AGRICULTURE VALUE CHAIN FINANCING

CONTENTS 1. Concepts and Definition of Value Chain 2. Malaysian Value Chain Activity & Financing 3. Agrobank Value Chain Financing 4. Key Performance Indicators 5. Malaysian Economic Transformation Program in Agriculture 6. Concluding Remarks

By Dr. Sockalingam R. Ramasamy

www.agrobank.com.my

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CONCEPT AND DEFINITION OF VALUE CHAIN

Firm Infrastructure Human Resource Management Technology Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Primary Activity    A value chain is a chain of activities for a firm operating in a specific industry. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities.   The value chain categorizes the generic value -adding activities of an organization. The "primary activities" include: inbound logistics , operations (production), outbound logistics , marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procuremen t.  The sum total of link-level value-added yields total value.

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MALAYSIAN VALUE CHAIN

ACTIVITIES/ FINANCING

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Agro-based Manufacturing Grows Faster than Primary Agriculture

• The Malaysian economy grew at an average annual rate of 4.6% in the past five years.

• • The primary agriculture sector grew at an average annual rate of 3.0% in the past five years.

The agro-based manufacturing sector grew at a higher average annual rate of five years.

5.1% in the past

Growth of Agro-based Manufacturing, Primary Agriculture and Malaysian Economy, 1Q05 – 2Q10

0 -5 -10 -15

% Year-on-Year

15 10 5 Primary Agriculture Mal Economy Agro-based Manuf Industry 4

Loans Outstanding for Agro-based Manufacturing is Bigger than Primary Agriculture

• Loans outstanding for the agro-based manufacturing sector has been always for the primary agriculture sector.

bigger than that • The difference between the two sectors is expected to continue in the coming years.

Loans Outstanding for Primary Agriculture and Agro-based Manufacturing in the Banking System, Mar 05 – Jun 10 RM mil

30000 25000 20000 15000 10000 5000 0 Primary Agriculture Agro-based Manufacturing 5

Loans Growth for Primary Agriculture Stronger than Agro-based Manufacturing

• The loans growth for the primary agriculture sector generally agro-based manufacturing sector.

moves in line with that for the • At most time, the loans growth for the primary agriculture sector is the agro-based manufacturing sector.

stronger than that for

Loans Growth for Primary Agriculture and Agro-based Manufacturing in the Banking System, Mar 05 – Jun 10 % Year-on-Year

30 25 20 15 10 5 0 -5 -10 -15 Primary Agriculture Agro-based Manufacturing 6

Agricultural

Financing

Contribution in Banking System by Market Segment

• Financing for the primary agriculture sector in the banking system is mainly contributed by the oil palm industry .

• Financing for the agro-based manufacturing sector in the banking system is mainly contributed by the food and beverage , wood products and palm oil processing industries .

Fisheries 3% Rubber 2% Livestock 7% Forestry 10% Others 10% Oil Palm 69% Rubber Paper Products 10% Products 6% Wood Products 21% Others 11% Food & Beverage 30% Palm Oil Processing 22% Loans Outstanding as at Jun 10: RM19.9 bil Loans Outstanding as at Jun 10: RM27.3 bil

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Growth Prospects for Agro-Based Manufacturing Financing Are Promising

• The loans growth for the palm oil processing industry had grown the years, followed by rubber products, and food and beverages.

fastest in the past five • As the global economy recovers, the loans growth for the to improve going forward.

wood and paper products is expected

Loans Outstanding for Agro-based Manufacturing in the Banking System, Mar 05 – Jun 10

9000

RM mil

8000 7000 6000 5000 4000 3000 2000 1000 0 Rubber Products Food & Beverage Palm Oil Processing Wood Products Paper Products

Sub-sector

Palm Oil Processing Rubber Products Food & Beverage Paper Products Wood Products

Average Growth Per Annum (%)

15.0

14.6

9.8

4.9

0.3

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AGROBANK VALUE CHAIN ACTIVITIES

FINANCING

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Agrobank has 6 objectives and 3 objectives shown below refers to Agriculture Value Chain Financing

To provide loans, advances and credit facilities for development of agriculture and agriculture related business To uplift the well-being of the agricultural community ; To carry on the general business of a modern and progressive financial services institutions catering for the total financial needs of its customers.

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TOTAL NEEDS OF AGRICULTURE COMMUNITY CONCEPT Supporting The Whole Value Chain Section 10 (2) (e): provide financing to the agricultural community

Agriculture

Primary Production Processing Marketing Retail & Wholesale Consumers

Non-Agriculture

(eg: housing, education & vehicle) Section 10 (1) (e): To uplift the well being of the agricultural community

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Focus SCOPE OF FINANCING Section 10 (1) (f): To carry on the general business of a modern and progressive financial service institution catering for the total financial needs of its customers

Non-Agriculture Community Agriculture Community

Agriculture Activities Non-Agriculture Activities

Crops, livestock, fishery, plantation, agro-based manufacturing processing & marketing.

eg: education, housing, computer, vehicle, workshop, petrol stations etc

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ROLE OF AGROBANK

Roles Developmental Role Commercial Role Govt funded loan schemes to target groups with concessionary interest rates to promote the development of priority agriculture

   

sectors



Fund For Food (3F) Fund for SMEs Micro Credit Scheme Fund for Production of Food Industrialization and Commercialization of Bumiputra Entrepreneurs

   

Non-Food Credit Scheme Paddy Credit Scheme Fishery Boat Credit Scheme Replanting of Oil Palm Credit Scheme



