Problem: The current problems associated with the agricultural
industry in emerging economies are multi-faceted; however, key problems
can be grouped into the following:
- Agricultural Sustainability (crop yield, environmental damage,
mismanagement)
- Agricultural Finance (banking, insurance, agricultural commodities)
- Agriculture Management (value chain, adulteration)
- Agricultural Trends (organic food, consumer demand)
- Agricultural Trade (global trade, transportation, food pricing)
- Agricultural Security (food security, growing population, lack of
land)
- Agricultural Livelihood (rural lifestyle vs urban lifestyle)
Examining these issues from the perspective of emerging economies
provides a better understanding of the problems at hand.
Agricultural Sustainability: Contemporary agriculture has been
characterized by increasing crop yield through the utilization of
synthetic fertilizers and pesticides. However, this process has damaged
the soil and natural ecosystem, thus hindering the long-term development
of crops. Today, as the agricultural industry moves towards a more
sustainable crop production model, it is critical for farmers to possess
data, information, and recurring feedback on their assets. In most
emerging economies, farmers are ill-equipped with any such resources due
to lack of infrastructure, cost of information and updates, and little
access to knowledge.
The environment plays another critical role in the agriculture of
emerging economies. Drought, natural disasters, and pollution are some
of the major problems associated with asset maintenance. Battling the
environment requires proper management, as well as knowledge of both pre
and post-disaster strategic crop cultivation. Furthermore, environmental
issues have led to increased problems in both food security and exports
for emerging economies.
Management of the agricultural sector can be underlined as one of the
major problems in emerging economies. In many developing nations, the
inability to utilize existing resources and provide enough
knowledge/tools to farmers leaves them susceptible to sustainability
issues and causes them to suffer production and output shortages.
Furthermore, some developing nations lack resources such as
infrastructure, qualified teams, and equipment to support their farmers
altogether.
Agricultural Finance: Most emerging countries are unable to cover
the agricultural sector with traditional financial services. Unlike in
developed countries, where systems, such as the Farm Credit System
(FCS), enable agricultural financial
services, similar specialized agricultural banking, insurance, and
equipment lending services are relatively new or non-existent here.
4 This
lacking is largely due to the risk associated with lending without
proper data, models, or gauging methodologies to track farmers’
progress. Most agricultural lands in emerging economies are located in
rural areas, which lack the mainstream infrastructure to facilitate
growth or monitoring mechanisms. Corruption, nepotism, extortion, and
transportation add to the complexities of enabling agricultural
financial services in emerging economies. Critical risk factors related
to lending in the agricultural industry include:
- Credit risk: Banks financing agricultural operations and capital
investments assume the risk associated with the borrower’s (i.e.
farmers) ability to successfully deliver products to market. Prolonged
adverse market conditions can increase borrower defaults and
significantly impair collateral value, negatively affecting a bank’s
ability to withstand a sustained market downturn. The borrower’s
repayment capacities are also vulnerable to risks, many of which are
outside the borrower’s control, including adverse weather conditions,
commodity price volatility, diseases, land values, production costs,
changing government regulations and subsidy programs, changing tax
treatment, technological changes, labor market shortages, and changes
in consumer preferences.
- Interest rate risk: Most agricultural operating lines that banks
finance are either short-term or variable rate loans, resulting in
lower interest rate risk. A bank that provides fixed-rate financing
for an extended term (e.g. on farmlands) exposes itself to an interest
rate risk where shorter-term liabilities fund the long term loans. For
example, to mitigate interest rate risk in real estate, banks may
underwrite long-term loans with a three to five-year balloon payment
to provide the opportunity for repricing the loans at maturity.
Additionally, the bank may have an increased credit risk exposure in a
rising rate environment as agricultural borrower’s repayment ability
is reduced by higher borrowing costs.
- Liquidity risk: Agricultural lending can result in higher liquidity
risk for banks, especially banks with large agricultural credit
concentrations. For example, if crop losses or unfavorable market
conditions result in loan payment deferrals, the bank’s liquidity
could be strained. In addition, discontinued farm operations and
migration to urban areas can cause declining deposits, creating
long-term liquidity pressure.
