ZimbabweAgFinancialMarketAssess_Volume2_Final.pdf

ZIMBABWE

AGRICULTURAL AND RURAL LIVELIHOOD

FINANCIAL MARKET ASSESSMENT

VOLUME II

FEBRUARY 2012

This publication was produced for review by the United States Agency for International Development. It was prepared by Weidemann Associates, Inc.

i

ZIMBABWE AGRICULTURAL AND

RURAL LIVELIHOOD

FINANCIAL MARKET ASSESSMENT

VOLUME II

Submitted by:

Weidemann Associates, Inc.

Submitted to:

USAID/Zimbabwe

Contract No.:

Raise Plus IQC No. AID-613-TO-11-00003

Period of Performance:

October 2011– February 2012

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Zimbabwe Agricultural and Rural Livelihood Financial Market Assessment – Volume II ii

ACKNOWLEDGEMENTS

Weidemann Associates Inc. appreciates the extensive support and cooperation of all who participated and assisted in the development of this financial market assessment.

Of particular note is the contribution of personnel from many companies, producers, communities, associations, non-governmental organizations, donors and the Government of Zimbabwe who took the time to patiently explain their business and financial relationships to the assessment team and how the availability or lack of finances affected their lives and work and how they overcame challenges. Some of these people traveled at their own expense to be able to meet with the team members. We thank them all for offering their time and resources.

Our special thanks go also to the USAID staff in Zimbabwe for their support in facilitating this study, for providing the team with direction and assistance in obtaining the information needed to conduct the assessment.

Members of the assessment team:

Arvin R. Bunker, Team Leader Tafireyi Chamboko George Gray James Hochschwender Onisai Machiridza Jackqeline Mutambara Erickson Mvududu Eliot Takaindisa With administrative support by Rufaro Shumba and Ximena Navajas.

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CONTENTS

Acknowledgements ............................................................................................................................................... ii

Contents ............................................................................................................................................................... iii

Acronyms & Abbreviations .................................................................................................................................... v

1. Maize Value Chain Finance

1.1 Summary of Activities and Results

1.2 Maize Production, Costs, and Returns

1.3 Financing of Input Suppliers and Farmers

1.4 Financing of Maize Processors and Traders

1.5 End of Value Chain Buyers

1.6 Conclusions and Recommendations

2. Soya Value Chain Finance

2.1 Summary of Activities and Results

2.2 Soya Bean Production

2.3 Financing of Input Suppliers and Farmers

2.4 Financing of Soya Bean Processors and Traders

2.5 End of Value Chain Buyers

2.6 Conclusions and Recommendations

3. Dairy Value Chain Finance

3.1 Summary of Activities and Results

3.2 Financing of Input Suppliers and Farmers

3.3 Financing of Dairy Processors

3.4 End of Value Chain Buyers

3.5 Opportunities and Challenges for Financing Dairy

3.6 Findings, Conclusions, and Recommendations for Financing Dairy

4. Poultry Value Chain Finance

4.1 Summary of Activities

4.2 Production Costs for Poultry

4.3 Financing of Input Suppliers and Producers

4.4 Sources of Finance

4.5 End of Value Chain Buyers

4.6 Conclusions and Recommendations

5. Banana Value Chain Finance

5.1 Summary of Activities and Results

5.2 Banana Production

5.3 Financing of Input Suppliers and Farmers

5.4 Financing of Banana Processors

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5.5 End of Value Chain Buyers

