Allocating production risks through credit cum insurance contracts: the design and implementation of a fund for small cotton growers to access market finance
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Media type:
E-Article
Title:
Allocating production risks through credit cum insurance contracts: the design and implementation of a fund for small cotton growers to access market finance
Contributor:
Alem, Mauro;
Elias, Julio Jorge
imprint:
Brill, 2018
Published in:International Food and Agribusiness Management Review
Description:
<jats:p>Collateral requirements that lenders place on small cotton producers can lead to risk rationing and to farmers’ dependence on downstream parties. This paper presents a cotton fund that consists of a set of contracts – credit, insurance, warrant and forward – that enables producers to tackle specific agricultural risks and gain access to market finance. These financial contracts proved to be successful at guaranteeing the fund as issuer of state-contingent debt securities in the capital markets. The fund, as an intermediary, lent to cooperatives to help finance small cotton producers in northern Argentina. The paper explains the experimental design of this innovative fund and presents a potential alternative to government intervention by moving away from <jats:italic>ex post</jats:italic> subsidies for small producers and, instead, facilitating <jats:italic>ex ante</jats:italic> private credit. The paper contributes to the literature on rural financial intermediation by designing a new mechanism to raise funds coming from relatively uninformed investors and creating collateral substitutes through delegated monitoring to overcome asymmetric information and limited commitment.</jats:p>