Rice Resilience Bond

Smallholder farmers, numbering over 450 million in Asia, are central to the food system. Asia's vulnerability to climate change underscores the need for a transition to sustainable agriculture practices. Rice, a staple food, is both a major contributor to methane emissions and a vital sector for potential climate mitigation. While emissions-reducing rice cultivation practices have been scientifically established, the challenge lies in equipping the farmers with the capacity and capabilities required to execute these practices in reality. The key barrier between the translation of findings from lab to field is the lack of financing infrastructure that will empower farmers to risk adopting new practices, which will negligibly impact yield, but are critical for the sector’s sustainable transition.

Rice is not a sustainable crop, from all dimensions:

1. Rice is the second largest emitter of greenhouse gases in the agriculture sector, accounting for 10% of global methane emissions. In Southeast Asia, it can account for up to 25-33% of the region’s methane emissions. Due to the short atmospheric lifetime (12 years compared to estimated 100 years for CO2) and greater Global Warming Potential (GWP) of methane, it has the most potential to contribute to the immediate mitigation of global warming – preventing the world from exceeding the planetary boundary of 1.5°C.
2. An estimated 100 million of these farmers operate 46 million hectares of rice fields in SEA, with the majority living below the poverty line, making this a poverty alleviation issue. 
3. Rice cultivation consumes 24-30% of our global freshwater supplies, water that will inevitably run out in the near future.

Today, the promotion of sustainable rice farming is largely through donor-funded projects with very little commercial involvement, which translates to a lack of financial sustainability and farmers reverting to non-sustainable practices once donor funding runs dry. Farmers, due to life circumstances, are unwilling to take on more risks than what they already undertake. To drive behavioural change, incentives and alignment of interest are critical. According to a global study by the Mastercard Foundation, only 30% of smallholder farmers’ financing needs are fulfilled. The primary factor is that commercial financiers (e.g. banks) are unable to price the risk they are taking with farmers when they use traditional credit assessment methods, driving the interest rates to a level which is unaffordable to the farmers. With farmers turning to other less-formal sources of financing, most existing financial products available to them have:

1. High or opaque interest rates, especially those in the form of input financing
2. Payment schedules do not fit the revenue cycles, forcing farmers to borrow from informal sources to keep up with payment. Inevitably farmers prioritise the return of informal loans
3. Loan amounts do not match the requirements, once again encouraging informal loans

AgriG8’s solutions propose a change of narrative. Instead of positioning sustainable agri as a climate mitigation tool with an uncertain chance of increasing revenue, AgriG8 presents it as a tool for accessing affordable finance that would tangibly help farmers at the beginning of the season. The Rice Resilience Bond (RRB) aims to use the proceeds of the bond sales to lend directly to farmers, eliminating the need to involve an intermediary, which would inevitably increase the cost of funds to the farmers. We embrace a step-down approach where the borrowers are rewarded with a discount on their loans for their extra efforts to adopt sustainable practices. 

The RRB does not naively ignore the challenges and danger of lending to the farmers directly; instead, AgriG8’s solution framework of risk management mechanisms will quantify and mitigate the risks. This framework was designed with three core enablers in mind - technology, programme design, and a human-centric approach. The solution comprises three main stages:

1. Access: Lower the cost of customer acquisition for FIs
2. Appraise: Provide an alternative credit assessment based on agronomic potential
3. Assure: Provide an in-season risk mitigation system to increase repayment capability. 

Beyond financial inclusion, the RRB provides an alternate, commercially viable approach towards incentivising smallholder rice farmers to adopt sustainable practices such as alternate-wet-dry (AWD). AWD is the main method in our instrument to reduce methane emissions, with the potential to generate carbon credits. Loan rebates are offered to farmers who carry out AWD and are able to provide real-time, accurate records of their water management practices for verification. Data collection and analysis are performed via AgriG8’s CropPal app. This availability of high-quality data allows a better price for the carbon credits. Investors of the instrument will enjoy the first right of refusal at a discount for the carbon credits generated, allowing them to meet their internal sustainability targets, satisfy compliance requirements, and/or trade the credits at a profit. The discounts given to farmers who performed AWD are justified by the additional earnings/savings investors make from receiving carbon credits at a discounted price, thus making this a win-win solution for all. Proceeds from carbon credit will further offset the farmers' loans.

