The digital agriculture revolution will take more than innovation (Part 1)

By Shruthi Baskaran, Sonya Hoo, Chris Mitchell, Jim Larson, Shalini Unnikrishnan, Sushma Vasudevan, and Younès Zrikem

This article was originally published at https://www.bcg.com/en-cn/publications/2021/digital-agriculture-and-development

Over the past decade, public and private sources have dedicated impressive amounts of energy and resources to digital agriculture in developing countries. If only the impact on the lives and livelihoods of the more than 500 million smallholder farmers around the world were as large.

Myriad digital agriculture initiatives and startups have leveraged digital tools and technologies in hopes of increasing farmer productivity and incomes, strengthening food security, and enhancing the resilience of food systems. In India alone, capital investments in agricultural technology (digital ag solutions along with other components such as hardware) between 2014 and 2019 have totaled $1.7 billion. Yet few digital ag solutions have reached scale: today, in sub-Saharan Africa, only 15 digital ag solutions exceed the 1 million registered users mark, and in many cases only 15% to 30% of registered users are active users.

To understand why digital agriculture has not yet lived up to its potential—and how countries might accelerate development of the sector—we conducted an in-depth assessment of activity in fourteen geographies across sub-Saharan Africa and South Asia. From that work, we identified three insights that many governments and private- and social-sector players overlook or fail to fully appreciate:

• It’s a journey. Different countries or regions have reached different levels of digital agriculture maturity, and they face different obstacles depending on their maturity level. Without a clear understanding of their maturity level—and a roadmap for tackling the most pressing obstacles—they may adopt a mindset of “digital for the sake of digital” that yields little progress.

• Innovation isn’t enough. From a planning perspective, it is not sufficient to let a thousand flowers bloom and hope that the right solutions gain traction. Until adequate growth-stage capital and a strong focus on developing robust, scalable business models are in place, meaningful impact will remain out of reach.

• Markets matter. Besides limiting farmers’ livelihoods, inefficient agriculture markets in many countries dampen the utility and impact of digital agriculture solutions. Yet digital agriculture efforts in recent decades have disproportionately focused on improving farmer productivity rather than on supporting market development.

When players across the digital ag ecosystem—governments, private-sector entities, and social-sector organizations—factor these insights into their strategies, they can accelerate sorely needed progress. Broad adoption of solutions throughout the agricultural value chain can help mitigate the economic blow of COVID-19, including the impact of movement restrictions on farming productivity, and advance the UN’s Sustainable Development Goals (SDGs). The question is whether all stakeholders within the ecosystem can work cooperatively to turn the promise of a digital revolution in agriculture into a reality.

THE UNREALIZED PROMISE OF DIGITAL AGRICULTURE

Agriculture forms the backbone of many developing economies, serving as a source of food security and providing income and livelihoods for the world’s smallholder farmer households, which number in excess of 500 million. And as populations rise and appetites for more diverse diets grow, food demand will continue to increase in these developing economies. Nevertheless, smallholder farmers face multiple problems that severely limit their agricultural productivity and income potential, including limited information about proper agronomic practices, poor access to credit and inputs, rudimentary logistics and transportation services, and inadequate planning and risk management. In the decades ahead, smallholder farmers also face harmful repercussions of continued global temperature increases, including smaller yields and greater prevalence of crop and livestock diseases and pests.

Digital agriculture can help smallholder farmers surmount these challenges, increasing their productivity and integration into food value chains and supporting their adoption of climate-smart practices. For example, the emergence of integrated data sets combining satellite imagery and weather and soil data is a significant advance; service providers and development partners could leverage these data sets to provide famers with more affordable credit and insurance, better early warning of crop failures, and improved farm management.

Today, digital ag solutions run the gamut from simple advisory services that send text messages about optimal planting times or imminent pest threats to complex, integrated platforms that aid farmers in managing their supply chain or accessing financial services. These solutions typically consist of elements of a digital stack comprising data and content (such as agronomic guidance), an integration layer, an analytics layer, and a user-facing layer (including apps and tools). Supporting them are such enablers as a solid digital infrastructure, appropriate government regulations and policy, healthy and fully functional agricultural markets, and sufficient human capital. (See Exhibit 1.)

Expanding access to technology in developing countries is setting the stage for accelerated digital ag innovation. More than 80% of people in developing economies now have a mobile phone, according Gallup, and nearly 45% of people living in developing markets used the internet in 2019, according to Statista. Meanwhile, the already low cost of transmitting information via inexpensive texts, voice messages, and videos is declining rapidly in places such as India and sub-Saharan Africa. In that environment, digital ag has the potential to transform the sector much as digital tools have done in industries such as finance and health care.