5.6 Opportunities and Challenges for Financing Banana

5.7 Findings and Recommendations for Financing Banana

6. Groundnuts Value Chain Finance

6.1 Summary of Activities and Results

6.2 Cost of Production

6.3 Financing of Input Suppliers and Producers

6.4 Financing of Groundnut Processors

6.5 Opportunities and Challenges to Finance Groundnuts

6.6 Conclusions and Recommendations

7. Tea Value Chain Finance

7.1 Summary of Activities and Results

7.2 Production Areas and Costs

7.3 Financing of Input Suppliers and Farmers

7.4 Financing of Tea Processors

7.5 End of Value Chain Buyers

7.6 Source and Amount of Finance

7.7 Opportunities and Challenges for Financing Tea

7.8 Conclusions and Recommendations

8. Sugar Beans Value Chain Finance

8.1 Summary of Activities and Results

8.2 Area and Cost of Production of Sugar Beans

8.3 Financing of Input Suppliers and Farmers

8.4 Finance to Processors/ Traders and End Markets

8.5 Opportunities and Challenges for Financing Sugar Beans

9. Cotton Value Chain Finance

9.1 Summary of Activities and Results

9.2 Area and Cost of Production of Cotton

9.3 Financing of Input Suppliers and Farmers

9.4 Financing of Cotton Processors

9.5 End of Value Chain Buyers

9.6 Summary of Funding for Cotton Value Chain

9.7 Opportunities and Challenges for Financing Cotton

10. Export Vegetables Value Chain Finance

10.1 Summary of Activities and Results

10.2 Export Vegetable Production

10.3 Financing of Input Suppliers and Farmers

10.4 Financing of Export Vegetables Processors

10.5 Opportunities, Challenges, and Recommendations

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ACRONYMS & ABBREVIATIONS

A1 & A2 Small- and Medium-Scale Farmers AfDB African Development Bank Afreximbank African Export Import bank Agritex Agricultural Technical and Extension Services AMA Agricultural Marketing Authority ARDA Agriculture and Rural Development Authority ASPEF Agriculture Sector Productive Enhancement Facility CBZ Commercial Bank of Zimbabwe CFU Commercial Farmers Union CGA Cotton Ginners Association CMA Collateral Management Agreement COTTCO Cotton Company of Zimbabwe CRI Cotton Research Institute CSB Corn Soya Blend DAPP Development Aid from People to People DOC Day Old Chicks DRC Democratic Republic of Congo DZL Dairibord Zimbabwe Limited ESAP Economic Structural Adjustment Program f.o.b. Free on Board FAO Food And Agricultural Organization FDI Foreign Direct Investment FTLRP Fast Track Land Reform Program GMB Grain Marketing Board GMO Genetically Modified Organism ha hectare HPC Horticulture Promotion Council HVEV High Value Export Vegetables ICAC International Cotton Advisory Committee IDBZ Infrastructure Development Bank of Zimbabwe IFAD International Fund for Agricultural Development (IFAD) IRD International Relief and Development kg Kilogram KYC Know Your Customer km Kilometer MAMID Ministry of Agriculture, Mechanization and Irrigation Development MFI Microfinance Institution MIS Management Information System MTP Medium Term Plan 2011-2015 MS Multicurrency System MT Metric Ton NADF National Association of Dairy Farmers of Zimbabwe NASSA National Social Security Authority Natbrew National Breweries NGO Non-Governmental Organizations POSB People’s Own Savings Bank vi

POTRAZ Postal and Telecommunications Regulatory Authority of Zimbabwe PSF Productive Sector Finance Facility PTA Bank Eastern and Southern African Trade and Development Bank, also known as the

Preferential Trade Area Bank RBZ Reserve Bank of Zimbabwe SA South Africa SACCO Savings and Credit Cooperatives SADC Southern Africa Development Community SAFEX South African Futures Exchange SHF Small Holder Farmer SNV Netherlands Development Organization SOW Statement of Work TIMB Tobacco Industry and Marketing Board TTA Total Transformation Agribusiness UHT Ultra High Temperature UNICEF United Nations Children’s Fund VAT Value Added Tax VCA Value Chain Analysis VETCO Veterinary Company WFP World Food Program WRS Warehouse Receipt System ZABG Zimbabwe Allied Banking Group ZAMFI Zimbabwe Association of Microfinance Institutions ZAQP Zimbabwe Assured Quality Pig Scheme ZAR South African Rand ZCFU Zimbabwe Commercial Farmers Union ZETREF Zimbabwe Economic and Trade Revival Facility ZIMACE The Zimbabwe Agricultural Commodity Exchange Zimvet Zimbabwe Veterinary Service ZWD Zimbabwe Dollar ZMPT Zimbabwe Medium Term Plan, 2011-2015

1. MAIZE VALUE CHAIN FINANCE

1.1 SUMMARY OF ACTIVITIES AND RESULTS

1.1.1 ACTIVITIES

The team visited a cross section of all stakeholders in the maize value chain including both commercial and non-commercial interests, such as ZimSTAT, FAO, DFID and other donors. Commercial interests were asked to complete a questionnaire describing their needs for, and sources of finance for the production and marketing of maize and its products (mainly maize meal) both in the past, present and short-term future. All stakeholders were asked to discuss the current and anticipated state of maize production and marketing, to give their opinions on the nature, and amount of finance required to sustain the stage(s) of the value chain with which they were familiar, including the current availability of finance and the level of commercially sustainable demand. Stakeholders were also asked to comment on any policy or regulatory provisions that might require modification in order to facilitate the flow of finance into the value chain.

The results of the interviews were used to draw up an outline of the maize value chain showing the amounts of finance currently provided together with the main sources of finance at each level. Additional information describing the nature of the finance provided in terms of term, timing, rate and collateral requirements was also compiled from the data.

The summarized results were analyzed to determine the commercial demand for finance under current circumstances and to estimate demand in the short-term future.

1.1.2 RESULTS

The value chain map of finance for maize in 2011/12 is shown in Figure 1.1. It is evident that a substantial proportion of the finance made available to small-scale producers is provided in the form of free or subsidized inputs. It is also evident that supplier finance is common at every transaction level, including significant amounts of financing of grain buyers by producers, and which forms a significant proportion of the total finance within the value chain.

Figure 1.1 displays four stages of the maize value chain on the left hand side, which from bottom to top are inputs for production, production, processing and trading, and end markets. The center of the figure identifies the types of institutions that participate in each stage of the cycle.

The vertical and horizontal black lines in the center indicate the movement of products through the value chain from one stage to another by type of institution. The red boxes indicate the finance provided by one stage to the next stage of the value chain, most often in the form of delayed receipts of payments due. On the right hand side are the financial institutions and groups or individuals that provide financial resources with red boxes showing the amount of financing provided to the maize value chain in 2010/11. The summary data in Figure 1.1 is described in greater detail in the text and tables that follow.

In the maize value chain, agro-dealers, wholesalers, and suppliers of farm inputs received an estimated US$30 million of financing from banks and US$20 million from investors in 2010-11. These agro-dealers, wholesalers, and input suppliers provided about US$29 million of finance to farmers via delayed payments and various short-term credit instruments.

In addition to the US$29 million of credits provided by input suppliers, farmers received funding from GOZ and donors in the amount of US$60.71 million. Farmers contributed from their own resources an additional US$50 million to produce 1.45 million tons of maize.