The RRB draws inspiration from impact-linked bonds such as those issued by the World Bank and Citi to support clean water projects and those who adhere to similar structures such as the ones set out by the FMO.

AgriG8’s target audience is split into two distinct groups - financial institutions as our paying customers, and smallholder rice farmers as the ultimate beneficiary.

AgriG8’s solution helps commercial financial institutions more appropriately assess the risk of lending to smallholder farmers, lowering their costs and opening up new market segments which were previously inaccessible to them. It will also help them meet their sustainability mandate, through the access of carbon credits at a rebate.

Complementarily, the RRB serves to meet the financing needs of smallholder rice farmers, especially in Southeast Asia, who lack access to financing and are living below the poverty line (statistics/figures were stated in previous questions). 

To illustrate the size of the target beneficiaries in Southeast Asia, it is estimated that 26% of all rice fields, amounting to 12 million hectares, are managed by smallholders. This translates to a production value of USD17 billion from the main end product (head rice), with an additional USD4 billion (and growing) from by-products (e.g. broken rice and husk for biochar), presenting a total market value of more than USD21 billion. This production value is generated from the farmers’ working capital of USD1,000 per hectare annually (simplified estimation as the cost and activities vary from country to country). Across 12 million hectares, the total financing required amounts to USD12 billion. While a USD12 billion financing facility for the farmers could potentially generate more than USD21 billion in market value, actual farmer revenues are lower. While the market value is determined based on the price that rice is being traded at as a commodity, the revenue farmers receive is determined by the price of paddy, which is less transparent. The price of paddy is subject to the offtakers and rice mills, who set the price based on several other factors beyond the rice price. Assuming the paddy buyers are fair, farmers could be operating at a gross profit margin of 30%, interest and any other cost of funds on top of the working capital (acquired via a financial facility) eat into the farmers’ final operating profit.

The RRB could help these smallholder farmers access affordable financing from formal/commercial sources that were previously unattainable to them, helping them in many ways including: 

• Increase their profit margin, breaking them out from the poverty cycle

• Be empowered to not be a simultaneous victim and unwitting perpetrator of climate change, but instead an active steward of our environment, enabled by concrete and certain commercial incentives

• Gain protection against loss of yields (and therefore income) from factors beyond their control, such as extreme weather events, through the embedding of crop insurance in the product 

• Avoid exploitation/malpractice from informal lenders

• Establish a digital profile for greater access to services

Our team is exceptionally positioned to deliver this solution due to our combined expertise, deep-rooted industry connections, and genuine commitment to the communities we serve.

Our CEO (the Team Lead), David Chen, brings 17 years of invaluable experience in the agriculture sector, with a dedicated focus on rice farming, covering seed breeding, policy, contract farming and marketing of sustainable rice. AgriG8 is a pivot from the last startup David founded - Golden Sunland, a full rice value chain company based in Myanmar with the aim of introducing high-quality rice and first-world farming practices into the country. Through years of working closely with smallholder farmers, David possesses unparalleled insights into the intricacies of rice farming and the challenges faced on the ground. This firsthand knowledge is crucial for designing effective solutions that address the real needs of farmers.

Our COO, Joshua Tan, boasts 30 years of experience in bringing innovative technology to market and driving business growth from inception to profitability, across industries from pharmaceuticals to infrastructure, and including rice as well. Joshua was the Chief Administrative Officer at Golden Sunland, where he drove operational excellence and contributed to the company's success through strategic planning and execution. His expertise extends to mobilising both commercial and non-commercial capital, ensuring sustainable financial support for our initiatives.

Additionally, our Head of Projects, Ho Qian Yu, brings 5 years of diverse experience in public, corporate, and startup environments. Previously a founding member of a social enterprise leading business development efforts, and a programme manager for the Singapore government’s flagship growth partnership programme, her proficiency in partnership development, particularly in tri-sector and regional/global contexts, strengthens our ability to forge meaningful collaborations that amplify our impact.

Over the past 3 years, our team has been actively engaged in understanding the specific needs of smallholder rice farmers across Vietnam, Thailand, the Philippines, and Indonesia. Through direct interactions with over 150 farmers, we've gained invaluable insights that inform our solution's design and implementation. The design of the RRB was based directly on a combination of the team’s previous experience in the agriculture sector, our extensive deep engagements with the farmers, and other sources such as secondary insights from other organisations or literature. For example, CropPal, the digital tool that enables the RRB has seen significant changes based on direct feedback from the farmers, introducing features that were requested by farmers.

