Financing for Food Security

April 20, 2020
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Financing Safe and Nutritious Food Businesses for Food Security

Dr. Shah Md Ahsan Habib

(Published in the Financial Express in 2020)

Ensuring nutritious and safe food are amongst the major challenges for the developing economies like Bangladesh. It is associated with the United Nations goal of ‘Food Security’ according to which all people, at all times, have physical, social, and economic access to sufficient, safe, and nutritious food that meets their food preferences and dietary needs for an active and healthy life. Though sufficiency or adequacy received due attention at the enforcement level however, ‘Safe and Nutrition’ aspects remained unseen a bit.  Thus, at this stage, having attained notable progress in sufficiency of food, the global key challenge of food security is associated with the efforts to ensure safe and nutritious food.

In the global context, massive investment is necessary in food sector to meet the growing need as global food supply is expected to upsurge dramatically to cope with the increasing demand. By 2050 the world’s population would reach 9.1 billion, 34 percent higher than today; and the growth, combined with increasing per capita meat consumption, will require a 60 percent increase in global food and feed production, as estimated in FAO study. According to relatively recent World Bank estimations, demand for food will increase by 70 percent by 2050; and at least USD80 billion annual investments will be needed to meet this demand. To address this growing need, the world needs huge investment and financing. The investment and financing requirements are associated with the attainment of UN targets as financing to the sustainable food and agriculture is clearly associated with attaining Sustainable Development Goals (SDGs) that include significant number of interconnected objectives related to agriculture and food. Especially, SDG 2 deals food explicitly by seeking to ‘end hunger, achieve food security and improved nutrition and promote sustainable agriculture’, and multiple other goals relate to challenges in the food system. Today, need for greater investment and financing of the safe and nutritious food value chain is well recognized, however, efforts to find wide scale commercial financing avenues and products are relatively recent developments. The capacity of the low income developing countries to meet the investment gap with their budgetary resources is limited. It is crucial to involve private sector to meet the investment gap, and finding greater way and instruments for commercial financing.

There is huge but uneven growth of investment in food and agriculture around the world. Empowering farmers has been one of the primary tasks. Agriculture finance empowers poor farmers to increase their wealth and food production. However, the task is not easy in developing and low income countries. The investment gap and complexity are particularly visible in developing countries where the food sector comprises a wide variety of companies pursuing a variety of roles in the production, processing, distribution, and sale; and the size of these entities range from multinationals to large regional and national companies to medium, small and micro enterprises. Variety of food items are also produced at the primary sector by the individuals at the farm level.  These entities/individuals offer different growth prospects and rates of return, and have different financing needs.

Large companies, engaged in delivering food items, are well positioned and have easy access to commercial financing in developing countries. For example, big staple food companies(approximately 95 percent of wheat flour in Africa is processed and packaged in mills with a capacity of at least 20 metric tons a day) and salt (an estimated 60 percent of salt comes from large salt producers)  companies in Africa have easy access to commercial financing to meet their investment need. However, SMEs and smaller companies have generic challenge associated with access to finance. In regard to bank financing, micro and small enterprises have common barriers of limited collateral and uncertain growth prospects. A study by the International Finance Corporation estimates that nine million SMEs, 44 percent of all formal SMEs in developing countries, have unmet financing needs of USD 4.5 trillion a year. Financing farm level activities of agriculture sector from institutional sources are also very challenging. It needs different nature of products where presence of formal commodity market has a role to play.

For ensuring adequate and required financing for safe and nutritious food business promotion, probably the primary job is to get it recognized as a special sector or a different category. Practically, most investors do not recognize ‘nutritious food value chains’ or ‘companies that can improve access to nutritious and safe foods’ as a category or sector. As investment or financing sectors, these are simply part of financing to crop or agricultural sector, agro-processing sector, SME financing, working capital financing or even corporate financing.  To consider the category under the umbrella of a particular type of specialized financing (like Green Financing to address Environmental Risk) food security should be considered as a global public good.  Although less directly than other sectors as environment or health, safe food and nutrition security should be considered as global public goods as the food security is clearly a prerequisite for health; and hunger and food insecurity can be responsible for public unrest, political instability, a threat to peace. To build a clearer understanding of the opportunities to invest and finance safe and nutritious food value chains, it is also important to identify nutrition investment opportunities. In this connection, there were initiatives in developing countries.  In 2018, the Global Alliance for Improved Nutrition (GAIN) commissioned an impact investment advisory firm, to assess the financial needs of companies in safe and nutritious food value chains in Kenya and Tanzania. These included primary producers, food processors and manufacturers, and providers of value chain services such as cold storage. Most of these companies were relatively small, family-owned, medium growth businesses.

Considering the differential needs and diversified nature of entities engaged in agro-food value chains, types of financing products vary widely. In the primary farm sector, warehouse receipt financing are contributing in a number of developed and developing countries. This financing product is particularly effective where commodity exchanges are workable. South Africa and Tanzania are good examples. For new and innovative ideas, venture capital is the solution. For example, founded in 2014, ColdHubs in Nigeria provides farmers with a solar powered walk-in cold room for 24/7 off-grid storage and preservation of perishable foods. Located on farms and in food markets, they extend the freshness and nutritional value of fruits, vegetables, and other perishable foods from two to about twenty-one days. The company has partnered with a venture capital firm focused on sustainable energy, which supports early stage entrepreneurs through access to risk capital and technical support. Use of various hybrid financing products combining debt and equity are common like mezzanine finance.  There are also combinations of grant or discounted finance and commercial finance.  For example, Faso Kaba in Mali is producing and selling certified seeds that are rich in vitamins A and E, including corn, rice and peanut, and that give farmers higher yields and incomes. To support its business growth, following an initial injection of seed capital, the company has attracted a package of mezzanine finance. This in turn has enabled the firm to draw working capital and capital investment requirements, to meet growing demand. Faso Kaba more than doubled its sales from 700 tons of certified seeds in 2011 to more than 1,600 tons by 2015. East Africa has also several success stories. For example, established in 1996, Happy Cow is a dairy manufacturer producing a diverse portfolio of high quality milk, cheese, yogurt, and butter brands. Technical and grant assistance helped the company to secure a bank loan to fund working capital requirements and capital investment in new processing equipment required to produce fortified yoghurt.

For relatively smaller food producers, cluster financing approach has been contributory in many instances. Some developing countries such as India, Colombia, South Korea and Sri Lanka have been able to establish clusters in agricultural and seafood processing. In the context of different global economies the approach and status of SME clusters are not very similar, and thus their importance and benefits appeared to be different. Clusters are growing trends in a few African countries as a way of building competitive advantage and ensuring access to small enterprises.

Risk management products are also crucial for investment and financing in food sector as producers and financing institutions might be severely affected by the weather conditions like heavy rainfall or draught. Traditionally,   most insurance has been indemnity-based, meaning the company insures against crop loss or damage. However, index-based insurance products are new innovation in the area of crop insurance. This insurance product is index-based, meaning payouts are determined by comparison to historical, regional rainfall or draught patterns. Agricultural banks can bundle weather risk management with their loan packages, for example, loans are forgiven if there is a drought, and the bank claims its money back from an insurance company. Price risks can also, under certain circumstances, be addressed by price insurance schemes based on market projections. In addition, Guarantee Fund has been widely and very successfully used by EBRD in its agricultural financing activities in transition countries.

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