The Economics of Co-farming

At Fefifo, we are pioneering digitalised, standardised farming in ready-to-farm modern farm spaces called Co-farms so smallholder farmers can now start commercial level farming businesses easily in Fefifo Farms (fee-fai-fo-fum…get it? Jack and the Beanstalk?). For the uninitiated, here’s a 2 min video to get you up to speed. Fefifo also licences our model and co-farm digital operating system for others to run white labelled co-farms.

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Discovering the power of the co-farming model

Before going live at the beginning of 2022, we thought that co-farming had only 2 straightforward revenue lines. We provided fully equipped precision farming spaces and in return Agropreneurs paid us a form of monthly subscription we call Farmspace-as-a-Service (FSaaS) fee. Each Agropreneur also receives a lot of help in a co-farm,

1. Support for the first cycle working capital to get kick started,
2. Our proprietary digital mobile platform – DDFN, short for “Digital Distributed Farm Network” which helps standardise their seed-to-sale workflows across finance, input purchases, inventory, worker payment, crop cycle durations, growing protocols, and harvest recording,
3. Easy access to our on-farm crop experts to help them troubleshoot issues with pest and diseases for timely action. 

For all that support we provide, Fefifo takes a second bite of the cherry and crop profit share with our Agropreneurs after each harvest sale.

Post go-live, we found ourselves providing more on-demand services to our Agropreneurs as need arose – additional workers at peak harvest or for labour-intensive tasks like pollination, one-off pest & disease management (P&D) products that didn’t make sense for Agropreneurs to buy a full unit, specialised equipment like fogging machines for off-cycle space sanitation which could be shared, etc. Thankfully, DDFN had always been built with foresight and it was able to handle levying per use charges to our Agropreneur’s digital wallets easily. 

Then came the realisation – Everything that transacts on our Agropreneur’s DDFN wallets is Fefifo’s revenue under accounting principles. In other words, besides FSaaS and profit sharing revenue, Co-farming has the potential to literally turn multiple value chain costs of a typical farm owner-operator into potential profit earning revenue streams. This, together with other characteristics of the co-farming model which we are just beginning to observe and leverage, is helping us realise we had underestimated how powerful the co-farming model really is.  

This article is to showcase the elegance of the model to the public.

Economies of a co-farm

Let’s start from the lowest common denominator – a co-farm space.

At the time of writing, Fefifo focuses on offering farmspaces that grow pre-curated short cycle cash crops –fruits and vegetables with crop cycles 6 months or less. Our first 2 inaugural crops were chili for open farmspaces and musk melon for greenhouse farmspaces. 

We’ve modelled many crops under these 2 broad categories and found that their unit of economies were quite representative of many crops that we can grow under the co-farm model e.g. ginger, brinjal, lettuce, bak choy… So, for this exercise I use these 2 crop models as the baseline to examine profitability of a co-farm space.

The table above illustrates the revenue and profitability of 2 of our current farmspaces, giving us an annual crop sales revenue of RM 201,015.36 (USD44,670.08) per acre across these 2 types of spaces. Under a commercial farm owner-operator model, where one builds a similar farm, employs all its growers, takes on all the costs and all its profits, this would be what one will earn. But how is it under a co-farming model?  

Fefifo Revenue vs. Agropreneur take-home income 

Under a co-farming model, the co-farm operator only shares profits, but can capture more value along the seed-to-sale value chain than a farm owner-operator. Averaging out the total annual revenue per farmspace across these 2 types of farmspaces, Fefifo enjoys RM 81,543 (USD 18,120) of revenue per acre from FSaaS, crop system rental and crop profit share.

From the Agropreneurs’ perspective, they average an annual take-home income of RM69,762 (USD 15,494) or RM 5,810 (USD 1,291) per month which is easily twice that of fresh graduate, white-collared pay in Kuala Lumpur, Malaysia.

However, comparing the revenue levels of the farm owner-operator vs. the co-farm operator, one can immediately see that its better off to be the first rather than the latter. So why co-farming and share the profits when you can just employ your growers and keep all the profits?

The answer in short is – SCALABILITY AND LICENSABILITY.

Scaling co-farm spaces and its impact through B2C, B2B, and B2G channels

With over 300m rural population and underutilized agricultural acreages in Southeast Asia, Fefifo is looking to be the world’s first decentralized, outsourced contract farming network to serve the USD 159bn contract farming market in the region.

By developing our key competencies in building standardised farmspaces and technologies that enables our agropreneurs to grow consistently, we are not just developing the capability to help smallholder farmers start successful commercial farm businesses in our self-operated co-farms – a B2C business targeting individual existing smallholder traditional farmers or agri-tertiary graduates; we are also building a licensable model with proprietary technology for others to build and run successful co-farms of their own, developing licensing opportunities in both the B2B and B2G channels.

