Michelle Marais - Second runner up 2024 -
Hollard Insure and Farmingportal.co.za and Agri News Net - Young Agri Writers awards - 2024
Building Sustainable Business Models Servicing Smallholder Farmers: Where to Begin and What You Should Know
I am fortunate to be an advocate for smallholder farmers in Africa, a mission that has taken me around the world to represent them on international platforms and within rural communities. I was recently at the International Seed Federation’s 100th World Seed Congress, where a young student, full of potential, raised a critical question: “How do I make investing in smallholder farmers more attractive to my investors?” This is a common question I hear across different platforms. Where do you start when the goal is to empower smallholder farmers and achieve developmental goals in a financially sustainable way? 1. Define Your Smallholder Farmer There are countless academic articles addressing smallholder farmers, but no universally accepted definition of a "smallholder" exists. In the industry, we often categorise all farmers with small plots of land in developing economies as smallholders. Yet, this fails to consider the complexity and diversity of their operations. There are an estimated 500 million smallholder farmers worldwide, much like how there are millions of cars on the road. However, just as the car market is segmented into countless niches, the definition of a smallholder farmer cannot be one-size-fits-all. If we defined smallholders by land size, we would soon find that one hectare of maize is vastly different from one hectare of saffron. Defining by revenue doesn’t solve the issue either, as farming practices and resources vary widely. For example, if you're working with poultry farmers, smallholders are loosely defined as those raising fewer than 2,000 birds. The difference between a farmer with 50 birds and one with 2,000 is significant when considering revenue. The smallholder with 50 chickens uses far less feed and resources than the larger farmer, although they share the same definition in many respects. When developing a business model, it is crucial to define your customer. Investors want to know who your product is for, where these farmers are located, what they produce, where they sell, and their access to and potential willingness to pay for your product / service. Risk in Smallholder Farming Business Models Investment is simply put a game of balancing risk and return. In agriculture, where external factors like climate and socio-political issues play a significant role, risk management becomes critical. When evaluating business models centred around smallholder farmers, several risks cannot be overlooked. Smallholder farmers often lack access to credit and insurance, which limits their resilience to shocks. Moreover, there’s usually little separation between their business and personal livelihoods, meaning that any disruption, be it a failed crop or a family emergency, can have devastating effects on both. Investors must consider these factors when assessing the viability of smallholder-focused ventures, even if the venture itself is separate from the farmer, it cannot always be separate from the risk of servicing these farmers.
ROI: The Challenge of Low Margins and High Acquisition Costs
A major challenge in building business models around smallholder farmers is the low return on investment (ROI). Acquiring smallholder farmers as customers often incurs a high customer acquisition and distribution cost, primarily because reaching them—especially in remote areas—requires significant time, effort, and resources. Despite this high cost, smallholder farmers generally have the lowest expendable income, making them highly price-sensitive consumers. This creates a dilemma. To achieve profitability, businesses must scale and sell to large volumes of smallholders. However, scaling up without inflating acquisition costs is difficult, meaning that margins on products sold to smallholders are slim. Moreover, the ROI is slow, and even when success is achieved, the return remains relatively low compared to other ventures. For these reasons, projects targeting smallholders require patience, long-term vision, and innovative solutions to lower acquisition costs while maintaining customer loyalty. Without addressing these structural challenges, the financial sustainability of such business models remains tenuous and unattractive to investors. Conclusion Building sustainable business models that support smallholder farmers is both a noble and necessary endeavour, but it is far from easy. The first step is to clearly define your customer and subsequent business model. Secondly, understanding and managing the inherent risks tied to smallholder farming is essential, as external factors and resource limitations make them vulnerable. Finally, achieving a return on investment is challenging due to high acquisition and distribution costs at low margins, but with the right strategies and patience, it is possible. Smallholder farmers play a pivotal role in global food security, and empowering them with sustainable business models can unlock tremendous potential. The journey, however, requires patience, innovation, and a deep understanding of both the farmers and the markets they serve.
Michelle Marais is an agricultural economist by training and an advocate for smallholder farmers at heart. With her team at Urban Farmer she is bringing their smallholder farming solution, U-MIX to farmers all around Africa. Michelle is passionate about training and working towards finding more business models that can profitably and sustainably service smallholder farmers. Reach Michelle on LinkedIn @MichelleMarais1.
