However, the average annual growth rate of the agriculture sector was 4 percent between 2010 and 2016, lower than the 5.4 percent recorded at the national level. During that period, the average contribution of agriculture to the national GDP was about 13.9 percent, second only to manufacturing at 21.8 percent and ahead of the sectors of trade and construction at 13.7 percent and 9.9 percent, respectively.

Despite the significant role of agriculture in the GDP, Indonesian farmers are generally not prosperous. Based on data of farmers’ terms of trade, the prices of goods consumed by farmers have generally increased faster than farmers’ income.

For example, the price of food consumed by food crop farmers increased by 8.3 percent per year between 2014 and 2016, while the price of processed food and clothing rose by an average 6.7 percent and 5.2 percent, respectively. On the other hand, the average price increase of agricultural products was only about 4.7 percent. Thus, the prices paid by farmers, or their expenditure, grew faster than the gains in income from their own production.

Therefore, it is important to balance farmers’ expenditure and income, which can be done by either reducing the price increase of expenditure components, by increasing the price of agricultural products as a component of income or by working simultaneously on both sides. This article focuses on efforts to increase the income of rice farmers, specifically with regard to the financing of on-farm and off-farm activities.

Financing for farmers is basically a process of connecting lenders or investors, who generally live in urban areas, with rural farmers. Financing can be done by banks, other financial institutions or investors through online lending platforms.

So far, the proportion of credit disbursed by banks to the agricultural, hunting and forestry sectors is still small, ranging between 5 percent and 6 percent of national loan disbursement, with 6.6 percent recorded by the end of October 2017. Bank Indonesia’s (BI) pilot project report called Agriculture Financing Scheme shows that the proportion for the plantation subsector in 2014 reached 83.8 percent. Other subsectors, especially food crops and horticulture, account for the smallest share of agricultural loans, at 4.2 percent and 2 percent, respectively.

Several factors have been blamed for the low share of agricultural loans in the food crop subsector. The perception of higher risk, a lack of business feasibility information and a mismatch of existing financing schemes with the characteristics of the food crop subsector have made banks quite reluctant to provide loans. Hence, several requirements are needed to improve bank financing for farmers.

The first requirement would be to establish a trading structure that ensures certainty on rice distribution in terms of volumes and prices. Such a structure is important, as it enables its stakeholders and banks as those on the lending side to mitigate the risk of price fluctuations. Second, the trading structure should be able to optimize the price of rice sold by farmers. This would improve farmers’ ability to repay loans, thus reducing the potential for bad loans.

A 2013 study on rice trading conducted by Purwono et al. in Banyuwangi concluded that the optimal trading structure for farmers and consumers is one that only involves farmer groups and retailers. In this arrangement, the price gap between rice sold by farmers and purchased by consumers is narrow. This means farmers can sell their rice at a fairly high price.

Given the lack of information on customers’ profile and business feasibility, the third requirement for banks to provide financing for farmers would be channeling loans indirectly to farmer groups rather than disbursing directly to the individuals.

Fourth, farmer groups should become farming centers. Their range of activities should cover the whole process, from preparing production facilities and administering loan needs to dealing with financing institutions, purchasing grains, milling, packaging, storing and marketing up to managing logistics and rice distribution.

Therefore, farmers need assistance in the establishment of such groups and ongoing training to ensure aspects of management, administration, financing, marketing, technology and regulation until communications can be implemented properly.

It should be noted that farmers’ high dependency on middlemen, who have been actively financing them, has become one of the major obstacles in the effort to push higher farmers’ selling price. To that end, farmer groups should transform themselves into strong institutions to ensure that bank financing and trading can be done effectively.

In the proposed trading structure, farmers groups would buy grains from their peers and store them in their warehouses. To keep the margins from price fluctuations, the range of grain prices should be set forth in a sales and purchase agreement between farmers and farmer groups. The price range is reviewed periodically to adapt to changing harvest conditions.

Afterwards, the farmer groups carry out rice milling and packaging and manage rice sales with modern retailers. Term of sales are written in sales and purchase agreements between farmer groups and modern retailers, particularly regulating the price range for rice sold by farmer groups to modern retailers, the volume and the time of delivery. The goal is to ensure the availability of buyers, the price and delivery time.

In the financing scheme, as a first step, banks can finance the procurement of storage warehouses and rice mills owned by farmer groups. The loan collateral will be land certificates for the place where warehouses or rice mills are built. That is, farmer groups should first own the land and certificates. If that is not yet the case, the government is expected to support land procurement and certification for groups without land ownership.

If farmer groups functions well, banks can finance the farmers through the groups, with saving accounts as collateral. The amount of savings can be set, for example, at 20 percent to 30 percent of the total loans. For this purpose, farmers will have micro-savings accounts when they obtain loans and are encouraged to save income from crops.

Incentives for farmers can be either in the form of gaining higher interest rates on their saving accounts, or making them eligible for additional interest if they refrain from withdrawing money from their saving accounts over a certain period.

Another type of collateral for loans could be the groups’ receivables to modern retailers with sales and purchase agreements as their underlying, aside from their own inventories as well as storage, rice mills and land certificates.

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The writer is a researcher at the Mandiri Institute.

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