Problem: The current problems associated with the agricultural industry in emerging economies are multi-faceted; however, key problems can be grouped into the following:
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:
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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