The Experience of the CFP and Lessons for Other Countries
The privatization in 2012 of the ATE Bank, a specialized agricultural credit institution in Greece, and its acquisition by Piraeus Bank, a commercial bank that has proved its innovative approach in the financial market of Greece in the past, gave a new impetus to agricultural finance in Greece. Following a market analysis immediately after the acquisition in Q3/2012, a new program, the CFP, was designed and put into place in Q4/2012, based on the international experience of Contract Farming but in a tripartite system, bringing together the producer, the processor and the bank. This tripartite system proved very successful and expanded rapidly throughout that agri-food sector of the country. The experience and success of this innovative program can lead to the following main inferences about the main agricultural finance issues.
Innovation in the agri-food value chain could be initiated even from nontraditional direct sector participants, such as banks, who may offer a new and fresh approach to old issues. Innovation is also facilitated by a continuous review of the business models and cooperation of all partners. Innovation in agricultural finance should not be just on the flow of liquidity to the market, but it should target the elimination of the structural problems in each market. As a result, this will maximize the benefits for all participants in the value chain and minimize the risks involved. Agricultural finance also requires a different approach from market to market because each market has unique characteristics. Thus, the implementation of a new credit system should analyze in depth the conditions and the rules of the target market, identify problems that are linked to the financing and propose the appropriate solutions.
The Greek agricultural sector, as any sector, is unique due to its structure, history, product categories involved, processes, legal environment and participants’ mentality. Moreover, its strengths and weaknesses make it difficult to imitate either a northern European market financing model or one from a developing country. Thus, the restructuring of an agricultural credit system, like the Greek one, could be based on current trends, such as value chain finance, but with the appropriate modifications.
Financial institutions that decide to offer value chain finance should have certain characteristics including (a) financial strength, (b) commitment to the rural sector, (c) wide branch network close to the producers and (d) staff with the appropriate know-how to manage the process. Additionally, financial institutions should not be tempted to be involved in the commercial relationship between farmers and processors. They should let the market work by formulating its rules. To facilitate this, financial institutions should offer more than one choice (buyers per product) to farmers for selling their products. Private companies and producers’ organizations should be included in the related programs for each product.
The main criterion for the success of a value chain financing program is trust among participants. Thus, as a prerequisite, there should be farmers and buyers who are willing to participate actively in the value chain. In this context, financial institutions should ensure that anyone that on purpose violates the agreed terms in the chain for short-term benefits should be excluded from the financing programs. Value chain financing could positively affect benefits, such as production costs, making products more competitive. Thus, financial institutions should promote ways so that benefits are allocated fairly among value chain participants. This will strengthen trust and create a long-term view of their cooperation.
Benefits from cost reduction may be significant if financial terms lead to the proper use of capital. Targeted financing for professional use only, the time of capital release and the period of use are the main parameters that may ensure proper use of capital available. Credit rules set by financial institutions for value chain financing programs should guarantee that there will not be any barriers in accessing credit for women, young farmers and small farms. The introduction of a new value chain financing scheme requires strong management commitment because of significant investment resources required and delays in the realization of returns. Thus, the motivation for value chain financing should be robust and clear. Moreover, as value chain financing projects are complex, there is a need for effective cooperation between different units of a financial institution and efficient coordination.
For the successful implementation of value chain financing in the agri-food sector, agricultural economics and credit know-how is crucial. However, more important for success is the ability of the financial institution to learn from the members of the value chain, using appropriate methodological tools. Financial solutions should be tailored to the real needs of each chain under the different characteristics of each market. There are no ready-to-use solutions.
A holistic approach to the financing of the value chain may strengthen trade cooperation, create relationships built on trust, ensure the delivery of safe, certified products of higher nutritional value and contribute to the enhancement of the local economy and social cohesion. This is in accordance to Porter and Kramer’s (2011) suggestion about the need of a “shared value” approach, which reconnects companies’ success with social progress. More specifically, companies should bring business and society back together, by redefining their purpose as creating “shared value,” generating economic value in a way that also produces value for society by addressing its challenges.
Finally, the role of public policy is important in promoting and supporting cooperation of the value chain members, by creating the appropriate legal environment that enforces contracts and provides landownership documentation systems. Additionally, it should offer systems that could provide reliable market data to facilitate business decisions of all three parts, producers, processors and the financial institution.