Alastair Cooper, Head of Venture at Cibus Capital, explains why sustainable agriculture’s long-term growth story and low correlation to traditional assets continue to resonate with investors.
The EU Commission’s 2030 Climate Target Plan has raised the bloc’s ambition on reducing greenhouse gas (GHG) emissions to at least 55% below 1990 levels by 2030 by setting a more comprehensive and cost-effective path to achieving climate neutrality by 2050. A core component in achieving this goal is the sustainable transition of agriculture and food production.
At the heart of the European Green Deal is the EU’s Farm to Fork strategy, which aims to make food systems fair, healthy and environmentally friendly. To make this a reality, food systems – which account for over a third (37%) of global GHG emissions – must be completely overhauled.
“The present global food system is broken,” says Alastair Cooper, Head of Venture at Cibus Capital, which channels investment to solutions and innovations in sustainable food and agriculture. “We’ve got a supply-demand imbalance and resource limitations the likes of which we’ve never seen.”
The ongoing war in Ukraine, increased incidence of extreme weather and the Covid-19 pandemic exposed global food systems’ vulnerabilities, disrupting supply chains and driving up prices of food, fuel and fertiliser.
Due to the unprecedented overlap of crises, the World Food Programme’s annual operational requirements hit an all-time high of US$22.2 billion, with the organisation calling for coordinated action.
“Since [the pandemic], there’s been an enormous focus on food security and building resilience within our food value chains – technology is a big part of that solution.”
To fix the food system, he says, it’s vital that capital continues to flow into sustainable agriculture.
“It’s important to realise that food and agriculture is a sleepy backwater, when it comes to technology and digital integration – it’s way behind other industries in terms of technological disruption.”
A challenging environment
Up until last year, venture capital (VC) deal activity in sustainable agriculture had risen year-on-year. Global deal values in agtech and foodtech reached US$11.7 billion and US$41.4 billion respectively in 2021, according to data from PitchBook, a provider of data and research on private and public capital markets.
“Capital has continued to flow into sustainable agriculture,” says Cooper, admitting that last year was tough given the plethora of severe macro shocks which saw many of the big allocators of capital inundated with re-ups – diverting funds into existing portfolio investments – and general “firefighting”.
Despite the challenging macroeconomic environment, however, Cooper expects the strong focus on sustainable agriculture to drive VC deal activity and valuations higher in 2023.
“The past year has seen a dramatic reversal of public-private market valuations, with the private market correcting less severely,” he says, adding that valuations should bottom out this summer, with increased investor appetite for agtech and foodtech heightened by strong tailwinds.
Approximately 18 months ago, Cooper and the team at Cibus noted that that public market valuations within sustainable agriculture were way higher than in the private market.
“At the time, there was relatively few companies in the sustainable agriculture and food space trading on the public markets, so there was a real supply-demand imbalance. If mutual funds wanted exposure, there weren’t many opportunities.”
As such, investors were drawn to companies like Beyond Meat, Oatly and other big names, predominantly in the B2C market, he says. Such companies, says Cooper, were trading at inflated valuations as a result of the limited public market opportunities.
“The areas where we’ve seen the most pullback would be in the B2C space,” says Cooper, adding that some of the alternative meat and dairy companies are struggling to maintain momentum.
An inability to keep up the pace has led to lack of confidence, with Brazilian meat major JBS pulling out of Planterra Foods in the US just two years after the plant-based producer launched its Ozo alternative protein brand.
In September 2021, Oatly was trading at 20x trailing twelve months (TTM) revenue. Since then, the Swedish producer of alternative dairy products has seen its share price slump more than 88%.
Private markets valuations, therefore, were looking good by comparison, says Cooper, driving deal activity and capital inflows to sustainable VC funds.
But the grass wasn’t always so green.
Winds of change
Prior to 2014, there was no risk capital available for agrifood tech, says Cooper. The picture has changed significantly in recent years with the space becoming one of the fastest growing areas of venture investing, driven by regulatory pressures, changing consumer habits and a recognition from corporates that responsible land management and farming is vital to achieving net zero.
“In the last 15 years, the corporate world of big agriculture and big food have consolidated significantly – it’s a pretty narrow world,” he says, noting that, as a result, research and development (R&D) and innovation at the corporate level has contracted significantly over the past decade.
“Nowadays, the majority of R&D and innovation is taking place in the venture world rather than the corporate world,” he says. “Big agriculture and big food have become active venture investors […] and are then buying these companies when they reach scale.”
In terms of investment opportunities, a key thematic that investors are focused on is robotics and smart field equipment, which is expected to receive record funding in 2023, according to PitchBook.
Inflationary pressures and the acute rise in all prices within the food value chain is highlighting the robotics opportunity, says Cooper. Another is its ability to address labour risk with machines required to pick and pack to mitigate young people pouring into cities and professional services. The third is the replacement of heavy, gas-guzzling machinery in favour of smaller, lightweight electric robots, he says.
All pesticides, insecticides, and fungicides are all derived from fossil fuels and come with very negative externalities. This means artificial inputs is another thematic that nearly every investor is talking about, says Cooper, with the level of inflation across traditional fertilisers, pesticides and other inputs to traditional farming making biological alternatives and control mechanisms a big focus.
Speaking of inorganic input reduction, every conventional farm uses artificial nitrogen to manage crop fertility, particularly in intensively managed agricultural and forested production systems. Artificial nitrogen is produced by the Haber-Bosch process, which is incredibly energy intensive.
“Only around 30% of artificial nitrogen applied to crops is ever incorporated into the biomass of a crop plant,” says Cooper. “The remaining balance ends up in the environment, either in the water or in the air as nitrous oxide which is incredibly damaging – we’ve got to stop that.”
The UN Environment Programme (UNEP) called nitrogen pollution one of the biggest issues facing humanity, with officials from around the world gathering on 17 January to facilitate the implementation of two sustainable nitrogen management resolutions.
“[Sustainable agriculture] offers a relatively unprecedented opportunity to invest for impact correlated with strong investment returns,” says Cooper.
Historically, many investors have approached impact and ESG investing with a degree of cynicism, he says, because they always thought it came with a haircut on returns.
“In our mind, this is an opportunity where the two are absolutely correlated,” he says. “Sustainable agriculture has a systemic long-term growth story, with a low correlation to traditional assets and it has strong tail winds – all of this is resonating with institutional investors.”