The double arrow for maize transferred from non-commercial (NCF) farmers to hammer mills is because hammer mills grind the maize for a toll and return it to the farm household for consumption.

Maize processing and trading has many actors, the major groups shown in Figure 1.1. Farmers are normally paid immediately in cash when they sell their maize. A few farmers sell with agreements of being paid in a few days, but the tonnage sold this way is minimal, except in 2010/11. In that year the Grain Marketing Board (GMB) was buying maize for above market prices, encouraging farmers to deliver their maize to GMB. It tuned out that the GMB was receiving the maize, but they were not paying.

Promises to pay stretched out for months. Consequently in 2010/11 farmers extended credit in the form of delayed payments in the amount of US$30 million, nearly all of which was overdue payments by the

GMB.

The maize processing and trading stage of the maize value chain received short-term financing of S$30.5 million from banks, and US$20 million from long term investors.

The processing and trading stage extended US$32 million in credit to the end markets stage. This credit comes from delayed payments by supermarkets and to a lesser amount by shops and livestock feed suppliers.

Financing between stages of the value chain is nearly always the result of short-term supplier credit, seldom carrying interest or fees to be paid by the buyer. Payment dates are agreed to prior to the transaction, but stakeholders report that nearly all payments are delayed by days, weeks and occasionally months.

The text and tables below provide additional detail about funds transfers between actors in each stage of the value chain.

FIGURE 1.1:

1.2 MAIZE PRODUCTION, COSTS, AND RETURNS

Large commercial farmers (LCF) constitute approximately 1 percent of producers and account for 23 percent of national maize production (Table 9.1). Average yields in 2010/11 were 2.1 mt/ha for LCF and

3.0 mt/ha for the very largest corporate farm producers. At these yields, LCF may be able to use and repay finance, although at current interest rates the viability of many is debatable (Table 1.2).

Nevertheless, these producers are currently using a variety of means to access credit and it is these producers that establish the potential market for finance in the foreseeable future.

Small commercial farmers (SCF) are 9 percent of producers and grow 27 percent of the crop. Finance for these growers may or may not be viable depending upon the individual yields and resources available to pay for some of the production costs. The current level of production and farmers’ responses to interviews and questionnaires both suggest that most small commercial maize producers are using approximately half the FAO-recommended rates of fertilizer for regions III and IV. In 2010/11, the average maize yield by SCF was 1.2 mt/ha, worth approximately US$258 at current prices. The current cost of inputs is estimated to be US$173/ha if seed, fertilizer, land preparation costs, transport, and packaging are included so that the average return on non-labor production costs is 50 percent, but a negative two percent return if labor costs are included. For most SCF it is not economically feasible to finance maize production unless a large portion of the production costs are paid from the farmer’s own resources.

Non-commercial farmers (NCF) number approximately 1.53 million and in 2010/11 produced 727,000 mt of maize. Average production of maize per household was approximately 472 kg valued at US$104. The average household size in rural areas is at least five1 and average per capita cereal consumption is estimated to be 120 kg/yr. If an allowance of 20 kg/yr is made for small grain consumption, NCF will consume approximately 750,000 mt of maize per year, i.e. their consumption will exceed the total volume that they produce. From this perspective alone, NCF are not viable targets for finance. Although there are individual exceptions that exceed average levels of production, from a national perspective, the 90 percent of maize producers that fall into this category are not candidates for credit.

TABLE 1.1: ESTIMATED NUMBER OF MAIZE FARMERS, AREA, YIELD,

PRODUCTION, CONSUMPTION, SURPLUS/DEFICIT BY TYPE OF FARMER 2010-11

Farm Type

No. of Producers

(x 000)

Area in Produc-tion (ha x 000)

Average Yield

(mt/ha)

Produc-tion (mt x

000)

Household Consump-tion (mt x

000)

Surplus or Deficit (mt x 000)

LCF 17 160 2.084 333 0 333

SCF 147 333 1.175 392 40 352

NCF 1,534 1,603 0.454 727 750 -23

Total 1,698 2,096 0.693 1,452 790 662

1 Most estimates place average household size at six, but a more conservative figure is used in the light of recent high levels of emigration.

TABLE 1.2: ESTIMATED MAIZE PRICES, PRODUCTION COSTS, GROSS AND NET

INCOME AND FINANCE COSTS BY TYPE OF FARMER, 2010-11

Farm Type

Price /mt

Labor

(US$/

ha)

Purcha sed

Inputs

(US$/

ha)

Other Costs

(US$/

ha)

Total Costs

(US$/

ha)

Gross Incom e

(US$/

ha)

Net Income Before Finance

(US$/

ha)

Financ e Cost

(US$/

ha)

Net Income After

Finance

(US$/

ha)

LCF 220 88 200 37 325 459 134 26.8 107

SCF 220 88 140 33 261 259 -2 0 -2

NCF 220 0 64 0 64 100 36 0 36

Sources: MAMID statistics, Africare cost estimates, and stakeholder consultations

1.3 FINANCING OF INPUT SUPPLIERS AND FARMERS

The inputs for maize production vary according to the nature of the production system but typically include initial cultivation which is often paid for after harvest, seed, fertilizer and agrochemicals, although the latter may not always be used under small-farmer cultivation systems, and the labor required for weeding and harvesting. Of these, seed, fertilizer and agrochemicals are normally obtained through commercial transactions from input suppliers, wholesalers, or agro-dealers.