Agro-Entrepreneur Graduates Credit Scheme Financing through Bank’s funds at competitive interest rates to commercial enterprises, corporations and individuals

  

Project loan Revolving Capital Personal Loan

  

Educational Loan Micro Credit Loan Contract Revolving Credit

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VALUE CHAIN AND CLIENT SEGMENT

Since 2008 move from production based financing to Client Based Financing === Focus on Value Chain AGRICULTURE PRODUCTION SMEs (Logistics, processing, packaging etc) Consumer loans (To assist business banking/Agro banking) hire-purchase, Ar Rahnu, property purchase) AGROBANKING BUSINESS BANKING PERSONAL BANKING  

Unique marketing mix for each segment Market oriented & client driven products & services

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15

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AGROBANK BSC - CORPORATE KEY PERFOMANCE INDICATORS

• 10 KPIs • WEIGHT 30%

DEVELOPMENTA L VALUE CUSTOMER VALUE

• 8 KPIs • WEIGHT 30% • 7 KPIs • WEIGHT 20%

Refer to Appendix 18 EMPLOYEE VALUE FINANCIAL VALUE

• 11 KPIs • WEIGHT 20%

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DEVELOPMENTAL MEASUREMENTS (KPI)

N O VALUES

1 2 3 4 Concessionary loan portfolio growth (%) Number of entrepreneurs developed Disbursement value of concessionary loan/budget (%) Market share of primary agriculture financing (%) 5 6 7 % of concessionary loan to total loans (Num) (Value) Disbursement value of New agriculture growth segment /Total disbursement value (%) % of agriculture lending to gross value added for agriculture sector Number of rural branches to urban branches 8 9 % of Net NPL on concessionary loans /total concessionary loans 10.

% of rural deposits/total deposits NM – Not Measured for the year

WEIGH T 30 %

0.15

0.05

0.10

0.10

0.05

0.05

0.10

0.10

0.05

0.15

0.10

2010

NM 500 NM 13.3

NM NM NM NM NM 13.8

NM

2011 2012

15.0

1,000 93.0 14.0 8.3

18.5

20.0

10.2

2:1 8.6 44.5

15.4

1,000 96.7 15.0 8.4

18.9

33.0

12.4

2:1 5.4

47.5

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SOURCE : PEMANDU, MALAYSIA 19

Malaysia’s Economic Transformation Programme (ETP) for Agriculture Sector

Transform Agriculture into Agribusiness

Case for Change

• Increasing global demand

Aspiration

• Double national income from agriculture by 2020 • Overcome challenges in agriculture: lack of scale, low value and low productivity • Create 74,000 new jobs by 2020 • Replicate success of some domestic companies • Increase farmers’ income by two to four times

Proposed Broad Plans of Action

• Capitalize on Malaysia’s advantage, i.e. biodiversity and agriculture expertise • Tap premium export markets • Active participation in the regional value chain • Address food security concern SOURCE : PEMANDU, MALAYSIA 20

SOURCE : PEMANDU, MALAYSIA 21

ECONOMIC TRANSFORMATION PROGRAMME PROJECTS

ENTRY POINT PROJECTS Public Funding Private Funding

Replication of industry aquaculture Increase productivity paddy Participations of MNC Strengthening paddy productivity in other granaries Swiftlet farming Premium market for fruits & vegetables Overseas JV/ acquisitions High value herbal products Integrated cage farming Dairy cluster Seaweed mini estates Others (5 EPPs) SOURCE : PEMANDU, MALAYSIA 485 73 572 534 20 29 58 55 169 188 196 400 74 164 164 534 276 88 483 833 500

TOTAL USD MILLION

985 833 607 572 224 222 219 570 554 445 400 262 22

SOURCE : PEMANDU, MALAYSIA 23

SOURCE : PEMANDU, MALAYSIA 24

SOURCE : PEMANDU, MALAYSIA 25

SOURCE : PEMANDU, MALAYSIA 26

RM Billion 2.5

3.2

2.9

6.4

5.1

1.3

21.4

RM Billion 8.9

2.9

11.8

RM Billion 8.9

16.8

7.9

SOURCE : PEMANDU, MALAYSIA 27

KEY SUCCESS FACTORS FOR MOVING UP THE AGRICULTURE VALUE CHAIN No

1 2 3 4

Key Success Factors

Developing the right financial products and instruments to support downstream activities Staff competency and skill on value chain activities and financing requirement Linkages and Strategic Alliances with right correspondent Financial Institutions Location and Accessibility Current Account Trade Finance Facilities Overdrafts Appraisal, Evaluation. Risk Management Letter of Credit, Confirmation etc.

Customer convenience 28

Concluding Remarks

 The primary agriculture sector and the agro-based manufacturing sector in Malaysia account for almost 10% of the economy, comprise over 40,000 business enterprises, offer about 2 million jobs to the people, and require a combined total of about RM45 billion bank financing.

 The diversification of the financing market into primary agriculture and agro-based manufacturing has helped strengthen the whole value chain of the agriculture sector in Malaysia over the years.

 Financing market for the agro-based manufacturing sector is much bigger than that for the primary agriculture sector in Malaysia. Nevertheless, the loans growth for the primary agriculture sector has been generally higher than that for the agro-based manufacturing sector over the years.

 In line with the mandated development role, Agrobank will continue to increase its financing for the primary agriculture sector. Meanwhile, Agrobank will tap the vast financing market in the agro-based manufacturing sector.

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