This CASA Breakthrough Webinar built on the recent publication by the CASA Technical Assistance Facility which maps the landscape of investment in smallholder sourcing models. It set out the current percentage of funding allocated, by investors, to smallholder sourcing. It explored the perspectives of investors on the commercial viability and development impact of these sourcing models. It also shared case studies that show what investors have been able to achieve.
- Alice Chapple CASA (moderator)
- Melanie Machingawuta from the CASA Technical Assistance Facility (managed by TechnoServe) presented the five key takeaways for investors to deliver profitable and impactful investments based on the recent publication: Sourcing from smallholders: complex challenge or commercial opportunity? Perspectives from investors and agribusinesses.
- Marcel Neutel, from Capital 4 Development Partners (C4D)
Marcel explained the opportunities for investors from sourcing from small-scale farmers. He shared some of the constraints that CDC has faced & how this experience influenced their investment strategy. - Edward Stiles from Maris Ltd
Edwards explored the incentives that are required to drive investment in more smallholder sourcing businesses and the tools that are needed to support this approach. - Cara Middleton from the IDH Farmfit Fund
Cara set out the levers can drive commercial viability and impact. She also explained how is Farmfit is structured to address the constraints often experienced in sourcing from small-scale producers. These including upfront analysis and the use of blended finance.
- This study seeks to add to the body of knowledge on the commercial and development impact potential of smallholder-sourcing agribusiness models by: quantifying the share of investment flowing specifically to agribusinesses sourcing from smallholder farmers within the broader category of agriculture; and capturing investor perspectives on the commercial viability and development impact of companies that source from smallholder farmers.
- Based on the findings, five specific opportunities are identified for investors, agribusinesses and development partners to support investment in smallholder-sourcing models.
- It is suggested that unlocking the opportunities of smallholder sourcing requires acknowledging and addressing the constraints in investing in smallholder-sourcing agribusinesses and the challenges in sourcing from smallholders.
Five opportunities for investors
- Investors should map the investment gap through systematic classification and tracking of smallholder-sourcing agribusinesses to provide greater clarity on this ‘asset class’. This can improve guidelines on the blend of capital and Technical Assistance (TA) required to boost effectiveness.
- Agribusinesses should invest in thorough upfront analyses, including supply chain, context and end-market analysis, before implementing a smallholder sourcing model. In-depth analyses (ideally pre-investment or early investment stage) can help manage the complexities of sourcing models, pinpoint where private capital should be deployed when commercial gains are evident and target public funding where it is needed. Existing examples of this type of analysis include TechnoServe’s Inclusive Business Plans which are carried out prior to advising on and implementing TA and IDH’s work on Service Delivery Models.
- There is a continued role and need for partnerships between investors, donors and agribusinesses to support provision of critical upstream support services to smallholder suppliers, where inclusive TA has the potential to sustainably improve smallholder sourcing operations and de-risk investments. Investors need a critical mass of profitable, inclusive sourcing examples to ensure that there exists a path to scale and exit. Similarly, public funders want to see evidence of meaningful development impact to support further funding of private sector initiatives. Routine TA provision and impact monitoring can help to build the pipeline of scalable smallholder sourcing businesses.
- Investors should consider establishing agricultural investment vehicles with longer investment horizons than the typical Venture Capital or Private Equity timeframes. An example of such a structure is a Permanent Capital Vehicle (PCV) which has no set time for exiting an investment. PCVs provide the time and flexibility for investments to generate returns at their own rate which can be an agronomic necessity.
- Agribusinesses and investors should leverage monitoring and impact measurement to improve business operations and integrate impact data into existing management systems. Impact measurement can assist in streamlining processes and leveraging digital technologies can enable data-driven decision making. This type of monitoring can also direct TA efforts and inform the set-up of future smallholder sourcing schemes.
Shared resources during the webinar:
This is the third article in a four-part series from Aceli Africa, exploring challenges and solutions in agricultural investing in Africa. Part one of the series highlighted the disconnect between the unattractive lending economics and the need for private investment to achieve development goals in African agriculture. Part two focused on how blended finance approaches that are data-driven, impact-linked and marketplace-level could bridge this gap. The article below shares perspectives from lenders in the region and unpacks Aceli’s data findings, particularly those that illustrate the under-recognized role of high transaction costs in limiting capital flows for African agricultural small and medium enterprises (SMEs).
Aceli Africa partnered with Dalberg Advisors to analyze loan-level data from 31 lenders and 9,104 loans to agri-SMEs totaling $3.7 billion. The key findings explain the persistent financing gap for agri-SMEs in Africa:
- Risk in agri-SME lending is at least twice as high as risk in other sectors served by the same lenders in Africa; it is also twice as high for lending to agri-SMEs in Africa as in Latin America. • Returns in agri-SME lending are on average 4-5% lower than returns in other sectors in East Africa.
- High operating costs and low returns of serving agri-SMEs are as significant a driver of sub-par lending economics as risk (i.e., credit guarantees that only address risk are not sufficient).
Service Delivery Model (SDM) CASE STUDY
A joint research series by the Mastercard Foundation Rural and Agricultural Finance Learning Lab and IDH Sustainable Trade leverages; the Service Delivery Model (SDM) Case Study series leverages IDH's research methodology to assess the business model sustainability of financial service providers serving smallholder farmers.
Related:
Watch the April webinar on-line or download the 1-page summary and learn how to explore the reality on the ground after a year of COVID-19.
Watch the April webinar on-line or download the 1-page summary and learn how to explore the reality on the ground after a year of COVID-19.
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