smallholder farmers – Agri-Logic

Agribusiness Access to Finance Nigeria

Financing agribusiness in Nigeria is perceived as difficult, high risk, and insufficient by many. This study aims to provide an objective and comprehensive overview of supply and demand for agricultural finance, current gaps, and potential solutions that have been identified in Nigeria, Africa and the rest of the world. The research was commissioned by the Embassy of the Netherlands to Nigeria and conducted by Agri-Logic.

The aim of the report is to explicitly inspire stakeholders to action in improving access to finance. A thorough understanding of current agricultural access to finance in Nigeria can inform recommended interventions for government and development programs, and opportunities for entrepreneurs as well as providers of financing.

The report distinguishes real risk from perceived risk, while highlighting gaps in supply and demand, and illustrating solutions and best practices. The report aims to understand the status of access to agricultural finance across sectors, the value chain, and states in Nigeria, with a focus on those most relevant to the objectives and most relevant to bilateral relations between the Netherlands and Nigeria.

Sector characteristics

Agriculture and agribusiness are widely recognized as being critical for development. The sector in Nigeria is characterized by:

Production of crops, livestock and aquaculture, with staples for domestic processing and consumption; and cash crops for export value.
Smallholder farming with many subsistence farmers and often low productivity. Commercial farmers are less than half of the farmer population.
A largely informal economy and entrepreneurship: SMEs are significantly contributing to GDP, yet often not registered and with limited scalability.
Policy and legislation is often focused on incentivizing domestic production and self-sufficiency, often by trade regulation for import or limiting access to foreign currency.
With a growing population, challenges in infrastructure, and trade barriers, the country has high and increasing food prices and self-sufficiency is not yet in sight.

Demand and supply

The total demand for agricultural finance is estimated at ₦83 trillion ($200 billion). Demand for financing roughly falls into three categories: farmers short term finance for inputs, MSME medium to long term finance for assets and overheads, and large and multinational companies short term working capital and long term investment in productive assets.

The total supply of agricultural finance is estimated ₦1.6 trillion ($4 billion), with an additional ₦6 trillion ($15 billion) self-financed by entrepreneurs.

Banks are the largest provider of agricultural finance in Nigeria, even though agriculture only represents ~5% of their total loan portfolio. Bank funds for agriculture grow ~35% annually. Nigerian banks generally have liquidity, but stakeholders have reported collateral requirements, lack of knowledge, currency and market risks, and lack of a rural branch network as challenges.

Public schemes by CBN and others are a significant source of funds for agriculture and agribusiness, and are the largest actor that is facilitating inputs credit to farmers and providing medium term finance to SMEs. These funds however do struggle with low repayment rates and as such have limited scalability.

Value chain finance is disseminated through traders or processors as an aggregator, and while there is a strong business case to build on commercial relationships, aggregators are not always willing and able to scale considering that financial services are not part of their core business capability.

Financing gap

Based on a bottom-up estimation of demand and supply, the financing gap for agricultural finance in Nigeria is ₦76 trillion ($183 billion), roughly 90% of total demand for agricultural finance.

The financing gap is largest for medium term and medium sized debt, revealing a missing middle. However, considering the very large finance gap for all financial instruments and transaction sizes, the missing middle should not be the only focus. While supply of agricultural finance grows with an average 29% annually, compared to a demand growth of 15%, this is insufficient to catch up with the finance gap, which could have doubled by 2027.

Weaknesses of the sector that underly the very large access to finance gap relate to collateral, knowledge and profitability. Stakeholders report corruption, policy and security as specific concerns for Nigeria. In addition, market volatility, weather and supply chain dependencies are risks that are common to agribusiness globally. For entrepreneurs, innovators and investors, sector knowledge, a safety net through savings or insurance, diversification and partnerships are the key elements for risk mitigation.

Way Forward, Returns and Impact

The authors call on all stakeholders to focus on the most scalable and impactful solutions in each segment:

Informal community schemes are the most appropriate solution for a large segment of smallholder farmers, and can be scaled through public and private extension services. This can also be a solution for MSME services such as aggregators or inputs dealers on community level.
Value chain finance builds on existing commercial structures to reach commercially viable smallholder farmers, and needs alternative collateral solutions, de-risking, and data to become scalable. This could potentially be achieved in partnership with MFBs who leverage fintech.
Banks have liquidity, interest and incentive to invest in agribusiness, and combined knowledge and tools for agribusiness and SME investing can support the growth of this segment. Funds as an indirect investment vehicle could also provide a solution for those banks who are not able to build agribusiness expertise.
Fintech and agritech can reduce risks and reduce transaction cost through data and targeted solutions. By developing solutions that appeal to asset managers, pension funds, investment clubs and diaspora, fintech offer the opportunity to tap into sources of funding not currently accessible for agribusiness.

