I recently came across an interesting headline in the Wall Street Journal about an AgTech management firm. They had just raised money to invest in commercially established businesses with technologies that improve the productivity, sustainability and efficiency of the food and agriculture supply chain. So of course, I explored it further. I went to the company’s website and sure enough, they had a drone flying over a farm (the photo below is not from their website).
The company’s press release talked about how they invest broadly across agriculture technology including Life Sciences, Information Technology and Precision Farming, among other areas. The company’s capital raise was oversubscribed and was able to raise almost 3X more money than they had raised for their first fund. One of the co-founders said, “Sophisticated investors are increasingly discovering agriculture and food technology sector as a means to diversify their alternative strategies and as an opportunity to make a significant impact on sustainability”. He went on to say, “Food demand is expected to double in the next three decades, while production is constrained by diminishing supplies of land, water and labour, coupled with increasing regulation”. (Link to Article)
The company’s first fund monetized two investments from that fund. One is a next generation robotics and automation technology for crop cultivation and the other is a disruptive gene editing technology. The second fund is investing in a biological crop protection technology that disrupts the mating patterns of invasive crop insects.
Before I go any further, let me be clear: nobody is happier than we are for the success of funds like this. These innovations have resulted in higher productivity and efficiencies. Below is the link to a video we recently shot that shows exactly how we are winning because of these technology gains and improvements in genetics.
This sounds like a successful group who has invested in technology that is making their investors wealthier. The thing about technology like this is that it is always being improved upon, so this group is wise to develop it and sell it. But what most investors probably do not realize is that all these improvements in technology help make farmland more productive and more efficient. As funds like these raise more money, the technology continues to improve, and the gains continue to accrue…to farm owners. While investors in these funds win “once” when the technology is sold, they must then take their money and find the next technology or innovation to invest in. As the owners of farmland, every one of these wins for technology funds or other ag-related investments means more gains in productivity and efficiency each year; and those gains are cumulative. It means we can feed more people with less land, which is vital since we lose thousands of acres of arable land each year. It also means when you own some of the best farmland in the world with plenty of access to water and a long growing season, that land will continue to become more valuable as the gains accrue and compound.
Shortly after reading the story about this fund, I came across a McKinsey study titled, “Agriculture’s connected future: How technology can yield new growth”. The study pointed out how radically the agriculture industry has transformed over the past 50 years through advances in machinery, seeds, irrigation, and fertilizers that have combined to help increase yields. It then goes on to talk about another revolution that is just beginning, at the heart of which lie data and connectivity. The study suggests artificial intelligence, analytics, connected sensors and other emerging technologies could further increase yields, improve efficiency of water and other inputs, and build sustainability and resilience across crop cultivation. They estimate that with proper connectivity in agriculture, the industry could tack on $500B in additional value to the global GDP by 2030. They argue the need for agriculture to produce more with demand for food growing as the world’s population is on track to reach 9.7 billion by 2050. That must happen in the face of a water supply crisis. They estimate that by 2030, the water supply will fall 40% short of meeting global water needs. They also point out that one-quarter of arable land is degraded and needs significant restoration before it can again sustain crops at scale.
I have included the link to the McKinsey study and the exhibit above from the report, to make a few points that investors should consider. The study mentions the looming water supply crisis, and for many farming regions, it is already becoming an issue. At AGinvest we are focused on southwestern Ontario for a reason. We are surrounded by the largest bodies of fresh water in the world. We are also committed to maintaining the integrity of the farmland and work closely with farmers to ensure its long-term viability, productivity, and value.
Check out the link showing just some of what we do…
So, the next time you’re thinking of adding something sexy like agtech, that could “win big” for your portfolio, once in a while, you might want to add a less glamorous investment like farmland. Farmland wins every time a new discovery increases productivity or improves the efficiency of farming and compounds those winnings every year. As the McKinsey study points out, the gains that have accrued to the agriculture industry are far from done. And while many regions of the world will be challenged by lack of water, it is our greatest strength in southwestern Ontario. Sometimes the boring compounding return portion of the portfolio is the part you are most grateful for, even if it is not the one with the sexy headlines.
Written by AGinvest Senior Vice President of Business Development, Anthony Faiella. To reach Anthony please email Anthony.Faiella@AGinvestCanada.com
This information does not constitute financial or other professional advice and is general in nature. It does not take into account your specific circumstances and should not be acted on without full understanding of your current situation and future goals and objectives by a fully qualified financial advisor.