Agribusiness finance is the economic study of the acquisition and use of capital in agribusinesses. Agricultural credit refers specifically to the process of obtaining control over the use of money, goods and services in the present in exchange for a promise to repay at a future date. Agricultural finance deal with the supply of and demand for funds in the agricultural sector of the economy. Knowledge of fundamental economic management principles and analytical procedure facilitates obtaining control over capital and using it efficiently.
• Investment analysis helps determine how much capital it will pay to allocate to alternative uses.
• Financial analysis relating to income, repayment capacity and risk management indicates the total amount of capital the farm business can profitably and safely use.
• Information on legal aspects of borrowing, leasing and contractual arrangements helps the farmer/agribusiness manager select the means of acquiring and controlling recourses that will contribute most to his farming operation.
• Knowledge of the legal and financial aspects of retirement and estate planning can ensure an orderly transition and transfer of farm business to the next generation.
• An understanding of agricultural credit institutions and the legal and regulatory environment in which they operate helps in the selection of lenders who can provide the proper amount of credit along with the terms and related services needed to adequately finance the business.
Even though, agricultural finance and agricultural credit are not the same, the terms are commonly used interchangeably. This is because the study of the acquisition and use of capital naturally leads to the process of obtaining and using the capital.
Flow of funds in an Economy
There are three key players in finance:
(i). The savers or investors of capital
The key source of funds for the macroeconomy is the individual households. Families and individuals who set aside some portion of savings provide the major source of funds for the users of capital. Other sources of funds are business savings and government surpluses when they occur.
(ii). The borrowers or users of capital
Agribusinesses access funds through the financial markets
(iii). The financial markets and institutions.
They facilitate the flow of funds from investors to users. Financial intermediaries such as commercial banks accept savers’ deposits and invest them in loans and securities, profiting n the interest rate differential. Middlemen derive a commission with each transaction, such as the sale of stock and bonds.
The Continued Needs for Credit for Agricultural Development
Agricultural Credit is an important instrument for channelling funds from Savers to borrowers in amount necessary to finance production expenses and capital expenditures. With the removal of subsidies on inputs in the 1990s and the increasing costs of the inputs required to carry out farming operations, there is always need by farmers for credit to be able carry out the operations, purchase the inputs and fulfil their domestic obligations. Farmers need credit to expand their scales of operations and improve on the levels of technology, as accessibility has implications for technology adoption. For the agricultural sector to perform well, credit is essential for the achievements of sound economic and social development, which the nation requires.
Farmers are resource poor. They therefore need money to purchase their requirements and increase productivity in growth and output. This could be achieved through credit supply. Suitable credit delivery and collection system can be used to facilitate the procurement of production needs of farmers. Credit is needed to break the persistent vicious cycle of poverty among farmers. Farmers need credit to practise commercial production.
The Roles of Credit for Agricultural Development
Adoptions of modern technologies require capital. Farmers’ incomes are seasonal while their working expenses are usually spread over time. However, farmers’ inadequate savings require that some credit be harnessed to meet the increasing capital requirements. Credit is a unique resource that provides the opportunity to use additional inputs and capital items in the present to pay for them from future earnings.
In most developing countries, the development of agriculture has not yet reached the stage where the average small scale farmers make efficient use of farm credit and also of credit facilities. This fact is attributable to their traditional approach to farming and other socio-economic problems such as land tenure system, the condition under which the farmers works, illiteracy etc. Also, the risks involved in modern farming are more that the traditional farmer can bear. Farmers are therefore left in a situation where they cannot make proper use of credit and credit institutions.
Role of credit in farm business
1. To protect against adverse conditions
Weather, disease and price are all uncertainties in farming. Risk also is virtually impossible to eliminate in farming. Credit can play a major role in protecting the business from financial failure or liquidation when adverse conditions occur.
2. To meet seasonal and annual fluctuation in income and expenditures
Inputs must be purchased in one period and products are sold later in the years, so cash inflows and outflows typically do not occur at the same time. Using credit to smooth out these fluctuations and so match cash inflows and outflows is essential to efficient operation.
3. For production purpose
This may be to buy inputs such as seeds, fertilizer, tractors, chemicals etc.
4. Increase Efficiency
The use of credit makes it possible to substitute one resource for another. For example, machinery might be substituted for labour as a means of reducing cost, improving timeliness and increasing the efficiency of the farm business.
5. Adjust to changing economic conditions
New technological development or changing market conditions may require major adjustment. For example, change from one enterprise to another may require major capital investments.
6. To meet unproductive purpose such as meeting expenses of marriage, funeral, festival, clothing and feeding the family.