Maize input suppliers comprise four major seed houses and four large fertilizer suppliers, each group with several minor competitors. All of the large seed houses produce their own seed. Two of the fertilizer suppliers make their own products; the other two import fertilizer from South Africa. Agrochemicals are imported by three large suppliers, along with a number of small companies that operate more as trading houses than dedicated input supply companies.

Most of the input companies have faced liquidity constraints for a decade as a result of economic policies, restrictions on trade in agricultural commodities, high inflation, and subsequent dollarization and consequently have relied for many years upon supplier credit from seed multipliers, parent companies, or raw material suppliers to sustain their operations. In some cases companies sought additional investment capital through the sale of shares.

Despite liquidity constraints, input suppliers have been able to rebuild their working capital to a large extent through the entry in the market of donors who were direct purchasers of inputs in 2009 and who stimulated demand in 2010 through utilization of voucher systems. This has reinvigorated the inputs supply sector to the point where the levels of production by local input suppliers have now outstripped demand so that at the beginning of the 2011/12 cropping season, seed suppliers have burgeoning stocks that are estimated at 70,000 MT at the beginning of October 2011, equivalent to twice the national annual requirement at current levels of demand.

In 2011, direct donor purchases have declined and the support through voucher programs has increased.

Donor support for humanitarian assistance through agricultural inputs in 2009/10 was US$58.4 million, and in dropped to US$18.8 million in 2010/11but did include support through open voucher programs

(Table 1.3).2 The assessment team estimated donor support for maize inputs in 2010/11 was 58 percent of total donor support or US$10.9 million.3

High levels of input subsidies by the GOZ continue and exceed the support provided by donors. These subsidized inputs are available for multiple crops and livestock products, though maize received more assistance than any other crops.

GOZ support to agriculture is shown in Table 1.4. To estimate the share of support of the GOZ for maize the assessment team compared the area planted to maize in 2010/11 as a percent of the area planted to 9 major crops, which is 57 percent, suggesting the GOZ contribution to maize farmer inputs in 2010/11was US$49.8 million.

Donor and GOZ support for 2010/11 to maize producers is estimated to be US$60.7 million.

The Presidential facility of US$30 million that is mentioned in the same source document cited in Table

1.4 is reported to represent the amount that farmers were not paid for more than six months for maize delivered to GMB. For the 2011/12 season these farmers can receive inputs in exchange for payments due for maize.

At the time of data gathering for this report input suppliers reported that cash sales for inputs were limited; especially seed companies are unable to fulfill their obligations to the farmers who have grown

2 Source: FAO Summary of Summer Season Humanitarian Assistance 2009/10 and 2010/11. Data does not include inputs provided through open vouchers.

3 Estimated by the share of support of maize seed US$2.964 million (= 1.265+1.708) as a share of support of all seeds US$(US$1.126+1.708+0.678+1.503) to arrive at 58 percent of total input donor support allocated to maize production.

TABLE 1.3: QUANTITY AND VALUE OF HUMARITARIAN ASSISTANCE BY

DONORS THROUGH AGRICULTURAL INPUTS

Input Inputs (mt)

Value of Humanitarian Assistance Through Agricultural Inputs (US$ millions)

2008-09 2009-10 2010-11 2008-09 2009-10 2010-11 OPV Maize 1,282 5,877 628 2.564 11.754 1.256 Hybrid Maize 54 641 683 0.135 1.603 1.708 Top Dressing 10,222 37,330 13,841 6.542 23.891 8.858 Basal/Compound 5,287 14,026 7,464 3.384 8.977 4.777 Cowpea 208 6,038 399 0.354 10.265 0.678 Sorghum 822 844 1,002 1.233 1.266 1.503 Millet 117 313 0.176 0.470 0.000 Lime 1,041 0.000 0.146 0.000 Groundnuts 274 0.493 0.000 0.000 Sugar Beans 173 0.294 0.000 0.000 Total 18,439 66,110 24,017 15.174 58.370 18.780

Source: FAO Summary of Summer Season Humanitarian Assistance, 2008/09, 2009/10, 2010/11

Notes

a. Assistance in 2010-11 does not include inputs procured under open voucher program.

b. The average beneficiary received 44 kg top dressing, 24 kg basal fertilizer, 4 kg of seed in 2010-11.

c. Price of inputs from crop budgets of MAMID and selected NGOs.

seed for them. Similarly fertilizer manufacturers had stocks that appeared more than enough to meet anticipated demand and which, until recent moves by the Government to purchase inputs for its support program, remained largely unsold.

While the smaller input suppliers that import products have been less exposed to these problems, it is evident that at the time of this analysis input suppliers as a whole had been substantially affected primarily by the reduced purchases of inputs by donors and NGOs and also by limited purchasing capacity of producers, These reductions resulted in the accumulation of excess stocks and reduced liquidity of the supplier companies. Pressure to move stock in the hope of increasing liquidity has resulted in an increase in sales on credit both to government and to selected producers in the private sector.

At the present time, input suppliers have limited need for finance, since they anticipate reduced production over the coming year and current expenditures are largely restricted to day to day logistics and administration. Some businesses are utilizing overdraft facilities available at an interest rate of 18 to 20 percent, renegotiated after 180 days, but the amounts borrowed are small. Some local fertilizer companies might engage in equipment rehabilitation, but this is not likely under current sales uncertainty and high finance costs.

