The agricultural sector is undergoing radical change, and its financing methods are being transformed. Faced with these changes, we need to ask ourselves: what are the prospects for farms?
To analyse this question, we asked Laurent Chevalier of Soliance Alimentaire and Olivier Fray and Baptiste Andrieu of Canopée Consultingsignatories of a recent study that explores the challenges of financing agriculture and the innovations emerging to meet the sector's new challenges.
Farm financing has a number of specific features. First and foremost, it's important to consider the farm as a business in order to understand its financial needs. Indeed, the image of agriculture in France is often far removed from that of a business.
As entrepreneurs, farmers need to generate sufficient profits to invest in tools that comply with production standards, and to keep up with price inflation (+30% for tractors in three years).
The transfer of farms is another crucial issue in the agricultural world, as it represents a major source of income for retiring farmers. Conversely, it represents a major investment for young farmers wishing to set up in business, with the cost of setting up having risen considerably over the past 30 years.
In this context, the issue of financing agriculture raises a number of questions, which were the subject of a study carried out jointly by Soliance Alimentaire with Olivier Fray and Baptiste Andrieux of Canopée Consulting, commissioned by the French Ministry of Agriculture and Food Sovereignty. This study, carried out in 2023, aimed to address the issue of the financing gap. In a report by the European Commission, it was estimated that the agricultural sector would need almost 2 billion euros by 2020.
Traditionally, agricultural loans and guarantee funds have been the best-known financing tools in the farming world.
According to the Banque de France, total outstanding loans amount to around 60 billion euros. To facilitate access to this financing, guarantee organizations such as SIAGI or Terena are available.
In addition to these loan systems, national guarantee funds such as INAF or regional funds such as Foster in Occitanieprovide additional support for farmers.
However, these solutions represent only a fraction of the funding available, and many innovations are emerging.
It is important to specify that in this study we are talking about farm financing, i.e. the French farm. The scope of the study excludes issues relating to agricultural land (already addressed in a previous CGAER study) and agricultural cooperatives.
The aim was to explore innovative financing solutions, asking how to finance the farm of tomorrow, the agro-ecological transition and farm expansion.
As we have seen, historically, this financing has mainly consisted of bank loans. This study has brought to light new tools outside the banking framework.
French agriculture is facing two major challenges, each with its own financing needs.
1- Adaptation issues such as climate change, agro-ecological transition, biodiversity and food sovereignty have a direct impact on the financial needs of farms.
2- A profound change in the fabric of agricultural businesses
These changes are creating new financing needs adapted to tomorrow's agriculture.
To identify innovative financing solutions in the agricultural sector, it was essential in our study to define precisely what constituted genuine innovation.
1- Financing solutions exist, but they are new to the farming world
2- Financing exists in the agricultural world, but its implementation is innovative
3- Innovative financing solutions dedicated to agriculture
Based on this categorization, we have identified three levers of innovation in agricultural financing.
New non-bank players are entering the market. For example, in South America, where bank penetration is lower than in France, crypto-currency financing launched by start-ups is emerging, backed by agricultural commodities.
New tools are being developed to model the risks typical of the agricultural sector. These specific risks include climatic hazards, year-on-year sales variability, and intrinsically lower profitability spread over a longer period than in other sectors. These risks are taken into account by banks, but poorly understood by Tech investors.
Investors are increasingly incorporating environmental, social and governance (ESG) criteria into their investment decisions.
These three components contribute to innovation in the financing sector.
A number of financing solutions are emerging on the market to support the sustainability of agriculture, notably through the agro-ecological transition and the development of regenerative agriculture. These involve partnerships between banks, manufacturers and farmers. The most common pattern is for the industrialist to support the farmer in his new practices by financing the interest on a loan obtained from a banking entity.
Each player benefits from this collaboration:
Laurent Chevallier, from the Soliance Alimentaire agency, explains: "This issue of financing the sustainability of agriculture is part of a global greening of the financial system. We're hearing a lot of talk at the moment about CSRD, the European green taxonomy."
The European green taxonomy, which aims to direct investment towards sustainable activities, does not include all areas of agriculture, such as livestock farming. In the near future, this will raise the question of which financing tools to use to fund tomorrow's livestock farmers.
With regard to CSRD, agri-food companies will be required to produce extra-financial reports including their carbon footprint, with a particular focus on Scope 3. For an agri-food company, Scope 3 encompasses all of its upstream agricultural activities, i.e. farming. As a result, these companies will be encouraged to exert positive pressure on farmers to reduce their carbon footprint and thus contribute to achieving the targets set by the Paris Agreement.
Innovative financing is an essential lever for supporting the agro-ecological transition and making farms more sustainable and resilient , and it will be important to continue developing new solutions tailored to farmers' specific needs to help them meet tomorrow's challenges.
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