Wikifarmer

The importance of Agri-food financing

Written by Wikifarmer | Feb 23, 2024

Overview of the Current Condition in Agri-Food Funding in the EU - Shortcomings, Opportunities and Wikifamer's Proposition

Media across Europe have recently mentioned the agri-food chain's vital role for people in and beyond the continent. Regardless of social, economic, or international events, agricultural value chains pose a crucial driving factor in safeguarding the harmony of our daily lives. From businesses supplying production inputs to retailers selling fresh or processed products, they must all work together to produce high-quality, safe, and cost-effective products suitable for satisfying the most basic of human needs.

However, wars, inflationary pressures, and fierce international competition often pose a significant challenge to achieving this goal. But how can supply chain participants navigate through this challenging landscape with ease; businesses require flexibility and swift and ample access to lending capital, which will allow them to invest in modernizing operations and maximizing efficiency.


The unbearable financing gap

The current situation fails to support parties involved in the agricultural sector. Enterprises involved in agricultural supply chains often struggle to obtain finance from private lending institutions, which often feels like coming up against a brick wall. This is widely affecting primarily farmers, who may lack credit history and collateral to declare, making traditional banks hesitant to lend to them. Nevertheless, it stretches further; small and medium-sized enterprises (SMEs) in the food processing sector also face high rejection rates across EU countries. Moreover, the mere absence of surveys and research regarding the financing of agricultural marketing testifies to the scarcity of private funding for the segment.


Sustaining operations is difficult, and evolving is a plus

It is important to highlight that it is the very nature of demand for loans from businesses in this segment that makes it incompatible with the customary loan offerings of banks; activities related to the primary sector often create unpredictable working capital needs, so they are often needed under conditions of emergency, not readily available from traditional banks. This creates a significant financing gap in the operations of producers, food processors, and traders-wholesalers of agricultural products, as shown in the following graphs. This financing gap hinders innovation and modernization, making it difficult for businesses to expand and sustain their operations when uncertainty strikes.

Moreover, sustainability efforts are put on the back burner, perpetuating the heavy environmental footprint of farming, processing, and trading operations. We see this reflected in the fact that 24% of the agri-food sector’s funding deficit relates to green investment proposals by otherwise financially viable companies. Also, rural decline is augmented, as young people do not see any financial opportunities in agri-food activities and are less likely to take over relevant family enterprises and instead choose different career paths. All the previous pose a threat to food security by perpetuating inefficiencies in the agricultural supply chain, contributing to the aging of the underlying workforce, and limiting the innovation and flexibility that younger generations bring.


The Risks Involved

Over years of maturation, the sector has spontaneously devised solutions to this problem. For example, farmers often accept short-term deferred payments from wholesalers, and they, in turn, offer credit terms or deferred payment options to their customers, such as food production units or retailers. These operator-to-operator credit linkages have helped the sector survive its working capital emergencies. However, they come with multiple dangers, such as perpetuating market inefficiencies and giving rise to exploitative practices during crises, like lenders demanding that borrowers do all business with them. Additionally, the number of potential lenders is volatile and directly dependent on the financial results of businesses with cash surpluses. As such, these informal practices come with high uncertainty in available capital.


A Brief History of Promising Initiatives

Therefore, It is clear that we need financing solutions tailored to the segment's actual needs and characteristics. Promising initiatives have already been pursued, as a micro-loan facility is currently offered to Greek farmers and food processors to renew their tangible assets and funding consultation services. The nature of this scheme, which concentrates only on micro-loans (up to 25,000 EUR), with preferential terms, interest rate subsidies, and a 2-year grace period, does a very good job catering to the sector's needs. This is evident in farmers' and small-scale processors' swift absorption of its funds, even though it diverges from the grant-based tradition of financing tools that operators are accustomed to in the EU. However, we cannot stress enough the limits of such initiatives; bureaucratic obstacles creating lengthy application procedures still exist, and the expansion of such programs to the totality of the EU is deemed unrealistic due to the vast amount of preparation and research it would require. Also, the lack of transparency and difficulty in handling funds at such a grand scale would also arise.


A Financing Solution

At Wikifarmer, our active participation in all agricultural market segments allows us to gauge the market sentiment and fully comprehend its needs effectively. Being involved in such supply chains ourselves, we understand the basis of banks' reluctance and the advantages of the established informal financing practices. Consequently, our attention has shifted towards developing a hybrid financing solution for B2B buyers of agricultural products. Members of our extensive partner network, mainly made up of food production units and wholesalers, can enjoy favorable 30- to 90-day credit terms if deemed eligible; this process is run through a trusted service that implements a data-driven approach, considering company data we have extracted through performing thousands of similar transactions across the globe with businesses of various segments. Our process puts the very innate characteristics of this highly neglected (up to now) sector at the epicenter of its decision-making to free its credit applications from over-generic and irrelevant approaches that fail to give it fair consideration.

 

 

References

European Commission. (2023, October 12). Access to finance remains insufficient for farmers and agri-food SMEs. https://agriculture.ec.europa.eu/news/access-finance-remains-insufficient-farmers-and-agri-food-smes-2023-10-12_en 

European Commission & European Investment Bank. (2023, April). Survey on financial needs and access to finance of EU agri-food micro, small and medium-sized enterprises. fi-compass. Retrieved from https://www.fi-compass.eu/library/market-analysis/survey-financial-needs-and-access-finance-eu-agri-food-micro-small-and 

European Commission & European Investment Bank. (2023, June). Survey on financial needs and access to finance of EU agricultural enterprises. fi-compass. Retrieved from https://www.fi-compass.eu/library/market-analysis/survey-financial-needs-and-access-finance-eu-agricultural-enterprises 

European Investment Bank. (2023). Financing gap in the EU agricultural and agri-food sectors. Retrieved from https://www.fi-compass.eu/library/market-analysis/financing-gap-eu-agricultural-and-agri-food-sectors 

Food and Agriculture Organization of the United Nations (FAO). (2015). Financing agricultural marketing. https://www.fao.org/publications/card/en/c/9b99147d-4708-55be-a974-a43640692397/ 

Mayanja-Namayengo, F. M., van Ophem, J. A. C., & Antonides, G. (2023). A comparative study on the role of microcredit on agricultural production improvement among resource-poor rural women. Frontiers in Sustainable Food Systems, 7, 1083660.

Organisation for Economic Co-operation and Development (OECD). (2023, January 17). Labour and skills shortages in the agro-food sector. https://www.oecd-ilibrary.org/agriculture-and-food/labour-and-skills-shortages-in-the-agro-food-sector_ed758aab-en