Welcome back to the Agri Fintech Newsletter and a warm welcome to the 34 new subscribers since my last issue.
👀 The Agri Fintech Investment Report for 2022 is currently with designers and will be released in the next 1-2 weeks.
✈️ I will be attending the World Agritech Innovation event in San Francisco ... checks diary .... THIS WEEK. I look forward to catching up with some of you there. and tune in next week for a follow up. (Yes next week!). My next Issue will also run through some takeaways from the event.
🧐 Thoughts - Farmer Mac chase green growth
In some ways this issue is the perfect antidote to the Silicon Valley Bank drama that has unfortunately taken place over the past few days.
In this write up, I explain Farmer Mac - a stalwart of US agricultural finance, run down some of their performance and highlight the major opportunities they see in their business, especially around renewables.
Note: Farmer Mac is a listed business and no investment advice is given in this Issue.
🗞 Relevant News - Lots of talking points and even better thinking points.
⦿ News from Fifth Third Bank worth thinking about.
⦿ An article from Seana Day of Culterra Capital in Agfunder.
⦿ Fundraising announcements from Hectare and Kemiex.
⦿ Agrifintech updates from the Agfunder Report
Farmer Mac chase green growth
Capital Markets are not an obvious place for any Fintech to obtain funding in their early days, but I at least tried to argue that AgriFintech had the potential to use them more when I introduced Agree.ag from Argentina.
Agree achieved this by getting an A1+ rating from Fitch for their trade finance structure, which they enhanced with their proprietary data.
In the U.S., Farmer Mac are a major pillar of the agricultural finance system and provide a secondary market for hundreds of institutions, including some Fintech focused lenders. This issue is a specific look at their activities.
Below I consider:
- How it works - Dropshipping but for farm debt;
- How big is the market and what we can learn;
- The major growth areas they see in the market; and finally
- What this means for Agri Fintech
Dropshipping but for farm debt
Drop shipping is when an online seller takes order for a product via their website and routes that order directly to a supplier. The supplier then ships the order directly to the buyer.
This is a phenomenon where online sellers leverage various platforms to originate clients for example Amazon, Facebook or a standalone storefront and act as a buyer on a separate platform, possibly importing products from a Chinese platform such as Alibaba.
In the case of agricultural finance in the US, Farmer Mac runs a similar programme, where lenders operate the 'storefront' and attract clients and Farmer Mac is the supplier for the funds that operates in the background.
The ease with which lenders - Banks, Non Banks and Fintech companies - can potentially access these programmes is one of the fundamental strengths of agricultural credit markets in the United States.
Farmer Mac also offer guarantees and standby commitments to lenders which can help them reduce risk or even enhance their regulatory capital.
Luckily for us, as a listed business, it also allows Farmer Mac to become a window into the sector itself.
How big is the market?
Farmer Mac provided $9bn in liquidity in 2022 according to its latest financial statements released at the end February. This compares to $8.6bn in 2021 and only as recently as 2018 this figure was as low as $717m.
In 2022, 50% of this activity was in crops, 22% in permanent plantings and 18% in livestock with just 5% each going to Ag storage/ Processing and Part-time Farms. This is notable, especially when we consider problem loans below.
This activity in 2022 nudged their 'Outstanding Business Volume', a value of both their on and off balance sheet exposures, to $26bn as at December 2022, from $23.6bn a year earlier, just under 10% in annual growth.
Again to frame this in the context of the overall Agricultural Real Estate market in the US, this $26bn is 7.4% of the total $349bn farm real estate debt outstanding, which is a sizeable market share.
In other words, at least 7.4% of the total outstanding ag real estate debt has made its' way through secondary markets. I say at least as there are other secondary lenders in the market. 👀
What can we learn?
There are some general and specific things I had to wrap my head around.
Firstly, this slide below amazed me when presented in the context of the Outstanding Business Volume (i.e the $26bn).
Yes, the $349bn relates to the 'tiny' number in the right column and the Ag Real Estate Debt to Asset Ratio of just 10.9% is astonishing.
This underlying data is taken from the USDA here if you want to delve further. (I had to stop myself).
