The New Year will naturally bring numerous developments and talking points for investors and asset managers to sink their teeth into.
Agri Investor has looked at four segments of the agricultural investments space which, in some form or other, will impact the vast majority of stakeholders in the industry.
California’s Sustainable Groundwater Management Act 2014 is one of the reasons water will be a key topic at the start of 2020 and beyond.
The SGMA seeks to provide a framework for long-term sustainable groundwater management and requires municipalities to regulate groundwater use by January 2022.
January 31, 2020 is a milestone deadline in the development of the framework – by this date, municipalities in critically overdrafted basins must begin implementation of their groundwater sustainability plans.
As a major supplier of fresh produce to the domestic US market and a critical supplier of almonds to the global market (the state is thought to account for 80-90 percent of international almond production), the impact and implementation of the SGMA should be closely watched by investors.
CoBank said in November that weather conditions and the impact of SGMA could determine whether US almond producers face oversupply or undersupply in the coming decade.
The country’s ongoing drought, the Australian Competition and Consumer Commission’s inquiry into the Murray-Darling Basin water markets, and public distrust towards investors in water assets mean stakeholders must monitor this asset class closely.
Following a meeting of the Murray-Darling Basin Ministerial Council in December, the state government of Victoria said Basin states had “acknowledged concerns around foreign ownership and monopoly behavior in the water markets, and agreed to ask the [ACCC] to look at whether changes to trading rules are required and consider registration of brokers across state borders.”
The headline risk now attached to the asset may well have persuaded LGIAsuper to sell a portfolio of agricultural assets and water rights to Pitt Capital Partners for approximately A$100 million ($68.7 million; €61.8 million). Speaking to Agri Investor before it had been established that LGIAsuper was the seller in the transaction, which closed on 31 July, the superannuation fund’s chief investment officer Troy Rieck said: “Increasing political scrutiny on water rights makes it a tougher investment strategy going forward.”
Plant-based protein products have received a lot of attention over the past 18 months, as the consumer excitement surrounding ‘alternative meats’ has remained strong.
Early-stage investors in Impossible Foods and Beyond Meat will understandably be pleased with their fortune in having caught lightning in a bottle. However, the insatiable global demand for animal and alternative proteins suggests more investors stand a chance of doing the same.
For a start, cultured meat – otherwise known as lab grown meat – is yet to enter the consumer market in a similarly meaningful way to that enjoyed by plant-based products. The success of the Impossible Burger has propelled these alternative plant proteins.
Israel-based Future Meat is one of several companies pioneering in the cultured meat space, and has hopes of entering the consumer market towards the end of 2020.
Another area ripe of investment in the protein world is aquaculture.
Setting out his firm’s rationale for taking an equity stake in a new aquaculture investment firm, Stafford Capital Partners’ head of agriculture and food Jos Boeren told Agri Investor: “The total investable universe of private aquaculture assets is more than $500 billion in size – our estimate is that there is less than $2 billion of institutional capital invested today.
“We therefore want to provide a point of entry for institutional capital, which is sorely needed to fund growth and inject operational best practice.”
Another major development impacting demand is African swine fever and the devastating impact it has had on China’s pig herd.
Rabobank data suggest the country has lost more than half its herd. Having produced 420 million pigs in 2018, the bank’s forecasts indicate a figure closer 190 million is more likely for 2019.
As a result, Rabobank predicts the effects of African swine fever could be felt in China for another three to five years. This represents an opportunity for any China-based and international producers capable of filling the supply gap.
Some of the standout and widely cited statistics from this year concerning the global food production system’s carbon emissions came from the UN’s Intergovernmental Panel on Climate Change.
In its September report, Climate Change and Land, the IPCC estimated that 23 percent of all human-made greenhouse gas emissions derive from agriculture, forestry and “other land use.”
“If emissions associated with pre- and post-production activities in the global food system are included, the emissions are estimated to be 21-37 percent of total net emissions,” the report said. The IPCC’s conclusion was clear: the current global food production systems are unsustainable and must be modernized.
As investors grow more comfortable with ag as an asset class, the alarmingly poor sustainability credentials inherent in parts of the sector will no doubt play an increasingly prominent role in influencing where capital is placed and how.
Greencoat’s £120 million ($147 million; €134 million) investment into a greenhouse that uses sustainable energy is a good example of the direction of travel many others could soon take.
The Coller FAIRR Protein Producer Index was another report that homed in on food production’s carbon emissions. It revealed the extent to which the industry has flown under the radar while energy generation has received the brunt of scrutiny, criticism and, ultimately, innovation.
Of the world’s 60 largest publicly listed companies that produce meat, fish and dairy, 43 (71 percent) are ranked as “high risk” by the FAIRR Index. This means they “do not measure all greenhouse gas emissions and do not have meaningful targets to reduce them.”
Jeremy Coller, founder of FAIRR and chief investment officer at Coller Capital, aptly captured how animal protein producers could be caught in the crosshairs of the climate debate.
“The Paris agreement is impossible to achieve without tackling factory farm emissions,” Coller said in a statement. “Coal is a stranded asset and cows are the new coal.”
Agtech and biotechnology
From reduced carbon emissions and water use through to enhanced farmland efficiency and new plant-based products, agtech and new biological techniques are expected to play a significant role in modernizing food production systems.
In the IPCC’s conclusions to its Climate Change and Land report, it said action required to improve sustainability included the need to “accelerate knowledge transfer, enhance technology transfer and deployment, and address gaps in implementation and upscaling.”
ADM Capital’s Cibus Fund has signaled its intent to invest in and establish a cloud-based veterinary best-practice platform, aimed at bringing the best livestock production methods to a wider audience. Ag investment veteran Paine Schwartz Partners has also created an animal nutrition platform through investments in Warburton Technology and MS Biotech.
The two investments show how food production systems can be modernized and still complement existing and future portfolio companies. ADM Capital chief operating officer Jeremy Alun-Jones said the Cibus Fund originally wanted to invest in a meat or alternative meat business but found itself priced out.
Clearly, investing in a technology that supports a booming market segment remains a sure way to gain exposure.
Elsewhere, the $4.2 billion valuation of biotechnology company Ginkgo Bioworks, following its $290 million Series E in September, indicates there is a lot of anticipation for what this developing area can achieve.
Ginkgo creates custom organisms that can be used across several industries, including food production. The company has its own plant-based protein producer – Motif FoodWorks – which was spun out with a $90 million Series A in February.
Ginkgo also raised $350 million for its Fervent Fund in October. The vehicle will exclusively invest in biotechnology companies spun out from its platform, some of which are expected to target food production.
The size of the fund and the concentrated area into which it will invest should at least convince investors to take some time to get to know this space.
Crop protection products are another area that biotechnology is entering. Several established and start-up pesticide businesses are developing pheromone-based repellents, which get around the need to use harmful chemicals.
One such company is California-headquartered Provivi, which in October raised $85 million in a Series C led by Pontifax Global Food and Agriculture Fund.