Access to finance for farmers: the rise of agrifintech
From ruined crops due to heatwaves, grain hostage taking in the Black Sea and worrying levels of food price inflation, agricultural sustainability and food security have suddenly been catapulted into mainstream news from relative obscurity. At the same time, investments in the space, in particular agritech and its subset agrifintech, are growing rapidly. The smart agriculture market, for example, is forecast by some to grow by 10% CAGR to US$20.8bn by 2026, while others put the number of the global agtech market as a whole at US$32.5bn by 2027.
With demand for food set to increase by 70% by 2050 while the world’s resources are being rapidly depleted, it is no surprise that agriculture has become a hotbed for innovation in the last few years. Having come under the spotlight as an industry has also laid bare one of the biggest obstacles for farmers to thrive and adopt more sustainable practices: access to finance.
Due to the cyclical nature of agriculture, many farmers require some sort of financing to tide them over until the next harvest. According to the World Bank, half of the world’s farmers are unbanked. That is 440mn farmers. Despite common misconceptions, around 95% of global farms are smallhold with less than five hectares of land, which produce 80% of food for some regions, including Asia and sub-Saharan Africa. Although agricultural challenges vary immensely by geography, access to finance is a universal problem for farmers across the world. In India, for example, only 30% of farmers have access to institutional financial support, while 70% remain underserved. In many parts of Europe, on the other hand, farmers are forced to make agreements with their agricultural input suppliers to agree financing options at inordinate rates.
Risk assessment challenge
The reason traditional financial institutions often shy away from the agricultural sector is the challenge of assessing risk in this unpredictable industry. Lack of data is a particular hindrance. In farming, no two years are the same, with weather, yields, prices, markets and regulations all contributing to uncertainty. This, however, is an area where agrifintech startups have been making huge strides.
Smartphones have been game-changers, especially in developing countries, as they provide farmers with the opportunity to access financial services. A study of Kenyan farmers has found that 98% own mobile phones that are increasingly used to improve farming practices and improve access to markets. In India, 4G connectivity and rising smartphone penetration has seen an explosion of agrifintech startups to support the large farming sector by tapping into the vast potential of mobile apps powered by Web3.
With the help of AI, advanced satellite data, drones and the power of blockchain, the ability to more accurately assess risk has improved vastly. The emergence of better and more accurate data is leading to more transparency and traceability that allows agrofintechs to offer loans faster, at better terms and with reduced risk.
Blockchain is playing an important role in this new agricultural finance ecosystem. Take the example of agricultural insurance: clean and open digital data from weather stations and farms on blockchain that cannot be manipulated form the basis of Web3-powered index insurance. This allows claims to be processed fast with quick, automated payouts. Farmers are able to better manage risks and become less vulnerable to the adverse effects of weather events, equipment failure and other problems.
Financing to fight climate change
While many farmers struggle to access finance to tie them over to the next season, climate change and population growth means it’s absolutely crucial for the agricultural sector to have the ability and necessary tools and funds to adapt to the changing climate and resource scarcity. This means huge investments will have to be directed towards the agricultural sector above and beyond just making sure it can keep the lights on. The World Bank talks about a requirement of US$80bn of annual investments.
In the short-term, funding for agricultural sustainability could in part come from private companies looking to offset residual emissions in their quest to reach net zero. Agriculture is an industry incredibly well suited to be part of the carbon offset ecosystem. Soils are the largest carbon sink outside oceans and sequestering carbon into agricultural soil via photosynthesis is a key natural means to fight climate change. Pre-financing carbon credits enables farmers to invest in the long-term future rather than season-to-season whilst providing an extra revenue stream.
Additionally, looming regulations around sustainable investments, including the upcoming EU Taxonomy, is putting pressure on financial institutions to invest according to more stringent ESG principles. Offering farmers more favourable lending terms for moving towards sustainable practices is good for banks and good for the planet.
Agrifintech: providing the means to bring regenerative farming from niche to mainstream
Wildfires, floods, blizzards, melting glaciers, pandemics, war, famine, fuel shortages, inflation – 2022 will go down in history as the year when the world at large finally connected the dots. With the climate, environment and societies in crisis, investors and innovators are turning their attention to the agricultural sector, on which human life depends. Enabled in part by advancement in technology including AI, machine learning and blockchain, agrifintech is working to fill a gaping hole in agricultural finance that has held back progress towards regenerative farming for too long.
About the author: Robin Saluoks is CEO of climatetech company eAgronom, which works to connect farmers with the economic benefits that come from sustainable farming practices. The company offers pre-paid farming credits for farmers, a sustainable land programme for landlords, and a green loan programme for banks. The firm is based in Estonia.