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Unlocking the Potential of Agriculture In Emerging Markets

Global food systems employ 29% of the world’s workforce and utilize 38% of the total available land for the cultivation of crops. The global population is expected to touch 10 billion by the year 2050; to meet the growing demand, food production levels must increase by 50% compared to 2012 levels. Most of this increase in demand is expected from developing regions like India, the Middle East, North Africa, and Sub-Saharan Africa which are also predominantly emerging markets.

However, a few challenges stand in the way of unlocking the full potential of the industry and achieving the required output:

  1. Inefficient supply chain — Globally, a third of the food produced is either lost or wasted. 1.3 billion tonnes annually is lost to inefficient supply chains alone primarily due to poor transportation and storage facilities. The high number of middlemen involved in the process also eats into the margins of the farmers and reduces the transparency of the whole supply chain.
  2. Lack of access to high-quality inputs — Farmers lack access to high-quality agricultural inputs, farm machinery, and other allied equipment, which leads to low agricultural productivity or low-quality crops. Reasons for this vary from affordability to accessibility.
  3. Lack of education — Farmer illiteracy directly affects the yields of their produce. Undereducated farmers are unable to leverage the technology at their disposal to make informed decisions about fertilizer use, irrigation patterns, soil nutrition, and other areas of their practice. Making this information more accessible for them is the chief objective of many startups.
  4. Lack of access to credit — Farmers have typically struggled to get loans from digital lending platforms or even banks due to their bad credit history or lack of credit bureau data. Banks have traditionally been a significant agri lender but in recent times, they have been constrained by bad loan-related norms.

To address these issues, entrepreneurs around the world are developing technology-enabled solutions to bring this primitive industry into the modern age and these ventures are collectively known as AgTech.

At Alter, we believe that AgTech will have a large part to play in the coming years and our conviction for the same is summarised by the table below:

*According to data from the Label Insight and Food Marketing Institute Survey, the number of users willing to switch to brands that provide ‘more in-depth information beyond what’s provided on the physical label’ rose almost twofold from 2016 to 2018, from 36% to 78%’.

While there are challenges in the immediate deployment of technology in this space, most of them are being actively worked upon by governments and institutions and yet others will ease with time. We believe that the growing tailwinds overpower the dying headwinds and that ultimately, it is a question of when not if for AgTech in emerging markets.

Now that we understand the scale and importance of AgTech in the bigger picture, it is equally important that we zoom in, and take a peek at the innovations that are bringing agriculture into the 21st century. Emerging technologies such as IoT, ML/AI, blockchain, drones, microsensors, robotics, cloud computing, etc. are poised to transform agriculture into a data-driven precision industry. We can divide AgTech into three sub-spaces — upstream, downstream, and midstream based on the stage at which innovation is applied during the production cycle. For reference, a typical agricultural value chain looks like this:

Upstream is the stage where inputs come in. A classic example of an upstream innovation would be that of high yield variety (HYV) seeds that were all the rage in India’s Green Revolution in the 60s.

Midstream is the collective term used for innovation in farm operations and management. The drip irrigation methodology developed in Israel during the 60s is a good example of innovation at this stage of the production cycle.

Downstream is the stage where we incorporate output supply chain and post-harvest technology like food traceability in the scenario. An example of downstream tech would be e-mandis (online marketplaces for the trade of agricultural produce) that were introduced by the Government of India in 2016.

Besides these three sub-spaces, we also have agri-finance which are financial services that cater specifically to the needs of the farmers.

Looking at the data collected from India, we can observe that the output market linkage space has the largest market potential, nearly equal to the rest of the sub-sectors combined. This also helps explain why this segment has seen an investment inflow heads and shoulders above the other sectors.

The graph below will help us gain a better understanding of the global agricultural landscape. It divides major agricultural economies of the world into 4 segments based on a mix of market size and penetration of technology in agriculture practices.

EY Report — AgriTech — Towards transforming Indian Agriculture

Below are some of the most successful (by valuation) startups in their respective categories in emerging markets across the world:

Out of all of the exciting opportunities in AgTech, there are two that excite us the most. First, we predict that full-stack platforms, offering end-to-end services, from providing agri-inputs to connecting farmers to marketplaces and taking care of everything in between, will take the center stage and all ventures in this space will either collaborate with other players to offer a wider range of services or build their own suite of products to cater to all the needs of a farmer. A combination of factors favors full-stack offerings over sector-specialized ones:

1, Farmers are sticky — One of the biggest challenges that AgTech players face is that of connecting to and onboarding a farmer to their platform. Farmers are not technology-friendly, they do not want to experiment with their yields and they do not trust corporations easily. A typical farmer is unwilling to use different apps on his phone for ordering inputs, getting agronomy advice, selling his produce, and then getting a loan for the next cropping cycle.