Secondly - and more specifically - the overall performance of the loan book has been pretty robust and the company proudly cites just $38m of cumulative loan losses on cumulative business volume of $35bn. 😳
➡️ $38m of cumulative losses on cumulative volumes of $35bn.
Below are historical credit losses going back to 1995 and as you can see Ag Storage & Processing has been a 'poor' performer since 2006 and may explain why it constitutes a small overall portion of the existing portfolio (5%).
Where do they see growth?
As mentioned above, their business volumes increased almost 10% in the past year. In the overall change of business volumes, one segment increased by $144m, which appears immaterial but was a huge gain of 167% year-on-year and this is where Farmer Mac see continued growth: Renewable Energy.
According to data from the U.S. Energy Information Administration, renewable electricity capacity is expected to grow by 48% in the next five years, compared to total electric capacity growth of 10%.
The rising cost of fossil fuel-based inputs combined with the falling costs of renewable power generation and the tailwinds of the recent Inflation Reduction Act, which incentivises production in clean energy technologies such as solar and wind, all combine to make this a sweet spot in time.
Under this initiative, Farmer Mac's total outstanding loans and loan commitments of renewable energy financing transactions was $230.2 million as of December 31, 2022.
According to their Annual Report, in response to this expected growth;
"Farmer Mac has deployed new financing products tailored to the renewable energy sector, which represents a new market opportunity for Farmer Mac"
On the analyst call following their results release, they outlined this opportunity a bit more with near term volumes in 2023 and 2024 expected to be "mid 9 figures", taken to mean $400-600m.
They also advised in the medium to long term, this segment would most likely cross the $1bn mark as volumes grow and they would target a 10% market share in a "$8-9bn per annum market".
Is there relevance for Agri Fintech?
🤔 We have already seen nimble players who have recently entered the market, such as FBN, utilise this partnership to good effect. For example, land financing from FBN Finance is offered in partnership with Farmer Mac. This relationship works both ways and Farmer Mac in return get a large and well capitalised partner with some debt servicing capacity.
🤔 Alternatively, I also see gaps. Farmer Mac's core markets are agricultural real estate and unless you are building a standardised product for this market in the U.S., then they are unlikely to be a partner, especially for earlier stage companies. (I couldn’t get any confirmation from them on this though!).
💡 Finally, the new opportunities in renewable energy could develop some interesting Fintech related propositions. This is where I call upon my emerging market experience with pay-as-you-go digesters, solar powered water pumping and irrigation systems or renewable energy powered storage units.
Either way, these renewable investments can be a huge part in increasing the overall energy efficiency of agriculture.
⦿ Fifth Third Bank announced the acquisition of Big Data Healthcare.
Fifth Third have quietly developed a specialism in Healthcare since 2008, with recent acquisitions such as this one focused on payments/ software and an earlier one of an equipment marketplace.
Fifth Third offer a glimpse into one way I see Agri Fintech play out - a bank or financial player starting to buy value chain specific software businesses and use them to provide financial services to a particular sector rather than a geographical region.
⦿ And on a very related note, Culterra Capital's Seana Day makes some important points in this write up on AgFunder where she considers 'serving the Ag service providers' as the next opportunity in Agtech.
I could not agree more.
1️⃣ I think a shift to Agribusiness-tech is needed and digital ecosystems should exist for every physical value chain. Look at the example of healthcare above. Let's make this happen.
2️⃣ I sometimes joke there is too much Ag in Agtech. It is a strange statement but think about it. A lot of time is spent fawning over farmers when there are huge business sectors pre-farm and post-farm gate.
I can't wait to read the next instalment of her write up. 😀
⦿ Fundraising announcements were made:
➡️ UK based Hectare announced a $20m Series A funding to develop its' inventory, trading and logistics network hub. The company announced it had in excess of 130,000 businesses using their platform and also reduced the carbon footprint of its livestock supply chain by 2.5m miles.
➡️ Kemiex, a marketplace for ingredients and raw materials raised investment from strategic investors such as the CME.
➡️ And speaking of fundraising, AgFunder's latest investment report served up some excellent insights including this on Ag marketplace and AgriFintech funding globally.
As always, I hope you have enjoyed this. Let me know what you think 💭 and please continue to share this with your colleagues and network. 😀
I'm back next week with follow ups from World Agritech.