Segmenting the Ag Finance Market, Part 3: Non-Commercial Smallholder Farmers and the Pathways
In parts 1 and 2, we talked about the top of the smallholder pyramid and compared it to microfinance. Here in part 3, we’ll talk about the non-commercial smallholder farmers at the base, or bottom, of the pyramid. Some highlights:
- Working directly with smallholders farmers likely requires continuous subsidy.
- Even a small dollar amount can make a big difference for people living on the margins.
- Should we try to increase productivity or give farmers alternative livelihood opportunities?
An estimated 60 percent of the world's 500 million smallholder farmers are classified as non-commercial. This is otherwise known as subsistence farming, which means the farmers grow food to feed themselves. This is not a target segment for whom you can likely provide any type of financing on commercial terms because the farmers' income is just too low. It reminds me of something I recently read in the book “The Key Man” attributed to Kito de Boer. “Target market will be the lower half of the pyramid. Not the Bottom of the Pyramid, which is unlikely to be economically sustainable.”
(To better understand this customer segment, I would highly recommend reading The Last Hunger Season by Roger Thurow.)
When we think about the farmers who need help and the farmers we can work with in a commercially sustainable manner, we have to acknowledge that we have a Venn diagram that may not overlap very much.
One Acre Fund
The goal of providing services to subsistence farmers is reducing hunger, not economic development, and it requires subsidy funding rather than 100 percent sustainable financing. An organization that provides financing to this segment is One Acre Fund (OAF). OAF has achieved impressive scale working with the extreme poor reaching more than 1 million farmers. It also rigorously measures its impact; in 2020, OAF farmers achieved an $81 gain in annual income, a 33 percent increase (Our Impact | One Acre Fund). The percent increase is impressive but what does it mean in relative dollar terms when you are working with the extreme poor? I divided $81 by 33 percent to come up with the base income of $245 in the table below.
When I put this table together, my first thought was that increasing someone's daily income by less than a quarter, i.e. 25 cents, did not seem that significant. But as I thought about it more, I realized it was very significant that you could change people's lives with such a small dollar amount when they are living on the margins. And, because of OAF’s scale of reaching 1 million farmers, that's $81 million in economic value they are creating every year. (I hope any economists or OAF staff reading this can check my thinking.)
Another thing that OAF does is adopt a denominator mindset (Four Mindsets That Accelerate Nonprofit Growth). In OAF’s case, the denominator is “50 million chronically hungry African farm families.” This approach forces OAF to always think about the scale of the problem they're trying to solve.
USAID’s Development Innovation Ventures (DIV) gave OAF a $5 million grant to support its work in Uganda and Malawi (DIV Portfolio). The DIV is sector-agnostic, so it does not focus only on agriculture. However, if you have a development solution backed by evidence, I would definitely encourage you to check them out (Development Innovation Ventures | US Global Development Lab). DIV is in a different bureau than mine called Development, Democracy, and Innovation. Keep an eye out for an upcoming blog for a primer on USAID’s organizational structure.
One thing to remember about all the segments is that they are dynamic, not static (same goes for the Venn diagram shared earlier). This point is highlighted by ISF Advisors in the Rural Pathways Model (Pathways to Prosperity).
The conceptual framework on agriculture below from the Foreign, Commonwealth & Development Office (formerly the Department for International Development) can be overlayed onto the Rural Pathways Model to simplify it.
The pathways also align with this report from the Consultative Group to Assist the Poor. Big thanks to Harry Davies at Ceniarth who pointed out the DFID and CGAP overlap!
Looking at the Pathways again, the bottom left are farmers “hanging in”/subsisting (One Acre Fund works here). The top left are farmers “stepping up”/commercializing (Good Nature Agro helps farmers do this ). On the right are farmers “stepping out”/diversifying (Cinch — DOB Equity leases land giving farmers more work options.
January is Agricultural Finance Month
Segmenting the Ag Finance Market, Part 1: Tight Value Chains
Segmenting the Ag Finance Market, Part 2: What Can We Learn From Microfinance?
Segmenting the Ag Finance Market, Part 4: Small and Medium-Sized Enterprises and Transaction Sizes
Segmenting the Ag Finance Market, Part 5: Small and Growing Businesses and Disruptive versus Traditional