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Aggregation is the key to unlock the huge potential of Africa’s smallholder farmers

Written by Ali Al Suhail, Associate at DAI Magister

More than 700 million Africans work as smallholder farmers, a vital sector of the region’s economy. However, this $250 billion+ sector is hugely underdeveloped and faces major challenges on both the supply and demand side, cutting productivity and income for farmers.

Agritech businesses can play a leading role in addressing these challenges, developing innovative business models and technologies to unlock the potential of smallholder farming across the continent and finally meet the growing food needs of the population.

Africa’s key industry left to rot

Africa has made incredible strides economically in the last two decades. Much of this is due to increased private investment and the application of technology, which has transformed sectors like telecommunications and financial. Yet agriculture, the continent’s biggest sector by far, accounting for 23% of GDP, has been nearly untouched by technology, and looks much the same as it did 50 years ago.

Productivity and profitability of smallholder farmers remain low due to outdated practices, poor data, pricing volatility, and a severe lack of financing. While smallholder farmers produce 85% of sub-Saharan Africa’s agricultural output, more than 75% still prepare the land by hand and just 5% of cultivated land is irrigated.

Yields from maize, one of the continent’s most important crops, average two tons per hectare annually, one-quarter of yields achieved in the US. Post-harvest, only $40 per ton of value is added to agricultural produce, a fifth of the value added in high-income countries.

Recent analysis suggests that only 20-30 million hectares of additional cropland are ready to cultivate today due to a lack of infrastructure, regional conflicts, and other issues. This represents only a 10% potential increase in cultivable land to increase production. As such, growth in agricultural output (and profitability) cannot solely come from land expansion, it has to come from boosting smallholder farmer productivity.

Key challenges & emerging solutions

Access to Finance

Irregular cash flows generated by different crops makes financing essential to support the purchase of inputs and modernize the operations for smallholder farmers. But recent studies estimate financing is available for less than a third of annual farmer credit demand from smallholder farmers in low and middle-income countries.

In fact, Sub-Saharan Africa’s farmers face the biggest financing gap in the world, a shortfall of 73% for short-term agricultural financing and an astonishing 98% for long-term financing. African banks are simply not filling this gap, today providing just 3% of financial services to smallholder farmers. In Tanzania, for example, agriculture represents 25% of GDP growth in 2020, yet received less than 9% of all credit issued by banks.

A major reason is the sector’s low and unpredictable income (high-risk profile), but there’s a deeper issue as well. The vast majority of farmers do not have a bank account and resort to cash and physical bookkeeping. Without a way to verify their financial history, banks see farmers as too risky to lend to.

Thus, many farmers must turn to informal credit sources such as family, friends, unregulated lenders or loan sharks. Microfinance organisations, long the primary access point to credit for Africa’s unbanked, largely fall outside the reach of most smallholder farmers. Additionally, microfinance organisations usually only provide one-time loans designed to fund a specific purchase or investment, and these one-time loans do not meet the ongoing needs of farmers who typically require $500 to $1,500 in short-term financing and $500 to $2,000 in long-term funding annually to cover their expenses.

Now with the emergence of mobile procurement and payment solutions, opportunities are opening up to deliver financing and other financial services to smallholder farmers. These new solutions provide farmers with “economic identities” and allow for the collection of crucial data from multiple sources, key to assessing and building their credit profiles.

In Nigeria, ThriveAgric is providing farmers with inputs-based financing that farmers can payback with their farm produce. It relies on its proprietary technology to assess the creditworthiness of farmers using data collected by field agents and farm mapping.

Similarly in East Africa, Apollo Agriculture provides small holder farmers with inputs related financing. It leverages machine learning, remote sensing, and mobile payments to accurately underwrite farm’s credit risk. Apollo also built an automatically managed network of 5,000+ agents and 1,000+ retailers that enables last-mile delivery of farm inputs and services to small-scale farmers.

Price volatility

Pricing shocks remain a key risk for most farmers, resulting from macroeconomic disturbances, policy changes, oil price shocks, disease & parasite outbreaks, and adverse weather events. Pricing shocks can trigger wide swings in farm income in a relatively short period, leading to substantial losses that can quickly push smallholder farmers into debt or make it difficult for them to service existing debts.

