Blockchain can bring transparent and fair capital to farmers struggling with unforgiving debt
The biggest challenge facing farmers worldwide is not global warming, or the threat of crop failure, but the poor quality of capital available to them. Farmers face sustained financial pressure from poor capital terms, and the potential loss of livelihood has caused many to take their own lives. Farmer suicide is now a global crisis that is not limited to developing economies, and can be seen even in developed countries such as Australia, France, and the US.
The US farmer suicide crisis echoes a much larger farmer suicide crisis happening globally: “An Australian farmer dies by suicide every four days; in the UK, one farmer a week takes his or her own life; in France, one farmer dies by suicide every two days; in India, more than 270,000 farmers have died by suicide since 1995”
- The Guardian
Governments must improve capital availability for the agricultural sector to address this crisis and to safeguard food production for a rapidly growing global population. But this has been difficult to achieve given the risks, inefficiencies, corruption, and politicization of the agricultural sector. Blockchain technology can address these challenges and enable decentralized capital models to give farmers access to fair and transparent capital.
Quality of Current Capital is Poor
Modern farming is capital intensive. Beyond the capital investment in farm machinery and equipment, farmers require working capital for each crop to procure consumables (such as seeds, fertilizers, and pesticides), and for irrigation. But given the high perceived risk, the quality of capital available to farmers is poor.
Farmers are often forced to borrow from unregulated money lenders on very poor terms. Interest rates can be as high as 40% and can drive farmers into perpetual debt traps. Even farmers that have access to capital from regulated lending institutions are required to provide personal guarantees and collateral. In either case, they often end up losing their farms.
It’s Been Difficult to Improve Capital Availability
Agricultural lending is different from lending in other sectors where risks and rewards are balanced. The risks in the agricultural sector are high, and often due to factors outside of human control. Price controls and market conditions limit any potential upside. And then there is the politics that drives short-term populist solutions such as loan waivers and subsidies.
Resources available to governments are limited and direct measures taken by them are not sustainable. Government efforts to rope in the private sector via bank mandates and public investment bonds have not had much success.
- Established lending institutions are reluctant participants given the inherent risks and politicization
- Speculative investors are dissuaded by the lack of any significant upside to counter the high risk
- Government-backed loans and schemes are inefficient, prone to corruption, and unsustainable
To improve capital availability in the agricultural sector, governments must look beyond traditional sources and attract new investors.
Is Decentralized Capital the Solution?
Blockchain offers transparency, fairness and verifiable accountability. Coupled with distributed ledger technology (DLT), it has proven to be very effective at raising decentralized capital via token offerings. This capital is highly efficient and inherently liquid. Investors are attracted by the liquidity and the transparency with which the underlying assets operate.
To enable decentralized capital for the agricultural sector, transparent processes and controls need to be put in place. While transparency will weed out fraud and corruption, availability of accurate and verifiable performance data will help investors understand and manage risk.
Let’s re-imagine agricultural financing:
- Capital will be available to farmers not as loans, but as investments in their crop funded from geography and crop-specific tokenized funds operating on public distributed ledgers
- Investment decisions will be based primarily on prior performance of the farm/farmer and crop projections; all performance data will be recorded on the blockchain and will inform future investment decisions
- The crop will be monitored regularly using ground sensors and drone-based imaging, with all data recorded immutably on the blockchain; this is a critical element as it will verify farmer performance, reduce risk by identifying problems early (underwatering, disease, …), and help mitigate fraud
- Availability of attested performance data and monitoring framework will enable insurers to access risk effectively and make insurance readily available to farmers
- The transparency, reach, and liquidity of decentralized investments will attract new capital to the agricultural sector
With irrefutable blockchain-based monitoring and reporting, it is possible to reduce risks and make agricultural investments lucrative. Structured as tokenized funds, they can attract a vast pool of new investors that are active in the decentralized economy thus improving capital availability to farmers.
“A fair financing model for the agricultural sector must account for the fact that most risks are beyond human control. By treating farm capital as investments instead of loans, the pressure on farmers is greatly reduced. This allows them to focus on maximizing production and safeguards their long-term livelihood.”
-Raman Saluja, Founder@Gramco.in
A More Sustainable Capital Model
In most countries around the world, agricultural financing requires government support. This support can come in the form of subsidies, loan guarantees or direct assistance.
But government support is not sustainable. Financial resources are limited, and burdened with inefficiencies and corruption. Furthermore, the agricultural sector urgently requires additional capital to brace against global warming as well as to increase output for a rapidly growing population.
A decentralized capital model can attract fresh investment to the agricultural sector, make capital support more efficient, and reduce the burden on governments.
The solution proposed in this article was inspired by getting a first-hand look at the real-time crop monitoring technology being developed by Gramco(gramco.in) in India.