- Operational risk: There is extensive documentation, inspection,
control, and monitoring associated with agricultural lending. Failure
to perform these administrative functions can lead to loan collection
problems. In addition, improper controls can unnecessarily expose
banks to losses and increased operational risk, particularly if loan
collateral is sold out of trust. Failure to properly document a loan
supported by a government guarantee can result in the bank’s inability
to collect on the guarantee if needed. This is most often the result
of lender complacence or inappropriate assumptions about a borrower or
collateral. Furthermore, lien perfection requirements for agricultural
collateral can vary depending on property type and legal requirements
in different areas. If liens are not properly perfected, banks may not
be protected by collateral when liquidation, repossession, or
foreclosure becomes necessary. Evidence of collateral lien perfection
and timely collateral inspections should be documented in the loan
file.
- Price risk: For agricultural loans secured by real estate, price risk
can occur upon a bank’s foreclosure or physical possession of a
property, whereby the loan is transferred into other real estate owned
(OREO).5
During the holding period, OREO must be carried at the lower cost or
fair value (less estimated costs to sell). A decline in real estate
prices can reduce the number of proceeds realized upon the property’s
disposal.
- Compliance risk: Compared with consumer transactions, there are few
borrower-focused rules regulating agricultural financing. In developed
markets such as the United States, agricultural lending is subject to
the Equal Credit Opportunity Act (Regulation B) (12 CFR 1002).6
Even then it may be subject to zoning, environmental protection, and
other government regulations if real estate serves as collateral.
Failure to comply with regulatory requirements can expose the lender
leadership to liability and jeopardize ultimate repayment, resulting
in supervisory actions and/or significant losses.
- Strategic risk: A sound agricultural lending program should include
risk management systems to identify, measure, monitor, and control the
bank’s risks. The bank should also have staff with requisite knowledge
and expertise to manage the bank’s unique agricultural risks. Prudent
agricultural lending requires specialized expertise. Failure to
provide effective oversight of agricultural activities can increase
the bank’s strategic risk profile while also negatively affecting
interrelated risk in areas such as credit and reputation.
- Reputation risk: Banks with lending activities in certain agricultural
enterprises can face reputation risk. For example, a bank may finance
operations that generate large amounts of animal waste that could
potentially contaminate water sources or cause other ecosystem damage.
Public perception and potential litigation may cast the bank as being
responsible for environmental cleanup, the costs of which may exceed
the amount of the original loan. In addition, a bank can damage its
reputation by reducing the availability of its farm credit or
foreclosing on farm collateral. Many agricultural lenders do business
in small, rural communities where constructively working with
borrowers often benefits both parties. Lending decisions that are not
publicly perceived as favorable to the community may have a
significant effect on the bank’s agricultural lending activities. For
example, if the bank forecloses on a family farm owned for
generations, the community may negatively view the bank’s foreclosure
action, even if the action was a prudent business decision.
These risks, along with several other factors, make it increasingly
difficult for banks to perform operations in the agricultural industry
of emerging markets. Governance, rural communities, and smallholdings
add to the complexities of banking operations, as do insurance and
equipment lending. Thus, a significant amount of risk assessment and
management is necessary to execute financial operations in the
agricultural industries of developing nations, and without adequate
manpower, forecasting, and risk management, it is difficult to deploy
such services. Although some emerging economies have introduced a
micro-finance scheme that enables them to provide a certain amount of
facilities to farmers; the operational costs and size of lending figures
cannot be maintained or scaled to tackle the next ten years of global
agricultural and food security needs.
Agriculture Management: There are multiple problems pertaining to
the successful management and distribution of agricultural products in
emerging economies. Value chain, which is defined as the cost of food
processing, distribution, and agricultural marketing, is at a
significant disadvantage due to poor resource quality, corruption,
extortion, pilferage, and lack of adequate storage spaces. These
problems hinder product management and encourage product adulteration to
increase shelf life and cover target production volumes. Emerging
economies are unprepared to tackle problems stemming from the
grass-roots level and causing the final costs of agricultural products
to rise for consumers without directly attributing to farmers’ revenue.
