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World Ag Congress : World Ag Congress
MANAGING RISK AND FINANCING AGRICULTURE AND FOOD PRODUCTION James Bond, COO, Multilateral Investment Guarantee Agency, The World Bank; Joseph Quinlan, Chief Market Strategist, Bank of America; and Esther Muthoni Muiruri, General Manager Marketing-AgriBusiness, Equity Bank Ltd. World Agricultural Forum 2009 Congress 11 Q: In many parts of the world, govern- ment has tried to direct funding and lending and also tried to regulate the interest rate. How is your bank working to advise countries to deal with this? A (Bond): We have to make agriculture markets function better. We have to lower price variability, make financing available, and mitigate the downside risk for farmers so the coping strategy is not minimizing risk but capturing some of the opportunities. For efficient markets you really need physical movement of product, rural roads, irrigation, decent water management, research and extension, the right seed stocks and the like. This is really a need for investment. The World Bank is tripling its lending over the next couple of years to about 12 billion dollars a year in agriculture, and, of course, when the World Bank invests we are actually doing it through governments. They should invest beyond what they get from the World Bank and from other sources of donor financing. They should invest some of their tax revenue into basic infrastructure and in skills. There is a key role for the private sector to invest in agriculture. Private investors bring in know-how, access to markets internationally and locally and they create employment. For those poor farmers who continue to stay on the land, they have to have risk mitigation tools, things like crop insurance, weather insurance. There should also be social safety nets to reduce the costs of failure so farmers do not get wiped out if they invest and bad luck goes against them. Q: I would like to hear the view from the private sector and whether we can get private to join. What types of investment do you look for? What are the constraints that prevent you from lending to farmers? A (Quinlan): Distorted trade policies really make agricultural trade very dif- ficult to handle. When it comes to lending to the agricultural sector, a lot of this infrastructure spending that we are seeing will not go into the water infrastructure, will not go into the agricultural sector. There is a general lack of knowledge that agriculture is a building block; it is probably the first block of any economy. Hopefully Africa can not only become more productive in agriculture but also create that manufacturing base. If Africa can get its manufacturing base up and running, create some middle class consumers along the way, that could perhaps then see more investment seep into the agricultural sector as these companies realize that there are opportunities at the village level instead of at the urban levels. That is a shift that should really come from the grassroots literally and figuratively, but I think it is going to start in the urban centers and come down. Most of the financing is still going to have to be vis-à-vis the local banks. With the global downturn, capital is staying closer to home. We are seeing creeping financial protectionism in the United States and in Europe and really with government involvement now more than ever in banks, if there is any money for the agricultural sector it will be localized in those national economies. Q: You also work in Africa. Would you share your experience in dealing with financing agriculture? A (Muiruri): What we have done with the bank is to try to be responsive to the issues that affect farmers. This happens when we get involved in interactive research where we are able to really discuss with them and get to know the real issues and how we can position ourselves to be responsive to their issues. What we have done is to develop value chain financing through estab- lishing partnership with the players in the agricultural sector. Another initiative that we have introduced is working with partners through credit guarantee. Through the con- certed efforts with the other players, it becomes easier to help farmers access finance. Another initiative that we have introduced is to use group lending where the farmers do the producing individually. The whole idea is to make it commercially competitive without bringing systems that make it dependable and non-sustainable. As much as there are many risks, when we work with many partners we mitigate some of these risks, and agriculture becomes competitive and can be sustainable. WAF Q & A SESSION WITH SHUILIN WANG, CHINA INVESTMENT CORPORATION, MODERATOR TAKE-AWAY INSIGHTS FROM ROUNDTABLE DISCUSSION "The role for government is to regulate the market because the market does need regulation. There is an important role for government: It is human protection and protecting the financial sector, not actually providing financing and certainly not tweaking interest rates to bring them down to rates which are no longer financially sustainable and create distortions in the credit market." "What can governments do to mitigate risk? Get the basics right. Whether it is education, infrastructure, transparency, the rule of law when it comes to land ownership, take out the corruption as much as possible." "I would invite the participants to send more messages about the economies of scales, risk and risk management, the margins at different levels in the entire circle of commodity plays from the field to your plate."