Outgrowing the Flower Pot: Why Just Selling Productive Equipment to Smallholder Farmers is Not Enough
A new wave of companies are bringing equipment powered by renewable, decentralized energy to smallholder farmers. Solar-powered refrigerators, water pumps and milling machines (among other devices) have the potential to significantly increase yields and reduce wastage. But turning that potential into economic impact — making productive equipment actually produce — takes more than just technology. It requires a deep understanding of the systems that these companies are disrupting, and raises a need for bundled interventions to address the overlapping barriers that farmers face.
To overcome these barriers, Acumen is supporting companies that are combining productive equipment with market access to help farmers improve their incomes. Market access — having a ready buyer who will purchase excess production and pay a premium for higher quality — is a fundamental criterion for impact investors or philanthropists to consider when investing in solutions that promise economic impact for smallholder farmers.
The Problem: Smallholder farming needs an enabling system in place to work
Smallholder farming produces 30-34% of the global food supply, and provides livelihoods for 2.5 billion people. Unfortunately, these farmers also comprise a significant share of people in poverty, so boosting their income can have a substantial impact on global poverty. Supporting smallholders can also help preserve the environment: Having food chains that are local and decentralized — with small farms, not factories, at the center — is a crucial part of building resilience to climate change. Yet for smallholder farmers to thrive, a core set of fundamentals need to be in place, including access to land, inputs, equipment, capital, advice — and above all, markets.
It has become clear that simply providing these farmers with modern equipment won’t address these multifaceted needs. A new piece of equipment might increase yields or improve quality, but to what end? Imagine a tree growing in a flower pot: If the growth has nowhere to go, it can become a strain — even a danger. Similarly, if a farmer cannot find a buyer to absorb their extra output, or one who’s willing to pay a premium for higher quality, the new equipment can make farming less profitable, not more. Too many agricultural interventions fail when farmers cannot find a market for their increased production and the boon becomes a burden.
Growing rural economies by linking them to better markets
The energy access field has broadened to include renewably-powered and efficient assets that are helping people in poverty improve their incomes. Smallholder farmers operate in rural areas, where grid electricity is often absent or weak. The combination of renewable energy and productive appliances can unlock profits for those farmers. But serving this market is different from selling a solar lantern or home system to a regular household: The equipment alone is not enough. As Lighting Global found, “a whole set of value chain issues, which vary in severity by country and crop, prevent farmers from being able to reap the full benefits of productive appliances.”
To address these needs, as part of our Pioneer Energy Investment Initiative Plus (PEII+), Acumen has recently closed follow-on investments into two of our most exciting portfolio companies: Promethean and S4S. Both companies (operating in India) are selling productive assets that benefit farmers, and both have taken the extra, essential step of providing farmers with a market for their produce.
Promethean’s weak grid refrigeration for dairy farmers
Promethean Power Systems designs and manufactures refrigeration systems for agricultural use in partially electrified areas. They began by selling bulk milk chillers to large dairies in India’s highly centralized dairy industry, which serve as aggregators for the milk from rural dairy farmers. The quality of milk is directly proportional to the time it takes for it to be chilled. After a short time, milk kept at room temperature is no longer suitable for premium products like yogurt; after six hours, it spoils completely. Promethean’s milk chillers aimed to address this challenge.
However, the company saw that the savings created by better refrigeration at these dairies were not being passed on to the majority of smallholder farmers. Many still lived too far away from the dairies, receiving lower prices for lower quality milk — or in extreme cases seeing their milk spoil before it could find a market.
“Distributed and decentralized milk chilling is ideal and necessary for all stakeholders,” said Jiten Ghelani, CEO of Promethean. “The challenge was, who was most likely to make that investment on a larger-scale basis?”
Promethean is stepping into this gap. Using a technical assistance grant from Acumen, the company developed a micro-chiller model that is affordable, can operate in weak-grid environments, and chills up to six 40-liter milk cans per day. Promethean then partnered with village-level entrepreneurs and farming cooperatives to establish chilling hubs in strategic locations. These entrepreneurs will purchase the micro-chiller and use it to provide market access to their community.
