As an essential service, the Brazilian agricultural market has been sheltered from the devastating economic effects of COVID-19-related shutdowns, but farmers still face enormous challenges. Most of Brazil’s farms are small or medium, and they depend on credit for 80 percent of their working capital each season. But these independent farmers are often ignored by banks because they are difficult to reach geographically and challenging to underwrite. As the government continues to reduce subsidies to farmers and demand for crops increases, the need for responsible financing to support this vital sector of the country’s economy is becoming more critical than ever.
Even before the pandemic started, the Accion Venture Lab team was looking for startups that drive the digital transformation of Latin America’s agricultural landscape with innovative financial products. When we met with TerraMagna, we immediately realized that the company was in a unique position to help underserved farmers because of their use of satellite imaging to appraise and monitor collateral and their embedded finance model, which allows input suppliers to improve underwriting and reduce costs.
We previously invested in African agri-fintech startups Pula and Apollo, and we are convinced that this is the right time to support the agri-fintech space in Brazil. The current conditions are favorable for a company like TerraMagna to thrive: satellite images are now more accessible, low interest rates make debt funding possible, and new regulations will bring more financing to the sector.
Accion Venture Lab is thrilled to make its first agri-fintech investment in Latin America. We are most excited that TerraMagna is:
Connecting small and medium farmers with fairly priced credit
The lack of access to traditional financial institutions forces smallholder farmers to seek credit from expensive retailers where they purchase seeds, fertilizer, and other inputs. TerraMagna addresses this problem by using their proprietary machine learning platform and monitoring technology to generate a more personalized farmer credit score and an accurate estimate of collateral value. This approach reduces the manual cost of the underwriting process, which lowers the retailers’ credit risk and enables them to provide lower-cost loans. Lenders in Brazil have typically used land as collateral and have found it difficult to properly accept crops as collateral, given the high fraud risk. Using satellite images, TerraMagna can track the crop status in real-time and help prevent fraud attempts. This approach aligns with our thesis that technology and innovative lending models can work together to create new asset collateral, ultimately granting better access and better credit pricing to smallholder farmers.
Taking a holistic approach to strengthening the farming sector
Rather than lending directly to farmers, TerraMagna leverages partnerships with local input retailers to monitor, underwrite, and fund their loans. Since these retailers operate with slim margins and are forced to sell seeds and other agricultural goods primarily on credit, they value TerraMagna’s ability to reduce their loan risk and improve their collateral documentation. TerraMagna’s precise, lower-cost underwriting processes and collateral-monitoring technology allow retailers to provide farmers with loans that cover a larger portion of their working capital and enable them to purchase higher-quality inputs. With broader financing coverage, farmers can ease the pressure on their margins, improve their financial resiliency, and reinvest their profits into their farms.
Leveraging data to improve the agricultural ecosystem
As TerraMagna continues to monitor farms across the region and develops relationships with input retailers, they will gather critical data about how agronomic conditions and inputs impact farmer yields. As we’ve seen through our work with Apollo and Pula, this data can generate insights and personalized agronomic advice that helps retailers better support farmers, increasing their crop yields and benefiting the overall health of the agricultural ecosystem.
As QED’s Nigel Morris said in our latest podcast series, “a great company going into COVID is invariably a great company coming out.” TerraMagna is a perfect example of this. With their unique technological skills and vast knowledge of the agricultural sector, the team built a product with competitive advantages for the suppliers and turned it into a profitable business. And they went one step further and fully immersed themselves in the fintech world, first by participating in the underwriting process and now by funding some of the suppliers’ loans to provide better pricing and expand their lending capabilities.
We’re continuously impressed by the eagerness of TerraMagna’s team to keep learning and innovating, and we can’t wait to see what comes next for them.