Smallholder AgriTech Southeast Asia Landscape 2022
2021 continued to be shaped by the global COVID-19 pandemic. The UN Food Systems Summit and COP26 only served to underscore the urgent need for more sustainable and resilient food systems. These forces have continued to shape the global influx of venture capital into agrifoodtech. According to AgFunder’s recently launched 2022 AgriFoodTech Investment Report, agrifood technologies received $51.7 billion in investment in 2021, an 85% increase over 2020.
The Smallholder AgriTech Southeast Asia Landscape focuses on high-impact technologies that have the potential to improve the productivity, profitability and sustainability of smallholder value chains. These startups may provide farmers with better access to agronomic information, markets, credit and inputs, though their end customers may not necessarily be smallholders themselves. Since 2020, when Grow Asia identified five key AgriTech business models in Southeast Asia: Farmer Advisory, Peer-to-Peer Lending, Traceability, Digital Marketplaces and Mechanization Platforms, we have been paying particular attention to the progress of startups providing these solutions.
In the first session of Grow Asia’s Digital Learning Series for 2022, Adam Lyle, Executive Chairman of Padang & Co, presented an update on the Smallholder AgriTech landscape in Southeast Asia. We also welcomed John Friedman, Asia Director, AgFunder to share insights for Southeast Asia from their recently released 2022 AgriFoodTech Investment Report. This year we took a closer look at financing for smallholder producers. How has the P2P lending space evolved and how has this been shaped by the pandemic, what other solution/business models can enable smallholder producers to access financing and what other critical pieces of ecosystem support are needed?
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Guest Blog
Financing Trust
By David Chen, CEO of AgriG8
A defining moment of my career in the rice sector happened in 2019. Late in the evening after a community event in the Delta region of Myanmar, a farmer approached me with his smartphone. He had a page open on his browser to a popular e-commerce website in Singapore. He went to Golden Sunland’s page and saw that we were selling 2kg of our rice at S$9.80. With the help of a translator, he asked “if this is how much you are selling our rice, why are you paying us so little?” He was surprised to see me respond with a big grin on my face, and his initial macho swagger disappeared. This is a huge win for me. A year ago, this farmer would not eat with me at the same table. There was distrust, largely influenced by his past experiences with people whom he perceived as either authoritarian or as scoundrels out to exploit him. The fact that he could walk up to me with the courage to seek justice meant that he was starting to trust me. We used that opportunity to conduct a supply chain lesson and I explained how we were paying him 30% above the government announced price, and the challenges we faced. This helped us to reach a mutual understanding.
We had spent a full year building relationships with these farmers and during this time also had the opportunity to contribute tangibly to their livelihoods. It was a combination of these two factors that seeded a sense of trust and opened up opportunities to introduce new concepts to them.
There are millions of smallholder farmers like the gentleman in my story who are caught between aspirations for the future and reality. Smallholder farmers do not have the luxury of being able to consider long term sustainability, which can reinforce the notion that they are both victims and contributors of climate change. Without sincerely acknowledging and appreciating their current situation, we lose their trust and with it, the ability to facilitate much needed finance for sector innovation.
We are currently in the midst of an AgriTech boom, racing to feed 10 billion people in 2050. Looking back, our current trajectory eerily echoes the Green Revolution in the 1960s. Despite being more sensitive to environmental issues, we still seem to be leaving some smallholder farmers behind. Specifically, even the well-intentioned can contribute to creating social divides when we focus primarily on development of the next big-thing rather than bringing the last best-thing to the farmers. One of the best examples I could think of is the modern rice transplanter, a Japanese invention in the 1990s. It is a tractor-like machine that could transplant paddy seedlings evenly and takes only 2 men, 2 hours to complete the task on a 1 hectare field. This is a stark comparison to the manual transplanting method that requires 20 men and half a day to achieve similar output. In 2015, in Myanmar, I witnessed a transplanter being operated by 2 men in the field, and 18 men standing on the bund. Everytime the transplanter got stuck, the 18 men cheered and rushed towards the machine to help it out of the mud. Because at that moment, these 18 men were able to contribute and were once again relevant. What could have been done with 2 men in 2 hours eventually took 20 men, 4 hours to complete. The transplanter represents progress, efficiency and innovation to innovators and development practitioners, yet to the farm laborers, it represents job losses. This story also highlights the complex intersection between technological and societal development, a heavy topic for another time.
This was a picture taken in 2019. We already have the technology level to replace 80% of the manpower in this picture. Besides efficiency, there should also be a holistic consideration of the overall impact.
Linking back to our discussion on smallholder financing during the recent Grow Asia Digital Learning Series on the Smallholder AgriTech Southeast Asia Landscape 2022, two topics stood out. Firstly, the challenges faced by the sector to bring affordable and comprehensible financial products to farmers in Southeast Asia. Secondly, trust-building is crucial to enabling transformation towards a more climate-resilient food system.
Technologies, which can help farmers navigate climate challenges and create more predictability, cost money. Access to finance thus becomes key to technology adoption for sectoral transformation. Finance comes in many different forms in the sector, ranging from tontine (village-level), microfinancing, government subsidized lending, credits from vendors etc. The key characteristic of those farmers who find themselves in vicious downward spirals of debt is the presence of multiple lenders and the inability to quantify the cost of their loan (e.g. when percentage of harvest is pledged to a loan). These are also common themes for informal lending. Farmers turn to informal lenders because formal lenders cannot appraise this untapped market adequately and therefore often do not serve small-scale farmers in rural areas. Perceived risks are managed either by increasing loan interest rates, frequent repayments or reduced loan quantum.
These mechanisms are counter productive for the farmers and do not necessarily lower the amount of non-performing loans . The truth is, this is clearly an unbankable market in a traditional sense. While the development sector continues to dangle the more-than-US$100 billion financing gap (i.e. market size) to the banking sector, to some lenders, this is just not currently worth their time and investment.
To bring more lenders onboard to bridge the financing gap, AgriG8 proposes a more forward-looking approach and to rethink the topic of creditworthiness for smallholder farmers. By embracing the shared-data-infrastructure to reduce cost of technology adoption and a multi-data approach (from satellites, near surface imagery, IOT devices on the ground and user-generated data) to generate actionable insights, we use practical technologies to increase farmers’ productivity. At the same time, we convert these data into insights that would help lenders lower their loan origination costs and perceived risks. The key objective is to design loan products that make sense to both parties.
The journey doesn’t stop here. Assuming we have the most logical product on paper, from our interactions with the farmers, some of them still prefer informal loan channels. Informal loans offer flexibility and are based on a trust system that technologies can’t mimic. With smallholder farmers, the quickest way to lose trust is by believing we know farming better than they do. This sort of first world arrogance often shuts down conversations. We have to continuously embed the notion of trust-building into our solutions at every step. At the 2019 Sustainable Rice Conference, an IRRI scientist said that the smallholder farming sector is “knowledge rich yet solution poor”. As we move forward, AgriG8 endeavors to focus on solutions that are supported by scientific knowledge, but firmly rooted in the complex and sometimes contradictory reality of farmers’ experiences.
Author Bio
David is privileged to have spent the last 14 years in the rice industry. His first major milestone was co-founding Golden Sunland, a certified B corp operating in the rice value chain in Myanmar. In 2021, as a result of the experience and knowledge gained through the years, he founded AgriG8 together with the Trendlines Group. AgriG8 is an Agri-Fintech firm, whose mission is to make investing in climate-resilient farming attractive for lenders.