In 2010/11 GOZ and donors have continued to provide free or subsidized seed, fertilizer, and other inputs to both communal area producers and other small farmers. Most of the input support has been directed towards the production of maize, although for 2011/12 about 1,000 tons of sorghum seed was made available and in region V support was provided for livestock production.

When, in 2009 it became evident that after implementation of the economic and financial policies of the mid- to late-2000 and the resulting hyperinflation and dollarization, very few small farmers were left with any liquidity whatsoever, let alone the financial capacity to purchase crop inputs, the Government and donors provided input support. In 2010, much of the support was directed through market channels through the use of open and closed vouchers and electronic cards. The total value of the inputs provided to non-commercial and small commercial farmers was $87.4 million, most of which was used to support the production of maize. The volume of inputs sold through voucher and card systems was equivalent to 75 percent of the anticipated requirement for the national maize crop. In 2011, in an attempt to avoid the development of dependency, the voucher system has been substantially reduced and now incorporates a 10 percent farmer contribution for most beneficiaries, although inputs remain free for some of the neediest households.

1.3.1 FINANCING BY IMPUT SUPPLIERS

In 2010, the slow rate of payment for maize did little to enhance the limited purchasing capacities of growers so that demand for inputs was low in 2010 and has remained so in 2011. As a result, despite the constraints mentioned above, input suppliers have been obliged to extend credit to wholesalers, agro-dealers, and individual farmers in recent years to the extent that they are able to source finance to do so and are willing to accept the high risk of default. Most of the credit extended under these arrangements

TABLE 1.4: GOVERNMENT SUPPORT FOR

AGRICULTURE (US$ MILLIONS)

Item 2009 2010 2011 Total Grain Procurement 5.650 101.346 75.050 182.046 Input Support 60.000 87.400 45.000 192.400 Capitalization of Agribank 17.000 2.500 19.500 Extension and Other Services 13.390 93.617 103.854 210.861 Irrigation Development 0.843 11.764 12.607 Total 79.040 300.206 238.168 617.414

Source: GOZ 2011-10-14. Launch of 2011/2012 Government funded Agricultural Input Support Facilities. p.3.

has been at interest rates of 20 percent or more and has rarely extended for more than 60 days. Different solutions have been found to be appropriate to different types of inputs.

Seed in particular has often been sold on a consignment basis, but recent levels of repayment performance by dealers and farmers have been very poor. One seed company reported 60 percent default rate by farmers and another company a 50 percent default by the agro-dealers and wholesalers to whom it had consigned seed. There appears to be little appetite on the part of seed companies to repeat this process.

Nevertheless, in 2010/11 seed companies provided an estimated US$5 million of credit to farmers for production of maize. These are short-term loans with interest rates above 20 percent per year for most farmers. Data is not available on the distribution of credit between LCF and SCF. Today credit sales of seed are limited quantities and are provided to wholesalers of inputs and selected agro-dealers on 30-day credit terms. Some large farmers and estate farms also receive short-term credit.

Fertilizer companies are limiting credit to traders but do make sales on account to larger traders and growers. Up to 70 percent by value of imported inputs for maize are supplied on credit, while a smaller but still substantial proportion of domestic fertilizer is also sold on credit.4 In such cases, credit is being advanced subject to the provision of security, often a bank guarantee, provided against non-agricultural assets. The term of the credit can be 30, 60 or more often 90 days. Some, but not all suppliers charge an additional two percent per month for this facility. In a small number of cases, fertilizer companies may be lending on an unsecured basis, subject only to an inspection of accounts and the confirmation of insurance. Such facilities are extended to no more than 90 days and are limited in number. Credit provided by fertilizer companies to farmers is estimated to be US$18 million.

Approximately 80 percent of current equipment sales are to A2 farmers and the balance to large commercial farmers including the large estates. Equipment sales are normally financed over two or more years, but neither equipment companies or banks are willing to offer credit to farmers. Because agricultural machinery must be paid for in full before it will be released by the manufacturer, suppliers must be able to raise the required funds at least seven weeks before delivery. In the case of highly specific machinery that might have no other market, which occurs on 5 percent of sales, the cash is required upon ordering. In 2010/11 mechanization equipment companies provided US$6 million of credit to producers.

In some instances, equipment suppliers have allowed farmers to make a 50 percent down payment and have covered the balance using funds from local banks at an interest rate of 20 percent or more for a term of up to 90 to 120 days. Such facilities are provided subject to the provision of a bank guarantee and the full cost of the loan is passed on to the buyer. In a limited number of cases credit has been provided through leasing companies, whereby the equipment itself constitutes collateral and can be repossessed upon non-performance. Such leasing is subject to terms and interest rates of the same order and a 50 percent down payment. Credit provided by suppliers of farm equipment for maize production in 2010/11 is estimated at US$6 million.

A list of input suppliers is contained in Volume 1 Annex 2.

