Global Vista | Agricultural Finance in France: Models, Insights, and Inspirations

France's agricultural land development system is quintessentially a two-tier mechanism, on the basis of which the country's agricultural finance system is constructed. This system allows both policy-based finance and their market-driven alternatives play their respective roles properly, resulting in virtuous interactions between agricultural land tenure system and agricultural finance. “Stones from other hills may serve to polish the jade of this one”, as the old Chinese saying goes, the French experience may serve as an inspiration for China's land tenure and agricultural finance systems. Scrutinizing China's reform practices against the reference framework of France's experiences, it is hoped, shall be a revealing and thought-provoking process.


Agricultural sector in France is renowned for small-scale farming operations and its experiences merit a thorough comprehension for China. Agricultural finance, a critical component of the French system, serves the objectives of land tenure reform, the essence of which are two-fold, namely: to prevent land fragmentation resulted from small-scale farming operations; and to prevent price bubbles and non-agricultural uses incited by speculative capital. The objectives can be summed up as a dual mandate of efficiency and fairness of land use. Agricultural finance is both a policy tool that the government wields to direct land reclamation and fine-tune the market and also an essential means to nurture family farms and facilitate scaled operations to an appropriate degree. These reform objectives and policy imperatives bear striking resemblance to China's ongoing land tenure reform and innovations in agricultural reform. In general, France's agricultural finance system consists of two major components, namely rural land reclamation institutions and agricultural credit system, with the archetype of the latter being Credit Agricole, a cooperative financial institution.



Land Reclamation and Rural Development Institutions


Société d'amenagement foncier et d'etablisement rural (SAFER, Land Management and Rural Settlement Corporation), created by the Law No. 60-808 d' Orientation Agricole (Agricultural Orientation) in the 1960s, is an important policy instrument of the French government to implement agricultural land control. It is a not-for-profit entity consisting of 28 land management and agricultural infrastructure agencies throughout France, entitled by the government to the right of first refusal and other privileges and acting on government's behalf to implement optimized zoning and efficient allocation of agricultural land. It is run by its board of directors and counts as its main shareholders agricultural banks, investment companies of local agricultural administrations, other local authorities, and agricultural professional organizations. Major purposes of creating SAFER are to purchase agricultural land, restrict land speculations, reorganize land zoning and division, adjust optimal farm size as needs arise, and supply land and equipment to new farmers, among others. SAFER's privileges are embodied in its right of first refusal on justifiable ground in land transactions and the decision-making power in altering land uses. Pursuant to the law, before a land transaction take effects, attorneys are obliged to notify SAFER the location and category of the land, names of the buyer and seller, and the price, and the SAFER has the power to invalidate the transaction within two months after the contract is signed.


As its institutional design dictates, SAFER's functions encompass five major aspects, namely:


a. Management, including managing land transactions, facilitating balanced and sustainable development of land and agriculture, and protecting the environment;

b. Land transaction, including the right of first refusal transactions and normal transaction. The former mainly happen when SAFER believes that the price reached in a transaction substantially exceeds fair market value, or that the transaction is not for the best and most efficient use of the land. A motion to exercise the right of first refusal, however, has to be filed to the local representatives of the Ministry of Agriculture and the Ministry of Finance, both of which have the equal power to veto the motion, compelling SAFER to be highly judicious when exercising the right in order to ensure high passage rate and to mainly resort to normal market dealings or friendly negotiations in land transactions;

c. Intermediary. France's land tenure system is notoriously Byzantine in structure and cumbersome in procedures. Entrusted by farms, SAFER takes custodies of their lands and acts as a professional intermediary to provide services to the parties of the transactions. Moreover, all rural land transactions have to be brought to SAFER's notice and as a result, SAFER is in procession of complete information of land market, making it the de facto central data hub of land transaction information, which in turn enables SAFER to discover best prices and best uses faster and better;

d. Agricultural education. In France, farmer is categorized as a profession and only those who have completed relevant training and obtained qualification certificates are entitled to government subsidies. SAFER provides agricultural technical trainings to farmer prospects. Through the provision of training, SAFER acquires information, which lays foundation for its ensuing business of arranging land transaction and providing financial support;

e. Land development and reclamation. Leveraging the huge quantity of data that it accumulates, SAFER is able to predict land expropriation and farm transfers and therefore, can help local authorities to better plan zoning and land development.


