Farmers are Bankers in Brazil
Argentina, Uruguay and Panama have the only agriculture-friendly banks of the region
Want a financial surprise? In Dominica farmers have to be their own bankers. They have to find financing for the whole process, from sowing to selling their crops. Banks have only 0.8 percent of their total loan portfolio in the agriculture sector, on an island that generates a sizeable 13 percent of its GDP in agriculture.
Not surprised? Perhaps you might be if you find that farmers in agriculture giant Brazil have the same problem of banks turning their backs on them. The country has the same 0.8 percent ratio of credits in agriculture to total bank loans, in an economy that is the second biggest grain producer in the world, and the largest producer of sugarcane, coffee, orange juice, the list goes on.
Even if there were problems with these statistics (see chart below, click for full size) the fact is that in most countries credit seems to be a scarce resource in their agricultural production function.
Access to financing is crucial for farming, precisely because of the time lag between reaping and sowing. When formal credit is not available, farmers have to rely on informal lenders who charge high-interest rates, sometimes hidden behind large, in-kind payments. In turn, high lending costs impair investment and productivity, said Sangita Dubey, Senior Statistician at the Statistics Directorate of FAO in Rome.
A Pervasive Problem
Latin Trade was the first publication to have access to the latest results of the Agricultural Orientation Index (AOI,) for Latin America (). The AOI is an experimental series put out annually by the UN’s Food and Agriculture Organization, FAO. The index shows the relative importance of credit to agriculture, and it’s the result of dividing the share of credit to the agricultural sector as a total of commercial credit by the country’s agriculture share on GDP.
“An AOI less than 1 indicates that the agriculture sector receives a credit share less than its economic contribution, while an AOI of greater than 1 indicates a credit share greater than its economic contribution,” FAO explains.
From the chart it’s clear that banks in the majority of Latin American and the Caribbean countries participate less than they should in agricultural financing. There are exceptions in Peru, Dominican Republic, and Bolivia, and more significantly in Panama, Argentina and Uruguay. In fact, these two Southern Cone countries stand out because they have reached First-World AOIs.
In 2013, the world average for the AOI was 0.65. In 2014 (the data just released) Latin American countries averaged 0.58, which is probably still around 10 percent below world standards.
Is it desirable to have a greater index value? For many countries the answer would be yes. High AOI seems to be an attribute of development: Germany (4.6), Belgium (4.4), New Zealand (4.0), France (3.5), and Australia (3.5). These countries are the leaders of the AOI world ranking, and the value of their indexes is between six and eight-fold that of the Latin American average.
Agriculture is a risky activity, but bankers, as professional risk managers, should pool, diversify and manage risk better than small farmers.
Besides, banks have a profitable opportunity if they find a reasonable way to deepen their presence in this market. Just to take the region’s AOI to the world average (0.65) would require an additional $7 billion in loans. Banks would have to increase their portfolio to include agriculture, fisheries and forestry to $57 billion, from the current $50.6 billion.
All About Collaterals
High indexes are often associated with large-scale commercial farming, Sangita Dubey said. Bigger estates are easily offered and accepted as collaterals, which is not the case with small land holdings. Abundant bank financing of agriculture is also related to financial sector development, and to specific policies such as farm subsidies.
Being in isolated areas and lacking collaterals seem to be the main obstacles for farmers to access bank credit in Dominica, technical officer at the Ministry of Agriculture and Fisheries, Winston Magloire, told Latin Trade.
However, lack of understanding cash flows and of a dose of financial creativity on the part of banks, might just be the core of the problem of having a constellation of inefficient farmer-bankers in the region.
Written by: Latin Trade