Investing in a Dynamic Agricultural Sector: Insights from Global AgInvesting 2017
Agriculture and agricultural land in particular have been sources of prosperity for centuries. Therefore, it is not surprising to see the world’s largest investors actively trying to learn how to invest in the sector for stable and competitive risk-adjusted returns—a rare thing in today’s market. This is why in December 2017 London hosted the next edition of Global AgInvesting – the go-to conference for serious agricultural investor. The main takeaway from the lively discussions in which the Center for Industrial Development actively participated was that wise investments in the global agricultural sector are as difficult as ever. Nevertheless, the investors who get it right – thanks to focusing on environmental stewardship and co-operation with successful farmers – are bound for abundant harvest.
Detlef Schoen representing Insight Investment pointed out that the agricultural sector has recently been attracting investors from all walks of life. Investors from the tech, health, and environment sectors are those most active among the new players. That is a fundamental change to the sector, as historically the investors into the agricultural sector were primarily agricultural funds. Those traditional investors are increasingly having to compete with new investors who often approach investments in a much different than the old guard of investors. These innovations are having profound implications for the sector, including valuations. Detlef argues that such a dynamic is good for the sector, as agriculture was historically underfinanced. However, for the old investors in the space, the sector is suddenly much more fast-paced and complex than ever before.
Agriculture and climate change
Virtually all of the investors present in London realized that agriculture is at the very center of another key global debate: environmental and climate change. Until recently, the sector was viewed as a liability: one of the largest contributors to the climate change globally. It is our great joy to indeed confirm that the conversation is rapidly changing in this respect: it is increasingly normal for agriculture to be seen as one of the key stakeholders in designing the world envisioned by the Paris Accord in which the temperature does not rise above 1.5°C.
The importance of soil
The key to profitable agricultural investments and to fighting climate change is the soil, specifically improving its quality. The issue of soil quality is unique since maintaining soil quality contributes to the mitigation of climate change and increases the resilience of agricultural business models. This is because soil is capable of capturing and storing CO2 from the atmosphere. As we have argued in our report from Chatham House’s Climate Change 2017, it is likely that we will have to pay for carbon emissions in the near future, which means all that CO2 stored in soil will result in a huge revenue source for the investors betting on such a scenario.
From an operational perspective, the healthier your soil is, the better it will cope with both drought or unexpected rainfall. At the same time, healthy soil allows for yield increases while reducing other expenses. While some investors are thrilled to invest in such climate-resilient business models for the sake of their being climate sensitive, there is still a large group of investors who think about the above factors as merely a risk that needs to be mitigated.
Whatever the motivation of the investors is, the question in London was not whether the above scenarios will be true, but when they will materialize and whether the sector will be ready to face those changes.
Each farmer intrinsically understands that agriculture is a truly multigenerational business. Therefore, only those who approach agriculture from a long-term perspective can really focus on soil health. It is refreshing to see that more and more investors are starting to appreciate this key insight. Moreover, investors are acting on it by creating perpetual investment funds. This is well advised considering that today’s investments in soil health start yielding noticeable returns within five-ten years, and skyrocket within the 15-20 years, making investment in climate-smart agriculture a long-term gold mine.
Are large-scale investments viable?
Another recent insight for agricultural investors is a realization about the viability of commercial farming, specifically large farms with corporate management and institutional investors. There were huge expectations that such models would be able to yield substantially higher returns then family-managed and owned farms. The data, however, does not prove this fact, and investors are starting to realize that they are often not able to manage the farms the “proper way”. Examples of Doug Hawkins, who invested in a substantial cocoa plantation in Colombia, or Pierre van Hoeylandt, who invested in Zambia, drive this point home. When both of them were asked why they weren’t investing in, for example, Brazil, or Nigeria, they answered that they would love to be present in those markets, but they have no people on the ground to trust, let alone manage investments that average $100 million.
Investing in knowledge Furthermore, technology is no longer being understood as just huge machines that require great capital investment, but also management techniques and local knowledge. One cannot easily buy the second kind of knowledge, and yet it is critical for achieving more-than-average ROI. This is why investors want to partner with successful farmers to provide them necessary growth capital and, in some cases, access to international markets. In this sector, the investor should be asking themselves, “which farmer is the best future steward of my investment?” While the farmer should be asking themselves, “which investor will be the best long-term partner to work with?”
Nevertheless, when well positioned in the agricultural world, technological companies can also create and sustain very profitable businesses. One such company present in London was Geosys which for the last ten years was taking multiple photos per day of each field in the world. Such a database is priceless for investors interested in land investments, or insurance companies. Thanks to Geosys an investor can quickly understand whether the productivity of the land they are considering purchasing is has been rising, stable, or decreasing over the last decade. Needless to say, such insight is of strategic importance for understanding the risk level and upside potential of any investment, which feeds into the pricing of the investment. Of course, the same tool can be used by the seller of the land to strengthen their investor pitch.
Innovation in Ireland
London’s conference enabled us to learn about a very innovative investment vehicle, the Ireland Strategic Investment Fund, which was created by the Government of Ireland right after the financial crisis of 2008 with the primary goal of stabilizing the banking system. However, the Irish people proved to be ambitious by making sure the fund also had to support long-term development of strategic sectors for Ireland. Agriculture and the dairy sector in particular are among the few focuses of the fund. What makes the Irish fund even more interesting is its co-operation with Finistere Ventures from Silicon Valley, which is aimed at co-investments in the most promising start-ups.
Productivity vs nutrition
The final key insight appreciated by investors gathered in London was the awareness that while the productivity and effectiveness of agriculture has been rapidly rising (an average farmer is now producing more kilocalories per hectare than ever before), the nutritional and health value of this produce is decreasing. Therefore, there is a clear sense that investment in sustainable agricultural models, which put soil quality and health at their center, is the next big thing. Not only will those systems be resilient financially and operationally in the face of climate change, but they will also provide nutritional produce to consumers. This is only a step-away from conversations on public health, which is more dependent on food then on anything else. It is thus clear why investors from the health sectors are looking at agriculture and seeing plentiful opportunities.
How to succeed in agriculture
In summary, we acknowledge that the conversation about the tremendous magnitude and complexity of agricultural change can be overwhelming. This is exactly why the Center for Industrial Development is here to help YOU make sense of the trends, sentiments, and facts described in this article.
Whether you are a farmer thinking about improving the health of your soil and making your business investor ready, or an investor who feels the pressure to re-assess their investments in the world of negative interest, we, together with our global network, expertise, and insight, are here for you. Contact us today!
Mateusz Ciasnocha is constantly on a mission to “unleash dormant potential.” He specializes in agriculture, energy, and Africa, and is also passionate about innovation and entrepreneurship. A Hult International Business School graduate, Mateusz currently studies at ESCP Europe Business School and the University of Oxford, where he is receiving a Masters in Energy Management and Philosophy Certificate, respectively. Mateusz is currently in India participating in the prestigious IDEX Fellowship, which enables him to work with Vrutti to support 130,000 smallholder farmers.