loan agreement. The pledge agreement describes
the type of grain that is pledged, the location of farm and its
size. It has to be notarized.

34

Ukraine and the southern region near Odessa is

48 Banks typically require 200 to 300 percent collateral,
depending on the farms credit history and the risk level. Future
crop usually serves as collateral, but collateral can also be offered in the form of livestock, farm machinery or the personal
property of the farm director. (Ukraine: agricultural overview,
http://wdc.org.ua/en/node/29). This situation was evident in the
early 2000s, when such crop pledges were, reportedly, fairly
common. In the late part of the 2000s, they seem to have
become rarer.
49 Shynkarenko, 2007.

Innovative agricultural finance and risk management

nearly zero.50 The regulator had no objection to

decision moved two weeks of heavy rainfall

introducing weather risk insurance for farmers.

into the index, with the result that no rain

After intensive consultations with farmers, local

shortfall was measured and, thus, no payout

officials and scientists, and a detailed analysis of

initiated. Had the company stayed with the

yield and weather data, a product was designed

originally agreed period, there would have

together with one of the larger insurance

been a payout as the initial critical period,

companies, Credo-Classic. Its winter wheat drought

indeed, saw insufficient rainfall. Farmers

insurance product was ready for marketing by

naturally felt short-changed and not inclined to

2005. However, only two farmers signed up. Their

recommend the programme to their peers.

experience was so poor that there was no interest in

continuing the product.

All in all, the conditions for the successful launch

of weather index insurance52 were not fulfilled in

Many reasons contributed to this failure:51

Ukraine in 2005:

Subsidized risk-management options should

To gather widespread acceptance, products

not crowd out market-driven products. With

should catalyse access to credit and other

a 50 percent subsidy for the competing

financial services, technology or new markets,

products, this condition was clearly not met.

and they should help generate significant

While other crop insurance contracts benefit

additional income. There was no such catalytic

from a 50 percent government subsidy, no such

effect in Ukraine, nor were any products or

subsidy existed for weather index insurance.

services designed to bring about such an

Whatever the relative merits of index insurance,

effect.

the subsidy served to make traditional crop

Products must be affordable and cover the

insurance more attractive. This fact also

most relevant risks with minimal basis risk.

discouraged insurance companies interest in

They did not, as the rules of the game were

investing time and effort to understand and

changed once the farmers started winning.

market the index instruments.

Ad hoc disaster assistance to farmers in 2003

There must be opportunities to finance the

premium through contractual arrangements

and 2004 by the Government of Ukraine

with input suppliers or bank finance. No such

lowered incentives for farmers to pay for

arrangements were put in place.

commercial insurance premiums.

The insurance regulator only allowed use of

There should be an effective legal and regulatory

system to enforce contracts and supervise

index insurance by farmers: input suppliers,

insurance. With the absence of these systems,

processors and banks were not permitted to

the insurance company was permitted to change

buy the product.

There was no capacity in the insurance

ongoing contracts.
There have to be sufficient weather stations

companies to calculate proper premium levels,

to provide unbiased weather data. Only a

so premium rates were directed by reinsurance

small part of Ukraines farmers live within a 20

rates, or rates charged by competitors. This trend

km radius of weather stations, which is often

discouraged innovation.

considered the maximum possible if basis risk

There was not enough time for marketing,

and the partner insurance company, Credo-

is to be kept within acceptable limits.

There have to be credible, cost-effective

Classic, did not have an established client

and commercially viable national insurers,

network among farmers in the target region;

and intermediaries that market and package

nor did their regional staff have experience in

insurance with relevant inputs, technology,

agricultural insurance.

agronomic and weather information, and/or

Insurance is generally an unknown concept to

most Ukrainian farmers.
During the period of coverage, Credo-Classic
decided to extend it by two weeks. This

50 Hess, 2005b.
51 Hazell et al., 2010.

financial services. The latter were not available

and, in effect, legislation did not permit the
packaging of weather insurance with other
products or services.

52 The conditions described in this section are largely taken

from Hazell et al., 2010.

35

 The product should cover the right risks:

international markets, or providing insurance

infrequent, but high-impact events. It is not

in hard-currency terms with assignment to a

clear whether this kind of risk coverage was in

foreign bank. International insurance companies

place.

are still kept out of many transition countries or

There should be availability of cost-effective

remain limited in the product coverage that they

products, for which the benefits of transferring

are allowed to offer. To some extent, these gaps

risk exceed costs for the client. This situation

can be filled by taking out offshore insurance. A

was clearly not the case.

company headquartered in an OECD country can

buy weather insurance against risks originating

Despite these experiences, it appears that the

in virtually any country, although the insurance

experiment attracted the attention of a number of

company needs sufficient data to calculate

Ukrainian insurance companies, and that thinking

premium rates. But such offshore insurance is

about possibilities to use weather insurance for a

limited to very large financing deals in the tens

series of crops is continuing.

of millions of dollars managed by banks or

trading companies in OECD countries.

2.2.2 A scoping exercise: the potential

Developing index-based insurance will require

for index-based agricultural insurance in

a significant effort. A 2008 paper (Odening et

transition countries

al.) explores the possibilities in 20 transition

Local insurance companies often do not have

countries, categorizing countries along the

the required expertise to design and price

axes of demand for index-based insurance,

insurance against production risks, whether using

and the existence of the preconditions for the

production data or a proxy such as weather data.

establishment of such insurance. Their results are

Even if they have such expertise, regulations

presented in Figure 6 below.

often prevent them from re-insuring risks on the

Figure 6
The scope of index-based insurance (IBI) in transition countries

4
Romania

Preconditions for establishment of IBI

Bulgaria
good

Hungary

Moldova

Croatia
Kazakhstan

Russia
Turkey

Uzbekistan

Albania

Serbia

Ukraine

Azerbaijan

Kyrgyzstan

Tajikistan

Kosovo
Georgia

poor

Armenia
FYR of
Macedonia

Belarus

low

high
Demand for IBI

Source: Odening et al, 2008.

36

Innovative agricultural finance and risk management

The report recommends that actions are tailored

Insurance companies have little interest in

to the specific situation in the respective

offering weather index insurance as they are

categories:

already offering competing products. The

Quadrant 1 (low demand, poor preconditions):

reports advice is to wait until preconditions

Albania, Georgia, Belarus, Serbia, Kosovo, and

the former Yugoslav Republic of Macedonia.
Albania and Georgia have high rainfall and

have improved or to try to support this process

of improvement.
Quadrant 4 (high demand, good preconditions):

exhibit low yield variability. Thus, demand for

Uzbekistan, Republic of Moldova, Kazakhstan,

insurance is likely to be low. In Belarus, the

and the Russian Federation. These countries

policy environment is unfavourable, leaving

are all exposed to high weather risk, while

little room for the private sector. For example,

they have well-developed financial sectors,

the country has a mandatory insurance

including insurance sectors. that have the

programme for winter and summer wheat,

capability to introduce index-based products.

triticale and barley, provided by the state

Competition from subsidized insurance

insurance company and benefitting from a

programmes is a hindrance, however. The

95 percent subsidy on insurance premium.

reports advice is to obtain more information

In Serbia, Kosovo, and the former Yugoslav

by means of pre-feasibility studies or pilot

Republic of Macedonia, there is relatively little

projects and to facilitate the implementation

demand for index insurance, given rainfall

process of IBI.

patterns, and the policy environment is not

entirely conducive. In this context, there is
little scope for meaningful international support

2.3 Dealing with price risk

for developing index insurance.

Quadrant 2 (low demand, good preconditions):

Farmers and others can deal with price risks

Bulgaria, Hungary, Romania, Croatia and Turkey.

by passing them on to others through forward

In the first four countries, the finance sector is

contracts, or they can manage them by using

well developed. However, yield and weather

organized futures and option markets.

risks are moderate, and farmers also benefit

from direct income payments granted under the

Through their contractual arrangements for the

EUs common agricultural policy. The situation

sale and delivery of crops, farmers can shift

in Turkey is difficult to interpret: the country is

certain risks to buyers. This shifting of risk is

large and agricultural production systems are

especially possible if farmers can become part

diverse. Lending to agriculture is low, due partly

of value chains wherein they receive credits

to a high level of risks. Nevertheless, insurance

to enable them to grow crops as per buyers

companies have been hesitant to introduce

specifications, and where their sale, albeit

index-based insurance (IBI). The reports advice

not necessarily their sale price, is guaranteed.

here is to try to obtain more detailed information,

Forward contract arrangements to this effect

identify sub-regions and/or niche products where

have been developed in many transition

the application of IBI is reasonable, but not with

countries. Among other things, they permit banks

highest priority.

to provide loans to small farmers who otherwise

Quadrant 3 (high demand, poor preconditions):

would have insufficient collateral, on the back of

Armenia, Kyrgyzstan, Tajikistan, Azerbaijan and

a tripartite agreement in which a processor/trader

the Ukraine. In all these countries, agriculture is

commits to buy a farmers crop and routes the

highly exposed to weather especially rainfall

payment through the financing bank to enable

risk. However, the mountainous character

easy loan recovery.

of the first three makes it difficult to design

appropriate index insurance products. The

Forward sales contracts are normally linked to the

part of agriculture that is not in such regions

provision of inputs on credit, not only to ensure

is often irrigated, which reduces exposure to

sufficient production, but also to create a situation

weather risk; this is also a factor in Azerbaijan,

where farmers who decide to side-sell their crop

where there is a subsidized insurance scheme.

(i.e. default on their obligations under the forward

The case of Ukraine was discussed above.

contract by selling to a third party) lose future

37

access to input finance. Such risk mitigation is

traders. In a competitive market, such buyers will

necessary because forward arrangements of any

try to strengthen their competitive position by

kind carry significant default risk. When farmers

building various forms of price risk management

can realize a better price by selling to a third party,

into their offers to farmers. In Canada or the

they can easily renege on their obligations under

United States of America, for example, farmers

the forward contract.

can choose from a panel of over a dozen different

pricing formulas built into spot and forward

Using futures contracts is a tool for managing

contracts.54

price risk. Actual physical trading practices are

not necessarily affected. By buying or selling

Cooperatives often run risk management

futures on an organized commodity exchange,

programmes both for crops and for inputs such

farmers and others can lock in certain price levels

as diesel. Members benefit by, for example,

independent of their physical trading operations.

having access to diesel at a fixed price. In other

Even if farmers do not use futures markets,

cases, as is prevalent in the cotton, palm oil or

they benefit indirectly through better price

sugar sectors, processors and other corporates

information, more flexible sales/pricing options

may run contract farming programmes or offer

and more competition in both crop and agri-

fixed prices to farmers who supply them. They

finance markets. Options are risk management

lay off the resulting price risk on an exchange. In

instruments that do not lock in prices but

some cases, over-the-counter risk management

give protection against unfavorable price

providers such as banks or large trading firms

movements, with the possibility of benefitting

may offer risk management instruments that are

from favorable ones. Where farmers have access

tailored to specific conditions. For example, they

to risk management markets, they use these

may use a local reference price rather than the

instruments to gain greater control over and more

global futures exchange price. Alternatively, they

flexibility in their marketing and pricing decisions,

may warehouse these risks (i.e. carry them on

rather than just to reduce risk.

their books until it is convenient to lay them off)

53

or manage them on an exchange.

Futures contracts do not conflict with forward
contracts. In effect, a futures market will support
much wider use of forward contracts, as buyers
will be able to lay off their price risks much more
effectively. Fixed-price forward markets in an
environment without futures carry very high
default risk; in addition, the transparency and
discipline imposed by a futures market will further
reduce contractual risks.
Farmers and others do not need to trade
on their own account through a broker on a
commodity futures and options market. As Figure
7 illustrates, there are many ways for them to
access commodity risk management markets.
Even in the United States of America the
country with the longest experience with the
agricultural futures market most farmers do
not directly use organized exchanges. If they do,
they use options more often than futures. Rather,
the prevalent mode of access is through fixedor minimum-price contracts with elevators and

53 Rutten, 2002.

38

54 See for example http://www.cargillaghorizons.ca/_documents/grain_contracts/prairies.pdf

Innovative agricultural finance and risk management

Figure 7
Examples of distribution mechanisms for price risk management
Excharge

Excharge

Excharge

Excharge

Eventually, risk
management

Excharge

Excharge

Excharge

Excharge

Buying/selling of futures and options

Broker

Broker

Broker

Broker

Broker

Broker

Corporate
Long-term, strategic risk
management

OTC player

Broker

Cooperative

Input provider

Bank

Warehouse

Lottery firm

Distribution
Fixed
minimum
price contract

Households

Households

Households

Cooperative
processor
Conditional pricing
Households
Commoditylinked loan
Minimum-price
guarantee
Commodityprice-linked
lottery tickets

Households

Households

Households

* = Buying/selling of futures and options

Source: Author

There are many other possible forms of

counterparty may renege, either overtly or

distribution, with price risk management (either

by disputing the performance of the buyer

as a price reference or an insurance-type feature)

or seller. Therefore, when legal enforcement

built into input prices or agricultural loans. And

is weak, fixed prices will be acceptable for

there are some forms that have yet to be used.

buyers only if sellers have a very good track

For example, warehouses could guarantee

record. This reality strongly limits possible

farmers a minimum offtake price, or options could

be packaged and sold in the same way as lottery
tickets.

applications in transition countries.

Other conditions remain theoretical as long
as there are no relevant futures markets.
They include the need for acceptable grades

Price risk management requires a number of

and standards in physical trade; a supportive

conditions:

legal and regulatory framework; a brokerage

There should be a relevant liquid reference

network with reasonable distribution ability;

market. Despite efforts in many countries

an understanding by banks of price risk

(discussed in the next chapter), there are no

management and their willingness to offer

successful, liquid agricultural futures contracts

credits at better terms to those managing their

in transition countries. Using the leading global

price risk; a reasonable electronic payment

market, the CME, is challenging, not only

system; the ability of prospective users to

because the logistics of using an overseas

open brokerage accounts; and so on. Price risk

exchange can be cumbersome, but also

management, therefore, requires

because local prices in transition countries do

not necessarily move in tandem with CME
prices.
In some cases, traders are willing to offer
fixed-price contracts, or minimum-price
contracts using local prices as reference.
However, the default risk on such contracts

considerable institution-building (see further

discussion in the next chapter). Fortunately,
although the challenges remain daunting,
exchanges have become cheaper to set up and,
thanks to the Internet, networks of users can be
built much more easily

is high. When prices move adversely, the

39

Chapter 3: Building institutions for agri-finance, trade and

risk management
This chapter focuses on two institutions that can

unless they are completely reorganized and

play a central role in organizing agri-finance, trade

upgraded, which would necessitate substantial

and risk management in transition countries;

financial support from the government or

namely, commodity exchanges and WHR

international agencies. Where they do play a role,

systems. It builds on two earlier studies done by

it is generally with financial sector contracts or,

the FAO Investment Center.55

in one case, with gold contracts. Nevertheless,

there are positive developments on a number of
exchanges.

3.1 Commodity exchanges in

transition countries

Agricultural contracts are of little significance

for most of the large exchanges in transition

Two out of three transition countries have at

countries. Of the exchanges offering agricultural

least one commodity exchange (see Annex 3).

contracts, six56 are well developed in Hungary,

The largest number can be found in Turkey with

Romania, the Russian Federation and Turkey

over a hundred exchanges, although fewer than

and can be compared with exchanges in

one fifth of them play a role in physical trade. The

Europe, the United States of America, Brazil,

remainder serve tax registration purposes. The

China and India. These exchanges have sound

Russian Federation and Ukraine each have a few

technologies including electronic trading and offer

dozen operational commodity exchanges, and

a sophisticated range of instruments including

many more registered but inactive exchanges.

agricultural futures contracts. They are reasonably

Despite their rapidly developing commodity

well integrated in the community of international

sectors, most exchanges in these countries only

exchanges and have a well-developed

provide auction platforms and do not provide

organizational structure, which is generally visible

financing and risk management services.

on their website. In terms of trading volumes,

however, turnover in agricultural contracts tends

Most of the other countries of the FSU also

to be low. Their trading volumes are concentrated

have one or a few commodity exchanges, with

in precious metals, as is the case of the Turkish

Azerbaijan and the Baltic States being the only

Derivatives Exchange, TurkDex, whose gold and

exceptions. Poland has about 20 commodity

silver contracts make it the largest commodity

exchanges, acting mainly as wholesale platforms.

exchange in transition countries, and in securities

Most of the other Eastern European countries,

and financial derivatives such as stock indexes,

including those that are now part of the EU, have

currency futures and interest-rate contracts.

between one and six exchanges. The Eastern

European exchanges include a number of energy

There are also a number of emerging

exchanges, as well as financial exchanges that

exchanges for which agricultural contracts are

also offer agricultural contracts. Only a handful of

of considerable importance and which have

the exchanges in this region have an agricultural

been investing in upgrading their systems and

focus, acting as auction centers.

practices by introducing an electronic trading

platform, a clearing system and forward contracts.

The exchanges in transition countries tend to

These emerging exchanges consist of around 10

have weak organizational and financial strength

exchanges in seven countries, including Turkey

and play an insignificant role in their economies.

Many exchanges operate at unsustainably low
transaction levels and are likely to disappear

55 Hllinger et al., 2009, and Belozertsev et al., 2011.

40

56 Burse Romana de Marfuri (Romania), Budapest Stock

Exchange (Hungary), Moscow Interbank Currency Exchange,
Russian Federation Trading System, St. Petersburg International Mercantile Exchange (all three in Russian Federation in
2011, the first two decided to merge) and Turkish Derivatives
Exchange (Turkey).

Innovative agricultural finance and risk management

and countries of Eastern Europe and the FSU.57 In

contracts remains strong. The total annual trading

terms of trading volumes, it is in this group that

volume of all commodity contracts in all transition

the largest agricultural exchanges can be found.

countries together is estimated at around USD

The largest is the Izmir Mercantile Exchange, with

10 billion,60 primarily in Turkey where most trading

annual cotton trade valued at over USD 2 billion.

is in gold. This value is less than what is traded

Several of these exchanges are profitable and cash

in one day on the main exchanges in China

rich, and some have been developing innovative

or India.61 In many countries, the underlying

approaches. For example, the Belarus exchange

physical commodity sectors are large enough

offers buyers the possibility to buy goods and

to support important volumes at exchanges.

commodities free on board (FOB) in ports in other

For example, the role of countries such as

countries on the Baltic and the Black Sea, meaning

Kazakhstan, the Russian Federation and Ukraine

that the buyer does not take on the risk or cost

in world grain and oilseed trade has developed to

of transport. The exchange takes on the risk of

a level that successful Black Sea grain and oilseed

transport from Belarus to these ports by laying it

futures contracts could attract avid international

off through the countrys export-import bank.

interest.

In a further eight countries, there are less-

3.1.1 Developing wheat futures: the Russian

evolved commodity exchanges that offer trade

Federation experience

in agricultural commodities.58 Half of these

In April 2008, the National Agricultural Mercantile

exchanges, all located in the FSU, are barely

Exchange (NAMEX), a subsidiary of Russian

active. Others are in a transition from an

Federations leading stock exchange MICEX,

open outcry auction-type platform to a more

made a first attempt at developing wheat futures.

sophisticated exchange, offering electronic

NAMEX had a large regional reach, providing

trading services as well as value-added

remote access points through various regional

information and quality control services, as is the

exchanges. Since 2002, it also had been buying

case for three countries of former Yugoslavia.

grains on behalf of the Russian Federation

Government, for its market intervention

In summary, despite the large number of

programme.62 NAMEX counts the Russian Grain

commodity exchanges in transition countries,

Union among its shareholders. It was thus well

only half a dozen have reached a good level

placed to succeed. NAMEX introduced two

of development, and these exchanges barely

milling wheat futures contracts: one contract

trade agricultural commodities. About 20

for 65 tonnes with delivery of franco elevators

other exchanges have some potential to offer

in the South Russian Federation (43 elevators

agricultural risk management tools and may be

had been accredited), and one contract for 60

supported in these efforts.

tonnes with FOB delivery in Novorossiysk,

Russian Federations main port on the Black Sea.

There is ample scope for growth, and in countries

The contracts had a good start, achieving a total

such as the Russian Federation and Ukraine,

turnover of over 5 million tonnes in 2008, which

which have recently seen renewed attention from

almost doubled in 2009 to 9.2 million tonnes,

the CME, interest in developing agricultural

representing 149 249 contracts, worth USD 1.4

59

billion. Two thirds of this value was for the export

contract, and the remaning third for the franco
57 Belarus Universal Commodity Exchange (Belarus), Eurasia
Trading System and Kazakh International Commodity Exchange
(Kazakhstan), Izmir Mercantile Exchange and Konya Ticaret
Borsasi (Turkey), Kiev AgroIndustrial Exchange Kievagroprombirzha (Ukraine), Sofia Commodity Exchange (Bulgaria),
Uzbek Commodity Exchange (Uzbekistan), Warsaw Commodity
Exchange (Poland).
58 Armenia, Kyrgyzstan, Macedonia, Republic of Moldova,
Serbia, Slovenia, Tajikistan, Turkmenistan.
59 In May 2011, CME announced the signing of MoUs with
the Ukrainian Government and National Bank, and with the
Ukrainian Futures Exchange (a hitherto largely non-operational
entity) to develop financial and derivatives markets in Ukraine
for grains and other products; a Black Sea wheat contract
would be launched on CMEs electronic trading platform,
Globex. The arrangements for implementing these MoUs are
weak, however.

elevator contract. However, in 2010 stagnation set

in, with a growth in volume of only 12 percent.

60 Estimate based on the information as provided in the

websites of the individual commodity exchanges. Most of the
smaller exchanges do not publicly report their volumes.
61 In 2010, the Dalian Commodity Exchange in Dalian, China,
traded USD 6.3 trillion worth of commodities, and the Multi
Commodity Exchange of India traded USD 1.9 trillion.
62 Such state intervention purchases can be large. For example, from August 2008 until May 2009, total purchases through
NAMEX reached 9.6 million tonnes (MICEX, The MICEX Group
in 2009, Moscow 2010).

41

While this level is still 10 percent higher than

Kyrgyzstan, Tajikistan, Turkmenistan and

the 2010 volume of the European wheat futures

Uzbekistan. As Uzbekistan is the worlds

contracts on the London International Financial

second largest cotton producer, this option is

Futures Exchange, it is negligible compared to

probably best based on the regional expansion

volumes in the main international wheat futures

of Uzbekistans main exchange, UZEX, and the

contracts in Chicago.

development of its contract base. For example,

it can include Kyrgyz warehouses among those

3.1.2 Regional exchange projects

where its cotton contracts are deliverable. To

In certain cases, developing a commodity

be successful, such a regional exchange would

exchange with a regional outlook may be feasible,

have to introduce new contracts such as repos

if political support could be secured. In particular,

and trading modalities like EWRs which are of

there are the following possibilities:

Revive the work done towards the
establishment of a regional grain and oilseeds

been talks on the potential development of

futures exchange for the Black Sea Basin and

the so-called CIS Common Market, which

the countries on the Danube river; in particular,

would include agricultural products. Should

Hungary, the Former Yugoslav Republic of

a system of unified customs rules for the

Macedonia, Romania, Serbia and Turkey.

CIS Common Market countries indeed be

Turkey, with its large domestic production

realized, then the large national commodity

and consumption, has the best potential for

exchanges can link electronically and act

developing such an exchange, but the window

as a backbone for regional trade and price

of opportunity for a regional initiative is small.

formation. The CIS Common Market has not

One of the large western exchanges would do

made much headway as of 2010 but talks are

well to introduce a Black Sea wheat contract

still continuing. Meanwhile, three of the core

with delivery locations in one or more of the

countries (Belarus, Kazakhstan and the Russian

EU member countries in the region.

Federation) have created a Customs Union.

Develop a grain and oilseeds futures exchange

As part of the work of this Customs Union,

that serves the export-oriented grain sector

the agriculture ministries of these countries

through the Black Sea of the Russian

have decided that the Belarus Universal

Federation and Ukraine. The grain exported

Commodity Exchange (BUCE), MISEX and the

from these two countries is very similar in

Kazakhstan International Commodity Exchange

quality and in export destinations, and export

(KICE) will coordinate their efforts to create a

prices are well correlated. If the two countries

new organized marketplace for commodities,

could agree to coordinate their grain policies,

the Eurasian Commodity Exchange, to trade

a regional organized market would become

agricultural products. A protocol of intent to

feasible.
Develop a regional grain exchange for

this effect was signed in February 2010.

There have also been talks among the Central

Kazakhstan, Kyrgyzstan and Turkmenistan,

Asian countries Azerbaijan, Kazakhstan,

trading a range of contracts including spot,

Kyrgyzstan, Tajikistan, Turkey, Turkmenistan and

forwards, repos and futures. The latter two

Uzbekistan, on how to intensify commodity

countries are already importing much of their

trade in the region for energy items,

grain from Kazakhstan, and their importers

agricultural commodities and some other

would benefit from the opportunity to buy

raw materials. Again, the political process

through a Kazakh exchange or to hedge

would have to succeed first, followed by

on such an exchange. Given the economic

implementation of unified customs rules and

and political conditions in these countries,

regulations. If unified rules are implemented,

an exchange of this nature could be built

commodity exchanges, particularly in

gradually. It could start with EWR-based

Kazakhstan, Turkey and Uzbekistan, could

spot trading, bring in financiers once there is

play key roles in the regional commodity

enough trust in the system and, as volumes

trade, price formation and risk management

picked up, futures could be introduced.

practices.

Develop a regional cotton exchange for

42

particular interest to the smaller countries.

In the political context of the CIS, there have

Innovative agricultural finance and risk management

Technically, with the spread of fast internet

increase transparency in their markets.

access and the development of cheaper, better

The existence and quality of an enabling legal

performing electronic trading and payment

and regulatory framework further determines the

systems, such regional projects face fewer

scope for commodity exchange development. An

barriers.

exchanges viability can be undermined by lack of

rules and regulations, such as those that govern

3.1.3 Obstacles and constraints

investment in exchanges, give an exchange the

The absence of large, successful commodity

ability to self-regulate its operations or enable an

exchanges does not mean that such exchanges

efficient delivery mechanism, which necessitates

could not become relevant for the region.

WHRs.

Commodity exchanges can offer a wide range

of tools which could help improve agricultural

For example, exchanges throughout the region

marketing and make agricultural investments,

have been struggling to build an efficient link

processing and trade safer and more profitable.

between the physical grain sector and paper

The agriculture sectors in transition countries

trade in fungible grain contracts. The normal link is

have generally been moving from heavy state

through WHR systems, which give the holder the

domination and control towards more liberalized,

right to a certain quantity of product of a specified

market-oriented systems, though some countries

grade at a certain warehouse. However, for such

are lagging behind. After liberalization, commodity

systems to work properly, a functioning legal and

exchanges could step in and perform many of

regulatory framework is required including the

the marketing and risk management functions

licensing and supervision of public warehouses

formerly performed by the state, in support of

and credible protection against fraud. In countries

the newly emerging private sectors. However,

where there were early private sector efforts

developing successful exchanges is a challenging

to create futures exchanges, as in Kazakhstan

task and many constraints are yet to be properly

and the Russian Federation, the efforts to make

addressed in most transition countries.

this link were undermined owing to the absence

of strong WHR regulation and a proper grading

While lack of familiarity with exchange

system, and because warehouse ownership was

mechanisms and risk management is a challenge

concentrated in the hands of a few.

that cuts across most of the region, other

constraints vary depending on country-specific

Agricultural and trade policies are important

conditions such as the size of the agricultural

determinants for the scope of commodity

economy, the development of the agricultural

exchange development. For example,

and financial sectors and commodity policies. If,

interventions in agricultural markets such as

for example, agricultural production is low and

export bans as well as other interventions to

the size of the potential market for an agricultural

reduce price fluctuations undermine commodity

exchange is small, a national exchange may be

exchange, especially if implemented in an

financially non-viable. If agriculture is poorly

arbitrary manner. Also, as can be inferred from

organized, with insufficiently trained farmers,

the fact that commodity exchange initiatives

processors and traders, it may be very difficult to

that focused on European farming have never

acquire enough traction for the exchange project

done well, whether in France, Germany, the

to take off. These projects are further hindered

Netherlands or the United Kingdom, the safety

if bankers have little understanding of modern

net provided by the Common Agricultural Policy

commodity marketing and financing mechanisms,

(CAP) is in contrast with the idea of farmers

and if there are no organized speculators

fending for themselves in the management of the

interested in becoming active on an agricultural

price risks to which they are exposed. Thus, new

exchange. Without speculators an exchange

agricultural exchanges in EU accession or pre-

cannot grow. If, on the contrary, agriculture is

accession countries may be a difficult proposition,

highly organized, with just a few large, vertically-

at least in the near future. In the longer term, the

integrated companies dominating agricultural

further reform of the EUs CAP might increase

value chains, then these companies may not

the scope for commodity exchanges. Finally,

be too keen on introducing mechanisms which

government attitudes towards commodity

43

exchanges also matter: a government that wants

development of carrots for them in the form of

to retain control over a commodity exchange is

refinancing opportunities (with EBRD), along with

likely to stifle its growth.

various actions meant to make local warehousing

companies more secure, such as fidelity funds.

3.2 Warehouse receipt systems

These projects have had some success, but

there is still room for improvement. Local banks

In the late nineteenth and early twentieth

generally remained unwilling to explore the

centuries, WHR finance played a major role in

possibilities of WHR finance, inter alia because

enabling the development of agriculture in the

of continuing and often justified concerns about

United States of America. The federal government

the reliability of local warehouse operators. Legal

recognized the importance of this financing tool,

and regulatory reforms often stalled. Warehouse

and boosted the ability of local banks to lend

operators were not keen to contribute to fidelity

to the agricultural sector by opening a special

funds. Some projects were oriented at replicating

discount window for loans by WHR.63 There were

western WHR systems, in particular, those of the

similar financing systems, with government

United States of America, but were insufficiently

support, in Europe. But in the course of the

adjusted to the specific conditions of emerging

1920s and 1930s, financial reporting improved

market commodity sector. There has also been

with the development of credit bureaus like Dun

an overemphasis on the creation of a legal and

& Bradsheet and of rating agencies, and with

regulatory framework while much less attention

the creation of a better organized accountancy,

has been paid to supporting concrete operations

auditing, tax and legal system. Thus, it became

solutions on the ground. Those include collateral

much easier for banks to judge companies on the

management/credit support which is the vehicle

basis of their balance sheets and track records,

for most WHR finance in emerging economies

and to pursue reluctant creditors.

and value chain finance. EBRD, which has been

the major driver of WHR finance programmes in

One could assume that the situation of agriculture in

the past with projects in Bulgaria, Czech Republic,

transition countries after the demise of communist

Hungary, Kazakhstan, Lithuania, Poland, Romania

rule was similar, and that WHR finance could

and Slovakia continues its support in this domain.

have played a similar role in reviving the sector.

Since 2008, it has added Bosnia, Serbia, Tajikistan

Indeed, such was the thinking of some donor

and Ukraine to the countries where it works or

agencies, including the Canadian International

will work on WHR finance.

Development Agency (CIDA), the Common Fund

for Commodities (CFC), EBRD and United States

3.2.1 The state of warehouse receipt finance in

Agency for International Development (USAID).

transition countries65

They funded several projects, in countries such as

EBRDs and other donor agencies support of

Bulgaria, Poland, Romania, the Russian Federation

the development of WHR finance has been

and Ukraine, primarily focusing on creating an

successful in a number of countries, most

environment conducive to WHR finance. Work was

notably Bulgaria, Hungary, Kazakhstan, Republic

also supported in Turkey. 64 These projects included

of Moldova, Serbia and Slovakia. In these

legal and regulatory components, often targeting the

countries, the initial consensus among key

introduction of new national legislation. They were

stakeholders was built, the important elements

involved in awareness-raising for local banks and the

of a WHR system were put into place and

many local private sector banks have begun to
finance against WHR. Local bank finance reaches

63 These dated from 1915. Federal Reserve Act, Article 13,

sections 6 and 7, http://www.federalreserve.gov/aboutthefed/
section13.htm.
64 WHR finance is relatively well developed in Turkey and is
predominantly conducted by banks using their own warehousing subsidiaries. Turkish banks own a large number of warehouses, especially at ports. These warehouses were primarily used
for financing operations, in particular, for pre-export storage of
cotton and tobacco. Each bank uses its own warehouses. It
will be a challenge to convert this system into a more open
system, where warehouse owners agree to provide storage and
WHRs for third-party depositors.

44

more than USD 1 billion a year in Kazakhstan,

and several banks have set up their own field
warehousing operations, putting their own agents
on the grain elevator premises. In Bulgaria, some

65 For an extensive country-by-country overview, see Belozertsev et al., 2009.

Innovative agricultural finance and risk management

local traders finance their grain trading operations

systems has been identified by donor agencies

completely on the basis of WHR and off-take

in a number of countries, including Tajikistan and

contracts, without any fixed assets required as

Uzbekistan. In a few countries, like Uzbekistan

collateral by the banks.

for cotton, international banks already provide

WHR finance. Work to expand the use of WHRs

Other countries such as Croatia, Romania,

by local banks has started in some of these

the Russian Federation, Turkey and Ukraine

countries. For example, Georgia and Azerbaijan

have at least established rudimentary WHR

are included in the activities of Ukraines

systems. They are developing them further by

Agrarian Markets Development Institute (AMDI)

means of donor support, except for Poland,

to create a common grain trading platform.

where much work was done, but progress

then halted towards the late 1990s. Some

3.2.2 Obstacles and constraints

countries actively use WHR finance in certain

There are a number of obstacles and constraints

sectors, e.g. to finance local stocks of grain

to the full-fledged operation of WHR systems in

66

or exports of hazelnuts and tobacco in Turkey.67

transition countries.

In other countries initial efforts to create a

comprehensive legal framework and to pilot

An appropriate legal framework can be a strong

WHR finance have not developed into full-

support for a functioning WHR system. Without a

scale implementation, in part because of lack

good legal framework, the WHR system depends

of local stakeholder support. In many cases,

on the contractual relationships between the

core elements of a WHR system such as a

different parties active in the agricultural sector,

proper institutional framework for licensing and

and on their perceived credit risks. In such

inspection of public warehouses, or financial

conditions, transaction costs are higher and

performance guarantees, are still missing. In

bank credit committees will be more reticent to

the Russian Federation, Turkey and Ukraine,

approve transactions. Electronic systems can

though, there is some financing based on field

help here, as bankers feel comfortable with the

warehouse arrangements,68 particularly for

access to documentation and information that

grain and oilseed exports and various imports.

they provide. The better the legal framework,

Some of these countries are still trying to move

the wider the range of possible transactions.

forward. For example, in the Russian Federation

Bank risk controllers and credit committees, in

improvements in the legal framework are from

particular, feel more comfortable when there is

time to time discussed in the countrys Duma,

strong legislation in place protecting the integrity

and the need to expand the scope for WHRs is,

of the system, establishing clear procedures in

at times, mentioned by the countrys leaders.

case of bankruptcy and default and allowing the

69

perfection of security interests.

A considerable number of transition countries
do not yet have WHR legislation in place.

Despite the importance of an enabling legal

Nevertheless, the potential to develop WHR

framework, it should not be regarded as a precondition since WHR finance is also possible
with a poor or virtually non-existent legal

66 When grains are stored by the government grain trading

company, TMO, they are acceptable collateral for banks. This
rule applies to farmers who deposit grains in a TMO warehouse.
They can obtain loans against the TMO warehouse receipts.
In the past (2001/2002) it has also been used by TMO itself to
secure a USD 135 million pre-export loan from BNP Paribas.
67 These sectors have a more limited number of buyers
and sellers who often have been active for a long time, and
financiers may believe that this compensates for the gaps in the
regulatory framework. While this system has worked reasonably
well in the tobacco sector, as one of the largest WHR finance
frauds in recent years (20012002) has been for a hazelnut
transaction in Turkey (see Lloyds Law Reports, Bank of TokyoMitsubishi Ltd. V. Baskan Gida Sanayi, 2004 Vol. 2 Ch. D., Part 7,
29 April 2004), such belief is evidently not warranted.
68 In Turkey, field warehousing facilities are provided by the
Grain Board, TMO. For a description of its services see http://
www.tmo.gov.tr/Main.aspx?ID=285.
69 For example, by the countrys President, Dmitry Medvedev, at a meeting in Tambov on July 25, 2011.

environment.70 In the past, some donor

agencies have put undue reliance on getting
the government and parliament to promulgate
supportive warehouse legislation. This process
has proven to be costly and slow and, at times,
unsuccessful. Poland is a prime example,
which, compared to the global experience with
WHR finance, has been somewhat misguided.
Although there is no specific WHR finance

70 For example, during the civil war in Liberia in the 1990s,

rubber exporters continued to be financed on the basis of warehouse receipts issued in Liberian ports.

45

legislation, it has worked perfectly well in the

Republic of South Africa.

