Agriculture Needs Financial Instruments

The needs in the agriculture and processing sector in Poland have become the subject of fi-compass research. As representatives of the European Commission say, Polish agricultural sector needs as much as EUR 6 billion, and the financial gap in agriculture accounts for half of the country’s deficiencies. The greatest difficulties to obtain funding are encountered by young farmers and new entities. Financial instruments can help with these problems.

Fi-compass is a platform for advisory services in the field of financial instruments under the European Structural and Investment Funds (ESIF) programme. It is provided by the European Commission in cooperation with the European Investment Bank.

Financial instruments are implemented with the use of all European structural and investment funds, and the report on their share in financing Polish agriculture was discussed today at the conference entitled “Financial Needs of the Agri-Food Sector in Poland”.

Financial instruments required under the new CAP

Maciej Gołubiewski, Head of Cabinet of the EU Commissioner for Agriculture, stated that the negotiations on the CAP have entered a decisive stage; a compromise, which will allow the implementation the new CAP from 2023, is expected to be reached in May-June. As he emphasized, in 14 Member States lending has been concentrated in the hands of a limited number of intermediaries, which allowed them to set their own financial terms (e.g. as regards the loan period and interest rate). Farmers may also find it difficult to provide the required guarantee. Young farmers and new entrants, constituting 50 percent of this group, suffer the most. This causes difficulties. It is estimated that in Poland this gap amounts to EUR 3-6 billion. Financial instruments can close it. 50-70 percent of the financial gap in Poland concerns agriculture.

In Poland, the offered financial instruments were expanded in 2018: in the future the Polish Reconstruction Fund will have at its disposal EUR 72.5 billion, and the RDP – EUR 8 billion.

Financial instruments are needed and Member States are already proposing their own financial solutions. Financial instruments will play a key role in the Green Deal and in bringing about change.

Due to the new “Farm to Fork” and “Biodiversity” strategies there will be many new needs, also requiring investments and digitization, especially in the field of organic farming.

Digital investments are more attractive and accessible. Monitoring and reporting is also simplified. The member states will decide for themselves which instruments they want to implement.

The Commission formulated customised recommendations for each country: in the scope of financial instruments for 14 states and removal of obstacles for 4. Financial instruments are therefore necessary in each country, as they can improve the situation. The Commission is working on the agricultural vision until 2040. It encourages consultations.

Poland after the pilot of financial instruments

Monika Grążka, Head of the Department of Technical Assistance and Promotion of the Ministry of Agriculture and Rural Development, stated that agriculture is one of the most important sectors of the economy. The difficult time forces you to analyse the market situation. Support from public funds is necessary and provided mainly in the form of subsidies, although financial instruments have been implemented for several years also under the Agricultural Guarantee Fund. This is a pilot initiative. Returnable support was launched under the RDP “Modernisation” and “Processing” measures. BGK established the Agricultural Guarantee Fund, the first financial instrument co-financed from RDP funds to facilitate access to loans. It was predicted that EUR 50 million should generate PLN 1.1 billion in the form of lending. Therefore, support in the form of subsidies was complemented by repayable aid in the form of loan guarantees.

Until now, it has been an investment instrument, but as the pandemic led to the need to provide guarantees also for working capital facilities, the support was adjusted. Designing financial instruments under the new perspective and adapting them to the present needs is currently a great challenge.

Research on financial needs in agriculture and the food sector

Miglena Dobreva, advisor to the European Investment Bank, presented the results of the research on financial needs in agriculture and the processing sector. They were carried out in 24 countries to assess the gap. The funding gap is calculated based on rejected loan applications filed by viable enterprises. Applications not submitted due to the expected refusal or rejected by those in need after receiving an offer that they considered unacceptable were also taken into account.

50-70 percent of the gap is attributable to small entities, which have problems with providing collateral and are poorly perceived by banks. In the agri-food sector, 80 percent of the gap applies to small enterprises and 62 percent the gap concerns long-term loans (extended for over 5 years).

