The food production industry is vital to the future of humanity – and yet, several factors are converging to make it increasingly difficult for manufacturers and farmers to survive. Despite consumer food prices increasing at a rate of 28% over the last five years, the US Department of Agriculture is currently forecasting a drop of 25% in net farm income for 2024 compared to 2023. This comes following a 16% drop from 2022 to 2023.
Analysts point to rising costs of production in areas such as feed, fuel, packaging materials or labor. However, factors such as climate change, supply chain disruptions, and corporate profiteering on the part of supermarkets are all also playing a part. The net effect is that the number of producers is shrinking, while the population continues to grow.
The US is just one country, but it’s indicative of the challenges faced by food producers globally. The geographically dispersed nature of global food production, with smaller operators accounting for as much as one-third of output, also makes it difficult to find suitable solutions.
Unfortunately, financial solutions and platforms that exist for other industries or even large-scale food producers and manufacturers often don’t serve the needs of mid-sized operators.
However, fintech innovation at the cusp of food production and finance is helping to deliver solutions that are more accessible and effective at all levels of the food production sector.
Addressing a Unique Set of Challenges
The volatility of commodity prices is one challenge faced by food producers everywhere. Raw ingredients, energy, packaging and labor are all vital inputs, and yet their prices can vary wildly. In turn, this impacts the cost of production – so when manufacturers are dependent on these commodities, the volatility challenge can also directly impact their profits.
Larger food producers are less exposed to price volatility risks. Not only can they benefit from economies of scale and geographical arbitrage, they can also hedge their risks. Partnering with investment banks allows companies to lock in future prices via derivatives contracts, which protect future prices against unforeseen circumstances.
However, there’s a distinct lack of hedging solutions for medium-sized firms, which can end up spending even more on inputs by locking in prices with suppliers.
Hedgify aims to rectify the gap, opening up hedging opportunities to a far broader base of food manufacture firms. Users of Hedgify can purchase price protections for commodities, materials, interest rates, or FX rates as a shield against unfavorable market movements. It reduces barriers to hedging with an easy setup and no margin deposit requirement, allowing companies to benefit from more stable costs, consistency of earnings, and reduced business risk.
While a solution like Hedgify can help to manage price risk and enable more effective planning and forecasting, another unfortunate gap is a lack of integrated accounting and financial planning tools that support the unique conditions of the agricultural sector.
Farmers don’t typically have in-house finance teams, so they rely on networks of accountants, financial advisers, and agricultural advisers and planners to manage a holistic operation under ever-changing conditions. Figured, an agri-fintech platform that integrates planning and resource management with finance and accounting tools.
It enables farms to work collaboratively with financial advisors and banks or credit partners based on real-time data, supporting smoother collaboration and more effective planning based on accurate information.
Securing the Future of Smallholders
Finally, a lack of insurance coverage disproportionately affects those producers in remote areas, who are most likely smallholders or smaller manufacturers. Without insurance, the risks involved in small-scale food production are substantive. Farmers are at the mercy of crop failures, while smaller or remote manufacturers might also suffer more exposure to risks such as energy outages resulting in perished goods, or face issues such as wildfires or floods.
Without insurance, the operation still needs to cover the costs of production even if it ends up with no saleable product. Depending on seasonality, may have to wait up to a year before production can resume.
A key challenge for insurance companies is technological – they lack the means of making assessments for premiums and claims in remote regions. Pula, a food production insur-tech platform, aims to address the insurance gap.
The company has developed a digital actuarial platform that leverages data sources such as historical weather patterns or satellite data combined with machine learning to design insurance products for smallholders. It distributes these directly to smallholders through a network of localized financial channels.
Fintech for Feeding the Globe
Unlike many other sectors, food production is an industry that defies the logic of scale economy. Smallholders produce one-third of the world’s food using only 24% of the available agricultural land since smallholdings tend to be labor-intensive efforts that generate higher yields.
As such, the role of smaller operators in the future of global food security is critical. Innovation that helps to maintain the viability of farming as a livelihood is key to maintaining that security in the future.
Fintech solutions alone cannot solve the challenges facing global food production. However, fintech’s strength lies in its ability to deliver solutions that are both innovative and accessible. Given that issues such as commodity price volatility or a lack of insurance coverage disproportionately affect small and medium-sized enterprises, these capabilities are critical in delivering solutions that can help to overcome these challenges, tipping the odds in favor of a more diverse and sustainable food production industry.