This approach is increasing the number of smallholder farmers who have access to a formal, transparent market for their dairy products, giving them an opportunity for more sustainable livelihoods.
S4S solar food dehydrators
Farmers often struggle to find a buyer for “ugly” produce, as buyers associate natural imperfections with poor quality. That is where Science for Society (S4S) comes in. The company uses technology to convert what is perceived as waste into value. S4S sells solar conduction dryers to women micro-entrepreneurs (MEs), who use the dryers to dehydrate fruits and vegetables, restoring the value of rejected produce to smallholder farmers. The MEs purchase the dryers on credit through asset finance partnerships.
From the beginning, S4S had market linkages in mind. Farmers would gain a new potential market for lower-grade produce: For instance, misshapen onions could be transformed into onion powder. Moreover, MEs had a guaranteed buyer in S4S, which purchased the dried product, aggregated it in a central facility, and sold it to large-scale buyers, including corporations like Nestle and Sodexo.
Yet something was missing. For any asset, maximizing utilization — i.e. the share of potential output that is reached — is the key to success, and S4S’ assets were underutilized. The potential market was still too far away for many farmers, so MEs were not receiving sufficient produce from farmers to pay off their dryers, let alone make a profit.
S4S solved this problem by moving closer. They established a network of village-level collection centers within 2 km of farmers. The efficiency gains are now as much as 16-30% for farmers, and this competitive advantage attracts more smallholders and allows S4S to maintain supply for its MEs. S4S moves produce from these collection centers to the MEs for dehydration, then it purchases the dried produce and sells it to large buyers, as it did before.
A systems-level approach to value chains
What Promethean and S4S have shown us is that selling efficient agricultural equipment requires companies to take a systems-level approach to a value chain, understanding how inputs, capital, labor and outputs work together. Only when companies have understood the system can they bundle the right combination of products, services and equipment to meet smallholder farmers’ multiple needs. That’s why investors and entrepreneurs need to look beyond technology for technology’s sake, and focus on how to use this tech to create value.
However, this broader focus does bring some challenges. For example, Promethean and S4S are dealing with more operational complexity, as both companies are now managing last-mile logistics and schedules. But the upside is that they are able to build long-term relationships with farmers, based on the value they are creating. Additionally, the small businesses built around these assets are providing new income for entrepreneurs at the village level.
In terms of whether the benefits of this approach outweigh the challenges, Mahesh Yagnaraman, Acumen India’s Country Leader, is unequivocal: “The market linkages that S4S and Promethean have built are more than just linkages. This is actually a core ‘asset’ of both companies. They have marquee customers, and leveraging that market enables these companies to go deeper in the supply value chain to create value for farmers. They are thus genuinely increasing the value across the chain with the smallholder farmer getting a fair share. This is why we are doubling down on our initial investments.”
What comes next?
Ensuring access to markets is just the first step when selling renewable energy-powered agricultural assets, not the last. Both Promethean and S4S are experimenting with additional value-added services that can increase farmers’ profitability. S4S is developing an impressive array of digital tools to boost farmers’ access to markets, inputs and credit. Meanwhile, Promethean is planning to make its hubs the entry point for a whole suite of end-to-end dairy services. For instance, the same village entrepreneurs that operate its micro-chillers are also selling cattle feed and offering connections to tele-vet services, with agronomy support and credit to follow.
Mechanization and improved access to all sorts of equipment are crucial for smallholder farmers to become resilient and profitable, but these tools are not enough. For farmers, all the links of the value chain need to be in place to turn productive equipment into a profitable investment.
Dan Waldron is Head of Insights at Acumen, Christopher Emmott is Associate Director of Investing in Energy Access at Acumen, Priyanka Dudeja works in the investments and portfolio team at Acumen India, Paraag Sabhlok is the Associate Director of Portfolio for Acumen India, and Christopher Wayne is Associate Director, Investing in Agriculture at Acumen.
Photo courtesy of Saumya Khandelwal, S4S/Acumen.
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