Pre Harvest Financing

Farmers often face difficulty obtaining pre-harvest financing for production because they are unable to satisfy the demands of lenders for risk-managing collateral. An agrarian receipt is essentially a promise to supply agricultural products or to make payment after the sale of agricultural products in future in return for getting resources (financial or commodity) at the time of receipts issuance for business activities.

A properly functioning system for agrarian receipts makes agricultural financing more attractive for potential creditors and improves farmers’ access to pre-harvest financing from banks, agricultural input suppliers, traders, and processors.

While the details of this financing system will be adapted to each country’s specific needs, a system for agrarian receipts will generally possess some key characteristics:

• The receipt itself is a bond issued by farmers, producers, or farmers’ cooperatives, whereby the issuer promises to deliver agricultural products or a financial sum at a given time.
• Being subject to the promissory note rules, the issuer’s grounds for refusing to honor his or her obligations are strictly limited.
• A system of registration publicizes the existence of the bond to the public.
• Commonly, agrarian receipts are secured by a security right created over the future products or a mortgage over the farming land as chosen by the contracting parties.
• Parties may agree on out-of-court enforcement.

The major advantage of a well-functioning agrarian receipt system is the reduction of risks for potential lenders. Out-of-court enforcement guarantees rapid execution and avoids long, uncertain court proceedings. Agrarian receipts may further provide alternative liquid collateral where the underlying land has already been mortgaged, and allow lenders to hedge their price risk.

Notably, agrarian receipts were successfully introduced in Brazil in 1994 with the creation of the CPR (Cedula de Produto Rural – Certificate of Agricultural Product) and helped to mobilize private financing of agriculture after a reduction in government involvement in agricultural finance. Ten years after their introduction, an estimated 5 billion US-dollars per year in CPRs were negotiated over and under the counter.

More recently, several countries in Eastern Europe, with FAO and/or EBRD assistance, have embarked on introducing pre-harvest financing instruments in form of agrarian receipts in their legislation, tailored to specific country conditions and legal traditions.