This article was orginally published in https://shekels.substack.com/p/farms-on-portfolios/
The agri-tech sector in India, has rarely been the focus sector in the government schemes, nor has been an attractive avenue for the institutional investors, because of various reasons: governmental control and tight policy structure in agriculture, lack of farm infrastructure which requires large capital investments, seasonality and dynamic effect of climate on produce et cetera.
But things are slowly changing now. Mobile phone and internet penetration is increasing, farmers are consolidating and cooperating on their farm lands, and long-term investors are noticing value. 2019 was a good year for Agri-Tech startups, with some of the key deals involving tier-1 VCs like Accel Partners, Tiger Global and Matrix Partners. The top agri-tech startups that raised capital included Samunnati, Ninjacart, AgroStar and Country Delight, and they solve diverse set of problems for the sector. And now in 2020, with VC investors like Omnivore Capital, and agri-tech focussed accelerators like AgriKul (a collaborative effort of India Accelerator and Alfa Ventures) jumping in, the investments are set to rise. Because of this continuous flow of strategic capital from early and late-stage institutions, the sector is set to grow at a stable rate, if not exponentially, even if the macro-economic indicators go awry.
If something this crisis has taught us, it is to value food on the table, and more so, the source of it.
In this article, we take a deeper dive into the sector, understanding the major issues in the sector, starting right from the production to distribution and consumption. We would look at the startups trying to solve these issues and the investment sentiment around these startups.
The key issues in the sector that the startups have been solving for are the following:
1. Corruption & Agri Supply Chain Challenges:
Free market in the supply chain of agricultural products is of utmost importance, since corruption hampers the margin distribution across the stakeholders.
Let us understand by looking at a typical supply chain example: So a farmer goes to the wholesale market or as we call it a ‘mandi’, with 200 kilograms of tomatoes. The farmer approaches his standard, known agent who helps the farmer segregate the produce according to the grade of tomatoes. Basically, separate the best, the average and the low quality. Now these markets have a simple bidding system, where the farmers produced is sold to the highest bidder. Let us say, our farmer gets INR20/KG for his best produce, and the retailer takes the produce further in the chain. These bidders are basically individual retailers or small co-op retail organisations. Seems like a simple and transparent procedure, right? Not really.
The issue here is, that the bidders in the markets have been bidding for years and years, and they know each other quite well. Hence, this bidding is more co-operative than one would think. The bidders here collude with each other, and hence make this process unfair by bidding lower, collectively. This leaves the farmer with lesser margin, out of which he also has to pay the agent, a commission. The regulatory body of these markets is the Agricultural Produce Market Committee (APMC), which also is not that transparent. APMC makes sure that new licenses for bidders are not issued, and hence corruption is widespread.
Another issue with this process is government regulation on selling agricultural produce. The government mandates that the farmers cannot go ‘direct-to-consumer’, which leaves them with no other channel to sell their producer.
The startups that are tackling this issue are often termed as ‘farm-to-fork‘ startups, these source the produce directly from the farm, act as the only middlemen, thereby eliminating the above-mentioned problems, and sell it to larger retailers, or retail themselves. Startups have tried out various models within this category and the latest one that Zomato is trying is Zomato Fresh, where they would procure the products from the farmers and directly sell it to their partner restaurants. Ninjacart is another champion in this space, which claims to work with over 20,000 farmers from the country and supply the produce to over 60,000 retailers, directly. Eliminating the skewed-margin problem, helps the farmers earn more and sustain themselves better. Many of these startups have now also started to use sensors that constantly monitor the freshness of the produce, and eliminate various kinds of fraud in the supply chain
2. Production-Stage Challenges : Starting from procurement of farm equipment, credit line, a farmer faces many issues, because of which he/she is not able to optimise for maximum profits, and hence we see not so many farm-jobs and people dropping out of the agricultural sector, pushing the productivity further down. A few production-stage issues are: lower levels of farm mechanisation and slower adoption of technology among farmers, abysmally low irrigation uptake and over-dependency on rainwater for irrigation, and improper usage of fertilisers/pesticides due to non-availability of insights and knowledge. For all these reasons, in some proportion, the per-hectare farm productivity in India is lower than most of the other top economies. Although we are still dependent on agriculture, our agriculture produce is low in quality and quantity when compared to that of our peers: China or Brazil. Another major issue in the production is the decreasing land sizes per farmer. Land fragmentation is a big phenomena in India. A farmer has many children, among whom the farm gets divided, and this has continued to a point where 57% of our farmers own less than 1 hectare. This hinders them from using economies of scale benefits in procurement.
More than half of the startups in the agri-tech space, are trying to solve production-level challenges: in procurement of raw material, in providing information and expertise, in helping with irrigation, in monitoring crop growth through drones and then using artificial intelligence to provide actionable insights. This sub-sector has abundant startups because of two reasons: first, because this part of the agricultural supply chain has low-to-no regulation or policy hindrances and secondly, because products built for solving these issues often have applications in other sectors as well. For example, a drone monitoring service can also use drone monitoring for multiple other sectors, and essentially the data is what is important. And that data rests with the farmer.
3. Financing Challenges:
Loans to farmers have been a topic of major political debate in the country, every election season. Credit line extension to farmers is one of the riskiest debt investment any bank or an NBFC can do, again because of various reasons we have discussed above. The sector has been denied access to cheap capital for decades, and recovery on these loans, although better than the industrial sector, is costlier for the lender. The graph below shows how the farm loan NPAs have remained relatively constant throughout this decade whereas the the industrial sector performed poorly in loan repayment, which shows although high but a less volatile default rate.
Non-availability of credit to a farmer is one of the major issues that hinders their mechanisation, and appropriate usage of the right quality fertilisers. many government schemes have aimed to solve this issue, but this still continues to haunt the bankers. Informal sector constitutes a major portion of the farm loans extended with draconian terms of repayment. With increased mobile phone penetration and increased financial literacy among farmers, information about fair credit is now available to them comparatively easier than it used to be.
Quite a few startups in India are trying to work at the fin-tech & agri-tech intersection. Samunnati is a champion in this field, and has raised over $70mn in investments from tier-1 VCs. These startups use various techniques to bring down NPA rates, as close to bank rates as possible, without a collateral, like attaching various allied service partners with the farmer. So if a farmer buys seeds and fertilisers from you for production, connects with other farmers to jointly buy a tractor through your platform, the chances of willful defaults will go down, and they have.
In conclusion, the sector is ripe with disruptive technology and startups are paving the way for farmers to go from “farming-for-yield” to “farming-for-profits”. There is rising inflow of capital and interest to this sector and hence the support for nascent agri-tech startups would be solid.
If you are/know an agri-tech entrepreneur, AgriKul might interest you: https://www.indiaaccelerator.co/accelerator/agrikul/