With increased monitoring, compliance, infrastructure, and skilled
manpower, developing nations can work to potentially reduce
approximately 60% of final goods value that is spent on the value
chain. This is not an easy feat to achieve, as most emerging economies
have major constraints in place.
Agricultural Trends: As consumers across the world become
increasingly aware of the quality of food they eat, the type of high
yielding agricultural products produced in emerging economies faces a
massive threat. Over the course of time, fertilizers and
post-industrialization methodologies have created an adverse effect on
the soil along with the knowledge of how to produce food organically.
The new health trend caused many farmers to focus on organic production,
which resulted in lower yield and global food insecurity due to farmers’
inability to satisfy demand. New methods such as genetic modification,
agricultural phonics, and organic farming schemes are both costly and
require new knowledge insertions.
Agricultural Trade: Global trade wars and changes to import laws
along with new tariffs have created new complexities for agricultural
exports from emerging economies, while exchange rates and subsidy
policies have negatively affected farmers in both the developing and
developed world. To make matters worse, new compliance laws related to
agricultural products do not allow most emerging economies to tackle
these changes with a holistic approach. Infrastructure remains a major
problem for the transportation and shipment of agricultural products,
and volatility within the food market adds to the list of problems the
industry faces in emerging economies. As the global population increases
in both size and personalized trends, most farmers are not able to
deploy production on demand. Meeting consumer demands for decades to
come will require increasing market trend knowledge, faster production
capacities, and the ability for producers to reach end consumers.
Instability and corruption within local governments can also have a
major impact on agricultural trade in emerging economies. Examples
include government officials requiring bribes prior to conducting
business, or even the threatening of smallholding owners whose trading
is seen as disrespectful. The financial burden of continuous bribes can
dissuade potential business from being conducted, thus hindering
stimulation of the economy. Furthermore, many people in emerging
economies still place great value on traditional beliefs such as holding
family above everything. Without means of protecting themselves or
relocating, a smallholding owner would most likely refrain from
conducting business rather than bring potential harm to their family,
thus also hindering economic and personal growth. Finally, most emerging
economy smallholding owners lack an education, with many of them being
illiterate and lacking trade-knowledge, thus significantly limiting
their options by making it difficult to properly handle complex trade
deals.
Agricultural Security: Smallholdings agriculture is thought to be
the solution to the global food security crisis. A smallholding is a
small farm owned by one or several farmers in a developing country. As a
country becomes more affluent, smallholdings may cease being
self-sufficient for reasons such as rising costs, distribution
capabilities, and production requirements. While a large portion of
smallholdings exists in emerging economies, food security requires the
ability to produce agricultural products in a timely and effective
manner, which in turn requires these farmers to be equipped with the
knowledge, machinery, etc. In the past decade, the global demand for
food has almost doubled due to population growth, which has not only
caused a decrease in farms, but also pollution that has affected large
areas of previously arable land. Most emerging economies are unable to
tackle these problems and will require significant amounts of planning,
data, and effective production schemes before any progress is made.
Agricultural Livelihood: Due to changes in the economic outlook
of emerging economies, a large number of farmers are moving towards the
service sectors. This is primarily because of better economic
opportunities and institutionalized education. Most rural populations
downplay the role of an agricultural producer in favor of service sector
incentives and an urban lifestyle. This move is further threatening the
agricultural sector in emerging economies. Unless similar economic
opportunities are created where farmers are rightfully credited for
their productions, the world will face agricultural manpower shortages
in the following decades. Most emerging economies or even developed
economies are not prepared to tackle this massive loss of manpower or
facilitate employment to over one billion people.
7
Therefore, to address this problem requires substantial planning, new
market opportunities in agricultural sectors, and equal opportunities
and incentives compared to service sectors.
The following graphs depict the change in rural populations and
agricultural labor forces in developing regions:
Agricultural
labor force and rural population by continent, 1960-2005 – World
Development Report (2008).8