Analyzing and Financing

Value ChainsRichard L. Meyer

Figure 1. Value Chain Concept

End users/consumers

Marketing

Production

Inputs

Capitalequipment

InfrastructureHumanresources

Services

Figure 2. Paprika Subsector in Zambia

Commercial PaprikaFarmersIrrigated

N = 2

Vol = 2,220 tons

Exporter Market

World Vol – 150,000 tons(Zambia = 5,000

Rest of SADC = 25,000 tons)

Private Exporters

N = 7Vol = 2,600 tons

Channel 1aRainfed Smallholders

Channel 1bIrrigated Smallholders

Channel 2Commercial Production

Export

Grading

Assembly

Farm production

Seed and fertilizer

Rainfedsmallholders

N = 1,500Vol = 1,100 tons

Y/ha = $700

Irrigatedsmallholders

N = 500Vol = 1,500 tonsY/ha = $1,500

Source: Haggblade

Source: Haggblade

Figure 3. Zambia Cassava Supply Chain

Channel 1SubsistenceProduction

Consumption

Processing

Trade

Soaking, drying

Farm production

Channel 2Marketed Fresh

Cassava forHuman

Consumption

Channel 3Processed

Cassava forHuman

Consumption

Channel 4Livestock

Feed

Channel 5Industrial

Uses

Subsistence households

Volume = 920,000 tons

Cassava traders, dried chipsVol = 45,000 tons (fresh equivalent)

= 15,000 dry weight

Farmers

TradersFresh

Vol = 35,000 tons

Industrial usersVol = 500 dry

ExportsVol = 4,000 dry

Purchases forhuman consumption

LivestockVol = 500 dry

FoodProcessorsVol = 10,000

Industrialprocessors

Feed companies& livestock

farmers

Topics being analyzed

1. Vertical coordination

2. Competition

3. Dynamics

4. Governance

5. Income distribution

6. Interventions

Financial analysis of value chains

Types of value chain finance

• Self-finance

• Direct informal within chain finance

• Indirect formal financial services from outside the chain

Common problems of suppliers

• Information asymmetries (can and will borrower repay)

• High operating costs

Common credit functions to be performed

• Client screening

• Client monitoring

• Contract enforcement

Five analytical components of a financial lens

• Identify informal and formal financial relationships

• Outline key features of contracts

• Analyze how credit functions are performed

• Analyze legal systems, infrastructure, and social norms

• Identify possible interventions

Three examples of a financial analysis of value chains

Functions

Supermarkets US and EuropeRetail

Wholesale/ Export

Processing

Production

Input distribution

Inputs

ExtensionServices

Viru, Agromantaro, TALSA, Procesadora

Misti – fertilizers;Bayer – pesticides

Seed and Plant Sellers

Formal Financial Links

General Mills, Green Giant, etc.

Local Supermarkets

Local Wholesalers

Small Farmers Large Farmers

Independent Distributors

Plants

Banks, NBFIs

Banks, NBFIs

Banks, NBFIs

MFI’s; Rural Banks

Banks, NBFIs

Key: Financial links: who finances whom Participant in value chain Broken line indicates skipped function

Figure 4. Artichoke Value Chain, Peru

Source: USAID

Table 1. Financial Patterns and Potential Demand for Finance, Artichoke Value Chain, Peru

Value Chain Level

Within Chain Finance Finance from Financial Institutions

Potential Demand

Retail Receive supplier credit Bank loans, outside Peru None

Wholesale/Export

Offer supplier credit to retailersOffer contracts to processors

Bank loans, outside Peru None

Processing Contracts and advances for wholesalers Offer supplier finance and technical services to producers

Short-term bank loans, 12% interest, 100% collateral

Medium and long-term investment finance for expansion

Production Supplier finance and technical assistance from processor and input distributor

Short-term NBFI loans, some facilitated by contracts, 2.5 to 3.5% per month

Medium to long-term credit or leasing to acquire fixed assets

Input Distribution

Offer supplier finance and technical services to producersReceive supplier finance and volume discounts from suppliers

None Short-term finance

Input Supply

Offer supplier finance to input distributors and large producers

Short-term bank loans, 12% interest, 100% collateral

None

Extension Services

Processors and input distributors offer technical services to producers

None None

Source: Campion

Figure 5. Sunflower Value Chain, Uganda

Source: DAI/USAID

Smallholder Farmers

Retail

Wholesale

Processing

Production

Inputs

FunctionsExternal

Sources of FinanceConsumers

Retailers

MukwanoProcessing Plant

Retailers

MukwanoWholesaler

Mukwano BuyingCenter

Retailers Wholesalers

Small/MediumMills

RuralConsumers

HouseholdUse

Rural RAM Press

Mukwano(hybrid seed)

Stockists(non-hybrid seed, fertilizer)

Rural Traders

MukwanoCorporation financeto Mukwano buyingand processingchannel

UOSPA CreditProgram (failed)

Finance flows

Product flows

Finance flows

Product flows

Key:

Local SugarRetailers

Local SugarWholesalers

Functions

Local AlcoholRetailers

Local Informal Alcohol Wholesalers

Retail

Wholesale/ Export

Processing

Production

Extension Services

Input

Jaggery Mills Sugar Estates

UNAIDED Outgrowers

Sugar Estates

Household Loans from MFI’s

Participant in value chain

Broken line indicates skipped function

Key:

ExternalSources of Finance

• Rehabilitation loan from GOU, WB & ADB

• Commercial Banks• Madhvani Corporation

Finance flows

Product flows

Input Suppliers

Non-Contract Farmers

AIDED Outgrowers

Figure 6. Sugar Value Chain, Uganda

Source: DAI/USAID

Issues Raised

• Enforcing contracts (warehouse receipts)

• Alternatives for aiding small farmers

• Partnerships, alliances and linkages

• Capacity to sustainably reach large numbers (estimate profitability, cash flow analysis)

CONCLUSIONS

• Value chain analysis focuses attention on priority interventions

• Encourages financial systems analysis as the logical next step