71

For example, most

what they understood from the system in the

United States of America, the government and

of the countrys grain that is not used for intra-

banks had promoted a system of WHR finance

firm trades is managed and traded through the

using public warehouses. Political pressure to

countrys EWR system. On the other hand,

assist farmers was strong, and the existing

there are countries like Brazil where there

infrastructure of the large public warehouses

is a comprehensive legal environment, but

could not cope with this. In order to increase

the government mismanaged its supervisory

lending, banks started accepting rural warehouses

powers over the sector to such an extent that,

belonging to farmers groups as public

for a long time, WHR finance was not used by

warehouses, simply leasing them and putting

the countrys banks.

a lock to secure the goods inside. They did not

understand that this system was, de facto, a field

Ideally, one would want to see a strong system

warehousing operation and should have been

of licensed and supervised public warehouses. In

managed as such by putting collateral managers in

the absence of such a system (as is unfortunately

charge of supervising the warehouses and laying

still the case in most transition countries), the

off risks to these collateral managers. It is only a

financial institution is exposed to the risks related

matter of time until such a system collapses, and it

to the warehouse operation, such as improper

happened in 2008. Behind the locked doors were

handling, damage or loss of the collateral

empty warehouses.

or fraud. These operating risks are normally

mitigated through a highly selective choice of

Similarly, the 2010 loss by international banks

warehouses and close monitoring by specialist

of reportedly USD 160 million of grain pre-

collateral managers.

export finance to the RIAS Group (then the

Russian Federations second largest grain

Things do not always go as planned. In recent

exporter, accounting for 11 to 13 percent of the

years, banks have lost many tens of millions of

countrys total) was linked to loose controls

dollars in agricultural finance deals in which the

over grain warehouses. In 2009, the gross

WHR component was improperly structured, in

revenue of the RIAS Group was more than

countries like Hungary, the Russian Federation

USD 700 million, of which about four fifths

and Ukraine. To some extent, these losses

came from grain exports. As is typical for

are due to banks not realizing the difference

trading groups, RIAS was highly indebted.72 In

between inspection, that is, spot checks

late 2010, it had debt of USD 360 million.

on whether commodities are still in the

warehouse, and collateral control, where a

The domestic debt was secured by RIASs

third party is liable for the continued presence

fixed assets, but for the USD 160 million of

of the commodities in the warehouse.

international finance, only grains were used

as collateral. Western survey companies, in

For example, in 2008, there were large losses

particular, Control Union, provided inspection

in WHR finance in Hungary because banks had

and survey services on the ground. The August

improperly structured their schemes. Based on

2010 grain export ban affected RIASs ability to

serve its debt, and it started defaulting on both
domestic and international loans. In December

71 The success of the Republic of South African system

rests on four main pillars. First, there is only a small number of
large grain trading and processing companies in the Republic
of South Africa, which know each other well. Second, the
commercial farming community in the Republic of South Africa
is small. There are only about 10 000 commercial farmers, but
their production is high and they are well organized. They are
also serviced by well organized logistics providers, including the
silo operators. The two main shareholders of the EWR systems
company between them own more than 60 percent of the
countrys grain storage. Third, the WHR system has benefitted
considerably from its synergy with the countrys commodity
futures exchange. The exchange accepts silo certificates for
delivery, and this facility is popular. Around a million tonnes of
grains and oilseeds are delivered annually. Fourth, system management is outsourced to PwC, thus ensuring the confidentiality and integrity of the system.

46

2010, Control Union was refused access to the

72 In August 2010, the RIAS Group domestic debt was

around USD 200 million (three quarters of which was with Sberbank; the remainder, with two other banks), and international
debt was about USD 160 million. The Sberbank debt was collateralized by RIAS fixed assets: agricultural land, in-land grain
elevators, river and sea port terminals, feedstuff enterprises,
bakeries, etc. The international debt was entirely structured as
pre-export finance, mostly contributed by BNP Paribas (about
USD 80-85 million), UBS (about USD 50-55 million), and two
smaller Swiss cantonal banks, with all the funds provided
through to the RIAS Swiss subsidiary. The pre-export facility
was signed in October 2009, and funds were disbursed from
May to July 2010.

Innovative agricultural finance and risk management

elevators in the Krasnodar region where the

There have been successes that merit

grain was supposed to be stored, as evidenced

replication, but the challenges that new

by WHRs issued by these elevators. In January

projects face are substantial. Using the same

2011, RIAS declared bankruptcy. No grain was

approaches that have been tried in the past

found in the elevators. However, it is possible

may not be the most effective. There are

that it was never bought in the first place, and

possibilities to innovate, and Table 4 gives a

that the receipts were issued fraudulently. It

number of suggestions.

was supposed to have been bought from June

to October 2010. The lack of any direct control

3.3.1 Rebalance the focus of projects from

of the financiers over the elevators in other

regulations to deals

words, the reliance on inspection rather than

Much of the attention of the donor community

collateral management is, therefore, a major

has been on improving legal and regulatory

reason for the size of the default.

systems, whether for commodity exchanges

or WHR systems. Helping local counterparts

The management of WHR finance would be

to set up structures that can operate within

much improved if transition countries were to

existing limitations has not been high on the

adopt EWR systems.73 So far, no country has

agenda. In a number of countries, legal and

done so, although at least Ukraine now has

regulatory conditions have improved, but no

an electronic registry. Annex 6 describes the

new agricultural exchanges have been set

benefits of an EWR system and how it can be

up and WHR finance has remained limited.

used.

In other countries, efforts to change laws

and regulations met bureaucratic inertia and
resistance. Moving forward, the focus should

3.3 Possible new approaches that

merit international support

shift to working with local counterparts to

develop pragmatic approaches to improve price
risk management and WHR finance by focusing

In many transition countries, commodity

on specific contracts and specific transaction

exchanges and WHR systems have been on

structures rather than trying to change the

the radar of governments, industry groups

overall policy framework first.

and international agencies. In countries

such as Belarus and Uzbekistan, the

Work to improve the conditions under which

government is the main driver of commodity

exchanges or WHR finance will operate should

exchange development, albeit in the context

continue. This work includes policy dialogue

of controlling export flows. The Russian

and awareness raising among key government

Federation state agencies have been actively

stakeholders to remove the risk of arbitrary

promoting new exchanges. Agricultural

and unpredictable government interventions,

contracts and exchanges have been supported,

and the introduction of proper laws and

among others, by the MICEX, in which the

regulations.

Central Bank is the largest shareholder (holding

about 36 percent of the shares). It has used its
electronic platform to tie together a number of
the regional exchanges, which are dealing in
spot contracts. Donor agencies have supported
exchange development as well as WHR
systems in many countries. How can such
interest be leveraged to create truly successful
exchanges and fully operational WHR systems,
and how can government and donor support be
made more effective?

73 Laws recognizing the validity of electronic signatures, a

necessity before EWR are feasible, are already in place in most
Eastern Europe and Central Asia (ECA) countries.

47

Table 4
Suggested new approaches for the development of commodity exchanges
and warehouse receipt systems
Traditional approach

Suggested approach

First, set up a legal framework for WHR finance,

then promote deals.

First, look at potential deals and structure them

around legal constraints; then work to improve legal
and regulatory framework.

Refinance WHR finance originated by selected

banks.

Promote innovation towards the development of a

secondary market of tradeable WHR instruments,
using a wide range of refinancing options including
the equivalent of discount windows.

Look at commodity exchanges as stand-alone

projects.

Consider instruments beyond agricultural futures and

options, which target the needs of physical trade and/
or finance such as repo contracts or project bonds.
Then, work with potential partners to introduce
instruments one by one.

Commodity exchanges should look like the

exchanges in the west.

Make full use of available technology to develop costeffective approaches, targeting specific needs on a
country-by-country basis.

Electronic registration is of little importance.

Make EWR systems the basis of WHR projects and

use this technology to attract new participants to the
sector.

enactment of such new laws and regulations.

a discount window (akin to that of the Bank of

But this work should go on while deals are being

England or the United States Federal Reserve)

created.

for eligible WHR loans and develop a secondary

market for tradeable WHR papers.74

For example, in Azerbaijan, rather than doing

general work on exchange development, donors

Eligible could be defined to include not only

could support the development of a regionally-

deals structured by approved banks, but also deals

integrated electronic spot exchange, including one

that benefit from certain credit enhancements (e.g.

for fruits and vegetables. Among other things,

guarantees by reputable domestic or international

such an exchange can more efficiently link the

entities); deals in transition countries where an

countrys producers with the buyers in the Russian

acceptable international bank underwrites the

Federation. In Kyrgyzstan, a work programme can

risk; or deals which are structured using approved

be centred around bringing more efficient finance

warehousing companies or collateral managers.

to the cotton sector, for example, through an EWR

The senior component of a securitized portfolio

programme. In the Russian Federation, support

of WHR transactions could be discounted.

can focus on the specifics of wheat futures, while

Transactions in any transition country should be

leaving the external environment in the hands

eligible, within a broad framework of acceptable

of the counterpart exchange. Even with partial

success, it will become easier to re-engage the
government with a view to improving legal and
regulatory conditions.

3.3.2 Improve the incentives to innovate in

warehouse receipt finance by widening the
range of refinancing options
Currently, organizations such as IFC, EBRD, or
USAIDs DCA programme either guarantee or
refinance part (i.e. up to half) of the WHR finance
portfolio of selected banks in transition countries.
The banks have to be individually approved. There
is much scope for deepening these programmes.
In particular, the approach could shift to opening

48

74 According to Section 13A, clause 1 which dates from

1923 of the Federal Reserve Bank, any Federal reserve bank
may discount agricultural paper (for periods up to nine months)
that has been endorsed by a member bank, with all such paper
with maturities in excess of six month having to be secured by
warehouse receipts for readily marketable staple agricultural
products, or chattel mortgage upon livestock. The discount facility is available only for staples stored for commercial purposes
(stocks held for speculative purposes are not eligible); and the
goods must be adequately insured, with the member bank as
beneficiary. As an alternative to discounting such warehouse receipt-backed paper, banks can also sell it on the secondary market (the main one is the New York open market of acceptances),
but this is not possible for all such paper: it is only open to paper
backed by domestically stored staples. In 1978 (Federal Reserve
Bulletin 486), this access was further restricted: only receipts
issued by warehouses, elevators and terminal companies duly
bonded and licensed and regularly inspected by Federal authorities are accepted, and then only up to an amount that does not
exceed the amount of the bond posted by the issuer. As to the
Bank of England, warehouse certificates, including on stocks in
countries other than the United Kingdom, can be used to create
bankers acceptances eligible for discounting by eligible banks.

Innovative agricultural finance and risk management

country exposure levels.

large commodity sector.

The companies that can structure and enhance

In transition countries that have already

WHR finance transactions to make them eligible

become EU members or are aspiring to

for the discount window, such as collateral

become members, donor agencies should

management companies and commodity funds,

consider carefully whether it is worth creating

can themselves become interesting investment

new exchanges or supporting the fledgling

vehicles for international financing institutions.

exchanges that already exist. The advanced level

of development of commodity sector support

Furthermore, by putting greater reliance on the

companies and structures in the region, such

structure and less on the originating bank, the

as banks, quality control companies, logistics

current constraints due to individual bank limits

companies, information vendors, industry bodies

can be overcome. For example, a bank in the

and commercial arbitration panels make it difficult

Kyrgyzstan that has been approved as issuing

for a commodity exchange to compete with high

bank by EBRD or IFC, structures a state-of-

existing standards to provide services that really

the-art cotton pre-export finance for USD 15

make a difference.

million, starting with seed and input supply and

anticipating reimbursement through export sales.

Work related to price risk management in these

If this bank does not have USD 15 million or its

countries could usefully encompass the following

local currency equivalent, it can try to obtain

activities:

an international bank credit, against its own

Consider the viability of exchanges as physical

guarantee and assignment of the export sales.

trading tools. Several western European

This attempt will be very difficult as many banks

countries conduct large agricultural auctions

do not accept any credit risk in Kyrgyzstan. The

that make intensive use of electronic media

country risk is considered too high by the banks

and have highly advanced logistics systems.

credit committees and, even if they do accept

These auctions are so attractive as platforms

risk, the process of opening interbank credit lines

for physical trade that they even entice

is complex and slow. If it qualifies for an EBRD

international users. Their experience could be

counter-guarantee, EBRD may well respond that

replicated in new and aspiring EU member

the amount is too large given the balance sheet

states, and exchanges that focus on these

of the Kyrgyz bank. In reality, risk exposure in

activities, like those in the Former Yugoslav

this deal may well be minimal. All risks can be

Republic of Macedonia or Poland, could be

systematically mitigated. While assigning all the

individual risk mitigants (e.g. weather insurance,

supported.
With respect to futures exchanges, these

WHRs, export contracts etc.) to EBRD may be

marketplaces can no longer hide behind

impractical, there should be ways in which risks

national barriers and must be able to compete

are partitioned, with, for example, an international

with their long-established peers in western

collateral manager providing guarantees to EBRD

Europe. It is probably already too late for

on physical stocks. In other words, the due

them to reach the necessary critical mass to

diligence/risk assessment can partly be shifted

be able to compete on a stand-alone basis.

from local banks to international providers of risk

The best they can hope for is to become

management, such as credit support agencies

part of pan-European exchange networks,

or insurance companies. Then, bank limits are no

giving local market participants access to

longer a constraint.

international contracts. Even then, given their

current weakness, they would need new

3.3.3 Consider alternative approaches to

funds for their transformation. Donor agencies,

deliver price risk management contracts

in particular, those associated with the EU

Local futures exchanges are not necessarily the

and its member countries, may find it useful

best approach. The possible scope for action

to support the integration of exchanges in

can best be described by grouping the transition

EU accession countries into pan-European

countries into three broad categories: current and

aspiring EU members; large economies of the
CIS; and small, relatively poor, economies with a

networks.
Turkey is in a somewhat exceptional position
within the first group of transition countries.

49

The large size of the Turkish economy, its

be successful, it should focus on providing the

unique economic fundamentals as a bridge

best possible value propositions to key market

between Europe and Asia and the large

actors. What proposition this will be depends

number of sophisticated financial sector

on the constraints to which these market actors

companies could enable one or two futures

are exposed. Thus, agricultural contracts will

exchanges to become large and vibrant

have the best chance of success if greater

enough to survive EU accession. In particular,

focus is put on areas where exchanges can

there is scope for establishing a regional

build up comparative advantages, such as trade

commodity exchange and attracting new users

security (counterparty risk management), quality

from throughout the region, including the

assurance and commodity finance across the

Central Asian countries. While exchanges in

range of commodities.

Turkey have so far not made a serious move

into this direction, should such a move occur,

In the many small, agriculture-dependent

the international community could provide

countries of the FSU, commodity exchanges

support.

were created in the early 1990s to cope with the

disruption of traditional trading mechanisms after

In the second group of countries, large

the collapse of the old command economy. With

economies like Azerbaijan, the Republic of

the exception of Uzbekistan, the exchanges in

Belarus, Kazakhstan, the Russian Federation

these countries have not been able to develop.

and Ukraine, the commodity exchange initiatives

They do, indeed, face many obstacles, and

face different challenges. A lingering mistrust of

stand-alone exchanges, even in Uzbekistan,

competitive markets by both the private sector

will find it difficult to survive using traditional

and government decision-makers is an important

exchange approaches. These countries need

obstacle. Because of this mistrust, a project

markets that provide suitable risk management

to promote commodity exchanges has to have

contracts, but a new approach is necessary to

a component that will capture the minds

build such markets. This challenge is discussed

of private and public sector decision-makers.

in the next section.

Support to the development of appropriate laws

and regulations as well as regulatory structures,

3.3.4 Fully leverage technology to create

which has been provided on and off in past years

exchanges that fit in the economies of

in the latter three of these countries, will remain

transition countries

very useful.

Exchange technology as well as the technology

surrounding the exchange (brokerage systems,

However, in these countries the main bottleneck

information systems, payment systems) have

towards the development of viable agricultural

improved considerably over the past decade.

futures contracts lies not with the government,

Thanks to advanced technology, countries can

but with the private sector. The large private

make use of the benefits of an exchange, even if

consortia that back the financial exchanges

it is outside their territory.

in Kazakhstan, the Russian Federation and

Ukraine do not need international financial

This access provides new opportunities for

support, but they could benefit from improved

small, poor transition countries. Conditions in

access to international expertise. In Azerbaijan

these countries make a case for small, low-cost,

and Belarus, advisory work on agricultural

focused, highly efficient micro-exchanges that

exchange development may also be useful.

use an electronic trading platform (which can

Perhaps by trying to replicate the approaches

be in another country) to trade a broad range of

of the Chicago exchanges, which operate in an

products. The trading platform for such exchanges

environment where all of the services for efficient

could be provided on a Business Process

commodity trade are readily available, and trade

is supported by a sound legal and regulatory
framework, efforts in these countries to build
viable agricultural futures contract have not been
successful. In any country, if an exchange is to

50

Innovative agricultural finance and risk management

Outsourcing mode by a regional venture.75

rapidly, even in small countries. They save on

The old auction exchanges, where they have

the costs of printing and safeguarding physical

survived, may not be the best anchors for such

receipts, reduce the risks of frauds and make

new ventures. External support for awareness-

information about warehousing operations readily

raising, advice and training could be a catalyst,

available to financiers, giving great comfort to

and venture capital-like funding for exchange

bank credit committees and depositors. They

initiatives and related market institution-building

are safely accessible through the Internet, meet

projects could be the most effective way to

banks security standards and provide easy

empower new private sector initiatives.

interfaces with other systems, such as the back

office and front office systems of traders or

In the larger countries where there is scope for a

banks, or price information systems. Annex 6

strong agricultural exchange, there is also room

provides a description.

for making better use of technology. For example,

it is possible to provide brokerage technology

More importantly, they can be considered as a

(back office, middle office and front office)

proto-exchange, offering market participants the

through a cloud computing approach, which

chance to trade WHRs not just as instruments

means that prospective brokers do not need to

for physical trading, but also as vehicles for

invest in expensive hardware and software, but

commodity finance. This service attracts both

can, instead, start their brokerage business on a

banks and investors to the market, and reduces

pay-as-you-go basis. Improved risk management

the financing costs of commodity depositors.

systems can protect both the exchange and its

It turns WHRs into capital market instruments.

brokers against defaults, making it possible to

An EWR system can and should be used for a

attract a broader range of clients. The Internet

broad range of products, not just agricultural

makes it easy to build a countrywide network,

commodities, but also metals, petroleum

which can be readily used to trade and to make

products and petrochemicals, manufactured

margin payments, thanks to the development of

products and even carbon credits and related

new safety features.

environmental instruments.

3.3.5 Boost the use of EWR systems, and use

As the experience of the Republic of South

these as platforms to bring in the financial

Africa shows, an EWR system does not require

community

a complete legal and regulatory framework

So far, remarkably little use has been made

for WHR finance. Transition countries should

of modern technologies to enhance WHR

seriously consider the introduction of such

and commodity exchange programmes. The

systems.

absence of EWR systems in transition countries

is particularly surprising. Such systems are not
expensive and are likely to earn back their costs

75 In order to provide a high quality of services, it is

necessary to invest in a fairly sophisticated trading environment,
including hardware, software (not just the actual exchange
trading engine, but also various supporting softwares, including
for brokers), communication systems and the like. And then,
in order to operate well, the exchange needs a fairly sizeable
and well-trained staff. The resulting high start-up costs and
fixed operating costs make it difficult for an exchange in a small
economy to break even or even, to offer trading fees that are
low enough to generate high trading volumes. The transaction
fees on a typical modern commodity exchange are in the
range of USD 10 to USD 50 per USD 1 million traded value, for
instance. Fortunately, with improved communication systems,
it is possible to use a different configuration. Rather than having
all the technical facilities of an exchange in each country, it is
possible to have a central exchange service which acts as
a Business Process Outsourcing center for several countries.
Each can have its own exchange, which, however, uses the
common service infrastructure. Each national exchange can
have its national look, and access and use can be readily
controlled by local authorities. But when the conditions for
regional trade exist, it is easy to open up national platforms to
regional and international participation.

51

Chapter 4: Boosting finance for food production,

processing and trade
This chapter focuses on innovative approaches

unions77. These programmes are doubtlessly

to enhancing financing for agricultural

useful. They build on and strengthen the capability

production, processing and trade. The first

of local banks to finance smaller projects, probably

section briefly addresses some of the current

with a catalytic impact on the target sectors. But

programmes to provide facilities to local banks,

there is room for broadening their scope and

including microfinance banks. The next two

enhancing their impact.

sections take a closer look at the wide range

of financing structures currently used in the

First, capacity building can be streamlined.

region, divided into pre-harvest and post-

To simplify, there are two main ways to make

harvest finance, and how these can be boosted

lending to the agricultural sector safer: improve

using innovative approaches. After discussing

credit scoring methodologies for individual

how banks in transition economies have

candidate borrowers, and develop blueprints for

structured agricultural finance in the face of

secured and structured financing schemes. In

the risks prevalent in the sector, lessons from

the first case, the bank relies on the borrower,

their experiences as well as from other regions

but enhances its ability to judge whether the

will be discussed. The chapter closes with a

borrower will be able and willing to meet his loan

discussion of the links between a commodity

obligations. In the second case, the bank shifts

exchange and agricultural finance.

its risks from the borrower to other parties by a

careful structuring of the lending transaction.

4.1 Providing capacity-enhancing

facilities to local banks

Credit scoring methodologies can be codified

and incorporated into bank procedures, and
staff can be trained in properly applying them.

EBRD, IFC and other development agencies

This expertise should be a standard part of

have, in different ways, been supporting the

the technical assistance that EBRD and IFC

financial capacity of local banks and non-bank

give to their partner commercial banks.78 In

financing institutions to lend to entities in

many transition countries, banks have little

the agricultural sector, both for short-term

or no expertise in agricultural lending and are

and longer-term purposes. In many countries,

wary of the sector. While helping banks to

there are a multitude of programmes, although

implement the basics of credit risk assessment

their overall scope may be narrow. Annex

and loan management in agriculture is a definite

14 describes the case of Armenia as an

improvement, in many of the partnerships

illustration. Support is for general purposes

or for specific ones, such as leasing or WHR
finance. Lending, refinancing or guarantee
programmes76 are generally accompanied by
capacity-building activities. Capacity building
can be focused on existing institutions like
banks, or on newly promoted institutions
such as microfinance institutions (MFI) or credit

76 Szabo, 2005, describes guarantee schemes in a number of

Eastern European countries.

52

77 Donor agencies have funded micro-finance and credit

union programs in many transition countries, mostly with a
focus on small loans, in the USD 50 to USD 100 range, which
does not really meet the investment or working capital needs
of farmers. Also, the organization requirements for functioning
agricultural credit unions have proven difficult to meet. As an
example, the World Banks evaluation for Georgia: Ten credit
unions were set up at the outset. At first, they performed well.
Encouraged by this success, the central government made
pre-election promises that there would be a credit union in
every village. In 19981999, 164 credit unions were created,
with 12 231 members. The network expanded so rapidly that
sustainability was compromised. By 2008, only seven credit
unions survived, of which just two were deemed viable. The
evaluation concluded that these projects have shown that
small village-based credit cooperatives are not an appropriate
mechanism for large-scale credit delivery (World Bank, 2010).
78 EBRDs current trade finance e-learning programme does
not cover any form of structured finance. See http://www.ebrd.
com/downloads/research/factsheets/e-learning_factsheet.pdf.

Innovative agricultural finance and risk management

into which EBRD and IFC have entered, banks

processing. As local banks are expected to

go little further than this. They learn how to

generate and structure agricultural financing

segment borrowers into different categories,

deals, training should be refocused away from

such as small ones who only require some

a credit scoring philosophy and boosted to

social endorsement, and larger ones who

inculpate a strong culture of structured finance,

can be organized into joint liability groups and

where there is understanding about risks and

other large borrowers who are required to

the tools to mitigate them. Banks need to

provide collateral and submit proper business

be building loans around the strength of the

plans. They learn about group lending and using

transaction structure rather than on the strength

collateral, and are helped to install procedures to

of prospective borrowers. And training should

monitor loan performance and enforce collateral.

extend from classroom-type instructions to

hands-on development of transaction structures,

But credit scoring does not remove the risks

including the implementation of operational

from agricultural production and trade due to

mechanisms to manage ongoing transactions.

external factors such as price developments or

weather events, not to mention risks related to

Second, there is a large scope for wider use of

government policies or commercial counterparts.

proven instruments. Partner financial institutions

Empowering banks not just to quantify, but, more

should be given access to a large toolkit. One

importantly, to manage such risks is critical to

may take the case of agricultural microfinance.

enhancing their capacity to lend to agriculture.

Microfinance programmes exist throughout

How much can be done in this regard depends

the transition region, generally run by NGOs.79

on the specific bank, but at the very least,

They tend to rely on a combination of credit

banks need to be taught how to be proactive in

scoring, group guarantees and assessment of

managing the most basic production risks. For

business plans. There appears to be great scope

instance, they need to ensure that borrowers use

for a more direct management of risk in such

the proper chemicals to treat their crops or, if they

microfinance schemes. Some interesting ideas

finance livestock, that good veterinary services

for this strategy can be found in India. Annex 12

are available for the animals that they finance.

describes how BASIX, an Indian microfinance

It is unwise to finance non-vaccinated animals.

bank, on evaluating its programme, found that

If the necessary service providers are absent in

it was underperforming because its borrowers

the country, the bank should make it a priority

faced three sets of major problems: unmanaged

to create them. Another relatively simple risk

risk, low productivity and unfavorable terms in

management measure is to control the use of at

input and output market transactions. The bank

least part of the loan. For example, if it is meant

then decided to tackle these problems directly

to pay input providers, banks can pay directly

by introducing new product offerings that would

against the invoices of such providers rather than

systematically mitigate these problems.

just disbursing the funds to the borrower.

The results were lower lending risks and new
But it is advisable and feasible to move beyond

revenue sources for the bank, and a much

the most basic risk management. Fortunately,

improved impact of the banks operations on its

structuring a financing transaction in such a

borrowers. Apart from the usual microfinance

way that risks are appropriately mitigated is a

loans, BASIX now provides various forms of

systematic process. Annex 7 provides a step-

insurance, including weather index insurance,

by-step approach, and the remainder of this

veterinary and extension services, capacity-

chapter will discuss some possibilities. When

building programmes for farmers groups, support

applied to specific sectors or to specific lending

to contract farming schemes and price information.

methodologies, blueprints emerge. There

It has experimented with WHR finance and price

are guidelines on how to manage a factoring

risk management. The broad approach adopted

programme which are particularly useful for

by the company and its success in improving

small and medium-sized enterprises (SMEs);

how to start leasing agricultural machinery; or
how to finance the cotton value chain or soybean

79 Szab (2005) gives an overview of loan guarantee

schemes in a number of transition countries.

53

livelihoods by delivering an integrated range

partner for a bank: in emerging markets, local

of agriculture-related services may inspire the

banks often are averse to creating syndicates

approach of microfinance banks in the transition

between themselves. Venture capital can also

region.

finance innovative transaction structures until

these have set a track record which will inspire

Third, credit support institutions should be

banks to come in. With respect to exchanges

strengthened. There are many transaction

and similar platforms (e.g. alternative trading

structures where a bank is best off relying on

systems), improvements in information and

a third party: the required skills are specialized,

communications technology have made the

and an additional level of checks and balances is

introduction of platforms for trading financial and

created. Examples are veterinarian services for

commodity assets much easier and cheaper,

livestock, or collateral management. Collateral

and well within the affordable range for most

managers are virtually absent in transition

transition countries. International organizations

countries. There are no EWR systems.

should consider how they can support proposals

Specialized insurance from weather index

from private sector groups to form agricultural

insurance to the insurance of warehousing

investment funds and trading platforms to

companies is poorly developed, and inspection

complement their ongoing commitments to local

agencies offer only a limited range of services.

banks.

80

International organizations may consider setting

aside a part of the funds that they wish to
provide to local banks to develop credit support
institutions. As noted before, at least some of

4.2 A closer look at instruments and

structures

these support elements are cheap. Setting up an

EWR system (with the wide range of operations

Each borrower is different, and risks change as

set out in Annex 6), for instance, would cost less

commodities move through the value chain.

than one percent of a typical EBRD credit line to

Each financier has a strong incentive to select

a local bank. While the model pursued by some

finance structures that fit their own needs as

Latin American countries and Turkey, namely for

well as those of a specific borrower. It is a

banks to set up their own collateral management

logical outcome of this process that one can

firms, may not be the best suited for transition

find a wide variety in structures. Figure 8 gives

countries, partner banks of EBRD and IFC could

a stylized overview of innovative structures that

be encouraged to jointly fund the creation of a

can be used to reach the different players in the

regional collateral management firm.

agricultural value chain.

Fourth, banks work best if they are part of a

more complete financial environment, ideally
operating alongside investment funds of various
stripes as well as a multi-asset exchange where
they can refinance themselves and recalibrate
their risk exposure. Investment funds can focus
on venture capital, on bringing firms to a higher
level or on trade finance. What matters here is
that their activities benefit from and feed into
bank business. For example, venture capital can
make a firm advance to become a bank client. A
fund investing in trade finance can be a syndicate

80 Collateral management in the FSU is almost uniquely

provided by a handful of international agencies (Baltic Control,
Cotecna, Drum Risk Management, Peterson Control Union
and SGS). In addition, a number of forwarding companies
issue Freight Cargo Receipts, which some banks rely upon as
evidence of the existence and position of the cargo, as well as
acknowledgement of pledge. Unlike in other parts of the world,
there are no local collateral management agencies.

54

Innovative agricultural finance and risk management

Figure 8
Innovative structures for bringing finance to different participants of the agricultural value chain

Source: Author

Figure 8 describes what could be possible if

This database can form the basis for medium- to

commodity exchanges and banks were able to

long-term credit schemes, which, again, can be

optimally link agriculture and financial markets.

securitized. And when traders and processors sell

Farmers, input providers and traders could

on credit, they can sell the resulting receivables to a

move their inventories into exchange-controlled

securitization vehicle, which allows them to receive

warehouses, where they can be graded and

prompt payment against their issuance of invoices.

the rights to finance them auctioned off among

This is an ideal picture, of course, but banks and

interested financiers. Goods in processors

others can gradually work their way towards it.

warehouses can be guaranteed by collateral

management agencies, and similarly become the

Where legal and regulatory frameworks are not

underlying basis for issuing securities. For example,

yet conducive to the more advanced forms of

in the United States of America a cooperative has

agricultural finance, and support agencies are

issued securities with grains in its elevators as the

lacking, financiers can still structure relatively

underlying guarantee. Commodities in the field, that

sound financings by the systematic identification

is, those crops that have yet to be harvested, can

and mitigation of risks. Annex 7 gives a brief

become part of structured finance schemes, as can

step-by-step overview of the methodology. The

famers outstanding payments with input suppliers

risks to which financiers are exposed pre- and

and traders. Ultimately, these schemes hinge

post-harvest differ sharply. In pre-harvest finance,

upon future sales by farmers through an organized

uncertainties include:

mechanism, such as an auction, or to a specific

Will the farmer produce the expected

buyer or processor. Again, these can be securitized.

volume?

Even the provision of infrastructure for farmers,

Will he realize the anticipated price?

like those for irrigation, cold storage or processing,

Will he use his earnings to reimburse the

could be securitized if made part of such structured

loan?

schemes. This provision has been achieved in subSaharan Africa, so there is no reason to believe that

In post-harvest finance:

it would be out of reach for transition countries.

What is the value of the goods financed?

What is the risk of these goods being lost,

Furthermore, if farmers inventories and sales

are registered through a central system, like

stolen or diverted?
When payment for the sale of the goods

that of a commodity exchange, a database of

is received, will the borrower use this to

farmers individual track records will be built up.

reimburse the loan?

55

4.3 Pre-harvest finance

4.3.2 Make equipment available, not money

After the break-up of the Soviet Union, many

4.3.1 Trust in the farmers willingness to

farmers needed new farm equipment. The

reimburse the loan

equipment pools of the old state and collective

In transition countries that have entered into the

farms were either not available to new farms,

EU, banks have largely adapted the agricultural

or in need of replacement. Setting up leasing

finance practices of western Europe: they provide

schemes was an evident solution, albeit facing

working capital finance to farmers backed by

the obvious obstacles including legal issues such

mortgages or pledges over land and real estate.

as whether there is a clear difference between

They take no measures to secure the farmers

ownership and use, tax issues with leasing

earnings, or to establish priority claims over

payments, the difficulties of enforcing regular

these earnings. This form of finance is easy

lease payments, practical and legal difficulties

both for banks and for farmers, but replicating

in recovering leased equipment and a weak

it elsewhere is difficult. In effect, such finance

secondary market for recovered machinery.

is possible only because of the conditions that

Nevertheless, leasing schemes can now be found

prevail in these countries:

throughout the region.

the EU provides a safety net for many

agricultural prices;
there are official transfer payments to further
secure farmers incomes;
the identity of the farmer, his past credit

In several transition countries, such as Belarus,

Kazakhstan, the Russian Federation, Ukraine
and Uzbekistan, the leasing of agricultural
machinery was driven by government bodies.

record and his ownership over his farm can be

Early efforts were not always successful. In the

easily established;

1990s, the state leasing company in Kazakhstan

should it be necessary, the banks rights can

collapsed, as did the privatized agency for

be reliably and speedily enforced through the

machinery supply in agriculture in the Russian

courts;

Federation, but governments kept up the efforts.

title over the land and real estate is clear and

The state leasing companies generally provide

pledges thereon are registered, with very

long-term leases of five to seven years at

little possibility of dispute and in the case of

subsidized or low rates. They usually target large

a farmers default the bank can seize the land

farms. For example, the Russian Federations

and sell it; and

Rosagroleasing provides contracts in the range

there is an open market for land so that the

bank can realize a fair price upon the sale.

of EUR 300 000 to EUR 50 million.81 In some

of these countries, private leasing firms have
emerged, often attached to commercial banks or

In this form of agricultural credit, the bank takes

agricultural machinery manufacturers and dealers.

a call on the farmers business prospects, and

Independent leasing companies and branches of

uses a land/real estate mortgage as his only

international leasing firms have also developed.

collateral. However, the banks willingness to do

However, as they generally rely on local bank

so is dependent not just on his understanding of

funding their terms are less attractive than those

the farmers business or the legality of a farmers

provided by state leasing agencies.

pledge of land/real estate, but on a whole set

of other conditions. Efforts by governments,

International agencies have supported the

supported by the international community, to

development of agricultural leasing in several

train bankers in understanding farmers business

countries. USAID and other US government

plans or to establish clear titles over land are

agencies have helped set up leasing companies

certainly useful in their own right, but one cannot

in Armenia, and supported agricultural leasing in

expect that this suffices for the development of

Georgia. EBRD has provided facilities to leasing

an agricultural credit market. Thus, the agricultural

companies targeting SMEs in a large number

finance mechanisms of the transition countries

of countries. In some of these cases, the

that have entered the EU hold few replicable

companies include agricultural equipment leases

lessons for other transition countries.

81 Serova and Prikhodo, 2010.

56

Innovative agricultural finance and risk management

among their products.82 In other countries, such

financing farming operations to productivity

as Romania and the Russian Federation, EBRD

targets. In its credit scoring methodology,

has supported leasing programmes specifically

a farmers productivity is a key factor, and

targeted at agriculture. In Central Asia and

maintenance of this productivity a condition

Azerbaijan, Hungary and Mongolia, technical

for renewal of funding. It is useful to keep this

assistance and financing facilities provided by

concept in mind. There are few things more

IFC, including investments in leasing companies,

supportive to successful innovation in agriculture

fostered the development of companies leasing

than profitable agriculture.

skills and of a sound legal and regulatory

system. These included the exemption of leasing

4.3.4 Rely on the pledging of future production

interest payments from value added taxes.83

The legal framework of some transition

Programmes were generally successful and

economies permits farmers to assign rights to

leasing in these countries has since developed

future harvests as collateral for loans. In Ukraine,

rapidly. Agricultural equipment leases formed

for example, the law on pledges sets out the

part of the product range, and IFC is making

procedures, which generally stipulate that pledge

efforts to promote the downscaling of such

agreements are notarized and registered with

leases. In Tajikistan, for example, it is linking

the relevant state registry. Other countries also

up with a microfinance bank. This approach of

have pledge laws. These should be reviewed to

bringing agricultural leasing as a new product to

ensure registration requirements are not unduly

MFIs, or micro-leasing, is well worth replicating

cumbersome or expensive and future assets

in other transition economies.84

can be pledged. In some cases, only clearly

identifiable assets are permitted to be pledged,

4.3.3 Ascertain farmers likely production

which excludes future crops. But even when

Banks may be willing to provide unsecured credit

pledge laws are well-formulated, banks are

if they have reliable records on individual farmers

only likely to accept pledges of future crops as

credit and production history. Governments

collateral if the farmer has a well-established track

can help here, as is the case in the Russian

record.

