Africa Crop Receipts:

Can Sub-Saharan African farmers obtain pre-harvest finance

by issuing capital market instruments?

A study for IFC and FAO

Inception report

2 November 2015

.
Contents

Introduction

1. Using capital markets for short-term financing in the agricultural sector:

precedents
A. Bank vs capital market short-term pre-harvest finance
B. Overview of short-term capital market instruments for the agricultural sector
C. The Brazilian CPR experience
D. The experience with crop receipts in Russia, Serbia and Ukraine
E. Guarantee schemes
F. Exchange-traded instruments
G. Climate bonds
H. Conclusion

2. Deconstructing the Brazilian experience – form and function

A. Which farmers?
B. Which commodities?
C. The initial drivers for CPRs
D. Registration mechanisms
E. Monitoring agencies
F. Buyers of CPRs
G. The secondary market
H. Legal and regulatory framework
I. Tax issues

3. Conditions for success of Africa crop receipts

A. Minimum requirements
B. Viable commodity clusters for CPRs
C. High-prospect input providers and offtakers
D. Land titles
E. Local capital markets
F. Rule of law

4. Selecting two high-potential countries

A. Meeting the criteria: a look at potential candidates
B. Selection of countries
C. Assumptions and risks

5. Country A

A. Relevant commodity clusters

B. Key commodity sector actors
C. Key potential CPR investors
D. Support services
E. Competitiveness of CPRs compared to traditional instruments
F. Readiness of the existing legal and regulatory framework
G. Readiness of the Government and Central Bank
 H. Likely market size
I. Moving forward

6. Country B

A. Relevant commodity clusters

B. Key commodity sector actors
C. Key potential CPR investors
D. Support services
E. Competitiveness of CPRs compared to traditional instruments
F. Readiness of the existing legal and regulatory framework
G. Readiness of the Government and Central Bank
H. Likely market size
I. Moving forward

Roadmap and next steps

Annexes
I. Brazil
II Country A case study
III Country B case study
Introduction
The lack of access to finance is a major constraint to the growth of Africa’s agricultural
sector. Producers, processors and others active in the agricultural value chain in Africa often
have difficulties obtaining affordable bank loans. This has not been helped by the recent
developments in the banking industry which have reduced available country credit lines,
including the Basel Capital Accord have made it more expensive for banks to lend into
environments or to companies that are deemed risky.
One possible way to deal with the constraints to bank finance is to disintermediate the banks,
and borrow directly from the capital market (in practice, this will often amount to working
with banks to borrow from the capital market). In most developing countries, including in
Africa, depositors and investors such as pension funds receive low interest rates compared to
the rates paid by borrowers, even prime rate ones. Directly linking those needing capital in
the commodity sector with the suppliers of capital is of benefit to both sides. At an
international level, the volume of funds under professional management has not stopped
increasing, and investors are looking for new investment possibilities with attractive returns
that are, preferably, not closely correlated to those obtained in western markets - so this opens
a potential source of funds for the commodity sector in developing countries.
In this context, the International Finance Corporation (IFC) plans to implement the “Africa
Crop Receipts Initiative” under its Global Trade and Supply Chain Solutions Department. A
Crop Receipt (CPR1) is a promissory note issued by a farmer to mobilize pre-harvest
financing based on pledging the future crop to be grown or livestock to be raised. There are
several types of CPRs which have been used successfully and at scale in Brazil over the past
20 years following the introduction of specific legislation and a conducive regulatory and
institutional environment. Inspired by the success in Brazil, CRP legislation has been drafted
in Ukraine, Russia and Serbia during the past five years, with support from the European
Bank for Reconstruction and Development (EBRD) and the Food and Agriculture
Organization of the United Nations (FAO). Through the “Africa Crop Receipts Initiative”,
IFC aims to pilot the introduction of CPRs in selected countries and crops in Sub-Saharan
Africa in order to test an alternative way for farmers to access to pre-harvest finance in order
to purchase seeds, fertilizers and crop protectants.
This report is a feasibility study on the possible development of a market for crop receipts in
Sub-Saharan Africa. The study aims to (i) identify the preconditions for the successful
introduction of CPRs based on international experiences, (ii) identify potential countries and
commodities in sub-Saharan Africa where CPRs might be introduced, (iii) conduct an in-
depth analysis in two countries, including the legal and regulatory environment and interests
of key stakeholders in CPRs. The study indicates the feasibility of CPRs in the selected
countries, identify potential champions (potential issuers and buyers of CPRs and supporting
institutions) and highlight policy, legal/regulatory and institutional reforms needed for
introducing/scaling up of CPRs.

1
CPR can be considered an abbreviation of crop receipt, or also, of Cédula de produto rural, the
“original” Brazilian crop receipts.
Chapter 1 Using capital markets for short-term pre-harvest financing in the
agricultural sector: precedents

Lack of access to finance is a major bottleneck for Africa’s agricultural sector - for farmers
large and small, for processors, for traders, for the many companies that provide inputs and
services to the sector. Only for the US$ 35 billion in food that Africa imports each year is
financing relatively easily available, from banks and traders supported by export credit
agencies. While African banks are reacting positively to new risk sharing schemes set up by
governments and their development partners (in Nigeria, for example, the share of bank
lending to agriculture has improved from 0.7% in 2011 to close to 5% in 2014), bank lending
to the sector remains low, and those few farmers and agricultural sector firms that do have
access to bank lending pay high interest rates.

Meanwhile, the potential of the agricultural sector is large. Most of the food imported into the
continent could be produced by African farmers, and with the rapid growth of African cities,
urban demand is set to continue growing. Rising purchasing power will drive a tripling in
expenditure on food over the next decade. Production gains can be made both by increasing
yields (maize yields for example now stand at only 20% of their potential) and by expanding
land under cultivation (around 60% of the globally available uncultivated arable land is found
in sub-Saharan Africa). Furthermore, investments in trade infrastructure can much reduce
post-harvest losses, making more agricultural produce available for the market.