Inputs have also been supplied to about 3,000 small farmers and about 700 large maize growers through the contract farming mechanism. Larger contract farming companies have been able to finance the purchase of inputs from suppliers and to deliver these inputs to contracted smallholders in exchange for the opportunity to buy their maize at the end of the season. Growers have agreed to reimburse the contracting companies either in grain to the value of the inputs or by deduction of the cost of inputs from the grain price. This mechanism has allowed input suppliers to make cash sales although some inputs of

4 In 2011, the three largest fertilizer companies have provided credit to the Government for the purchase of 50,000 mt of fertilizer, approximately 20 percent of estimated national requirements. The terms of the loan are not revealed.

seed and fertilizer have also been made on a credit basis. In such cases, credit has been provided against an inspection of the contract farming company’s accounts or a bank guarantee, but this does not yet extend beyond 90 days.

1.3.2 BORROWING BY IMPUT SUPPLIERS FOR MAIZE

Given the overstocked position of local seed and fertilizer companies, there was limited need for input suppliers to borrow funds in 2011 to finance their operations for the 2011/12 season. Obviously companies will need to finance manufacturing and purchase of inputs for the 2012-13 crops, but company officials were reluctant to speculate on the anticipated amount of funding or sources of that finance due to the high level of political and economic uncertainty. As indicated earlier, some seed suppliers have a need to pay growers who have multiplied seed. Also fertilizer suppliers that are importing stock and making it available on credit may require bridging finance in order to fund the gap created by delays in delivery between the supplier’s credit terms (usually 90 days from shipment) and those provided to the farmer (30 to 90 days from delivery). The necessary bridging finance can be obtained locally at rates of 15 to 20 percent for a period of up to 60 days and the cost of money can be allowed for by a 2 percent per month interest charge to the grower. Delays are usually no more than 20 days by road, but can exceed 60 days if by rail.

Contract farming companies are obliged to source finance in order to make the necessary inputs available to their maize growers. Although it is possible to obtain some finance at terms of up to 270 days, at 15 to 20 percent, the interest rates of such funds are prohibitive. The cost of such money erodes most of the slim profit margins to be made from maize crop production and outgrower companies must obtain finance either off shore or as soft loans from donors for their operations to be economically sustainable.

1.3.3 BORROWING BY INPUT SUPPLIERS FOR INFRASTRUCTURE

Because of economic turmoil of the past decade input suppliers reported that they have made minimal capital investment in equipment upgrades. They also reported that this backlog of investment is resulting in higher maintenance costs as well as in production inefficiencies. Given long-term finance at rates below 10 percent per annum, local fertilizer companies might engage in equipment rehabilitation, but this is impossible under current conditions.

1.3.4 BORROWING BY FARMERS FOR MAIZE

The financing of growers is the most significant constraint to the overall maize value chain. As indicated earlier, the bulk of production is by non-commercial farmers and hence beyond the scope of commercial finance. Nevertheless, even for commercial producers, given the current cost of inputs and other expenses of production, yields of at least 2.0 mt/ha is required to break even if recommended rates of fertilizer are applied, which is not always achieved. The current production and hence yields estimated by the Ministry of Agriculture, which is consistently higher than either the Commercial Farmers Union or ZimSTAT estimates, suggest that even amongst commercial growers, a significant proportion would not be able to repay commercial finance.

Under normal conditions, production by very large corporate farmers who achieved average yields of 2.8 mt/ha in 2010/11 can be expected to be commercially viable. Similarly, large commercial farmers (LCF) who achieved yields in excess of 2.0 mt/ha might be considered commercially viable. In 2010/11, the A2 maize producers achieved an average yield of 2.1 mt/ha. This could be the result of a small number of farmers achieving high yields or a larger number achieving close to average yields. The former scenario would require less finance, but the latter is considered both more likely and more a more useful scenario in terms of predicting the upper limit of the total requirement for finance. SCF achieved an average yield of approximately 1.1 mt/ha and it is estimated that this was a result of conservative fertilizer application by approximately 40 percent of growers. Table 1.5 shows the estimates used to calculate the input usage and the total potential demand for finance for inputs that is estimated at just under US$48 million.

TABLE 1.5: POTENTIAL DEMAND FOR FINANCE FOR MAIZE PRODUCTION

Farm Type Inputs/ha

Cost

(US$

/ha) (a)

Maize Area (ha)

Commerci ally Viable Area (%)

Commerci ally Viable Area (ha)

Total Cost

(US$

millions)

LCF Estate 25 kg seed

250 kg Compound D 100 kg AN

237 19,000 100 19.000 4.503

LCF High Input

25 kg seed 250 kg Compound D

100 kg AN 237 141,000 10 14,100 3.342

LCF Standard Input

25 kg seed 100 kg Compound D

100 kg AN 173 - 70 98,700 17.075

SCF

25 kg seed

100 kg Compound D 100 kg AN

173 334,000 30 133,000 23.009

Total 494,000 245,800 47, 929 Source: Computed from MAMID Crop and Livestock Assessment and FAO Fertilizer Use Data

(a) Includes variable and others costs in Table 1.1, labor is not included.

This figure of approximately US$48 million is estimated to cover only the purchased inputs and other costs, primarily seed, fertilizer, and agro-chemical, bags, and transport required by farmers to achieve the level of production as assessed by the Ministry of Agriculture for 2010/11. It does not cover the funds required by non-commercial farmers, who are considered to be operating at a level of production that cannot justify commercial crop finance.

1.3.5 SOURCES OF FINANCE FOR FARMERS

The sources of this finance are unclear. A portion has been advanced by input suppliers under the terms and conditions described in section 1.3.1 above. The overall amount advanced in this way is estimated to be no more than US$29 million, i.e. about half of the total required, and is often of a shorter term than the period between input delivery and crop payment.