Federation. There, regional offices of the Ministry

of Agriculture certify how much seed a farmer

Pledges of future crops form the basis of pre-

has sown. These certificates give banks a certain

harvest finance in Brazil, and act as the key

measure of confidence in a farmers likely future

building block for a series of more complex

production; enough to finance as much as 30

instruments that tightly knit agriculture and

percent of the likely future value of their crop.85

finance together. This relationship is discussed in

Several countries have organized systems for

more detail in Annex 10. Section 4.3.2 discusses

registering loans. In Kazakhstan, such registration

potential issues with respect to introducing

may even spell out for what purposes such

similar instruments in transition economies.

loans can be used (e.g. to pay diesel suppliers).

Initiatives of this nature deserve replication.

4.3.5 Rely on loan guarantees by third parties

In many transition countries, donor agencies have

Another possibility is for a bank to develop

established guarantee schemes for bank lending

agricultural expertise. A bank in the Philippines

to rural sectors. For example, USAID encourages

that has built a successful niche in innovative

its local missions to support sustainable lending

agricultural finance has more agricultural

programmes to micro, small and medium-sized

engineers among its staff than credit officers.

enterprises through the provision of Development

It explicitly ties its willingness to continue

Credit Authority (DCA) loan portfolio guarantees.

In these guarantees, DCA takes half of the

82 See EBRD, Small and medium-sized leasing finance from

local companies, undated note, http://www.ebrd.com/downloads/funding/leasing.pdf.
83 Tax treatment is a problem for leasing in several countries.
For example, in Tajikistan, imports of agricultural machinery are
VAT-exempt, but imports of the same machinery by a leasing
company are subject to 18 percent VAT.
84 See Goldberg and Palladini, 2010; and Kennedy, 2010.
85 Winn et al., 2009.

credit risks. This revolving guarantee scheme

in which individual transactions continue to
be guaranteed as long as there are sufficient
uncommitted funds in the guarantee scheme, has
been frequently used worldwide, including in 17

57

transition economies.86 It is often associated with

legal constraints,88 Kyrgyzstans Bai Tushum

technical assistance, to enhance partner banks

Financial Foundation and Kyrgyz Agricultural

understanding of new financing tools such as

Finance Corporation have developed successful

factoring or WHR finance.

agricultural loan programmes, including those for

preharvest finance. As the microfinance industry

Agricultural loan guarantees have, at best, a

has come under criticism for not creating enough

mixed record. DCA typically makes a loss on its

real value with its traditional financing of small-

guarantee schemes, but considers the loss as

scale retail or processing activities, expansion into

a grant element and argues that so far, in terms

agricultural microfinance is an evident response.

of positive impact on development, this has

The particularities of agricultural microfinance are

been an effective use of grant funds. Losses

now well-known, and organizations such as EBRD

from the agricultural part of its portfolio are

may consider how their lending or guarantee

higher than the DCAs average losses (i.e. three

activities for bond issues by microfinance banks

percent versus one percent). As EBRD, IFC and a

(not for the banks loan portfolio) can boost the

number of bilateral agencies are expanding their

practice, including through new tools such as

loan guarantee programmes to banks, due care

microleasing.

should be given to the proper structuring of such

programmes to maximize impact and reduce

4.3.7 Capture the farmers earnings through

possible losses. Accompanying loan guarantees

the buyer

with a robust technical assistance package is a

When farmers have little choice but to deliver

must. Guarantee programmes have to be time-

through a single marketing channel, such as

bound. That time could be long, for in some

through a processor (e.g. cotton, dairy, livestock,

developed countries guarantee schemes have

sugar), an auction system or a government

been in place for as much as 30 years before

trade monopoly, banks can use this as a

it was deemed that commercial banks were

reimbursement mechanism. A similar possibility

sufficiently familiar with agricultural lending and

exists when farmers have strong financial

no longer required them. It is also essential to

incentives to deliver to a particular buyer such

formulate at the outset the expected outcomes of

as a supermarket that may pay premium prices

a guarantee programme not just in terms of new

for high-quality fruits and vegetables,89 or a baby

credits, but also in terms of behavioural changes

food manufacturer willing to pay well for high-

by the client bank and other banks in the country.

protein soyabeans. Upon receiving the loan, the

Then, they need to monitor actual performance

farmer assigns priority rights over his earnings

with the possibility to intervene if results are not

to the bank, and informs the marketing channel

as expected.

agency accordingly; on later sale of the goods,

this agency/company deducts the payment due

4.3.6 Rely on group guarantees

to the bank before paying the remainder to the

In a typical microfinance approach farmers form

farmer. This system, used in the Tajik cotton

groups. Each farmer borrows individually, but

sector, enables farmers to select input suppliers

his loan performance is guaranteed by all of the

themselves; but there is a risk of credits being

farmers in the group. There are many institutions

diverted for non-farm purposes.

providing microfinance in transition countries,87

and they are actively involved in rural lending.
Some have become successful agricultural
lenders. For example, despite significant

86 USAID, 2010.
87 For a list, see Pytkowska, 2008.

58

88 The main constraint for agricultural micro-finance institutions in Kyrgyzstan is that, on the one hand, they are not
licensed and thus are not permitted to accept land as collateral.
On the other hand, by law all loans have to be fully collateralized. Furthermore, Kyrgyz law has very cumbersome and costly
registration requirements for collateral. (Pearce et al. 2006).
89 Winn et al., 2009, give the example of a supermarket chain
in Croatia that enters into contracts with preferred suppliers of
strawberries. These farmers are encouraged to invest in irrigation and greenhouses. To enable them to finance such investments, the supermarket negotiated with local banks to finance
against the security of the farmers contracts, offering to cover
part of the risk.

Innovative agricultural finance and risk management

4.3.8 Shifting credit risk to processors and

It was and remains the second largest export

traders

product after aluminium.

Instead of lending to farmers, banks can lend to

processors and traders who will then provide

Cotton production is input intensive compared

farmers with the inputs they need, on credit.90

to many other crops, and requires significant

Farmers bargaining power under this mechanism

pre-harvest finance. As a result of the civil strife,

is weak. The experience in transition economies

state input supply and finance organizations had

has been that often very high interest rates were

collapsed, and the sector had become dependent

demanded under this form of pre-harvest finance

on private sector financiers, called futurists (as

(i.e. paying high input prices and receiving

described in section 1.3). To create an alternative

low output prices). Nevertheless, as long as

mechanism, IFC together with the Swiss

arrangements can be made to safeguard the

Secretariat for Economic Affairs (SECO) decided to

interests of farmers, this form of finance has

support the creation of a farmer-owned enterprise.

great potential. From the banks perspective,

there is only one large borrower, so the

In April 2002, in the Northern Sugd province

administrative burden is reduced, compared

of Tajikistan, 365 farmers established a closed

to having many individual farmers as clients.

joint-stock company called SugdAgroServ (SAS)

The processor or trader will tend to provide a

together with IFC and SECO. The farmers

large part of his credit in kind,91 benefitting from

together contributed USD 1 472, and the two

lower prices because they can buy in bulk. The

others invested USD 250 000 each. SAS works in

processor/trader is best placed to allocate the

four areas92:

credits appropriately, depending on individual

The provision of working capital and

farmers production capability. Farmers may

investment loans: Working capital loans are

benefit not just from credits, but also from

available for up to 14 months. Loans for the

extension services, marketing contracts with

purchase of fixed assets such as agricultural

guaranteed minimum prices and other contract

machinery or irrigation pipelines, or for cattle

farming arrangements. Thus, they are likely to sell

breeding were for up to three years. Interest

through the processor/trader, ensuring that the

rates were set two to four percent below

bank gets reimbursed.

those of Tajik banks (i.e. it was not structured

as a microfinance organization).

Arrangements of this nature are widely used in

Marketing services: SAS markets cotton on

transition countries, including with funding from

behalf of its members, including with traders

international traders, banks and organizations.

in Kazakhstan, the Russian Federation and

other countries.

4.3.9 A case study: organizing cotton finance

Sourcing and sale of input: SAS procures

through a new farmers organization the

fertilizers, chemicals, petrol and diesel fuel,

experience of SugdAgroServ, Tajikistan

and, to a lesser extent, seeds. It provides

Tajikistan went through a prolonged period of civil

these to its own members, and sells them

strife from 1992 to 1997. Thereafter, institutions

through a shop to other farmers.

needed to be rebuilt to fuel economic growth.

The cotton sector was one of the priorities. At the

Technical assistance: To member farmers to

improve product quantity and quality.

time, cotton accounted for more than a quarter of

GDP and employed two thirds of the labor force.

In its first two years of operation SAS was very

successful. It had a good return on equity, and
a loan portfolio of some USD 800 000 with

90 This approach is akin to the old Soviet system, as is still

operational in Turkmenistan and Uzbekistan. Farmers have to
supply their crops to monopoly state-owned buyers, but are in
return supplied with subsidized inputs, equipment and services
on credit reimbursable from the proceeds of the farmers sales.
91 This setup is not primarily to make a margin on supplying
fertilizers, seeds, diesel and the like, but to ensure that funds
are not diverted. Farmers are often under large financial pressures, and if they are given cash they may use much of it to
meet immediate consumption needs. A combination of credit in
kind with some cash to avoid the likelihood that farmers will sell
part of their fertilizers etc.,works best.

110 clients. It marketed over 1 500 tonnes of

cotton. In 2004, IFC and SECO injected additional
resources that permitted the expansion of SAS to
over 1 000 members, and the new shareholders
brought in another USD 19 000 for their shares.

92 Hess et al., 2005a.

59

But then, problems started. In 2004, the world

corporate finance, Brazils large-scale experience

cotton price fell by 45 percent, and, in addition,

in extending the commercial paper programme to

Northern Tajikistan was hit by a drought that

farmers is unique. The regulatory framework for

caused yields to fall. At the end of 2004, SAS

this commercial paper, called Cdula de Produto

found that 40 percent of its by then USD 1

Rural (CPR literally rural product note), was

million loan portfolio was in default. In 2005,

introduced in 1994, and over the years has been

SAS was close to financial collapse. Analysis of

extended to include new forms of CPRs as well

the situation showed a number of deep-seated

as various other products based on them. Annex

problems. Perhaps inspired by the experience

10 provides extensive discussion of the system.

with credit programmes in the former Soviet

Union where every five to seven years, loans

CPRs are bonds that can only be issued by

were forgiven, farmers did not quite perceive

farmers and farmers associations, including

the difference between loans and grants.

cooperatives, by pledging an agreed amount of

The board members of SAS had improperly

crops (including in semi-processed form) or cattle,

used their position to obtain loans and were

in return for financing. Essentially, the CPR is a

often delinquent in their obligations. It proved

promise by a farmer to a CPR buyer to deliver a

necessary to purge the board of defaulters, and

certain quantity of crop/cattle or to make a certain

to pursue them in court.

payment at a specific time in the future. The

93

buyer is willing to make an immediate payment

This action helped reverse the situation. Policies

for receiving this promise.

were changed, with a new rule requiring notarized

collateral for loans of more than USD 2 000.

It is the willingness of the CPR buyer to make

A special approval process was introduced for

such immediate payment that is crucial. If

loans to board members; and it was decided to

the political will exists, it may be relatively

diversify into non-cotton lending. IFC and SECO

straightforward to introduce the legal and

intensified their business management training

regulatory framework for CPRs. But if the

activities for farmers. SAS survived and became

complementary conditions to create trust are

a healthy, profitable and growing organization.

not created simultaneously, the newly created

And the experience inspired IFC to start a second

instruments will hardly be used. The Brazilian

cotton lending project in April 2007 the South

experience also shows that there are a number

Tajikistan Cotton Lending Project with two local

of factors that, while not necessarily critical,

banks, TojikSodirotbonk and First MicroFinance

contribute significantly to the development of

Bank. It was based on a detailed credit scoring

CPRs.

methodology, making it possible to assess

farmers ability to be profitable and their current

As far as the Brazilian experience suggests, a

indebtedness.

number of conditions are essential for creating

trust in the promises that are implicit in CPRs.

4.3.10 How readily can the Brazilian system

Thus, any effort to introduce CPR-like instruments

of rural bonds be replicated in transition

in transition economies should include actions to

economies?

replicate these conditions:

Brazil provides an approach towards agricultural

Various registries help prevent farmers from

finance which is different from any other

over-promising. CPR buyers can check

country, but which may inspire new approaches

whether farmers own enough land, whether

in transition countries. Much of farmers

they have made other pledges and whether

finance provided in Brazil outside of the system

farmers assets are mortgaged to any

of government-subsidized farm credits is

financiers. The introduction of a (preferably

given through the purchase of farmer-issued

electronic) registry encompassing land

commercial paper. In other words, banks do not

ownership, farmers mortgages and pledges

provide loans, but buy commercial paper issued

over crops is essential for the introduction of

by farmers. While this is commonly used in

CPR-like instruments.
An electronic system for trading CPRs and

93 Wright et al., 2010.

60

instruments based on them similar to the

Innovative agricultural finance and risk management

EWR system discussed elsewhere in this

of CPRs. It is advisable that when CPRs

report eliminates many potential risks, and

are introduced, instruments to link CPR-

thus creates trust in the CPR system. In

based finance to the capital market are

addition, it reduces transaction costs.

also envisaged. Together with the relevant

The legal system provides for a high level of

financial regulation agencies, an effort should

security: CPR-related claims have priority over

also be made to conceptualize and develop

other claims (even in the case of bankruptcy).

the mechanisms to trade such instruments

Force majeure is not a valid excuse for defaulting

over-the-counter or, preferably, on organized

on CPR-related obligations, and in case of dispute

there is a rapid out-of-court dispute resolution

exchanges.
The existence of monitoring agencies that can

process. In addition, Brazilian courts are familiar

verify the behaviour of farmers, and processors

with bonds in general, and do not negatively

issuing bonds similar to CPRs, have added

intervene in the out-of-court process. Creating

further trust to the system. They give the

similar legal protection may be the most difficult

bond buyer confidence that the bond seller

aspect of introducing CPR-like instruments in

is, indeed, using the funds for the planned

transition countries, yet it is essential. It will

activity, and give hands-on control during the

require not just the introduction of a suitable

critical period. For example, during harvest

legal and regulatory framework for the CPRs

time the monitoring agency can make sure

themselves, but also efforts to work with the

that each day the pledged goods are, indeed,

judiciary to ensure that judges understand CPRs

going to the agreed buyer. The creation and

and will not undermine their functioning.

strengthening of such agencies merit support

as a component of a programme to introduce

As the Brazilian experience indicates, the

following factors are supportive for introducing
CPRs:

CPR-like instruments.
CPRs and similar instruments have benefited
from favourable tax treatment.

Much of the drive to use CPRs did not come

from banks, but rather from channel partners

While CPRs are valuable tools, the fact that they

of farmers who had strong commercial

remain based on trust in a farmers promise

reasons to build credit relations with farmers

implies that,they are more likely to benefit

such as input suppliers for whom this was

well-organized medium- and large-size farmers

the best way to sell inputs, and processors/

farmers rather than small and unorganized ones,

traders for whom it was a good way to secure

as is the case in Brazil. They may be a good tool

future supplies. In the absence of CPRs, in

for agricultural development, but they are not a

many cases these companies would have

priori well suited to target the poorest farmers or

provided finance anyway (e.g. by selling

poverty alleviation in general.

inputs on credit, or pre-financing forward

contracts). However, CPRs gave superior
legal protection. This fact suggests that if

4.4 Post-harvest finance

CPRs are introduced, they are most likely to

be used in already-established value chains,

Cost effective post-harvest finance is necessary

and it is advisable to focus initial efforts

both to strengthen farmers bargaining power

to establish CPRs on such chains and the

vis--vis buyers, and to ensure a proper flow of

channel partners involved.

goods from farm to fork. Finance can be provided

It has been important for the buyers of

to producers, processors or traders. Banks may

CPRs that Brazils regulatory framework

provide unsecured finance to good corporate

gives them easy options to refinance the

names, but otherwise will look for security in

CPRs, through banks and the capital market.

the supply chain. They have several tools at their

Several instruments have been created for

disposal.

this purpose. These have benefited both the

agricultural sector and investors, and have

4.4.1 Control the good

ensured that lack of credit/finance capacity

Financiers, including banks, investment funds or

has not been an obstacle to the development

trading companies, can obtain control over the

61

crop once it is harvested and provide finance

a purchase of invoices, and several large

against this security. There have been many

factoring companies have come up as a result.

programmes over the past two decades to

Since 2007, EBRD has supported factoring

promote this kind of finance; this is considered

in Georgia, Republic of Moldova, Romania,

in some detail in the section on WHR finance. As

the Russian Federation and Ukraine through

discussed above, many banks have participated

its Trade Facilitation Programme. It may be

in financing using WHRs on their own initiative

worthwhile for EBRD to consider how, within

or under the EBRD WHR programme which is in

the framework of value chain financing for the

operation in many of the transition economies.

agricultural sector, factoring can help improve the

The large banks provide financing against WHRs

flow of capital. It can also work with its partner

predominantly using their own funds. WHR

factoring companies to strengthen the relevant

finance is not without risk. There have been

product lines and, where relevant, introduce

cases where a bank found that the elevator was

new agriculture-specific factoring products (e.g.

empty after it tried to take possession of grain

working with supermarkets).

evidenced by WHRs when its borrower had

defaulted. While the bank then has recourse to

4.4.3 Assign export receivables

the elevator company, this may only be a meagre

If there is an export contract, a bank can provide a

consolation as the elevator may be weakly

pre-export loan on the basis of the assignment of

capitalized and not bonded (i.e. guaranteed by

the export proceeds (i.e. once the financed goods

a specialized insurance company).

are exported, the buyer pays the bank, which then

transmits the sum that remains after payment

In certain cases, banks may not require full

of the loan to the exporter). This mechanism

control over the crop as it moves down the

has been extensively used for large-scale grain

supply chain, but, instead, just need up-to-date

exports, from Kazakhstan, the Russian Federation

information. For example, Socit Gnrale de

and Ukraine. A separate section discusses the

Surveillance has introduced an Internet-based

Kazakh experience. In transition economies,

tool that allows grain trade financing banks to

this financing form is most often found in the

monitor on a real-time basis how grain moves

mineral and energy sectors. In agriculture it has

into and out of silos, railway cars and ships during

been mostly used for large (USD 20 million plus)

critical phases. While the bank does not have

grain, oilseeds and cotton deals. Thus, there is a

collateral control over the grain, it can quickly

fairly large scope for expansion into agriculture,

identify discrepancies and intervene to safeguard

including for south-south trade and for perishable

its interests as needed.

commodities such as fruits, flowers and

vegetables. However, a USD 5 million deal may

4.4.2 Control the farmers local receivables

require as much, if not more, work than a USD

Buyers may insist that their suppliers deliver

100 million deal. Therefore, smaller deals would

their produce on 3090 day credit terms. This

be more attractive for local and regional banks

agreement is the typical purchasing mode

with a lower cost base than for international

of supermarkets, for example. There are also

banks. To enter into this market, however, local

processors who make deferred payments.

banks need to build up the necessary appetite

Consignment sales, which are fairly common for

and expertise.

fruits and vegetables, similarly lead to payment

62

delays. In the case of deferred payments,

4.4.4 Ownership-based financing structures

factoring operations can enable sellers (i.e.

The main tool of ownership-based financing

farmers, cooperatives) to obtain ready cash.

is the repurchase or repo contract. In a repo,

Factoring and the related practice of forfeiting

rather than taking a pledge over the goods

are standard in developed market economies

being stored or shipped, the bank actually buys

as well as in international trade, including for

the goods. It simultaneously signs a contract

sales to transition economies. Indeed, they have

for resale in a pre-set period of time at a price

been growing fast in some transition economies.

that reflects the cost of funds from the original

In countries like the Russian Federation, the

time of sale to the resale. This arrangement

legal framework fully supports factoring, as

provides much greater legal protection to a

Innovative agricultural finance and risk management

financier than the use of a pledge. However,

his repurchase obligations. To deal with this risk, a

the financiers remain exposed to risks related

conditional offtake contract is often signed with a

to the warehousing and transporting companies

reputable international buyer.

involved in the transaction, and also take on new

risks related to ownership such as liability in case

Overall, international agencies may wish to

of environmental damages. Repo contracts have

act carefully when it comes to advocating the

been used in Poland, the Russian Federation

replication of repo financings. Few local banks

and Turkey. Rabobank, for instance, has used

may have the sophistication to manage them

repos mostly in the sugar sector, but had to face

properly. On the other hand, repos can also be

a considerable loss in at least one case, in the

traded on commodity exchanges, which merits

Russian Federation, due to disappearance of

further exploration. An example of this option is

the sugar. Nevertheless, there are possibilities

the case of Colombia, discussed below.

for replication in other transition economies,

particularly in Central Asia, as this mechanism

4.4.5 Rely on third-party guarantees

perfectly replicates the standard Islamic financing

To finance exports, one may benefit from official

form of Murabahah. Indeed, in 2010, an arm of

export credits or credit insurance. But in transition

the Islamic Development Bank structured a USD

economies, the offer is still limited. By and large,

40 million Shariah-compliant facility for a Kazakh

export credit agencies only started to be created

wheat exporter, using WHRs as support.94

in transition countries in the second half of the

1990s. Central and Eastern European countries

It follows that, in many transition countries, there

set up new entities, and the larger countries in

is scope for the introduction of repo contracts,

the FSU Kazakhstan, the Russian Federation

depending on specific conditions such as tax

and Ukraine converted existing banks into

systems and the reliability of warehouses.

export credit agencies. The means put at the

disposal of these agencies, however, remained

Legally, repo contracts are not loans, but

limited, and they have been largely earmarked

purchases and sales. They can thus be subject to

for manufactured exports. Multilateral agencies

value added taxes (VAT). VAT has posed a problem

such as the EBRD and IFC have, to some extent,

in the use of repo-based finance in the Russian

filled this gap, and some south-south trade in

Federation. Banks such as Rabobank had to set

agricultural products has been made possible by

up special vehicles, including the prefinancing

this support. Nevertheless, agricultural exporters

of VAT payment, to deal with this issue. VAT

from transition countries can generally not count

reimbursements in the Russian Federation are

on the ready availability of export credit insurance

sufficiently reliable to make this work, and the

or guarantees. It may be useful to engage these

financing potential worth enough to make the

national export agencies to open windows for

process worthwhile, but this is not necessarily

financing agricultural trade.

the case in other countries. Another problem is

that, as the bank is the owner of the commodities,

4.4.6 Financing processors

it is fully exposed to all risks associated with

Several structures have been used to finance

ownership: the goods being damaged or stolen, or

processors in the difficult period after the break-

involved in some form of accident (e.g. leakage of

up of the Soviet Union. One was the buy-back

vegetable oils leading to environmental damage).

arrangement. A form of countertrade used

Furthermore, the price setting in repo contracts

for refurbishing processors, the equipment

can be complicated. In case of a dispute, if the

supplier was paid over several years either with

price is set too low, a court may decide that

products produced by his equipment, or with

there was no true sale, depriving the bank of its

part of the export proceeds of these products.

priority rights over the commodities. If the price

This arrangement was a risky form of finance,

is set too high the counterparty may default on

and was only used when an international firm

entered into a joint-venture with the local

94 Details on the structure of the deal can be found in Islamic

Trade Finance Corporation (ITFC), Progress Report on ITFCs
Role in the Promotion of Intra-OIC Trade, 27th Meeting of the
Follow-Up Committee of the COMCEC, Ankara, Turkey, 1-2 June
2011.

counterparty. Another form was tolling. In this

case, the processor was paid a fee for processing
raw commodities that are bought, handled and

63

financed by a third party, such as an international

estimates between 11 and 100, as to their

trader. This form is an attractive solution for

numbers. Each investor was allocated, through

processors who do not have sufficient capital

informal means, a monopoly area. In this area,

to buy all the raw materials they require for full-

he provided credit to local farmers, mostly in

year operations. In transition countries, tolling

kind, in the form of fuel, fertilizer, pesticide and

has been particularly important in the sugar and

other inputs, with some cash advances for salary

vegetable oil industries, but also very significant

payments and machinery repairs.

in the production of flour.

95

These are particularly

useful financing solutions in crisis situations. But

The funds were mismanaged, with the investors

while financing structures of this nature may still

appropriating massive rents because of their

be useful under certain conditions, there is little

regional monopolies, while the farmers received

value in international organizations promoting

only a quarter of the export price. Farmers were

their use.

forced by the government to continue producing

cotton, under production quota; failing to do so

4.4.7 The mixed experience of finance in the

could lead to the loss of their land use rights.

Central Asian cotton sector

The poor fund management combined with

Cotton exports have benefited from structured

falling world market prices rapidly caused a loan

finance for many years, but the track record

default. The 1999 campaign saw a major financing

is mixed with negative experiences in the

shortfall, which led to severe input shortages.

Kyrgyzstan, Turkmenistan and Tajikistan, and a

This fact, compounded by poor weather, caused a

positive experience in Uzbekistan to date.

major reduction in the cotton harvest. The loan was

rolled over in consecutive years, but the situation

In Turkmenistan, exports remained in state hands.

did not improve. The debt burden only increased

The state company, while receiving prepayments,

to USD 150 million by mid-2002. The cotton sector

regularly defaulted on its delivery obligations with

did not manage to escape its problems, and

international cotton traders. In 1996, the Central

despite further rescheduling, the loan went into

Bank had to pay out USD 80 million because it

default. When, under an IMF programme in 2004,

had guaranteed performance, and the Ministry of

the cotton debt was taken off the books of the by

Agriculture was blacklisted at the Liverpool Cotton

then insolvent Agroinvestbank and transferred to

Exchange. In Kyrgyzstan, in the latter half of

a non-banking financial institution called Kredit

the 1990s, cotton ginneries provided finance to

Invest, it amounted to USD 260 million. 98

96

farmers, and were themselves financed through

prepayments from international traders. But in

While this Tajik cotton finance had the

2000, cotton ginneries became the target of

characteristics of a structured pre-export financing,

money-laundering activities, resulting in a default

the loan structuring was amateurish. In a properly

on international obligations; prepayments thus

structured deal, the financier secures the asset

stopped.97

conversion cycle, from finance to commodities and

then back to finance again. He ensures that the

In Tajikistan, in early 1998, a major cotton

funding is, indeed, used to produce and process the

trading company, Paul Reinhart A.G., through a

commodities, and that these are then transported

consortium of banks led by Credit Suisse First

Boston, granted credits totalling USD 77 million
to Tajikistans Agroinvestbank, in which Reinhart at
one time owned a majority stake. Agroinvestbank
then loaned the money to local cotton traders/
ginners, called investors. Sources give varying
95 Avdasheva, 2002. One of the largest agricultural credits
in transition countries in 2003 was a USD68.5 million tolling
facility by ABN AMRO and Socit Gnrale for French trading
company Sucden, for sugar processing in the Russian Federation. The facility covered raw material costs, transport costs and
taxes, storage costs as well as tolling fees.
96 International Crisis Group, 2005.
97 Swinnen et al., 2007.

64

98 Asian Development Bank (ADB), 2000, Porteous, 2003,

Hollinger, 2006, and Bale, 2008. Kredit Invest basically continued with Agroinvestbanks financing methods: trilateral agreements were signed between a farmer, an investor and the bank,
under which the investor provides the farmer with cash and
inputs (without any mechanism to control input prices) and the
farmer, in turn, delivers cotton to the investor with no mechanisms to ensure fair payment. All risks were on the farmer: The
value of the seasonal finance is deducted from the value of the
cotton at the time of sale and the farmer is either in debt or in
credit with the investor/Kredit Invest. If the farmer finds himself
in debt to the investor, he is then required to contract with the
same investor for the next season, a share of the value of his
next seasons crop going to pay back the previous debt and interest (Bale, 2008). Not surprisingly, farmers debts continued
accumulating; in December 2006, they were estimated at USD
400 million.

Innovative agricultural finance and risk management

and sold to a buyer whose payments will settle

performance of the export company.99 In later

the loan; and he builds in a series of risk mitigants

years, the transaction structure became more

to prevent, to the extent possible, any disruption

complex, combining cotton pre-export finance

to this asset conversion cycle. He also takes

with warehouse financing. This supply chain

insurance to cover the potential loss.

financing covered the period from prepayments

to the Uzbek exporter which was guaranteed by

In contrast, in this transaction, it was left up to

the National Bank of Uzbekistan, transportation

the investors to decide how funds would be

to and storage in third party warehouses in

used. Very little was done by the financier to

Latvia and Iran (on the basis of WHRs) until

ensure that funds would be properly utilized.

the export sale to and receivables from final

Consequently, funds were diverted, fertilizers

buyers. Payment risks were covered through

delivered late, loans to pay wages were provided

credit insurance on the buyers. The bank actively

too late, costs of inputs and services were

monitored the flow of the goods from the gin

inflated, etc. Furthermore, there was no coverage

in Uzbekistan (the country has effective pledge

of production-related risk. As investors paid such

laws100) until arrival with the spinning companies.

low prices, many farmers diverted inputs to other

crops that they could sell independently, and
price risks were not managed properly. There was
a price hedge in place, but this did not secure the
farmers margins. The financier might have relied
on a government guarantee but in practice, in a
country with serious hard currency constraints, if
a loan does not lead to hard currency earnings
that is, if cotton export revenue is too low it is

4.5 Possibilities for replication and

innovation tools for and lessons
from the region
While copying a structure from one commodity
sector to another, or from one country to another,
may not work, structures that work well in

very difficult to enforce such a guarantee.

one case should provide inspiration to others.

With proper structuring, all of these risks could

can find many examples of deal structures that,

have been managed, and if Tajikistan learns from

international best practice there is no reason to

Globally, as well as in the transition countries, one

if properly adapted, may function well in certain
transition countries and can provide practical

repeat the earlier experience.

solutions to the financing needs of commodity

Uzbekistan has had a more positive experience

international banks tend to concentrate on large-

with structured finance. While cotton is produced

by a large number of small producers, it is
effectively controlled by the government. Each
year, a state body, the Uzbek Association
of Cotton Industry, enters into procurement
contracts with farmers, and the state makes
advance payments to the farmers for up to
50 percent of the contract price, which tends
to be very low compared to world prices. The
association then processes the cotton and

producers, processors and traders. Given that

scale transactions and that many of the financing
needs in the agricultural sector are below their
usual threshold, it falls largely on local and
regional banks in transition countries to learn
from international experience and to structure
financing solutions for their own regions.
Structured commodity and trade finance
is considered by financiers a low risk area,
compared to other forms of bank lending. Thus,

delivers it to large state trading organizations.

Several structured finance transactions have
been built around cotton export flows. For
example, in 1997, a German bank structured a
prepayment structure in which the foreign buyer
prefinanced the export company a percentage
of the forecasted contract value of cotton it
was to buy under an annual export contract.
The National Bank of Uzbekistan guaranteed the

99 The percentage paid was high as much as 90 percent

because the financier put full trust in the Advance Payment
Guarantee of the National Bank. In a pre-export financing in
1997/98, by Standard Bank, the Bank called on the guarantee
following a contractual dispute between the international trading
company and the Uzbek exporter, and was duly paid within a
few hours, without any problem (see Commercial Court, Uzinterimpex JSC v Standard Bank Plc., 15 May 2007, http://www.
nadr.co.uk/articles/published/ArbitLRe/Uzinterimpex%20v%20
Standard%20Bank %202007.pdf).
100 Uzbek pledge laws recognize public warehousing, field
warehousing and even tolling arrangements. And in case of
default, it is relatively easy for the financier to take the goods
and dispose of them. See Sidelnikov, 2006. .

65

this form of financing is particularly suited to

yet perfect101. As a result of the cooperation

borrowers in higher-risk environments, which

with western banks, several banks in the region

from a banking point of view applies to the vast

have a reasonable experience with various

majority of non-OECD countries. Furthermore,

forms of structured finance for agricultural

the agricultural sectors in these countries need

commodities. In addition to providing WHR

efficient finance, and the purpose of structured

finance and discounting export receivables (i.e.

finance is to enable credits to flow even in very

post-shipment), they have participated in pre-

challenging situations. A pragmatic solution may

export financings for grain, oilseed and cotton

be to take a two-pronged approach. On the one

exports, using expected receivables from future

hand, they should target the lowest-hanging

exports as collateral. By the early 2000s, some

fruits, that is commodities for which sound

of the banks had developed reasonable in-house

supply chains can be structured like those for

capacity that allowed them to initiate their own

export sales or for delivery to supermarkets,

transactions. With large farming enterprises as

including through demonstration projects. On

their clients, local banks have provided both hard

the other hand, they should remedy some of the

currency and local currency loans to finance the

institutional and regulatory weaknesses, including

production cycle, from ploughing to growing and

reducing direct government intervention while

harvesting. They have also commonly financed

investing in market infrastructure.

the working capital needs of grain millers, using

WHRs and collateral management to secure their

The scope for more structured finance is probably

loans, putting their own agent on the premises of

least in the transition countries that have become

the miller, rather than outsourcing to a specialized

EU members, where lending risks, both real

agency. EBRDs programmes to promote

and perceived, declined, and the need for tight

WHR finance and, to a lesser extent, its trade

financing structures reduced. Aspiring members

facilitation program (TFP), have been effective in

are going through the same process. Therefore,

promoting such forms of structured finance.

by and large, in these countries there is currently

limited need for structured finance, and even less

However, given that the very recent introduction

need for international support in this domain.

of structured finance concepts, and the availability

Banks in these countries are now, to a large

of large, attractive sectors (oil, metals and grains)

extent, owned by western European and, to a

have absorbed most of the countrys bankers that

lesser extent, American banks, and should not

are knowledgeable in structured finance, fewer

be prime targets for international support. Legal

efforts have been made to target less traditional

and regulatory conditions have much improved,

sectors. Targeted support could help change this.

including as part of the process to prepare these

In particular, banks start-up costs of learning

countries for EU accession. Major companies

how to finance a new sector can be reduced

have built up track records, which now allow

through international support. A good starting

them access to balance sheet finance. There

point would be to focus on integrated commodity

have been many western European investments,

chains and non-traditional sectors. It should also

ranging from individual farmers migrating east

be possible to extend existing financings, for

to large acquisitions in the agricultural and agro-

example, to apply pre-export financing structures

processing sectors in these countries. By and

to benefit small farmers.

large, agriculture has become well organized.

There is, however, still scope for improving local

In the final category, the economies of Armenia,

banks understanding of commodity finance and

Georgia, Kyrgyzstan, Republic of Moldova,

connected risks, as well as the practicalities of

Tajikistan, Turkmenistan and Uzbekistan are small

structured finance.

and vulnerable. They pose a sub-investment

The large CIS economies of Kazakhstan, the

Russian Federation and Ukraine have seen quite
a few large structured finance deals, mostly on
the back of major export flows. The legal and
regulatory framework is favourable, though not

66

101 For example, in the Russian Federation it can be difficult

to enforce the assignment of future flows, i.e. of goods that are
to be produced in the future (Winn et al., 2009); in Kazakhstan,
such assignment is permitted. .In many countries, easy out of
court foreclosure, e.g. on WHRs, is not yet feasible. Moreover,
in many countries there is a risk that courts will overturn commercial arbitration rulings.

Innovative agricultural finance and risk management

grade risk to international lenders. The financial

and many rules and regulations, such as those

sector is underdeveloped, with few large local

on exports, hinder their proper development.

banks and virtually no international banks.102 Local

The infrastructure for physical trade, including

interest rates are high. In Armenia, Kyrgyzstan,

warehouses and grading laboratories, is deficient.

Republic of Moldova and Tajikistan, migrant

The legal and regulatory regime is weak and

remittances account for a large percentage of

corruption rife. Practices in commodity trade are

hard currency earnings and GDP, making these

unsatisfactory, with contract defaults a common

countries vulnerable to disruptions of these

occurrence. There is a lack of trust among the

flows. A large number of migrants work in the

various players in the commodity sector. All of

Russian Federation, many of whom operate in

these factors complicate commodity finance.

the oil and gas sectors. Agricultural production

Structuring techniques can help mitigate the

is fragmented, with very few large farms.

risks, but possible deal sizes are, in general,

Governments have often retained strong control

too small to be of much interest to international

over agricultural sectors seen as strategic,

banks, while local banks do not have the required

expertise.

102 For a discussion of the situation in two of these countries,

see Hollinger, 2006.

