Finding the Value Convergence in Agri-Start-ups (Moving from Whammy to Value)
We’re hearing and reading constantly these days about farmer suicides, distress and decreasing farm incomes (when the Indian Government seeks to double farmers’ income). At the same time, we hear about consumers suffering high prices on food purchases (recent tomato prices at INR 85 a kg!). And then there are the agri-start ups in the market, looking to raise funding, but meeting with investor caution and skepticism. This feels like a triple whammy. Something isn’t making sense here.
As a farmer and investor myself, this post is an attempt to understand the dynamics that have created this situation, and an attempt to find the value convergence point for all stakeholders in agriculture. Let’s look at the 2 big challenges from a farmer’s perspective.
Labour shortage: One of the biggest challenges in recent years in farming has been labour shortage — farm hands are fewer and the average age of farm labour is 45+. Paradoxically, while we say there are insufficient employment opportunities in a country like India (5 million jobs have to be created every year), farming as a sector is experiencing distress for lack of labour (whammy!)
Pricing: Farmers are the only set of entrepreneurs who are not able to set a price for the commodity he/she is producing! If the supply of any commodity increases, there is a glut in the market and consumers enjoy low prices, which are unviable for the farmer (the Government has fixed Minimum Support Price (MSP) only for certain commodities.) On the other hand, if supply is low in the market and the price of the commodity increases, we would expect farmers to benefit due to increase in profit; not so, as the government generally pitches in to save the consumer and shield prices (e.g., Onion last year and Tomato in recent times). Either way, market-based model or state-sponsored model, the farmer takes a hit on earning (double whammy!). Of all the challenges faced by farmers, appropriate pricing, rather than productivity of a commodity is the single largest driver that makes or breaks a farm. For instance, a farmer produces 100 kg tomato and sells at INR 4 per kg, earning revenue of INR 400. On the other hand, when the same farmer produces only 50 kg of tomato and sells at INR 10 per kg, he earns a revenue of INR 500. Fair price for commodities is the area that most farmers are seeking support in. Start-up entrepreneurs in agriculture should use this as an opportunity to create business models.
Now, let’s look at farming from an Agri-start-up perspective. Lots of start-up entrepreneurs in agriculture relate to this gap between the price farmers are selling his produce (to intermediaries) and the price paid by consumers in urban areas. For instance, farmers sell milk at INR 20 per liter whereas an urban consumer buys milk at INR 44 per liter. The price difference ranges from 50% to as high as 500%.
Unfortunately, most of these start-ups who try to eliminate the intermediaries in the supply chain end up in their own double whammy situation. Although they pay the farmers a fair price (in competition with intermediaries), their value proposition to consumer is often high quality but at a low price. In this equation, what has been forgotten is that when the commodities change multiple hands from farmer to consumer through intermediaries, there is not a lot of value addition taking place. Intermediaries do not invest in any infrastructure (washing, sorting, grading) and their costs are low. On the other hand, a company working in this space will have to set-up infrastructure (base procurement centre, cold storage and other grading facilities) — escalating costs, fixed sales price and margin pressure (remember what I was saying about another double whammy?).
A case in point is Tomato. It’s procured by an intermediary from the farmer at INR 4 per kg. After changing hands through 5 intermediaries, it reaches the customer at INR 20/kg, with a 1–10% margin at each point between them. Now, when a start-up procures the same tomato from the farmers, it’s likely to be at INR 5/kg. This produce then goes through the entire sorting and cleaning infrastructure, but still needs to reach the customer at around INR 25/kg — the customers have a cap for the premium they will pay for value addition. Even without taking into account loss due to damaged items or those without visual appeal, the company is already dealing with wafer-thin margins. And then, break-even suffers.
While market linkage (farm to fork) is a great opportunity, it is important that entrepreneurs identify the nature of value addition that a consumer will be willing to pay premium for. When the nature of value addition is primary processing (sorting, grading) margins are likely to be thin; on the other hand, companies that are in secondary and tertiary processing (example: Milk converted to Paneer, Pro-biotic Yogurts, Milk powder, Potato converted to Chips etc.,) have scope to operate at reasonable margins.
So, an agri start-up in the value chain (farm to fork) should look for those areas/ commodities
a) which are unorganized (farmers disconnected from end consumers)
b) where customers pay for value addition
c) the value bridge between farm to fork is high (farmers can be paid premium as well as company can get better margins) before choosing the commodity.
This is the value convergence point at which a company can operate profitably, positively impact farmer incomes (in line with the Governments’ vision) and create quality products for consumers. Our goal at Menterra is to work with teams that have this kind of insight, and support them as they grow and build value.
AB Chakravarthy is a Post-graduate in agriculture, a practitioner from a farming family and has been into venture investing in agriculture and other sectors for the last 9 years. Currently, he is Principal at Menterra Venture Advisors Private Limited (MVAPL)
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