Transcript basix quarterly review

Risk management strategies for
financing the agricultural value chain
Johannesburg
1st -3rd April 09
Presentation By
Subhash C Jindal
Vice President – BASIX Group
Financiers have a risk-return trade-off
If risk is mitigated, more funds would flow to agriculture
Income
(Imax, Rmax)
(Imin, 0)
Risk
Type of risks in Agri Value Chain
• The types of risks faced are:
– Yield Risk – short-term (e.g. weather) and long-term (due to
climate change)
– Price Risk – short-term (intra-season fluctuations) and
long-term (due to severe swings in commodity prices)
• Yield risk in the short-run can be managed through
physical methods such as protective irrigation & GAP,
as well as through insurance.
• Long term yield risk due to climate change can be
mitigated by steps like afforestation, financed by
carbon credits, or it can be insured through
catastrophic bonds.
Type of risks in Agri Value Chain
• Price risk in the short-run can be managed
through
– support price mechanisms as well as through
– Fair market mechanisms
– commodity derivatives (futures/options)
• Long run swings in commodity prices require
shifts in the production structure of the
economy which only governments can pay for.
Risks faced at different stages of
agri value chain
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Pre Germination stage
Crop growth stage
Selling raw produce
Processing
Reaching to consumer
Pre Germination stage (1/2)
Risk
factors
Cause of risk
Lack of financial
track records of
farmers
Conservati Access to finance
ve plans and other
for agri resources
production
process Inadequate
irrigation
Inadequate storage
of seeds
Roles of
stakeholders for
Risk Mitigation
Type
of
risk
Financial inclusion for
track transaction for
more financing
deepening of micro/
agri finance
better assured
irrigation or at least
protective irrigation
farmer friendly
warehouses/receipts
Yield
Risk
Yield
Risk
Price
Risk
Pre Germination stage (2/2)
Risk
factors
Cause of risk
Roles of
stakeholders
Advisory services
by NGO, Farmers
Call Center,
Improper lack of knowledge,
lack of control system Stringent penalty
seed
system
quality by Govt
pushed
Proper backward
by
lack of access to
linkages by NGO/
vendor/ market options
processors
moneyDeepening of
lender lack of access to
micro/ Agri
finance to buy quality finance (inc. of
savings)
seed
Types
of risk
Price
risk on
seeds
Yield
risk on
seeds
Crop growth stage
Risk
factors
Improper
(qnty/qlty)
Agri inputs
Cause of risk
Lack of access to
finance,
resources, know.
Lack of finance,
renting option
Roles of
stakeholders
deepening of micro/
agri finance and
advisory services
leasing to reduce
burden of depr.
lack of
knowledge,
AMC; Warranty;
Price
Insurance
risk
Insurance
Advisory services on Yield
IPM, micro irrigation, risk
timely and right
inputs etc
Access to
Agri
Implements mal functioning
theft
Lack of
GAP
Types
of risk
Price
risk on
inputs
Selling stage
Risk
factors
Cause of risk
Roles of
stakeholders
Types of
risk
Pre sold to money deepening of micro/
lender
Agri finance
risk of
distress
selling
risk of
lower
price
Lack of proper
storage facility
Access to ware house
facilities.
lack of holding
capacity
Access to loan against
Warehouse receipt etc
lack of access to
market options
Proper market
linkages. Access to
Price risk
price hedging products
and services
Price risk
Reaching to consumer stage
Risk
factors
market
off take
risk
Cause of risk
added
competition
(locally or
globally)
Roles of stakeholders
for Risk Mitigation
Types
of risk
Proper market linkages
including distant buyers/
market place through net
Wider distribution
change of trend
(locally or
keeping track of
globally)
consumer preferences
Price
risk
proper packaging and
logistical quality loss in
transit / storage insurance
costs
Price
risk
transit risk
Transit / Marine insurance risk
BASIX Strategy – The Livelihood Triad
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IDS
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LFS
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Organize
Functional Linkages
Formalize : the legal status
Enabling systems: operations,HR &
MIS-IT
Revive : defunct community
organizations
Ag/BDS
Savings, Credit (short-term as well as
long-term)
Insurance, for lives and livelihoods
Fund transfers
Commodity derivatives
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Productivity enhancement
Risk mitigation (non-insurance)
Local value addition
Alternate Market Linkages - Input
supply, output sales
How does the Livelihood Triad mitigate risk?
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IDS
LFS
Ag/BDS
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By offering insurance, for lives
and livelihoods and by offering
credit so that farmers can
invest in risk mitigation
measures like irrigation and
financing livestock insurance
By organising farmers into
groups/cooperatives, IDS
reduces price risk on both
input and output side by
increasing their bargaining
power. Aggregation also
enables participation in
commodity derivative
exchanges. Mutual learning
takes place
By offering risk mitigation
advice through proper
agronomic practices like
deep ploughing, timely
sowing, selection of right
varieties, pest control etc.
and vaccination of livestock
, instant solution through
FCC ( SBI and AXIS bank
have asked us to provide)
Our Partners in Insurance
•Life Insurance
-AVIVA
•Health Insurance, Livestock
Insurance & Micro-Enterprise
Insurance
-Royal Sundaram
BASIX
Equity for Equity
•Rainfall InsuranceICICI Lombard
BASIX lessons in micro insurance
• Micro-insurance is a must along with
microcredit, for ensuring that the poor do
not get into a debt trap after they take a
loan and suffer an adverse event.
• In the long run, the crop insurance program
should switch from crop-cutting based yield
determination to satellite imagery based
yield determination or to a weather index or
a combination of these two methods.
• Mutual insurance to play larger role, with
adequate reinsurance cover against large
covariant risks of farmer households
Our Pilot in Commodity Price Risk Mitigation
Warehousing - NCMSL –
National Collateral
Management Systems
Ltd
•Trading platforms
•National Commodity and Derivatives Exchange
(NCDEX)
•Multi commodity Exchange (MCX)
•Safal National Exchange (SNX)
Aggregator - Koutla B
Farmers’
Cooperative
BASIX
Equity for Equity
BASIX lessons in commodity derivatives
• Farmers prefers options to pure futures. They are
willing to pay a fee for having the choice to get a
better price, while locking in the floor price (a
typical option contract).
• Most farmers in India are too small to directly get
into contracts or trade on exchanges, so they
need aggregators, of which cooperatives are a
good example.
• Another infrastructure that is needed is a network
of warehouses with assaying agents, offering
negotiable warehouse receipts, which can be
traded on exchanges.
Successful & scalable experiences of
BASIX
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Weather insurance
Live stock insurance on fast track
Health Insurance for Rural Poor
Rural BPO to speed up services
Farmer Call Center for instant advisory
Price Options services to farmer
Access to distant buyers through CEx
Ware House Receipt prod to small farmers
Value Chain facilitation at each linkages
Centers for AI + Vet care + Insurance on
sustainable mode
New methods for risk mitigation
To meet new challenges like climate change there
are new methods:
– Carbon Finance
– Catastrophic Bonds
• BASIX has attempted to aggregate micro
certified emission reductions (AMCERs) though
group company CTRAN
• Major swings in commodity prices can only be
handled by governments through financing longterm changes in the production structure of the
economy.
Conclusion
• If farmers are offered all these methods of
risk mitigation, then the “perceived risk” in
financing agricultural value chains will
come down
• This will lead to an enhancement of
financing by private sector, which is much
more efficient than old style government
financing (which have to waived) or
persistent subsidies
Thank You
[email protected]