Moreover, our commitment to inclusivity is evident in our continuous engagement with stakeholders, particularly NGOs and co-ops directly working with farmers on a daily basis. By prioritising community input, ideas, and agendas, we ensure that our solution is not only relevant but also genuinely reflective of the communities we aim to serve.

The technology components powering the RRB have been built and beta-tested with their respective target groups. The public-facing component (i.e. farmer app CropPal) is available on the Play Store in Southeast Asia. A version of the financial instrument was piloted with farmers in Myanmar in 2021, but its design has since seen significant refinement. A pilot for the current iteration of the RRB is planned to begin in 2024 Q3, with most partners in final discussions.  

We are applying to Solve to receive support to refine our solution, such as overcoming barriers to launching and scaling it. As there are currently no full-time team members with a finance/risk management background in the team (although we are exploring onboarding such members), the finer details and nuances in navigating this complex sector sometimes escape us, even if they may seem obvious to those in the sector. This is compounded by the fact that the solution is to be launched regionally, with each country having their own regulatory requirements. As we move beyond the Pilot phase, we intend to be more intentional and systematised with our impact measurement practice, which is a key highlight of MIT Solve for us.

We are also looking to meet more like-minded people with a similar vision of uplifting smallholder farmers and/or providing more affordable financing through alternative risk assessment, whom we would like to learn from, exchange insights with, and collaborate with.

Most solutions in the market fail to understand their main users’ (smallholder farmers) needs. Most solutions are developed with large farm operations in mind - providers focus product development on enterprise offerings such as dashboards, charging on a per-farmer basis to maximise revenue. 

Engagement of farmers is limited to static interactions where farmers are provided with weather forecasts and simple data logging systems, which have minimal impact on farmers' actions. There is no incentive for farmers to participate voluntarily in the solution. These are also inaccessible to smallholder farmers due to lack of capital and scale.

Farmers are key stakeholders as they directly affect any changes in agricultural practices. Their input is crucial in the design and implementation of any solution that aims to improve their livelihoods. Thus, AgriG8 has taken a different approach from our competitors to provide value add to both farmers and financial institutions. 

Firstly, unlike crop-agostic solutions, AgriG8 brings decades of experience working with rice to provide a dedicated solution to the rice value chain. Currently, there are no tools tailored to the needs of the rice and smallholders due to the complexities of the smallholder farming sector.

Next, our business model seeks to create access for farmers while still providing sizable financial returns for the financial institutions. The financial institutions benefit through three stages - Access, Appraise, and Assure. 

1. Access - farmers are aggregated into portfolios through existing 'farmer access partners' such as NGOs. This reduces the cost of onboarding.

2. Appraise - the key value proposition from AgriG8. We prioritise farmers' agronomic potential and ability to produce as opposed to relying solely on traditional credit assessment. We view farmers as entrepreneurs who require working capital to produce. We use a crop modelling approach with remote sensing data to evaluate farmers' past field performance. Beyond the first season, farmers' utilising of CropPal also allows us to derive more insights to better assess them. This would open the doors to farmers who do not qualify for loans under the current credit assessment.

3. Assure - continuous monitoring of farmers via satellite and CropPal allows risk mitigation and intervention when required. AgriG8 ring-fences part of the loan so that farmers can only use them to purchase input/services they would require to produce rice.

Lastly, we seek to increase engagements with the farmers by gamifying the process on our mobile application designed around farmer behaviour and tapping on community-sourced advisory as a rich source of data to build collaboration between smallholders.

By providing farmers with access to more affordable financing from formal sources, we could achieve the following, which could help them break out of the poverty cycle and uplift themselves.

• Reduce cost of financing/production for rice growing, increasing their profits

• Avoid exploitation, malpractice, or even well-intentioned but poorly-designed financing terms from informal financing sources

• Prevent catastrophic impact on income from crop damage beyond farmers’ control, by increasing access to crop insurance 

By increasing the farmers’ capabilities and capacities to practice sustainable agriculture, on top of the benefits of a discounted loan from the RRB itself, we are better preparing farmers to be active stewards of mitigating and adapting to climate breakdown, which is particularly relevant on our increasingly threatened planet.

By providing financially sustainable commercial incentives to rice farmers to practice sustainable agriculture, we could achieve an emissions reduction of up to 8 tonnes CO2e per hectare annually, which could help safeguard the global climate. 