But realizing this potential requires various forms of finance: investment finance, for example
to expand irrigation schemes and set up cold chains, and more in general, permit farmers to
build climate change resilience; pre-harvest finance, including to expand fertilizer use (now
only one tenth of that in South Asia); post-harvest finance, for storage and trade. Concerted
effort is therefore needed on several fronts. Developing capital market instruments for short-
term pre-harvest finance, the theme of this paper, can be a useful component of such a broad
effort. This chapter sets out the context of such instruments, and briefly describes the
experiences so far with their use in agriculture.

A. Bank-, supplier- and capital market short-term pre-harvest finance

The traditional sources of pre-harvest finance are rural moneylenders, traders (who either
provide inputs on credit or pre-payments for future deliveries), processors and cooperatives.
Micro-finance institutions (MFIs) have tended to focus on urban borrowers and small-scale
processing, but in recent years, many have developed lending products adapted to agriculture.
Different kinds of banks also provide pre-harvest finance (including indirectly, by financing
input suppliers and processors who then on-lend to farmers), but only a small minority of
farmers have been able to access formal financial institutions.

These forms of finance are constrained. Moneylenders and to a large extent, MFIs charge
high interest rates, unattractive in the light of the low profitability of many farms. Traders
and processors may hide high interest rates in the low prices that they pay farmers on delivery
of their goods. Saving and loan cooperatives can play valuable roles, but the majority of
farmers are not members of such cooperatives, and where they exist they often have poor
access to funds, partly because of past experiences with cooperative mismanagement.
Commercial banks perceive agriculture as very risky, and (until recently) lacking effective
ways to lay off risks, rationed their loans to the most creditworthy borrowers (those able to
offer fixed collateral such as real estate) and charging high interest rates.

Agricultural lending by these traditional sources needs to be improved. Developing new

capital market instruments for pre-harvest finance will not endanger such efforts. Rather, it
will create a parallel system which has several “touch points” with traditional lending,
enabling these lenders to use capital market instruments to leverage their activities. For
example, in the traditional system, input providers sell, say, fertilizers on credit, to be repaid
in cash or kind after the harvest. These loans will be on their books, they have to mobilize
their own working capital in order to provide such finance – and in this, are constrained by
their own limited asset base (they do not have a lot of collateral). If instead of receiving a
promise of the farmer to repay the loan, they receive a crop receipt (CPR), then they can
discount this crop receipt with an investor, freeing up their own capital and thus allowing
them to do more business. Similarly, banks can offload a part of their agricultural loan
portfolio to investors. This reduces the capital that banks need to put aside against their loans,
and thus improves their return on capital. In turn, this is likely to incentivize banks and buyers
(e.g., in the fair trade sector) with a strong ability to generate agricultural loans but
constrained by lack of capital to start operating as “investment banks”, putting agricultural
financing deals together for investors.

In other words, capital market instruments, including CPRs, can not only provide a
complement to these existing forms of finance, bringing in a new category of financiers, but
they can n become a new, firmer basis for many of the traditional forms of finance, boosting
this source of funds as well. In all, investors such as pension funds and insurance companies
are not likely to crowd out banks and other traditional financiers when they become involved
in agricultural finance, but rather, they will help create more robust systems for agri-finance.

B. Overview of short-term capital market instruments for the agricultural

sector

The past decade has seen a decline of bank risk capital for developing countries (as a result of
banking sector consolidation and regulatory pressures), but at the same time, an increase in
interest from investment funds in commodity sector finance. At the same time, there has been
a trend towards vertical coordination and integration in agricultural supply chains, making it
easier for investors to invest in agriculture. While many investors are still limited by their
statutes or government regulations to investing in investment-grade issues, there is also a
growing number of investors that do not have such restrictions. The financial sector has now
developed a range of instruments that permit investors to fund agriculture, including both debt
and equity instruments, lower- and higher-risk tools, and with tenors that vary from the very
short (3 months) to the very long (25 years).

CPRs are a form of the purchase by investors of rights to future production from a commodity
company. But there are many other forms. Specialized companies could gather such rights
from various companies and then refinance themselves with investors (either directly or
through a stock or commodity exchange), or they could even set up their own agricultural
operations funded by investors. 2 Banks can bundle loans to agricultural firms and issue
securities against this portfolio. Large agricultural firms can place their assets and future
production in a Special Purpose Vehicle which then sells bonds to investors. All of these
instruments, and varieties thereof, are used in different parts of the world.

CPRs, however, can play an important role in catalyzing the development of a broad range of
investment instruments. While farmers may issue CPRs directly to investors, it is likely that,
just has been the case in Brazil, others will start using CPRs as the core building block for

2
The latter is done by “managed investment funds”, which generally sell shares to a wide audience
(directly or through a stock exchange) promising investors a return that is a function of future
production and prices – they have been used to fund ostrich farms, olive plantations, avocado
production, etc. These schemes, however, have a chequered history, and governments that wish to
make it possible for agricultural sector stakeholders to raise funds in the capital market may wish to
exclude retail investors from this, until there is a strong regulatory framework in place.
other instruments. A strategy that focuses on the development of the CPR market may then
be more effective than a broader strategy that tries to develop a full range of instruments.

C. The Brazilian CPR experience3

Genesis and reach

Up to the early 1990s, Brazil’s agricultural sector relied to a large extent on the government to
obtain the finance necessary for its operations – the government-owned Banco do Brasil was
a large financier, and banks were obliged to allocate 25 per cent of their demand deposits to
the agricultural sector, mostly to be lent at a fixed, low interest rate. But with the State
reducing its involvement in agricultural finance and marketing while at the same time, the
agricultural sector continued growing, it became necessary to develop new mechanisms.

