As the world turns to Africa to contribute to global food security, there is need to have an ample knowledge about value chains especially with respect to value chain finance instruments.
Many diverse and innovative financial instruments may be applied or adapted to fit the specific financial needs, and the commodities and cash flow projections can be used as to secure financing and reduce risk.
Value Chain Finance Instruments Include:
Product financing is a tool which targets how the farmers receive benefits either in cash or kind from traders, marketing companies, financial institutions in order to promote agricultural productions. This is the most frequently used of the value chain financing instruments. In Nigeria, Farmcrowdy used this technique to raise $1M to help bring Nigerian farmers to a broader market.
Receivables financing is a value chain tool which tries to reduce common financial risks by monitoring a value chain actors' history of payment and purchase, bill collection services so as to improve the cash flows in a value chain cycle. ECOWAS developed the Regional Agency for Agriculture and Food (RAAF) Agency so as to carry out effective monitoring and evaluation activities as regarding the agricultural sector of West Africa so as to know finances placed into agriculture are managed.
Physical asset collateralization - Enables value chain actors to receive receipts that enables them opportunity to access agricultural outputs at cheaper prices, or the chance to retain the goods until when convenient to pay back.The African Rural and Agricultural Credit Association (AFRACA) organizes yearly programs in Sub Saharan Africa to help rural farmers with agriculture credits, finance and outputs. This has therefore helped farmers gain access to more finance and agricultural inputs.
Risk Mitigation makes it possible for the farmer to get back to their feet in the case of disaster through farmer's insurance policies and forward contracts. The Nippon Foundation used this approach first in Ethiopia in the year 1984 to help farmers come out stronger from the famine that occurred that year. As a result of the success achieved, other agricultural disaster reliefs was birthed from this initiative, an example is the Sasakawa Africa Association. Farmers in Ethiopia have been able to attain great food production yearly, despite the current famine that is experienced in the country.
Structured enhancements This is a tool which helps value chain actors re-brand their products to make it sell-able to investors. It also gives the value chain actors opportunities to joint venture finance and loan guarantees. The Agriculture Productivity and Market Enhancement Project (APMEP), a project developed by the Africa development bank group currently ongoing in Zambia is developing structures to help make farmers reach international standards by enhancing irrigation networks, proper drainage and better road networks.
This approach has also helped countries like Nigeria meet international standards and make large productions of agricultural product such as rice and cassava to feed its population, an example is the FADAMA projects Nigeria.