Advance payment for small farmers: challenges and benefits

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Agricultural Value Chains / Agri-Businesses

“It is not the farmers that decide the price but the buyers”. This is the reality acknowledged and shared by a farmer during a workshop in the DR Congo in 2021, lively discussing with farmers about production costs and identification of the right price to cover at least the production costs.  Hence, a better relation between buyers and farmers (farmer’s organizations – FOs) needs to be worked on.

Get the money and run your business on time

Small farmers do not have enough cash to buy inputs (fertilisers, seeds, etc.) ahead of the planting season. Therefore, they plant with little inputs or with inputs of low quality, and cannot achieve the quantity and quality required by the buyers.  Farmers don’t only need finance, but they need finance at the right time. If finance arrives too early, it risks being used for other sudden priorities (and farmers happen to have quite a few) and if it arrives too late, it cannot be used to support farmers’ production, but it just increases their debt burden instead. A solution could be that buyers (or any financial institution – FI) provide finance to farmers ahead of the planting season. Buyers, farmers and their financial institutions however need to know the risks of their own value chain, to design a financial product that can address such risks. PARM risk assessment by value chain provides practical and holistic recommendations in this respect to de-risk investments.

Logically, the buyers have a clear interest in providing advance payments to farmers to enable them to buy inputs on time. This is not rocket science, however its implementation proves as challenging as rocket science. Indeed, according to the DEFIS project financed by IFAD (Inclusive Agricultural Value Chains Development Programme) in Madagascar, “Advance payments and support to the farmer allow the buyer to obtain a good product in terms of quality and quantity, but importantly, it makes the buyer understand the parameters brought into play on operating and pricing costs and share the product risks with the latter, both upstream at the production level and downstream at the price level on the market”.

Key elements to hold on to

  • What farmers need to know ahead of asking finance is for instance, the surface of their cultivated land to buy the exact amount of inputs (not too little, not too much), often they do not know it, which causes waste. Digitalisation could make wonders in this process; Incofin for instance, an impact investor in Africa, has supported highly the digitalisation of their investees through training.
  • What buyers/financial institutions need to know is the calendar of production of their farmers as well as their costs of production to be able to assess the advance payment that farmers require. FIs and buyers should also allow a time window before asking a reimbursement of their advance payment. This time window will leave cash (and power) in the pockets of the farmers to negotiate with their intermediaries and obtain a better price for their produce. In turns, making the farmers a better investment case!
  • What farmers and investors need to discuss together is: the finance disbursement and reimbursement calendar to align it to the production calendar of the farmers and the commercialization calendar of the intermediaries (sometimes many) that bring the production to the market. A gender perspective needs to be adopted through this process. Women often are assigned the less productive lot of the land, which therefore may require different quantity and quality of inputs compared with the average inputs required by the higher-productivity lots cultivated by men.

How can PARM be of support?

PARM through its multi-donor network and multi-stakeholder partners can broker the contacts between FOs, buyers and FIs and help FOs to better integrate value chains. Furthermore, PARM through its workshops, provides the venue for diverse partners to meet and their dialogue – as remarked by the participants to a workshop in Burkina Faso in 2022– is a principal tool for Agricultural Risk Management (ARM). PARM manages FARM-D, the Forum to carry this dialogue further!

Francesca Nugnes, Capacity Development Specialist
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© Carlos Thomas Lora Acosta