Spotlight on the head of the agribusiness department of DEG

Ms Hollmann, for many years DEG has been financing enterprises in developing countries that operate in the agricultural sector. What are the motivations?

Food is an essential basic need. In our view, this fact alone is reason enough for co-financing the production, distribution and processing of foodstuffs. Furthermore, the agricultural sector creates work and income for a large proportion of the rural population, especially in remote regions. Investments in agriculture and the whole value chain therefore make a significant contribution to food security for the growing world population.

However, agriculture is an important sector of growing significance well beyond the aspect of food production: in line with people’s income in developing countries, there is an increasing need for renewable raw materials such as wood, rubber and cotton – but also for energy. With our financial and advisory measures we have frequently helped agricultural businesses to become self-sufficient in energy through the efficient use of their organic waste materials (e.g. rice husks, cocoa or nut shells) or even supply their unused energy to the power grid.

What are the main objectives of your projects?

We want to be a reliable financing partner for sustainably managed agricultural enterprises. We advise our clients and develop action plans with them for environmentally friendly, resource-conserving and climate-compatible investments. By financing investments aimed at increasing production and productivity in farming – if possible, by the use of brownfield sites – we are contributing to the supply response in developing countries.

In order to combat hunger effectively, it is important to us that jobs and income are created especially in rural areas so that people have better access to food. This is why we place great emphasis on socially responsible investors who comply with the core labour standards of the International Labour Organization and to whom fair contractual relationships with suppliers, customers or in connection with land acquisition are important.

In addition, there is an urgent need to reduce post-harvest losses in developing countries. Accounting for 40% of all foodstuffs produced, they cause substantial damage to business and the economy. As well as agribusiness and the food industry, DEG finances investments in modern, efficient warehouses and cold stores, in transport infrastructure (e.g. port terminals) and in energy projects.

What are the particular challenges facing the agricultural sector in developing countries?

It varies widely from region to region. Generally speaking the growing conditions are becoming more difficult because of climate change with its extreme weather phenomena. Applying the water risk filter developed by us and the WWF, we provide free access to a comprehensive database that enables investors to check the “water risk” of their project and, where necessary, obtain advice on risk-limiting measures.

Considering widely fluctuating harvests as well as speculative influences, the volatility of prices for farming products has further increased. This can entail social problems in developing countries, but it also makes high demands on the financial management of agribusinesses. DEG supports its clients, partly by providing advice on the risk management of price fluctuations.

Rural migration into cities, the unattractiveness of working in farming and the low level of education in many agricultural regions pose additional challenges. Therefore public investment in school education and occupational training is urgently needed. Agriculture has to be transformed from subsistence farming into a professional and economically attractive career. In my view, inadequate or unclear rights of land ownership are another subject that must be tackled at the state or government level.

What does DEG’s financial commitment usually involve?

Our financing is long-term; depending on its use, funding runs for 5 to 15 years on average. The type of financing – loans, participations, guarantees or mezzanine finance – is guided by the company’s needs. The terms and conditions are governed by the risk profile.

Based on our many years’ experience of agricultural financing, we are familiar with the particular features of agribusinesses, such as seasonal production cycles, natural crop fluctuations, price movements with their corresponding impact on the balance sheet structure and liquidity needs of our clients. This is why ultimately every financing solution is tailor-made.

Can you give an example of agricultural financing?

One example is a Zambian company that we provided with long-term financings at market-oriented terms from our own resources. We made around 20m US-dollars available for investments. Today the company employs around 5,000 people in Zambia.

The company produces staple foods such as meat, milk, dairy products, eggs, edible oils, flour, and bread, thereby significantly contributing to Zambia's food production. The wages that the company pays to its employees furthermore secure the income and food security. It additionally offers the local population free support in issues concerning production and processing of its crop yields. This helps to boost the smallholders's productivity - a further contribution to food security.

It sounds as if mainly larger companies are considered for financing. But most farmers – especially in Africa and Asia – are smallholders or have small family businesses. Can they benefit too?

Yes, admittedly not always through direct financing, but for instance via our commitment to local banks and specialised SME and agrarian funds which, with the aid of DEG financing, make loans available to small and medium-sized agricultural enterprises.

Besides, around half of our clients in the sector work with smallholders in various forms of contract farming and often pre-finance their harvest. DEG frequently covers the constant, associated need for financing of working capital. In so doing, DEG pays particular attention to ensuring a fair contractual relationship between the company and the smallholder farmers. In a number of cases, we additionally support smallholders with agricultural training provided through our Technical Assistance programme.

What do you consider the future focal points of DEG agribusiness financing?

We want to support our clients on their path towards a more social, more sustainable and more efficient agribusiness by means of our individual financings. We are focusing increasingly on equity and mezzanine financing, where there is a particular high demand in the agricultural sector. Furthermore, we will expand our advisory services in the area of resource efficiency. It is absolutely essential for us that by doing so we help ensure people are better fed, gain skills and are able to develop their future prospects.

Franziska Hollmann has nine years of experience with financing agribusiness companies; she has been head of the Agribusiness Department of DEG for three years.