Features

Agtech Revolution Under Way

As the climate and ecological crises start to deeply modify the way we eat and farm, investors face new risks and opportunities. 

From Bangladesh to the UK, the devasting effects of climate change on global agriculture have come to a head this year. UK farmers warned this month that the wettest February since 1836 would lead to a “horrific” harvest, while in Europe farmers began revolting against political measures to help combat climate change.  

Meanwhile, Brazilian President Luiz Inácio Lula da Silva has made agriculture and food security in the Global South front and centre in his country, which is set to host the G20 this year and COP30 in 2025. In the US, climate change and political pressures have led to an agricultural crisis for farmers – whom President Trump is heavily courting as part of his presidential campaign.  

Global agricultural shortages and supply issues caused by high temperatures and extreme weather from climate change, along with the pandemic and the war in Europe’s breadbasket – Ukraine, have been felt through food price inflation for a while. While being acutely vulnerable to climate change, agriculture is one of the leading causes for it too.  

Against this background, a transition similar in scale to the energy one is likely inevitable across the global agricultural system, which will lead to new types of risks and opportunities for investors.

Land, a key natural infrastructure for agriculture, is a live example of investment risk. Global policies to tackle deforestation could mean that firms at the centre of the global food supply chain will lose up to 26% of their value unless they change their business practices, the Inevitable Policy Response (IPR) warned last week. The IPR also said that a significant shift in land-related policies in major economies such as China, the EU, and Brazil, underlined that a land transition was now under way. 

Are there credible investment opportunities? 

Agriculture technology (agtech) is seen as key to driving the changes needed to help farmers meet increasing consumer demand, and achieve emissions reduction without undermining the environment’s health. Although this will creates opportunities, the market is in early stages and hiccups have already occurred.  

Valued at US$18.12 billion in 2021, the global agtech market is expected to reach US$43.37 billion by 2030 at a compound annual growth rate (CAGR) of 10.2%. 

DAI Magister, an investment bank helping companies fundraise and conduct M&A deals across Europe and Africa, has reported increased activity in the agtech space, despite some constraints.

“Agriculture is a little bit peculiar because you have quite a concentrated market in the agtech space, and we have not seen other types of investors come in and start acquiring,” explains Ali Al Suhail, Vice President at DAI Magister.  

Some trends, however, could catalyse in the near term, with new types of investors in the sector such as Microsoft having collaborated with biotech multinational Bayer last November on improving farm data sharing. 

“The market is maturing, with more private equity raising capital to invest in agtech, not just venture capital (VC) players,” Al Suhail adds. “You saw Paine Schwartz Partners announce a US$2 billion fund towards the end of last year. Cibus also just raised US$600 million (for its second mid-market private equity fund and second venture fund).” 

Cibus, an investment advisory firm focused on sustainable food and agriculture, attracted investment from a diversified investor base of both new and returning participants, including the Los Angeles County Employee Retirement Association and the Retail Employees Superannuation Trust – one of Australia’s largest profit-to-member superannuation funds. 

“When we started eight years ago, we were looking at one company a day mostly in North America, but today, risk capital availability has progressed globally – as has the availability of agtech companies globally,” says Alistair Cooper, Head of Venture at Cibus Capital. “We’re able to look at a much bigger supply pool, with probably four or five new opportunities every day. We certainly speak to at least three companies daily, and see just about every new cutting-edge foodtech and agtech firm out there.” 

Last year, Cibus Capital saw 800-odd opportunities come across its desk, according to Cooper. 

“We are in the early stages of what is likely to be a multi-decade transformation,” says Dr Henning Stein, Finance Fellow at the Cambridge Judge Business School and agtech investor advising several asset managers in the space. “From a global perspective, annual investments in nature-based solutions must reach US$737 billion by 2050 to meet nature targets, which is a huge leap from where we are today. One component that can help to close this gap, is agtech.” 

What are the risks in the agtech market? 

But as with every nascent market, risks also do exist.

