Horticulture Will Dominate Agtech Innovation in India in Next Decade

Editor’s Note: Hemendra Mathur is agribusiness investment lead and venture partner at Bharat Innovations Fund, a new $150 million early-stage fund with a focus on agtech, cleantech, health-tech and enterprise-tech ventures. Mathur previously worked at SEAF India Investment Advisors and Yes Bank.

Indian horticulture production just hit a new record. Horticulture production in India exceeded 300 million tonnes for the financial year 2016-17, according to the latest estimates from Ministry of Agriculture. This is the first time in Indian history that horticulture production crossed the 300 million tonnes mark. This was also the fifth consecutive year where horticulture production in India exceeded food grains production (which was approximately 275 mn tonnes).

The achievement can in part be put down to the government’s National Horticulture Mission, which launched in 2005 to enable the creation of the necessary infrastructure for the industry to thrive.

Horticulture production in India, which covers 25 million hectares, includes the following five categories:

The growing horticulture sector has implications for everyone from farmers to processors to consumers and importantly, entrepreneurs who have the opportunity to build innovative business models, products, and services for the sector.

Small and marginal farmers are the key beneficiaries

Small and marginal farmers account for the majority of horticulture production – except those involved in orchards and plantations where larger players dominate. The key vegetable producing states in India including West Bengal, Bihar, Uttar Pradesh also happens to be the poorest states, and hence the role of horticulture becomes even more enhanced in bringing farmers out of poverty in these states.

While the relatively high liquidity of horticulture crops, especially vegetables, compared to food grains means that farmers have an easier working capital cycle, seasonal surplus in crops like onions and potatoes has caused pricing volatility creating some losses.

Increasing horticulture production has also enabled diversification in the consumer diet towards more protein, fiber, vitamins, and minerals. This is a welcome shift given the fact that a large section of the Indian population is either malnourished or suffering from diseases like diabetes, protein/iron deficiency or cardiac disorders.

Horticulture emerging as breeding ground for innovations

There are three broad areas in need of agtech innovation in India horticulture, presenting an opportunity for entrepreneurs and investors:

1. Aggregation of farm produce

There are about five to seven intermediaries between the farmer and the consumer in the horticultural trade. Most fresh produce gets routed through market yards in rural as well as urban settings. The increase in horticulture production has put the infrastructure of existing market yards under severe stress. The majority of market yards are constrained for space, cold storage, and grading and sorting infrastructure. There is, therefore, a crying need for the decentralization and modernization of market yards. For example, Azadpur Market Yard in Delhi — which is Asia’s largest market yard for horticulture produce — handles about 15,000 to 20,000 tonnes per day in a highly-congested area of just 76 hectares.

The modernization of market yards will take time and a strong political will to make this happen. Hence the answer lies in innovation and disruption. A bunch of startups is working on disrupting the chain by bypassing market yards, sourcing directly from farmers, aggregating near consumption areas, and selling directly to the consumer, retailer or hospitality industry. Some examples of startups working in fresh produce aggregation and distribution include Merakisan, Sabziwala, Crofarm, Ninjacart, and Krishihub. The value proposition to end customers typically includes superior quality, transparent pricing, and on-time delivery.

The sustainability and scalability of these models depend on building sufficient gross margins, which could be upwards of 40% in case of direct sourcing from farmers, versus less than 20% in the case of sourcing from market yards. These models also need to ensure sufficient volumes compared to the alternatives; many of these startups are currently doing volumes of 10 to 20 tonnes per day, which still is a small fraction of the demand. For example, daily demand in the national capital region of Delhi alone is about 25,000 tonnes per day.

There is another group of startups that has built crop-specific supply chain management through the ownership and leasing of farms, or through contract farming. Some examples are SVAgri (potato), Desai Fruits and Vegetables (banana), INI Farms (pomegranate, banana, aril), Carmel Organics (organic herbs). LEAF started with vegetables and now has diversified across a range of fruits and vegetables. The focus of these models is to build the infrastructure for quality control, grading, sorting, packing, and cold storage backed by strong market linkages.

All the above horticulture supply chain startups have attracted both financial and strategic investors. Some of the financial investors that have invested in the sector include Mistletoe, the venture capital firm of SoftBank CEO Masayoshi Son’s youngest brother Taizo Son, George Soros-backed Aspada Investments, US VC Accel, as well as Elevar Equity,  Factor(e),  Bestsellerfoundation, Patamar and Lok Capital. The strategic investors include Indian corporates such as Mahindra & Mahindra (invested in Merakisan) and international players such as Total Produce (which entered India through a joint venture with Suri Agrofresh). Del Monte, which is a large player in both fresh and processed horticulture products in Europe and the US, entered India through a joint venture with Bharti Group’s FieldFresh Foods.

Given the scale of the potential opportunity to improve margins through disintermediation and quality control, this segment will continue to be attractive to the investing community.

