Investors still perceive rural markets as risky. To attract private finance for viable agricultural investments, the European Commission (EC) has launched a new Agriculture Financing Initiative (AgriFI). “AgriFI addresses the whole value chain system, to boost investment in rural areas and achieve inclusive and sustainable agricultural growth”, says Roberto Ridolfi, director of the EC for Sustainable Growth and Development at Directorate-General for International Cooperation and Development.
Conventional thinking is that financing smallholder farmers and agribusinesses has high transaction costs, low investment returns and is risky business. Is this a myth or a reality?
In our view, inclusive financing is about long-term availability, patient capital, and financing mechanisms adapted to smallholders and micro/small/medium enterprises (MSMEs). There has been serious underinvestment in the agricultural sector for decades, particularly in smallholder agriculture. The FAO estimates that we need to invest €240 billion per year to eradicate hunger by 2030. Given that smallholders account for more than 95% of all agricultural holdings, the major share of this investment has to go to smallholders.
It is true that there is an inherent high risk related to agricultural production in general. This is because of production and market risks such as environmental conditions, quantity and quality of produce, and fluctuating prices. There is often a higher perceived risk associated with small producers due to limited technological and innovative capacities, market inefficiencies and disruptions, and limited access to financial services and markets. On top of that is the high cost of doing business in small remote, rural markets. That’s why agricultural risk management is so important. We see a lot of new developments in this area, including smallholder insurance, but also market information systems, warehousing, and other more conventional programmes, such as road and market infrastructure development and access to energy.
How will AgriFI help to tackle investment risk?
Regarding risks, AgriFI will have a twin track approach: firstly reducing risk on the producer side – meaning business and advisory services, skills, technology and innovation; and secondly, by providing greater risk-bearing finance.
We will also provide greater risk- bearing capacity through using public money to attract private finance to viable investments which would not have happened otherwise. AgriFI aims to finance initiatives that have a clear development impact on those not normally reached, including smallholders with limited market orientation, vulnerable groups, women and young farmers and entrepreneurs.
How will AgriFI be implemented?
AgriFI is an initiative under which various programmes will be implemented and can be financed from various sources. We will have financing available from a variety of thematic, regional and country programmes but, of course, there will be loan contributions from development banks and financing institutions, and from the private sector.
Most AgriFI investments will be done within the EU blending framework. AgriFI is meant to be flexible, using different financing products most suited to the specific circumstances. All blending instruments like direct investment grants, technical assistance but also provision of risk capital, guarantees or other risk sharing mechanisms can be used in principle. Given the perceived high risk environment of smallholder agriculture and agribusiness MSMEs, the use of risk sharing mechanisms is an important instrument to use.
So how would you convince a financial service provider to invest in smallholder farmers and agribusiness MSMEs?
We can offer a trusted and reliable partnership with those investors. Such partnership offers advantages in terms of spreading the risk and in terms of long-term engagement. Another argument is that global food supply cannot be guaranteed without tapping into the underused agricultural production potential of smallholder farms. These are the producers that currently feed 80% of the population in the developing world. And they will remain vital in the pursuit of global food security. So we need to better tackle this together now, otherwise we will never reach the required impact at scale that is required.