The private sector was already using prepaid forward contracts as a financing tool, but these
carried high transaction costs and were difficult to enforce. The government strengthened the
regulatory framework for such financing mechanisms by introducing the Cédula de Produto
Rural (CPR, literally “rural product note”) in 1994. CPRs are bonds that can only be issued
by farmers and farmers’ associations, including cooperatives, in which they pledge an agreed
amount of crops (including in semi-processed form, such as ethanol) or cattle, in return for
financing.

CPRs have since become the underlying for a vibrant financial market in a whole range of
instruments. But while CPRs and derived products now account for more than US$ 20 billion
year in agricultural finance, less than 5% of farmers use them, mostly mid-sized and large
producers, and then, generally not for the larger part of their financing needs (the obligatory
lending program referred to above ensures that bank loans remain their principal means of
finance). Coffee, soybeans and cattle have been the main commodities used, and there has
also been strong activity in sugarcane, cotton and timber.

The basic forms of CPRs

In 1994, only one form of CPR was provided for: a physical CPR, in which the farmer or a
farmers’ association commits to the delivery of a specific commodity at a specific location.
This implies that they have effectively fixed their sales price. These bonds could be difficult
to use for financial investors, as they ultimately had to find a physical market buyer to take
delivery of the commodities. To bring more financial sector players into the market, in 2001
the government therefore introduced two new categories of CPRs: financial CPRs, and CPRs
indexed to the futures market or another price reference system.

In a financial CPR, the farmer issues a bond 4 with a size that is determined on the one hand by
his pre-harvest financing needs, on the other by the expected value of his future production.
The bond can be issued to a bank or other credit provider which has already promised to
finance the farmer; or it can be auctioned off to the highest bidder through the electronic
network of the commodity exchange. The bond has to be secured through the pledge of
agricultural commodities. On expiry, the farmer pays off the bondholder.

Investors who by law were prohibited from holding contracts or bonds that could result in
physical delivery (e.g. pension funds) flocked into financial CPRs. Also, financial CPRs were

3
Extracted from Annex 1, which in turn is an update of Annex 10 of L. Rutten, Innovative
agricultural finance and risk management - strengthening food production and trade in the transition
region, EBRD/FAO, 2012.
4
In practice, farmers generally issue consecutive bonds, to cover the cash flow requirements of each
phase of their production campaign.
often used as a marketing tool by input or service providers. For example, a farmer may buy
fertilizers on credit through the issuance of a CPR; or a warehousing company can entice
farmers to store their goods by immediately arranging a loan against them. After their
introduction in 2001, they rapidly became the most popular form of CPRs.

Index CPRs in principle combine the best of both worlds: for the investor, they do not give
rise to any physical delivery; and for the farmer, he has effectively managed his price risk.
Nevertheless, these instruments have been used quite sparsely. Farmers possibly prefer to
handle price risk management and finance separately.

The legal and regulatory status of CPRs

CPRs have strong legal status under Brazilian law. They are not just forward contracts. The
buyer buys the bond, and the bond seller has to perform on his obligations. If he does not, the
buyer has access to a fast and efficient arbitrage system, with no dependency on the generally
slow courts. The seller is also explicitly barred from using force majeure or “Acts of God” as
an excuse for defaulting on his obligations.

The CPR clauses provide for the possibility of collateral or guarantees. While this is not
obligatory, it has become standard. Collateral can take the form of a pledge on the underlying
crop, or on other floating assets, or a mortgage on real estate. Guarantees can come in the
form of bank avals/guarantees (Banco do Brasil, the country’s largest bank, is the most active
player in this domain), or insurance against default (this can be difficult to obtain and
expensive). The buyer/financier often engages a monitoring agency to follow the pledged
crop as it approaches and then enters the harvest phase. 5

In order to be publicly negotiated (i.e., to be considered as financial assets), CPRs must be

registered in a Central Bank-approved system. But in most cases, holders of CPRs do not
wish to publicly negotiate them. Such CPRs are used in particular to reinforce credit
transactions between two parties, e.g. large corporates (input providers, processors, traders)
which have longstanding and good relations with certain farmers. Such non-negotiable CPRs
are likely to represent a different way to express a credit relationship, rather than unlocking
new credit.

Building on CPRs to create a more complete agri-finance market

Only farmers and their associations can issue CPRs. For others, the government introduced a
series of new pre-harvest financing instruments in December 2004, inspired by its experiences
in the real estate sector. Two types of post-harvest bonds were also introduced at that time.
Table 1 gives an overview. These bonds have to be collateralized with CPRs, commercial
contracts, warehouse receipts or another formal credit right (promissory notes, rural mortgage
notes and the like). They can be issued for any kind of current or future agriculture-related
receivables, for example, by a farmer who has receivables from an offtaker, an input provider
or equipment supplier who has receivables from farmers, or an agricultural processor that has
receivables from his buyers. To be tradable, these instruments have to be registered in one of
the two permitted registries; they can be transferred by endorsement; rights are enforceable
through arbitration procedures; and they benefit of priority rights – the commodities
mentioned in the bonds cannot be seized by third party creditors, even in the case of
bankruptcy of the issuer.

