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From the Farm and Back to the Farmer: Lessons Learned from Agri-processing

In 2018, SELCO Foundation implemented solar energy-based livelihood solutions across Karnataka, Odisha and the North East. These projects were primarily working with micro-businesses like tailoring units, small provision stores, blacksmiths, digital centres and other small-scale enterprises. Subsequently, the team also started to gather energy problem statements in the agriculture sector. And we entered the space with the same processes and the same expectations of impact.

Our experience with micro-businesses had been great. Through local grassroots partners, we identified individuals struggling with their businesses due to unreliable power supply, productivity loss because of manual processes, or the use of machines that did not have adequate features. In most cases, entrepreneurs knew their business end-to-end and were quickly able to turn productivity increase into an increase in income by catering to a larger market and, thus, were often financially viable. Business cases were showcased to banks, and financial products were unlocked for over 1000 entrepreneurs in rural Karnataka and Odisha. We knew that if we proved the viability to the end user and created an apt financial product with the bank, the solutions would easily start replicating.

However, our experience in agriculture, specifically agri-processing, was very different. On paper, we could see a reason to intervene, that made complete ‘business sense’. Making an agri-processing unit accessible to farmers would mean that they could now capture more value in the market by selling processed goods instead of just the produce. In some cases, the difference in the sale price would increase by more than ten times. The guiding thought was that the value-add would surely result in a viable business model, which could inform a financial product.

Though we had a detailed plan to substantiate how the project would roll out, its applicability met with several challenges. To begin with, we banked on immediate utilisation, as seen with our earlier livelihood projects and micro businesses. However, we learned that in agro-processing, utilisation builds only over a period of time. It also depended on the capacity and market linkages of the person running the unit. Unlike fresh produce, market linkages for the sale of processed turmeric required a lot of hand-holding as the farmers lacked the business know-how to facilitate the sale of processed turmeric. Putting in a solar-powered agri-processing unit did not mean that the market was keen to buy processed goods instead of the produce. This often resulted in the underutilisation of the capacity provided for. We also failed to consider the internal and external demand for processed agricultural produce. While on excel sheets, external demand lent the intervention financial viability, internal demand had to be met as well. During the COVID-19 pandemic, when service availability was low, these units were still functional at a lower production level to cater to the local community’s needs.

From our experience with micro-businesses, we also assumed that farmer groups were financially sustainable and that they understood the cash flow of their business. We believed that procurement, processing and distribution would lead to cash flow that, in turn, would help in improving the profits in a sustainable manner. Here it is also important to understand that traditionally, agri-processing is done in the main markets, by traders who procure from farmers in large quantities and engage with the market directly. We were working with farmer groups directly, not with the traders. Farmer groups were losing value for the produce because they weren’t doing value addition activities like agri-processing, and were now embarking upon a new business venture altogether. These farmer groups often represented marginalised communities, the processing centres were often closer to the farms and the markets, and the individuals running these units had never dealt with processed produce before.

Neither our team nor the farmer groups or farmer entrepreneurs truly understood the breakeven of the business and the minimum output required to avoid losses. Going by our previous experience, the team monitored and calculated financial feasibility from one unit’s perspective to prove viability on the ground before we took it to the financier. However, the cash flows for such projects weren’t enough to make it financially feasible for other, similar centres. When analysed, capital expenses were nowhere close to breaking even. We had falsely assumed that the business model could be showcased to agri-financing institutes for financing future similar projects.

Debates started to emerge within the teams – some would declare that these projects were not scalable, they were never going to be financially viable for our partner rural banks to finance. Others would talk about the projects being a success – the farmers were slowly building their capacity and starting to capture the market for processed agri-produce, and the farmers were saving money by processing their own produce locally and by avoiding trips to the market. In some cases, the number of farmers associated with the group was increasing and in some cases, we noticed the impact across the region, with confidence increasing amongst the farming community on their capacity and even smaller local markets emerging around the processing centres in some cases.

The farmers were earlier spending a lot from pocket to get their produce to the market. The alternative was to sell their produce at cheaper rates or waste it entirely. The value added to the business was another aspect to consider. And in most cases, even if the farmers were mobilised, they did not have the means to respond to the market. This is where the unit economics could be considered. Agri-processing, in general, is considered an unsustainable, unviable business. Furthermore, the benefits of the intervention were looked at from an individual perspective, and not the cumulative impact it would have on the communities vis-a-vis the access it provided to farmers in close proximity in a remote region.

What is the impact of building an airport, an infrastructure on which many livelihood-related activities depend? Is the construction of a road considered a success based on its economic viability and the development that it brings to a region? Establishing agri-processing infrastructure in rural communities, closer to marginalised farming communities had to be seen in a similar manner – a catalyst for economic growth. A cost that results in payback over a period of time in the form of livelihood opportunities, local capacity, improved well-being and savings in the region.

This understanding gave inputs to the programme design as well – strategy on partnerships, training and hand-holding mechanisms. It developed enhanced and more nuanced expectations on impact and paved the way for a new model of financing where agricultural schemes and government funds were unlocked, along with the loans, depending on the capacity of the farmer groups.

To sum up, our process failures included a flawed financial modelling process which looked at unit economics and failed to look at the importance of livelihood infrastructure creation as a way of boosting economic activities and economic gains in a region. This learning resulted in several new strategies, processes, and partnerships; but also led to a deeper understanding of sustainable energy’s role in creating livelihood value chains that keep people at the centre.