We target to reduce 800,000 mt CO2e annually through farmers’ adoption of sustainable agriculture, which is tracked on our internal dashboard based on farmer-provided data cross-validated by other sources (please refer to technology in next question). We strive for the betterment of farmers’ livelihood, targeting at least a 3% decrease in loan interest rate, which reduces the entire portfolio of farmers’ operating cost by USD6 million.

There are several components that power the RRB. Granular details have been omitted due to confidentiality.

1. Farmer-facing app, CropPal: A gamified, digital logbook for farmers to record their agricultural management activities (including financial information). The app was developed with a farmer-first approach, presenting a refreshing and minimalist take compared to some others on the market designed with only the data receiver (not provider) in mind. The app allows farmers to not only view all their individual activities by season, but also view aggregated seasonal analysis on performance (e.g. inputs, yield, costs, expenses). The data provided by the farmers will be used in several ways - to evaluate credit risk/worthiness, to validate practice of emission-reducing techniques, to provide details of crop cycle for crop modelling. 

2. Crop model: The AI/ML model of satellite imagery-acquired vegetation indices provides AgriG8 with greater agronomic insights into farmers’ past, current, and projected farming.

3. Dashboards: Dashboards tailored for the different users (AgriG8 team, financial institutions, NGOs and other outreach partners, etc.), which can provide individual and aggregated insights on indicators of concern to each organisation (e.g. default rates, carbon emissions savings, engagement rate of farmers with the application).

4. Financial instrument (bond) design and mechanism: All the aforementioned components come together to enable to Access, Appraise, and Assure objectives of the RRB. It is an alternative financial instrument unlike those currently available on the market.

Our crop modelling methodology is based on scientifically-published findings, even though our model itself is proprietary to the company and crop-specific. For the design of the financial instruments, similar instruments have proven successful in other regions beyond Asia (e.g. Africa), and will be further validated during our upcoming pilot.

Full-time staff: 3

Contractors: 3

AgriG8 has been established for three years (since 2021), and has been actively developing the mentioned solution since. Prior to this, the two co-founders both had up to 17 years (individually, not cumulative) of experience in the rice industry, working with farmers and understanding their challenges. They first worked with other organisations in a consortium for smallholder lending in 2020 (https://www.inclusivebusiness.net/ib-voices/fintech-digital-agri-solution-provider-rice-company-and-ngo-walk-bar).

As AgriG8 is currently an extremely lean team (with 3 full-time staff), a systematic approach to ensuring DEI is still in the pipeline. As an organisation with a flat, non-hierarchical structure, we actively promote open communication, mutual respect, and a sense of belonging among team members. Our hiring process is inclusive, as we aim to target all suitable candidates regardless of their social, cultural, and identity-based human attributes. Within the company, there are equal opportunities for all, with essentially no barriers for access to opportunities.

AgriG8 embarks on two different revenue models. Under Condition 2.1 (See segment on ‘Market Description’), AgriG8 operates the SaaS (software as a service) model where the client (Financial Institution) is charged a flat fee for the use of our software and solution suite. It is a tiered charging scheme starting at USD 100,000 for up to 20,000 hectares.  Under Condition 2.2, where the opportunity window between chargeable interest (to the borrowers) and return expectation of investors is wider, AgriG8 operates the LaaS (lending as a service) model where the client (Financial institution) is first charged for onboarding and know-your-client (KYC) processes, then subsequently the second charge when the loan had been returned. The supplementing revenue also includes a commission from sales of input/service. The estimated sales value is estimated to be 5% of the loan quantum. Bonus revenue includes a cut from carbon credit sales if farmers/borrowers successfully reduce emissions and are awarded carbon credits.

It is envisioned that the interest from the loans disbursed will cover the investors’ expected returns, AgriG8’s cut of the profit, and all operating expenses. Based on the current market rate of ~30% for smallholder farmer loans, and the bond investors’ expected return of 5~8%, the difference of 22~25% (USD220-250 for a loan quantum of USD1000/ha/year) remains sufficiently high to cover the required components, namely cost of lending, discount from market rate to attract farmer-borrowers, rebate offered to farmers for practising sustainable agriculture, and risk premiums (if any). 

AgriG8 has raised close to half a million (in USD) for its pre-seed round, and is currently raising its seed round, which is expected to close at USD1.25 million