5
In an interesting twist, there is a special type of cover regulated by the Superintendence of Private
Insurance, known as “CPR insurance”: this is a monitoring service, allowing the creditor to follow the
stages of the productive process of the crop/cattle pledged under the CPR.
Table 1
Agricultural bonds in Brazil – acronyms
Acronym Name Underlying collateral Issuers
Pre-harvest
CPR Cédula de produto rural Crops, cattle, to be Farmers, cooperatives
produced in future
LCA Letra de crédito do Loans backed by Banks
agronegócio agribusiness credit rights
CDCA Certificado de direitos CPRs Agri-businesses
creditórios do
agronegócio
CRA Certificado de recebíveis Receivables (linked to Securitization
do agronegócio CPRs and CDCAs) companies
EPA Export prepayment Commodities (agri or Commodity producers
agreement non-agri)
Post-
harvest
CDA Certificado do depósito Goods in warehouse Warehouses
agropecuário
WA Warrant agropecuário Goods in warehouse Warehouses

To give some examples of how these instruments are used:

 Processors issue CDCAs backed by CPRs. For example, a sugar mill pre-finances the
farmers, using physical CPRs through which farmers commit their future sugar
production. The mill also signs an offtake agreement for the white (processed) sugar
with a buyer. The mill then issues CDCAs, backed by the CPRs as well as the
commercial contract with the buyer. Just like CPRs, the CDCAs contain a “collateral
clause”, and under this the mill pledges the product (both sugarcane and white sugar,
in this case), he makes a fiduciary assignment of the CPRs and the commercial
contract, and he may provide further collateral such as personal guarantees,
promissory notes or a bank aval. It is possible that the investor who buys the CDCAs
employs an inspection agency, not just to monitor the farmers but also, to monitor the
performance of the mill. When the white sugar is delivered, the buyer pays into an
escrow account from which the investor is reimbursed; any remaining sums are
remitted to the mill.

 Specialized agri-finance companies can use Agribusiness Receivables Certificates

(CRAs) to finance their operations. It sets up a Special Purpose Vehicle (an
Agribusiness Securitization Company) which acquires agribusiness receivables (such
as CPRs) and securitizing them through issuing and selling CRAs. into financial and
capital markets. It pledges as collateral for the CRAs the same pledges it has
received from the farmers/agribusiness companies (that is to say, the CPRs and/or
CDCAs and collateral therein, as well as the rights under the sales contracts). The
CRAs are generally over-collateralized (i.e., for 120 US$ of receivables, only 100
US$ of CRAs are issued), which makes it possible to create issues with different
risk/reward profiles, tailored to different categories of investors. Furthermore, CRA’s
can be secured by a floating pool of agricultural receivables, and therefore, it is
possible to longer-term CRAs. Agribusiness Securitization Companies can be more
or less specialized, financing only a small number of pre-determined farmers
involved in one crop, or giving its managers flexibility to invest in a range of CPRs
and CDCAs across a range of crops.
  Banks and agricultural credit cooperatives issue LCAs. In the most straightforward
case, farmers enter into contracts with a trader, issuing CPRs that the trader needs to
pay. The trader then issues CDCAs to the bank for the finance that he requires,
simultaneously assigning the rights under the CPRs. The bank refinances itself by
issuing LCAs.

The secondary market

There is an active secondary market for CPRs and associated instruments. An investor can
endorse a CPR and sell it to a bank, and the bank will pay him the face value of the bond
discounted at prevalent interest rates. The bank can warehouse the CPR, or pledge it to
another bank as part of a security package, or after endorsement, sell/discount it to another
bank. International banks are often the buyer in the second case.

CPRs and other instruments that are registered either in BBM or CETIP can be traded
electronically through the trading network provided by these two organizations. Repo
transactions (sale with promise to buyback or buy with promise of resale) are possible for
financial CPRs (but not for CPRs specifying physical settlement), as well as CDCAs, LRAs
and CRAs, with trade taking place both bilaterally (as long as one of the two parties is a
financial institution) and through CETIP’s electronic trading network.

The secondary market in CPRs and related bonds is also strengthened by the presence of
investors keen to package sets of such instruments. Agribusiness Securitization Companies
have already been mentioned – but they are restricted to investing in CPRs and CDCAs.
More important are the so-called Credit Rights Investment Funds, FIDCs. FIDCs can be
closed-end or open-ended investment funds that can invest in any asset class. But because of
the significant potential of agriculture in Brazil, financial institutions and portfolio managers
have structured dozens such FIDCs specifically for agribusiness instruments and receivables,
and have used them to invest billions of US$.

D. The experience with crop receipts in Russia, Serbia and Ukraine

The European Bank for Reconstruction and Development (EBRD) has promoted the
establishment of crop receipt systems in Russia, Serbia and Ukraine, with the last one making
most progress.

In Russia, EBRD has provided technical assistance for the introduction of appropriate laws
and regulations; supported consensus-building on the issues; and supported the promotion of
the new instrument with farmers, processors and banks.

Work on introducing crop receipts in Ukraine started in early 2011, with a visit of key
Ukrainian decision-makers to Brazil.6 On the basis of this visit, it was possible to draft a law
on the implementation of “agrarian receipts” by the end of that same year, which was passed
by Parliament in 2013. A pilot project was started in 2014 with EBRD and FAO support in
one region; the first crop receipt was issued in February 2015, for 32 tons of oilseeds, and
within a few months, US$ 1.8 million of crop receipts had been issued, by 10 farmers. The
pilot programme was then scaled up to three regions. 7 It is hoped that in the medium-term,
US$ 1.5 billion of new funding will be available to producers.

6
The learnings from this mission can be found in Agrarian Markets Development Institute, New
instruments of financing under future crops – the Brazilian experience of a CPR system: opportunities
and issues for Ukraine, FAO, December 2011.
7
World Bank Group, Switzerland, and Ukraine Roll out Crop Receipts to Expand Access to Finance
for Farmers, World Bank, 15 October 2015.
To be completed with information gathered from FAO/EBRD/IFC staff involved in these
countries’ crop receipts programmes.

E. Guarantee schemes

Capital market funding can be used for direct lending, but it may achieve greater leverage if it
is used to guarantee agricultural loan portfolios, in that way unlocking bank finance. It can be
argued that the main constraint to greater agricultural finance in Africa is not lack of finance
(after all, most African banks are very well-capitalized), but rather, lack of willingness and
capacity to take on risk, and thus investors can have the largest impact if they focus on
providing risk mitigation tools. Traditionally, investors are interested in providing such risk
mitigation tools, e.g. by forming insurance pools or by buying bonds with attractive returns,
but a principal that can be lost if a certain event (e.g., a hurricane) occurs.

