Briefing | Agriculture gets a financial beating
There is an increasing need to invest in the agricultural industry due to changes in people's dietary preferences as they try to take a healthier approach to eating. Agricultural investment is also relevant due to rising local and global population rates. The Jamaican population has increased from 1.62 million people in 1962 to close to three million today. The population in the United States of America (USA), for example, has grown from 75 million in 1900 to 307 million people presently.
According to World Bank estimates, the demand for food will increase by 70 per cent by 2050, which will require at least US$80 billion worth of investment to meet the demand. Most of this is expected to be generated from the private sector, not the Government.
What has been the problem?
While agriculture productivity has been increasing in the USA and other developed countries, agriculture productivity has been declining in Jamaica due to lack of research, development and implementation of new techniques and strategies on a widespread basis. This, to some extent, has been due to lack of funding in some regard. The private sector, especially in developing countries, has been less than willing to lend to the productive sector, especially the farming sector, due to the high level of risk and uncertainty surrounding output crop yield and revenue generation.
Banks and financial institutions over the last two decade's have reduced the amount they lend for productive purposes gradually year to year and have increase the amount they lend for consumption purposes, mainly because the funds lent for consumption loans (car and mortgages) are backed by the person's salary. Meanwhile, the uncertainty surrounding doing business in Jamaica, especially farming, has prevented the industry from expanding and securing itself to be viable to consistently attract funding. According to the World Bank, the banking sector in developing countries has lent less to the agricultural sector than the agricultural sector's share of GDP.
What have been the major problems facing agriculture?
The unwillingness to lend to the agricultural sector has been due to lack of willingness rather than lack of availability of funds and liquidity in the banking sector. Moreover, when funds are made available to lend to the sector, it is done on an informal or short-term basis, which defeats the long term aim of increasing productivity gradually over time. Financial institutions do outline that they face three major challenges when attempting to invest in the agriculture industry:
1. They face a high transaction cost when they attempt to enter rural areas.
2. There is higher perception of non-payment of loans due to higher perception of risk including production, price and market risk. Production is normally hindered by both internal and external shocks. For example, in Jamaica, hurricane has been the major external shock over a number of years, even though Jamaica has not seen a major hurricane within recent times. More recently, Jamaican agriculture has been impacted negatively by internal shocks; namely, fire has damaged output from the coffee industry over the last two years and drought in rural areas reduced the farming shares of GDP in 2014 and 2015.
3. According to the World Bank, financial institutions lack knowledge of how to manage these agriculture-specific risks, transaction cost, and how to market financial services to agricultural clients.
What role has the government played?
The World Bank has found evidence which indicate that government policies to help the industry always prove to be inefficient and ineffective at achieving increase productivity in agriculture. These government policies have in most instance have impeded financing to the agricultural sector rather than increasing them.
How should agriculture be financed?
The small farmer and their financial needs should be clearly separated and identified. Different small farmers have different needs. It is important to identify each small farmer's needs and the role they play in the larger farming puzzle. This way they can receive the tailored help necessary to move them and the industry collectively forward.
We must find ways to de-risk agriculture, by addressing both the risks faced by individual farmer and risk to different sub-industries. Identify appropriate institutions and delivery channels that would rescue the cost to service agriculture clients. More recently, farmers and agro processors have complained about commercial bank being an intermediary to the government banks for lending to the productive sector. The interest rates they receive, though they have been reducing, remain higher than expected due to the middleman's markup. Also, the high level of bureaucracy associated with accessing these finances since very cumbersome and acts more like a deterrent rather than a motivation.