Michał Deuszkiewicz, a researcher from Ecorys, added that in 2018 the amount of investment in agriculture amounted to EUR 1.3 billion and that the gap is reaching half of the investment value.  Polish companies have a small production volume, so there is a need for investment and modernization. And at the same time new markets are sought, which makes it necessary to meet new standards. Employee costs have significantly increased, which is accompanied by an outflow of workers. The cost of materials for production has also been increasing. Climate change – droughts, extreme weather events – also affect production. He assessed that the financial gap pertains mainly to medium- and long-term financing and affects mostly young farmers (this problem is on average twice as dire in Poland as in the EU). Low-production companies with low employment, young farmers: these are the groups that have the least possibility to take advantage of the loans.

Over 50 percent of institutions financing the needs of agriculture are cooperative banks and 44 percent are commercial banks.Before the accession, an average tractor in Poland had several dozen years, now it is ten-odd years; still, in the EU the average is 7 years. Loans are mostly secured with land, and its value is lower than the investment needs. Accounting deficiencies also limit the ability to assess the financing and profitability of a given enterprise. The report recommends that the tools should be targeted to meet the existing needs. These are medium- and long-term loans related to investments. The main difficulties consist in understanding the risks associated with investments and risk management, which could be alleviated with trainings.

Small farmers and small businesses are the groups most in need of this kind of support.

Does Poland have specific needs?

When comparing the situation in Poland with that in other countries, Miglena Dobreva stated that each country has its own issues. Her impression from the Polish report is that loans are growing in both sectors: most farmers apply to banks only for long-term loans, and for short-term needs they tend to rely on private support. Cooperative banks dominate this sector and play a greater role than commercial banks. There are a number of instruments that can be used – not within the framework of the RDP. Leasing is a good alternative for farmers. FGR instruments have been available on the market since 2018, but there is still a gap and a need to modify the instruments to make them better suited to the farmers’ needs.

Michał Deukszewicz spoke about the gap in co-financing for young farmers, which in Poland is twice as large as in other EU countries. He explained that pensions are low, so parents work until old age and avoid transferring farms to the younger generation. Hence the disparity between Poland and other EU countries.

Miglena Dobreva recalled that financing outside the banking market consists mainly in leasing. As regards long-term financing, e.g. for the purchase of machinery and equipment, Polish farmers do not ask family or friends for financial aid, but apply for commercial loans. Short-term needs, on the other hand, are more often met without involvement of the banks.

Michał Deukszewicz assessed that new markets would result in the need to increase production and meet new standards. Costs would increase, which with stagnating prices would result in the need to optimise production, reduce materials such as fertilisers and introduce technology innovations, which in combination with climate change would drive investments. He predicted that production volume, productivity and climate change would power the sector.

Will the demand lead to a richer offer and an increased use of services for agriculture?

One of the conclusions of the report is the need for training.

Ryszard Kogut, Deputy Director of the Department of Technical Assistance and Promotion, MARD, discussed the documents on the basis of which financial instruments are established. Financial instruments were established in Poland in 2018, an agreement with BGK was signed in July 2019, and from June 2020 the mechanism also covered working capital COVID loans (currently they can be granted until the end of June 2021). The current budget for guarantees and interest in working capital loans amount to EUR 68.6 million. As calculated, the guarantee risk in the agricultural sector is 23%, whereas the target group, i.e. the demand for guaranteed loans, is 30 percent among farmers and 80 percent among entrepreneurs. It was established that the mobilisation of PLN 50 million from the RDP will allow PLN 1.1 billion to be taken out as loans. Financial instruments in Poland are of a pilot nature. According to Ryszard Kogut, the calculated financing gap is EUR 2,8 billion. The need for support has been established for two RDP measures: “Modernisation” and “Processing”. PLN 5 million is the maximum amount of guarantees for farmers, and PLN 10 million for enterprises (up to 80% of the loan).

In the new perspective, the support is to be maintained. It has been planned that it would concern investments and cooperation within the food chain. Evaluations are still being prepared and the final form of the financial instrument will be proposed for the new period.

Ewa Chudoń from the ARMA Investment Project Assessment Department informed who can now benefit from support in the form of financial instruments and what is the role of the agency in their implementation. She emphasised that audits on combining loans with subsidies show that the clients of these two forms of support are different groups.