For B2B, we focus on corporates that need a better way to manage their contract farming, e.g. large fruit and vegetable producers, livestock producers that need feedstock, processed food manufacturers like chili sauce producers etc. For B2G, we see big interests from government bodies for the adoption of our co-farming model and operating system to turn around many loss-making rural farm settlement projects and new initiatives like large scale agro-parks to booster the agriculture economy.

Having multiple channels to drive scale is great, but only if the model lends itself to scaling well and on that, the co-farming model fares well too. 

Characteristics of the co-farming model that makes it perfect for scaling

(1) Economies of scale on CapEx

The graphic below is a breakdown of our 10-ace pilot co-farm build cost – with little to no economies of scale having built the farm progressively as we raised funds. 

With a typical 50-50 split between greenhouse and open farmspaces, we are currently running a per acre build cost of around USD 69,000. Even if we never do better in crop sales revenue through R&D for stronger seed variants and cheaper growing protocols, or business develop for higher-tiered sales channels, our return on CapEx is around 3.8 years on a typical 20-year co-farm operational life with our current USD 18,000 ARR per acre. This metric would have performed better if we had been better capitalised and was able to purchase materials is larger quantities directly from component suppliers instead of a turnkey supplier. We assess that our build cost could be 20% more cost effective with scale, bringing down return on CapEx to around 3 years just on this aspect alone. 

(2) No crop cycle OpEx & increasing potential for seed-to-sale value chain capture 

In a co-farm model, cycle-on-cycle crop growing OpEx is entirely on the Agropreneur and not the co-farm operator. So, unlike a farm owner-operator, operating costs does not scale linearly with acreage growth, marginally increasing for technology, corporate support, farm ops, account management and crop sales headcounts per acre of additional co-farm, particularly for licensed co-farm acreages.

In fact, as we scale, we can capture more of the value chain which would otherwise be OpEx for a farm owner-operator. 

The table above illustrates the crop cycle expenses which are charged to our Agropreneurs’ DDFN mobile wallets. These are all revenue from the co-farm operator’s perspective but clearly not all of them are profit earning revenue streams. However, every item that we now offer at cost has the potential for a margin to be added on as we drive the cost of offering down with scale, e.g.

• Bulk discounts off agri-inputs,
• Cost plus models for shared equipment and inventory usage,
• Access to low-cost farm worker resource through internship programs with private and public sectors

We are already experiencing this at only a 10-acre pilot. As we scale, we expect to capture at least 24% more of the value chain this way and bring up per acre revenue, reducing return on CapEx to 2.5 years. 

(3) A whole that is bigger than the sum of its parts

A decentralised network of farm and farmers under the co-farming model comes together as a whole that is greater than the sum of its parts – for two key reasons.

I. Network effects for central strategic activities – Cashflow otherwise needed for crop growing OpEx can be utilised for functions that increase the size of the pie for the entire network. These are just a few things which Fefifo has started embarking on and will invest more as we scale:

• Institutional crop sales & business development to build bigger and better offtake markets,
• Partnerships development with public and private sectors for worker resource pipeline,
• R&D for new crop growing protocols,
•  Develop or source for new technologies to enhance crop growing efficacy, e.g. IoT sensing & automation, specialised equipment and systems
• Network branding, traceability & standards accreditation, e.g. GAP

II. Optionality from DDFN data – As our entire network of Agropreneurs use DDFN for their day-to-day operations, we are collecting multifaceted data on their farming activities cycle-on-cycle.

• How much money they spent for the cycle,
• What agri-inputs were bought and how much were used,
• When did key crop cycle stages start and what percentage adjustments were made to baseline yield as cycle progressed,
• How much harvest did their workers pick, sort, pack, and submit for sale 
• What was the sale price, yield rejected, sales revenue, and how much was earmarked for next cycle or how much was their profit share

This data is already providing powerful insights to improve our crop growing protocols, but there is still much latent potential we have yet to tap with data science techniques as our data set grows with our co-farm footprint.

Our vision is to be able to use a combination of computer vision, sensing, user input and machine learning seamlessly, to develop tools for real-time operational optimisation, yield & cashflow forecasting, even forward-looking credit models to create smallholder micro insurance and loans products with financial institution partners; a highly underserved, yet extremely valuable space.

Co-farming as a venture-backed business

Fefifo has ambitious plans to grow in Southeast Asia, where modernising the huge demographic of B40 smallholder traditional farmers into smallholder commercial farm-owners has the greatest impact for food security in the region. 

Having piloted in Malaysia, we plan to start scaling in Malaysia and to enter Indonesia in the coming year, progressively entering and scalng throughout the other key ASEAN markets from there. Our vision is to scale up to 5,000 acres of self-operated Co-farms across 6 SEA countries within 10 years, and for licensed co-farms to reach 10x acreage and match the revenue of self-operated co-farms within 5 years.