2. Input retail

Horticulture crops are input-intensive, and farmers need hybrid seeds, pesticides (or organic inputs), micro-irrigation and some bit of mechanization. Typically, the window to plant and apply products are shorter compared to cereals. The traditional retail channels have failed to meet farmers’ evolving needs for high-quality inputs for horticulture. Farmers do not get the right quality inputs at the right time and hence fail to get the desirable productivity. Often seeds sold are spurious and sometimes sold above the legally permissible maximum retail price set by the company.

The input channels, therefore, need disruption and business model re-engineering to meet farmer needs for horticulture farming. There are already business models like Agrostar, Bighaat, Dehaat, Unnati, Agribolo, though the majority of these models are crop-agnostic, so a focus on inputs for horticulture specifically presents an opportunity for differentiation. For example, there is a shift in demand in seeds in horticulture from open-pollinated to hybrids where the direct-to-farmer channels can play a role in disseminating the information about new varieties and delivering authentic seeds at a transparent pricing to farmers.

This is not an India-only phenomenon; in the US Farmers Business Network pivoted from a data software service for farmers to an input procurement business focused on improving transparency around the pricing of agrochemicals. It also launched a study into seed labeling, and prices, which it believes were misleading.

Challenges remain in scaling direct-to-farm channels in India, however. They include:

• The dispersion of farmers across the country, particularly small and marginal farmers growing vegetables.
• The need for an offline / on-the-field presence
• Seasonality in input usage
• The threat posed by conventional channels that are financially strong and typically advance book quality inputs.
• The high cost of logistics, particularly for high-volume products like fertilizers.

At the same time, the opportunity exists for direct to farm channels to work closely with vendors to provide authentic and innovative crop solutions direct to farmers.

It is only a matter of time before Agribusiness Marketplaces focused on input e-commerce will start to attract investor attention in India; there have been two notable investments in this space in the last one year: Agrostar’s $10 million Series B round involving Accel Partners, IDG and Aavishkaar, and Ankur Capital’s investment in Bighaat.

Globally, Agribusiness Marketplaces, which include platforms to purchase inputs as well as sell produce, raised $301 million in funding globally in the first half of 2017, a 2,488% increase on the first half of 2016. The number of deals also grew 42% year-over-year as investors and entrepreneurs globally see this opportunity, according to AgFunder data.

3. Tech Enablers

While there is a wealth of innovation taking place that applies to horticulture as well as other crops, including the supply chain disruptors described above, horticulture’s specific challenges, such as perishability and evolving demand, mean there are several for horticulture alone.

Here are a few examples:

– Sensors and IoT in greenhouses growing vegetables and fruits in controlled environments to enable the remote monitoring of critical parameters in crop growth. T

– Mechanical tools for harvesting, such as Sickle Innovations which has developed apple and mango pickers which increase the plucking efficiency and reduces farmer dependence on manual labor.

– Imagery-based grading of potatoes by Agricx is another interesting application where mobile imagery with proprietary algorithms is used to grade potatoes on key physical parameters.

– Innovative technologies in the processing of fruits and vegetables include solar conduction dryer developed by Scienceforsociety, which not only dehydrates the products to increase shelf life but also retains the nutritional value that can otherwise get lost in traditional drying.

– There are many startups that are working on the extraction of high-value ingredients such as pectin from apple pomace and tomato.

– Cold chain solutions – a big missing gap in Indian horticulture – has also opened opportunity for startups such as Tessol, which has developed cold chain solutions using Phase Changing Material to bring the operating cost down by 60%. (PCMs have different melting points so provides more flexibility in cooling and heating.)

– Post-harvest losses are significant in India’s horticulture industry, estimated to cost about Rs400 billion a year, promoting innovation in micro cold storage, mobile pack houses, and smart packaging. Ecozen has developed solar-powered micro cold rooms ideally suited for on-farm storage. Ycook has developed innovative packaging solution to store minimally processed fruits and vegetables for as long as 12 months without refrigeration.

Horticulture will lead agrifood tech investment in India in next decade

In summary, it is quite coincidental that the inflection point for both growth in horticulture and agtech entrepreneurship occurred around the same time (2013-17). I believe that agtech innovation in India has huge applications across the three dimensions as discussed above not only to accelerate the growth of horticulture but also make it far more profitable and sustainable to the benefit of farmers and consumers.

From an investor’s perspective, I believe that Indian horticulture is at a point where Indian dairy was about a decade ago. Dairy has attracted the most private capital in the food sector since then and now is the time for horticulture. However, unlike dairy where most money got invested in building processing capacity, the money invested in horticulture will go more into supply chain integration as the opportunity in fresh produce is many times bigger than in processed products. Investors with patient capital and the ability to do multiple rounds are ideal candidates for investing in horticulture.