Table 5
Country aspects affecting agricultural finance
Importance of
agriculture

Fragmentation
of agriculture

Yield risk

Weather risk

Development
of finance &
insurance

Legal environ
ment

S&P Sovereign
risk rating

Albania*

High

Highly
fragmented

Low

Low

Medium

Moderate

B+

Bulgaria*

Medium

Sharply dual

Moderate

Moderate

High/Medium

Good/
Moderate

BBB

Croatia*

Medium

Highly
fragmented

Low/ Moderate

Moderate

High/Medium

Good/
Moderate

BBB-

Hungary

Medium

Sharply dual

Moderate

Moderate

High/ Medium

Good

BBB-

Kosovo

High

Highly
fragmented

Moderate

Moderate

Medium

Moderate

Macedonia*

High

Highly
fragmented

Moderate

Moderate

Medium

Moderate

BB

Medium

Normal

Moderate

Moderate

Medium

Moderate

BB+

Serbia*

High

Highly
fragmented

Moderate

Moderate

Medium

Moderate

BB

Turkey

High

Normal

Moderate

Moderate

High/Medium

Moderate

BB

Azerbaijan*

Medium

Highly
fragmented

High

High

Medium

Moderate

BB+

Belarus

Medium

Collectivized

Moderate

Moderate

Medium

Bad

Kazakhstan*

Medium

Sharply dual

High

High

Medium

Moderate

BBB

Russian
Federation*

Medium

Sharply dual

High

High

Medium

Moderate

BBB

Ukraine*

Medium

Sharply dual

High

High

Medium

Moderate

B+

Country
Group A

Romania*

Group B

67

Importance of
agriculture

Fragmentation
of agriculture

Yield risk

Weather risk

Development
of finance &
insurance

Legal environ
ment

S&P Sovereign
risk rating

Armenia*

High

Highly
fragmented

Moderate

High

Medium/Low

Moderate

B to BB#

Georgia*

High

Highly
fragmented

Moderate/High

Low

Medium/Low

Moderate

B+

Kyrgyzstan*

Very high

Normal

Moderate

High

Medium/Low

Moderate

Republic of
Moldova*

High

Sharply dual

High

High

Medium/Low

Moderate

B+ to BB+#

Tajikistan*

High

Sharply dual

High

High

Medium/Low

Moderate

Turkmenistan*

High

Highly
fragmented

High

High

Medium/Low

Moderate

CCC+ to B#

Uzbekistan*

High

Sharply dual

High

High

Medium/Low

Moderate

Country
Group C

Source: Based on Odening et al., 2008; Annex 1 of this report explains the criteria through which the authors arrived
at their assessments, based on detailed country tables in the same report. Sovereign risk ratings as per Standard &
Poors, June 2011.
* Countries covered by the EBRDs Trade Facilitation Programme.
# Predicted ratings for unrated countries, as per Dilip Ratha (World Bank), Euromoney Conference, Washington DC,
18 June 2009.

4.6 Linking commodity exchanges

and agricultural finance

Figure 9
The hedged credit line of the Agricultural
Development Bank of China

The existence of commodity exchanges helps

banks expanding their agricultural financing
activities. Transparent prices as generated on

Agricultural
Development
Bank of China

these exchanges mean that banks can more

easily determine and monitor the value of
collateral. Moreover, the possibility to deliver
onto an exchange platform makes banks more
comfortable with taking physical commodities

Close
monitoring

Loan

Reporting from
and monitoring
of the broker

Agricorporate
Warehouse
receipts and
cash

as collateral. The percentage of the value of

goods financed by a bank may be as much
Price risk
management

as 8090 percent if the goods are exchangetraded, compared to 5060 percent if they are
not.

Prepaid
forward
contracts

A bank can be proactive in assuring that

Commodity
exchange

Exchange
warehouse

the borrower hedges his exposure. Figure 9

illustrates a scheme used by the Agricultural
Development Bank of China. The bank lends to

Farmers

Delivery

an agri-corporate so that it can enter into prepaid

forward contracts with farmers. These contracts

Source: Based on Gross and Santana-Boado, 2009

oblige farmers to deliver into warehouses

accredited by the Dalian Commodity Exchange.

When the goods are delivered, the WHRs stay

The agri-corporate has to hedge its price

with the broker, ensuring that the bank will be

exposure through the exchange, using a bank-

reimbursed.

approved broker. The bank oversees the forward

contracts as well as the hedge activity, receiving

Exchanges also permit cash and carry operations,

regular reports from the broker.

which allow investors to make a profit if their

financing costs plus commodity storage costs are

68

Innovative agricultural finance and risk management

less than the difference between nearby and further

to buy securities offering a return to the net

out prices. The investor buys futures contracts

revenue103 on a specific part of a farming, fisheries

which are near to expiry, and simultaneously sells

or forestry investment project (e.g. 0.1 ha of forest

futures contracts for a future month. He then takes

land).104 The commodity assets are controlled by

delivery of physical goods on expiry of the nearby

specialized management companies, while their

contracts, and keeps the goods in the exchange

operations are regulated as managed investment

warehouse. In due time he delivers the goods

funds. Shares in these schemes are traded on the

against the further-out futures contracts. Globally,

stock exchange, making it easy for investors to

a significant portion of commodity stocks are

close out their positions.

financed in this manner, which considerably reduces

the financing costs of storage for commodity

Under these schemes, an operator procures

producers, processors and users.

funds to invest in an operation from investors

by selling them formalized rights to future

But there are ways to create a tighter link, with

production. For instance, in the case of fish

commodity exchanges intermediating directly

ponds, these are the rights to a certain share of

between capital markets (not just banks) and

the fish in one pond; or, in the case of a timber

commodity producers, processors and traders by

plot, a share of the proceeds from the sale of

offering innovative commodity-linked products.

timber produced on that plot and, eventually, the

Globally, there are several successful examples

proceeds of the sale of carbon offset rights. The

of this arrangement, none of which have so

investment can be for a short period, such as

far been used in transition economies. It is

three months for fish ponds. It can also extend

worth exploring the possibilities to introduce

to longer periods like the 20 years or more that

these instruments, as they do not require

is common in timber investments where the

any particularly large investment in exchange

investor also has to wait several years before

infrastructure. They can be added to the product

receiving any dividends. The operator, that

portfolio of existing exchanges, or, alternatively,

may be a large company managing hundreds

traded on the same kind of platform that is now

of fish and shrimp ponds, or tens of thousands

used for trading WHRs.

of hectares of timber land, is paid out of the

proceeds of the sale of the securities plus,

One example is presented by the agricultural

typically, a share in the profit. Generally, he does

repos that are structured by and offered on the

not take a significant risk. Certain risks are laid

Colombian commodity exchange. Section 4.6.1

off through insurance; others are borne by the

below as well as Annex 15 describe these in

investors who would often manage them through

some detail. Another example is the securitization

portfolio diversification.105 The structure may be

of commodity projects to tap into the retail

further strengthened by medium-term marketing

and institutional investment market through

arrangements with large offtakers, such as

exchange listing. There is extensive free-floating

supermarket chains or sawn wood or plywood

capital in many of the countries of transition

mills.

countries, much of it ending up in western

markets, including in real estate. To a certain

Schemes have included ostrich, emu, crayfish and

extent, this capital flight is linked to a desire to

sheep farming, as well as flower and horticulture

make the ownership of funds less transparent,

production. For example, in the livestock

but to an important degree, it is also the result

investment schemes, the investor buys animals

of a lack of possibilities in the home countries

for diversified investments, safe from legal
and regulatory intervention. If one can create
viable new investment vehicles, then these may
well attract many investors. There are many
possibilities in this domain.
For example, over the past two decades, it has
been possible for individual investors in Australia

103 Sales revenue minus costs, including management costs.

104 With less diversity, similar schemes have also operated
in the United States of America for grains, in New Zealand and
Chile for forestry and, in a more informal setting, in Indonesia
for fish and shrimp farming.
105 Investors can manage these risks through portfolio diversification. For example, in Indonesia both individual investors
and corporate treasuries invested in fish and shrimp ponds, as a
high-return alternative to short-term money market placements.
In order to reduce their exposure to individual ponds, where
100 percent of the fish or shrimps may succumb to disease,
they generally invested in several ponds spread out over several
lakes and other locations.

69

and pays regular fees to a manager to look after

discounting on commodity transactions. As

the stock and to sell them when appropriate.

individual notes and investment opportunities

In the horticultural and forestry investment

have deliberately been kept small (in the USD 1

schemes, the investor leases land that is used

000 - USD 7 500 range) they are widely traded by

to grow the crop. The manager is responsible for

retail, corporate and institutional participants. In

planting, maintaining, harvesting and selling the

countries where there is a large spread between

crop.

prime deposit rates and prime lending rates,

these kind of contracts can be very attractive to

But most schemes have been in the forestry

investors and borrowers alike.

sector. Investors in these schemes can expect a

return not just based on the value of the timber

To give one example, a repo on a physical stock

of tree products expected to be sold, but also, on

works as follows. The commodities are stored

carbon credits and other environmental payments

by a commodity producer, processor or trader

such as biodiversity rights and salinity credits.

under the control of a warehouse operator

Many of the companies in this sector issue

who has been accredited by the exchange.

securities that are traded on the countrys stock

This storage can be in public warehouses or

exchange. All in all, commodity-linked issues like

field warehouses temporarily put under the

this offer a full range of investment opportunities,

control of a collateral manager. The warehouse

from short- to long-term.

operator issues a certificate of deposit to the

commodity owner. The owner transfers the

4.6.1 Linking commodity and financial

certificate to an exchange broker asking him

markets the experience of the Mercantile

to sell it, while simultaneously signing a repo

Exchange of Colombia

which commits him to buy it back at a given price

An interesting example of how commodity

after a specified period. The certificate is then

exchanges can link the commodity and financial

ready to be auctioned on the exchange. After

sectors is provided by the Mercantile Exchange

auctioning, there is a secondary market where

of Colombia (BMC), which was set up by the

the buyer can re-sell the certificate. Note that the

countrys government in 1979 as the National

physical certificate itself is held in custody by the

Agricultural Exchange. BMC provides spot and

exchange clearinghouse. At expiry, the owner

forward trading facilities; offers a procurement tool

pays the required sum, which is underwritten

for homogenous products bought by a large

by his broker and also, in many cases, the

number of government agencies, from the armed

clearinghouse, and receives back the certificate

forces to municipal utilities; provides registry

of deposit.

functions for agricultural sector contracts; enables

70

exporters to buy subsidized currency options

Repos on future receivables work in a similar

to protect themselves against the risks of local

fashion although here, the underlying security is

currency depreciation; and acts as a vehicle for

a production process. The farmer sells forward

the Ministry of Agriculture to provide subsidies

the right to the revenues from the sale of poultry,

or minimum prices. But its most interesting

pork or slaughter cattle, and, in return for the

products have been focused on bringing finance

financing, agrees to act as an agent of the

to the commodity sector (see Annex 15 for a more

financier to fatten the animals for the required

complete description of BMCs experiences).

period.

In particular, BMC has made a highly innovative

By and large, repos have worked well in

use of repo contracts. In these contracts, those

Colombia. But there have been a number

seeking finance sell their assets, such as

of problems, particularly in situations where

commodities in stock, or production capability

Colombian practices and regulations differed from

leading to future revenues, with a commitment

international best practices. With respect to repos

to their future repurchase. Among others, BMC

on physical stocks, for example, the exchange

has offered repo contracts on warehoused

accepts certificates of deposits for goods that are

commodities, repos backed by the receivables

not deposited yet, but that are merely on their

from future commodity deliveries, and invoice

way to the warehouse. It accepts as underlying

Innovative agricultural finance and risk management

goods those that do not have liquid markets or

BMCs ability to innovate exchange-traded

that are highly perishable. With respect to repos

contracts has been remarkable. In learning

on future receivables, the exchange did not keep

from its experience, one should try to add

the proper level of independent due diligence

an impeccable implementation process. An

prior to and during the transactions, leading to

important advantage of the Colombian repo

the diversion of funds. Nevertheless, overall

products, as compared to, for example, Brazils

defaults have been in the high single digits, and

CPRs, is that they do not rely on a complex

the process improvements that would lead to

institutional framework. The repos are transaction-

reduction to acceptable levels can be readily

based, and risks are largely dealt with within the

imagined. More rigid structuring matching risk

exchanges own rules, regulations and operational

management tools and active monitoring of

mechanisms. Building on BMCs experience, even

the transactions would have avoided most of

in a country with weak institutions, an exchange

the exchanges problems and would have given

can create a safe harbour for financiers to

producers the opportunity to raise funds directly

invest in the both preharvest/production and post-

on the capital market.

harvest phases of agriculture.

71

Conclusion

There is vast scope for institution-building in

A broad condition for enabling innovative

transition countries, focusing on: organized

agricultural finance and risk management is

that agriculture the supply chains that one
wishes to target is profitable from farm to
fork, from producer to final buyer. If the farmer
cannot cover his costs he is likely to default on
his loan obligation and unlikely to invest in risk
management. If a processor is not profitable,
his equipment will not be properly maintained
and he will have difficulty in supporting timely
input supply to growers, risking that the flow
of goods will be disrupted. If buyers can
find better deals from other suppliers, there
is a risk they will default on their purchase
obligations or try to renegotiate them. And
there are many more risks that go with

finance and risk management; chain integrators

that enable goods to flow efficiently in agricultural
value chains; and banks capability to originate
and manage innovative agricultural financing
transactions. The EBRD and other international
financial institutions can support each institutionbuilding mechanism in a distinct way.
Trading platforms, whether commodity exchanges
or EWR systems, should be designed as
vehicles for innovation. They can weaken existing
inequitable or inefficient trading and financing
structures and grant various groups initial access
to innovative instruments. This innovative, game-

unprofitable supply chains.

changing potential should be the driver behind

A wide range of innovative agricultural

is unable to deliver disruptive innovation in its

finance and risk management products and

mechanisms is already in use in transition
economies, and institutions supporting further
implementation and development are being
strengthened under ongoing development
agency programmes. Governments and
international agencies can broaden and deepen
the approaches developed so far. Approaches
that have demonstrated success in some
transition countries and some sectors may be
extended to other countries and sectors. In
turn, it is possible to adapt successful models
from other parts of the world. Possible actions
can be divided into three areas: institutionbuilding, developing instruments and legal and
regulatory improvement.

72

trading platforms that can link agricultural trade,

initiatives in this area. A trading platform that

distribution modalities and/or the products that
it offers is unlikely to overcome the resistance
to change in transition countries agricultural
sectors. In transition countries, such innovation is
likely to be not just, or not even primarily, in price
risk management, but also in finance including
repos, products based on CPRs and bonds
for commodity projects (see Annex 10), and
counterparty risk management. Exchanges should
also leverage available technology, including that
for brokers, such as cloud computing solutions, in
order to keep costs low and build large networks.
There are different possibilities in different
countries. Table 6 summarizes approaches that
may be of particular interest to EBRD, but note
that local ownership is critical for the success of
an exchange project.

Innovative agricultural finance and risk management

Table 6
Suggested areas for EBRD attention in various countries
Country
Group A
Albania
Bosnia and Herzegovina
Bulgaria
Croatia
Estonia
Hungary
Latvia
Lithuania
FYR Macedonia
Montenegro
Poland
Romania
Serbia
Slovakia
Slovenia
Turkey

Group B
Azerbaijan
Belarus
Kazakhstan
Russian Federation
Ukraine
Group C
Armenia
Georgia
Kyrgyzstan
Mongolia
Republic of Moldova
Tajikistan
Turkmenistan
Uzbekistan

Trading platforms

Structured finance

Instruments

integration of exchange in panEuropean network

electronic auction
electronic auction
integration of exchange in panEuropean network
-

support the capacity of local

banks to develop value chain
financing structures, centered
around offtakers (e.g. supermarket
chains) and contract farming
arrangements: strengthen public
warehousing system/laws and
regulations.

forward contracts; regional

delivery locations for futures
contracts; exchange-traded
weather index futures and options.

regional exchange strategy; EWR

system as anchor for exchange.

build finance around EWR system;

work with banks to develop new
pilots.

retail EWR products; securitization

training for banker; support to the

emergence of collateral managers
and credit support companies;
through EWR system, build links
with capital market.

forward contracts;
new retail-oriented products on
exchanges; local receivables-based
financings; repos.

electronic auction;
privatization of platform;
exchange development; EWR
system
develop specific contracts; EWR
system
exchange development; EWR
system.

regional approaches to develop

commodity exchanges and EWR
systems using a business process
outsourcing model.

work with banks on specific value

chains (e.g. cotton); support the
emergence of collateral managers;
introduce links with capital market
e.g. use exchange to place repos
and project bonds.

EWRs; value chain financings;

project bonds.

Source: Author

There is large scope for regional approaches

build truly regional exchanges. Political support

when it comes to trading platforms. One

for such regional projects has so far not followed

possibility is the provision of a common

politicians rhetoric, but that might change.

technology. Business process outsourcing

companies are a more specialized option that

Organizations like EBRD and IFC can expand

can provide and maintain the trading system for

their investment in chain integrators such as

a range of countries. Linked through a leased

warehousing companies, collateral managers,

line or the internet, this system can be used by

marketing companies, special purpose vehicles

a series of independent exchanges. This option

(SPVs) that service specific sectors/companies

not only has large cost benefits, but also enables

(e.g. FMC) and the like. For example, in order

each exchange to obtain improved access to

to make collateral management services

the international trading community. Among

more accessible to a larger group of players,

other things, this system will make intraregional

international financing institutions as well as local

trading much easier. Another possibility is to

banks could invest in such companies, tying up

73

with an experienced collateral manager for the

While structured finance techniques are used in

necessary technical skills.

the region, their application is, from time to time,

a bit loose. In effect, structured finance provides

The promotion of local FMCs merits more

a high level of security to banks because of its

attention. FMCs are now active in transition

rigid control and monitoring structure, among

economies, but they mostly belong to western

other things. Overly loose procedures negate

groups. As special purpose vehicles FMCs are

much of the benefits of structuring tools. For

set up with the explicit purpose of managing

example, banks monitor the flow of goods and

investment or financing; therefore, they appoint

of receivables when they finance an agricultural

professional managers. They ensure proper

processor, and they consolidate these records

support to the actors in the supply chain, the

with physical stock data. However, it is rather

marketing of the products, the adherence to

common in transition countries that banks only

the conditions of the loan, and take out the

perform this consolidation every two weeks.

relevant insurances. Government agencies and

They also have no systems to make proper use

donors traditionally have looked at strengthening

of monitoring data, such as detecting anomalies

farmer cooperatives as the vehicle for financing,

which should give rise to further investigation.

but as experience has shown, there are many

Structured finance is not fully safe, but the ability

factors that hinder such efforts. FMCs can be

to detect any problems in a deal at a very early

a good alternative, and they do not necessarily

stage should strongly limit the size of losses.

undermine long-term policy objectives to empower

farmers: a FMC can be set up with professional

Or another example: in structured finance, the

management, but structured in such a way that

bank converts credit risk (will the borrower

control is gradually transferred to farmers.106

reimburse?) into performance risk (will the

borrower continue in his business?). A key tool

EBRD, like IFC, now depends primarily on the

for doing so is to ensure that the buyer of the

ability of local banks to originate deals that can

borrower pays into an account controlled by

then be partially refinanced. Across the board,

the bank; the borrower will only receive what

more could be done to strengthen local banks

is left after debt service. In some of the deals

understanding of the commodity sector and of

in transition countries, a reasonable structure is

structured finance tools, and even of simple tools

put in place, but the borrower is then allowed to

like factoring and leasing. A good starting point

directly receive the payment for his goods from

would be to do value chain audits, which identify

an offtaker, and is supposed to reimburse the

support entities that can form constriction points

bank out of this revenue.

in the chain (e.g. commodities are likely to pass

through these entities) and which, when properly

It is thus clear that more intensive training on

organized, can form the anchor for structured

innovative agricultural finance would be useful. This

financing. These audits can be followed by the

training does not need to be limited to commercial

development of blueprints for financing different

banks, but can include microfinance banks and

sectors, and intensive training so that bankers

investment banking outfits, as well. In areas, like

are able to interpret and adapt these blueprints.

Central Asia, with more difficult conditions such

In countries where banks have a sophisticated

training may most productively be organized around

understanding of financial tools, as in Turkey,

the actual structuring of financing transactions for a

it is possible to work on the securitization of

particular value chain.

agricultural assets and future receivables.

Innovation in instruments depends, in part, on
106 As an illustration of how control of a bank-financed SPVs
can be shifted gradually from the bank through its appointed
professional managers to farmers, one may consider what in
the Philippines is aptly known as the corporative model. A
common structure is that the bank enters into a joint venture
with a farmers group, for example, to set up a processing plant,
with the bank holding the majority stake. The bank appoints
professional management. Over time, the farmers deliver raw
materials to the joint venture, and part of the proceeds are used
to buy back the banks stake until the farmers are full owners
(see Rutten, 2004).

74

institutional innovation. Trading platforms are

vehicles for innovative instruments. With an EWR
system, capital market investors can directly invest
in stocks of physical commodities. Repo finance
becomes possible. On exchanges, project bonds for
agricultural projects such as those set up by FMCs
can be listed. A weather index derivatives contract

Innovative agricultural finance and risk management

can be introduced, facilitating the growth of the

readily been accepted as issuers of CPRs.

weather risk management market. Nevertheless,

This fact suggests that, at least in the short-

designing appropriate instruments can be complex,

and medium-term, experimentation with

and the end result does not necessarily entail

these instruments should focus on countries

the benefit of copyright protectio. The successful

with fairly large farms.

innovator can be easily copied. Hence, there

Project bonds, as traded in Australia, which can

is a good argument for public support of the

permit new, professional managers to become

development of new instruments. Governments

engaged in agriculture: as long as there is an

and the international community should also support

organized trading platform, these instruments

demonstration projects. They should stimulate,

can add value throughout the region. International

through various means, research into these

support can come in the form of product design

issues and the exchange of experience between

and, perhaps, participation in the capital of the

practitioners and government policy makers.

FMCs that are most likely to issue such bonds,

at least in the commodity sector. There are

Instruments that merit special attention include

also good opportunities for project bonds in the

the following; and except for index insurance,

energy and infrastructure sectors.

all of these have the best chance for success if

they are traded on or supported by an organized

Governments need to create a policy, legal and

trading platform such as a commodity exchange:

regulatory framework that enables efficient

Index insurance, in particular, for weather

use of modern financial instruments. For

risk:where there is a clear link between

commodity exchanges, this kind of framework

weather risk and economic losses, such

includes the absence of negative actions such as

instruments can be useful. But developing

unpredictable interventions in markets, and the

instruments and then arranging their

provision of a supportive framework in terms of

distribution requires sophisticated skills

grading and quality control, contract enforcement,

and it is expensive. While in principle,

taxation, etc. If governments want to improve

index insurance is likely to be useful in

finance along the supply chain, they have to take

many transition countries, donor agencies

into account the legal environment with respect

should make a pragmatic choice as to which

to ownership rights, enforceability of contracts,

countries they wish to support. This decision

bankruptcy and the transferability of WHRs,

should be determined by the likely benefits

contracts and export licenses.107 While this

for the national economy as well as the

work area should not be the main thrust of their

readiness of the local financial sector and the

programmes, donor agencies should support

government to embrace these instruments.

governments efforts. If governments are not

Repo contracts, as traded on the Colombian

making any efforts, then donors full focus should

agricultural futures market: this instrument

be on making specific transaction structures

requires not only a trading platform, but also

possible, both because certain groups will

an appropriate legal and taxation framework,

benefit from this and are thus likely to support

which will limit the number of countries

it, and because as a result of the transaction

where these instruments can be promoted.

support, the readily identifiable benefits will help

Capital market instruments such as Brazils

overcome government reticence to the support of

CPRs; as argued in Annex 10, these particular

modern financial instruments. In addition, given

instruments depend on an intricate supporting

the mistrust of markets that still prevails among

framework, and one should not assume that

certain policy-makers, an advocacy role of the

one instrument can be replicated in isolation.

international community remains useful.

But international support can help determine

which supporting elements are necessary for
its success, and can then help in putting these
elements in place. In Brazil, CPRs have largely
been used by medium-sized and large farms
because there is still too large a counterparty
risk in the instrument. Small farmers have not

107 For a general description of the most appropriate policy

environment, see FAO/GTZ, 1998; and for a detailed checklist of
supportive legal and regulatory conditions, see Budd, 1995.

75

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78

Innovative agricultural finance and risk management

Annex 1:
Variability of production of major crops in transition
economies
Table 7
Variability of wheat production
Country

Average production,
2005-2009 (000 tonnes)

Lowest year as % of
average

Highest year as % of
average

Albania

282

82%

119%

Armenia

225

68%

118%

Azerbaijan

1 607

81%

130%

Belarus

1 534

70%

133%

247

94%

104%

3 556

67%

130%

Croatia

803

75%

117%

Estonia

303

73%

113%

Georgia

94

57%

203%

4 700

85%

120%

Kazakhstan

14 143

79%

121%

Kyrgyzstan

860

82%

123%

Latvia

822

73%

126%

Bosnia and Herzegovina

Bulgaria

Hungary

Lithuania

1 481

55%

142%

Mongolia

182

40%

214%

76%

117%

8 643

82%

113%

836

49%

154%

5 659

54%

127%

53 499

84%

119%

Serbia

1 976

95%

106%

Slovakia

1 538

87%

118%

Slovenia

141

94%

113%

Tajikistan

694

89%

130%

The former Yugoslav

Republic of Macedonia

282

77%

119%

19 425

89%

111%

2 814

82%

116%

18 671

75%

139%

6 228

97%

107%

Montenegro
Poland
Republic of Moldova
Romania
Russian Federation
Federation

Turkey
Turkmenistan
Ukraine
Uzbekistan
Source: FAO Statistical Database

79

Table 8
Variability of maize production
Lowest year as % of
average

Highest year as % of
average

920

69%

109%

Bulgaria

1 229

25%

129%

Croatia

2 051

69%

122%

Hungary

7 557

53%

120%

Poland

1 696

74%

115%

Republic of Moldova

1 159

31%

129%

Romania

7 810

49%

133%

Russian Federation
Federation

4 233

83%

158%

957

65%

132%

Turkey

4 014

88%

106%

Ukraine

8 589

75%

133%

Lowest year as % of
average

Highest year as % of
average

Country

Average production,
2005-2009 (000 tonnes)

Bosnia and Herzegovina

Slovakia

Source: FAO Statistical Database

Table 9
Variability of cotton production
Country

Average production,
2005-2009 (000 tonnes)

Azerbaijan

103

31%

191%

Kazakhstan

386

70%

120%

Kyrgyzstan

95

52%

124%

391

76%

115%

2 124

81%

106%

864

77%

116%

3 636

94%

103%

Tajikistan
Turkey
Turkmenistan
Uzbekistan
Source: FAO Statistical Database

Table 10
Variability of sunflower seed production
Country

Lowest year as %
of average

Highest year as
% of average

Bulgaria

1 063

53%

124%

Hungary

1 215

87%

121%

Kazakhstan

259

72%

142%

Republic of Moldova

304

51%

125%

Romania

1 136

48%

134%

Russian Federation
Federation

6 532

87%

113%

Slovakia

187

71%

122%

Turkey

999

85%

112%

5 418

77%

120%

Ukraine
Source: FAO Statistical Database

80

Average
production, 2005
2009 (000 tonnes)

Innovative agricultural finance and risk management

Annex 2:
Producer prices for some major crops

Table 11
Producer prices for cotton, maize, sunflower seed and wheat, 20002009 (USD/tonne)
COTTON

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Azerbaijan

190

230.9

211.9

228.1

283.7

297.9

331.8

344.7

389.5

419.8

Tajikistan

227.8

253.4

265.2

307.1

319.9

309.7

297.3

252.9

241.9

461.2

Turkey

449.7

379.8

494.9

907.2

1044

1159

1173

1579

1890

1607

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Belarus

138.3

107.5

119

63.7

121.5

145.1

195.6

206.1

266.2

257.9

Bulgaria

90

105.3

93.9

120

148.1

92.9

107.2

196.2

235.6

149.3

Hungary

89.9

68.5

82.7

133.8

116.1

108.8

124.7

249.5

174

145.4

Kazakhstan

65

72

70.8

68.2

91.1

103.5

107.6

123.1

176.8

158.4

Kyrgyzstan

76.2

112.2

85.5

91

123.8

118.3

141

240.1

315

217.2

Poland

99.2

94.8

89.5

120.1

121.5

108.6

144.5

238.9

219.2

142.9

MAIZE

Republic of Moldova

82.4

87.4

90.6

105.1

86

92.4

97.7

219

149.6

133.2

Romania

147.4

158.5

115.1

196

201.3

127

135.5

316.3

385.1

220.4

93

112.1

95.3

90.6

126.1

84.4

125.6

202

231.7

137.9

Slovakia

84.6

88.3

88.2

106.9

127.2

116

126.4

230.1

222.1

135.7

Tajikistan

114.1

127.3

93.3

98

177.8

199.5

164.4

131.4

228.2

242.7

71

84.5

70.8

91.1

82.3

67

102.6

165.1

137.3

109

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Bulgaria

140.3

149.7

177.7

211.8

226.9

231.6

231.7

309.7

412.8

273.6

Republic of Moldova

109.7

122.2

142.4

145.6

175.3

186.5

170.4

327.1

247.7

216.2

Romania

164.1

161.6

202.8

181.9

235.5

247.1

249.6

345

444.6

282.9

Russian Federation

102.5

132

153

158.4

209.2

200.6

182.4

365.4

390.3

263.2

Ukraine

96.1

145.8

158.4

160.7

216.4

190.9

185.9

376

259.5

243.5

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Azerbaijan

112.9

102

92.6

118.1

128.6

131.9

145.2

199.1

289.7

272.8

Belarus

129.1

97.7

86.3

87

104.1

106.8

113.1

145.2

208.9

132.9

Bulgaria

91.8

96.1

78

118.9

150.6

98

115.5

208.8

234.1

150

Hungary

98.4

80

88.5

134.7

115.7

102.7

125.3

238.6

233

148.8

69

77.2

63.1

80.7

107.1

97.1

97.3

136.9

224.3

174.6

Poland

116.9

123.4

106.9

117

129.7

113.6

144.5

256.3

266.5

155.8

Romania

154.1

145.2

115.1

198.5

169.4

123.6

121.2

250.6

262

154.6

Russian Federation

77.5

76.9

55.9

78.9

112.5

88.7

112.6

182

205.3

134.7

Slovakia

89.2

94.5

97.7

117.2

138

121

131.6

221.6

216.5

159.9

Turkey

159.5

126.9

164.3

222.4

252.8

268

249.3

323.6

438.7

328.4

Ukraine

89.5

71.9

58.2

119.1

92.7

81

104.4

157.8

143

101.7

Russian Federation

Ukraine
SUNFLOWER SEED

WHEAT

Kazakhstan

Source: FAO Statistics, Pricestat

81

Annex 3:
Overview of commodity exchanges in transition
economies
Table 12
Overview of selected commodity exchanges in transition countries
A) Exchanges at a low level of development:
Mostly operate as an open outcry auction platform with some standardization of trade. Mostly stagnant, with few or no plans to
improve exchange operations.
Name of exchange (in English/ Country,
Date of establishment and main features
Agricultural
Derivatives
local language) and website
starting year
trade
address
Yerevan Commodity and Raw
Armenia 1990
Auction trade in wheat, oil products, gold, equipment,
Yes
No
Material Exchange (Yercomex)
precious stones, etc. The exchange merged with the
http://www.yercomex.am
Armenian Commodity and Raw Material Exchange in
1996.
Rousse Commodity Exchange
Bulgaria 1995
Organizes twice-weekly auction sessions in four
Yes
No
http://www.rsb.dir.bg/
market segments, including an agricultural segment.
Plovdiv Commodity Exchange
Bulgaria 1991
Only operational since 1998.Auction trade. Plans to
Yes
No
http://pce.bg/
introduce futures as well as options trading did not
materialize.
Skopje Commodity Exchange/
Former Yugoslav Auction trade in potatoes, tomatoes, other fruits and
Yes
No
Agro Berza Skopje http://www.
Republic of
vegetables, lamb and tobacco.
agroberza.com.mk
Macedonia
Kazakh International Commodity Kazakhstan
Trade in wheat, cash and futures. Mixed system of
Yes
No
Exchange (KICE)
1996
open outcry and screen-based trading. Largest of
four active commodity exchanges that act as regional
auction houses or physical brokerage companies.
Kyrgyzstan Commodity and Raw Kyrgyzstan 1996 A traditional spot market with trade in a variety of
Yes
No
Materials Exchange
industrial goods and agricultural commodities.
Universal Commodity Exchange
Rep. of Moldova Daily auction trade in commodities, real estate,
Yes
No
of Moldova (UCEM) http://www. 2002
securities and intellectual property.
bursa.md
Novi Sad Commodity Exchange
Serbia 1958
Spot trade, mostly in agricultural commodities. In the
Yes
No
(Proberza)
mid-2000s, explored possibilities to introduce futures.
http://www.proberza.co.rs
Bratislava Commodity Exchange Slovakia
Offers spot contracts in agricultural products, timber,
Yes
No
(KBB)
1992
metals and industrial products. Trade in carbon credits
http://www.kbb.sk
(emission allowances) and contracts that allow the
financing of commodities.
Tajik Universal Goods and
Tajikistan 2002 Set up as the Dushanbe Cotton Exchange. Primarily
Yes
No
Commodity Exchange (TUGE)
regulates cotton exports.
Commodity and Raw Materials
Turkmenistan
A fully state-owned exchange, which is organized as
Yes
No
Exchange (CRME)
1994
a pure spot commodity exchange. Trade in energy
items, some industrial goods and foodstuff. Weekly
volume varies widely, from USD 4 million to over USD
100 million, in mostly fuels.
Ukrainian Futures Exchange
Ukraine 2003
Set up in 2003 to launch a commodity derivatives
No
No
exchange. Limited activity so far (mostly active in real
estate and spot energy product auctions), but in May
2011 signed a MoU with CME to develop a grain and
non-agriproducts exchange in Ukraine.
B) Exchanges at a medium level of development:
Electronic trading platform, forward contracts, and moves/plans to improve exchange operations.
Name of exchange (in English/
Country and
Date of establishment and main features
Agricultural
Derivatives
local language) and website
starting year
trade
address
Sofia Commodity Exchange
Bulgaria 1991
Futures and spot trade in three segments:
Yes
Yes, but low
http://www.sce-bg.com
futures for wheat, barley, sunflower and white
volume
beans;
spot food commodities, with a broad range of
products;
spot non-food commodities including metals,
chemicals, energy products and yarns.

82

Innovative agricultural finance and risk management

Georgia International Commodity

Exchange (GICEx) http://www.vef.
ge/ exchange.htm

Georgia 2009

Warsaw Commodity Exchange S.A. Poland 1995

(WGT)
http://www.wgt.com.pl

Belarusian Universal Commodity

Exchange (BUCE)
http://www.butb.by

Belarus 2003

Slovenia Power Exchange (SPE)

http://www.borzen.si
Commodity Exchange of Ljubljana/
Blagovna Borza v Ljubljana
Istanbul Gold Exchange/Istanbul
Altin Borsasi, http://www.iab.gov.tr
Polatli Grain Exchange http://www.
polatliborsa.org.tr
Adana Commodity Exchange
http://www.adanatb.org.tr
Konya Grain Exchange
http://www.ktb.org.tr
Izmir Mercantile Exchange (IME)
http://www.itb.org.tr
Kiev agroindustrial exchange
Kievagroprombirzha

Slovenia 2001

Ukrainian Interbank Currency

Exchange (UICE)

Ukraine 1993

Uzbek Commodity Exchange

(UZEX) http://www.uzex.com

Uzbekistan
1992

Slovenia 1995
Turkey 1993
Turkey 1984
Turkey 1913
Turkey 1912
Turkey 1891
Ukraine 1991

Earlier exchanges (the Caucasian Commodity

Exchange and Tbilisi Universal Exchange)
were created around 1991 but soon ceased
operations.
An auction exchange, mainly for agricultural
commodities (wheat, live hogs, etc.).
Introduced, with some success, options on
physicals. Tried unsuccessfully to introduce
futures.
Established in December 2003 but only
organized its first auction in 2005. An electronic
trading facilitating exports and imports of
commodities, with plans to introduce futures.
An electronic trading platform offering electricity
spot and forward contracts.
An electronic trading platform offering currency
futures and (without success) two grain futures.
Trade in precious metals spot and forward
contracts.
A large spot exchange primarily for wheat.
A major cotton exchange with an open outcry
trading floor.
Turkeys largest physical grain exchange. Eight
satellite exchanges in surrounding villages.
Turkeys largest cotton exchange with primarily
spot transactions on an open outcry floor.
The countrys largest physical commodity
exchange, set up by trading companies and
banks. Approved by the Ministry of Agrarian
Policy for the introduction of derivative
contracts.
Set up by the National Bank of Ukraine for
currency trading. Its currency futures were
banned in 1998. In mid-2002, applied for
permission to introduce futures for agricultural
products but did not follow up.
Formerly Uzbekistan Republican Commodity
Exchange. An electronic exchange, heavily
controlled by the state. Serves as spot physical
exchange, primarily for cotton but also for grains
and fruits, and non-agricultural goods.

Yes

No

Yes

Yes, but low

volume

Yes
(Timber, milk)

No

No

No

No
No

Currency
futures
No

Yes

No.