At the first glance, SAFER's functions concentrate in land transactions and associated areas, but the author believes that SAFER is the key to the understanding of France's agricultural finance system. Not only does the very existence of SAFER effectively contain speculative activities in and de-agriculturalization of agricultural land, SAFER's firm grasp of the whole picture of land supply and demand enables it to help achieve optimal matching between supply and demand sides. At the same time, through land development and reclamation, SAFER helps improve operation efficiency and achieve optimal scale of family farms, contributing to the overall improvement of agricultural sector's productivity. Leveraging its various franchises, SAFER also engages in environmental protection and development of eco-agriculture. All these serve an enhanced underpin for general-purpose banking institutions to innovate in agricultural finance.




Credit Agricole

Credit Agricole is the major force in providing rural and agricultural finance. Established in early 1880s and dedicated to promoting cooperation and financing in agricultural sector, Credit Agricole is a cooperative banking institution and the largest bank in France, boasting an 85% share in the country's agricultural lending market. As of 2009, Credit Agricole consists of 2500 local banks and 39 regional banks, the latter of which majority-own Credit Agricole S.A., a holding company that started trading on Euronext Paris in 2002. In addition, Credit Agricole also enters into a partnership with Grameen Bank and launches the Grameen Credit Agricole Fund (GCA Fund), dedicated to providing support and help to microcredit worldwide.


The stated mission of Credit Agricole is to promote agricultural modernization, electrification of rural areas, and the modernization of livelihood, to create stable and long-term credit flows for farmers, and to provide long-term financing to rural areas, including credit support to farmers in land purchases and modern equipment financing to help new farmers establish themselves.


It can be seen that agricultural finance claims an eminent position within Credit Agricole's business portfolio. To access the Bank's agricultural financial services, a prospect lender is required to meet several critical criteria:


First off, the lender runs the farm by him/herself. The reason for this criterion is that in the French system, banks' agricultural credits are mainly steered to support family farms; and


Secondly, the family's operating capacities should meet agricultural standard and productivity bench mark set by EU and France. Lender's operational savvy and technical sophistication are of considerable import and in order to help its clientele meet such requirements, Credit Agricole put great emphases on agricultural education and training, in addition to provide land purchase loans.


Credit Agricole is highly proactive in providing agricultural education and training to local farmers aiming at improving the operational excellence of family farms, particularly capacities in individualized production. To those new in the farming operations, before proving land purchase credits, the Bank offers a holistic service package that encompasses technology, management, operation, and professional development. Regional banks and local credit co-ops integrate agricultural education into their scope of corporate social responsibilities, a tradition that can be traced back to the earliest days of their inception, when it was stipulated in the by-laws of the earlier co-ops that the farmers who borrow from the co-ops shall pledge to have their children be educated. In addition, Credit Agricole also plays an active role in the supply, sales, and processing of produces and helping farmers get well informed of and well versed in industrial chain of produces, so as to enhance the farmers risk prevention and control capabilities.          




The Present State of Agricultural Finance in China


China's innovations in agricultural finance traces its genesis to 1980s in Guizhou and Zhejiang, among other areas, and have been an exploratory endeavor of various regions' own volitions ever since. After 2016, as the Standing Committee of the National People's Congress passed laws and central government made planning, national-level pilot programs of agricultural finance were launched. Pilot programs of secured loans accepting the right to contractual management of rural land, ownership right of rural residential properties, and the right to the use of rural collectively-owned land for commercial development as collaterals were introduced in 232, 59, and 15 counties (cities/districts), respectively. The programs were extended for another year till December 31, 2018 when the trial period expired after a year.


Experiences were acquired during the over two-year pilot period but several critical challenges have yet to be tackled, including:


First off, liquidity. Rural land is difficult be liquidated in cases of insolvency resolution due to the institutional, market, and social constraints, making financial institutions skeptical of its eligibility as collateral;


Secondly, target borrowers. At present, agricultural loans are mostly extended to large-scale operators of circulated land, co-ops, and agribusiness firms and hardly accessible to average farmers; and


Thirdly, loan terms. What the financial institutions offer are mostly one-year working capital loans, which cannot meet agricultural sector's demand for long-term financing.


French experience can provide insights and inspirations for us to find solutions to those challenges.      




Why French Experience Is Relevant to China


When we take SAFER and Credit Agricole as an integral whole and further scrutinize France's agricultural finance system, we can have a more thorough comprehension of its topography and draw inspirations from it for China's innovations in agricultural finance.


