However, alongside this, there are several bottlenecks hindering the development of commodity financing. The intricacies of commodity lending in Ukraine and the world are explored by Nikolai Volkov, an advisor on access to financing for the USAID AGRO Program. What are the volumes of this market in Ukraine?
In Ukraine, thousands of agricultural producers utilize commodity loans. The turnover in this sector reaches billions of hryvnias. Statistical data indicates that commodity loans are the third most popular means of obtaining financing in Ukraine's agribusiness.
For instance, according to UKAB, during the spring sowing campaign of 2024, 8.5% of funds ($544 million) were attracted by agrarians specifically through commodity loans.
In the European Union, commodity loans are most popular among small and new farming enterprises, as banks often refuse to lend to them. According to the European Commission, over 50% of applications from such farms are rejected by banks, while this rate is 32% for established farming enterprises. The reason is clear: these farms are considered high-risk.
However, there are solutions for such cases. For example, there is the mechanism of selling commodity loans. The party providing this service reduces its risks and gains the ability to be more flexible in resolving financial issues.
With the support of the USAID AGRO Program, commodity loans can be obtained from seven market players: ADAMA, Himagro M, Agrosource-A, West Agribusiness, UKRAVIT, Makosh, and Agro Arena.
This targeted lending is aimed at acquiring seeds, fertilizers, protective agents, spare parts, and other working assets of agribusiness with additional benefits for agricultural producers. The volume of commodity loans under this program is expected to exceed 1.7 billion UAH by 2025.
The limited liquidity of material and technical resource suppliers is a major hindrance. Recently, there has been a growing demand from them for refinancing part of their commodity loans through transfer/sale to other investors. Such investors can include banks, financial and factoring companies, and investment funds.
Another issue is that the Ukrainian market lacks a universal solution for developing the secondary market for commodity loans. The USAID AGRO Program has developed a concept and a roadmap in collaboration with suppliers of agricultural resources, services, IT services, banks, financial companies, and strategic investors.
The program plans to support the creation of an ecosystem that will optimize client portfolio analysis and improve interaction among participants in the secondary commodity lending market. It will combine the advantages of commodity loans and bank financing for farmers.
What will such a system provide? It will help companies to receive cash more quickly and reduce currency risk when transferring their debts to banks.
Yes, let's outline the advantages of selling commodity loans:
Increased liquidity for suppliers and buyers. Suppliers of agricultural products can quickly receive cash by selling commodity loan portfolios, allowing them to continuously finance their operations without waiting for the installment payment terms to end. This is especially important during peak seasons or when quick purchases of new resources are needed.
Financial inclusion. Farmers, even those without prior banking experience, can quickly access banks and may subsequently receive better lending terms through partnership or government programs.
Mitigation of currency risk for agricultural producers. During the transfer of the bank debt, the debt is fixed in hryvnias.
Business scaling. Suppliers gain the opportunity to secure financial resources for development, expand production capacities, or cover costs for purchasing goods. This creates additional opportunities for businesses without the need to attract traditional bank loans, which may be complicated or time-consuming.
Stimulating the development of agribusiness. Financial institutions that buy commodity loan portfolios become interested in the growth of the agricultural sector, as this gives them access to a broader market, even to clients who have not had prior banking experience.
Increased transparency of financial operations. Since commodity loan portfolios are formed and sold based on verified and agreed contracts, this helps reduce the level of fraud and risks. For banks, this also means access to verified credit histories and real data about clients' business solvency.
Support for innovations in agribusiness financing. Such agreements stimulate the development of new financial products and instruments that promote innovation in the agribusiness sector. This may include new risk analysis methods, financing models, or even specialized products for agricultural producers.
What are the additional advantages of the secondary commodity loan market?
Suppliers will gain access to liquidity for replenishing stocks for the next season. This will also help them overcome cash deficits, reduce credit and currency risks, and expand credit limits. Banks, in turn, will benefit from investing in financial operations and earning interest and commission income.
Finally, agrarians will have broader access to trade credits for purchasing resources while minimizing their currency risks.
USAID AGRO is working on creating an ecosystem for the secondary commodity loan market, which could significantly improve access to financing for agricultural MSMEs. This will help attract banks and other financial institutions to finance the smallest segment of the agribusiness (up to 500 hectares) and contribute to the growth of Ukraine's agricultural sector.
Nikolai Volkov, advisor on access to financing for the USAID AGRO Program