Instar Asset Management on why high-tech matters in agri investment

This article is sponsored by Instar Asset Management

Instar invests across a range of sectors. How does agricultural infrastructure fit into your overall investment strategy?

Morty White: We define agricultural infrastructure as essential businesses that are critical to economic growth and development, community resilience and sustainable food production. This sector fits into our broader interest in the environmental space, including businesses addressing food safety and security, logistics and storage of agricultural commodities, waste recycling and disposal, and technology-based environmental services. As concerns around climate change and food security and supply intensify, we’re seeing an increase in opportunities in this space.

We seek businesses promoting sustainable use of arable land and building materials, and responsibly deriving their products from natural resources. Significant investment is needed to support and grow companies, products and services that benefit our food supply chain and reduce food insecurity in Canada, the United States and around the world. There are good returns to be made by prioritizing sustainability.

What makes agricultural infrastructure an attractive asset class of the future?

MW: With rapid population growth and climate change impacting our food security and supply, the agricultural sector will require significant investment over the coming decades by governments, private companies and other players in the sector to build resilience.

Steve Simpson: Food insecurity is a devastating problem globally, and the war in Ukraine has highlighted the importance of this issue. According to the World Economic Forum, we would have to clear most of the world’s forests to feed 10 billion people by 2050 at the current level of food production efficiency.

The global agricultural industry has experienced significant under-investment over the past few decades, with a decrease in public spending on agriculture globally since 2000, according to the United Nations’ Food and Agriculture Organization. Trillions of dollars are needed annually in investments to bring about the necessary changes to reduce poverty and hunger and improve sustainability.

We need to be thinking about how we can innovate and modernize agricultural systems to mitigate scarcity and better manage resources. With growing populations, increasing urbanization and intensifying climate change, agricultural infrastructure offers investors the potential for attractive returns and the opportunity to make a positive impact.

What is the role of technology in addressing some of these challenges?

MW: People don’t typically associate agriculture with high-tech, but technology is increasingly driving meaningful change in the sector. Windmill Farms is a perfect example of how state-of-the-art technology can be harnessed to revolutionize the way food is produced and processed. Its facilities are some of the most technologically advanced in North America, delivering twice the yield and twice the profit margin than the average mushroom producer elsewhere in the continent.

Controlled-environment agriculture blends specialized science with the latest technology to optimize growing and deliver a consistent level of quality and quantity of product.

Technology is changing the agricultural landscape. Drones and radar technologies allow farmers to monitor crop and livestock conditions. Sophisticated irrigation systems help regulate water supply to produce more for less. Artificial intelligence technology and advanced data systems can be used for early detection of disease and poor nutrition of farms. This is the future of agriculture.

We talked briefly about Windmill Farms. What sets the company apart in North America and what are your future plans for the business?

SS: We’ve been in the Windmill Farms investment for about nine months now and we’re just as excited about the company and where we’re going to take it as we were at the very beginning.

As a premier controlled-environment agricultural producer of mushrooms, there are a couple of things that set Windmill Farms apart. As we mentioned, its innovative use of modern, Dutch-style technology across its facilities produce consistent yields of premium-quality, organic mushrooms to customers year-round. Over the last decade, Windmill Farms has brought a lot of innovation to the agriculture industry. We’re using fewer resources per pound of mushrooms that we grow to support sustainable food supply year-round, transforming how mushrooms are grown in North America.

Windmill Farms’ facilities are vertically integrated, combining production, processing, packing and distribution capabilities. With the only fully enclosed composting facility in North America, the company produces its own substrate compost using waste products for growing mediums and production in its closed-loop system. Windmill Farms’ integrated operations allow it to generate industry-leading production yields, control the value chain and ensure margin capture.

I suppose one thing people might ask is: why mushrooms? Overall, the mushroom industry presents steady and consistent historical pricing, as well as demand growth through economic cycles. Right now, there are also some interesting tailwinds to the market around the potential health benefits of mushrooms.

Our vision of Windmill Farms is to grow the company from a regional market leader into one of the largest mushroom growing platforms in North America while improving its market-leading profitability and production yields.

We took our first step towards this goal recently when Windmill Farms purchased a farm in Sunnyside, Washington. This is a fully integrated facility using the same Dutch-style technology as Windmill Farms. Besides creating a coast-to-coast presence, this latest acquisition also increases annual production capacity by between 40 to 50 percent. This is an exciting opportunity for us and we’re thrilled to be working with the local community to enhance the Sunnyside facility.

You’re clearly very fond of the Windmill Farms investment. Is this one of a kind or have you made similar investments?

SS: About two years ago, we purchased PRT Growing Services, North America’s largest producer of forest seedlings. Though this controlled-environment agriculture business doesn’t sit within the food value chain, it exhibits many of the same characteristics as Windmill Farms.

PRT provides seedlings to government, local municipalities and the forestry industry for either replanting trees that have been harvested or for broader reforestation initiatives. Similar to Windmill Farms, the company’s operations are fully vertically integrated, from sowing the seeds through to growing the seedlings and selling the products to customers.

Again, these are characteristics that we seek in our investments: industry-leading businesses with significant barriers to entry and the ability to set prices for customers. Windmill Farms and PRT prioritize people and innovation, employing modern technologies that support sustainable agricultural production to benefit our communities and the environment for decades to come. These are the kinds of investments that will help drive growth and profit in the future.

What does Instar look for when exploring new agricultural investment opportunities?

SS: We invest in niche, middle market businesses in North America. We look for businesses that are dominant in their industries and deliver an essential service that is critical for customers and communities. We seek businesses with an enterprise value ranging from $50 million to $500 million with sustainable downside protection and the ability to scale up and grow in value and size. As leaders in what they do, our portfolio companies benefit from significant barriers to entry and feature strong margins and pricing power throughout the economic cycle. We partner with management teams that have ambitious five-year business plans and need capital or specific expertise to help them get there.

Within the agricultural space, we are focused on a specific segment of the value chain: businesses with a physical asset underpinning and stable cashflow that support the cultivation of food, the movement of agricultural commodities to market, the management of water and other natural resources, and the management of waste.