Despite many individual success stories in digital agriculture, however, evidence that it has had a major, positive impact on smallholder farmer incomes is surprisingly limited. Most solutions that have reached scale have focused on medium-size farmers or intermediaries such as agro-dealers. And users often do not leverage the solutions that do reach them. Safaricom’s DigiFarm, for example, has more than 1 million users, but estimates in 2020 put the share of active users at less than 24%.1 In contrast, 96% of Kenyan households use Safaricom’s mobile-banking service M-PESA.

THREE KEY INSIGHTS

So, what is holding digital ag efforts back? We think that many current digital agriculture efforts by public-, private-, and social-sector players fail to reflect three key insights.

It’s a Journey

Too many companies and startups try to roll out solutions in countries where the ecosystem is not mature enough to support it. These efforts fail to take into account the fact that digital ag ecosystems evolve along a continuum. We have observed four primary stages: a basic investment stage, a digital inflection point, a stage of moderate digital capacity, and a stage of robust scaling capacity. (See Exhibit 2.) Each of these stages reflects a step change in the digital ecosystem and in the ecosystem’s ability to deliver value and impact for farmers.

The challenges to development, and the elements required to accelerate it, differ at each stage of ecosystem evolution. In particular, different stages require a different balance between investment in solutions and elements such as enablers (including digital infrastructure) and digital stack components (including mobile infrastructure, digital identity layers, and digitization of land records). In fact, 75% of scalable interventions operate in just three countries—Kenya, South Africa, and Nigeria—all of which have relatively well-developed digital ecosystems. Enablers and digital stack components typically don’t create immediate impact, but they are critical to the development of high-impact solutions including digital advisories, supply chain solutions, and e-marketplaces.

Innovation Isn’t Enough

Frequently, even digital ag solutions with promising business models don’t achieve scale. That’s because of limited growth-stage financing (the funding that supports companies in the period between startup and rapid growth) and constrained capabilities to support the scale-up of digital ag solutions, including the ability to articulate a robust business model and product-market fit.

Adequate availability of growth-stage capital and suitable capabilities are critical, given the high risk profile of digital ag in developing markets. Factors contributing to the high level of risk include restrictive regulatory environments in some markets, the challenge of integrating millions of smallholder farmers into the market, and the potential negative impact of climate change on the economics of the ag market in the years ahead. As a result, these businesses often need strategic investments, including bridge capital, and expertise in pushing them forward.

Today, relatively few strategic investors and accelerators are on hand to provide this support and capital, and most of them are international. For example, some 80% of the capital invested in Indian ag-tech in 2019 came from international investors. Such investors often shy away from ventures that carry high levels of risk such as those present in early to middle-stage digital ag plays in these countries. That helps explain why the bulk of digital ag investments in India in 2019 went to late-stage, established deals; very few transactions involved bridge capital.

A few notable exceptions prove the rule. Revenues at Twiga, a digital platform that connects smallholder farmers with mama mbogas (small-scale vegetable vendors) and small stores in urban areas, grew by 500% last year and now serves 5,000 Kenyan outlets daily and works with 13,000 farmers. Jumbo Tail, a marketplace that links local Indian kirana (traditional retail grocery) stores with brands and traders, serves upward of 30,000 neighborhood stores in India. So far, however, such successes are few and far between.

Markets Matter

Domestic agriculture markets in many developing countries remain fragmented and inefficient, owing to such factors as information gaps, price asymmetries, weak systems for aggregating output and quality assurance, and significant logistics and transportation issues. But digital ag efforts are not sufficiently focused on addressing the situation.

Today domestic markets dominate agricultural trade in many regions. In sub-Saharan Africa, for example, some 96% of total farm output goes to domestic markets. As urbanization increases, demand tends to concentrate in large population centers while production centers remain rural. For this reason, agricultural markets play a pivotal role in aggregating demand and supply, facilitating transformation of raw materials into value-added products such as milled rice, and enabling discovery of market prices. Inefficient and weak agriculture markets, however, constrain the agriculture system overall and prevent smallholder farmers from tapping into demand centers where they might sell their products at competitive prices.

Digital ag has the potential to accelerate the development of agricultural markets and connect farmers to buyers who will purchase their outputs. Digital solutions can, for example, offer price information services for inputs and outputs, enable demand and supply aggregation, and facilitate e-marketplaces. In fact, the Technical Center of Agricultural and Rural Cooperation (CTA) estimates that market linkage solutions deliver, on average, a 73% improvement in farmer productivity (including through access to lower-cost seeds and fertilizer) versus just 23% for digital advisories. Our review of dozens of current market solutions revealed a number of successful alternatives, but no one-size-fits-all approach.