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Can agritech in SEA disrupt a multi-billion dollar industry?

No one in our world should go hungry, especially in a world with as much wealth as ours. But the reality is more than 811 million people go to sleep without food every night, that’s almost one in nine people on earth who don’t have enough to eat. Number of people on the brink of starvation has risen 10 times over the last couple of years. 

And in these times, a war has even worsened the situation.

Russia’s war has compounded or accelerated pre-existing food deficits and inflationary trends arising from a host of linked factors: the negative economic impact of the pandemic; resulting supply-chain, employment, and transport problems; extreme weather and climate-crisis-related falls in output; spiralling energy costs; and numerous other ongoing conflicts worldwide. 

Early effects in many countries are already evident. African and select Latin American countries are poorly placed to cope with food insecurity. 

The situation in Asia is also alarming. 

Scarce food, combined with price increases, electricity blackouts and shortages of petrol, cooking gas and medicines, provoked a political crisis in Sri Lanka this spring that served as a discomfiting template for countries facing similar problems. It recently defaulted on its debt for the first time ever.

Similarly, Pakistan is facing a double-digit inflation which has left many unable to afford basic foodstuffs and was also a major contributory factor in the fall from power earlier this year of the prime minister.

Likewise, India is grappling with high inflationary pressures and has imposed a ban on wheat and certain essential commodities to ensure national food security and to cool off raging price increase.

Another region where agriculture remains sensitive and largely fragmented is Southeast Asia.

A complex system

The agricultural economy in Southeast Asia, much like India, remains one of the most traditional and unorganised sectors in the region. Within the agri-value chain, technological advancements in downstream operations have helped improve productivity and reduce the requirement for labor. 

However, as we move closer to the farm, the industry remains fragmented and underdeveloped.

To put things in context, the majority of farmers in SEA have farm sizes that are smaller than 1 hectare, while average farm sizes in the US are nearly 200 times more. Due to the small land holding, farmers have very little bargaining power at both ends, pushing up the price of inputs (seeds, fertilizer etc) and the end price of the output. Moreover, given the nature of the market, SEA retains a complex supply chain network, with multiple aggregators in the fray.

Typically, local produce changes hands three to four times before reaching a downstream player. Downstream players appropriate a majority of the margin in the supply chain, with little left for the farmer. For example, for every dollar of produce consumed, less than 10% reaches the farmer in SEA compared to nearly 30% in Western markets.

Fragmentation creates opportunity

Today, with increasing internet penetration and consumer demand for visibility, VCs are turning their eyes towards this traditional industry. Funding in the agri-sector has increased substantially over the last decade, from a total investment of $3.1 billion in 2012 to $51.7 billion in 2021. Of this, about a third of the investments came to SEA startups, with investments across all legs of the supply chain.

Agri-tech in Southeast Asia is skewed primarily towards solving the downstream (production and distribution) issues; however, an uptick can also be seen in the startups solving the upstream (seed, fertilizer, alternative meat etc) issues. 

The startups in Agri-tech in SEA can be broadly classified into 3 themes.

One is optimising supply chain and distribution. While considered the low hanging fruit, it remains the biggest issue to solve because of the remote locations of the smallholders and low digital adoption.

However, the space has emergence of players throughout the value chain such as AgriAku (marketplace for farm supplies), Tanihub/Eden Farms (streamlining distribution channels for farmers i.e B2B ecommerce platform), and LimaKilo/Java Grocer/HappyFresh (Farm to Table). A common theme across the chain can be observed around providing transparent pricing/market intelligence to farmers and similarities can be drawn to the solutions that revolutionary ITC E-choupal provided in India.

Another important theme is farmer financing. Working capital remains a key constraint for them, and players have now stepped in to solve for this. Crowde and TaniFund for example, have disbursed millions in loans since inception. Similar models can already be seen in the rest of SEA such as Kilimo Finance in Vietnam and Cropital in Philippines.

Lastly, another key theme is focusing on improving farmer productivity. Arguably, in a sector as complex as this, trying to get efficiency gains at source makes the most sense. Agritech startups in SEA are now turning to incorporate cross-industry applications such as drone technology, IoT, data analytics to improve productivity. Poladrone, a Malaysia based drone company which raised a US$ 4.3mn funding in 2021 helps in monitoring the farms, forecasting the yields and administering preventive measures. In Vietnam, agritech start-up MimosaTek uses an IoT platform to provide data, support decision-making and remotely control farming using sensors on agricultural equipment.

However, as the market is evolving newer themes, especially on the upstream side are emerging. Some of the newer trends include use of blockchain technology for data exchange (Hara Tokens), farming-as-a-service for improving productivity (Feifo) and data/AI led models and farm analytics (AgNext, Braintree Technologies). 

Path to Profitability 

Although these startups are solving mission critical problems, a key question has always been around profitability. Critics claim these models are either capital intensive, or so complex with low order values that eventual profitability remains distant. 

However, it is important to note that we are talking about a multi-billion dollar essential industry here. By eliminating middle men alone frees up 20% or so of margins that can be shared amongst all ecosystem participants such as farmers and end customers. 

Moreover, while margins may not ever resemble that of a true tech business (the good ones), this is very much a volume game. 

Quantity and efficiency are the key litmus tests to determine which companies will prove to be eventually successful. While that remains to be seen, what is certain is that agritech in SEA continues to be brimming with potential.

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