Yes

No

Yes

No

Yes

No

Yes

No

No

No

Yes

No

C) Exchanges at a high level of development:

Sound technology level (electronic trading), a sophisticated range of instruments (including derivatives), integration in the
international exchange world, a well-developed website and good trading volume.
Name of exchange and website
Country and
Date of establishment and main features
Agricultural
Derivatives
address
starting year
trade
Yes
Yes
Budapest Stock Exchange (BSE),
Hungary
BSE (as Hungarian Stock Exchange) established
http://www.bse.hu
in 1864. Budapest Stock and Commodity
Exchange (BSCE) established in 1868 and
dissolved after WWII. BSE re-established in
1989 as the Hungarian Grains Exchange, BCE;
incorporated into BSE in 2005. Trade in financial
and commodity derivatives (grain futures and
options, gold futures). Its electronic system
also allows trading in commodities. Commodity
trade now almost defunct. Agricultural trade in
grains and oilseeds.
Eurasian Trading System (ETS),
Kazakhstan
New joint venture exchange of a Kazakh state
Yes
No, but
http://www.ets.kz/en/
2009
entity and the Russian Federations RTS.
planned
Agricultural commodities trade, primarily in
grains.
Polish Power Exchange
Poland 1999
Trade in electricity day-ahead contracts,
No
Yes
Towarowa Gielda Energii
forwards and futures.
http://www.polpx.pl
Sibiu Monetary, Financial and
Romania 1997
Mostly trade in currency forwards and futures.
Yes
No.
Commodities Exchange (SIBEX)
Small volumes of agricultural commodities trade.
http://www.sibex.ro
Romanian Commodities Exchange/
Romania 1992
Has both spot physical auctions and an
Yes
Yes
(RCE/BRM) http://www.brm.ro
electronic derivatives market trade in energy
futures, financials and agricultural products.

83

St. Petersburg International

Mercantile Exchange (SPIMEX)
http://www.s-pimex.ru
MICEX RTS: 2011 merger of the
Russian Federation Trading System
(RTS) http://www.rts.ru
and Moscow Interbank Currency
Exchange (MICEX)
http://www.micex.com
Agricultural exchange subsidiary
of MICEX: National Mercantile
Exchange (NAMEX)

Turkish Derivatives Exchange

(TurkDex) http://www.turkdex.org.tr

Source: Belozertsev et al., 2009.

84

the Russian
Federation
Federation
2008
the Russian
Federation
Federation
1992

A major new exchange, which now trades

No, but planned
physical crude oil and other energy items. Plans to
introduce petrochemical futures, and derivatives on
grains, timber and non-ferrous metals.
Yes
RTS was originally a stock exchange. Started
trading in financial futures and options in 2001.
In 2006, introduced futures on oil products
and gold. Agricultural trade in grains and sugar
accounted for a very small part of RTS volume.
MICEX was a universal exchange, trade in
currencies, debt instruments and single
stock futures. It was set up NAMEX in 2004
for government grain procurement. NAMEX
introduced wheat futures in April 2008.

Turkey 2002

The biggest derivatives exchange in the country,

located in Izmir. Trade in currencies, stock
indices and government bonds. Cotton and
wheat futures are listed but not actively traded.

No active trade

No, but
planned

Yes

Yes.

Innovative agricultural finance and risk management

Annex 4:
Status of WHR systems in selected transition
economies
Table 13
Status of WHR systems in selected transition economies
Existence of
Country

Overall level of WHR

development1

Proper legislation

Licensing and
supervision

Performance
guarantees

Future potential

Countries with a fully developed WHR system

Bulgaria

High

Yes

Yes

Yes

Good

Kazakhstan

High

Yes

Yes

Yes

Good

Hungary

High

Yes

Yes

No

Good

Slovakia

High

Yes

Yes

Yes

Good

Republic of Moldova

Medium

Yes

Yes

Yes

High

Lithuania

Medium

Yes

Yes

Yes

Good

Countries with a partially developed WHR system

Poland

Low

Yes

No

No

Limited

Russian Federation

Low

Not final

No

No

High

Romania

Low

Yes

No

No

Limited

Ukraine

Medium

Yes

Yes

No

High

Turkey

Medium

Yes

Yes

No

High

Croatia

Low

Draft

No

No

Medium

Serbia

Low

Draft

No

No

High

Hllinger et al., 2009.

85

Annex 5:
Service providers in WHR finance a discussion
There are many different ways to implement WHR

Figure 10

finance. Which one provides the best way for the

Relative attractiveness of field and public

owner of commodities to obtain funding depends

warehousing, as a function of the borrowers

on the specific conditions of every case. Figure

logistics needs and the external environment

10 shows three of the factors that need to be

considered: how large is the need for depositors
to get immediate access to their products; how

Processor

Larger

good is the legal and regulatory environment;

Distributor varied products

and how strong is the financial status of public

warehouses. Processors who need immediate
access to raw materials will find little of interest
if a bank proposes to finance the raw materials

Distributor generic products

Need for
immediate
access
to products

in a public warehouse; instead, the bank should

Local trader
Field
warehousing

envisage creating a field warehouse on the

processors premises (see below). Conversely,
export trading is moving products through a
pipeline from inland producer to international
buyer. These goods need to be collected at

Export trader
Smaller
Better

Worse

Legal and regulatory environment and

financial status of public warehouses

a port warehouse, and as long as the ports

public warehouses are safe and professionally

Public
warehouses

Source: Author

managed, it may well be convenient for an export

trader to use them. On the other hand, if public

Philippines, these companies are allowed to issue

warehouses are poorly regulated or capitalized,

WHRs as evidence of the presence of goods

as is the case in many transition economies,

in their warehouses and banks accept these as

the bank may feel more secure if it wraps

collateral for loans. However, it is very risky to do

the public warehouse by using an independent

this in private warehouses. Other than spot checks

collateral manager.

by the bank, there is little to ensure that the goods

are really present, and even if they are, the bank

Banks need to realize that in WHR finance, the

has no control over their movement out of the

specificities of the case are essential. Who

warehouse. When the goods are present in the

owns the warehouse? Who manages it? In this

warehouse there is still a legal risk in the case of

respect, one should understand the differences

bankruptcy of the borrower because the bank will

between private, public and field warehouses.

not be given priority over other creditors.

Banks have lost money when, in terms of active

risk management tools, they treated private

A public warehouse is normally a large storage

warehouses as public ones.

area that serves many businesses; for example, in

a port or major transit centre. It is owned or rented

86

In a private warehouse, manufacturing and

for a long period and operated by a warehouse

warehousing take place under the same roof,

operator, who stores commodities for third parties

and are controlled by the same company. The

for a set fee. The warehouse operator does not

primary business of the company controlling

obtain title to the commodities it stores; he does

the warehouse is not warehousing, but

not own them, but acts as their custodian. Large

manufacturing, wholesaling or retailing, and

independent warehousing companies both own

the warehouse is operated as part of its overall

and operate their own warehouses, but many

business. Therefore, there is a close relationship

public warehouses are operated under long-

between the warehouse and the owner of the

term contracts by independent operators. The

stored commodities. In certain countries, like the

owner gets a fixed rental fee; the operator earns

Innovative agricultural finance and risk management

warehousing and other charges. In order to obtain

framework, a WHR issued by a reputable

access to bank credit, a farmer or trader may move

warehousing company can be good collateral

his/her goods into a public warehouse. Public

for any form of transaction. In such conditions,

warehouse operators often offer WHRs that banks

WHRs, or the corresponding silo receipts or tank

accept as collateral, but whether this is sound

receipts for bulk or liquid storage respectively, can

collateral depends on many factors, particularly the

be pledged or traded by both the commercial and

legal and regulatory regime in the country, and the

the financial communities. However, in transition

status of the warehouse operator.

economies it is very doubtful that a sufficiently

good legal and regulatory framework is already in

A field warehouse is an arrangement in which a

place.

collateral management or credit support company

takes over the warehouse of a depositor (i.e.

Many freight forwarders offer collateral

producer/customer) or a public warehouse by

management services as an extension of their

leasing the storage facility, or part of it, for a

logistics operations, often through their open

nominal fee. The company becomes responsible

cargo insurance policies. But a client is well

for controlling the commodities to be used as

advised to study the details of the forwarders

collateral employing its own staff, controlling

insurance coverage. They can be compared to

movements in and out, etc. In most cases, the

public warehouses in that collateral management

warehouse belongs to the firm that wishes to

will be in the forwarders own warehouse and will

obtain the credit, but control over the warehouse

cease once the commodity leaves its premises.

is relinquished to an independent operator. As

the field warehouse is on or near the premises

Inspection agencies inspect the quality, quantity

of the firm depositing the commodities, there is

and/or weight of goods, often on demand from

little disruption in the firms day-to-day business;

a financier. Letters of credit-based transactions

in effect, instead of the goods being moved to the

generally require an inspection certificate, but

warehouse, the warehouse is moved to the goods.

such a certificate is established for one point

This form of WHR finance is particularly useful

in time, and the inspection company does not

where the borrower needs ready access to the

provide any guarantee or assume any liability for

commodities, such as for processing operations.

the continuing presence of the goods. Monitoring

The credit support company issues WHRs that

services involving repeated inspections to verify

as long as a number of conditions are met are

that the goods are still in place are generally

good collateral from a banks perspective.

provided over longer periods. However, these,

too, give no guarantee on the continuing presence

Thus, banks may depend on different companies

of the goods; the monitoring company merely

for their WHR finance transactions. These

certifies the presence of goods of the agreed

companies operate under different names:

quality. Inspection agencies are widely used

inspection agencies, warehousing companies,

by international banks financing exporters from

freight forwarders, collateral managers and

transition countries, and all too often, banks credit

credit support agencies. How do these differ

committees treat these agencies services as if

from each other? In many respects, they offer

they were securing the presence of the goods.

the same services. For example, three of them

normally offer inspection services, but they can

Collateral managers offer a variety of services

be differentiated in terms of how broad a range of

for ensuring the integrity of warehouses and the

services they offer, and, in connection with this,

quality of commodities: quality inspection and

how much risk mitigation they provide.

grading, ensuring proper warehouse operations

and storage, insurance against loss, damage or

Warehousing companies may provide

theft, etc. Collateral managers either own or lease

warehousing services to third parties. They are

warehouses, or they co-manage and supervise field

the public warehouses referred to above. There

and other warehouses owned by third parties. Their

are some risks here in ascertaining what security

services cover the discharging of goods into the

the company provides against the risk that goods

warehouse, their actual storage and their discharge

disappear,but with a good legal and regulatory

from the warehouse.

87

Credit support agencies provide all of these

an upcountry warehouse to the export warehouse,

services, and can also secure the goods as they

or from one country to another.

move through a supply chain, including as they are

88

being processed. A credit support agency identifies

Different types of warehouses and support

all the risks associated with a transaction, proposes

agencies present different risk profiles and risk

mitigants for each risk for the financier, implements

structures. Which model is optimal depends

some of the mitigants and controls the entire

on the specific conditions of a transaction. But

transaction from when the bank releases funds

financiers have to make a logical evaluation of

to when the loan is repaid in full. Credit support

risks and rewards, and not mistake the risks that

is generally provided along the supply chain. For

go with any one structure or the risk mitigation

example, it can encompass a transaction cycle from

offered by a particular service provider.

Innovative agricultural finance and risk management

Annex 6:
Characteristics of an EWR system
WHRs in their traditional physical form have many

against fraud by preventing the double use of

disadvantages. They can be lost or destroyed

WHRs to obtain finance from two different banks,

through fire, for instance. They can be tampered

the transfer of previously pledged receipts or

with or falsified.

108

They require to be physically

attempts to take delivery with a fake receipt

moved from place to place, and late arrival can lead

when the real receipt has already been sold or

to costly delays whether in transferring a loan or

pledged. Suspicious discrepancies in movements

loading a cargo. They need to be kept for years by

into and out of the warehouse, or in the volumes

warehousing companies, commodity firms and

pledged from one warehouse are also more

banks to meet regulatory requirements. As long

easily identified.

as they are recognized under the law, electronic

systems avoid all these problems and, in addition,

Account holders can use the EWR system to

make it possible to unlock the full potential of WHRs

administer their stocks110 including when moving

as tools for trade and finance.

stocks between warehouses, if they use more

than one. Its trading functionalities permit it to

An EWR system is more than a registry.

find trading partners, for example, by issuing

carry most of the costs

tenders. Banks and funds use it for financing

of a full-fledged EWR system, but bring only a

against the security of pledged commodities.

few of its benefits. A proper system provides an

Financing can come within minutes of the

electronic platform for not just receipt issuance,

commodities being deposited. The electronic

but also for many forms of trade as well as

nature of the receipts often makes for easy

for pledging and repo-finance. A dozen or so

acceptance. A system should enable easy

such systems are operated globally, including a

integration into a banks back office software, and

number of proprietary systems of commodity

permits the provision of credits even in places

exchanges. As an example, under South Africas

where the financier has no local representative.

Electronic Silo Certificates system, certified

Moreover, financiers appreciate the fact that

elevators/warehouses input information on

there is a liquid secondary market. An exchange

commodity deposits into a dedicated interface

can use it as a convenient physical delivery

and, through the Internet, the information is

platform, including managing the procedures for

recorded in an electronic database. The database

allocating specific receipts to specific buyers.

Electronic registries

109

serves as a basis for exchange delivery systems,

as well as for WHR finance as an interface with

An EWR system can be considered as a proto-

banks, trading of EWRs as an interface with

exchange, offering possibilities to invest and

traders and investors, and information supply to

trade in existing commodities through a safe

clients, government agencies, etc. All activities

and easily acceptable electronic system. They

are internet-supported and hence, manageable

may be a good first step, pending integration

through mobile phones.

into a full-fledged regional exchange network for

countries that are too small for a comprehensive

Introducing an electronic system is not costly

commodity exchange, or where local investors

and gains are significant. The registry component

are unable to pay the costs of such a system.

on its own brings a significant level of protection

If the spread in the capital market between

108 To reduce the risk of counterfeiting, printed physical WHRs

require all the security features of banknotes. They can thus be
expensive. In Ukraine, the cost is USD 2 for a double WHR.
109 Such as Ukraines Central EWR Register, which uses software to keep track of the receipts which are still issued in paper
form, and to perform various regulatory and control functions.

110 EWR systems all have extensive reporting menus,

permitting users to generate historic and other customized
reports, and providing facilities for exporting data to accounting
software. They also provide strong internal control functionalities
and detailed audit trails, which greatly facilitates risk management.

89

deposit rates and lending rates is more than

approved delivery warehouses, given the multiple

a few percent, the investment opportunities

potential uses, it is better if an EWR system

offered through an internet-based EWR system

can be managed by an industry association

can be very attractive for investors and owners

(as long as firewalls can be built to prevent

of commodity stocks alike. Given that the

leakage of confidential commercial information),

commodities are actually already in existence,

a professional group (e.g. of notaries, initially

there is no risk of short-selling or excessive

financed by key stakeholders such as banks), a

speculation.

government department or a specialized company

which is not otherwise engaged in commodity

Although a commodity exchange may take

the lead in building electronic systems for its

90

trade or finance.

Innovative agricultural finance and risk management

Annex 7:
A step-by-step approach for identifying opportunities for
and structuring innovative and secure commodity loans111
Structured commodity finance demands much

This process essentially means drawing up one or

from the imagination of bankers in terms of

more financing flowcharts.

their ability to structure the financing around the

conditions of a company and the conditions of the

6. This step done, determine who would take

country in which it operates. However, at the same

care of securing the various flows in this flow

time, structured financing is a very systematic

chart, including the performance of the various

process. The following are the steps for a banker

actors. If goods are transported, how will this

to identify a financing opportunity and then design

process be made secure. Are there proper

a sound financing structure:

collateral management agents? Who will check

documentary requirements. Do you need a local

1. Identify current or expected regular earnings

partner bank? Who will check the borrowers

or payment flows which are not yet used to

physical facilities? If insurance is needed, is this

generate low-cost finance. Such flows are relevant

available, and at what terms?

because they form the reason for the deal: with

the appropriate structure, they can be leveraged to

7. Design specific risk-mitigating measures,

provide better credit terms in relation to amount,

which will make the transaction safe for the

tenor and rates.

bank, for the various components of the

financing structure. These measures can include

2. Identify which economic actors are involved in

controls over the spending of the loan, use and

the generation and processing of these earning

assignment of insurance, responsibilities given

flows (i.e. create a first flow chart).

to outside agents such as inspection companies,

hedging of price and/or currency risks and use

3. Decide whether it is possible to work with at

of escrow accounts. In this seventh step, it also

least one of the major actors involved in these

becomes possible to estimate how large the loan

earning flows. This process will become the

can be, how much overcollateralization is needed

anchor of the transaction. Is the possible deal

and what the terms would be.

significant enough? Is the performance of at least

one of the actors reliable?

8. At this stage the negotiations start. Is everyone

willing to play the role that the bank envisaged?

4. If the demand for finance has not originated

The original flow chart may have to be revised.

from the potential client, this is the time to enter

The result will be a term sheet.

into contact with the prospective new client

and explain the benefits of your proposal. In

9. Due diligence needs to be done. If problems

the process, determine what the prospective

are found, go back to step six. If there are no

client most needs. What are his main current

problems, the deal can be closed.

bottlenecks? Is he challenged by inputs,

machinery, electricity, services or perhaps the
need for more working capital.
5. Then, design a structure for the financing.
Which part of the product chain would be covered
under the financing and what would the money
be used for? How will the bank be reimbursed?

111 Adapted from Rutten, 2001.

91

Annex 8:
Pre-export finance in the Kazakh wheat sector
In September 2002, Kazakhstan became the

onshore security agent. The international buyers

first country in the former Soviet Union to obtain

of the grain had to be approved by the banks, and

an investment-grade sovereign rating. The year

they had to pay through letters of credit opened by

before, the country had enacted a new grain

international banks. Their payments were assigned

law, which gave a firm legal standing to grain

to Kazkommertsbanks correspondent banking

WHRs. The combination of these two factors

account with SG CIB and kept until each repayment

made it possible for international banks to start

date. After each loan reimbursement, surplus funds

extending major structured loans to Kazakh grain

were transferred to FCC. Export contracts were at

companies.

fixed prices to mitigate price risk. Insurance and

guarantees were put in place to secure the goods

Both state-owned and private farmers/exporters

in the warehouses and to cover against some

benefitted from structured financing. The Food

quantity-related risks.

Contract Corporation (FCC), which is in charge

of the strategic grain reserves and also exports

After this first deal, FCC, which became a

grain for commercial purposes, launched a tender

division of KazAgro, a national holding company

in August 2003 inviting banks to bid for the

to promote agricultural development, in

rights to arrange a structured loan. Winners were

December 2006, did a structured loan regularly,

Kazkommertsbank, a local bank in which EBRD

using the tender mechanism to get banks to bid

is a large shareholder, and SG CIB, the corporate

against each other. In 2004, the structure was

investment and banking arm of the Socit

a pre-export finance like the previous year, but

Gnrale Group. They put together a syndicated

was even larger at USD 105 million and arranged

facility that provided a USD 85 million, ten-month

by Credit Swiss First Boston. It had a two-year

loan.

tenor, a lower interest rate than the 2003 loan

and a one-year grace period before the principal

Structuring elements comprised the use of local

and interest had to be paid. Structures remained

WHRs; the assignment of export contracts

similar until 2008, when ABN Amro arranged

and other rights related to FCCs grain exports;

a borrowing base loan facility. This facility is

and the use of an offshore collection account

more flexible as the funds made available are

to capture payments for the grain exports (see

directly related to the value of the assets (e.g.

Figure 11).

commodities in stock or contract receivables)

that are pledged.

Grain bought by FCC was stored in approved

warehouses. WHRs were held and managed by

In 2003, there was the first structured pre-

Kazkommertsbank, which acted as the syndicates

export finance for a private grain producer,

Figure 11
Structured pre-export finance for Kazakhstans Food Contract Corporation, 2003
Assignment of
warehouse
receipts
Selected
warehouses

Deposit of
grain

Source: Author

92

Syndicated banks

Loan repayment

Collection
account, SG
CIB (offshore)

Release of
excess funds

Assignment of
export contracts
Letters of Credit,
Insurances etc.

Payment

Loan
Food Contract
Corporation

Export

International
offtakers

Innovative agricultural finance and risk management

Ivolga Holding LLP, using WHRs to secure local

have also taken the initiative. For example, in

grain stocks. This nine-month, USD 50 million

Kazakhstan, Kazkommertzbank has done a pre-

transaction was followed less than a year later

export finance in cooperation with Dutch bank

by a USD 70 million revolving 18-month deal.

ING, for grain sales to the Russian Federation

Both deals were structured by ABN Amro. The

offtakers. Few structured financings are done

structure was like that of the FCC transaction in

with such non-OECD offtakers.

2003, except that insurance was added to cover

sovereign risk. As was the case for FCC, these

These transactions essentially functioned without

deals were then regularly repeated. The latest

much problem until 2010. Then, the absence of

finance, signed in January 2008, was for USD

price risk management led to a default by the

300 million, and was a combination of pre-export

largest borrower, Ivolga, on over USD 100 million

finance and a borrowing base facility, but it ran

of loans from western banks. It also defaulted

into problems in 2010.

on even larger loans to the Russian Federation

banks. Ivolga ran the worlds largest farm,

Several smaller grain exporters also benefited

essentially converting inputs such as fertilizer

from pre-export financing from banks like

and diesel into wheat. It had the misfortune

Rabobank. The mechanisms are all similar:

that it bought the inputs when oil prices were

delivery of grain into an approved warehouse

high. Fertilizer prices were also at their height

unlocks the financing. The bank will take a

in 2008 and its wheat was only harvested after

pledge, and use an international inspection

the market collapsed at the end of the year. The

agency to verify the presence of a grain. Before

problem could have been avoided had a hedging

allowing the release of the grain from the

strategy been built into the financing. This

warehouse the bank will take assignment of the

example illustrates that for a financing structure

export contract and ensure that export revenues

to be sound, all major risks have to be identified

are paid through an escrow account. Local banks

and proactively managed.

93

Annex 9:
Integrated value chain finance for the cotton sector in
Cte dIvoire
Cotton is the major cash crop in the north of Cte

and processed cotton but also exported it, also

dIvoire, providing direct and indirect income

benefited from campaign finance. Both entities

to some 3.5 million Ivoirians. Civil strife, which

would have been unable to obtain the necessary

started in 2002, severely disrupted production,

funds through regular balance sheet lending. Thus,

which declined from 400 000 tonnes to 150 000

they required deal structuring to move risk away

tonnes in just two years.

from their balance sheet to the transaction itself.

Reviving the cotton sector became a crucial part

If the value chain from inputs to final export

of the programme of national reconstruction.

sales functions well, the loan is self-liquidating.

A structured finance facility which enabled the

The bank provides hard currency finance, and is

supply of seeds and inputs to farmers as well

reimbursed through hard currency exports. The

as campaign finance to the ginneries was a

deal was structured in such a manner that, to

core element of the cotton strategy. The facility,

the extent possible, the risks in this value chain

funded by the Islamic Development Bank, was

were mitigated. From distribution of the inputs to

structured as co-financed import of inputs, backed

procurement and processing of the seed cotton,

by proceeds of cotton exports.

and then transport and export of cotton bales, all

risks were analysed and systematically mitigated.

The responsibility of organizing the on-site

All phases of the transaction were extensively

logistics was given to a state-owned cotton

planned and documented, with the financier

producer and ginner, the Compagnie Ivoirienne

along with the credit support company as his

pour le Dveloppement des Textiles (CIDT). It

agent keeping a close watch on the actual use of

collaborated with the Bank and the Cte dIvoire

funds and the cotton produced.

branch of an international credit support agency,

ACE Audit Control and Expertise (ACE-CI) to put

The groundwork for the deal was the calculation

into place a comprehensive risk management

of the inputs required by the transaction

package. Seed and input supply were through

beneficiaries, CIDT and Yebe Wognon. This

CIDT as well as Yebe Wognon, an umbrella

groundwork was done from the bottom up, on the

organization of cooperatives of cotton growers.

basis of individual farmers needs assessments.

Both these companies, which not only procured

Figure 12
Cte dIvoire cotton finance: setting up the transaction
Campaign plan and input
requirements, per cooperative

Farmers

Contracting

Contracting

Cooperatives

Cotton gins/
exporter

Due diligence and

warehouse
inspection

Individual identification
(electronic identification)

Source: Author

94

ACE-CI

Warehouse
and factory
inspection

Innovative agricultural finance and risk management

The cooperatives contracted for the delivery of

The necessary inputs were pre-ordered from

specific volumes with cotton ginners. On the basis

established suppliers and distributed according

of these contracted volumes, it was possible to

to the cotton crop agenda. Ginneries delivered

establish campaign plans in terms of the timing

inputs to the cooperatives, which had the

of input supply and cotton deliveries and input

responsibility for re-allocating products to

requirements per cooperative. All farmers who

farmers. Under the oversight of the CIDT Cotton

benefited from the scheme were individually

Financing Coordination Unit, the credit support

captured in an electronic database created

agent controlled, under a collateral management

and managed by the credit support company,

agreement, the stocks of inputs at the level of

including data on their total land surface and

the gins and the cooperatives, and monitored

surface allocated to cotton farming, their past

the whole process of distribution and tallying of

cotton deliveries and other socio-economic data.

inputs. No cash actually went to cotton ginneries:

This information made it possible to ensure a

all was paid directly to the input suppliers.

realistic plan for input allocations. Fertilizers used

by the cotton sector benefit from a 50 percent

Harvesting typically begins in late November and

government subsidy and tight control over

ends in March of the following year. Individual

distribution was necessary to avoid diversion.

farmers were expected to reimburse the value of

the inputs distributed to them upon sale and delivery
of the harvested seed cotton to the ginneries.

Figure 13
Cte dIvoire cotton finance: securing input distribution
Farmers

Input delivery

Cooperatives

Input delivery

Monitoring
tally, weighing

Cotton gins/
exporter

Input
delivery

ACE-CI
Reporting
Requests for payment
of input providers;
reporting
ITFC

CIDT Cotton
Financing
Coordination Unit
Input
providers

Payment

Source: Author

Figure 14
Cte dIvoire cotton finance: the reimbursement process

Farmers

Seed cotton
delivery

Cooperatives

Seed cotton
delivery

Delivery ticket

Cotton gins/
exporter
Warehouse

Weighing, sampling of
seed cotton deliveries

Collateral
management

Transport

ACE-CI
Monitoring of ginning
process/efficiency;
tally/weighing of bales;
marking

Port
warehouse
Weighing, checking of
export permit, payment
of export taxes

Shipment

Source: Author

95

Upon harvest, farmers deliver their seed

then controls the process of transport from

cotton to their cooperative and receive a ticket

the ginnery warehouses to port warehouses,

acknowledging delivery. The ticket is matched

including due diligence to determine which

with the earlier input deliveries, enabling a correct

transport companies are reliable and should be

deduction of input costs. The cooperatives deliver

allowed to transport the cotton. The cotton in the

the seed cotton to the ginneries where it is

port warehouses is also under collateral control.

stored into warehouses controlled by the credit

In effect, the whole supply chain, from the seed

support agent. The agent issues WHRs for the

cotton to the delivery into a vessel, is guaranteed

seed cotton in cotton fiber equivalent terms,

by the credit support agent, which even checks

based on each ginnerys processing ratio.

the export contract, verifies whether export

taxes have been paid and collects the shipping

The cotton is ginned throughout the season

documents for remittance to the bank.112

with the credit support agent releasing only

enough seed cotton process for the ginning
process and taking immediate possession of the
bales of cotton fiber once produced. The agent

96

112 The credit support agency charges on a per tonne basis

with monthly minimum charges per warehouse, except for
insurance costs which are a function of the value of the cotton.

Innovative agricultural finance and risk management

Annex 10:
Using agricultural bonds for pre- and post-harvest
finance in Brazil
Up to the early 1990s, Brazils agricultural sector

was some 15 times higher. These numbers

relied, to a large extent, on the government to

can be compared to a total number of farming

obtain the finance necessary for its operations.

households of 5.2 million. These numbers

The government-owned Banco do Brasil was a

suggest that less than five percent of Brazilian

large financier and since 1965 all banks in the

farmers used CPRs. Coffee, soybeans and cattle

country were obliged to allocate 25 percent of

have been the main commodities for which

their demand deposits to the agricultural sector,

farmers used CPRs as pre-harvest financing, and

mostly to be loaned at a fixed, low interest rate.

there has also been strong activity in sugarcane,

Any shortfall to this target had to be deposited

cotton and timber.

with the Central Bank at zero interest rate. But as

the state reduced its involvement in agricultural
finance and marketing, the agricultural sector

The basic forms of CPRs

continued growing and it became necessary to

develop new mechanisms.

In 1994, only one form of CPR was provided

for: a physical CPR, in which the farmer or a

In the early 1990s, the private sector developed

farmers association commits to the delivery

prepaid forward contracts as a financing tool, but

of a specific commodity at a specific location.

these carried high transaction costs and were

Effectively, their sales price has been fixed. The

difficult to enforce. The government strengthened

warehouse or stock yard, in the case of cattle,

the regulatory framework for such new financing

is declared, a narrow delivery window is set,

mechanisms by introducing the cdula de produto

and grades and quality specifications are clear.

rural (CPR) in 1994. CPRs are bonds that can only

Often, too, discounts and premiums for varying

be issued by farmers and farmers associations,

quality specifications are set in the CPR. Partial

including cooperatives, in which they pledge

deliveries prior to the maturity date are possible

an agreed amount of crops (including in semi-

and are to be noted on the back of the CPR with

processed form, such as ethanol) or cattle in

the agreement of the buyer. These bonds could

return for financing.

be difficult for financial investors to use, as they

ultimately had to find a physical market buyer to

The concept has since been further elaborated,

take delivery of the commodities. In 2001, the

and now there are not only different forms of

government introduced two new categories of

CPRs, but they also have become the underlying

CPRs to bring more financial sector players into

for a vibrant financial market through a whole

the market: financial CPRs and CPRs indexed

range of instruments. Since its inception, many

to the futures market or another price reference

tens of billions of USD have been traded through

system.

these instruments and CPRs have become an

important, albeit not predominant financing tool
for mid-sized and large producers. The obligatory
lending programme referred to above remains
their principal means of finance. In June 2009,
there were some 12 000 registered CPRs with
an average size of real (R$) 150 000.113 It was
estimated that the volume of unregistered CPRs

113 Marzo, 2010. Exchange rates: 1 June 2009, R$ 1 = USD

0.502; 1 June 2010, R$ 1 = USD 0.549; 1 June 2011, R$ 1 =
USD 0.628.

97

Figure 15
Basic forms of CPRs
Initial date

Harvest/delivery time

Physical CPR

Financial CPR

CPR indexed to
futures market

Source: Based on Sousa and Pimentel, 2005.

In a financial CPR, the farmer issues a bond114

to financial CPRs. Also, financial CPRs were

with a size that is determined by his pre-harvest

often used as a marketing tool by input or

financing needs and by the expected value of

service providers. For example, a farmer may

his future production. The bond can be issued to

buy fertilizers on credit through the issuance of

a bank or other credit provider that has already

a CPR, or a warehousing company can entice

promised to finance the farmer or it can be

farmers to store their goods by immediately

auctioned off to the highest bidder through the

arranging a loan against them. Since 2003, they

electronic network of the commodity exchange.

have also been used by CONAB, the national food

In the case of an auction, the farmer would

supply company, as one of its procurement tools

be required to receive an aval/guarantee from

in Brazils food security programme. Through

a reputable bank or cover from an insurance

financial CPRs, associations of small farmers

company on his CPR. The bond has to be secured

contract with CONAB for delivery of a range of

through the pledge of agricultural commodities.

food products from vegetables to honey, which

Upon the expiration of the bond, the farmer pays

are distributed to local institutions.115

off the bondholder. The final payment could be on

the basis of floating interest rates or fixed interest

After their introduction in 2001, financial CPRs

rates; the latter has become the most popular.

rapidly became the most popular form; however,

since 2005 their volumes have been declining.

Investors who by law were prohibited from

As of 31 December 2010, the notional value of

holding contracts or bonds that could result in

outstanding financial CPRs was USD 700 million.

physical delivery (e.g. pension funds) flocked

To put this value into perspective, it is less than

two percent of total bank credit to the rural
sector, and can be compared with a total USD

114 In practice, farmers generally issue consecutive bonds, to

cover the cash flow requirements of each phase of their production campaign.

98

115 Chiemelewska and Souza, 2010.

Innovative agricultural finance and risk management

3.6 billion of CPRs estimated to be outstanding in

CPR, as well as an endorsable custody certificate.

April 2010.

The buyer endorses the custody certificate to

116

the international bank that prefinances him.

In principle, index CPRs combine the best of both

At delivery time, the producer delivers as per

worlds: for investors, index CPRs do not give

contract, and after receiving proof of delivery

rise to any physical delivery, while the farmer has

through shipping documents and the like.

effectively managed his price risk. The investor has

The bank will pay the remaining part of the

taken on this price risk, but in most cases, if he

purchase sum. If there is a delivery failure, the

wishes he can manage this on the futures market.

buyer is protected, first, by the Banco do Brasil

Nevertheless, these instruments have been used

aval. Second, he is protected by the custody

sparsely. Farmers possibly prefer to handle price

certificates that give him access to the underlying

risk management and finance separately.

CPR issued by the producer to Banco do Brasil

and, hence, to the physical commodities that

A fourth form of CPR, called export CPRs,

were pledged under this original CPR. Given this

was created by the Banco do Brasil. Figure 16

strong recourse in case of default, avalized export

illustrates how these function.

CPRs have been readily acceptable collateral

for international banks, so buyers have had no

Export CPRs are physical CPRs that can only be

problems in obtaining finance for their payment

issued by farmers or their associations for the

obligations under these CPRs.

purpose of exports. Terms are determined by

the commercial terms of the export contract,

The legal and regulatory status of

CPRs

including price, quality, delivery location and

time, or Incoterms. The producer issues the
export CPR, and Banco do Brasil guarantees it

CPRs have strong legal status under Brazilian

by aval. The buyer pays in advance by opening a

law. They are not just forward contracts. The

letter of credit or the like, while Banco do Brasil

buyer buys the bond117, and the bond seller has

provides a 50 percent pre-export finance to the

producer. On payment, the buyer receives a non-

117 In early court interpretations, the payment of an advance

was considered essential for creating a valid CPR. In 2010,
however, the Supreme Court decided that CPRs are valid even if
no advance payment is made, reasoning that CPRs, by enhancing contractual certainty, create wealth even if no financing is
involved.

negotiable copy of the Banco do Brasil export

116 Ambina, 2010.

Figure 16
The export CPR
Delivery time

Initial date
50% prefinance

Farmers

50% payment
Bank

Farmers

Bank

Sale of a bond

Identical
terms
Export
contract

Export CPR
and
custody
certificate

100%
payment
Buyer

Proof of
delivery
Delivery of crop
or cattle as per
export contract
terms
Buyer

Endorsement

Finance

International
Bank

Reimbursement

Source: Author

99

to perform on his obligations. If he does not, the

However, insurance can be difficult and expensive

buyer has access to a fast and efficient arbitrage

to obtain.120 The buyer/financier often engages

system, with no dependency on the generally

a monitoring agency to follow the pledged crop

slow courts. The seller is also explicitly barred

as it approaches and then enters the harvest

from using force majeure or Acts of God as

phase.121

an excuse for defaulting on his obligations.

This fact has not prevented farmers from trying

In order to be publicly negotiated (i.e. to be

to renegotiate in particular physical CPRs. For

considered as financial assets), CPRs must be

instance, when the market price at time of

registered in the system of registration and

delivery exceeded that agreed on in the CPR they

financial settlement of assets, as managed by the

thought it fair to ask for a higher price, without

Central Bank of Brazil. Currently, two registries

taking into account whether the buyer had

are approved by the Central Bank: the Bolsa

perhaps hedged himself against price risk. But if

Brasileira de Mercadorias (BBM), which is part of

farmers pose such demands, CPR buyers are in a

the countrys futures exchange, Bolsa de Valores,

strong position to refuse them.118

Mercandorias & Futuros (BM&F), and CETIP (the

Settlement and Custody Chamber). CETIP is

CPR clauses provide for the possibility of

by far the largest registry for rural bonds. Once

collateral or guarantees. While this is not

issued, CPRs must be held in custody in one of

obligatory, it has become standard. Collateral

the 50+ financial institutions authorized by the

can take the form of a pledge on the underlying

regulatory authority for capital markets to provide

crop, or on other floating assets, or a mortgage

custody services for securities.

on real estate. Floating assets as well as the

CPR itself have to be registered at the register

But in most cases, holders of CPRs do not wish

of deeds office in the issuers locality, together

to publicly negotiate them. Not to do so generally

with the registration number of the plot where

frees them from the requirement to provide

the crop is planted or the cattle are to be raised.

additional collaterals other than the crop pledge

Real estate mortgages have to be registered at

on the CPR. It also saves them the costs of a

the nearest real estate registry. They are less

bank aval or insurance cover, which is significant.

frequently used as they are difficult to enforce.