Discussions with growers indicated that few maize farmers are able to access finance from banks, primarily as a result of the limited availability of collateral. The uncertainty surrounding land tenure is almost universally quoted as the main factor in this regard. Where credit has been made available it has been against other forms of collateral such as urban properties or other off-farm assets. In general this limits access to LCF who produce just under half of commercial production.

The availability of collateral notwithstanding, neither the interest rates, nor the terms of the finance offered by banks to most maize growers are conducive to profitable maize production at current commodity and input prices. Interest rates vary from 15 to 40 percent, with the majority in the region of 20 to 30 percent. Such rates include the administration fees which are charged whenever loans are rolled over or renegotiated and which can effectively double the gross interest rate. Loans are of short term, varying from 30 to 270 days. While some farms have been able to access 270-day finance, the majority of businesses interviewed indicated that they were limited to 30-90 day loans and were obliged to renegotiate regularly.

Under such conditions, maize is of limited profitability. Although gross margin analysis may suggest that commercial breakeven yields are of the order of 2 mt/ha, fixed costs, especially the high costs of labor, utilities, transport and taxes all erode the profit margin so that the additional burden of a 25 percent interest charge can render the crop uneconomic. Farmers are therefore discouraged from accessing inputs through bank finance so that even if collateral were not a constraint, the amount of finance taken up for maize production might not be significantly increased. In this regard, the continual rollover of short-term facilities, and associated administrative fees that contribute substantially to the gross interest rates could be as much of a constraint to the uptake of finance and to maize production as either the net interest rates, or the lack of collateral.

Stakeholder interviews suggest that although a limited number of larger growers and estates can access credit at economic interest rates, the majority of commercial growers use their own resources to purchase inputs for maize. Nevertheless that estimate is confounded by the provision of inputs to the value of $87 million by government to NCF and SCF. LCF farmers were not assisted but expected to source inputs on credit through such agencies as the Agribank and commercial sources of finance. It is inevitable that some proportion of the inputs supplied in 2010/11 will have been taken up by LCF farmers or will have been sold by LCF to be purchased at a discount by SCF and other LCF.

One other source of finance to growers has been through contract farming arrangements, whereby growers have been provided with inputs on credit, by commodity buying and/or processing companies, and the value of the inputs has either been deducted from the price paid to the grower or has been recouped in kind. In either case, the contract farmer is expected to sell either all or a substantial part of the crop back to the contract farming company. This is necessary both for the company to recoup its costs and to justify the intervention in the first place.

There have been a number of commercial contract farming initiatives for maize over the last two years but the majority of experiences have been poor, with high levels of side selling and low rates of repayment. The isolated successes5 are still on such a small-scale, have only moderate repayment rates and involve subsidies that make it questionable whether they will be sustainable beyond donor funding.

Poor repayment may reflect the intense pressure on growers to accumulate capital in the current economic situation where the profitability of maize is low. It might also reflect inadequate contracting procedures, especially in the selection and training of contracted growers, since one company has uniquely reported considerable success in repayment and has expanded its contracted maize production from 2,500 MT in 2009/10 to 5,000 MT in 2010/11 and plans to contract the growing of 10,000 MT in 2011/12.

Incorporation of NGOs into the contract farming plan as providers of technical assistance may hinder repayments. The successful example mentioned above fields their own technical assistance specialists to work directly with growers.

Nevertheless at current levels of production, contract farming has provided less than three percent of the finance required by the commercial sector, although this may grow to five percent in 2011/12. Even with that increase, the contribution of contract farming to financing maize production is tiny.

5 The Northern Farming scheme that USAID supported last year and is continuing to support this year has moved some of the already more successful (previous minimum yields of 2 MT/ha) communal farmers to higher, more viable yields (4-5 MT/ha.), but the final results on repayments of input loans is still well below viable levels.

1.3.6 REPAYMENT PERFORMANCE

When credit has been extended to maize farmers, results have been variable. In general, facilities that were made available in 2009 were subject to high levels of non-performance, in excess of 20 percent.

This situation was repeated in 2010 so that by 2011, most input suppliers and banks very wary of providing unsecured credit for maize production. Only one contract farming company providing credit to maize producers has been able to achieve the level of performance necessary for sustainability. Under such circumstances those farmers without valid collateral have been obliged to fall back on their own resources.

1.3.7 FARMER SELF-FINANCE

In order to finance production in 2011 from a base of zero domestic liquidity in 2009, farmers have been obliged to liquidate assets, transfer money into the country, divert earnings from other enterprises or crops and most importantly, accumulate savings from the revenues earned from the crops grown in 2008/09 to 2010/11.

This assessment found that some farmers had indeed sold assets to finance working capital requirements.

Farmers also rented out land to other producers or uses to raise funds for inputs. A limited number of LCF may have access to external funds but the amounts are limited. Hence it is most likely that only those funds held in offshore accounts by growers themselves might be used to finance production.

One common source of inputs for maize, especially amongst smaller producers has been the diversion of inputs supplied through a contract farming arrangement for another crop, typically tobacco or cotton. It is possible that part of the SCF maize production has been financed in this way, although it is impossible to determine the extent.

The main source of finance appears to have been the revenues from the three crops grown since 2008.

