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6 Models of Private Sector VCF

Different models of private-sector VCF exist. Sometimes different models of VCF develop because processors themselves do not have access to finance. For example, in the Ukrainian oilseed sector in the 1990s, farms preferred to sell oilseeds to trading firms through barter contracts against inputs, such as agricultural machinery and fuel oil, rather than to crushers. Because processors (crushers) had poor access to credit, traders, equipment suppliers, and even banks procured seeds for the oilseed crushing factories. Many farms also retained ownership of their product, leaving the crushing plants in their role of subcontractors, who charged a tolling fee for processing seeds. In 1999, around 80 percent of the crushers throughput of sunflower seeds was based on a tolling basis. Under the tolling system, crushers received 13 to 20 percent of the oilseeds delivered to them as their toll payment for crushing. The oil obtained from the rest was returned to the owners (equipment suppliers, farmers, traders), who sold the oil either in the domestic market (competing with the crushers) or exported it (EBRD/FAO, 2002).

Alternatively, if domestic sources of finance are lacking, with tradable commodities foreign traders may provide the necessary finance for the whole chain. For example, in the Kazak cotton chain forward contracting between domestic processors (cotton gins) and international cotton traders provided the gins with financial means to pre-finance the farms' inputs (Sadler, 2005).[1] Hence the gins received themselves VCF from the international traders that they then used to finance their own VCF schemes with cotton farms. However, more generally, one can distinguish several “classes” of VCF.

6.1 Trade Credit

In its most simple form, VCF comes down to credit supplied by traders and middlemen. Trade credit usually involves short-term seasonal loans, in cash or inkind, generally between agricultural producers and produce buyers (or input suppliers). These type of trade-credit relations often do not involve a purchasing agreement and the farmer is free to sell his produce to other buyers as long as he can pay off his debt. However, crops are used as collateral and in case of default the trader/middlemen cashes in on the standing or harvested crops as loan repayment. The provision of credit through middlemen and small traders is mostly informal, and often based on social and personalized trade relations.

  • [1] The resulting ownership structure is the opposite to that in the United States or Australia, as the Central Asian farms, mostly small farms that have limited access to finance, sell the cotton to gins while in the United States and Australia farms maintain ownership of the cotton throughout the chain, and gins are paid as service providers.
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