New ways of farming through third-party service agencies
New ways of farming through third-party service agencies
Business Model Description
Invest in third-party service agencies that provide farmers with actionable information and perform tasks on their behalf, e.g. providing services and instructions on what to plant, when to plant, when to harvest, what pesticides to use, etc.
For example, KingFarm, established in July 2017, is a national modern agricultural service platform that provides farmers with services on soil improvement, crop nutrition program, agricultural technology training, machine-driven seeding, planting, and harvesting.
There are mainly three models as below. 1) Farmers pay for the services they purchase on a one-off basis 2) Farmers receive some services for free, but are obligated to purchase input from the agency 3) The agency takes responsibility of the operation and management of land on the farmers’ behalf (full trusteeship) (Jack Chen, IFU)
Expected Impact
The positive impact includes to provide professional advice for farmers with a lack of farming knowledge.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
Sector Classification
Food and Beverage
Development need
China is confronted with many challenges on its way to sustainable agricultural development. Chinese agricultural sector remains vulnerable and is not resilience to disasters, with homogeneous crop varieties and lack of diversity in livestock and poultry varieties. Under the COVID-19 pendimic, food and beverage safety become significantly important.
Policy priority
In 2017, Rural Vitalization Campaign came out as one of the highlights of the 19th CPC National Congress. Prioritizing the development of agriculture and rural areas are also featured in the Party leadership's proposals for formulating the 14th Five-Year Plan (2021-2025). In addition, the pandemic has brought food security again to policy focus
Gender inequalities and marginalization issues
In developing countries, women farmers are 20-30% less productive than men farmers. Most women farmers lack equal access to agricultural knowledge and technology. Smallholders produce only a third of the total value of the agricultural food supply due to their lack of access to non-staple seeds, land, and profitable markets.
Investment opportunities introduction
Agriculture sector account for 25% of China’s total employment by the end of 2019. Although China’s agriculture shares in GDP declined sharply over time, it is still an important force for the growth of other sectors.
Key bottlenecks introduction
There are about 600 million farmers in China. Over 90% of China’s agricultural sector comprises small-scale farmers with low levels of education and limited purchasing power. The trend that employment flows into to urban areas in young people changed the demographic structure of the agricultural sector. China also struggles with a lack of arable land.
Food and Agriculture
Development need
According to China’s Progress Report on Implementation of the 2030 Agenda for Sustainable Development (2019), China’s per capita natural resources for agriculture is below world averages. Moreover, the development of agriculture is key to rural development and raising rural residents’ income.
Policy priority
The 13th Five-Year Plan for National Agricultural and Rural Informatization Development promoted technology enhancement in agriculture. The Technical Guidelines for Green Agricultural Development (2018-2030) urged further R&D, demonstration and application of smart agricultural technologies, including smart sensing and real-time monitoring.
Gender inequalities and marginalization issues
In developing countries, women farmers are 20-30% less productive than men farmers. Most women farmers lack equal access to agricultural knowledge and technology. Smallholders produce only a third of the total value of the agricultural food supply due to their lack of access to non-staple seeds, land, and profitable markets.
Investment opportunities introduction
5 IOAs with the highest potential: “AIoT farming solutions”, “farm machinery and equipment”, and “drone-based agriculture” can scale up production. “New ways of farming through third-party service agencies” alleviates the common problems of fragmented land ownership and labour shortages. “Cold chain logistics and storage” improves food safety.
Key bottlenecks introduction
“AIoT Farming Solutions” is still in the stage of experiment and demonstration, and it will take alonger time to see returns. There are relatively few innovations, startups, and investment activities. Active investors
are mainly foreign PEs and industrial investment players. A large share of the investments in this field flow to agricultural production.
Agricultural Products
Pipeline Opportunity
New ways of farming through third-party service agencies
Invest in third-party service agencies that provide farmers with actionable information and perform tasks on their behalf, e.g. providing services and instructions on what to plant, when to plant, when to harvest, what pesticides to use, etc.
For example, KingFarm, established in July 2017, is a national modern agricultural service platform that provides farmers with services on soil improvement, crop nutrition program, agricultural technology training, machine-driven seeding, planting, and harvesting.
There are mainly three models as below. 1) Farmers pay for the services they purchase on a one-off basis 2) Farmers receive some services for free, but are obligated to purchase input from the agency 3) The agency takes responsibility of the operation and management of land on the farmers’ behalf (full trusteeship) (Jack Chen, IFU)
Business Case
Market Size and Environment
> USD 1 billion
The market value of agricultural services is expected to exceed RMB2 trillion
Nyguancha.com, 2018, http://www.nyguancha.com/bencandy.php?fid=76&id=8166
Indicative Return
10% - 15%
According to 5 experts, the IRR is estimated to be about 10%.
The cash flow of third-party agricultural services is considered to be stable, but the expected profit margin may be not very high. It is estimated that the rate of return will be lower than all the other 4 key IOAs within agriculture products subsector..
For the agricultural service enterprises, every increase of 1 percent penetration rate can contribute 20 billion revenue scale for the enterprises. For county trusteeship service providers, the break-even point corresponds with a trusteeship of 800 hectares.
Investment Timeframe
Short Term (0–5 years)
It may take approximately 3-5 years for investors to see cash flow, as per 4 experts' insights.
Ticket Size
For the agricultural service enterprises, every increase of 1 percent penetration rate can contribute 20 billion revenue scale for the enterprises.
Market Risks & Scale Obstacles
Business - Supply Chain Constraints
Impact Case
Sustainable Development Need
There is a lack of farming knowhow that makes it difficult for farmers to make informed decisions. Professional and specified guidance and services along the value chain are called for to increase productivity and efficiency.