The historic evidence with guarantee schemes is mixed, but there are a number of recent
schemes in Africa that look promising, notably schemes supported by the Central Bank of
Nigeria and the African Green Revolution Alliance (AGRA). The capital for these schemes so
far has been provided by donor agencies and governments, but there should be no obstacle in
leveraging these public funds with private funds.

F. Exchange-traded instruments

Crop receipts, as well as other instruments to finance agriculture, can be traded on stock or
commodity exchange. The Mercantile Exchange of Colombia (BMC) has traded both pre-
harvest and post-harvest financing instruments. 8 The pre-harvest instruments all ran into
problems, but the lessons learnt may make it possible to design more robust instruments.

The first form of pre-harvest finance was in the form of the discounting of the future
payments under a contract. Under a scheme introduced in the early 2000s, a sugar farmer, for
example, signed a forward contract with a sugar mill. He then ceded the rights to payment
under this contract to an investor (through the exchange), against cash payment. In 2004,
forward contracts for some US$ 55 million of sugar and US$ 40 million of barley were thus
financed on BNA. But the year after, the scheme collapsed, after one company lost some US$
4.5 million. The payment by the offtaker was conditional on the farmer delivering the
product, and when farmers defaulted, the investors were left unpaid. The structure did not
incorporate (other than the due diligence that brokers were supposed to do) any mechanisms
to manage the risk of non-performance by the farmer. In 2009, the exchange proposed to
reintroduce this instrument with as a new element, insurance to cover contract default by
farmers; but the regulator did not accept the proposal. Nevertheless, with such insurance
incorporated, these products could function well.

A second product took the form of securities issues, with livestock producers grouped into a
Trust which issued securities. These transactions were highly structured, to reduce risks for
the investors to the minimum. Cattlemen in selected regions who met certain selection
criteria signed contracts with a Trust, under which they transferred the ownership rights to
their cattle. The Trust then sold securities on the basis of these contracts, and paid the farmers
the funds received. To ensure that farmers properly fed their cattle, an independent company
was recruited to provide extension and quality control services – this company was liable to
the Trust if its services were ineffective. The marketing of the cattle was controlled by an
independent marketing agent, who was obliged to transfer the funds received to the Trust,
which assigned them in priority to the “repurchase” of their cattle by the cattlemen. Insurance
covered the risk of criminal or terrorist acts. The revenues from the milk produced by the

8
For a detailed discussion of the instruments traded on the BMC, see L. Rutten, op.cit., annex 15.
cattle were also assigned to the Trust. The transactions were over-collateralized - the value of
the collateral much exceeded the value of the securities issued. Despite all of these risk
mitigants, defaults reached 2 per cent of the total issue size, which was enough to put an end
to investors’ interest in the product. The problems were due to unexpectedly low productivity
(the cattle’s weight gain was less than expected), fraud by farmers (who illicitly sold the cattle
to third parties) and cattle theft.

Repurchase agreements (repos) by individual producers constituted the third form of pre-
harvest financing instrument traded on BMC. Repos were traded in cattle, pork and poultry.
A farmer who met a set of criteria stipulated by the exchange entered into a forward contract
with a processing plant. He then ceded the rights to payment under the contract to a broker,
and the plant confirmed the assignment. The farmer also mandated the broker to enter into
repo contracts on the exchange. Each contract was on the basis of the expected value (with a
discount to provide a buffer against price risk) of a certain number of animals. The funds paid
by the investor were paid to the broker, who then transferred these to the plant, which in turn
forwarded them to the farmer. The funds were to be used to buy the young animals, and the
costs of feeding them until they were ready for sale. As individual notes were deliberately
kept small and Colombia had a large spread between “prime” deposit rates and “prime”
lending rates, these instruments were quite popular with retail, corporate and institutional
participants. Unfavourable market conditions (price risks) led to the demise of the products.
An epidemic of swine fever and political strains with Venezuela, an important beef importer,
led to strong falls in demand and with it, strong price falls. Producers were unable to repay the
repos. In principle, there should have been sufficient risk mitigants in the transactions, but
when deals started going wrong, it was found that several of the brokers who were
responsible for structuring these deals had done so rather poorly or even, fraudulently (e.g.,
guarantees and insurances were found inexistent).

The Colombian experience offers a number of lessons:

 There is a clear appetite from investors, both large and small, to finance commodity
production.
 It is seemingly impossible to fully mitigate all the risks in the agricultural cycle. So
while one should systematically build in risk mitigation elements, it will remain
necessary to keep a large buffer between the finance provided and the expected value
of the produce financed.
 Fraud by producers as well as the brokers that structure transactions is a serious risk.

G. Climate bonds

The international financial sector is keenly exploring the potential of climate bonds, bonds
that help fund solutions to the challenges posed by climate change. From January to October
2015, US$ 31.4 billion of climate bonds were issued, but the potential of the market is much
larger – investors who together manage US$ 34 trillion of assets back the climate bonds
certification scheme.9 The market is constrained mostly by the lack of issuers, not by a lack of
investor interest. Investors in this market typically have lower return expectations than they
would have for “normal” commercial bonds, and therefore, when developing CPRs in
Africa’s agriculture, it is worth to consider whether these CPRs can be packaged for
refinancing in the international climate bond market.

