Fresh tomatoes, sweet oranges and bright green lettuce grown organically and tracked by computer may soon arrive on consumers’ tables directly from farms, thanks to agricultural deregulation.
Consumers are demanding safer food — and getting it — because small company-type farmers are changing the industry with advanced machinery and farming techniques, and by cutting the customary middleman out of the distribution chain.
The direct-marketing trend is likely to continue, thanks to increased support from banks. Banks are starting to focus on the growth potential of Japan’s long-protected farm sector because high-demand products and direct sales networks are introducing an element of competition, industry experts said.
Small entrepreneurial farming companies are the driving force behind the direct marketing trend. To date, agriculture has been dominated by the politically powerful Japan Agricultural Cooperatives. Most farmers still pay dues to JA, which also runs its own banks, to make sure they have marketing routes for their produce.
But the aging of the farmers and a dearth of willing successors has gradually increased the amount of abandoned farmland, prompting the government to deregulate agriculture and let newcomers in. This has pushed up the number of small company-style farms.
Some banks are already extending loans to these corporations, and as many as 62 financial institutions large and small have tied up with the Agriculture Forestry and Fisheries Finance Corp., an agricultural government-affiliated financing entity.
Earlier this month, Sumitomo Mitsui Banking Corp. held a trade show in cooperation with the semigovernmental body, becoming the first megabank to help the small farming companies. The event drew 60 farm organizations hoping to broaden their marketing networks. They were joined by 140 retailers, food makers and related firms.
In May, SMBC launched the collateral-free V Fund Agri loan, the first loan of its kind for agriculture. SMBC saw the trade show as a business opportunity and a chance to further help company-style farmers.
“Such farmers are trying to expand their business scale, and they’re changing from ‘cultivators’ to ‘marketing farmers,’ ” said Hironori Shimizu, an SMBC official in charge of financing for growing business areas. “That’s why we think we have a big chance.”
To expand the size of their operations, farmers must invest in more machines and fertilizers; others have to update their computerized tracking systems. This increases their need for funds, Shimizu said.
Under the V Fund Agri program, SMBC finances clients who have good business models, even if they don’t have collateral. For example, entities with prospective models that have set up a retail network and hedged for weather risks and price fluctuations by planting in different areas and seasons often receive financing, Shimizu said.
SMBC has so far signed loan contracts with two borrowers, worth a total of 130 million yen.
Agricultural deregulation started gaining momentum four years ago, when the government allowed groups of small farmers to set up stock companies, giving them bigger fundraising opportunities.
On Sept. 1, stock companies engaged in other businesses were allowed to enter agriculture by renting land.
Watami Food Service Co., which runs a chain of “izakaya” (pubs) and restaurants, was one of the first companies to take advantage of deregulation.
Watami has already started farming in a limited deregulated zone set up by the government in Hokkaido and some other prefectures, another element of Prime Minister Junichiro Koizumi’s structural reform drive.
Overall, deregulation and tax incentives had hiked the number of small agricultural companies to 7,383 as of the start of 2004, compared with just 114 in 1962, when they were first allowed to form in the shadow of JA.
Banks are keeping their focus trained on corporate farms, because demand for funds is rising to meet the high expectations of consumers, who are increasingly demanding safer food made with fewer pesticides and higher traceability to their source.
“Safety and relief are the key words when we plant vegetables,” said Eiji Hatanaka of Shinpuku Seika, a company in Miyazaki Prefecture that participated in the SMBC trade show.
Shinpuku’s products are all branded with computer codes that can be scanned with certain cell phones and used to reference information on the producers via the Internet. The information details the growing processes as well as the types of chemicals or fertilizers, if they were used.
Tokyo Star Bank is another financier eyeing business opportunities in the revamped farm sector. It signed a contract to securitize the future cash flow of a unique planter of perilla (a plant used as a garnish) in Shizuoka Prefecture to raise 400 million yen.
The farm will use the money to grow the variety of “shiso,” which is also known as beefsteak plant, on special facilities that sprinkle mist and fertilizer on the plants and reduce the need for agricultural chemicals. This method is considered more reliable because it is less likely to be affected by weather and other negative farming factors.
“It is usually very difficult to project the cash flow of an agriculture business, but in this case, it is easy to predict (because of the facilities),” a Tokyo Star Bank spokeswoman said, adding the bank hopes to finance more farmers who shun chemicals.
“In the past, only financial institutions in the JA group extended loans to farmers,” said Yukio Shibuya, a senior researcher at Mitsubishi Research Institute. But borrowing from such financial institutions limits a company’s sales networks to JA’s own marketing routes, which are mainly vegetable markets. It also requires borrowers to buy their equipment through JA, he said.
Financial institutions in the JA group accounted for about 19 trillion yen, or 87.4 percent, of agricultural financing as of March 2004. Commercial banks accounted for a mere 3.9 percent.
“Commercial banks’ financing of agricultural businesses will definitely increase in the future,” Shibuya said.
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