Ryszard Kogut announced that the additional instrument in the form of COVID working capital loans was met with great interest: by the end of March, such loans amounting to PLN 280 million were granted to 2,000 borrowers, which corresponds to 30 percent of all planned lending. These loans may be offered until the end of this year, but steps have been taken to extend this period.

Are there financial instruments specifically tailored to the needs of organic farming? Ryszard Kogut noticed that these entities may also benefit from this type of aid, but they are not the priority here.


Bank representatives assessed the guarantee fund

Piotr Natkański, Sales Director at Bank Gospodarstwa Krajowego, presented various guarantee instruments used by BGK in addition to agricultural ones: the offer includes COSME guarantees (PLN 5.6 billion, PLN 7 billion in loans) and Businessmax (from the Cohesion Policy, using EU funds; guarantees were granted for PLN 1.34 million, which corresponds to over PLN 2 billion in loans). As part of agricultural guarantees, contracts were signed with 11 banks, under which 2,300 guarantees were granted for PLN 360 million. This allowed to generate PLN 460 million in loans. More and more guarantees are taken over under working capital loans. An average guarantee is PLN 154 thou. The guaranteed loans are used by agriculture, processing and trading companies. It should also be noted that approximately PLN 250 million is financing under COSME for the agricultural sector. Importantly, the guarantee is free, no commission is charged, and the security is a blank promissory note. The maximum guarantee period for a working capital loan is 39 months.

The main advantages of this form of loans are: facilitated access to financing, no collateral costs, interest rate subsidy and flexibility in managing one’s own assets. Each guaranteed loan should be granted on more favourable terms than the standard ones (e.g. longer grace period or loan period). In the opinion of the director, interest subsidies (now 2 percent per annum) should be a permanent element of guaranteed loans.

Danuta Różanek, Head of the SGB Business Client Department, said that cooperative banks and SGB are the leaders in the field of guaranteed agricultural loans. Out of 192 as many as 165 banks started to grant these loans, so the interest in such a collateral is growing. They are mainly used by farmers. Until March, 830 customers obtained loans with collateral for PLN 179 million; 143 million were guarantees, 91 percent – working capital loans. SGB’s market share is 40 percent.

Recently, a dynamic increase in loans has been observed (more than 1000 of them have already been granted); those are mainly working capital loans and are used mostly by farmers.

Maciej Piskorski, Head of the Department of Agricultural Products at BNP PARIBAS Polska, reminded that a bank may grant a loan only if the customer is creditworthy. Of 33 billion for agricultural financing, approximately 30 percent falls with BNP PARIBAS, which makes the bank’s market share significant. He emphasised that commercial loans, i.e. those without support, are also an important sector of financing. He assessed that when it comes to loan guarantees, this is a very good solution. He pointed to the need to limit reporting and automate the credit process, which reduces the cost on the bank’s part. When financing investments, it is important to not have any security on property or own contribution, so it is crucial to limit them.

He admitted that lowering the cost of risk allows to limit the cost of the loan for the client. With a loan guarantee there is a possibility to introduce a longer loan period and a lower own contribution.

Danuta Różanek assured that banks inform farmers about the detailed features of the product. Piotr Natkański stated that the interest in loans (especially liquidity loans ) is growing. Slightly over a half of the available budget has been used, so banks still have free limits for guaranteed loans. The pace of their granting proves that allocation will suffice until the end of the year. An increase in the allocation for the following years is expected and the product will be developed in line with market expectations.

Silvia Michelini, Head of DG AGRI, summed up the meeting by stating that progress has been made in the field of financial instruments in Poland. Future investments can be supported and the new CAP and Structural Funds offer great opportunities and flexibility to implement various forms of financing. Research into conclusions about the future of funding shows what needs to be done. It is difficult for farmers to access financing, which must be taken into account in the future. Poland will consider the use of financial instruments in the new period.

See also!

Application collection procedure for irrigation and construction of manure plates to commence soon. Soon, ARMA will launch the application collection procedure for financial aid for investments aimed at protecting waters against pollution with nitrates from agricultural sources as well as farm irrigation systems. The application collection procedure for investments on farms located in Natura 2000 areas is also planned.