There are several types of climate bonds, two of which are of direct relevance to CPRs:
financial institution bonds and portfolio bonds. The first are issued on the back of a
“syndicated portfolio of loans to a set of agricultural borrowers, e.g. local producers
upgrading their operations”, the second has as underlying “related assets” financed by an

9
www.climatebonds.net, consulted on 28 October 2015.
asset manager.10 These would be the equivalent of LCAs, respectively CDCAs in the
Brazilian system, both of which have CPRs as underlying. To be eligible for financing in the
climate bond market, the activity financed must follow proper environmental standards. It can
well be imagined that, for example, value chains that serve the international fair trade markets
or that supply large supermarket chains can be shown to follow such standards (in the
industry concept paper11, “financing sustainable sourcing, e.g., trade finance for certain
products” is specifically mentioned as an eligible activity). Bundling CPRs of this nature for
refinancing through an international climate bond would then serve to reduce financing costs.
Furthermore, it may be interesting for asset managers in certain countries to develop the local
CPR market in order to generate such international bond issues.

H. Conclusion

CPRs are only one of the instrument for pre-harvest finance, and pre-harvest finance,
in turn, is just one of the forms of finance that the agricultural sector needs to develop.
As such, CPRs are not a panacea, but rather just one element in the agricultural
finance toolkit.

CPRs have certain limitations. As there is a risk of non-delivery, the issuing farmer
needs a reasonable reputation, and various risk mitigation mechanisms need to be
built into the transactions – at a cost. For small farmers, the fixed costs of due
diligence and risk mitigation may be too high; and thus, in Brazil the instrument has
mostly been used by medium-sized to large farmers.

Nevertheless, CPRs can be the building block for the further development of capital
market instruments for agriculture. In terms of sequencing the development of the
capital market for agri-finance in Africa, CPRs are thus a good entry point. When
developing CPRs, possible synergies with other initiatives that may be going on, such
as the development of commodity exchanges or the promotion of climate bonds,
should be fully exploited.

10
Agriculture, Forestry and Other Land Uses (AFOLU) and the Climate Bond Standard Background -
Paper to eligibility criteria (Draft), AFOLU Technical Working, Group Climate Bonds Initiative, 9
September 2015.
11
Idem.
Chapter 2 Deconstructing the Brazilian experience – form and function (8
pages)

While Brazil’s experience offers valuable lessons, other countries do not necessarily have to
structure, manage and regulate CPRs like is done in Brazil. The forms that the various aspects
of the CPR market have taken in Brazil were often in response to its existing pre-conditions.
Thus, there is room for adapting the Brazilian system to local conditions.

a. Which farmers?

In Brazil, the CPR market has been mostly used by large and mid-sized farmers with a good
integration into value chains. The vast majority of CPRs are issued by farmers to suppliers
(input companies) or offtakers (processors or traders), not to banks or other financiers. These
supply chain partners know the farmers, and have commercial incentives to supply them with
finance. Doing so through CPRs rather than through, say, prepaid forward contracts or input
sales on credit, offers benefits to both sides. At the same time, the farmers are large enough
to issue CPRs of a size that value chain partners can package and refinance through the
financial system.

The agricultural system in sub-Saharan Africa is rather different from that of Brazil. Most
producers are smallholders who sell surplus production to the market, not farmers who grow
food for sale to the market. The quantities they have for sale are generally small. In this
context, the issuance of CPRs in Africa cannot follow the same pattern as that of Brazil.
Instead, one should consider targeting three different market segments:

1) Commercial farmers and plantations, where they exist (e.g., large grain farmers in
Kenya or Zimbabwe, timber and rubber plantations in Central and West Africa).
2) Processors who buy from many small farmers, who individually are too small to issue
publicly-tradable CPRs – such processors can issue the equivalent of the Brazilian
CDCAs, backed by non-tradable CPRs issued by farmers to the processor.
3) Clusters of small farmers who sell into well-organized value chains. This requires
groups of farmers to cooperate to produce, under a contract with an offtaker, and sell
crops or livestock of a marketable quality. The crops in question can be any – what
matters is the strength of the value chain. If farmers do not cluster into small groups
(consisting of 5 to 20 growers), then their volumes are too low to efficiently arrange
the financing.

In other words, it is not necessary to target, for a programme to develop CPRs in Africa, only
the countries with large commercial farmers. Sectors with well-organized processors (e.g., the
cotton, milk, rice, tomato paste sectors) can be targets as well. Furthermore, where buyers are
leading strong efforts to structure value chains (e.g., procurement systems of supermarkets,
value chains for sustainable/fair trade products), it is possible to build on the strength of the
value chain, as long as farmers are willing to cluster in small groups for financing and
marketing purposes.

The ability of small, but commercially-oriented farmers to raise funds by issuing CPRs can
also be improved through the establishment of new guarantee/insurance schemes. When
financing against future production, there is a whole range of risks. There can be adverse
weather events, pests, diseases or other factors that negatively affect the harvest, or the cattle.
The CPR issuer may decide not to plant the crop that he committed to sell. Or if he plants it,
he may divert the payment through an alternative channel. The farmer who issued the CPRs
may die. For small farmers, financiers cannot afford to do any detailed due diligence to
assess all these risks. Third party guarantees or insurance, by companies that specialize on
this, would remove many of these risks from a financier’s perspective.
 b. Which commodities?

In Brazil, CPRs have been structured around tangible assets (in the case of livestock) and
crops with fairly long cycles (several months at least). If this is indeed the likely scope of
CPRs, the major part of Africa’s future agricultural production cannot be served. According
to a McKinsey projection, most of Africa’s revenue potential in 2030 will be in horticulture
(US$ 490 billion out of a total of 868 billion). The sectors in which CPRs are issued in Brazil
will be relatively much less important: cereals US$ 138 billion, cash crops US$ 129 billion,
livestock US$ 112 billion.

