Photo Credit: iStock
Photo Credit: iStock
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5/25/2022

Impact Investing: Agricultural Dynamics

Agriculture is one of the largest industries in the world. Not only does it generate revenues of more than $1.3 trillion, but over a billion people are employed in the sector and over 50% of the earth's habitable land is occupied by pasture and cropland.

In modern history, humanity has tried to keep pace with the food demand of an exponentially increasing population by mass-producing food through industrialised agriculture. While the mass farming practices developed and employed thus far have been able to partially resolve food security issues, the methods that are now being used to grow crops and livestock are, for the most part, unsustainable.

By adversely impacting the most important factors to cultivation (climatic conditions, soil, nutrients, and water), modern farming techniques are degrading the natural resources on which the future cultivation of food depends. There is therefore only so long that industrialised agriculture can continue at this rate.

HOW BAD IS AGRICULTURE FOR THE PLANET?

Agricultural activities rank highly amongst some of the leading sources of global pollution. Genetically modified organisms, mechanised tillage and many other modern practices can result in negative biological and ecological effects on the surrounding downstream natural resources. For example, the disposal of agricultural waste into local water bodies creates an agricultural pollution cycle, in that the same polluted water is used as irrigation water and is likely contaminated with small traces of lead, mercury, cadmium, and arsenic.

Due to the vast scale of the industry, agriculture presents a myriad of issues which make it an even greater challenge for sustainable agricultural practices to be integrated into mainstream farming. There is a growing scientific consensus that the current agricultural and food production system might not be sufficient to prevent food insecurity in the near future due to its effects on environmental change. The climate change to which farming contributes will affect the price and availability of food through increased frequency of natural disasters such as floods, cyclones, and droughts. Therefore, fostering a more sustainable way farming will be one of the arsenals that humankind will need to use to preserve earth's natural resources.

ARE THINGS CHANGING IN AGRICULTURE?

In response to growing concern around the future of food production and its impact on the planet, a new narrative around food production has emerged in the 21st century as sustainable practices are being embraced. The agriculture community is forging a new path, moving towards a global food production system that meets environmental, social, and governance (ESG) objectives.

Sustainable agriculture incorporates both organic and biodynamic farming techniques into plant and animal production. Some noteworthy sustainable practices include:

  • Agroforestry: The intentional integration of trees and shrubs into crop and animal farming systems.
  • Polyculture: The practice of growing more than one crop species in the same space.
  • Biopest Management: The reduction of pest populations by introducing natural enemies.
  • Cover Crops: A cover crop is a plant that is used primarily to slow erosion, improve soil health and/or enhance water availability.
  • Permaculture: The development of agricultural ecosystems intended to be sustainable and self-sufficient.

The concept of Agroecology is defined as ‘the application of ecological principles to agricultural systems and practices’ and has been claimed to be the best sustainable agricultural practice. It looks at how the shared synergies between plants, animals, humanity and the environment can benefit agricultural practices. Its long-term goal is to reconcile agriculture and society with natural processes for the common benefit of nature and livelihoods.

Figure 1: Source: http://allianceforagroecology.org/agroecology-1

IS SUSTAINABLE AGRICULTURE A FAD?

The widespread adoption of sustainable agriculture and the consumption of its products have been labelled as a fad or a hippy trend that is highly likely to be short-lived. The standout setback for middle-income countries is the cost implications of organic, natural, or sustainably farmed products. Organic produce generally comes at a higher price point compared with the normal or industrialised products. When one enters a grocery store, sustainable agriproducts tend to be tucked away in a corner and are relatively expensive. Wines, cheese, fruit, and vegetables are typical in the sustainably sourced aisle and as a result, the market for sustainable products is narrow.

SUSTAINABLE AGRICULTURE AS AN INVESTMENT PROSPECT

Interestingly, sustainable agriculture has been tipped to potentially be the next ripe investment opportunity not only for venture capitalists but also for institutional investors. The investment community has already latched on to ESG focused investment themes of which sustainable agriculture serves as a strong example. There are several developing areas within this theme that investors could look to for inspiration.

FOOD WASTE

Food waste accounts for over $1 trillion in economic loss and start-ups in this area could be a valuable destination for patient capital. Food waste is not only an environmental problem but economic one too, as foodstuffs, as well as labour, natural resources and money are literally thrown into the bin. Potential innovations present an opportunity in a waste market that was valued at $47 billion in 2019. At every stage of the supply chain, food goes to waste and this was worsened by lockdowns, which dealt a blow to global supply chains.

From small start-ups to established institutions, there are companies across the globe which are taking on the task of finding food waste solutions. So far, there have been some innovative approaches, such as upcycling, which finds uses for unconsumed food, product life and shelf extension technologies, allowing perishables to last longer and better aligning supply and demand (thus reducing food waste).

Photo Credit: iStock

ELECTRIFICATION

In the quest to limit greenhouse emissions, the electrification of farming mechanisms presents an agriculture investment opportunity. In the current electric vehicle market boom, pioneer automakers such as Tesla and Rivian have made fortunes for their investors. The farming EV market is yet to fully mature, with lesser-known companies such as Alke manufacturing electric utility vehicles for use in greenhouses, vineyards, farms and nurseries. Diesel tractors and combine harvesters are slowly being substituted by autonomous electric machines too. Technological development in the electric vehicle market is very likely to increase and small compact electric machinery could be particularly helpful in developing regions. Global farming powerhouses such as John Deere and Kubota have already begun introducing concept models, with Solectrac and Rigitrac offering small horsepower farm utility vehicles.

MEAT ALTERNATIVES

Did you know that one cow can emit between 250 and 500 litres of methane a day? Cutting down meat consumption through meat alternatives can reduce the greenhouse gasses released by livestock. Plant based meats, cultured/synthetic meats, aquaculture, and the supporting ecosystem are all areas for potential investment. Beyond Meat, Impossible Foods and Quorn Foods are on an upward trajectory and they are broadening their distribution channels to reach the increase in consumers looking for meat alternatives. The plant-based meat market is expected to grow to $11.9 billion in 2025 from the last measure of $6 billion in 2020.

NON-TOXIC SOLUTIONS

Companies that are championing novel technologies and new techniques to make agriculture more sustainable have set their eyes on non-toxic pesticides and ecologically friendly fertilizers. Although chemical fertilizers double crop outputs, thereby increasing the headcount that farmers can feed, they have a devastating effect on the environment. Nitrogen and phosphorus are very effective in nourishing cereals such as maize, wheat and rice, which have become staples in our daily diets. These synthetic chemicals release toxins that escape from the fields into ground water and river systems thereby harming land and aquatic biodiversity.

WHY SUSTAINABLE AGRICULTURE?

Investing in sustainable agriculture could strike the right balance for investors by potentially achieving returns whilst promoting environmental stewardship. As more investors turn their attention to ESG and the pressure on food production increases, being invested in sustainable agriculture could potentially result in increased return on investment.

By 2021 Money Maze Podcast Brand Ambassador, Tatenda Wellington Chikombero. Tatenda is a Graduate Intern at the Capital International Group, a financial services company headquartered in the Isle of Man.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.

Capital International Limited, Capital International Bank Limited, Capital Treasury Services Limited and Capital Financial Markets Limited are all licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. For further information visit capital-iom.com.


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