A Banco do Brasil aval costs as much as 0.55

Guarantees can come in the form of bank avals/

percent per month.122 Also, if the CPRs will not

guarantees (Banco do Brasil, the countrys largest

be publicly negotiated, they do not need to be

bank, is the most active player in this domain), or

registered with a Central Bank registry, thus

insurance against default.

saving most registration costs,123 other than those

119

of the municipal registry of deeds. Such CPRs are

usedin particular to reinforce credit transactions
between two known parties, e.g. large corporates
(input providers, processors, traders) that have
longstanding and good relations with certain

118 This position is true, at least, in principle. In 2005, some

farmers who defaulted on their obligations under physical CPRs
argued in court that they had the right to sell their product at
market prices, and the court sanctioned their contract defaults.
But, in a later case in 2008, the court decided that a trader who
had bought CPRs from a large soya producer had made a prepayment, not a loan, and had the right to delivery of the pledged
soyabeans.
119 It remains a problem that the local register of deeds offices are not yet integrated into a nationwide electronic registry.

100

120 The provider of the aval or insurance does due diligence

on the CPR-issuer and asks for negative pledge covenants
(i.e. a commitment that the farmer will not pledge his assets
to others, unless approved by the bank/insurance company),
mortgages and pledges (i.e. on machinery). In case the seller
of a CPR does not deliver on the terms as set out in the CPR,
the provider of the aval or insurance takes on the sellers
obligations. After, it will either negotiate with the farmer for reimbursement during the next campaign as the CPR gives it legal
rights over this next campaign, or will call on the mortgages/
pledges
121 In an interesting twist, there is a special type of cover
regulated by the superintendence of private insurance, known
as CPR insurance: this is a monitoring service, allowing the
creditor to follow the stages of the productive cycle of the crop/
cattle pledged under the CPR (Andima, 2009a).
122 Marzo, 2010.
123 The various registration costs reportedly add up to some
0.035 percent.

Innovative agricultural finance and risk management

Figure 17
Using CPRs in a structured finance transaction

Buyer

Agent bank
escrow
account

Payment
Contract

Delivery

Assignment

Payment

Payment
Investor

Farmer

Monitoring

Farmer issues
a Financial
CPR, backed by cattle
Reporting

Inspection
agency

Price risk
management
Commodity
exchange

Source: Junior, 2008.

farmers.124 As these bonds only are registered in

agropecurio (WAs) can also be distributed to

municipal registries of deeds, there is a risk that

qualified investors through Brazils regulated

the same production is pledged more than once.

markets.

To mitigate this risk, BBM is creating a central

registry for voluntary free registration of nonnegotiable CPRs, as well as forward contracts,
rural credit notes, rural promissory notes and the

Using CPRs in structured trade

finance

like.125 Banks may refinance such processors or

traders, accepting these CPRs as collateral, but

Because of their strong legal status, CPRs can

in the case of default it is not clear whether the

make the structuring of finance much easier.

banks have the legal right to directly enforce the

Figure 17 gives an example. At its root, this figure

CPRs.

represents a standard structure. A financier prefinances a farmer, in this case for cattle rearing:

Once CPRs are in a Central Bank-approved

this is a working capital loan that can have a

registry they can be used for many purposes.

maturity of up to one year or longer for crops

They can be traded on the commodity exchange;

where the maximum maturity is a crop season.

they can be used to meet delivery obligations

Before the financier disburses the funds, the

on a futures position; they can be traded over-

farmer has to have a contract in place with a

the-counter; they can be auctioned off through

reputable buyer and assign the payment under

Banco do Brasils e-auctioning system ; they

the contract to the financier.

126

can be used to meet margin requirements on

BM&F; and they can be used as underlying for
more complex financial transactions. Since July

The farmer uses the funds for his cattle rearing

2011, financial CPRs as well as certificates of

operations. The animals pledged under the

agribusiness credit rights (CDCAs) and warrant

transactions are marked accordingly.127 An

inspection company monitors funds to ensure that

124 In the past, there have been cases of fraudulent issue of

such non-registered CPRs, the most prominent one an ostrich
farming enterprise, Avestruz Master, which sold CPRs supposedly backed by ostriches to over 49 000 investors, for a total of
more than R$ 1 billion. This 2004-2005 scam (not even one out
of each 15 ostriches sold really existed) appears to have been
sufficiently well publicized to scare later investors away from
such schemes.
125 Marzo, 2010. This system, called IAgro, is expected to
go live by the end of 2011. While registration is free, parties
consulting the database have to pay.
126 This option is relatively expensive: buyers pay an auction
fee of 0.75 percent of the value of the CPRs (https://www.
agronegocios-e.com.br/cpr/quantoCusta.cdr).

they are used to buy feed and that the animals

are kept in good health, etc. Once the cattle are
ready for sale, they are delivered to the buyer who
pays into an escrow account that was previously
appointed by the financier. The investor is

127 The cattle have to be identified by numbered rings, with

SISBOV numbers registered in the Ministry of Agriculture
and the vaccination control services. All of the animals SISBOV
numbers are specifically mentioned in the CPR.

101

Table 14
Agricultural bonds in Brazil acronyms
Acronym

Name

Underlying collateral

Issuers

Preharvest
CPR

Cdula de produto rural

LCA

Letra de crdito do agronegcio

CDCA
CRA
EPA

Certificado de direitos
creditrios do agronegcio
Certificado de recebveis do
agronegcio

Crops, cattle, to be produced in

future
Loans backed by agribusiness
credit rights
CPRs

Farmers, cooperatives
Banks
Agribusinesses

Receivables (linked to CPRs and

Securitization companies
CDCAs)

Export prepayment agreement

Commodities (agri or non-agri)

Commodity producers

CDA

Certificado do depsito
agropecurio

Goods in warehouse

Warehouses

WA

Warrant agropecurio

Goods in warehouse

Warehouses

Post-harvest

reimbursed the bonds face value plus the interest

agricultural bonds now available. As is the case for

charges and the remainder is remitted to the

CPRs, these instruments have to be registered

farmer. The financier runs the risk that the value of

in one of the two permitted registries. They can

the cattle has fallen during the life of the loan, but

also be transferred by endorsement since rights

he will normally hedge against this risk by using

are enforceable through arbitration procedures

futures contracts on Brazils exchange, BM&F.

and they have priority rights as the commodities

mentioned in the bonds cannot be seized by third

The financier can be an investor or a bank; the

party creditors, even in the case of bankruptcy of

increased competition is, from the perspective

the issuer.

of the farmer, one of the benefits of the CPRs

bond status. For the financier, the benefit is that
the bond is legally much stronger than a simple
pledge, and enforcing his rights is relatively fast

Pre-harvest instruments building on

CPRs

and easy.
For the pre-harvest finance of agribusinesses
(farmers, cooperatives, processors, traders,

Building on CPRs the alphabet

soup128

agricultural equipment and input providers) the

certificates of agribusiness credit rights (CDCAs)
were established. The main characteristics are as

Only farmers and their associations can issue CPRs.

follows:

For others, the government introduced a series of

Issuer commits itself to pay in cash, at the

new pre-harvest instruments in December 2004,

inspired by its experiences in the real estate sector.
Two post-harvest bonds were also introduced at
that time. Table 14 gives an overview of the various

maturity date, the amount specified in the

bond to the bond holder.
CDCAs, like LCAs and CRAs, have to be
collateralized with CPRs, commercial
contracts, WHRs (CDAs and/or WAs) or

128 Agricultural finance in Brazil is replete with acronyms for

particular instruments. Apart from the bonds discussed here,
for example, financiers can discount rural promissory notes or
Notas Promissonas Rurais (NPRs) and rural trade confirmation
receipts or Duplicatas Rurais (DRs). They can lend against the
guaranty of Cdulas de Crdito Rural (CCRs). Agribusinesses
can issue commercial paper, which are then called agrinotes
or Nota Comercial do Agronegcio (NCAs). When an exporter
issues commercial paper, it is called Nota de Crdito Exportao (NCE). One can also mention a series of instruments
used in government agricultural credit programmes, such as
the rural pledge note or Cdula Rural Pignoratcia (CRP), rural
mortgage note or Cdula Rural Hipotecria (CHR), rural pledge
and mortgage note or Cdula Rural Pignoratcia e Hipotecria
(CRPH), and rural credit note or Nota de Crdito Rural (NCR).

102

another formal credit right (promissory notes,

rural mortgage notes and the like).
They can be issued for any kind of current
or future agriculture-related receivables; for
example, by a farmer who has receivables
from an offtaker, an input provider or
equipment supplier who has receivables from
farmers, or an agricultural processor that has
receivables from his buyers.

Innovative agricultural finance and risk management

Figure 18 gives an example of how CDCAs

of acquiring agribusiness receivables that

backed by CPRs can be used to finance a

is to say, promissory payments of cash and

processor, in this case a sugar mill. The sugar

securitizing them through issuing and selling

mill prefinances the farmers using physical CPRs

agribusiness receivables certificates (CRAs)

through which farmers commit their future sugar

into financial and capital markets. The main

production. He signs an offtake agreement for

characteristics are as follows:

the white (i.e. processed) sugar with a buyer. The

A special purpose vehicle (the securitization

mill then issues CDCAs, backed by the CPRs as

company) issues CRAs to investors.

well as the commercial contract with the buyer.

The company pledges as collateral for the

Just like CPRs, the CDCAs contain a collateral

CRAs the same pledges it has received from

clause, and under this clause the mill pledges

the farmers/agribusiness companies (that is

the product (both sugarcane and white sugar, in

to say, the CPRs and/or CDCAs and collateral

this case). He makes a fiduciary assignment of

therein, as well as the rights under the sales

the CPRs and the commercial contract, and he

contracts). In addition, they also normally

may provide further collateral such as personal

include the hedging contracts over the

guarantees, promissory notes or a bank aval.

products.
The CRAs are generally over-collateralized (i.e.

After funds have been disbursed to the farmers,

for USD 120 of receivables, USD 100 of CRAs

the mill may use an inspection agency to monitor

are issued).

their performance and to determine the status

The collateral used for any specific series of

of the sugarcane crop. As it is being readied for

securities can be put under a fiduciary regime;

harvesting, are farmers doing what is necessary

that is to say, it can only be used for payment

so that it can be delivered to the mills? Is the cane

under this series and not for any other

that is harvested fully delivered to the mill? It is

obligations of the securitization company.

also possible that the investor who buys the CDCAs

employs the inspection agency not just to monitor

LCAs can be issued only by financial

the farmers, but also to monitor the performance

institutions such as banks and agricultural credit

of the mill. The investor may also use futures or

cooperatives.129 They represent credit rights

options to manage his price risk. When the white

over CPRs, CDCAs, CDA/WAs (see below),

sugar is delivered, the buyer pays into an escrow

and/or commercial contracts. In the most

account from which the investor is reimbursed. Any

straightforward case, the farmer enters into

remaining sums are remitted to the mill.

a contract with a trader. Through one of the

registries, he then issues financial CPRs for

It is also possible to use an agribusiness

securitization company, which is in the business

129 On the specifics of LCAs, see Silva and Marquez, 2005.

Cooperatives play only a minor role.

Figure 18
Using CDCAs in a structured finance transaction

Buyer

Delivery

Payment

Agent bank
escrow
account

Contract
Payment

Payment

Payment
Sugar
mill

Farmers
Farmers issue
physical CPRs
for delivery of sugar

Investor
Issue of CDCAs
backed by CPRs

Price risk
management

monitoring
Inspection
agency

Reporting

Commodity
exchange

Source: Junior, 2008

103

the pre-finance amount that he requires to the

may be a bank or, in the case of the large deals, a

bank, simultaneously assigning the rights under

bank syndicate, an investment fund, an importer,

the contract. The bank pays for the CPRs and

or a SPV registered outside of Brazil. In the latter

refinances itself by issuing LCAs. When the

case, the SPV issues securities backed by the

goods are sold, the trader pays the bank, the

EPA. If it is a bank, then in parallel with the EPA,

bank reimburses the LCA buyers and remits the

the exporter will sign a contract with an importer.

remainder of the funds to the farmer.

The contract is then assigned to the bank,

alongside other credit enhancements such as

LCAs are by far the most popular of the financial

rights on underlying commodities (e.g. CPRs) or

instruments based on CPRs, with 49 074 LCAs

bank guarantees.

with a total value of R$ 231 billion issued from

2005 to September 2010. In the same period, 7

EPAs can be established for short periods of up

235 CDA/WAs were issued130 and 2 858 CDCAs

to 360 days, in which case they do not require

with a total value of R$ 6.9 billion. CRAs have not

any Central Bank approval. If they are settled

taken off. As of early 2010, only 19 agribusiness

beyond 360 days, registration of the transaction

securitization companies had been created,

in the information system of the Central Bank is

together issuing notes with a total value of only

obligatory. Longer-term deals have been signed

R$ 53 million (around USD 30 million).

with terms as long as ten years. They are typically

There is a further preproduction financing tool

very large (in the hundreds of millions of USD)

that is not restricted to the agricultural sector:

and, in the case of the agri-sector, are used for

the export prepayment agreement (EPA). Under

the construction of agri-processing plants and/or

an EPA, an investor makes a prepayment to an

infrastructure.

131

exporter for the future export of certain goods.

The mechanism has been used for a wide range

CRAs an example

of agricultural commodities, including ethanol,

soybeans, poultry, frozen vegetables, leather,

Agribusiness securitization companies can be

paper, pulp and petroleum products. The investor

more or less specialized, financing only a small

number of predetermined farmers involved in one
130 As these CDA/WAs are issued in terms of physical quantity, not value, no indication of total value is available.
131 Ministry of Agriculture, Livestock and Food Supply, 2010.
CRAs have grown relatively fast since then, though. As of 12
August 2011, the total value of outstanding CRAs registered
with CETIP was R$ 310 million, a twelve-fold increase over a
year earlier (data retrieved from http://www.cetip.com.br). This
result compares to a value of outstanding LCAs of R$ 15.1 billion (a growth of 37 percent as compared to a year earlier), and
of CDCAs of R$ 1.5 billion (a 15 percent growth).

crop, or giving its managers flexibility to invest

in a range of CPRs and CDCAs across a range of
crops. An example of a simple structure is a
USD 10.2 million CRA issue in September 2010
by a SPV called Ecoagro, which was Brazils first
securitization of agricultural receivables dedicated

Figure 19
The Ecoagro soyabean securitization
NPK
(logistic agent)

Delivery

ADM do
Brasil

Delivery
(from field of
warehouse)

Payment

Payment

Assignment
of contract
Payment

Farmers

Citibank
custodian
account

Payment
Ecoagro

Investors
Sale of CRAs

Farmers issue
Financial CPRs

Senior
Mezzanine
Junior

Rating

Reporting
Monitoring

Cotecna

Source: Author, based on Standard & Poors, 2010.

104

Rating
agency

Innovative agricultural finance and risk management

to soyabean producers.132 Figure 19 describes

the obligations to bondholders to be met through

the structure.

deliveries in 2012.

To summarize the essential characteristics of this

CRA issue:

Post-harvest instruments

The underlying were financial CPRs issued by

eight producers selected by Egoagro, following

Brazil has had a reasonable legal framework

a due diligence process.

for WHR for a long time. Its 1903 Decree on

These issued financial CPRs were each for

Public Warehouses (Decreto 1.102 Armazns

between four and 17.3 percent of the total.

Gerais) specified a double WHR system,

The CPRs were collateralized by commitments

with certificates of deposit confirming the

on the future delivery of soyabeans adding

warehouses receipt of the goods, and warrants

up to 110 percent of the face value of the

as pledge instruments. Both documents were

CPRs (using the CME November 2011 futures

transferable through endorsement. However,

contract as reference) and further collateralized

each transfer attracted taxes, and as financial

by the farmers real estate.

instruments the warrants were inferior to many

Commercial contracts were in place

other products available on the market. There was

for delivery to a large trader (ADM) and

also a lack of properly managed, financially-secure

receivables under the contracts were assigned

independent warehousing companies. Thus, the

to Ecoagros custodian bank, Citibank.

legal framework was not enough to stimulate

The local branch of a Swiss firm (Cotecna)

active use of WHR finance.

acted as monitoring agent to ensure that the

soyabeans committed under the contract were

To address the constraints, Brazilian regulations

indeeddelivered to the logistics agent, NPK.

on WHRs were modified in 2005, making them

Senior, mezzanine and junior notes with an

an integral part of the financial sector rather than

expected life of ten and a half months were

just tools for physical trade. The innovations,

issued. The senior notes comprised about

as compared to the earlier system, were the

one third of the issue and were rated by a

following:133

local agency as well as by Standard & Poors,

Obligatory registration in an officially-approved

at a local currency rating of A+, noting that it

(electronic) registry.

assumed the eight producers to have a much

Obligatory use of custodian institutions.

lower CCC rating.

Electronic transfer and trade.

Exemption from the tax on financial

The proceeds from the sale of the CRAs,

operations, and application of VAT only after

minus costs (about six percent) were remitted

exercise/liquidation of the CDA/WA.

to the farmers, enabling them to finance their

Liquidation of the warrant through the

production campaign. The soyabeans were

custodian institution rather than with the

harvested from February to April 2011, and ADM

warehouse.

paid into the Citibank escrow account from May

to 30 July 2011. The funds received in the escrow

As before, current regulations stipulate two

account were used to reimburse the investors,

instruments for post-harvest finance, CDAs

with a payment waterfall. First, the holders of

and WAs. Both are issued by a warehouse

the senior notes were paid, then the mezzanine

operator on request of a depositor upon his

bond holders, then the holders of the junior

deposit of agricultural commodities. Their main

bonds. To deal with the eventuality of production

characteristics:

shortfalls or price falls beyond the 10 percent

The CDA represents a commitment to deliver

of overcollateralization, the legal term of the

transaction extended for nine months to permit

agricultural products, including in semiprocessed form.

The WA represents the commitment to pay in
cash and grants the right of pledge over the

132 See Standard & Poors, 2010. In the eight months after,
Ecoagro structured five more CRAs for a total amount of USD
165 million, for sugar, ethanol and bioenergy; the longest tenor
was five years (Bloomberg, 20 April 2011).

133 Silva and Marques, 2006.

105

product described in the CDA.

difficulties meeting these norms, regulators

The WA and CDA are always issued together

have been flexible, with timelines regularly

and carry the same number.

shifting forward. Warehouses now have to

The WA and CDA are valid up to one year, with

possibility for extension.

meet the norms by 2017.

Other than the requirement to meet

The CDA and WA both need to be registered,

warehouse norms, there appear to be no

electronically, in an approved registry.

restrictions in terms of financial strength,

Once registered, the CDA and WA can be

operational capabilities or relationship with the

traded separately.

depositor.
The warehouse operator needs to have

The option to take delivery is in the hands of

insurance against a range of risks, including

the holder of the CDA. If he also holds the WA,

disasters and theft, in the case of public

he can immediately take delivery, assuming the

warehouses.

warehousing charges have been paid. He takes

In terms of prior claims, the depositor has to

delivery by asking the bank that acts as the

declare that the product belongs to him and is

custodian to cancel the electronic registration and

free of any liens. Also, at the time of deposit,

surrender the CDA and WA. If he does not hold

he has to irrevocably grant power to the

the WA that corresponds to his CDA, then he

warehouse to transfer the goods represented

must deposit the amount of the debt guaranteed

by the CDA to the last endorsee (i.e. final

by the WA (i.e. its face value) in cash to the

holder) of the CDA.135

custodian before he can claim the products from

With these instruments, a farmer who has

the warehouse.

issued a financial CPR but does not wish to sell

The main criteria for the issuance of CDAs and

his crop immediately after harvest to repay his

WAs are as follows:

debt, can roll his loan into a CDA/WA structure

Warehouses that issue CDAs and WAs must

and, thus, obtain post-harvest finance. Figure 20

be accredited by the National Register of

describes how CDAs/WAs can be used. An owner

Warehousing Units.

of commodities, which could be a farmer, trader

134

A warehouse is not permitted to issue

or end-user, or, as in this example, a processor,

CDAs/WAs for its owner, but cooperative

deposits them in a warehouse. The warehouse

warehouses are permitted to issue CDAs and

operator issues both CDAs and WAs, and the

WAs to their members.

processor sells CDCAs to a financier, with the

The warehouse needs to meet certain

CDAs/WAs and, optionally, a commercial contract

technical criteria with respect to its

with an ultimate buyer as collateral. When the

infrastructure. As many warehouses have

processor decides to sell the commodities, the

buyer pays the bank, receives the CDAs/WAs and

134 Administered by CONAB, the state-owned national food

supply company. When the law establishing CDAs and WAs
was passed in 2004, this National Register was not yet operational, and warehouses were permitted until 2009 to continue
under Ministry of Agriculture regulations. On 1 January 2010,
the CONAB accreditation system became operational.

then takes delivery from the warehouse.

135 Andima, 2009.

Figure 20
Use of CDAs/WAs in post-harvest finance
Issuance of CDCAs
backed by CDAs/WAs
and the commercial
contact
Deposit of
products
Warehouse

Financier

Payment
Product delivery

Processor
Issuance of
CDAs/WAs

Trader
Commercial
contact

Source: Based on Ministry of Agriculture, Livestock and Food Supply, 2010.

106

Payment and
hence,
liquidation of
the CDCAs

Innovative agricultural finance and risk management

The secondary market

financial institutions and portfolio managers have

structured FIDCs specifically for agribusiness

There is an active secondary market for CPRs

instruments and receivables. In 2007, the first

and associated instruments. Figure 21 gives the

year that such dedicated FIDCs were operational,

simplest structure. An investor can endorse a

they accounted for some 15 percent of the USD

CPR and sell it to a bank, and the bank will pay

5 billion invested in FIDCs137. By 2009, there were

him the face value of the bond discounted at

26 such FIDCs, investing billions of R$.

prevalent interest rates. The bank can warehouse

FIDCs operate as follows:

the CPR, pledge it to another bank as part of a

A fund manager finds companies that can

security package, or, after endorsement, sell/

cede credit rights, e.g. through CPRs, CDCAs

discount it to another bank. International banks

or LCAs.
Due diligence is done on these companies to

are often the buyer in the second case.

check their ability to perform in the future.

CPRs and other instruments that are registered

The credit rights are sent electronically to the

funds custodian who checks if they are eligible

either in BBM or CETIP can be traded

(e.g. no double pledges).

electronically through the trading network

provided by these two organizations. Repo

If they are eligible, the FIDC buys them, with

transactions (i.e. sale with the promise to

a subordinated tranche remaining with the

buyback or buy with the promise of resale) are

originating company (i.e. the originator sells USD

possible for financial CPRs as well as CDCAs,

120 of credit rights for USD 100. If at the end,

LRAs and CRAs. Repo transations are not

only USD 105 is paid, the FIDC receives the full

possible, though, for CPRs specifying physical

USD 100, and the originator loses USD 15).

settlement. Trade takes place bilaterally as long as

When a credit is due, the buyer pays into

one of the two parties is a financial institution and

an escrow account managed by the FIDC

through CETIPs electronic trading network.

custodian.

The secondary market for CPRs and related

In priority, and up to the value of the bonds,

bonds is also strengthened by the presence

the sums received by the custodian are paid

of investors keen to package sets of such

to the FIDC; the remainder is remitted to the

instruments. Agribusiness securitization

originator.
The FIDC redeems the bonds from its

companies have already been mentioned,

but they are restricted to investing in CPRs

investors. If there is a shortfall, there is a

and CDCAs. More important are the so-called

payment waterfall, with first the senior debt

being served, then mezzanine debt and the

Credit Rights Investment Funds or Fundo de

Investimento em Direitos Creditrios (FIDCs).

136

remainder, if any, to subordinated investors.

Figure 22 shows how these operate. FIDCs can

be closed- or open-ended investment funds.

While the secondary market is active, there still is

They can invest in any asset class, but because

considerable room for growth. As individual CPRs

of the significant potential of agriculture in Brazil,

have a strong credit risk component, they are not

136 Andima, 2006.

137 Herscovici, 2008.

Figure 21
Refinancing CPRs
Discounting at prevalent
interest rates

Payment
Investor

Farmer
Farmer issues
a Financial
CPR, based on the expected
value of his future production

Bank 1
Endorsement
Purchase,
or secured
loan

Endorsement
or pledge

Bank 2

Source: Author

107

the easiest investment instruments for those not

sold in November 2007. The global financial crisis

specialized in agricultural markets. If CPRs are

struck a few months later. The result was that

packaged through an LCA or another instrument,

by August 2008, sugar and ethanol prices in

the larger pool may provide for better diversified

Brazil had fallen by 50 percent and 40 percent,

risk, but the investor still needs to be able to

respectively. The fund had a heavy concentration

understand the particular risk profile of a specific

in the sugar industry: this sector had received

CDCA/LRA/CRA offer in order to properly price it.

almost half of its investments. By the end of

The case in the next section illustrates the risks.

the year, more than three quarters of its sugar

sector investments were in default. In March
2009, the fund had to decide to stop lending and

Union National Agro+ - not all

agricultural bonds are equally safe

to concentrate on recovery of outstanding dues.

Senior debt was largely protected, but mezzanine
debt was not.

Selection of borrowers and decisions on portfolio

allocation are of crucial importance for FIDCs. If

In addition to the assignment of receivables, land

the fund managers get this wrong, the payment

and other assets had been given as collateral.

waterfall structure implies senior debt holders

However, there was no explicit strategy to

may be partially protected, but others can see

manage price risk: the hedging policy was

the value of their investment erode quickly.

formulated in terms of managing the interest

This fact can be illustrated by the case of Union

rate risks between the rates expressed in

National Agro+, a USD 300 million FIDC which

the CPRs and CDCAs on the one hand, and

was established in 2007 to invest in financial

the interest rates on the notes issued by the

CPRs and CDCAs, but with the right to invest

FIDC on the other. With the collapse of main

also in the other local currency agricultural bonds

clients, these risk management measures were

discussed above. Figure 23 shows how the fund

insufficient. Recovery of debts proved difficult,

was to operate.

and even holders of senior debt were affected.

The notes, with a face value of R$ 1 million each

By September 2010, as much as 58 percent of

and an expected life of two to six years138, were

the debt owed to the fund was more than 180

days overdue. Senior debt, by that time, had been

138 After the expiry of the two-year notes, it was expected

that the FIDC would issue another series of equivalent amount
to maintain its investment capital. Also, there was a provision that if the value of senior notes in the FIDC exceeded 45
percent, the administrator had to liquidate (i.e. buy back) enough
of these notes to achieve a proportion of mezzanine and junior
debt of no less than 55 percent.

further downgraded to a BB rating.

Figure 22
Investment funds for agricultural finance
Senior (>50%)
Credit Right
Investment
Fund (FIDC)

Reporting

Payment
through escrows

Mezzanine
Issuance of bonds
Subordinated

Payment
through escrows

Buyer

Buyer

Contract

CPRs

CDCAs

Large farmers,
coops

Contract

Traders,
processors
CPRs

Collateral
manager

Source: Author

108

Monitoring

Farmers

Investor
Investor
Investor

Innovative agricultural finance and risk management

Figure 23
The Union National Agro+ FIDC

Offtakers

Delivery

Due diligence
(through credit
consultant)

Payments

Assignment
of contracts
Payments

Payments

Payment and Junior CRAs

Farmers
processors

Banesco
custodian
account

Reporting

Monitoring

Investors

Union
Agro+

Financial CPRs,
CDCAs

Sales of notes
Senior & Mezzanine
Ratings

Price risk
management

Monitoring
agent

Futures
markets

Ratings
agency

Source: Author, based on Oliveira Trust, 2009.

The support system for a vibrant

market in CPRs and related products

rather than through prepaid forward contracts

or input sales on credit offers benefits to both
sides. At the same time, the farmers are large

CPRs and the various other bond structures

enough to issue CPRs of a size that the supply

developed on their basis do not operate in a

chain partners can package and refinance

vacuum. Figure 24 gives an overview of the

through the financial system.

institutional supports on which the success of

these instruments has been dependent.

A supportive regulatory framework is required.

In particular, two aspects are important:
priority over other claims, e.g. in the case

A number of conditions have been essential for

of bankruptcy of the borrower (the assets

the success of CPRs and related instruments:

pledged in the CPR are excluded from the

A farming structure with enough large and

bankruptcy proceedings); and

mid-sized farms with a good integration into

the provision of out-of-court dispute

supply chains is needed.139 The vast majority

settlements, and the consequent rapid dispute

of CPRs are issued by farmers to suppliers (i.e.

resolution process.

input companies) or offtakers (i.e. processors

These mechanisms have been tested and

or traders), not to banks or other financiers.

they work. For example, when the issuer of

These supply chain partners know the farmers,

a financial CPR under which 32 918 animals

and have commercial incentives to supply

had been pledged fell into bankruptcy, the

them with finance. Doing so through CPRs

injunction of the buyer of the CPRs was

granted, and 15 000 animals were seized.
When a sugar company defaulted on its

139 Marzo, 2010.

Table 15
Impact of sugar sector defaults on Union National Agro+ FIDC notes
November 2007
rating, Standard &
Poors
Senior
239
AA
Mezzanine
266
B
Junior
127
Not rated
Source: Based on Standard & Poors and Fitch rating reports.
* Face value of each note: R$ 1 million.
Category

Initial amount
(million R$)

November 2009
rating, Standard &
Poors
A
CCC
Not rated

Value of each note*

on 23 October 2009
(million R$)
1.11
0.53
0

109

obligations under an EPA-backed by CDAs/

plant the crop that he committed to sell. If he

WAs, the release of the product represented

plants it, he may divert the payment through an

by the CDAs/WAs to the financier was granted.

alternative channel. The farmer who issued the

In the case of a sugar mill that had been

CPRs may die.141 For these reasons, CPRs are

declared bankrupt, an investment fund that

little used by small farmers their CPRs are

had bought CDCAs guaranteed by CPRs, under

considered too risky by financiers who cannot

which sugarcane was pledged, received a

afford to do any detailed due diligence. Third

favourable order that the sugarcane belonged

party guarantees or insurance removes much

to the fund. The revenue from the canes

of this risk. But the problem is that they can be

processing and sale had to be deposited in an

expensive as much as six to 10 percent for

escrow account and stay out of the general

guarantees.142
The existence of monitoring agencies are

bankruptcy proceedings, with priority to

serving the obligations of the fund.140 The out-

required and must be able to monitor whether

of-court settlement is, in principle, immediate:

CPR issuers are using the funds they received

an obligation due under a promissory note has

for the intended purposes, and that products

to be paid within 24 hours. When CPRs were

are not diverted surreptitiously to buyers

introduced, courts already had about 25 years

unknown to the financier.

of experience with promissory notes, making

The registration of the CPRs as well as the

the risk of legal re-interpretation very small.

underlying collateral are needed. CPRs have

The availability of bank guarantees and, to a

to be registered with the register of deeds

lesser extent, insurance to underwrite the

office together with the registration number

performance risks of individual farmers, is

of the property where the crop was planted.

needed. CPRs are not without risk. There can

This requirement has two advantages. First,

be adverse weather events, pests, diseases or

other factors that negatively affect the harvest,
or the cattle. The issuer may decide not to

141 Andima, 2009a.

142 Idem. An important reason for this cost is that under Basel
provisioning rules for banks, such guarantees need to be 100
percent provisioned for, and, therefore, immobilize much bank
capital.

140 Ministry of Agriculture, Livestock and Food Supply, 2010.

Figure 24
The institutional context of Brazils CPRs and related instruments

Reference prices and

price risk management

Accepted
for margin
purposes

CPRs and
similar bonds
Insurance
companies

Provision of
insurance and
guarantees

Insurance

Banks
Real estate
registry

Registration

Arbitrage and risk management

Futures
markets

Registration

Active
secondary
market
Exchange
(BBM)

Guarantees

OTC (CETIP)

Listed collateral

E-auction
(Banco do
Brasil)

Register of
Deeds

Verification

Registry of
farmers
landholdings

Source: Author

110

Internet

Monitoring of
actual use
Collateral
management
firms

Clear legal
protection
Extra-judicial
mechanisms

Priority rights over

collateral

Local and
international
investors

Favourable tax
treatment

Innovative agricultural finance and risk management

it becomes possible to control how many

future sale of buildings. Banks, investors and

CPRs are issued on the same property, and,

advisory firms (e.g. lawyers), therefore, have a

by using the separate registry of the National

high level of familiarity with the instruments and

Institute of Colonization and Land Reform, to

check whether a farmer pledged too many

their possible uses.

The tax-exempt treatment provided by the

CPRs given his land holdings. Second, the

government in terms of financial transaction

CPRs cannot be falsified or pledged twice.

taxes and income tax exclusion on revenue

The creation of another registry structure just

from trading CPRs is needed.

to enable negotiability of the instruments is

needed. Use of this second registry structure

But there also have been structural

is not mandatory, but it gives flexibility to

weaknesses.143 Lack of training continues to

issuers as well as buyers. Apart from its

be a problem. There is still a lack of awareness

evident benefits in terms of risk management,

of the instruments both in the agricultural and

the registry makes it possible to open up the

the financial sectors. Many structures, when

whole of the Brazilian market for potential

submitted to one of the registries, do not meet

buyers of agricultural commodities. Some

the criteria for acceptance.144 With respect to

400 traders are connected to the electronic

CDAs/WAs, it was only in January 2010 that the

system of the BBM, for example. The

right to issue these instruments was restricted to

system, which is similar to what is described

certified warehouses, which has not helped the

in Annex 6 on an EWR system, provides

financial sector to develop trust.

easy functionalities for buying and selling

contracts, for offering contracts for tender,

In conclusion, Brazil certainly has a most

for custody arrangements etc., and it is

interesting experience when it comes to financing

accessible through the Internet.

agriculture, and it is well worth exploring the

The integration of the products into the

Brazilian case for inspiration for new possibilities

commodity exchange system is required.

in other countries. However, given how well-

The exchange provides reliable reference

embedded the CPRs and associated bonds are

prices, as well as a point of sale of last resort

in the wider institutional and financial framework

for an investor who has had to take delivery

of Brazil, one cannot expect that it is possible to

of physical commodities, as in the case of

copy just one element. If an instrument is to be

default by the seller of CPRs. Integrating

successfully implemented, a sufficiently large

CPR transactions with risk management

part of its supporting environment needs to be

transactions permits arbitrage and a flexible

replicated, in terms of laws and regulations,

marketing strategy.

support institutions and a positive government

The regulatory freedom of large institutional

approach in terms of taxation.

investors to buy the instruments is required.

There are some restrictions as to the
percentage of their total portfolio that pension
funds and others can invest in agricultural
markets, but these are not unduly harsh.
The ability of the financial sector to use CPRs as
building blocks for more complex instruments,
which has contributed significantly to the
markets liquidity, is a requirement. It should
be noted that bond structures of the nature
described here are not unique to the agricultural
sector. They are widely used throughout the
whole of Brazils economy. For example,
electricity firms obtain working capital by
issuing bonds committing the revenue of future
electricity sales, and real estate firms finance
their projects by issuing bonds backed by the

143 Oliveira et al.et al., 2010.

144 The main problem here is complexity. The registries
recognize 20 different credit rights, and each has its own format
with respect to the information that needs to be entered into
the system in order to create a tradeable title. If a piece of
information is missing or does not exactly conform to the
requirements of the system, the attempt to register fails.