However, there is no reason why CPRs would be limited to long-cycle crops, as it is possible
to issue them against the collateral of a continuous flow of goods produced from a certain
piece of land, as long as these goods are sold to reputable buyers in a well-structured value
chain, or through a centralized mechanism such as an auction. The inspection arrangements
that are normally used at the time of harvest would have to be replaced by active monitoring
of the deliveries made by the farmer to his value chain buyers, and the payments made by the
buyers; and these payments should be through an independently-controlled escrow account.
These modifications will open up the CPR market for key products, in particular horticultural
produce and dairy.

c. The initial drivers for CPRs

The initial growth of CPRs in Brazil was driven by three main factors:

1. Commercial incentives of input suppliers and offtakers. The vast majority of CPRs
are still issued by farmers to suppliers (input companies) or offtakers (processors or
traders), not to banks or other financiers. These value chain partners know the
farmers, and have commercial incentives to supply them with finance – it is estimated
that 30% of input sales in Brazil are through CPRs. Selling inputs on credit through
CPRs rather than through, say, prepaid forward contracts or input sales on credit,
offers benefits to both sides. At the same time, the farmers are large enough to issue
CPRs of a size that the supply chain partners can package and refinance through the
financial system.
2. Precedents in other markets. CPR-type structures were already widely used in other
parts of Brazil’s economy. For example, electricity firms obtained working capital
by issuing bonds committing the revenue of future electricity sales, and real estate
firms financed their projects by issuing bonds backed by the future sale of buildings.
So banks, investors and advisory firms (e.g. lawyers) had a high level of familiarity
with the instruments and their possible uses.
3. A highly supportive government, sending all the right messages.

The first factor can act as a strong driver for the development of CPRs in Africa – input use is
still very low (and the net gains of using more inputs are high), while processors often have
difficulty reaching full capacity utilisation because there is insufficient supply of raw
materials.

However, the second factor is entirely absent in Africa – even the continent’s bond market
remains in its infancy. This will not be a serious obstacle for the initial development of the
CPR market in Africa, but if not remedied will be an obstacle to its growth. While most CPRs
in Brazil are unregistered (and therefore, not a part of the financial market per se, making it
irrelevant whether there are financial sector buyers) these unregistered CPRs probably added
little in terms of extra credit availability to the agricultural sector. Rather, they were a way to
enhance existing bilateral credit relationships, giving borrowers a legally stronger position in
case of a farmer default. New finance came through registered CPRs, and having a liquid
market for CPRs added much to the attractiveness of CPRs for financiers (thus leading to
lower interest rates). A programme for the introduction of CPRs in Africa should thus be
accompanied by an awareness-raising and promotional campaign targeting the continent’s
institutional investors. Such a campaign should target both key financial sector decision-
makers, and the mid-level staff who will have to engage in the actual CPR operations. It may
also be worthwhile for international development finance organizations like IFC keen to
develop this market to include CPR-related finance in their B-loan programme (that is to say,
they provide part of the funding, but the remaining funding by commercial banks continue
benefitting from the organization’s preferred creditor status).

The third factor – a supporting legal, regulatory and policy environment – remains to be
created. This is critical. A large part of the value of CPRs comes from the ease of enforcement
of investors’ rights under the CPRs, and investors have to be able to trust in this. This if
further discussed below.

d. Registration mechanisms

Brazil has multiple separate registration entities, for title deeds over land, for debts in general,
and for CPRs and related instruments. The registry function is critical for the development of
the market for CPRs because of the considerable risk reduction that it brings: for example,
financiers can easily check past transactions and performance by prospective CPR issuers;
they can check whether they owe enough land to issue the CPRs to the amount proposed; they
can check whether the issuer is over-committing his produce. 12 However, it is not necessary to
follow the Brazilian model of multiple registration agencies.

In fact, when it comes to the organization of the registration function, anything is possible, as
long as the information is considered as reliable, assets (including land rights) can be easily
and cheaply registered, and the registry is easily and cheaply accessible (i.e., through the
internet). Publicly managed credit registries (which are already being promoted by the World
Bank in a number of countries) would be well-placed to take on these responsibilities.

e. Monitoring agencies

The riskiest phase in a CPR cycle is when the crops are harvested (or the livestock has
reached the phase of fattening where it should reasonably be sold). The CPR will generally
assume the sale of the crop to a named offtaker, and the offtaker commits to pay to an account
named by the CPR buyer. In Brazil, buyers of CPRs will recruit a monitoring agency to
regularly inspect the crop as it approaches the time for harvesting, and then to be full-time
present during the actual harvest, ensuring for example that the trucks that pick up the crop
are indeed destined for the named offtaker.

As this is a service that is hardly in demand in Africa, such monitoring agents are absent in
the continent. This creates a chicken-and-egg problem. When the CPR market grows, demand
for monitoring services will increase and companies will start providing them. But for the
CPR market to grow, investors in CPRs need to be confident that the revenue from
crops/livestock is indeed used to pay back the crop receipt.

Using CPRs in well-structured value chains is one way to enhance confidence. In such chains,
the producer has significant commercial benefits from selling to the agreed offtaker.
Nevertheless, experience with contract farming arrangements – in principle, a strong form of
value chain – shows that there remains a risk of side selling. Modern technology may help
reduce this risk. For livestock, animals can be equipped with a electronic tracker (with signals
12
Most of the (rare) defaults in CPRs in Brazil were for unregistered CPRs, with farmers diverting the
pledged goods to other parties.
that can be detected from up to 40 km, with efforts underway to integrate them into GPS
systems), which they can be made to swallow, or can be implanted as a microchip, or fitted as
an ear-tag. Such systems have already been introduced in Botswana, Kenya and South Africa,
and the costs are considerably less than the losses that typically result from theft. For crops, as
long as there is internet coverage, fields can be monitored through remote cameras. For more
hands-on monitoring, agricultural drones are now providing opportunities for cheap
monitoring of fields and harvest operations, while vehicles used to transport the harvest can
be equipped with GPS trackers to ensure they indeed go to the agreed buyers.

f. Buyers of CPRs

Buyers of CPRs can include individual investors (including small retail investors who may
buy through an exchange or other organized trading platform); institutional investors who are
not specialized in commodity or trade finance but who include such finance in their overall
portfolio; commercial banks, who use it as a way to provide off-balance sheet finance; and
specialized trade finance funds who get their money from large individual investors, non-
specialized institutional investors (including private banks), or a regional development bank.
Some (hedge funds, private bankers, to some extent retail investors) look for low-liquidity,
high-risk investments, others (insurance companies, pension funds, and to a large extent
investment funds and company treasurers) focus more on high-liquidity, low-risk securities
(there are also large, specialized investment funds that are willing to take high risks, but also
require high liquidity).