There is a lack of labor forces in rural areas as lots of people migrate to cities for development. Professional organisations specialised in farming is called for to deal with these issues.
Gender & Marginalisation
Ageing farmers remains to be one of the key challenges in agriculture. Professional organisations specialised in farming is called for to deal with these issues.
Expected Development Outcome
This professionalisation of agriculture represents a radical break with the traditional approach to farming, contributing to the wider transformation of the sector.
Professionalised services help alleviate the common problems of fragmented land ownership and rural labour shortages.
Professional agricultural services can effectively improve the labor productivity, yield, the utilization rate of agricultural resources, enhance sustainability, and speed up technological modernisation.
Gender & Marginalisation
New ways of farming through third-party service agencies can provide farmers with scientific and accurate information until they carry out reasonable planting.
Primary SDGs addressed
2.3.1 Volume of production per labour unit by classes of farming/pastoral/forestry enterprise size
2.3.2 Average income of small-scale food producers, by sex and indigenous status
2.4.1 Proportion of agricultural area under productive and sustainable agriculture
Secondary SDGs addressed
Directly impacted stakeholders
People
Planet
Corporates
Indirectly impacted stakeholders
People
Public sector
Outcome Risks
It takes time to accumulate farming knowhow from region to region. Different sets of service standards need to be developed as per local conditions.
Impact Risks
In the case of full trusteeship between thrid-party agencies and farmer, farmers doesn't have bargaining power and may also suffer from asymmetric information.
Impact Classification
What
Likely to be positive, important, long-term and largely intended. It helps the consolidation of larger-scale agricultural operations and drives the professionalisation of services.
Risk
It takes time to accumulate farming knowhow from region to region. Different sets of service standards need to be developed as per local conditions.
Impact Thesis
The positive impact includes to provide professional advice for farmers with a lack of farming knowledge.
Enabling Environment
Policy Environment
(Policy document): The central government sees the development of professional agricultural service agencies as strategically important; this sector has been highlighted in the “No. 1 Central Document” multiple times since 2013.
(Policy document): The Party Central Committee and the State Council have issued a document describing a range of policy measures that should be taken to promote this sector, including fiscal taxation, infrastructure construction, financial credit, insurance, marketing, and personnel training.
(Policy document): In 2013, the central government launched a pilot program for agricultural production services, such as seed demonstration, input distribution, and agricultural information services.
(Policy document): In 2017, the central government allocated a part of its Fund for Agricultural Production and Development to support the development of agricultural production trusteeship services.
(Policy document): In 2017, the Ministry of Finance, the Ministry of Agriculture and Rural Affairs and the China Banking Regulatory Commission jointly issued a document stating that professional agricultural services are included within the service scope of the credit guarantee support system.
Financial Environment
Financial incentives: In 2017, the central government allocated RMB653 million to support the development of 237 demonstration projects of new agricultural services. Among these, 121 projects were to support the land trusteeship projects, with an investment of RMB 318 million.
Fiscal incentives: According the State Taxation of Administration, companies providing services on agricultural machinery farming, drainage and irrigation, pest control, plant protection, agricultural and animal husbandry insurance and related technical training are exempt from VAT.
Other incentives: The central government is encouraging local governments to provide financial support for regionally adapted agricultural services.
Regulatory Environment
(Regulation): In 2019, the Ministry of Agriculture and Rural Affairs announced that counties are required to establish a directory database of agricultural service agencies. All service agencies are subject to monitoring and regular reporting to the provincial government.
(Regulation): High-performing service agencies will be added to the directory database, while a blacklist system will also be established. Service agencies that are fail to meet the established quality requirements will be delisted or blacklisted for 5 years.
(Regulation): Local agricultural and rural authorities in counties need to co-work with other relevant institutions to formulate service standards. The guidance on service price, monitoring of service quality and the supervision of service contract is also strengthened.
Marketplace Participants
Private Sector
State-owned industrial enterprise SinoChem has launched its own project in this field, the Modern Agricultural Platform (MAP). These services are usually offered on a trusteeship basis or as one-off technical support. SinoChem has established demonstration farms in several provinces.
Government
There are several government-driven funds active in this field. For example, Guangdong Agricultural Supply Side Structural Reform Fund. Zhejiang Government provided a total investment scale of RMB 10billion for the provincial rural revitalisation.
Target Locations
References
- (21) Nyguancha.com, 2018, http://www.nyguancha.com/bencandy.php?fid=76&id=8166
- (22) State Council, 2020, "China No.1 Central Document of 2020", http://www.fao.org/faolex/results/details/zh/c/LEX-FAOC192850/
- (23) Party Central committee and the State Council, 2017, http://www.scio.gov.cn/xwfbh/xwbfbh/wqfbh/37601/37885/xgzc37891/Document/1618270/1618270.htm
- (24) Ministry of Africulture and Ministry of Finance, 2013, http://www.jcs.moa.gov.cn/trzgl/201408/t20140804_3989380.htm
- (25) Ministry of Africulture and Ministry of Finance, 2017, http://www.gov.cn/gongbao/content/2017/content_5234539.htm
- (26) Sohu.com, 2017, https://www.sohu.com/a/192000739_651395
- (27) Moa.gov.cn, 2019, http://www.moa.gov.cn/gk/cwgk_1/nybt/201908/t20190826_6323148.htm
- (28) Chinatax.gov.cn, 2018, http://www.chinatax.gov.cn/n810219/n810744/n3439465/n3439475/n3439539/c3448065/content.html "29) Moa.gov.cn, 2019, http://www.moa.gov.cn/gk/cwgk_1/nybt/201908/t20190826_6323148.htm "