Build an Agricultural Finance System That Supports a Two-Tier Development

France's rural land development system is characterized by a two-tier mechanism, in which SAFER serves as the first-tier developer and, after completing reclamation and optimization, provides the land to family farms for second-tier development. Corresponding to this development system, France's agricultural finance system is also two-tiered: the first tier is SAFER, which mainly focuses upon development and policy-based finance. Vested privileged franchise by the public authority, SAFER is empowered to consolidate premium resources to achieve medium- and long-term planning for the land use. The banks such as Credit Agricole are by and large committed to providing to farmers land purchase loans and other financing tools secured by land. These two players are separated in functions but mutually reinforcing, resulting in a multilayered and diversified agricultural finance system. SAFER serves as a solid foundational platform as it has in its procession all the fundamental information concerning rural land transactions and allocates land resources efficiently. Building upon this platform and leveraging their own business expertise, banking institutions develop corresponding agricultural financial products.


China's recently published Rural Revitalization Strategic Plan (2018-2020) suggests that county-level land reserve companies be involved in the pilot programs of loans secured against the right to contractual management of rural land and the ownership right of rural residential properties. The ways how the land reserve companies are involved could draw inspirations from SAFER's precedence, which can be organically embedded into the ongoing pilot programs, rather than simply participating in loan origination or policy-based credit enhancing. To be specific, county-level land reserve companies should leverage the advantages that their functional positioning bestows, integrate policy resources such as rural land improvement, reclamation, and zoning in accordance with the regional rural revitalization planning, create gradually the first-tier development mechanism of rural land purchase and reserve, facilitate orderly circulation and appropriate level of scaled operations of rural land, seek to build database of rural land circulation, and, on the basis of the aforementioned endeavors, undertake financial innovations that are in line with rural land circulation and use policies, in order to strengthen agricultural finance's power in guiding the orderly circulation and appropriate level of scaled operation of rural land.             


Achieve Virtuous Interactions between Agricultural Finance and Land Tenure Institutions

The objective of France's land tenure system is to achieve agricultural modernization with family farms as its nucleus and therefore, agricultural finance also counts farmers and family farms as its major service target. In China, it is safe to predict that smallholdings will persist for a reasonably long period during the agricultural modernization process, and hence, innovations in agricultural finance have to be in tandem with the development of finance inclusion. Efforts should be invested in innovating financial products and services targeted at smallholdings and family farms and the financial institutions' current preference of channeling credits mainly to large-scale operators and businesses ought to be reoriented. In France, supporting family farms is regarded a path towards agricultural modernization. In China, this year's No. 1 Central Document also proposes paths of financial support to “effective alignment between smallholdings and modern agricultural” and we can learn from French experience to figure out how this goal can be accomplished. In particular, agricultural finance should start from land reclamation, provide support to farmers in terms of both land and lending, develop enabling and inclusive finance, and help solve problems concerning essential factors in the process of organically aligning smallholdings with modern agriculture.


Agricultural Education Is of Great Importance

SAFER and agricultural finance institutions such as Credit Agricole all put great emphasis on agricultural education and are committed to nurturing farmers', especially new farmers', capacities in agricultural technology, operations, and management, rather than leave such undertaking completely to the realm of public authority or civil societies. Financial sector's involvement in agricultural education is not only a corporate citizenship endeavor but also an effective instrument with which financial institutions penetrate deeply into agricultural sector, overcome information asymmetry, and mitigate risks. In China, professional training programs of farmers are mostly confined within operating techniques but not sufficiently integrated with the practical aspects of running farms. In France, on the contrary, SAFER and banking institutions invest great efforts in agricultural education, make it intimately connected with land and production, and simultaneously nail the risks associated with loan uses. Hence, when promoting innovations in agricultural finance, China should consider to provide fiscal incentives to financial institutions in order to encourage them to embed farmer training into lending practices. Such undertaking will also in the long term facilitate in-depth integration between agricultural finance and the development of modern agriculture.


Put More Emphasis on Long-Term Lending

Contrary to France's singular emphasis on medium- and long-term lending, rural lending in China is mostly of one-year term, which cannot satisfy the farmers' demand for financing the acquisition of modern agricultural infrastructure and equipment, resulting to severe maturity mismatch in rural finance. From French experience, we suggest that agricultural finance, which is directly associated with land, should take a long view. Its objective should not be confined within satisfying farming operation's needs for cyclical short-term borrowing within one single growing season but should strive to develop lending products and service offerings that match agricultural investment's long-cycle nature.