Despite the enormous commodity potential in developing countries, agricultural finance has been decreasing steadily over the past 20 years and new modes of financing are needed, says a document from the United Nations Conference on Trade and Development.

To become more competitive and carry out higher value-added activities, including through diversification, farmers and other commodity producers must have better access to finance, including through more efficient and innovative loans and other financial schemes.

Financing constraints have worsened over the 10-15 years, particularly for agriculture and agro-processing. This is despite the fact that addressing financing obstacles is a major focus of rural development programmes.

Agricultural finance has been decreasing since the 1980s. In the 1990s, there were steep declines in many countries, often as the result of commercial banks retreating from the sector. Where finance was available, it was mostly provided to large borrowers, thus excluding the majority of small producers from the formal credit system.

In addition, external assistance to agriculture in the LDCs declined, with average annual official development assistance falling by 20 per cent between 1981-90 and 1991-99.

A renewed focus on commodity finance and rural development is needed.

In recent years, work and research, including by international organizations such as UNCTAD, on structured commodity financing has received more attention.

For innovative structured financing mechanisms to work, institutional inadequacies must be overcome. Experience has shown that institutional weaknesses in developing countries, coupled with a failure of governments to provide an appropriate legal environment, has led the banking sector to move out of agricultural finance. These shortcomings must be addressed.

There is also a need for private-public partnerships in commodity finance. Poverty cannot be reduced without business partnerships. PPPs can include investments in irrigation systems and warehouses in rural areas; improvements in roads and other transport infrastructure that link rural regions to ports; development and upgrading of ports and airports; and the building of grading and testing facilities.

Yet another important element is South-South trade. Importing and exporting of commodities between developing countries has expanded rapidly in recent years, but financial support for such flows is still lacking.

Finding ways to strengthen South-South financing can be a win-win arrangement. It can reduce poverty, lower the costs of trade, enhance South-South investment, and bring attractive returns to those providing the finance.

Courtesy: United Nations Conference on Trade and Development