This would be especially significant since much of the 2008 and 2009 maize crops were grown using subsidized inputs. Subsidized inputs were also available in 2010, but were restricted to the smaller producers. The importance of such accumulated capital in financing successive maize crops has been highlighted in 2011 by the impact of delayed payment by some buyers, especially GMB, for maize delivered in 2011, which has restricted the uptake of inputs through September and October 2011.

Overall, it would appear that the bulk of the maize crop has been financed from farmers own resources.

From a base of zero liquidity, growers have accumulated the capital necessary to fund approximately $30 million of an estimated $50 million self-finance requirement for maize. These resources appear to have been derived from the accumulated revenues of the last three crop seasons, from sale or rental of existing assets, and off-farm labor by farm households.

1.4 FINANCING OF MAIZE PROCESSORS AND TRADERS

There can be up to four stages between the maize producer and the processor. Maize is often purchased by assemblers, who may be growers themselves and who collect one or two bags from individual small growers to assemble small volumes up to 10 mt that can be delivered to or collected by traders. Traders may have the capacity to properly store larger tonnages (up to 500 MT, but more often 100 MT) and will trade these volumes between themselves or sell them on to merchants. Merchants will have substantial buying capacity, usually for lots of up to1,000 mt or more, and will sell to processors such as feed and food mills and to each other. Direct linkages may also be formed between each of these players, assemblers, traders, merchants and processors, and merchants and processors may also purchase directly from growers through contracts or agents.

There is a scarcity of funds within these stages of the value chain that is evidenced by the very limited accumulation of grain at any one stage. There is one notable exception to this in that the GMB has purchased up to 200,000 mt and claims to have now accumulated 500,000 MT of maize but has yet to pay the majority of its suppliers, in particular the smaller ones. This has significantly reduced the purchasing power of producers. Nevertheless, with the exception of GMB, most trading is currently on a back to back payment basis with some spatial but limited temporary arbitrage.

In addition to the above, there are many small hammer mills operating in rural areas, generally on a toll milling basis. Because the produce from these mills mainly returns to the villages from which the maize originated, and is normally completely consumed. The maize toll milling cycle is scarcely impacted by the availability of finance and is not included in this analysis.

1.4.1 ASSEMBLERS

Assemblers undertake a business that is seasonal in nature and often of the same order of magnitude as that of many small commercial farmers. The small size of their business means that they have little direct access to finance from banks, although they could be well served by microfinance institutions if those institutions had funds and were functioning in rural areas. As of now, outside of donor support, microfinance institutions rarely fund borrowers in rural areas. Assemblers either use their own resources, or may be provided with an advance by traders to purchase grain on their behalf. AgriTrade reports that a number of their loans granted or in process will be to assemblers, of which by the end of September 2011, 29% or $736,686 was intended to be used to purchase maize which would be used for inter-district trade6 (35%) trade via Harare (47%) or sold to processors (11%) or processed locally (4%). (AgriTrade Sept 2011) Though grain is almost always purchased from farmers on a cash basis, a few instances the assessment team encountered aggregators from within the farming community that were collecting grain in a surplus production area and arranging for transport and sale in deficit production areas of the country, and the farmers were paid after selling the maize.

1.4.2 TRADERS

In recent years, traders have purchased maize from assemblers and growers from April through November, after which most of the commercially marketed domestic maize has been purchased and the market has become dominated by imported maize. Maize is sold either to merchants or to mills, normally on a cash basis. Traders have only limited liquidity and are normally obliged to sell soon after purchasing maize in order to maximize turnover. There is little evidence that traders are able to access finance from banks. Although their business could absorb the current high rates of interest, maize traders normally lack the collateral to receive loans, although some may be able to use urban properties or warehouses for this purpose. Nevertheless they operate as discrete financial entities, buying and selling maize on a cash basis and for the most part utilizing their own resources. A large share of the domestic commercially sold maize passes through the hand of traders, who will purchase between 400,000 and 500,000 mt of domestic production. At an average price of $220/MT this will require at least US$8.5 million circulated eight to ten times over the seven month domestic marketing season.

6 Most inter-district trade is purchased from surplus SHF areas to sell directly to deficit areas with 66% purchased from Mashonaland, 17% from Manicaland, 6% from Masvingo and 7% from Midlands. No figures of actual use of the loans were available at the time of the study.

1.4.3 MERCHANTS

The larger merchants purchase grain from the larger farmers and from traders when it is available on the domestic market. Purchases are made on a cash basis and sales are usually on 30-day terms.

Their current operations require only short -term finance, up to 60 days at most, which can be sourced from domestic banks. The operations of the larger grain merchants are of such a size that they can negotiate terms with banks so that interest rates are generally below 15 percent. Merchants buy and sell domestic maize as well as importing and selling maize. Stakeholder responses suggest that the total volume of finance required by merchants purchasing maize is currently about US$20 million. This amount is circulated every 40-60 days so that total maize purchases during the course of a year would amount to approximately $120 million, or approximately 550,000 mt.

1.4.4 MAIZE PROCESSORS AND WHOLESALERS

Maize processors include maize millers for breakfast and roller meal, feed mills, and other manufacturers using maize by products. Food and animal feed mills are the primary products of processors. Traders, merchants and a few large farmers supply processors. The maize processing subsector is dominated by three major concerns that purchase over 90 percent of all the commercially marketed maize.

Maize processing companies are operating at approximately 50 percent of their physical throughput capacity. Capacity utilization is almost directly proportional to the availability of finance, and inversely proportional to its cost.