16:00 18.05.2020

Author LEAH SOROKA

Crop Receipts Create Over $1 billion of Financing and New Opportunities for Farmers

4 min read
Crop Receipts Create Over $1 billion of Financing and New Opportunities for Farmers

Leah Soroka, Program Manager, ECA Agricultural Financial Services, IFC

The crop receipt is a simple and efficient financial instrument that enables farmers to use their future crops as collateral to access financing to buy inputs like seeds and fertilizer. In Ukraine, in over just a few years, more than 2,000 farmers have issued 4,000 crop receipts to obtain over $1 billion of financing. This is significant for a country where the agricultural sector is a key economic driver and major employer.

Just five years ago, a majority of Ukrainian farmers were not even aware that this instrument existed. Lacking collateral, they could not obtain the financing they desperately needed to run their farms. Ukraine’s Law on Crop Receipts was passed in 2012 to address this issue but because of limited knowledge of the instrument and insufficient institutional  environment, Ukrainian farmers and creditors did not use it.

In 2015, IFC partnered with the State Secretariat for Economic Affairs of Switzerland (SECO) to launch a five-year project aimed at facilitating pre-season financing for farmers. IFC already had experience in helping implement a crop receipts program in Brazil and could use lessons learned to create awareness among Ukraine’s farmers and creditors.

The project, consisting of awareness campaigns and training sessions, also involved working with government partners such as the Ministry of Agriculture and the Ministry of Justice, to develop and launch a single, publicly-accessible electronic Crop Receipt Register and establish an efficient regulatory environment, such as accelerated out-of-court enforcement procedures to protect creditor rights. With this kind of legal support, creditors gained the confidence to use the instrument to lend to farmers.   

Thanks to the project, the use of crop receipts increased exponentially. Here are a few reasons why the project is such a success:

  • Active training of creditors led to around 200 lenders agreeing to finance against crop receipts, thus dramatically improving farmers’ access to finance.
  • Extensive nationwide farmer training and media outreach increased public awareness on the possibilities of using crop receipts.
  • The crop receipts instrument was diversified in multiple agricultural segments–traditional grains and oilseeds, horticulture, niche, and organic production, resulting in 40 unique value chains used by farmers as collateral.
  • The project especially targeted micro and small farmers, a segment of farmers that lacked collateral and therefore had limited access to financing.

Crop receipts got a boost when new currency regulations were introduced in 2019 by the National Bank of Ukraine—the regulations allowed the purchase of foreign currency to settle obligations under crop receipts issued to non-residents. This meant that even smaller Ukrainian farmers could access cheaper financing from outside the country, a privilege till then enjoyed by only very large farmers. Under the regulations, even farmers with around 100 hectares can issue crop receipts to access foreign capital to buy high-quality inputs, equipment, and machinery to increase yields and profitability and also make direct grain-supply contracts with foreign buyers. In just one year, Ukrainian farmers have issued 21 international crop receipts and received $7 million of working capital financing.

During the project, interactions with farmers, financial institutions, and input suppliers helped collect valuable feedback on how crop receipts could be improved to make the instrument faster to obtain and cheaper to register.  These changes are embedded into the new draft Law on Crop Receipts—submitted to Parliament in April—that enables crop receipts to be transformed into an electronic document. Thia means borrowers can sign with electronic signatures and transact through their online personal accounts.

The new draft law also defines crop receipts as a security, which can be traded on the stock exchange. The law will also expand crop receipts to new value chains, including livestock production and primary processing of agricultural products, increase access to finance to agricultural cooperatives, strengthen creditors’ rights, and also create refinancing opportunities for creditors.

As Ukraine opens up its land market next year, farmers will need more financing for working capital to plant crops. Creditors also will require new instruments to manage increased financing demands from farmers. Lessons can be learned from Brazil, where creation of a secondary market for crop receipts through the securitization of agricultural receivables brought additional liquidity to agriculture. In Brazil, this move increased available financing for farmers from $3 billion to $17 billion per year. IFC is now researching how capital markets development in Ukraine could provide new financing to agriculture. This could be the next step in IFC’s efforts to help Ukraine realize its agribusiness potential and accelerate economic growth.

 

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