The need for investing in agriculture is increasing due to a rising global population and changing dietary preferences of the growing middle class in emerging markets toward higher value foods (e.g. dairy, meats, fish, fruits, vegetables, etc.).
According to estimates, demand for food will increase by 70% by 2050, and at least $80 billion annually in investments will be needed to meet this demand, most of which is expected to come from the private sector.
Banking sectors in developing countries lend a much smaller share of their loan portfolios to agriculture compared to agriculture’s share of GDP. This limits investment in agriculture by both farmers and agro-enterprises. It also demonstrates that the barrier to lending isn’t due to a lack of liquidity in the banking sectors, but rather a lack of willingness to expand lending to agriculture.
Even when available, much of the agriculture funding tends to be informal and short-term, precluding longer-term investments. This informal funding only partially covers the financial needs of farmers and small agribusinesses, and usually at a high cost.
The challenges financial institutions face when offering financial products to agriculture are threefold:
- The transaction costs of reaching remote rural populations
- Higher perceptions of non-repayment due to sector-specific risks, such as production, price and market risks
- Financial institutions’ lack of knowledge in how to manage transaction costs, agriculture-specific risks and how to market financial services to an agricultural clients
- Longer-term agricultural Investment is needed for longer-term investments such as better storage facilities, food/commodity processing facilities and equipment/mechanization.
- Investment in agriculture-related infrastructuresuch as rural roads, port facilities, loading terminals, etc., is needed in most of the poorest countries. Currently, transportation costs are often too high, particularly for landlocked areas where moving food in and out becomes almost impossible because of poor logistics and high costs.
- Advancements in technologycould also lead lowering the cost of financial services to agricultural clients. Solutions involving information and communication technologies (ICT) could provide a key in reducing the costs of frequent small transactions by disperse populations in rural areas. The use of mobile phones, electronic payment platforms, mobile agents, etc. hold quite a promise and we are seeing an increase in such applications.