Agricultural value chains …integrated risks and optimal financing in the one district, one factory programme

A typical Agricultural Value Chain

There’s no gainsaying that food, agriculture and agribusiness have a substantial economic, financial, social, and environmental pawmark. According to Mckinsey, the $5 trillion Agribusiness industry represents 10 percent of global consumer spending, and 40 percent of employment. The Word Bank gives the industry 10% of global GDP (barring any double counting of items captured in primary and secondary processing). This is curiously true when a trend toward eating more healthily has created new sub-sectors, including the organic food business, and “functional foods,” such as neutraceuticals, which mix medicine and nutrients. Most of the successes in the industry have been due to well-structured value chains and mature interconnected risk management that has ensured consistent operational flaccidity.

Despite the seeming conundrum surrounding the exact measures and size of the food and agribusiness industry, almost everyone converges at the conviction that the sector is really growing (thanks to well designed and potently governed value chains), and at an astounding speed. Mckinsey suggests that total returns to shareholders (TRS) of food and-agribusiness companies, on the whole, have been higher than many other sectors: between 2004 and 2013 the TRS of more than 100 publicly traded food-and-agribusiness companies around the world increased at an average of 17 percent annually, relative to 13 percent for Energy and 10 percent for Information Technology.

It is a fact that companies that form part of industry value chains (IVCs) are more creative and competitive (with improved profits and better cost efficiencies) than stand alone businesses. It is also true that countries that participate in value chains and find themselves in segments of higher added value demonstrate greater economic development. There are countless enormous benefits in forming and participating in a value chain but Ghana’s IVCs and more particularly, AVCs, have not been properly developed and well rehearsed towards advanced and well interconnected maturity maps.

Let’s wander a bit into an area of interest; the writer is convinced that in as much as resource mapping is good for the country, there should rather be a comparative value modelling and appraisal between a district’s resources and a market for certain products. For districts with scarce or non-sellable resources, there may be markets for products in short supply (for example hibiscus or ‘sobolo’). There’s no need wasting capital for a resource mapping exercise when we can create the resources to satisfy markets with products in demand if a district’s agronomic data allow that.

To ensure sustainability and operational pliability of the 1D1F, owners and innovators of policies must look at interconnected risks that stream across the entire chain. Activities or links such as logistics operations between chain nodes of processing and wholesale/retailers have a lot to add to the value adding process but may be seriously exposed to operational and liquidity risks. The interconnected nature of risks requires a more integrated approach to risk management in value chains likely to be developed in the District Industrialisation Project (DIP). For example, Operational Risks can lead to more serious Market and Credit Risks. Weather Risks can result in Credit and Liquidity Risks at the nodes as well as within the links of the chain. These independent risks as well as their interdependencies can slow down or even disrupt the speed of achievement of the value building process in the 1D1F. The best approach to unravelling these complex interrelationships of risks is an integrated risk modelling and management approach. All risk data could be mobilised, quantified and modelled to unstitch the nature of these relationships. Applying the right risk models helps in ensuring risk visibility and unravels how certain risks affect others with attendant impact on value chain objectives (business competitiveness, product competitiveness, profit maximisation, cost efficiency maximisation, value streaming, and more jobs) and to what extent.

In terms of industrialisation initiatives and efforts, Ghana has history to learn from. There’ve also been a lot of successful models around the world (Botswana, Chile, and Malaysia) to guide us. The country should get it right this time in the DIP or in the Regional Clusters. Value Chain development and mapping has proven to be the fastest, more consistent and more sustainable model for pursuing any contemporary industrialisation drive. Within the context of more contemporaneous industrial organizational systems, nonetheless, value chains are increasingly becoming complex due to surging interdependence and interconnection between among actors. This procreates risks and uncertainties high enough to bother policy makers and VC managers because of the diverse nature of risk sources and drivers. Risks are multiple, sequential and mutually inclusive in that a risk in one part of the chain can generate further risks in other parts. As a result, whereas strategies and programmes to deal with a specific challenge in a chain may cap in some partial success, the entire chain may still experience certain bottlenecks. An integrated risk management approach that carries along all VC actors and the links proffers the requisite risk visibility for optimal financing and operational cleverness.

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Risks and Mitigation Strategies in an AVC

The DIP has the propensity to place Ghana as the industrial hub of the sub-region and designing an innovative IVC with integrated and mature risk strategy will provide the needed feasibility to allow optimal financing and operational resilience and push the whole programme onto the success trajectory. The strategy should have the aptitude to mobilise VC diagnostic data for upgrading, identify potential risks, the source, the probability of occurrence and the magnitude of impact, and the appropriate methods of action to mitigate and reduce chain susceptibility and enhance success. Public sector involvement is crucial in the design of integrated risk management strategies to prevent, reduce or remove the impact of failure and energise the private sector, particularly SMEs, through joint action programmes to realise external economies for needed spillovers to accomplish the requisite finest collective efficiency.

