Investor Panel: Agricultural Finance Perspectives From the Field
As part of a three-day Agriculture Finance Training at the Washington Learning Center, USAID — through the Investment Support Program — organized a panel of investors to speak about providing finance in the agricultural space. In particular, the panel focused on identifying the opportunities and challenges of financing agricultural projects, trends and innovations that are likely to shape the sector going forward, and reflections on where USAID can be most effective and impactful in this space. This panel discussion included perspectives from the following individuals:
- Songbae Lee – Senior Investment Officer, Calvert Impact Capital
- Mariana Petrei – Senior Investment Officer, International Finance Corporation
- Titianne Donde-Ommes – Regional Advisor, Council on Smallholder Agricultural Finance
- Chris Isaac – Director of Investments & Business Development, AgDevCo
We held a rich and lively discussion, in which a number of areas were explored. Key takeaways from the panel are highlighted below:
Overall reflections on agricultural finance
- Investing in agriculture is particularly effective at achieving development outcomes. It is a good “bang for donor buck” as one panelist put it. Smallholder farmers in emerging markets encompass a significant proportion of the world’s poor, so targeting agriculture is a very effective means of alleviating world poverty. There are also multiple and complex market failures involved in agriculture that require addressing; for example, Africa imports approximately USD 40 billion worth of food annually despite its wealth of arable land. Financial interventions can help iron out these failures.
- However, the agricultural sector in emerging markets does not have the risk and return characteristics necessary for conventional commercial investing without additional support. Agriculture is an inherently risky sector, which dissuades many international investors who cannot achieve satisfactory returns for a given risk exposure. For many agricultural enterprises, competitive returns which match the profile for commercial investors (i.e., up to 20 percent returns for standard financial products) are simply very difficult to achieve. Indeed, a recent study demonstrated that only about 50 percent of lenders’ portfolios in the agricultural space are profitable immediately. That doesn’t mean financing for agriculture cannot be sustainable — indeed, panelists agreed that with the right set of investments using different tools open to donors, this can fundamentally shift the risk return equation.
- There are competing commercial and development perspectives on agricultural investment in emerging markets which still need to be reconciled. While commercial lenders see potential write-offs of 15-20 percent of the portfolio as highly problematic, development actors may view the same 80-85 percent repayment rate instead as a development success. For development actors, 80-85 percent recovery of capital from an investment represents a significant savings compared to a 100 percent non-recovery rate in the case of pure donor capital. It’s important to keep these different perspectives in mind as we consider partnerships between commercial actors and donors.
- Emerging financial products also can make a large difference in overcoming the risk and return barrier to agricultural investment. Panelists agreed that instruments like smart subsidies and blended finance are well positioned to support agriculture finance given the availability of concessional capital via multilateral and governmental donor agencies (i.e. the USD 300 million Global Agricultural and Food Security Program) which can be partnered with commercial capital.
Reflections on the role for donors and USAID
- Given that the pipeline of investments is a primary limiting factor in matching supply and demand for lending in the agricultural space, donors can play an important intermediation function between finance providers and downstream borrowers. However, it is also important to understand the fundamental characteristics of financial partners to know what they can and can’t do in the investment space. For example, it is important to understand where a financial partner sources its capital from (as this can dictate what types of investments it is prioritizing and which it can engage in) so donors need to be able to segment and understand the financial institution landscape more deliberately. It is also important to understand the financial institution's risk appetite and whether it has a credit rating, as this may affect its appetite to enter risky agricultural lending and in doing so potentially jeopardize its credit rating.
- There are creative ways to balance the need for reporting on a variety of Environmental, Social and Governance (ESG) requirements which can often be burdensome for some investees. Panelists noted that in exchange for high levels of reporting, certain incentives (“carrots”) in the form of technical assistance and/or grant funding can be included in the investment package to motivate investees to report. For cases in which there is a financial intermediary between the finance provider and downstream borrower, it is important that reporting expectations are clearly communicated to the intermediary as there is a business case for capturing this information.
- There are some clear areas where USAID and other donors can double down to fill gaps in agricultural financing. As a clear example, cocoa and coffee growers around the world are facing aging orchards that require replanting and then several years of growth before becoming profitable again. Financing cocoa or coffee growers who often lack land title or collateral would be a very tangible way of achieving impact, especially as banks and other lenders avoid intervening without support due to the repayment risk.
For further information on the training itself, please reach out to Patrick Starr ([email protected]).