111

References
Associao Brasileira das Entidades dos Mercados Financeiro e de Capitais (ANBIMA). 2010. Mercado
de ttulos do agronegcio: desafios e perspectivas. 1 Junio.
ANBIMA. 2006. FIDC receivables investment funds. Rio de Janeiro, National Association of Financial
Market Institutions.
ANBIMA. 2009a. Agribusiness securities: CPR - rural product note. Rio De Janeiro, National
Association of Financial Market Institutions.
ANBIMA. 2009b. Agribusiness securities: CDA and WA: agribusiness certificates of deposit and
agribusiness warrant. Rio de Janeiro, National Association of Financial Market Institutions.
Barth, F. 2011. Reflexes acerca da cdula de produto rural (CPR). Conteudo juridico, Brasilia-DF, 15 jun.
Buainain, A. M., Gonzlez, M. G. , Meirelles de Souza Filho, H. & Vieira, A. C. P. 2007. Alternativas
de financiamento agropecurio: experincias no Brasil e na Amrica Latina. Brasilia, Instituto
Interamericano de Cooperao para a Agricultura/Unicamp.
CETIP. 2009. Ttulos do agronegcio - CPR, CRP, NCR, LCA, CRA, CDCA e CDA/WA - manual de
operaes. 18 maio.
Chmielewska, D & Souza, D. 2010. Market alternatives for smallholder farmers in food security
initiatives: lessons from the Brazilian food acquisition programme. International Policy Centre for
Inclusive Growth. Working Paper No. 64, June.
Costa, G., & Henrique, C. 2010. Alternativa de financiamento para a cafeicultura CPR Financeira por
ndice. 48th Congreso do Sociedade Brasileira de Economia, Administrao e Sociologia Rural, 25-28
julho.
Coulter, J., Leo de Sousa, E. & Martines, J. 1998. Brazilian experience with grain warehousing
services and associated marketing tools. Natural Resources Institute, May.
De Souza e Silva, G.. & Marques, P. V. 2005. Letra de Crdito do Agronegcio (LCA): um ttulo de
crdito para financiamento do agronegcio. XLIII Congresso da Sociedade Brasileira de Economia,
Administrao e Sociologia Rural, Ribeiro Preto, 24 a 27 de Julho.
De Souza e Silva, G. & Marques, P. V. 2006. Alternativas de investimentos para o certificado de
depsito agropecurio/warrant agropecurio (CDA/WA). XLIV Congresso da Sociedade Brasileira
de Economia, Administrao e Sociologia Rural, Questes Agrrias, Educao no Campo e
Desenvolvimento, Fortaleza, 23 a 27 de Julho.
De Sousa, E. L. & Pimentel, F. L. 2005. Study on cedula de produto rural (CPR) farm product bond in
Brazil. World Bank, February.
Herscovici, R., Herszkowicz, E. J. & Stacchini, F. M. 2008. Securitisation of agribusiness financial
instruments in Brazil: an expanding market. Global securitization and structured finance. (available at
http://www.globalsecuritisation.com/).
Junior, A.F. 2008. How are local traders and hedge funds utilizing commodities derivatives to hedge risk
and generate profit? Derivatives in Latin America Summit, Miami, September.
Marques, P. V. ,& and De Souza e Silva, G. 2006. Os cinco novos instrumentos no tradicionnais de
financiamento do agronegcio brasileiro. Serie Pesquisa no. P-59, Esalq/USP, Piracicaba, Agosto.
Marzo, S. 2010. The Brazilian cedula de produto rural: performance, lessons and replicability potential
outside Brazil. Harvard Kennedy School of Government, March.
Ministry of Agriculture, Livestock and Food Supply. 2010. Brazil how to invest in agribusiness. Brasilia.

112

Innovative agricultural finance and risk management

Oliveira, C., Carvalho, G. R. & Travassos, G. F. 2010. Os ttulos do agronegcio brasileiro: uma anlise
comparativa entre a percepo dos especialistas no seu lanamento e a situao atual. 48o Congresso
da Sociedade Brasileira de Economia, Administrao e Sociologia Rural, Campo Grande, 24 a 28 de
Julho.
Oliveira Trust. 2007. Prospecto definitivo de distribuio pblica de quotas do union national agro+
fundo de investimento em direitos creditrios financeiros agropecurios. 5 de Setembro.
Standard & Poors. 2010. 31a Srie de certificados de recebveis do agronegcio eco securitizadora de
direitos creditrios do agronegcio S.A. Relatrio de Rating Preliminar, 21 de Setembro.

113

Annex 11:
Index insurance for the Mongolian livestock sector
Two fifths of the Mongolian population make a

cattle and yak, horse, sheep, goat which

living in livestock herding. The livestock sector

made it possible to price the insurance. Individual

accounts for more than a quarter of the countrys

herders receive an insurance payout based on

GDP. The sector is highly vulnerable to weather

regional mortality, not individual losses, and,

events. From 2000 to 2002, 11 million animals

therefore, still have an incentive to safeguard their

died due to harsh winters; and in 2009/2010, 9.7

herds health.

million out of a total of 44 million died, amounting

to USD 477 million of economic losses.145

The BIP/LRI is sold and serviced by insurance

companies. It is supposed to be a profitable

Not even the most experienced herders can

product for them. Herders select the percentage

protect themselves from extreme weather

of the value of their herd by species that they

events. During the communist period, the

would like to insure, and pay the actuarially

country had a government-backed livestock

correct insurance premium. Herders now typically

insurance programme, but replicating this in a

insure 30 percent of their herd. The insurance

free market regime proved difficult. A traditional

pays out when a regions animal mortality

livestock insurance programme would be very

rates during the coverage period (January to

expensive to handle given the vast open spaces

May) exceed specified trigger percentages

of Mongolia. Weather-based insurance was a

(depending on the region and the species,

priori considered as an acceptable alternative

these percentages are in the range of seven to

to individual insurance because Mongolia has

10 percent). The maximum payment is when

reasonable historical weather records. However,

mortality rates reach a specified catastrophic

the link between weather data and livestock

level: 25 to 30 percent, depending on the region.

mortality proved difficult to establish. Therefore, it

was decided to use another index, that of region-

Beyond this point, the DRP/GCC comes into play.

level animal mortality.

Figure 25 illustrates the overall structure for the

distribution of risks. The DRP/GCC is financed

The principles of this index insurance that was

and provided by the government. Herders who

first piloted in 2006 were as follows:

buy the BIP/LRI are automatically registered for

Herders retain small losses that do not affect

the disaster facility on the same species at no

the viability of their business.

Larger losses are transferred to the private

take the BIP, they could still register for the DRP

insurance industry through a product originally

by paying a contribution to the administrative cost

called the base insurance product (BIP); in

of the disaster facility. But since 2009/2010, only

2009/2010 this was renamed livestock risk

herders with a LRI can benefit from the GCC.

insurance (LRI).
The final layer of catastrophic losses is borne
by the government, originally through the
disaster response product (DRP), which
was replaced in 2009/2010 by government
catastrophic coverage (GCC).
The insurance is on the basis of livestock
mortality in a herders locality. Mongolia had more
than three decades of data on animal mortality for
all regions and the four major species of animals
145 Luxbacher and Goodland,2011.

114

additional cost. Up to 2009/2010, if they did not

Innovative agricultural finance and risk management

Figure 25
The structure of livestock index insurance in Mongolia
World Bank
Access to contingent
World bank debt
facility
Losses
exceeding
25-30 per cent

Contingent
finance

Risk absorption
Government

Premium
payments for
BIP/LRI
Losses of up to
25 - 30 per cent

Reserve fund

Permium for
reinsurance
Insurance
companies

Surplus

Premiums received

First 7 - 10 per cent of losses

Selfretention

Regular insurance
fund (established
and closed each
year)

Farmers

Source: Based on Mahul and Skees, 2006; and Luxbacher and Goodland, 2011.

Livestock losses are correlated across Mongolias

2008 and 2009 due to a fall of cashmere prices,

regions. To ensure that insurance companies are

indicating that they find it of use. Banks have

able to make payouts required under the LRI,

responded by offering insured herders loans at

the government provides a re-insurance facility

decreased interest rates.146

through a livestock insurance indemnity pool

(LIIP). The pool is re-established each year. The
insurance companies pay a premium in advance
for re-insurance, on the basis of their expected
sales of LRIs into the pools reserve fund. Then,
all the LRI premiums that they received, minus
administrative costs, are put into the pool.
At the end of each insurance cycle, payments to
the herders, if any, are made from the regular
part of the pool; they are made directly to
farmers so that they are protected from eventual
insurance company bankruptcy. If these funds
are sufficient, then the surplus is distributed
among the insurance companies, pro rata to their
contributions. The reserve fund is carried over to
the next year.
If the funds are insufficient, then first payments
are made out of the reserve fund, and should this
also prove insufficient, then the government has
access to a contingent debt facility of the World
Bank.
The insurance facility worked well over several
seasons, including a number with high mortality
rates. Furthermore, herders continued to buy
the policies even when their incomes declined in

146 But insurance is still only offered through insurance

agents, not bundled with loans. Mahul et al. (2009) identify this
as an area in which the scheme can be improved as bundling
insurance with loans will help achieve a greater reach.

115

References
Luxbacher, K. & Goodland, A. 2011. Building resilience to extreme weather: index-based livestock
insurance in Mongolia. Washington, DC, World Resources Report.
Mahul, O. & Skees, J. 2006. Piloting index-based livestock insurance in Mongolia. AccessFinance, Issue
No. 10, World Bank, March.
Mahul, O. Belete, N. & Goodland, A. 2009. Index-based livestock insurance in Mongolia. International
Food Policy Research Institute (IFPRI), Focus 17, Brief 9, December.

116

Innovative agricultural finance and risk management

Annex 12:
Microfinance for the agricultural sector: lessons from
BASIX, India
BASIX147 is a MFI. It calls itself a livelihood

that of livelihoods promotion. Elements of BASIXs

promotion institution, providing credit to more than

work programme that had earlier been seen as just

a million poor households in India, and insurance

a support function now were given equal weight

to a million more. In 1996 it started providing

to credit provision.150 BASIX formally adopted

microcredit to rural poor. Cumulatively, until March

a Livelihood Triad as the core of its strategy,

2011, it distributed USD 650 million of credits. It

with separate parts of the group dealing with the

is present in over 25 000 villages, or about three

separate components of micro-credits, agricultural

percent of Indias total, and almost half of its

support and institutional development, including

microcredit portfolio is in agricultural lending.

organizing farmers into cooperatives.

BASIX structured its operations to be profitable,

The micro-credit operations were expanded to

aiming to yield a competitive rate of return to its

include savings, insurance, money transfers for

investors so as to be able to access mainstream

migrant workers and price risk management.

capital and human resources on a continuous

BASIXs agricultural and business development

basis.

services included work on productivity

148

enhancement, input supply and output sales,

It introduced the concept of joint liability group

local value additions and diversification from

lending to India, with the members of a group

farm to non-farm activity. The third component,

guaranteeing the loans to each other. It was

institutional development services, incorporated

the first microfinance bank in India to receive a

training activities as well as institution building.

commercial bank loan, and the first to refinance

In the first component, BASIXs earnings consist

part of its loan portfolio with a major bank

of interest on loans and commissions on the sale

both within three years of its creation. It rapidly

of insurance. For the latter two components,

created a large network.

beneficiaries pay an annual fee.

However, after five years of operation it

A detailed study of those who had experienced

commissioned an impact assessment, and its

no increase or a decline in income found three

findings shocked BASIX management: only 52

principal reasons:

per cent of its customers, who had received

1. unmanaged risk;

at least three rounds of microcredit from

2. low productivity; and

BASIX, showed a significant increase in income

3. unfavorable terms in input and output market

(compared with a control group); 25 per cent

transactions.

reported no change in income level; and 23 per

cent reported a decline in their income level.149

This study convinced BASIX that it had to address

these issues directly in order to have a better

These findings inspired BASIX management to

impact. Consequently, it developed service

change their organizations fundamental mode of

packages in all three areas.

operation, in which the mindset of its executives

would need to shift from that of microfinance to

Risk management
147 BASIX stands for Bharatiya Samruddhi Investments and
Consulting Services Ltd.. It is a holding company for several
entities, including two non-bank financial institutions: a bank and
a number of agriculture, business and institutional development
services. IFC is the second-largest shareholder of BSFL, the
main non-bank finance company.
148 Arora, 2010.
149 Mahajan and Vasumathi, 2010.

BASIX operates in regions with rainfed

agriculture. Therefore, it was well-aware of
weather-related risk and in 1999 had started

150 Arora, 2010.

117

research on the possibilities of insuring villagers

Figure 27 shows the premiums paid as well as the

against crop loss. In 2003, it started a weather

claim amount. The 2009/2010 experience clearly

index insurance pilot with ICICI Lombard (a

brings out the need for access to re-insurance for

major Indian insurance company) and World Bank

this kind of programme. BASIX benefitted from re-

support, with policies for two products sold to

insurance from Swiss Re. Obtaining re-insurance

230 farmers in seven villages, all covered by one

was not easy; only two major re-insurers operate

weather station. The second year witnessed only

in the Indian market, largely due to regulatory

a small growth, but afterward, the programme

constraints. Re-insurance rates can be high, and re-

started growing rapidly, expanding its product

insurers are not interested in amounts of less than

coverage and the number of weather stations

USD 1 million. And the time constraints of weather

it covered. It also continuously improved its

insurance, which tend to be written no more than

contract in response to the feedback of farmers.

30 days before the start of the covered period,

leave little time for placement with international re-

Its insurance contract divides the cropping season

insurers who require at least 10 days until the start

into three stages: sowing, flowering and harvest.

of the cover period.152

Each stage is separately insured, with payouts

occurring for each millimetre that rains are below

While the programme has not been a failure

the relevant threshold value, up to a certain

and has reached a client level at which it is

maximum. The policy also includes a payout in

sustainable, it is by no means a major success:

case of excess rainfall for a number of consecutive

the total number of clients is less than half a

days that can seriously damage the crop during

percent of the total number of BASIX clients,

the harvest period. And if the crop fails during the

and only around two percent of its agricultural

sowing stage farmers receive a payout that can be

borrowers. To have come so far, BASIX had to do

used to replant it.

151

Insurance is for multiples of

many things right, including:

INR 1 000 (approximately USD 22).

awareness-raising about the insurance

products and their limitations (allowing the

Figure 26 shows the growth of the programme

programme to grow in the first three years

up to 2010. In 2008, the government started

even though most farmers received no

permitting private insurance companies to

payouts);

take advantage of the same premium subsidy

the ability and willingness of its staff, including

offered to the public sector in certain regions,

its field staff, to pilot new product concepts,

which allowed BASIX to start offering a premium

which was reflective of BASIXs general focus

subsidy of 40 to 50 percent.

on innovation;

151 Manuamorn, 2007.

152 Hazell et al., 2010.

Figure 26
Number of clients and claims for the BASIX weather index insurance programme

14 000

90%
80%
70%

10 000

60%

8 000

50%

6 000

40%
30%

4 000

20%

2 000

10%
2003/04

2004/05

No. of customers

Source: Joshi, 2010.

118

2005/06

2006/07
Year

claims settled

2007/08

2008/09

2009/0

0%

% of farmers who received claims

claims percentage

No. of customers/
claims

12 000

Innovative agricultural finance and risk management

the capacity to listen to clients, and willingness

there was no payout on the insurance.154

to channel customer feedback into product

Weather risk insurance is only one of the many

design, which led to continuous improvements

risk management products that BASIX offers. It

in each product cycle.

also provides life insurance. Built into its credits, all

borrowers are covered for 1.5 times their loan size,

the development of an efficient policy

health insurance, livestock insurance, insurance for

distribution and claim servicing process.

micro-enterprises, and they even have the option

Despite these positives, BASIX faced many

of micropensions. Basix has also experimented

constraints. The quality of weather data was poor.

with price risk management on Indias exchanges;

Awareness-raising is a slow process, especially

however, its pilot projects have found that farmers

as the product had to be explained to farmers

have a clear preference for options, which are not

who generally are not only illiterate, but also

yet permitted under Indian regulations.

do not understand the concept of millimetre.

They sow when the soil is humid enough. In

Productivity improvement155

the beginning, there was a scarcity of usable

weather stations. BASIX has since entered into
an agreement with a private sector company

BASIX has recognized that profitable farmers

which installs and manages automated weather

are least likely to default. Under Agricultural,

stations. But the key constraint has probably

Livestock and Enterprise Development (AGLED)

been that the BASIX insurance programme is not

services, BASIX currently provides services to

linked to credit. Experience elsewhere indicates

farmers growing a range of crops and for the

that this is a major constraining factor. BASIX is

production of dairy and meat (sheep and goat). To

exploring the possibility of building weather index

operate AGLED services, BASIX has trained some

insurance into its microlending.

1 000 livelihood services providers (LSPs), similar

153

to extension agents.
In addition to acting as a broker for sales of weather
index insurance to individual farmers, BASIXs

AGLED services included soil-testing, integrated

principal non-banking finance company, Bharatiya

pest management, field surveillance, linking

Samraddhi Finance, bought a portfolio insurance

farmers with the proper input markets, health

product in 2004/2005. Its aim was to cover part of

checkups of animals, livestock vaccination,

its agricultural loan portfolio against weather risk,

training on use of feed and fodder and better

as a proxy to default risk, in three drought-prone

dairying practices. Farmers pay an annual fee of

districts where it otherwise would have stopped

around USD 10 for AGLEDs services. In 2009,

providing credits. Rainfall that year was good and

154 Mahajan and Ramana, 2004.
155 Based on Mahajan and Vasumathi, 2010.

153 Hazell et al., 2010.

Figure 27

10 000 000

500%

9 000 000

450%

8 000 000

400%

7 000 000

350%

6 000 000

300%

5 000 000

250%

4 000 000

200%

3 000 000

150%

2 000 000

100%

1 000 000

50%

outgo percentage

premium/claim
amount in Rs

Premium paid and claim amounts for BASIX weather index insurance

0%

2003/04

2004/05

premium collected (Rs)

2005/06

2006/07
Year

2007/08

claim amount paid (Rs)

2008/09

2009/10

loss ratio

Source: Joshi, 2010.

119

AGLED had around half a million clients, and

not only overcharged for the inputs, but also

generated a reasonable profit of USD 450 000.

underpaid for the cotton that farmers had to

deliver to reimburse their input loan. The farmers
became free to decide when and how to sell

Improving bargaining power in input

and output market transactions

their cotton. By tying up with a commodity

exchange that brought electronic tickerboards
to the principal market yards in BASIXs area of

BASIX has promoted various contract farming

operations, farmers became better informed

schemes. Some were non-viable because the

about real-time prices. The opening of a

agro-industries that functioned as offtakers were

warehouse by a collateral management company

unstable. Schemes worked, but only as long

created by the same exchange gave farmers an

as the offtakers remained in business.156 But

effective choice: if they did not want to sell their

many schemes had a more sustainable record of

cotton to a ginnery, they could store it in the

success. In a scheme for potato farmers, yields

warehouse and obtain a relatively cheap bank

almost tripled and prices doubled. A scheme

loan against their cotton collateral. BASIX also

for cotton growers took years to stabilize, in

helped bring new buyers to the area in order to

part, because of an undeclared war in progress

reduce dependence on the local ginneries. And,

between pesticide dealers/commission agents

in the second year of its cotton financing scheme,

and the new cotton producers [organizations].

BASIXextended loans to the farmers to enable

Ultimately, though, it had a major impact on

them to have their cotton toll-processed for a fee

farmers incomes.157

at a ginnery so that they could sell the resulting

lint directly to a large cotton mill.

The cotton project was particularly interesting

as all the components of BASIXs Livelihood

A project in the dairy sector with Reliance Fresh,

Triad came into play. Figure 28 describes the

a supermarket chain that is part of Indias largest

elements of this project, after several years of

industrial group, is another example of how to

work. When BASIX started exploring the cotton

build a successful value chain.158

sector, it found that the sector suffered from

many problems, including indiscriminate pesticide

Reliance decided to build its own dairy supply

usage, borrowing in kind at highly unfavourable

chain in order to meet the growing demand for

terms and low prices as compared to market

high-quality, safe milk. The supply chain it designed

prices, which, furthermore, were rather volatile.

has three tiers: village pooling points, where the

It chose a multi-pronged approach to these

farmers can bring their milk on a daily basis; bulk

problems. Its entry point was the replacement

milk cooling centres, where the milk from various

of expensive pesticides by new integrated pest/

village pooling points is collected and cooled; and

nutrient management techniques, taught through

dairies, where the milk is processed, packaged and

its AGLED services. Through its institutional

distributed to retailers.

development services, it encouraged farmers

to organize, both into joint liability groups that

In January 2008, Reliance signed on one of

permitted its members to borrow, and into

BASIXs subsidiaries, KBS Bank, to be its partner

producer cooperatives that aggregated the cotton

in setting up the village pooling points and bulk

supply.

cooling centres. BASIX already had a positive

experience in the dairy sector, having revived

BASIXs loans enabled farmers to buy inputs,

milk-chilling centres through technical assistance

of which much less was needed, in cash rather

and by lending money to farmers to buy milking

than on credit. As they were better organized,

animals. A combined Reliance/KBS Bank team

they were also able to buy in bulk. This approach

surveyed villages, appointed local people to

eliminated the old system where they received

run the cooling points and centres, equipped

inputs in kind from commission agents who

them and trained them. Reliance provided the

equipment. They helped farmers in each village to

156 Mahajan and Ramana, 2004.

157 For the potato and cotton case studies see Amarnath,
2007. The following paragraphs are based on his article.

120

158 Based on the section on Creating a new dairy value chain

in India: Reliance and BASIX in KIT/IIRR, 2010.

Innovative agricultural finance and risk management

Figure 28
BASIXs cotton value chain financing
BASIX

Buyer introduced by BASIX

Postharvest
loans

Bank

Loans, insurance
Agriculture & business
development services
Institutional
development services

Farmers
Help in
identification

Inputs

Input
providers

Pledging of
warehouse
receipts
Spinning
mill

Toll-processing of
raw cotton

Organization

Producer
group

Sale of lint
cotton

Ginnery

Deposit of cotton

Warehouses

Hedging
Exchange
Placement of electronic ticker boards
in market yards, for real-time price
information

Source: Based on Amanath, 2007.

elect one representative who would receive and

for equivalent loans to other agricultural

manage the milk payments.

borrowers.159
BASIX has also experimented with WHR

For BASIX and KBS Bank, the cooperation

finance for its clients in the soyabean sector

with Reliance opened up new avenues for

where, thanks to the activities of the countrys

financing, particularly for buying buffaloes. Of

commodity exchanges, there is good price

the 2 000 farmers supplying milk to Reliance

transparency. As they are no longer forced

towards the end of 2009, 500 had become

into distress sales, farmers are in an improved

clients of KBS Bank. BASIX helped farmers in

bargaining position with traders.

the 40 villages covered by the Reliance scheme

to form groups, and KBS Bank then started
providing these with group loans to buy new
milking animals. BASIX AGLED services helped
farmers to take care of the animals, with the
400 benefitting farmers paying annual fees. The
animals are insured through BASIX. The fact that
farmers sold their milk through an organized
marketing system which paid premium prices
for high-quality milk discouraged them from
defaulting on their repayment obligations.
Possible payment problems could be identified

Positive externalities, reduced

distribution costs
BASIX works through a network of 150 branches,
each with five field executives under a team
leader. Each field executive supervises five
livelihood service advisers (LSAs), who each
cover about 10 villages within a radius of six
to eight kilometres, originating credit, selling
insurance, selling AGLED services and collecting

early because of the sophisticated information

system put in place to monitor individual
farmers milk deliveries. In addition, for every
litre of milk collected, KBS Bank receives a
commission. In all, the business was sufficiently
attractive for KBS to offer loans at an interest
rate three percent lower than what it charged

159 Politically-inspired government practices, however, act

as an impediment. The government regularly announces programmes at low interest rates; three to nine percent a year as
compared to KBS Banks 18 percent rate, and while in practice
farmers rarely ever get access to these subsidized loans,
hearing about them discourages them from paying commercial
rates. Furthermore, the government regularly announces loan
amnesties, giving farmers the impression that there is no problem with defaulting on loans.

121

repayments.160 Extensive use is made of modern

experimentation with new ideas. In addition

information and communication technology,

to the examples above, BASIX has tried to use

including IT-kiosks at the village level and

electronic spot markets to create access to new,

automated procedures for many operations. In

remote buyers; it has set up a farmer call centre

parallel, under the AGLED programme, there are

to give immediate advice; it has aggregated

about a 1 000 LSPs (extension agents). Thus, it

and sold microcertified emission reductions

has a large network with large fixed costs that

through a group company; and it has studied the

need to be covered through earnings on its

possibilities for using catastrophe bonds.162

operations.
While BASIX has made a good effort to manage
BASIX has found its multidimensional approach

its risk exposure, it was unable to protect

to be very effective in this regard. The activities in

itself against one major risk: that of actions by

each of the components of BASIXs Livelihood

government authorities in India. In 2010, the state

Triad de-risk and reinforce performance of the

Government of Andhra Pradesh, where BASIX

other activities. In its own words, poor people,

was very active, intervened in the microfinance

in addition to microfinance, need a whole range

market, creating over USD 100 million of bad

of Agricultural/Business Development Services

loans for BASIX. A large new capital injection in

(input supply, training, technical assistance,

August 2011, however, enabled the institution to

market linkages). To offer these services in a cost-

stay afloat.

effective manner, it is not possible to work with

poor households individually and they need to be

Not all of BASIXs experiments have been

organized into groups, informal associations and

successful. It has tried giving loans through

sometimes cooperatives or producer companies.

market brokers, but found that they passed on

The formation of such groups and making

loans at overly high mark-ups and were prone to

them function effectively, requires institutional

default on their loan obligations. It has tried to

development services. Hence the Livelihood

work with input providers, which was an effective

Triad.

161

BASIX has found that while the per unit

way to distribute loans; however, when farmers

cost of delivering financial services to the poor

defaulted in drought years, the input companies

is high, packaging other services together with

defaulted on their loans, and the legal process

credit provision carries only a small additional

in India is too inefficient to enforce payment.

cost. For its insurance brokerage activities, for

And there are certain lending methods that

example, it now reaches two million clients, at

are, in principle, suitable for MFIs that BASIX

a cost with which it is difficult to compete, yet

has not experimented with, such as leasing.

which also generates considerable profits for

Nevertheless, the broad approach adopted by the

BASIX.

company and its success in improving livelihoods

by delivering an integrated range of services may

BASIX has also benefited from a self-critical,

well inspire other institutions active in this field.

innovative set of corporate values. It encourages

staff to seek customer feedback for continuous
process and product development and welcomes

160 Mahajan and Vasumathi, 2010.

161 Amarnath, 2007.

122

162 Jindal, 2009. The sale of the certified emission reductions

at the end of 2010, which had been generated by converting
some 15 000 households from traditional water heaters to solar
water heaters, brought in EUR 2.5 million (BASIX Corporate
Announcement, 18 November 2010).

Innovative agricultural finance and risk management

References
Amarnath, S. 2007. Financing the agricultural value chain - BASIX experiences. 3rd AFRACE Agribanks
Forum, Africa Value Chain Financing, October 16-18, Nairobi.
Arora, B. & Swamy, H. 2010. BASIX-Bhartiya Samruddhi Finance Limited (BSFL): a new generation
livelihoods promotion institution. Growing Inclusive Markets Case Study, UNDP.
Jindal, S. C. 2009. Risk management strategies for financing the agricultural value chain. Expert
meeting on managing risk in financing agriculture. Johannesburg, 1-3 April.
Joshi, V. 2010. Index-based insurance BASIX experience. Workshop on developing index-based
livestock insurance to reduce vulnerability due to drought-related livestock deaths. Addis Ababa, ILRI,
12 July 2010.
Mahajan, V. & Ramana, N. V. 2004. Agricultural finance by microfinance institutions, problems and the
way forward. Geneva, UNCTAD, November.
Mahajan, V. & Vasumathi, K. 2010. Combining extension services with agricultural credit: the
experience of BASIX India, in Kloeppinger-Todd, R. & Sharma, M. eds. Innovations in rural finance.
Washington, DC, IFPRI/World Bank.
Manuamorn, O. P. 2007. Scaling up microinsurance: the case of weather insurance for smallholders in
India. Washington, DC, World Bank, Agriculture and Rural Development Discussion Paper 36.
Royal Tropical Institute (KIT) & International Institute of Rural Reconstruction (IIRR). 2010. Value chain
finance - beyond microfinance for rural entrepreneurs. Amsterdam.

123

Annex 13:
Relevance of current CME contracts to Black Sea wheat
and sunflower exports
Figures 29 to 36 show the development of

could be managed separately on the currency

Ukrainian export prices of wheat and sunflower

forward market.

oil from Black Sea ports between 2005 and

2011, as compared to CME prices for wheat and

However, a closer look at the numbers indicates

soyabean oil. At first glance, it appears that the

that the case for using CME futures contracts as

Black Sea prices reflect CME prices, with the

a proxy for Black Sea prices is not that strong.

prices expressed in USD showing a correlation

of around 90 percent or higher. With such high

Tables 1 and 2 break up the analysis for separate

price correlation, one could conclude that there is

years. It can be noted that whereas CME and

no need for separate futures contracts for Black

Black Sea prices follow the same broad trend,

Sea wheat and sunflower oil. Instead, it would be

and, hence, show a high price correlation over

sufficient if exporters from the region, and those

a longer period, in the short run these prices

supplying to them, had access to the Chicago

often move independently. Moreover, there is no

market; for example, by placing CMEs Globex

indication of price correlations becoming better

trading terminals in the region. Currency risks

over time.

Table 16
Correlation of Ukraine wheat with CME wheat
Commodity - Grade - Price Quote

2005
2011

2005

2006

2007

2008

2009

2010

2011

Ukrainian wheat price FOB/DAF

Black Sea 3rd class 12% protein
in USD/tonne

94.22

NA

NA

NA

NA

67.75

93.63

69.38

Ukrainian feed wheat price FOB

Black Sea port in USD/tonne

80.33

-18.42

86.28

84.96

65.02

49.41

94.81

73.13

Ukranian milling wheat domestic

grade 3 in USD/tonne

89.64

-50.34

88.19

93.87

83.02

61.83

86.67

-22.40

Ukranian milling wheat domestic

grade 3 in UAH/tonne

78.02

-48.33

88.39

94.02

89.52

59.42

78.79

-21.16

Source: Bloomberg. Weekly data have been taken, due to lack of availability of daily Ukrainian data. The data quality
is not very good, as continuity is lacking.

Table 17
Correlation of Ukraine sunflower oil with CME soy oil
Commodity - Grade - Price
Quote

2005
2011

2005

2006

2007

2008

2009

2010

2011

Ukraine sunoil FOB Black Sea

USD/tonne

92.47

28.10

87.43

93.30

91.45

67.82

95.03

22.96

Ukraine sunoil FOB Black Sea

USD/tonne (daily)

94.71

NA

NA

NA

93.17

88.37

94.96

35.52

Ukrainian domestic sunoil prices

in USD/tonne

89.20

15.87

63.68

93.04

92.09

64.89

94.20

-27.13

Ukrainian domestic sunoil prices

in UAH/tonne

90.57

4.42

63.89

93.03

88.22

62.30

94.27

-27.18

Source: Bloomberg. Except for the second price series, weekly data have been taken. The data quality is not very
good, as continuity is lacking.

124

Innovative agricultural finance and risk management

As can be seen, years with good correlation are

to manage their price risks cannot rely on

interspersed with years with little correlation

existing CME contracts, at least not as long as

of prices. This result implies that producers

governments in the region continue to intervene

or exporters in the Black Sea area who wish

in exports.

Figure 29
Ukraine wheat FOB price and CME wheat price

CME wheat (USD/bushel)

850.00
800.00

350

correlation: 94.2%

750.00

300

700.00
650.00

250

600.00
550.00

200

500.00

Ukraine wheat in USD/ton

400

900.00

6/19/11

4/19/11

2/19/11

12/19/10

10/19/10

8/19/10

6/19/10

4/19/10

2/19/10

12/19/09

10/19/09

8/19/09

6/19/09

4/19/09

2/19/09

12/19/08

10/19/08

400.00

8/19/08

450.00
150

CME wheat
Ukraine wheat export price FOB/DAF Black Sea 3rd class 12% protein

Source: Based on weekly prices, as reported by Bloomberg.

Figure 30
Ukraine feed wheat export price and CME wheat price
1200
Ukraine wheat in USD/ton

correlation: 80.3%

1000
900
800
700
600
500
400

5/19/11

2/19/11

11/19/10

8/19/10

5/19/10

2/19/10

8/19/9

11/19/9

5/19/9

2/19/9

8/19/8

11/19/8

5/19/8

2/19/8

8/19/07

11/19/17

5/19/07

2/19/07

8/19/06

11/19/06

5/19/06

2/19/06

200

8/19/05

300
11/19/05

CME wheat (USD/bushel)

1100

CME wheat
Ukrainian feed wheat price - FOB Black Sea port USD/ton

Source: Based on weekly prices, as reported by Bloomberg

125

Figure 31
Ukraine domestic milling wheat price (USD/tonne) and CME wheat
300

1200

260

900

240

800

220

700

180

600

CME wheat

7/12/11

3/12/11

11/12/10

7/12/10

3/12/10

7/12/09

11/12/09

3/12/09

11/12/08

7/12/08

3/12/08

11/12/07

7/12/07

3/12/07

100

11/12/06

120

200

7/12/06

300
3/12/06

140

7/12/05

400

11/12/05

160

3/12/05

500

Ukraine wheat in USD/ton

280

correlation: 89.6%

1000

11/12/04

CME wheat (USD/bushel)

1100

Ukrainian milling wheat domestic grade 3 in USD/ton

Source: Based on weekly prices, as reported by Bloomberg.

Figure 32
Ukraine domestic milling wheat price (UAH/tonne) and CME wheat
2100

1200

1700

900

1500

800
700

1300

600

1100

500

900

400

CME wheat

7/12/11

3/12/11

7/12/10

11/12/10

3/12/10

11/12/09

7/12/09

3/12/09

11/12/08

7/12/08

3/12/08

11/12/07

7/12/07

3/12/07

7/12/06

11/12/06

3/12/06

11/12/05

500

7/12/05

700

200

3/12/05

300

Ukraine wheat in UAH/ton

1900

correlation: 78%

1000

11/12/04

CME wheat (USD/bushel)

1100

Ukrainian milling wheat domestic grade 3 in UAH/ton

Source: Based on weekly prices, as reported by Bloomberg.

Figure 33
Ukraine sunflower oil export price (weekly) and CME soyoil
75

1450

55

1250

45

1050

35

850
650

25

CME soyoil

7/12/11

3/12/11

11/12/10

7/12/10

3/12/10

11/12/09

7/12/09

3/12/09

11/12/08

sunoil/FOB Black Sea Port USD/ton

Source: Based on weekly prices, as reported by Bloomberg.

126

7/12/08

3/12/08

11/12/07

7/12/07

3/12/07

11/12/06

7/12/06

3/12/06

11/12/05

7/12/05

450
3/12/05

15

11/12/04

CME soyoil (USD/pound)

1650

correlation: 92%

250

Ukraine sunoil in USD/ton

1850
65

CME soyoil (USD/pound)

8100

45

6100

35

4100

25

2100

15

100

7/12/06

CME soyoil

7/12/11

3/12/11

11/12/10

7/12/10

3/12/10

11/12/09

7/12/09

3/12/09

11/12/08

7/12/08

5/12/11

2/12/11

11/12/10

8/12/10

5/12/10

2/12/10

11/12/09

8/12/09

5/12/09

2/12/09

11/12/08

8/12/08

5/12/08

2/12/08

11/12/07

8/12/07

5/12/07

2/12/07

7/24/11

5/24/11

3/24/11

1/24/11

11/24/10

9/24/10

7/24/10

5/24/10

3/24/10

1/24/10

11/24/09

9/24/09

7/24/09

5/24/09

3/24/09

1/24/09
correlation: 95%

45

35

25

15

65

correlation: 89.2%
1700

1500

45
1300

1100

35
900

25
700

65

Ukraine sunoil in USD/ton

CME soyoil

3/12/08

11/12/07

CME soyoil

7/12/07

8/12/06
11/12/06

11/24/08

9/24/08

7/24/08

5/24/08

3/24/08

55

3/12/07

11/12/06

5/12/06

2/12/06

11/12/05

8/12/05

55

3/12/06

11/12/05

7/12/05

5/12/05

1/24/08

CME soyoil (USD/pound)

65

1450

1250

1050
850

650

Ukraine sunoil in USD/ton

1650

correlation: 90,6%

Ukraine sunoil in USD/ton

55

3/12/05

2/12/05

11/12/04

15

11/12/04

CME soyoil (USD/pound)

Innovative agricultural finance and risk management

Figure 34

Ukraine sunflower oil export price (daily) and CME soyoil

75

1850

450

250

sunoil/FOB Black Sea USD/ton

Source: Based on daily prices, as reported by Bloomberg.

Figure 35

Ukraine domestic sunflower oil price (USD/tonne) and CME soyoil

75
1900

500

300

Ukranian domestic sunoil prices in USD/ton

Source: Based on weekly prices, as reported by Bloomberg.

Figure 36

Ukraine domestic sunflower oil price (UAH/tonne) and CME soyoil

75

10100

Ukranian domestic sunoil prices in UAH/ton

Source: Based on weekly prices, as reported by Bloomberg.