Stein notes that passive investment approaches had been very challenging to date. The Solactive AgTech & Food Innovation Index and the related exchange-traded fund (ETF) Global X AgTech & Food Innovation posted -26% in the past 12 months. Another ETF, VanEck Future of Foods, performed -6% in the past 12 months and will now be liquidated. Meanwhile, VegTech Plantbased Innovation & Climate performed better over the past 12 months, with more than 8%, but still underperformed compared to the S&P500 (+34%) and NASDAQ (+45%).  

According to Stein – who has already lost money in the space – American food production company AppHarvest is great example of the risks that exist in the sector from a public market perspective.

“The biggest problem with AppHarvest is that it grew too big, too fast,” he says. “It went through 12 rounds of funding, raised over US$800 million in seed and venture capital funding, along with loans from banks and national organisations like the US Department of Agriculture, and everyone believed it was blazing a trail for sustainable agriculture. Now, all of that money is lost.”

What this experience taught Stein, is that active and diversified portfolios likely provide better growth opportunities in this nascent market.

“Smart investors who want to go down the publicly listed route are increasingly taking a broader approach to tech, and look for funds in the AI space that also cover agriculture – among other sectors – to avoid narrow risks,” he says. 

Allianz Global Investors’ Thematica fund, for example, is highly diversified across themes and individual stocks globally, and has secured stable returns so far – with a five-year annualised rate of 11.6%.  

“The application of machine learning, a subset of AI, can help farmers create a cost-effective, fine-tuned seeding and spraying schedule that optimises crop yields and quality and reduces weeds, while significantly diminishing the use of pesticides,” Stein explains. “The real-time differentiation and localisation of weeds permits a targeted deployment of herbicides and is the shortest path to weed control. This is an essential contribution to food security.” 

Which barriers are impacting the sector?

The synergies between agtech and food security mean that the sector is covered by many of the UN Sustainable Development Goals. Goal 2: Zero Hunger, Goal 3: Good Health and Well-being, and Goal 16: Peace, Justice and Strong Institutions, are certainly all relevant. More sustainable and efficient agricultural practices should also contribute to Goal 6: Clean Water and Sanitation, as well as to Goal 12: Responsible Consumption and Production. 

Brazil’s focus on food security is a clear indication that agtech will continue to rise in importance globally – as is the fact that COP28 was the first to dedicate an entire day to food and agriculture, underscoring the links that exist between changing those systems and tackling climate change. 

But unlike in the energy sector, there’s no developed or shared direction on what a food and agricultural transition would look like. “We still don’t have a clear answer about where we should go from where we are today,” says Al Suhail.

Cibus’s Cooper, who is a former farmer, suggests that a good place to start would be to tackle the synthetic chemical inputs that dominate agriculture.

“The global food production system is pretty much totally reliant on artificial nitrogen produced from the Haber-Bosch process – which is incredibly energy intensive, using an estimated 3% of the world’s energy,” he says.  “Artificial nitrogen is produced in the form of urea, only a third of which is assimilated into the biomass when applied to crops. The balance ends up in the environment, the waterways, or the air as nitrous oxide – a dreadful greenhouse gas.”

As such, reducing artificial nitrogen use is critical, Cooper explains, citing examples of new innovations using natural poisons from insects such as spiders, which can be targeted through technology to kill specific pests on plants.  

“Addressing livestock production is pretty critical given it takes up about 70% of land mass but only produces around 20-25% of calories, has a tremendous impact on waterways, and contributes to complexities such as antibiotic resistance,” he adds. 

While it’s clear that an agricultural revolution is inevitable, the recent spates of farmer protests around the world indicate that the journey will be fraught – including for investors. A way to mitigate this could be to look at the value provided to farmers in every agtech business they analyse, Al Suhail suggests.

“Farmers face tight economics so creating value for them is critical – you can have the greatest technology, but if the farmer is not adopting it, you’re not really making any change,” he says. “The technology itself needs to create a real return on investment for the farmer, which should be visible from the sale of the product, through to farmers continuing to use it and upgrade it.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2024 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

To Top
Share via
Copy link
Powered by Social Snap