“Whoso hearkeneth unto me shall dwell securely, and shall be quiet without fear of evil.” – Proverbs 1:33.
Last week I participated in a very interesting regional meeting of the minds in Trinidad, the specific objective of which was to craft a solution to the problem of successfully matching existing and augmented services from traditional financial institutions to meet agribusiness value chain financial needs.
The development of the agricultural sector is important in at least four ways: (1) mobilizing arable land (a national asset) which is currently lying fallow; (2) providing food security for the people in the Caribbean (our most important resource) and our visitors (a very important industry); (3) contributing efficiently and effectively to the reduction of the food import bill (saving foreign exchange); and (4) contributing to the diversification of the region’s export economies (earning foreign exchange).
In this fourth context, we believe that the Caribbean can inspire the world using the food business as an example. In the same way we use nautical maps to discover new destinations, we want to reach new global food experience horizons for the Caribbean.
The food value chain concept refers to the coordination of the sequence of activities necessary for an agribusiness product to move from its source to the final consumer.
These activities range from the identification of prospective customers, and determining consumer wants, to receiving full payment from the customer for the shipment of good/services and include: the receipt of a customer’s order, production planning, land preparation, acquisition of inputs, husbandry, harvesting, grading, processing, packaging, storage, transportation, shipment and merchandising.
A range of goods and services are necessary, in support of this chain, for the successful growth in trade. These include access to land and equipment, incentives, agricultural information, training, input suppliers, technical assistance, research and extension, risk mitigation through shepherding (value chain coordination, positive mind-set change and business mentoring) and finance.
One of the challenges for agribusiness practitioners is access to funds at each stage of the value chain. Very often, potentially very good ideas and innovations are proposed, but unless the businesses are “investor ready” financial institutions are reluctant to fund agribusiness development because of the high risk which may be involved. Investor readiness implies that systems are already in place, directly or indirectly, to effectively manage the risk.
I include “indirectly” because represented at last week’s meeting was a Canadian organization Finance Alliance for Sustainable Trade – (FAST) which may be described as a “broker” providing a service between the agribusiness value chain financial needs and the traditional financial institutions.
To quote them: “FAST works with our member network to scale up the quality and availability of SME finance and close the ‘financing gap’. That’s one solid step closer to bringing quality sustainable products to market and growing the global economy.”
In an agribusiness setting the risks are many and may be delineated by business systems.
(1) Corporate governance risk – little or no focus on management meeting culture to structure the foundation of the business; failure to observe legal and environmental laws, reflecting society’s priorities or industry mandates; and deleterious impact on the natural resource base.
(2) Financial Investment risk – little or no focus on credit rating culture; and low equity input by the entrepreneur in the business.
(3) Marketing risk – little or no focus on customer centric culture; no proactive aggressive market led sales and distribution strategy; unrealistic sales projections especially for start-ups, re-births, spin-offs and scale-ups; and unpredictable prices and markets.
(4) Human resource development risk – little or no focus on productivity culture; poor time management practice; the lack of passion, perseverance and patience in the entrepreneur; and selection, training and motivation issues centered around family members and employees.
(5) Operations risk – little or no focus on profitability culture; use of low technology; variations in output due to weather, pests, disease and value chain logistics/timing; praedial larceny; lack of crop insurance; outdated ICT and administrative systems; and weak net cash flows.
The solution lies in an innovative approach so that the “non-investor ready” concepts can evolve to the status of “investor ready” businesses, so that they too have an opportunity to see the light of day and make a contribution to agribusiness sector growth.
Financing these “non-investor ready” concepts so that they can interface with traditional financing institutions directly or indirectly requires a disciplined approach which is my focus in today’s column.
The first component of the approach requires that due diligence be done on the agribusiness enterprise to determine whether the entrepreneur and the business idea or innovation have the potential to contribute to sustainable agribusiness development.
The second component is to apply the shepherding concept to the enterprise to bring it up to investment ready status by mitigating the risks that are relevant to each business system.
The third innovative component is to introduce the concept of equity, in contrast to loans, to non-investor ready businesses.
As we seek to strengthen these high potential businesses to make them investor ready, they need a financial buffer in the event of early inevitable expenses or losses, which burden the cash flow, and equity is better equipped to do this than loans.
This has already been qualitatively verified by the Caribbean Business Enterprise Trust Inc. in Barbados in an efficacy test of the CBET Shepherding Model™.
Let us build that security into the agribusiness sector. Let those who are in a position to contribute equity into the system come to the table so that we can strengthen the non-export ready business and mitigate the wealth divide.
God Himself is our insurance against lack or failure so let us pray that God leads us along safe paths of righteousness and truth as our strong tower of security.
(Dr. Basil Springer GCM is Change-Engine Consultant, Caribbean Business Enterprise Trust Inc. – CBET. His columns may be found at www.cbetmodel.org and www.nothingbeatsbusiness.com.)