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Financing smallholder farmers: from risks to opportunities 0

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.

Continue reading on SPORE

by Joshua Massarenti

Spore is the flagship magazine of the Technical Centre for Agricultural and Rural Cooperation (CTA), a joint international institution of the African, Caribbean and Pacific (ACP) Group of States and the European Union (EU). From October 2012, the magazine is managed by VITA.

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