In the Brazilian context, all of these actors are present. Africa’s financial sector is not that
well developed. The following suggestions can be made for the initial years of development
of CPRs:
 Retail-oriented instruments should be avoided, as the risks are high and regulatory
structures too weak to properly protect small investors.
 Pension funds and insurance companies should be targeted as buyers of CPRs.
Pension funds in Africa have assets of US$ 334 billion, and are growing rapidly 13,
while insurance companies have US$ 273 billion under management. 14
 In order to provide these pension funds and insurance companies with the deal sizes
that they are interested in, IFC and likeminded Development Finance Institutions
(DFIs) may invest in national and sub-regional investment funds that specialize in
originating crop receipts, acting as an aggregator of small CPRs to issue larger notes
(similar to the Brazilian mechanisms for linking CPRs and CRAs).

g. The secondary market

In Brazil, CPRs are widely used as building blocks for more complex instruments, which has
contributed significantly to the market’s liquidity. This makes it easy for those best placed to
originate CPRs (who may themselves not have access to the cheapest forms of capital) to sell
the CPRs (eventually after packaging) to a second layer of buyers, who in turn can also easily
refinance their investment. This has been a critical factor for the success of Brazil’s CPR
market.

However, in Africa, there are several barriers to the creation of a market, and it is not realistic
to try and develop a similarly broad market from scratch. In the beginning, many CPRs will
have to be warehoused by the original investors. Nevertheless, for the market to grow an

13
RisCura, Africa’s pension fund assets, http://www.riscura.com/brightafrica/social-security-in-africa-
pension-fund-assets/#gs.oQ5_Kw0
14
RisCura, Insurance AUM in Africa, http://www.riscura.com/brightafrica/insurance-aum-in-
africa/#gs.C87=e1c
active secondary market, with financial engineering possibilities building on the primary
CPRs, need to be created. The suggested sequencing of market development is as follows:
1) IFC, with likeminded other financiers, starts financing one-on-one CPR transactions,
which in each country are all registered in a common registry.
2) Participation in these transactions is offered to banks and investment funds, under
conditions similar to that of IFC’s B-loan programme.
3) When a certain familiarity with the instruments has been built among investors, the
right to participate is no longer through invitation, but through public tender, through
an electronic system linked to or part of the registry.
4) IFC and likeminded DFIs promote the creation of national and sub-regional
investment funds, which can not only generate CPRs, but also, bundle various CPRs
into more complex instruments that can be sold to various investors.

h. Legal and regulatory framework

Brazil has created a strong legal and regulatory framework. Key elements include:

- A sound pre-existing legal framework for promissory notes, compatible with the
Convention providing a Uniform Law for Bills of Exchange and Promissory Notes
(Geneva, 7 June 1930) to which Brazil had acceded in 1942. 15

- The legal framework permits farmers to assign rights to future harvests as collateral for
loans. In African countries, it needs to be assessed whether pledge laws relating to
farmers exist, and whether they permit the pledging of future assets (in some countries,
only clearly identifiable assets are permitted to be pledged, which excludes crops that are
not yet in existence).

- Priority over other claims, e.g. in the case of bankruptcy of the borrower (the assets
pledged in the CPR are excluded from the bankruptcy proceedings); and

- The provision of out-of-court dispute settlements, and the consequent rapid dispute
resolution process.

While the creation of the relevant laws and regulations is important for the long-term
development of CPR markets, in the short- to medium-term it is unlikely that investors would
rely on them – they would want to see these mechanisms tested to ensure that they work. In
its initial stage, it may therefore be preferable for CPRs to be developed relying primarily on
contract law. Contract law, including the enforcement of arbitration decisions made according
to it, is upheld in many African countries.16

The suggested approach, then, is to create “African CPR Association”, of which all those
issuing, buying and trading CPRs have to become a member. CPRs are originated and traded
not on an open market, but only within this group, with members who have signed up to the
internal rules and regulations of the Association. This means that all agreements are by
contract, and hence enforceable under contract law – including the arbitration provisions
made by the Association
15
The Convention aimed to provide common ground between civil and common law countries in the
treatment of these critical forms of commercial paper. No African countries have ratified or acceded
to this Convention. It was updated by the United Nations Commission on International Trade Law
(UNCITRAL) with the United Nations Convention on International Bills of Exchange and
International Promissory Notes, adopted by the UN General Assembly in 1988. Three African
countries (Gabon, Guinea and Liberia) have acceded to this Convention; however, lacking the
requisite 10 acceding countries the UN Convention still has not entered into force.
16
For example, 31 African countries are signatories of The New York Arbitration Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June 1958,
 i. Tax issues

In Brazil, the CPR market has benefited from the tax-exempt treatment provided by the
government, both in terms of financial transaction taxes, and in excluding individuals from
paying income tax on revenue from trading CPRs. This has probably supported the market,
but does not appear to have been critical to the initial development of the market or its
growth.

However, while tax exemptions may not be necessary, tax authorities do have to recognize
that CPRs, even physical CPRs, are financial instruments. Therefore, they should be exempt
from Value Added Taxes (VAT). If VAT needs to be paid on each transfer of a CPR, the
development of a secondary market will become impossible.