Farming and machine learning are combing to feed a hungry world. The agtech revolution continues but are investors seeing decent returns?
Vikas Pershad, portfolio manager, Asia Pacific equities at M&G, believes technology and innovation in farming is essential to meet growing demand, contribute to food sustainability and reduce waste.
He points out that more than one billion tonnes of food perishes annually. He blames inefficiencies at the distribution stage, poor warehousing, insufficient cold chain facilities and poor meal planning by consumers.
Pershad believes the arrival of blockchain as a game changer. “Digital ledgers will increase transparency of food origins, quality and safety, generating feedback that will cycle back to farmers on what – and how much – to produce”.
He adds that paired with improved logistics networks and blockchain technology, fintech should result in streamlined resource management, lower prices for consumers and greater incomes for farmers.
Investment opportunities
Ulrik Fugmann, co-manager of the BNP Paribas Ecosystem Restoration fund, insists agtech is an area of growing importance.
He points to investment opportunities including vertical and indoor farming operations, companies using satellite imagery for precision farming and finding ways to encourage no-till farming to prevent the degradation of soil quality. This weakening of soil quality ultimately leads to the desertification of agricultural lands, the loss of microorganisms and interferes with the greatest carbon sink on Earth – soil.
“Given population growth and with agricultural practices contributing to around 20% of global GHG emissions, as well as leading to toxification of our ocean and water streams, this (agtech) is a key area of focus and opportunity for investors.”
As to valuations and earnings potential Fugmann insists the agtech theme is still in its infancy but is showing tremendous growth rates given the opportunity and potential for significant yield enhancement whilst using significantly less water and sustainable farming practices.
“We see a number of companies that show vastly superior economics for growing agricultural produce whilst using fractions of the inputs that the sector traditionally needs.
He adds: “Whilst a lot of the focus within climate change investing has been on companies reducing carbon emissions, we see significant growth in investor appetite for companies focused on restoring and regenerating our natural capital, and within this, our lands and oceans”.
Agtech proving its credentials
Andros Florides, senior portfolio manager at KBI Global Investors, believes agtech is currently split between innovative companies that are established and already profitable; and those early-stage ideas that are conceptually highly interesting but capital intensive and still to prove their worth.
“There are established names in the precision agriculture space. For instance, high tech GPS that allows combine harvesters and tractors to be operated with a hugely specific degree of precision – down to centimetres. This means land is not damaged when machinery is in the field and precision planting means there is a significant improvement in yields.”
Controlled environment agriculture is not short of innovative ideas and companies with huge potential but it is also an area where the profit streams are not clearly evident yet, according to Florides.
He refers to cargo containers being repurposed as greenhouses and unused warehouses in cities such as New York being used to grow produce all year round. This not only reduces travelling times – for instance transporting fruit and vegetables from Florida – but it also lessens carbon emissions.
APP Harvest, a Kentucky-based controlled environment agriculture company, is a company Florides namechecks as a business with huge growth ambition but which is currently requiring large sums of capital to expand at the speed it requires.
APP Harvest, recorded a $166m loss in 2021 but is nevertheless set to open three mega-greenhouse farms this year.
“These indoor farms are very sophisticated. They are able to grow fruit and vegetables all-year-round using LED lighting and also require about 90% less water – they use rain water rather than drawing from local reservoirs.”
Florides adds: “APPH is still an early-stage business and has had a few hiccups – it was caught up in the recent Spacs hype. Its share price was hit hard but it has learnt from its mistakes. If you ask me if this is a scalable tech business I would definitely say yes.”
War and natural disasters
Whether it is floods, droughts or conflicts as we are currently seeing in Ukraine (known as the European breadbasket, it is one of biggest wheat producers in the world), the challenge is always there to not just broaden where food is produced; but improve storage and thereby shelf-life.
“The war in Ukraine and extreme weather events stress the need for infrastructure to move crops from one area of the world to another. Better storage of food is essential. In the US there is a large storage of crops – which are then brought into the market at the best time with little wastage.
“For instance, in the US the age of an apple from tree to shop is about nine months (using controlled atmosphere storage). But in Latin America there is a huge lack of storage on farms”.
Florides concludes: “Storage is certainly a good area to invest in right now”.
