Financing Agricultural Marketing - The Asian Experience, FAO 2004

Description
This paper reports on an exploratory study of how traders of grains and
horticultural produce in Asia finance their marketing activities and how they use that finance. "Traders" is interpreted broadly, and the paper considers activities from large-scale paddy milling to small-scale rice retailing and from small-scale rural assembly of horticultural produce to large urban wholesalers. Broad definitions of the terms 'finance' and 'credit' are also adopted, to include short-term trade finance and acceptance of deferred payment by farmers, as well as loans from the formal and informal sectors. The study was carried out in 2001 using country case studies of Cambodia, India, Myanmar, Nepal, Pakistan, the Philippines and Vietnam and that research has since been supplemented by discussion of the topic at two regional meetings.


Summary of results
The general conclusion of this paper is that lack of working capital may not be a major constraint to the functioning of agricultural marketing systems in Asia. That is not to say, however, that some actors in the marketing chain could not benefit from additional working capital sources. Lack of investment capital does appear to constrain both entry of new participants and expansion by existing participants, particularly processors such as paddy millers. One reason why the availability of working capital does not appear to present too many problems is the existence of many vertical financial linkages within marketing systems. These pivot around millers in the case of staples and wholesalers in the case of horticultural produce. Both millers and wholesalers lend to traders who buy from farmers and these traders may, in turn, make both production and consumption loans to farmers. Wholesalers and millers also lend in the opposite direction, to distributors and retailers. Farmers are significant providers of finance to the marketing system, by accepting short-term deferred payment from traders. This paper concludes that such linkages seem to be generally non-exploitative and serve primarily to secure supply, guarantee markets and reduce transaction costs.

Some commentators have suggested using the marketing system as a way of channelling government or donor funds to farmers. There appear to be significant problems with such a proposal in that actors in the marketing system only lend money to those with whom they have had a longstanding relationship or can easily supervise. Thus increasing the flow of funds into the marketing system will not necessarily significantly increase the amount of money being onlent, unless traders would like to be able to lend to additional farmers or lend more to their existing borrowers but are unable to do this because of lack of finance.