Therefore, if a startup can manage to successfully onboard a farmer despite the various challenges, it only makes sense to leverage this connection across the entire value chain.

2. Painfully low margins — Margins in the agricultural industry are low. According to the data, they vary between 8–10% depending on the sub-sector, this makes the task of generating a sustainable profit difficult. The seasonal nature of agriculture further exacerbates the problem of consistent revenue. Going full-stack allows startups to diversify their revenue streams and de-risk the business.

Further, our analysis shows that many startups which started out in particular sub-sectors like FaaS (farming as a service), precision farming, farm mechanization, etc. have pivoted to full-stack models in order to remain afloat. This fact lends credence to the notion that full-stack is a more versatile business model.

3. Access to the best data — Since a full-stack provider is connected to the farmer every step along the way, it naturally has access to the best, first-hand data on the quality of inputs, farming practices, yields, financial status, and other relevant nuggets of information. A full-stacker is thus in a position to generate the highest returns for a farmer (and a cut for itself!) if it uses the data at its disposal efficiently.

Moreover, the data collected by a full-stacker enables it to render financial services to the underserved farmer community or work with banks and other institutions (who are sorely lacking structured data on these farms and farmers) to help drive financial inclusion in rural communities.

In Egypt, Mozare3 is taking orders from buyers like food processors and then contracting farmers to fill this demand, allowing the farmer to focus on farming and not worry about marketing his produce. Mozare3 then provides their contract farmers with inputs and financing for these inputs as per the buyer’s demands.

iFarmer in Bangladesh is another classic example of a Full-Stack AgTech, they act as distributors for input companies like Bayer, Syngenta, etc. and having access to the data on the input side allows them to predict and aggregate agricultural outputs of the farmers they supply to. They are then able to sell this produce to processors, wholesalers, and retailers. As the size of their database and their understanding of the markets has increased, banks and other financial institutions have started partnering with them to extend loans to these farmers.

In Mexico, Verqorghy centralizes and digitizes the flow of cash, agricultural goods and information.

As evident from the examples above, different companies approach Full-Stacking differently, while Mozare3 uses demand to generate supply, iFarmer flips this approach on its head. While the strategy may vary, the final goal remains the same: to capture the entire value chain.

Secondly, we believe that the growing digitization of this industry will be the key to unlocking the potential of agri-finance and that the Agri-FinTechs will be worth keeping an eye on.

According to the Reserve Bank Of India, only 40% of India’s small and marginal farmers are covered by formal credit. The lack of structured data on farms and farmers is the core reason why banks have been unable to cater to this segment of society. There are many developments that are giving structure and formality to this data:

  • The Government of India announced the creation of “Agristack” which is essentially a stack of digital databases with its core database consisting of land records, in 2021.
  • Increasing the use of technology on farms with tools like sensors and drones, more and more data is being collected about the soil types, nutrition, crop diseases, irrigation practices, and other factors which can help build credit profiles of farmers.

In the midst of innovation, there are a couple of Agri-Finance models which have caught our eye:

  • Warehouse receipt financing — Companies like Ergos are lending to farmers against grain that the farmer stores in Ergos’ warehouses. Whrrl is bringing a modern twist to this model by introducing blockchain, IoT, and smart contract technology to make the process more transparent and efficient.
  • We also recognize the importance of cash-flow-based financing models in the industry with confirmed orders from credible buyers. This will not only enable access to credit but also increase access to quality inputs, farm advisory, and farm tools.
  • Some players are approaching the challenge differently, instead of dealing with individual farmers, they are targeting farmer organizations like FPOs (farmer producer organizations), these organizations are more accountable, have larger ticket sizes and reduce the effort in customer acquisition. Further, Government policy in India has been largely supportive of the creation of such organizations, enabling the creation of more than 16,0003 such FPOs since 2012.

Banks also realize the potential that AgTechs hold in deepening financial inclusivity, as in September 2021, The State Bank of India came up with an RFP (request for proposal) for AgTechs to become business correspondents for the purpose of sourcing, servicing, and collection of Agri and microloans.

We at Alter are excited about the opportunities that AgTech presents and the potential it holds to transform millions of lives across economies. We have invested in Tazah in Pakistan and continue to be bullish on the Agtech space in emerging markets.

If you are operating or investing in this area, or simply interested in its development, we’d love to hear from you. Please reach out to us anytime — Sidd Dhankhar @ siddharth@alter.global and Yash Kanoi @ yash@alter.global.

Written by: Mudit Rawat, an Alter summer 2022 intern and pre-final year student of Electronics Engineering at BITS Pilani, India. Born in the “Pink City” — Jaipur, he grew up playing cricket in its streets. When he’s not working or studying, you can find him either playing video games or engaged in a conversation about tech, formula one, or startups!

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