The DrumNet Supply Chain System and Risk Mitigation Managing Risk in Financing Agriculture

Johannesburg, South Africa

April 1-3, 2009

70% of Africa’s population is rural and depends on agriculture

Decline in agricultural productivity 36% to 23% in 2008

Africa has 20 percent of world’s arable land but only 5% is productive

Population has tripled in 30 years, pressure on productivity and farm size

The system of finance, production, marketing, and distribution of produce from small farms is inefficient, leeching away income and profits from all participants in the transaction chain, particularly from the small holder farmer.

Background

DrumNet – linking Markets, Finance and Information

• Inspired by the Supply Chain model to build a transaction based membership platform for rapid scale and replication

• DrumNet is a bridging mechanism to facilitate interaction between buyers, sellers and financiers to add value to their business transactions

• DrumNet links commercial banks, smallholder farmers, and retail providers of farm inputs through a cashless credit system

DrumNet

DrumNet provides an ICT platform through which all financial transactions and the communications take place using mobile phones and SMS and email.

DrumNet acts as the intermediary between producers and buyers to negotiate contracts and, through the TAs, ensures that farmers grow in accordance with the requirements of the buyers.

All payments from buyers pass through DrumNet accounts at the bank, thus mitigating risk and enabling buyers to focus on their core business.

The DrumNet platform links large-scale buyers, farmers, transporters, and field agents through an integrated marketing and payment system.

BUYER

Bank

Stockist

Farmer Groups

The model creates efficiencies and allows participants to enter markets

Banks shielded from complexity of managing large number of farm input loans

Repayment risks reduced with connection to produce payments

Buyers access predictable supplies of produce without significant field mobilization

Disintermediation of traditional brokers, resellers, and traders

Farmer Input Suppliers alerted to upcoming Farmer demand for products

Full transparency and market data for all participants

Farmers grow under structured contracts with Buyers

All financial transaction occur on cashless basis

DrumNet Flow

Partnerships Buyer Farmer Intermediary

Organizations (FIOs) Farmer Groups (FGs) Banks Agro Suppliers

MembershipFGs become DrumNet

members Fill Membership form Pay DrumNet

Membership fee

TrainingFGs get trained on DrumNet model Crop Agronomy

System Input• Partner & FG data get

input in the system• SMS generated by the

system acknowledging receipt of fee

E-Token: 382764Seed:10kgDAP:500kg

System E-Token • System sends E-token to FGs

to pick inputs from agro-dealers

FGs pick inputs from Stockist• Stockist uses DrumNet

procedures/tools• Stockist gets paid cash or by

Bank transfer against FGs loans

PlantingFGs plants & takes care of their plots

based of the Crop Agronomy training received

DrumNet Flow

Field Audit• Pre-scheduled messages to

FGs from DrumNet system

Harvest Projections• Buyer gets projections on

expected yields

Produce Collection• Produce aggregated from FGs

and collected at DrumNet Collection Points

Buyer Receives produce• Buyer receives produce,

weighs and grades• Buyer makes payment to

DrumNet Lockbox

Deductions & Payment• Deduct Principal & Interest• Deduct DrumNet Fees• Net payments transferred to

FG bank accounts

DrumNet Credit risk mitigating measures

•Buyer-Seller-Agro Dealer- must have bank accounts•with same financial institution for cashless transactions•Farmer Groups must be existing legal entities•Formal Buyer-Group contract confirming price quality and quantityFarmer Group solidarity guarantee•FG Transaction Insurance Fund TIF 25%•Group Bank account with Bank credit approval•Tripartite Line of Credit agreement- FG-Bank-Buyer

Supply chain relationships further reduce risk

Farmers are offered a guaranteed market and a guaranteed priceCost savings to the buyer allow for a higher price than that offered by local brokersCashless transaction between FGs and Agro dealer •Planting, Scouting, pre harvest SMS’ track crop status•Collection Point produce grading and weighing plus bagging and tagging at CP•Buyer takes title at Collection Point , notifies Buyer confirmed by FG•Money paid to groups through transfer from Buyer to Bank Lockbox and automatic payment of principal and interest, DN fee and farmer transfers.

DrumNet Credit risk mitigating measures

Other Risk Issues

Weather risk – unpredictable rain patternsWeather insurance?

Seed availability – erratic supply of seeds and fertilizerParticipation of certified stockists

Foreign exchange risk for horticulture export. Price volatility.Political Risks – Tribal clashes and aftermath

The vision for DrumNet is a wide-spread, distributed network of partners, sharing and improving the DrumNet platform. The goal is facilitating financial, marketing, and information transactions which directly stimulate wealth creation and economic integration of small farmers in Africa.

DrumNet vision