Harvesting the scaling characteristics of the co-farming model (pun intended), we are driving revenue growth with four main growth levers to double, triple and quadruple per acre crop revenue from current levels at each milestone; allowing us to increase a co-farm’s profit share revenue and raise FSaaS fees commensurately,

1. Capturing more seed-to-sale value chain,
2. Developing and sourcing for fit-for-space advanced Agtech to grow more for less,
3. Expanding crop portfolio for farmspaces to grow higher value and signature produce,
4. Fostering an ethical brand that focuses on traceability and good agricultural practices (GAP).

This is a vision and mission that could potentially see Fefifo co-farms span over 200,000 acres of agricultural production with over 700m in ARR.

With each farmspace growing a crop curated for baseline unit economics between 20%-40% margin, we see a clear path to profitability at a scale as low as 50 acres for horticulture crops. From there, we are in a good position to go from strength to strength managing growth vs. profitability – finding product market fit for commodity food crops (e.g. rice, corn, potatoes), even going beyond crops into animal protein or ex-farm value-add processing under the co-farming model.

Valuing co-farming as a business

Under a co-farm model, every farmspace, and hence every co-farm, starts with a positive unit of economy. Most importantly, every co-farm has a very tangible economic value tied to its operational lease. The model’s scaling characteristics interplaying with its licensability are then overlaid on top of that to better serve as the basis for assessing co-farming’s valuation as a venture backed business. In other words, every co-farm should be seen as a series of positive yearly cashflows represented by its ARR for the duration of its lease, discounted to get the present value of its lifetime economic value and have a multiplier applied on that to account for scalability, licensability, characteristics of scaling, and optionality from data for the broader business which is a decentralised network of such co-farms.

To illustrate this, I use our upcoming Series A fund raise as an example. We plan to raise USD 7m for a pre-money valuation between USD24.5m – USD 31.5m. We intend to use up to half of that funds raised to build another 50 acres of self-operated co-farms across Malaysia and Indonesia within 1 year. Combined with the existing 10-acre pilot, the graphic below illustrates our 1 year forward looking “back-of-napkin” numbers for 60 acres of self-operated co-farms. For simplicity, I did not include any licensing acreage which we expect to convert within the next year.

60 acres of self-operated co-farm with an average lease of 24 years would have an economic lifetime value of USD26m at USD18,000 ARR per acre. Using a simple 70% “haircut” to discount for present value, we estimate our 1 year forward looking present value to be USD7.8m, making the pre-money valuation in our ask a 3x-4x multiple. We then highlight the factors to justify that multiple – details of which are elaborated earlier in the article.

This is not the conventional VC method, it’s not even the proper way to calculate for present value. It is a quick and dirty estimation of what co-farming is valued with only a self-operated footprint within a foreseeable 1-year timeline – WITHOUT the venture backable aspects of our model and technology which are then catered for in the form of a multiplier.  This makes clear the intrinsic value of operational co-farms within reach while allowing the discussion on future potential and value to be more focused. 

Note: To do a proper present value calculation, each year’s cashflow from year 1 to 24 needs to be discounted back the respective number of years using a discount rate (i.e. WACC). A WACC of 15% will arrive at around the same valuation as a simple 70% haircut. A 15% WACC is somewhere in between what would be for a matured company and a startup which we feel is reasonable factoring in discounted cashflows are from reliable crop sale, rental and “as-a-service” fees, without the noise from the venture-backable aspects of the business, while still catering for size and scale of a young company.

Final words

NO FARMER NO FOOD.

80% of food Asia consumes is produced by smallholder farmers and 65% of them are retiring in less than 15 years. Traditional farming is not profitable enough to attract the next generation, and there are no breakthroughs in Agtech, today or even over the horizon – COMBINED, that can replace smallholder farming entirely.

Bringing up smallholder efficacy and profitability through modernisation is key to feeding 8.5 billion people by 2030 

In an earlier article “Want Agtech to Solve the World's Food Problems? Think About These 7 Things!”, I wrote that in the current landscape, we are doing much innovation to grow food outside of nature – for the future. When we build technologies for the now that helps “smallholder farmers”, such innovations often can only be afforded by farmers already operating at a commercial level even if small in scale. The innovations that do get traction and are used by many smallholder subsistence farmers arguably only helps them do more traditional farming albeit with better seeds, nutrients, or chemicals – working within caste systems instead of breaking them and in so, widening the gap with the B40 of the income pyramid.

Without first modernising the largest demographic growing food for the world with commercial baseline Agtech and turning them into small commercial level farmers, a new generation will not arise to replace the dwindling set of older farmers. Then, a food crisis is inevitable.

We see co-farming the perfect model to address this, we hope that now, you see it too.

Fefifo is raising Series A to acelerate our scale and impact. We are calling for all VCs that invests into Southeast Asia and is passionate about a solution that can truly modernise smallholder farming to reach out and have a chat with us. Join us to pioneer Co-farm spaces as a new world model to make sustainable, profitable smallholder farming commonplace and make safe and healthy food more accessible to feed the world population.