‘Agriculture cannot continue to be the odd one out’

We caught up with World Bank risk expert Marc Sadler to understand how close the asset class is to an institutional investment boom.

Agriculture is a centuries-old business. Yet for most of that period, it’s not been very much invested. The reason? “Profitability was low and risk very high. It was easy for farmers to be below the red line,” says Marc Sadler, advisor on agriculture risk and markets at the World Bank.

In 2007-08, however, food prices started to go up, and the “value proposition” changed. Costs have since risen as well, but profitability remains attractive. As a result, among the institutional community, “the agriculture thinking is starting to be done,” Sadler observes.

In his eyes, agriculture as an asset class has a set of unique traits. There are very few sectors, he notes, that are growing and where demand is a given. At the same time, low returns in capital markets have made alternative investments more compelling. That includes agriculture. “Interest is definitely increasing,” Sadler says. “We see major LPs coming into the space.”

‘Ag is going to mature much more rapidly than others’

The trouble, he reckons, is that agriculture remains a very complicated business. “It’s like playing three-dimensional chess. There’s a whole slew of variables interacting with each other, some correlated and others non-correlated between them.”

That leaves investors with a set of questions: how to source investable assets – and how do you aggregate them to reach sufficient scale?

He is confident that the asset class will soon become more structured. Enough sectors have gone through this process – first funds being raised, LPs gaining confidence, follow-on funds getting bigger – for the industry to benefit from the accumulated experience. “Ag is going to mature much more rapidly than others. It’s not to do with agri per se. It’s because markets now know how to construct themselves,” Sadler says.

While not worried about volatile prices – “Ag is volatile but in the long term, it isn’t” – he admits that the market is still being perceived as risky. “This will drive quite a lot of financial innovation,” he argues.

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Some of it is likely to come from the World Bank. In recent years, the organization has adopted the “cascade” approach – where it starts by looking at whether funding bottlenecks can be solved through policy or regulation changes; if that fails, it then moves on to consider de-risking projects via credit-enhancement mechanisms. If that doesn’t bear fruit either, finally, it starts looking at what used to be the default option – injecting public money.

There is one area in which he thinks agri is clearly lagging: climate change. “Agriculture cannot continue to be the odd one out,” he says, comparing it with other asset classes such as infrastructure and real estate. Here, again, he argues the default option needs to be changed, so that every project should seek to be climate-resilient in the first place.

“The huge opportunity for the private sector and investors is to be at the forefront of this curve. And it can bring good returns,” he concludes.