The DrumNet Supply Chain System and Risk Mitigation Managing Risk in Financing Agriculture Johannesburg, South Africa April 1-3, 2009

Background

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

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Decline in agricultural productivity 36% to 23% in 2008

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

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

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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.

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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

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

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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.

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

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

The model creates efficiencies and allows participants to enter markets Stockist

  Farmer Input Suppliers alerted to upcoming Farmer demand for products Full transparency and market data for all participants

BUYER

  Buyers access predictable supplies of produce without significant field mobilization Disintermediation of traditional brokers, resellers, and traders

Farmer Groups

  Farmers grow under structured contracts with Buyers All financial transaction occur on cashless basis  

Bank

Banks shielded from complexity of managing large number of farm input loans Repayment risks reduced with connection to produce payments

DrumNet Flow

   Partnerships  Buyer  Farmer Intermediary Organizations (FIOs) Farmer Groups (FGs) Banks Agro Suppliers Membership FGs become DrumNet members  Fill Membership form  Pay DrumNet Membership fee Training FGs 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: 382764 Seed:10kg DAP:500kg

System E-Token • System sends E-token to FGs to pick inputs from agro dealers Planting FGs plants & takes care of their plots based of the Crop Agronomy training received FGs pick inputs from Stockist • Stockist uses DrumNet procedures/tools • Stockist gets paid cash or by Bank transfer against FGs loans

DrumNet Flow

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 Field Audit • Pre-scheduled messages to FGs from DrumNet system Deductions & Payment • Deduct Principal & Interest • Deduct DrumNet Fees • Net payments transferred to FG bank accounts

DrumNet Credit risk mitigating measures

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Buyer-Seller-Agro Dealer- must have bank accounts

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with same financial institution for cashless transactions

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Farmer Groups must be existing legal entities

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Formal Buyer-Group contract confirming price quality and quantity Farmer Group solidarity guarantee

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FG Transaction Insurance Fund TIF 25%

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Group Bank account with Bank credit approval

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Tripartite Line of Credit agreement- FG-Bank-Buyer

DrumNet Credit risk mitigating measures Supply chain relationships further reduce risk

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Farmers are offered a guaranteed market and a guaranteed price

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Cost savings to the buyer allow for a higher price than that offered by local brokers

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Cashless transaction between FGs and Agro dealer

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Planting, Scouting, pre harvest SMS’ track crop status

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Collection Point produce grading and weighing plus bagging and tagging at CP

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Buyer takes title at Collection Point , notifies Buyer confirmed by FG

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Money paid to groups through transfer from Buyer to Bank Lockbox and automatic payment of principal and interest, DN fee and farmer transfers.

Other Risk Issues

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Weather risk – unpredictable rain patterns

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Weather insurance?

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Seed availability – erratic supply of seeds and fertilizer

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Participation of certified stockists

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Foreign exchange risk for horticulture export. Price volatility.

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Political Risks – Tribal clashes and aftermath

DrumNet vision

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

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