The transition to regenerative models in agriculture such as agroecology requires a specific approach in financing. In this context, one of the possible solutions to foster the transition is to establish a specialized institution which would respond to the particular needs of the stakeholders who are already engaged or willing to engage in agroecology.
Researchers and practitioners agree on the fact that access to finance for more sustainable systems such as agroecology represents a serious obstacle in the farming sector in both developing and developed countries. The report, A Matter of Scale (AMOS), indicates several barriers to productivity directly linked with the access to finance – investment in training, in infrastructure and equipment and technology suitable for small scale farmers as well as access to land.
In the recent event Farming Smarter: Investing in our future, the Food, Farming and Countryside Commission (FFCC), a London-based non-profit, launched its new report urging the UK government to establish such an institution which could be an important step in fostering access to finance. According to Farming the Future, a collaborative and systemic philanthropic grant-pool:
“The UK is greatly in need of financial opportunities that drive investment from banks, institutions, foundations, and individuals to the transition to a regenerative food system.”
FCC report Farming Smarter: Investing in our future recommends the establishment of a new financial institution, the Agroecology Development Bank, “which would have a research and leadership role to develop the agroecology sector” by first of all helping to overcome the constraints experienced by the finance sector, in particular by assisting banks to release the necessary capital for transformation, and secondly by providing “the right kind of private finance available at the pace and scale required”.
Based on data available from 18 agriculture development banks in 15 different countries, the authors of the report conclude that the assets under the management of the proposed bank for the UK population could range between £3.34bn and £9.94bn, suggesting that a relatively small amount of initial public capital (£1bn) could be transformed by the institution into a significant source of long-term finance with a balance sheet of approximately £6bn. Capitalising would need to be completed with the initial start-up costs with a lower bound estimate of £11 million.
The current barriers
Financials experts note several barriers faced by farmers when setting up or transitioning to agroecology and the investment risks involved for financial institutions and lenders related to these. Among the barriers are the lack of security for loans, smaller farms “for which transaction costs of lending are proportionately larger relative to loan size”, new entrants without a sufficient financial and management track record, and unfamiliarity with the new agroecological business model. Tony Greenham, Executive Director of South West Mutual, a co-operative aiming to obtain a banking licence, says that all these are related to the way that the finance sector and namely the banks (the predominant form of finance in agriculture) are structured.
In his speech, Ian Cheshire, the former Non-Executive Chair of Barclays UK, reinforced some of the abovementioned constraints emphasizing that the challenges the mainstream banks face revolve around investment risks, respective regulation, and the newness of the potential incomes that the diversified agroecological model comes with.
“We are really encouraged to see things are helmed, potentially start to deliver income streams of farmers in a way that wasn’t possible under the CAP [Common Agricultural Policy]”, he said.
Accessing appropriate finance
By borrowing from other banks and finance institutions, the Agroecology Development Bank would offer a different set of products appropriately designed and priced to “fit the needs of a business transitioning to agroecology”. These would include grants, equity/quasi-equity, soft loans, and commercial bank loans as well as insurance and other risk mitigation products. For this purpose, the authors note that:
It will be important to work down the supply chain to ensure rising demand for the output from agroecology businesses from consumers, retail business, food service, and especially public procurement.
Furthermore, the overall success of agroecology entrepreneurs would also depend on access to finance and high quality and comprehensive business advice, agronomy consulting, skills, and mentoring.
According to the report, one of the key design features of the future bank would need to be “the breadth of expertise and capacities contained within staff” which means the recruitment of experts in farming, researchers, and so forth “to ensure that they are able to offer a more complete package of help”.
A cascade reaction
The report states that the establishment of such a development bank has the potential to initiate a cascade reaction not only down the supply chain but also among the investors thus creating a common vision for the transformation of food systems. The authors claim that, rather than promoting “growth” and “market fixing”, due to significant in-house engineering and broad scientific knowledge, the institution would enable investment decisions to be based on the criteria of comprehensive socio-economic and environmental impacts instead of “relying on market signals alone”. Their belief is that the example in its turn could act
‘as a powerful way to crowd-in private investment, as development bank approval acts as a hallmark of quality which gives private sector actors the confidence they need to invest’.
Whereas the establishment of such a bank raises a series of questions such as the ownership of the bank and its governance, it may represent an opportunity to counteract the fact that the lion’s share of subsidies and funding continues to be channelled into conventional farming thereby marginalising small scale farmers and agroecology.
See also: Indebtedness and dependency: the untold story of the Green Revolution