These combined interventions can generate an additional supply of finance of ₦30 trillion ($73 billion) by 2030, improve livelihoods for 50 million people, enable production of an additional 125 million MT of food, and contribute ₦35 trillion to GDP. Banks and fintech have the potential to contribute the largest supply of financing to the sector, whereas informal schemes and value chain finance can have the largest impact on livelihoods and food security. While these combined interventions can reduce the finance gap significantly, this is insufficient to close the gap fully.

Addressing the $200 billion demand for finance for Agriculture and Agribusiness in Nigeria – detailed report (Netherlands Embassy)

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Addressing the $200 billion demand for finance for Agriculture and Agribusiness in Nigeria – executive summary (Netherlands Embassy)

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Addressing the $200 billion demand for finance for Agriculture and Agribusiness in Nigeria – infographic finance demand (Netherlands Embassy)

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Addressing the $200 billion demand for finance for Agriculture and Agribusiness in Nigeria – infographic finance supply (Netherlands Embassy)

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Scoping study horticulture Nigeria

With a combined local and international team, a scoping study was commissioned by the Embassy of The Netherlands to Nigeria, to define the road to improved food security through horticulture. The internal report summarizes production systems and agronomy, as well as value chain, market and finance, and provides recommendations for a large scale development program to be implemented by a consortium.

Scoping study horticulture Nigeria (Netherlands Embassy)

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Carbon Footprint Reporting on coffee farms in Vietnam for USAID, IDH and JDE

Agri-Logic is presently carrying out Carbon Footprint Reporting on behalf of USAID, IDH and JDE based on the data of ~14,000 coffee farmers in Vietnam. The carbon footprint of farmers will be calculated based on estimation of each farmer’s carbon emissions and carbon stocks on the coffee farms. Farmers’ carbon footprint will be compared to explanatory variables and farm profitability. Furthermore, the effect of project interventions by a range of organisations on the carbon footprint will be evaluated.

Final recommendations will tie the conclusions into a set of suggestions on how to move forward at the level of the supply chain management companies on how to work practically with farmers in their supply chain on reducing emissions while maintaining or enhancing yields and profitability. At programme level recommendations for scaling up of the involved initiatives will be formulated.

Farmer Field Book on smallholder cocoa farming Côte d’Ivoire for three large cocoa traders

Three Farmer Field Book projects on cocoa farming are ongoing in Côte d’Ivoire in collaboration with three large trade houses. A total of 1,075 cocoa farmers participate in these programs. They record data on their daily farming activities. The gathered data provide insight in the farmers’ farming practices, their cocoa production and productivity as well as their costs and income. Based on these data, recommendations can be made to improve farming practices. An important point of improvement, for example, is the use of fertiliser. Very few cocoa farmers in Côte d’Ivoire use fertiliser, and even fewer farmers use fertiliser with sufficient nitrogen content. As a result, soil nutrients are being depleted and cocoa productivity is low. This may push farmers to cut down forest to use its nutrient-rich soil for cocoa farming. Improved fertiliser use may help to avoid this by preventing soil nutrient depletion.

Agri-Logic provides the project partners with detailed analyses on the drivers of cocoa productivity and farmer income, in which activities as well as other characteristics are considered. Groups of farmers are compared to evaluate the impact of various project interventions aimed to benefit farmers. The analyses also shed light on social topics such as the gap to a living income, gender pay gap and the occurrence of child work and the risk of the occurrence of child work.

New Insights on Reaching Living Income (IDH & partners)

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Farmer Field Book on coffee farming in Honduras for Olam Honduras

In collaboration with Olam Honduras 2019 has seen the start of a new Farmer Field Book project in Latin America. In Honduras, Arabica coffee is grown. However, productivity of coffee farmers in the department of Santa Bárbara is among the lowest in the country. To gain more insight in how farmer productivity can be improved, two-hundred coffee farmers in Santa Bárbara participate in the Farmer Field Book, or ‘el libro de campo’ in Spanish. For this program, the farmers record data on their daily farming activities. This data is collected frequently and digitized. Agri-Logic and Olam Honduras provide the farmers with individual profit-and-loss reports as well as group reports. This allows the farmers to compare their investments and results with each other and share knowledge on best farming practices. Group discussions among farmers are facilitated to stimulate them to further improve their coffee farming practices. For farmers with low coffee productivity it is difficult to compete with large-scale coffee producers such as exist in Brazil. Improving farmer productivity is a way to improve farmer income from coffee.

Rainforest Alliance Living Income Tool

On request of Rainforest Alliance, Agri-Logic developed a tool for its cocoa certification programme that allows certificate holders to quickly and reliably estimate the gap to the living income of farmers in its supply chain. The model in the tool was developed from a large set of Farmer Field Book time-series data from Ghana and Cote d’Ivoire. The model relies on the very strong relationship between a farmer’s production level and income. Tool users need only add data on 5 variables for each farmer to the tool. The 5 variables are in most instances already available in existing datasets of the certificate holder and as such require no additional data collection. Reliability testing showed the tool to be highly accurate, erring no more than a single percentage point when assigning farmers to above and below the living income categories. This tool is currently being rolled by Rainforest Alliance to cocoa certificate holders who wish to report on living income development.