Restricted access to finance for businesses in Ghana is a consequence of a series of risk exposures, incoherent business linkages and market failures. Policy owners can play a more effective role in enhancing value chain access and performance by embracing a more integrated risk management approach to value chains. This will help businesses and policy innovators identify the various threats to which value chains are exposed, estimate the probability of occurrence and severity of such risks, and ensure effective prevention and mitigation actions through the use of a cost-effective combination of financial and nonfinancial (public and multilateral) instruments.

In effect, access to a value chain and its optimal business and financial access and performance are conditioned by a series of risks categorized as: Systemic; Weather; Biological, Locational Markets, Price Markets, Operational, Credit, and Liquidity Risks. These risks, variously interconnected, affect the different actors in a chain. This means that when a setback occurs at a point within a chain—a specific node or link—it can affect the entire chain, thus reducing the expected effects of independent actions of each enterprise, as well as the public programs that aim to improve business competitiveness, performance, and cost efficiency.

Once the main value chain actors, linkages and all data overlays have been properly diagnosed and mapped, the risk management process could then come in for a more operational buoyancy of the chains. The risk management steps will be discussed in more details in subsequent articles. The 7-step process involves Risk Communication and Consultation, Establishing the Risk Context, Risk Analysis, Value Chain Risk Evaluation, Risk Treatment, and Risk Monitoring and Review. The process must start small and developed with improved experience curve into stages of risk maturity management.

Designing a suitable and mature risk management strategy is essential for optimal VC performance. Optimisation should be sought throughout the chain – from the inception inputs points to the end markets. The resulting visibility of product trajectory combined with business feasibility pull banks and other financial services companies into the entire value stream. Optimal financing can then be utilised to mitigate the risks and other impediments that could potentially disrupt the value building process.

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For a typical value chain that sources inputs from Agricultural and Agropastoral covers, the sustenance and continuity of agricultural producers (or farmers) must connect positively to the uninterrupted liquidity flow from suppliers of fertilizers, pesticides and other agricultural production inputs. We hope Ghana has learned a lot from the recent invasion of army worms across the country. To prevent obstacles in input supply, it’s expedient to collate liquidity exposure data for risk visibility and design financial products such as factoring to fuel the inputs flow. Public sector, non financial solution may have to be complementary in filling up supply gaps. The non financial interventions must be more strategic in design to ensure businesses are not cut out of the inputs supply chain.

Agricultural producers (farmers) may be exposed to weather (rainfall, or temperature variability, floods or other extreme events) and biological risks (pests, diseases, contamination) as well as operational risks (production – low quality, improper storage and packing –, supply, farm management, agronomic). The best approach taken to manage these kinds of risks is to understand their impact on output using risk quantification, modelling and evaluation techniques. Financial and non-financial solutions (e.g. investments in irrigation, dams, and mechanisation) are then applied to reduce any potential downside. Supplementary public policy inputs should be structured to ensure adequate meteorological information, technical assistance and solution-centred extension services. When value chains are properly mapped and risk information becomes so clear with attendant mitigation strategies, the more feasible agricultural projects attract the requisite innovative financial packages with risk residue taken over by discerning insurance companies.

The real tangible value addition begins with the product transformation procedures at the processing stage but with several potential impediments. Risk exposures at this stage include credit risks (delayed payments or non-payments) and operational risks (mechanical, technical or process failures, forecasting errors, power failures, Idle capacity, communications, and transport, infrastructures, delays or failures in administrative procedures, quantity and/or quality issues).

The value chain node of product processing is also exposed to liquidity risks (financial health, long payment cycles and access to credit), spatial market risks (fluctuations in the levels of domestic and international prices for inputs and products, input availability, technological change, change in consumer preferences, availability of substitute products, and quality standards in the sector) and market price risks (changes in interest rates, changes in exchange rate, changes in international commodities prices such crude oil or metals). Complexities can easily arise out of the thin line relationship between credit risk and liquidity risk: lack of access to credit can affect the liquidity profile as well as the asset/liability matching of the processing company. The reverse is also true – illiquid companies can hardly convince suppliers of finance for credit. Understanding and enlisting these exposures for modelling can provide clarity on the obstacles that have to be mitigated or removed if possible. The much touted stimulus package in recent times must look beyond financing disparate companies in distress to ensuring the policy intervention energises an entire industry value chain.

In the context of the growing complexity and the risks involved in value chains, this article suggests a shift away from traditional programs that concentrate on lifting finance restrictions from a specific node in the chain to programs that aim to include access to finance using integrated risk management strategy. Access to finance is made more extendible across value chains if all chain actors are allowed the cherry pie of interconnected risk management solutions. Due to the diverse nature of risk and its prevention in agricultural value chains, business and policy programs should aim to achieve a more appurtenant design of interconnected risk management and nonfinancial instruments for optimal financing, overcoming the local, “one-size-fits-all” solution.

The writer is with Ghana National Chamber of Commerce and Industry (GNCCI)

 

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