Risk management strategies for financing the agricultural value chain Johannesburg 1 st -3 rd April 09

1. Risk management strategies for financing the agricultural value chainJohannesburg1st -3rd April 09 Presentation By Subhash C Jindal Vice President – BASIX Group

2. Financiers have a risk-return trade-offIf risk is mitigated, more funds would flow to agriculture Income (Imax, Rmax) (Imin, 0) Risk

3. Type of risks in Agri Value Chain • The types of risks faced are: • Yield Risk – short-term (e.g. weather) and long-term (due to climate change) • Price Risk – short-term (intra-season fluctuations) and long-term (due to severe swings in commodity prices) • Yield risk in the short-run can be managed through physical methods such as protective irrigation & GAP, as well as through insurance. • Long term yield risk due to climate change can be mitigated by steps like afforestation, financed by carbon credits, or it can be insured through catastrophic bonds.

4. Type of risks in Agri Value Chain • Price risk in the short-run can be managed through • support price mechanisms as well as through • Fair market mechanisms • commodity derivatives (futures/options) • Long run swings in commodity prices require shifts in the production structure of the economy which only governments can pay for.

5. Risks faced at different stages of agri value chain • Pre Germination stage • Crop growth stage • Selling raw produce • Processing • Reaching to consumer

6. Pre Germination stage (1/2)

7. Pre Germination stage (2/2)

8. Crop growth stage

9. Selling stage

10. Reaching to consumer stage

11. BASIX Strategy – The Livelihood Triad • Organize • Functional Linkages • Formalize : the legal status • Enabling systems: operations,HR & MIS-IT • Revive : defunct community organizations IDS LFS Ag/BDS • Productivity enhancement • Risk mitigation (non-insurance) • Local value addition • Alternate Market Linkages - Input supply, output sales • Savings, Credit (short-term as well as long-term) • Insurance, for lives and livelihoods • Fund transfers • Commodity derivatives

12. By organising farmers into groups/cooperatives, IDS reduces price risk on both input and output side by increasing their bargaining power. Aggregation also enables participation in commodity derivative exchanges. Mutual learning takes place IDS LFS Ag/BDS • By offering risk mitigation advice through proper agronomic practices like deep ploughing, timely sowing, selection of right varieties, pest control etc. and vaccination of livestock , instant solution through FCC ( SBI and AXIS bank have asked us to provide) • By offering insurance, for lives and livelihoods and by offering credit so that farmers can invest in risk mitigation measures like irrigation and financing livestock insurance How does the Livelihood Triad mitigate risk?

13. Our Partners in Insurance • Life Insurance • -AVIVA • Health Insurance, Livestock Insurance & Micro-Enterprise Insurance • -Royal Sundaram • Rainfall Insurance- • ICICI Lombard BASIX Equity for Equity

14. BASIX lessons in micro insurance • Micro-insurance is a must along with microcredit, for ensuring that the poor do not get into a debt trap after they take a loan and suffer an adverse event. • In the long run, the crop insurance program should switch from crop-cutting based yield determination to satellite imagery based yield determination or to a weather index or a combination of these two methods. • Mutual insurance to play larger role, with adequate reinsurance cover against large covariant risks of farmer households

15. Our Pilot in Commodity Price Risk Mitigation Warehousing - NCMSL – National Collateral Management Systems Ltd • Trading platforms • National Commodity and Derivatives Exchange (NCDEX) • Multi commodity Exchange (MCX) • Safal National Exchange (SNX) Aggregator - Koutla B Farmers’ Cooperative BASIX Equity for Equity

16. BASIX lessons in commodity derivatives • Farmers prefers options to pure futures. They are willing to pay a fee for having the choice to get a better price, while locking in the floor price (a typical option contract). • Most farmers in India are too small to directly get into contracts or trade on exchanges, so they need aggregators, of which cooperatives are a good example. • Another infrastructure that is needed is a network of warehouses with assaying agents, offering negotiable warehouse receipts, which can be traded on exchanges.

17. Successful & scalable experiences of BASIX • Weather insurance • Live stock insurance on fast track • Health Insurance for Rural Poor • Rural BPO to speed up services • Farmer Call Center for instant advisory • Price Options services to farmer • Access to distant buyers through CEx • Ware House Receipt prod to small farmers • Value Chain facilitation at each linkages • Centers for AI + Vet care + Insurance on sustainable mode

18. New methods for risk mitigation To meet new challenges like climate change there are new methods: • Carbon Finance • Catastrophic Bonds • BASIX has attempted to aggregate micro certified emission reductions (AMCERs) though group company CTRAN • Major swings in commodity prices can only be handled by governments through financing long-term changes in the production structure of the economy.

19. Conclusion • If farmers are offered all these methods of risk mitigation, then the “perceived risk” in financing agricultural value chains will come down • This will lead to an enhancement of financing by private sector, which is much more efficient than old style government financing (which have to waived) or persistent subsidies

20. Thank You scjindal@basixindia.com