Commodities Export Development Nigeria

For AFEX Nigeria, an innovative commodities exchange connecting smallholder farmers to large scale buyers, we were contracted to develop commodities export with an initial focus on ginger and cocoa.

Based on a thorough due diligence to assess credibility, we generated recommendations to adjust the domestic trading template to export and facilitated market introductions to cocoa and spices buyers.

Assessment of the impact of certification on Ivorian cocoa farmers for Rainforest Alliance

What are the impacts of certification for cocoa farmers in Côte d’Ivoire? In an impact assessment for Rainforest Alliance Agri-Logic compared certified cocoa farmers with non-certified farmers. The assessment focused on comparing key outcomes: production, yields, profitability and income at farmer level as well as comparing the driving factors behind these outcomes and the contribution of certification to these outcomes.

Key findings of the impact assessment:

Certified farmers show a greater reduction in the use of biocides that fall in the Highly Hazardous Pesticides group as defined by the Pesticide Action Network.
Certified farmers are more likely to use fertilisers. Their higher rate of savings provides them with a greater capacity to invest. Nevertheless, their choice of fertiliser material is equally skewed towards phosphorus-based products and they show a similar nutrient imbalance with far too little nitrogen being applied as do non-certified farmers.
The hours of work on carried out by minors is significantly lower on certified farms, after controlling for other factors, certified farmers use 33% less working hours made by minors. While the data does not allow the distinction between child labour and child work as defined by the International Organization of Labour (ILO), we conclude that the risk at child labour is lower at certified farms.
Certified farmers dedicate fewer hours to activities that are likely to result in better yields such as pruning, collecting diseased pods and pruning of shade trees.
Certified farmers are more likely to use formal banking services and tend to have lower debt levels and greater savings than non-certified farmers. These are of course desirable phenomena in their own right, but do not make certified farmers more profitable. Consequently, the incidence of poverty, whether measured as the share of farmers living below the international poverty line or the living income benchmark does not differ significantly between certified and non-certified farmers.
Cocoa production drives much of the income that farmers obtain and without meaningful changes in farmers’ nutrient management (fertilising and using an appropriate type of fertiliser) we do not expect to see much change in the reduction of poverty among cocoa farmers. This phenomenon helps to explain why despite years of investment in cocoa-growing communities change on the ground has been limited.

Value Chain Analyis Specialty Coffee Rwanda

CBI (Centre for the Promotion of Imports from developing countries) is part of the Netherlands Enterprise Agency, funded by the Dutch Ministry of Foreign Affairs.

The mission of CBI is to connect small and medium-sized enterprises (SMEs) in developing countries with the European market and so contribute to sustainable and inclusive economic growth. CBI does this by implementing three to five-year projects in a specific export value chain (VC) in a specific country, focusing on seizing opportunities for exports to Europe and tackling obstacles that hamper or hinder these exports. They are integrated projects, meaning they involve both SME exporters and the enabling environment. CBI develops and implements projects in several consecutive phases.

Value Chain Selection (VCS) phase: based on preliminary research, the most promising value chain in the target country is selected
Business Case Idea (BCI) phase: an initial idea for a project is formulated focusing on the selected value chain
Value Chain Analysis (VCA) phase: an in-depth analysis of the VC is conducted
Business Case phase: a detailed business case for a project is developed
Implementation and Performance Management phase: the project is implemented and the success of the project is monitored
Audit and Evaluation phase: after completion, the project is audited and evaluated.

The objective of the Value Chain Analysis study was to provide answers to the following questions.

What does the European export market look like? To confirm findings in the earlier phases of project development and to gain a better understanding of the specific markets and segments a project could focus on.
What is the composition of the value chain? Includes an analysis of the key actors, chain supporters and influencers.
What are the salient corporate social responsibility (CSR) issues?
What are the main opportunities for export to Europe and which obstacles prevent export?
What interventions and support activities are needed to seize opportunities and tackle obstacles?
How and to what extent will these interventions and support activities help seize opportunities and tackle obstacles?
Who can take up which interventions and support activities?
What the risks are for a project and how can these risks be mitigated?

The Value Chain Analysis was completed in September 2018, and CBI is currently implementing a specialty coffee program in Rwanda.

Value Chain Analysis for the Coffee Sector in Rwanda (CBI)

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Made-by-women specialty cocoa and chocolate

Thirty Six Foods has partnered with the Able Women Multipurpose Cooperative in Cross-River State and Rokbar to bring high quality and sustainable chocolate to market both in Nigeria and The Netherlands. The partners are creating a chocolate bar fully made by women and produced in Nigeria. The partnership aims to empower female cocoa farmers through access to specialty cocoa markets.

As part of the project partnership, Agri-Logic conducted a baseline measurement on farmer livelihoods and provided training on cocoa quality to the farmer’s cooperative. Agri-Logic also took on project management and reporting to partners.

The Able Women are now formally registered, trained and have a solar dryer in place. A commercial agreement between the cooperative and the chocolate company will ensure buying of cocoa going forward.