Agri-Food – underfinanced yet key to achieving UN SDG’s

The sector continues to suffer from limited access to finance, and SME farmers struggle even more.

There is an estimated credit gap of $170bn per year in small holder agriculture finance (source: IDH – the sustainable trade initiative). A number of factors drive this financing gap including perceived risks, unsupportive regulation, the limited number of investment solutions, and financial infrastructure. The finance sector needs to scale up and mobilise funds for this sector.

Individual investors, family offices, private equity and retirement funds have begun to realise the value proposition inherent to agriculture. As of 2014 there were a total of 230 funds focused on this sector of which more than 40 were private equity funds (source: Valoral Advisers). As PE activity is focussed on projected cashflow-based scalable opportunities, this leaves the smaller family-owned farms struggling to gain access to finance and sustain livelihoods.

The drawback remains that there are limited number of investment vehicles to support the small and family-owned businesses that make up 90% of the 570m farms worldwide (source: FOA, UN). China, India and the countries of Africa account for over 65% of the global number. They have the potential to be a force for dynamism, technological change and wider commercialisation. By transforming these farms inclusively, income of rural households increases and the sector become more productive and expands.

Collaboration between multiplayer sources needed to accelerate green finance solutions

Green bonds have the potential to support SME farm holders and to bridge the gap between the need for increased agriculture production and concern for the environment. Whilst Green bonds have gravitated towards clean energy, sustainable farming and land use also offers potential. These bonds can be issued by commercial banks, development finance institutes or governments and placed via public markets or privately distributed. The Agricultural Bank of China was one of the first issuers of green bonds (US $1bn). Brazil, a key emerging market, has issued R$11bn (US$3.4bn) of green bonds, and 24% of the bond issuance funds have been used to finance forestry and agricultural production (source: One to one Corporate finance).

Philanthropic capital is another source of capital that can increase exposure to the agri-food sector and achieve better alignment to SDG’s. Currently the philanthropic capital in 230,000 foundations globally exceeds USD 1.5trn and foundation expenditures exceeds USD 150bn per annum (source: UBS The Global Philanthropy Report). However, sustainable food is yet to become a top three beneficiary. Blended concessional finance solutions that combine philanthropic capital with development finance institute capital, can increase capital pools for commercial banks to support SME farm-holder sustainable farming.

Development finance institutes are a key source of capital supporting private sector sustainable growth in developing markets. DFIs in partnership with private banks can develop a range of innovative fixed income and equity solutions focused on the smaller farm-holder sector. These solutions targeted at the HNW and UHNW wealth pool valued at $115trn could increase private wealth flowing into the finance sector in developing markets to support smallholder farms (source: BCG Global Wealth Report 2020).

Impact capital investment in agriculture is currently about 9% of the total impact capital market size of $715bn (source: Global Impact Investing Network). The sector has the opportunity to innovate and develop new solutions to capture the growing sustainable agriculture market while still evolving some of the sub-themes including food packaging, food technology, food production for SMEs that operate in crop production, fish farming and animal farming.

Gender smart investing solutions needed to provide equal access

Gender-themed solutions are key to ensuring that women do not get left behind and have equal access. The majority of the workforce in small family farms are women who are likely to be disproportionately impacted by the pandemic.

Gender bonds are a key instrument in the gender investing tool kit, but are at early stages of development. These bonds focused on sustainable farming can deliver social, sustainable, as well as financial outcomes. As of March 2020, 13 gender bonds had been issued by a variety of entities (source: Lion Head Global partners). Venture capital and food supply chain financing are some of the other Gender investing solutions in agri-food sustainability that can drive systematic change.

Yields from farms could increase by 20-30%* (source UN & World Bank, IAASTD) if women were given the same access to resources and solutions to widen the capital pools.

Digital has the power to transform retail and commercial bank lending to deliver inclusive and sustainable agri-sector growth

Commercial and retail banks particularly in developing markets are one of the go to places for the small farm holders, but a combination of high origination and servicing costs, cost of capital, and the low familiarity of lenders with less developed value chains limits appeal of the sector.

Collaborations between different finance players developing innovative concessional finance solutions can widen the capital pools and reduce cost of capital for retail banks. Retail banks with their deep relationships offer an optimal distribution and deal origination source.

The rural nature of this business and lack of formalised data and credit history are other key barriers. Cost to serve can be reduced by leveraging technologies such as biometrics, robotic process automation voice or face recognition to onboard and service clients. Core banking systems established entirely on cloud do away with the need for branches. Artificial intelligence has the potential to leverage alternative data sources, behavioural, social media and mobile phone usage to develop alternative scoring and better manage risks.

MYbank a subsidiary of Alibaba Groups Ant Financial Services One has leveraged the power of digital to better serve the farming community. Mybank was set up in 2015, is cloud based and pioneered the “310 model” for SMEs and farmers providing collateral-free business loans. The 310 model enables borrowers to complete their online loan applications in three minutes, obtain approval in one second and with zero human intervention. This is made possible by a comprehensive AI-powered risk management system, which comprises over 100 predictive models, 3,000 risk profiles and more than 100,000 metrics. MYbank calculates an appropriate line of credit for SMEs that minimizes the risk of excessive lending. As a result, the non-performing loan (NPL) ratio for MYbank’s SME business loans has consistently been at around 1%. (Source: IFC, Business Wire)

In June 2018, Mybank announced Star Plan which aims to use its technology to enable 1000 financial institution partners to provide a more cost-effective financing service to 30million sme’s in China within a three-year period.

Banks in emerging markets are increasingly providing non-financial services to SME enterprises as a way of differentiating, improving portfolio growth and loyalty. Non-financial solutions targeted at improving farm productivity and sustainability will be key. This involves building an eco-system of players to include NGO’s focussed on training, training colleges and Agri-tech providers. Examples of solutions and training include how to optimise crop productivity by leveraging satellite imagery, smartphone GPS, big data, and internet of things. Solutions also address the range of options for supply chain management such as sensors for shipment tracking and facility management. Collaboration with predictive technology and the new digital banks enables commercial banks to provide a more cost-effective service to SMEs and women in farming. This could include partnerships with MNOs to provide access to supply chains and increasing the range of available solutions. Solution examples include renewable energy loans, solar lighting, and loans for water tanks and clean technology.

Ultimately, segmentation is key when developing appropriate business models, financial and non-financial solutions, clustering by plots sizes, production capacity, mechanisation, resources and expertise.

Players beyond the financial sector have a role to play to improve Agri-food productivity and sustainability

As outlined by the OECD, governments need to ensure that the policy environment is conducive for the agri-food sector to improve productivity, sustainability and resilience inclusively. This also includes policy interventions that eliminate discrimination against women and the ability of women to own assets given that in many markets the land is owned by men. Governments have a key role to play in driving collaboration across borders and players too. Public-private partnerships can collaborate to develop ‘Agri-innovation’ centres that can drive building clusters or farming communities of excellence, which in turn offer and benefit from economies of scale.

Consumers too have a role to play both in terms of reducing food wastage and donating to farmers and communities that grow the raw goods. Blockchain can document the food journey from farm to fork and QR codes enable consumers to see the story behind the product, facilitating donations and engagement.

Ultimately all actors need to be responsive to requirements that can in turn fuel the ‘innovation’ required to improve the Agri-system productivity and sustainability. Collaboration between various financial services and non-financial services players, a conducive environment, and digital have the power to transform the sector.