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Many smallholder farmers therefore become trapped in a vicious cycle of shock and partial recovery, degrading capital and natural resources over time. Price shocks and volatility also impact investment in land improvement, farm equipment and inputs, driving smallholders to favour low-risk subsistence farming rather than investing into high-return farming enterprises.

In recent years, several agritech startups have begun rolling out solutions to mitigate the impact of price volatility. Pula Advisors designs innovative agricultural insurance and digital products to help smallholder farmers cushion against the risks of volatile yields, improve their farming practices, and bolster their incomes over time.

Esoko, out of Ghana, helps 1 million hard-to-reach farmers to reduce risk by providing real-time data on market pricing and weather forecasts to help drive planting and other market-related decisions. Gro-Intelligence aggregates and analyses millions of environmental and economic data points such as crop forecasts, satellite images, topography and precipitation so farmers can develop a more holistic understanding of future market conditions and reduce risk.

Access to inputs and machinery

Chronic lack of productivity-enhancing inputs and the slow adoption of new technologies results in extremely low yields and produce quality. For example, Africa has the lowest fertilizer use rate in the world, and this rate has not changed for the last 40 years. Similarly, other yield-enhancing inputs such as improved crop varieties, pesticides, and automation/mechanization have also been chronically underutilized to this day.

Even where smallholder farmers use improved inputs, they often see little or no return on investment due to local variations in input costs and output prices. There are also instances where farmers know they could improve yields by using better inputs, machinery and techniques, but the extra income from these improvements is often not enough (due to poor access to markets or low crop prices) to justify the investment. Aggregators play a crucial role, enabling farmers to organise bulk purchases of productivity-enhancing inputs such as seeds, fertilizers and agrochemicals at lower than market prices, helping increase their returns.

Based in Ghana, Farmerline works with global suppliers to provide farmers and inputs dealers access to high quality inputs with the financing required to purchase those inputs. Loans can be repaid during and after the growing season.

Hello Tractor offers a technology to increase and optimize tractor activity where they connect tractor owners and smallholder farmers in Sub-Saharan Africa through a farm equipment sharing application. By creating equitable access to tractor services, Hello Tractor enables smallholder farmers to earn more and grow more.

Market Access

African farmers have long faced difficulties accessing markets for their farm produce due to a fragmented retail sector, high transport costs, poor facilities, and exploitation by powerful traders. If farmers had a way to aggregate their products and pool their resources to obtain certification at a lower cost, they may well have been able to deliver this objective profitably.

Aggregation also plays a role in negotiating better terms with influential traders and intermediaries who often exploit smallholder farmers. Substantial price differences for crops such as soybeans and maize between areas in Eastern and Southern Africa suggest high concentration levels in supply chains and local market power being exploited. Large traders regularly take advantage of poor storage facilities and the lack of other market options to drive down prices.

For example, throughout 2021, soybean prices were around US$900 per tonne, but prices in Zambia and southwest Tanzania fell below $400 per tonne. Considering these areas could supply Dar es Salaam and Nairobi and transport costs typically should not account for more than $100 per tonne, the price differences could well be explained by large traders offering farmers unreasonably low prices.

Aggregation can play a crucial role in overcoming these issues by allowing farmers to band together to negotiate better terms, better access to new local and international markets and more consistent demand for farmers.

One company helping address this is Twiga. Twiga leverages technology to aggregate retail demand and provides urban retailers access to higher-quality, competitively priced fresh foods and goods. To achieve this, it has signed up 20,000 farmers across Kenya, who use its app to secure orders. Twiga then collects, either from the farm or from aggregation points, and retailers can see what is available, order it, and have it delivered. ThriveAgric recently launched its ThriveAgric marketplace that aggregates produce in high-demand and provides farmers direct access to larger domestic & global off-takers with margins ensuring small holder farmers sell their products at fair prices.

The future of African agriculture lies in improved linkages and aggregation

Africa has the potential to cover the entire world’s food needs, yet its smallholder farmers are riddled with challenges that includes lack of Infrastructure, increasing adverse weather events and high levels of fragmentation.

Aggregators play a key, and rapidly growing role in unlocking this potential by connecting smallholder farmers and offering platforms that give them access to efficient markets. As these innovative Agritech startups continue to develop new solutions with the backing of international investors such as Softbank or Chan Zuckerberg Initiative (recently invested in Apollo Agriculture), smallholder farmers may soon finally have the tools and market power to compete, grow and take their rightful place as key economic drivers of the African economy.

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