127

Annex 14:
No lack of donor efforts when it comes to agricultural
finance the case of Armenia
Agriculture accounts for 22 percent of Armenias

a number of separate programmes and, since

GDP, and its smallholder farms account for 46

2006, under a Rural Finance Facility programme

percent of the countrys labor force. Apart from

started by IFAD and later supported by the World

staple crops of wheat, barley and potatoes,

Bank and a number of bilateral donors, such

Armenia has a significant production of fruit,

as the United States of Americas Millennium

especially grapes. Its principal agricultural export

Challenge Corporation (MCC). In this programme,

is distilled alcoholic beverages (mainly brandy).

the relevant ministries, the donor agencies and

Over a quarter of the population lives below the

eight participating commercial banks agree on a

poverty line and most of this segment of the

refinancing framework. When a bank approves

population are farmers.

a loan, it sends it to the programmes credit

committee which decides whether it qualifies for

While the vast majority of Armenian banks

refinancing. The banks carry all credit risks.167

refrain from financing agriculture due to the high

perceived risk of the sector,163 donor agencies

In the non-bank financial sector, one finds

have been rather active in agricultural finance

three agricultural leasing companies and a

since the mid-1990s when there was a dire need

number of microfinance organizations. All of the

for them created by the rapid privatization of the

leasing companies were created under donor

sector and the collapse of traditional financing

programmes: one with the World Bank, and the

systems.164 Table 18 gives an overview of the

two others with the United States Department of

agricultural financing programmes of Armenias

Agriculture (USDA). Of the MFIs, two are parts of

banks and non-bank financial institutions in early

large global microfinance groups, SEF and FINCA,

2009.

and most others were set up by international

organizations. Some of the latter were, from the

As can be noted, the only bank that had

beginning, set up as MFIs (e.g. programmes of

committed a significant share of its own ending

Save the Children Fund US and Catholic Relief

portfolio to the agricultural sector was the ACBA-

Services, which in 2000 merged to create

Credit Agricole Bank. Alone, it accounted for

KAMURJ). Others were spun off from broader

about 72 percent of the total commercial bank

programmes to meet regulatory requirements. In

portfolio in agriculture as of 31 December 2008.165

particular, in 2006, the Government of Armenia

ACBA (Agricultural Cooperative Bank of Armenia)

decided that foundations could no longer engage

was founded in 1996 in the framework of a EU

in the provision of credits and had to register as

project, with technical support from consultancy

regulated credit organizations to continue their

agencies associated with Credit Agricole and

activities. OXFAM, among others, decided to

Rabobank. In 2006, Credit Agricole became

arrange its credit activities into a separate entity,

ACBAs largest shareholder.166

Nor Horizon; and USDAs Marketing Assistance

Project first became the Center for Agribusiness

128

The other commercial banks active in the sector

and Rural Development (CARD) Foundation, and

essentially managed donor funds; first, under

then CARD AgroCredit.

163 On 31 December 2008, 5.8 percent of commercial bank

loans were to agriculture (Urutyan, 2009).
164 See Gow, 2003. The collapse of agricultural lending was
expressed, among others, in the very high costs of credit in the
late 1990s of 7 to 9 percent a month (World Bank, 2010).
165 Urutyan, 2009.
166 Credit Agricole holds a share of 18.44 percent, while ten
regional agricultural cooperation unions have a total share of
70.56 percent.

167 See IFAD, 2008.

Innovative agricultural finance and risk management

Table 18
Agricultural loan programmes of banks and non-bank financial institutions in Armenia, early
2009
Institution

Programme

Banks
ACBA-Credit Agricole Wide range of
Bank
products
Rural finance facility
Various banks
program
Non-bank financial
institutions
ECLOF (Ecumenical Group-guaranteed
loans
Church Loan Fund)
Nor Horizon LLC
SEF International
ANIV
AREGAK
FINCA
CARD AgroCredit

Farmer loans

Donor support

Set up under EU
project
IFAD, World Bank,
USA (MCC)

158 000
< 7 years
150 000
< 7 years

Part of international
network

400
< 18 months
800
< 3 years

OXFAM

Loans to registered
agricultural
associations
Loans to rural
enterprises
Loans to women
groups, and
enterprise loans
Group loans and
farmer loans
Group loans, loans
to farmers and
processors; leasing

Maximum loan size

(in USD equivalent)
and tenor

Interest rate

1228%
1016%

12%
24%

International MFI

35 000
< 2 years

24%

IFAD, MCC

15 000
< 3 years

18%

United Methodist
Committee on Relief

Open
< 1 years

2% per month

International MFI

20 000
< 18 months

22%

USDA

120 000
< 5 years

1622%

Turpanjian Rural
Development
Programme

Farmer loans

American University
of Armenia

15 000
< 5 years

6%

KAMURJ

Group-guaranteed
loans

USAID

1 500
< 1 year

2.7% per month

Izmirlyan-Eurasia
Universal Credit
Organization

Enterprise loans

Set up by Swiss
NGO. Bought by
Araratbank in 2009.

125 000
< 4 years

15%

Farm Credit Armenia

Farmer loans

USDA

15 000
< 3 years

1520%

ACBA Leasing

Agricultural
equipment leases

ACBA Bank/ IFC/

Credit Agricole/
Lebanon Leasing
Company

Open
< 5 years

1114%

AgroLeasing LLC

Agricultural
equipment leases

USDA

57 000 < 7 years

Sources: Largely based on Urutyan et al., 2006, and Urutyan 2009.

The various donor-supported agricultural

started to use their own funds to expend their

programmes have had a significant impact, both

operations and some have established a unit

directly and indirectly. ACBA-Credit Agricole Bank,

dedicated to rural loans.170

for example, had an outstanding credit portfolio

of USD 253 million at year-end 2008.168 With 142

The donor agencies have stimulated innovation.

500 loans outstanding, its average loan is of USD

Agricultural leasing is one example. Another

1 776 and has a two-year tenor.

169

This number

example is the creation of credit clubs under

of loans can be compared to a total number of

a USDA programme. This programme was

farmers in Armenia of around 338 000. IFADs

originally designed for rural women, but was

rural finance facility has introduced seven banks

then made available to all rural people. Under this

that previously had not issued any loans to rural

programme, USDA invested the initial capital for

clients involved in agriculture. Most have since

a credit club, expecting no return on its equity.

However, it can decide to remove its equity at any
time. Members make membership payments,

168 It benefits from large international facilities, e.g. from

EBRD and IFC.
169 ACBA-Credit Agricole Bank, 2009.

170 IFAD, 2008.

129

and can apply for credit using the Clubs funds as

individual counterparty risk assessment (with

guarantee. This programme created several viable

past performance and the ability to provide

credit cooperatives.171 However, whether these

collateral as important risk mitigants);176 group

credit cooperatives have any lasting value or

lending; and equipment leasing. There is room for

were only a useful tool until banks improved their

other techniques.

agricultural lending practices is an open question.

A 2010 evaluation finds that now that ACBA is

Among others, there are emerging value chains,

offering investment and working capital credits

with farmers supplying products under longer-

from its own resources, the usefulness of credit

term arrangements to processors and other

cooperatives has all but disappeared.

buyers. Local supermarket chains have been

172

expanding, for example, and are investing in

The operations of donors have also helped

their own logistics chains. In the dairy sector,

improve the legal and regulatory environment.

much work has been done to create efficient

Leasing is a good example. In the initial market

farm-to-fork chains for milk, cheese and other

survey, it was found that potential demand was

products. With respect to grapes, around 90

large, but that appropriate laws had to be in place

percent of those produced in the country are

before investors could become interested. A

processed; most by about 30 wine factories who

draft law on leasing was circulating, but was not

export much of the resulting brandy. A few of

making much headway in the regulatory process.

the factories enter into forward contracts with

However, once donor projects started and a

farmers under which they make prepayments.

financial package of USD 5 million of equity,

It seems, however, that banks have not yet

loans and technical assistance was lined up,

developed dedicated value chain financing

Parliament quickly started paying attention and

products.

the law was rapidly passed: The lesson to be

learned here is enabling environment activities

Furthermore, in the microfinance sector the

are stronger done in parallel to a technical

approach seems fairly traditional, with a reliance

activity.173

on groups for assuring repayment, but little

or no effort to identify and directly address

Still, a major part of agricultural credit demand

remains unmet.

174

Agricultural finance continues

the economic factors that are likely to cause

repayment difficulties. Furthermore, modern

to be perceived by banks as risky and difficult,

technologies that help bring finance to smaller

which is not unreasonable in the absence of

borrowers, such as smart cards and biometric

a proper supporting framework. ACBA-Credit

identification, do not seem to have been

Agricole Bank noted that in 2008, while it

introduced into Armenia yet. Much of the range

accounted for 74 percent of the market by

of microfinance products used by Basix in India

the agricultural loan portfolio, it accounted for

(see Annex 12) appears to be absent in Armenia.

only 16 percent of the market by the volume

Microfinance institutions in Armenia might

of profit,

175

indicating that the market segment

consider the scope for introducing concepts

on which it focuses is relatively low-profit.

such as the mitigation of risk by incorporating

The main constraints mentioned by farmers

insurance and market-based risk management

are the continuing perception of bankers that

approaches; extension services to secure the

agriculture is risky, along with the high collateral

viability of farming; and organizational support for

requirements of most agricultural lending. Using

the creation of agricultural value chains.

a wider range of lending techniques may enhance

agricultural credit penetration. The programmes
described approach depends on three techniques:

171 Urutyan et al., 2006.

172 World Bank, 2010.
173 USAID, 2004.
174 Urutyan, 2009, quotes a 2006 Central Bank survey in
which it was assessed that only 17 percent of agricultural credit
demand was satisfied.
175 ACBA-Credit Agricole Bank, 2009.

130

176 ACBA-Credit Agricole Bank, 2009, describes its main risk

management mechanism as follows:
the gradual increase in the amount and tenor of a borrowers loans, depending on his credit history;
a pragmatic risk analysis method: simple for small
amounts, detailed and with strong documentary requirements for large amounts; and
a visit to the farm by the loan experts, and thereafter regular (one to four times a year) control over the disbursed
loans.

Innovative agricultural finance and risk management

Finally, it can be noted that, with the exception

of market information services,

177

little attention

seems to have been paid to the development

mortgages, pledges and contracts; warehousing

and cold storage facilities;178 collateral
management agencies; or credit bureaus.

of support entities for agricultural finance, such

as electronic registries for land, other assets,

177 The Armenian Market Information Services project, funded

by the United States of America governments MCC, was
started in December 2008. It provides market prices for fruits,
vegetables and cut flowers, including through SMS messages.

178 An exception is a US-funded cold storage facility to act

as a link between farmers and supermarkets and other food
outlets, opened in December 2009. Facilities such as these can
act as an anchor point for agricultural finance.

131

References
ACBA-Credit Agricole. 2009. Integrated risk management for increased financing of the agriculture
value chain. Managing risk in financing agriculture expert meeting, AFRACA/FAO/Land Bank of South
Africa/World Bank, Johannesburg, April 1-3.
Gow, H. R., Shanoyan, A., Abrahamyan, L. & Alesksandryan, M. 2006. Agricultural production credit
clubs in Armenia: facilitating investment through market linkages, social capital, and microcredit.
Agricultural Finance Review. 66(2).
IFAD. 2008. Refinancing facilities: IFAD introduces an innovation in rural finance development.
December.
Urutyan, V.Aleksandryan, M. & Hovhannisyan, V. 2006. The role of specialized agricultural credit
institutions in the development of the rural finance sector of Armenia: case of credit clubs. Poster paper
prepared for presentation at the International Association of Agricultural Economists Conference, Gold
Coast, Australia, August 12-18.
Urutyan, V. 2009. Rural credit and finance overview in Armenia. International Center for Agribusiness
Research and Education, February.
USAID. 2004. Equipment leasing for Armenian agribusiness. USAID Frontlines, September.
World Bank. 2010. Agricultural sector reform in Europe and Central Asia: an IEG review of the
performance of seven projects. Report no.: 55258, June 25.

132

Innovative agricultural finance and risk management

Annex 15:
Linking commodity and financial markets the
experience of the Mercantile Exchange of Colombia179
The BMC was created by the countrys

The exchanges forward contracts, which are

government in 1979 as the National Agricultural

guaranteed by its clearinghouse (a subsidiary of

Exchange (BNA) to offer a platform for the trade

the exchange), have helped producers to obtain

in agricultural and agro-industrial goods, as well

finance.182 But in several of its products, the

as documents representing such goods, rights

exchange has focused on bringing finance to the

thereon, derivatives based on these goods and

commodity sector, particularly through a highly

related contracts. It was part of the governments

innovative use of repo contracts; that is, contracts

effort to create market institutions to support the

for immediate sale with future repurchase. Several

countrys liberalization programme. BMC is now

types of repos are structured by and offered on

a publicly traded company, with the government,

the exchange. Among other things, it has offered

through the Ministry of Agriculture, holding only

repo contracts on warehoused commodities for

a minor share.

180

BMC has a large experience

a total of close to USD 400 million in the period

in providing physical trading as well as financial

from 2006 to 2008, almost half of its total volume;

instruments to the commodity sector.

repos backed by the receivables from future

commodity deliveries (some USD 240 million

It offers spot and forward trading facilities, setting

in the same period); and invoice discounting on

standard contract specifications and arranging

commodity transactions. In 2009, its volumes on

for arbitration in case of disputes. It offers a

warehouse-backed and future-receivables-backed

procurement tool for homogenous products

repos were respectively USD 113 million and USD

bought by a large number of government

99 million. While not all of the exchanges initiatives

agencies, from the armed forces to municipal

have succeeded, many of its products, along

utilities. It provides registry functions for

with its failed experiments, may well prove an

agricultural-sector invoices. Agro-industrial firms

inspiration for exchanges in other countries.

can defer the payment of withholding taxes if

they register their invoices. It acts as a vehicle for
the Ministry of Agriculture to provide subsidies,181
currency price risk management tools or

Government minimum price

programme

minimum prices to certain sectors.

BMC is the vehicle for the governments price
support programme for local maize producers.183
The goal of the programme is to reduce exposure

179 The author would like to thank a number of industry experts,

and, in particular, Juan Camilo Pryor, who were willing to share
their insights and also, to comment on earlier drafts of this
section.
180 The stake of government entities is 16.7 percent. Several
of BMCs brokers are among its largest shareholders, but other
than the government, no single investor is permitted to hold
more than 10 percent.
181 For example, flower exporters can register their invoices
related to phytosanitary controls (to buy insecticides, fungicides
etc.) with BMC brokers, and when they meet certain conditions,
receive, through BMC, a subsidy on the related costs.

182 Including long-term capital market funding. For example,

one sugar mill, Ingenio Pichichi, in 2005 raised Colombian $ 30
billion (USD 15 million) on the back of a forward contract traded
through BNA and guaranteed by its clearinghouse. The transaction was structured by one of BNAs brokers. The forward
contract (valid for a year, but automatically renewed each year
during seven years) and its associated economic rights were
sold to a trust. This trust issued seven-year notes on Colombias
stock exchange. Despite going through a difficult period, the
bonds performed well at least until the end of 2009. For details,
see Interbolsa, 2005 and BRC Investor Services SA, 2009.
Similar deals using BNA forward contracts were structured by
others, in the sugar sector (see Duff and Phelps de Colombia, 2003) and for bananas (the Colombian Banana Trust; see
Guilln,2004), though this issue went into default.
183 A similar programme was in place earlier for cotton and
soyabeans. In the case of maize, in the past, the programme
consisted of a combination of the purchase of a put contract,
and the sale of a call contract. This arrangement would protect
buyers against international price falls, but implies that they
have to give up the price upside when prices increase beyond
the call options strike price.

133

of local producers to international price variations.

Currency risk management

Colombia is a large maize producer, as maize

accounts for four percent of employment in the

To help agricultural exporters in certain sectors to

agricultural sector. But its consumption as the

protect themselves from exchange rate volatility,

main animal feed is even higher, making Colombia

the Ministry of Agriculture sponsors the purchase

a large maize importer, which exposes farmers to

of Colombian $/USD put options. It has been

the risk of falling international prices.

used for many agricultural commodities, including

bananas, flowers, sugar and cocoa; the coffee

The Ministry of Agriculture enables maize

sector is not included, though. The programme

producers to buy, through BMC,184 heavily

works on the basis of annual budget allocations

subsidized put options on the CME.185 The

for specific sectors, with use on a first-come,

Ministry pays 70 or 80 percent of the option

first-served basis.

premium, depending on whether the producer

is large or small. It makes a fixed sum available

To avail themselves of the subsidies, which can

on a first-come, first-served basis, with limits on

reach up to 90 percent of the option premium, a

the maximum amount available to each producer,

company in an approved sector registers with a

to each region, and to each group of producers

broker, demonstrating that it meets the criteria for

(small versus large). In 2011, this sum was

participating in the programme. The broker then

sufficient to cover 67 000 tonnes of maize.

channels the orders to the exchange, and the

exchange not the broker buys the options on

Producers have to register with BMC, provide

the international market.

proof of their maize production, and then apply

to buy the quantity of options they need through
BMC. They are not permitted to buy options

Financing forward contracts

for a quantity higher than their certified maize

production. Producers can apply directly, as a

In the early 2000s, BNA started a scheme for

group, or through a cooperative. BMC publishes

the financing of forward contracts. Under the

each day between 13.00 hours and 14.00 hours

scheme, a sugar farmer, for example, signed a

the various option premiums, and producers

forward contract with a sugar mill. He then ceded

then make their choice. They choose the contract

the rights to payment under this contract to an

month (September, October or December), the

investor (through the exchange), against cash

number of contracts that they wish to buy (one

payment. In 2004, forward contracts for some

CME contract is for 127 tonnes) and the strike

USD 55 million of sugar and USD 40 million of

price, in USD. They retain exposure to exchange

barley were thus financed on BNA.187 The scheme

rate risk.186 The options have a fixed expiry date.

took off quickly, but collapsed just as rapidly.

After expiry, BMC remits the profits, if any, to the

farmers account, but only up to the amount that

In 2005, operations were ceased after a

corresponds to the quantity that the farmer can

government-owned company lost some USD 4.5

demonstrate he actually sold, through production

million in this type of transaction. The regulator

of contracts or invoices.

closed down one broker involved in these

transactions and took control of another. The
main problem was that payment by the offtaker
was conditional on the farmer delivering the
product. If the farmer did not meet his delivery
obligations, then the offtaker did not have to pay
the investor. The structure did not incorporate

184 The programme operates directly through BMC, not

through its brokers.
185 See Ministerio de Agricultura y Desarrollo Rural, 2011.
186 In addition to their share of the option premium, producers
pay a six percent fee to cover the risk of premium changes
between the moment that rates are published by BMC and the
moment that the option is actually bought on CME. Should the
option premiums change in an unfavourable manner, the difference is covered by the programme.

134

any mechanisms to manage the risk of nonperformance by the farmer, other than the due
diligence that brokers were supposed to do. In
2009, the exchange proposed to reintroduce this

187 Bolsa Nacional Agropecuaria S.A., 2004.

Innovative agricultural finance and risk management

instrument with the new element of insurance

Repos on agricultural stocks

to cover contract default by farmers,188 but the

regulator did not accept the proposal.

BMCs most-traded repos are based on a physical

stock stored, in principle, in an accredited

Invoice discounting
Commodity companies can sell or discount their
invoices through BMCs trading floor, and they
can enter into repos on invoices. In the first case,
the buyer of the invoice will present it at expiry
and receive the payment as stipulated. In the
second case, the original seller of the invoice
buys it back at expiry for a pre-agreed amount.
Until 2010, the clearinghouse guaranteed the
transaction. For example, exporters can use
BMC to offer repos on their export revenue.
The process is that the exporter sells his export
contract with the undertaking to buy it back after
a certain period. This transaction is possible for a
range of commodities: agricultural, mineral and

warehouse. It is used for a wide range of

commodities. In order of importance for 2009,
these include: coffee (34 percent of the total),
rice (26 percent of the total), wood, potassium
chloride, rum, polypropylene, cotton, coal, maize
and a series of less important products such as
fertilizers, milk powder and palm oil destined for
biodiesel production. Figure 37 describes the
repo mechanism.
The commodities are stored by a commodity
producer, processor189 or trader under the
control of a warehouse operator who has been
accredited by the exchange.190 Commodities
can be stored in a public warehouse, or in a
field warehousing operation, where a collateral

energy products. Repos can be for 30, 60, 90, 120

or 150 days. The payment under the invoice has
to be assigned to the exchange clearinghouse,
and the buyer of the physical products has to
acknowledge the assignment.

188 Such insurance had been used in the early 2000s in the
securitization of BNA-traded forward contracts by sugar mills
such as Incauca Refinera de Colombia and Ingenio Pichichi. It
covered the risk of non-delivery and non-payment of the forward contract, and could be triggered simply by the issuance of
a certificate of default signed by BNAs managing director. The
insurance was not on the full notional value of the contracts,
but on approximately one sixth of the total value, which was
the value at risk because of volatile international sugar prices,
calculated using the Black-Scholes option pricing model.

189 This option has been used, for example, for cotton ginning
and spinning. The WHR is issued in terms of raw cotton, but
the actual physical collateral can be in the form of yarn.
190 Only public warehousing companies (Almacenes Generales de Depsito), specifically accredited by the financial sector
regulator (Superintendencia Financiera), are permitted to issue
WHRs. In addition, BMCs clearinghouse has to agree that the
warehousing company is capable of fulfilling all the requirements of the exchanges internal regulations. Currently, there
are four warehousing companies in Colombia authorized to
issue CDMs. Two of them are majority-owned by banks that
are part of financial conglomerate known as Grupo Aval; one is
owned by the Colombian Coffee Growers Federation, and one
by the Government of Colombia, with a minority stake of a large
bank. Almost all repos are done on CDMs issued by warehouses that are bank-related. These warehousing companies
manage their own public warehouses, but also engage in field
warehousing operations, taking temporary control of a third
partys warehouse for the purpose of a financing transaction.

Figure 37
Exchange-traded agricultural repos

Source: Author

135

manager takes temporary control over a

secondary market.193 The purchaser knows that

processors or traders warehouse. Warehouse

he will be entitled to a cash sum at a defined

operators are also permitted to issue WHRs

point in time: the broker has the obligation to buy

when goods are not yet in their warehouse but

back the repo at its expiry date, with the payment

in transit, as represented in a bill of lading, as

(in many repos) guaranteed by the clearinghouse

long as the goods are destined for delivery at the

and further underwritten by the physical goods in

operators warehouse.191 The warehouse operator

the storage facility.194

is responsible for weighing and quality grading.

He issues a certificate of two-part WHRs,

Until early 2010, all CDM repo transactions were

consisting of a certificate of deposit or certificado

guaranteed by the exchanges clearinghouse.

de deposito de mercancias (CDM), and a pledge

After this date, BMC introduced the option of

certificate or bono de prenda (BP).

clearing on repos without central counterparty.

192

In this scheme, in the case of a default, the

The BP is immediately cancelled as the

clearinghouse will not pay the investor but will

warehouse operator knows that the CDM will

auction the asset on his behalf. If there is no

be used for a repo transaction. The CDM is

buyer interested, then it hands the asset over to

transferred by the depositor or the owner of

the investor.

the commodities to an exchange broker. This

owner asks the broker to sell the warrant,

Table 19 gives an indication of the costs of a CDM

simultaneously signing a repo that commits him

repo transaction.

to buy it back at a given price after a specified

period. The warrant is then ready to be auctioned

It should be noted that while CDM-backed repos

on the exchange. After auctioning, there is a

are generally for a large amount (USD 50 000

to USD 100 000),195 in effect, brokers often put
together a large number of small investors (in

191 This option is used for import and export operations. The
bill of lading as well as the insurance contract for the goods in
transit have to be assigned to the operator of the port warehouse that is the destination given in the bill.
192 Such two-part WHRs are common in civil law countries.
In a normal WHR financing, the owner would retain the first,
and use the second as a credit instrument. However, in a repo
transaction, it is the CDM that is sold while the pledge certificate is cancelled.

193 But this secondary market for any type of repos is not
very active. In 2009, secondary trade in repos was only USD
35 million; and, for example, on the secondary market for cattlebacked repos there were only six to seven contracts a day. The
main reasons are the prevalence of small retail investors in the
market. Institutional investors are not interested in taking part
in the market because of a lack of rules regulating valuation and
risk measurement, and the short term of the transactions, most
being less than 180 days.
194 The transactions are over-collateralized, with the CDM/repo
transaction representing only 70 to 80 percent of the value of
the underlying goods. Until 2008, for many commodities, there
were also further guarantees by a government fund.
195 The exchange has tried to introduce CDM repos for
smaller, standard sizes. For example, in 2007, it launched repos
on frozen shrimp with the size of a contract fixed at 12 tonnes,
but these did not succeed.

Table 19
Illustration of the financial aspects of a CDM-backed repo transaction
(in thousand Colombian pesos, $; 1 USD 2 000 $)
Notional value of the receipt
Collateral value of the receipt (70%)
Term of financing
Effective annual interest rate
Future value (repurchase price)
Costs
0.1% BMC registration fee
0.5% clearinghouse fee1
2% brokerage fee
0.3% warehousing charges
Interest charges
Received by the producer on the day of sale of the repo

Source: Figueroa, undated presentation.

136

1 500 000
1 050 000
360 days
8%
1 134 000
1 050
6 825
21 000
4 500
84 000
1 016 625

Innovative agricultural finance and risk management

the range of USD 500 to USD 7 500 each) to bid

Securitizing cattle receivables

on the issue. While the exchange assigns the

appropriate part to each individual investor, the

In 2000, BNA staff, who later left to set up their

actual CDM remains under the control of the

own investment banking firm, introduced a relatively

clearinghouse and is not broken up.

complex system for structuring repos around future

receivables for livestock producers. Repos were not

While CDM-backed repos have done well by and

structured around individual producers; but rather

large, there have been a number of problems, in

producers were grouped into a trust, which then

particular in situations where Colombian practices

issued securities.196

and regulations differ from international best

practices.

The first securities issue was in June 2000. From

then until 2003, a total of 21 series of notes

First, permitting a warehouse to issue receipts

were issued through two different trusts. The

for goods that are not yet in a warehouse is not

total funding raised was Colombian $ 92 billion

an internationally accepted practice. Even if a

(around USD 46 million) for the benefit of 491

producer or trader can provide a bill of lading,

farmers. Funds for the feeding of beef cattle were

there is a serious risk that the goods either do not

raised from local institutional investors through

exist or will be diverted to another destination.

livestock-backed securities offered and traded on

At the same time, experience has shown that

the BNA and the countrys securities exchange.

in a commercial relationship between, say, an

The structure, arranged under the overall

exporter and a warehouse manager, the manager

supervision of BNA as agent of the cattlemen, is

can be pressured to issue WHRs in anticipation

described in Figure 38.

of future deliveries with the exporter assuring

him that with the funds borrowed against the
receipts, the goods will be bought and delivered
to the warehouse. CDMs for goods in transit
have, indeed, led to a large default in Colombia
in the case of coffee. When the broker failed to
buy back the repos, the exchange found there
was no coffee in the warehouse and none in
transit. The clearinghouse had to compensate the
investors, and settled the matter through a fouryear payment arrangement with the warehousing
company, the broker and the coffee exporter
involved.
Second, internationally, banks are generally very
careful when they finance against perishable
goods or goods with narrow markets. On
Colombias exchange, CDMs on illiquid and
perishable goods such as stevia (an herb that
can be used as a sugar substitute), turkeys,
cottonseed and liquor have been used in repo
transactions. In several cases, when payment
defaults ensued, it proved impossible for the
clearinghouse to recover the money it had to pay
to the investor as the goods could only be sold
at a large discount, if at all. In some cases, the
goods were highly perishable and the search for a
buyer took so long that the goods went bad.

196 See Arias Puerta, 2004.

137

Figure 38
Livestock securitization on the Colombian commodities exchange
Buyers of
fattened cattle

BNA

Selection of the regions,ranches and

cattlemen suitable for inclusion in the
securitization (security conditions, cattle
experience, infrastructure, etc.)

Marketing agent

Sale of
animals

Fattened cattle

Cattlemen

Technical
supervisor

USD 150 000 bank guarantee

(only for first issue, June 2000)

Transfer of ownership of young

cattle and pasture rights

Extesion
services

Bank

Sales
proceeds

Assigned responsability, as agents for the

trust, for fattening of cattle, for 11 months

Trust
Guarantee in case cattle
fails to reach anticipated
weight gain

Registration of the securities

(which enables public trade)
Centralized
Securities Deposit

Insurance of
securities up
to 75% of
value of the
cattle

Insurance against larceny and

terrorism. Insurance value
increases in line with price
increase of animals
Insurance

Investors

Source: Author
As can be seen, the transaction was highly

some cattlemen defaulted on their obligations

structured to reduce risks for the investors to the

to the trust, the notes were downgraded; but

minimum. Cattlemen in selected regions who

because of the risk cover by BNAs guarantee

met certain selection criteria signed contracts

fund, they remained investment grade.

with a trust, under which they transferred the

ownership rights to their cattle. The trust then

Despite the high level of structuring and the

sold securities on the basis of these contracts,

high rating, this securitization structure ran into

and paid the farmers the funds received. To

problems. In the end, defaults in several of the

ensure that farmers properly fed their cattle, an

series had reached almost two percent of the

independent company was recruited to provide

total issue size.197 The technical supervisor found

extension and quality control services. This

that some of the cattlemen failed to achieve the

company was liable to the trust if its services

transactions growth objectives. As it had the

were ineffective. The marketing of the cattle was

right to do, the trust then stepped in, taking the

controlled by an independent marketing agent,

cattle away from these farmers and giving them

who was obliged to transfer the funds received

to other farmers to continue their fattening.

to the trust, which assigned them in priority to

Unfortunately, in the end, there was a very high

the repurchase of their cattle by the cattlemen.

concentration of risk on a few farmers who then

In effect, cattle sales generally were through the

actually failed to deliver the cattle as had been

BNA auction system. Insurance covered the risk

agreed, partly because they illicitly sold the cattle

of criminal or terrorist acts. The revenue from the

to third parties, and partly because of cattle theft.

milk produced by the cattle was also assigned to

As a result of this experience, the exchange

the trust.

shifted to simpler one-producer repos.

The first issue and the following ones were

independently vetted by a rating agency. The
value of the collateral much exceeded the value
of the securities issued. As a result, the securities
initially received a high local rating from the local
rating agencies. When problems arose because

138

197 Bolsa Nacional Agropecuaria S.A., 2004.

Innovative agricultural finance and risk management

Repos on contracts for future delivery

cover the costs of feeding them until they were

ready for sale.198

Towards the end of 2002, BNA introduced

repo transactions for cattle, pork and poultry.

As individual notes were deliberately kept small

The underlying security was not a commodity

up to around USD 1 000 (the cattle-backed

in stock, but rather, the process of fattening of

repos were up to USD 7 500),199 they were

these animals. Through the exchange, investors

widely traded by retail, corporate and institutional

could invest in this process from the purchase of

participants.200 In countries where there is a

the young animals to their sale, a certain number

large spread between prime deposit rates and

of days later, to a slaughterhouse. The maturities

prime lending rates, this kind of contract can be

were set by the exchange: 90 days for poultry,

very attractive to investors and borrowers alike. In

105 days for pork and a range of tenors from 90

the case of Colombia, repos permitted agricultural

to 360 days for cattle.

firms to reduce their financing costs by half, and

investors to achieve a yield considerably above
that of bank term deposits. For example, in 2009,

Repo transactions were structured as illustrated

the yield on cattle repos was eight to 10 percent,

for the case of poultry in Figure 39. A farmer who

compared to five percent for term deposits.

met a set of criteria stipulated by the exchange

entered into a forward contract with a processing

Towards late 2008, things started to go wrong

plant. He then ceded the rights to payment under

with some of the repos on pork and cattle. This

the contract to a broker and the plant confirmed

trend was triggered, but not necessarily caused,

the assignment. The farmer also mandated

the broker to enter into repo contracts on the
exchange. Each contract was on the basis of
the expected value, with a discount to provide a
buffer against price risk of 20 000 2 kg chickens
90 days after the financing. The funds paid by
the investor were paid to the broker, who then
transferred these to the plant, which, in turn,
forwarded them to the farmer. The funds were to
be used to buy 20 000 one-day-old chicks, and to

198 It should be noted that it takes only 40 days to grow a

chick into a chicken that can be sold to a slaughterhouse. Thus,
providing 90 days financing (presumably, to cover two cycles)
is risky. One of the principles of structured financing is that the
financing cycle should follow the physical value chain. In 2011,
after a review of its repo operations (linked to problems with
some of the cattle- and pork-based securities issues), BMC
recognized the risks of this timing mismatch, and decided to
temporarily halt poultry financing operations while evaluating
ways to reduce risk exposure.
199 The actual value of the contract depends on market prices,
as BMC has specified the contracts in physical terms: 100 pigs
with a weight of 20 to 22 kg; 5000kg of cattle; 20,000 chicks.
200 See Rutten, 2002.

Figure 39
Poultry repos

Source: Author

139

by developments in the physical market. An

traded on BMC have great potential. But as they

epidemic of swine fever had reduced demand for

are based on structured commodity and trade

pork, leading to price falls. In the case of cattle,

financing techniques, they carry risks if they

political strain let to the closure of the borders

are not tightly structured, with all risks properly

with Venezuela, stopping beef exports to that

identified and managed.

country and leading to a 30 percent fall in beef

prices in Colombia. Producers were unable to

In CDM-backed repos, the exchange accepted

make full payments to BMC brokers, and the

in-transit products as well as perishable,

brokers increasingly had problems in buying

thinly-traded commodities as underlying for

back the repo contracts. The obligation to do so

transactions. In a bank-structured finance, such

was on them, not on their clients. When it tried

underlyings would have been accepted only

to take possession of the pork and cattle being

with a much higher level of structuring. And in

financed, the clearinghouse found, in several

the case of the repos, the clearinghouse was

cases, that the funds had been diverted to other

overly lax in its control over the underlying

purposes, and there were no animals. In the face

transactions. It almost invariably depended on

of accumulating unpaid amounts, BMC decided in

documentation provided by the broker, and did

March 2011 to temporarily halt all its cattle, pork

not undertake any independent due diligence nor

and poultry repo contracts.

control the actual flows of money. It did not even

look over the payments that were supposed to

Nevertheless, a difficult market environment

be made by the buyers of the livestock. While it

alone is not sufficient explanation for the defaults.

did receive reports on the health and growth of

Among other things, a buffer against price falls

cattle from the technical agents during the life of

was already built into the transactions: they were

cattle financing transactions, it basically waited

negotiated at a 15 to 30 percent discount to

for farmers to pay. There were no such reports

notional values.201 In particular, in the case of the

to review for poultry or pork. Because of this

cattle contracts, it appears there were serious

situation, it was common for producers to roll

shortcomings in the transaction structuring, with

over positions to extend the term of financing.

insufficient due diligence done on the robustness

In fact, even though the longest authorized

of the companies that were being financed

contract, in the case of cattle, was for 360 days,

and weaknesses in the ways risks were laid off

brokers convinced the cattlemen that this was a

to third parties. For example, guarantees and

mechanism that would allow finance for several

insurances were later found to be nonexistent.

years because of the roll over system.

Deals were structured by the brokerage

companies that then sold the repo contracts

More rigid structuring, matching the risk

on BMC. Within most brokerages, there was

management tools used to the underlying risks of

no proper separation between structuring the

the commodity and the transaction, and then the

deal and approving its risks, and several actually

active monitoring of the transactions, would have

did not have an arms-length relation with the

avoided most of these problems. Furthermore,

producers financed. Furthermore, both brokers

the opportunity for producers to raise funds

and the clearinghouse made too little effort to

directly on the capital market would have been

diversify risks among clients and products.

left intact.

From concept to implementation: the

need for impeccable risk management
BMCs ability to innovate exchange-traded
contracts has been remarkable. Its ability to
actually implement as per plans, however, has
not been perfect. The structures developed and

201 BMC Bolsa Mercantil de Colombia S.A, 2011.

140

Innovative agricultural finance and risk management

References
Puerta, A. & Jairo, H. 2004 Mecanismos de financiamiento a travs de fideicomisos: la experiencia
Colombiana a la luz del nuevo marco normativo. Marzo 15.
BMC Bolsa Mercantil de Colombia S.A. 2011. Cmara Disciplinaria, Sala de Decisin No. 14, Resolucin
No. 144, 15 de Marzo.
Bolsa Nacional Agropecuaria S.A. 2004. Informe de la junta directiva y del presidente a la asamblea
general prdinaria de accionistas de la bolsa nacional agropecuaria S.A.
BRC Investor Services SA. 2009. Titulos Pichichi Exporta. 11 de Diciembre.
Duff & Phelps de Colombia. 2003. Ttulos incauca Colombia - ttulos incauca forward de azcar. 7 de
Marzo.
Figueroa, J. Undated presentation. Almagrario. (available at www.almagrario.com).
Guilln, R.M.G. 2004. Titularizaciones - la experiencia Colombiana. BRC Investor Services S.A. Sociedad
Calificadora de Valores, Presentacin para el Dcimo Aniversario de la Fundacin de Ecuability,
Noviembre 9.
Interbolsa. 2005. Prospecto de emisin y colocacin Ttulos Ingenio Pichichi Exporta. Julio.
Ministerio de Agricultura y Desarrollo Rural, Repblica de Colombia. 2011. Instructivo tcnico: programa
de incentivo para la toma de instrumentos de cobertura de precio para productores de maz amarillo
tecnificado. Segundo semestre.
Rutten, L. 2002. Farmers and farmers associations in developing countries and their use of modern
financial instruments. UNCTAD/DITC/COM/35, January.

141

Please address comments and inquires to:

Investment Centre Division
Food and Agriculture Organization of the United Nations (FAO)
Viale delle Terme di Caracalla 00153 Rome, Italy
[email protected]
http://www.fao.org/investment/en/
Report No. 7 May 2012