INVESTMENT
There are many investment opportunities in agriculture, but the complexities of the food supply chain create risks, as Sarah Murray reports
With rising populations creating more mouths to feed, newly affluent citizens in developing countries hungry for meat and other resource-intensive foods, growing global water stress and changes in climate, agricultural supply chains are facing unprecedented pressure.
And while this creates attractive opportunities for investors, the question is how they should deploy their money to shore up the global food supply in a way that minimises investment risk and is sustainable - both financially and for the planet.
In some ways, the pressures bearing down on food supply bring good news to both investors and farmers. The high farm commodity prices seen in recent years have the potential to increase farmers' incomes and stimulate investment. Meanwhile, the need to develop everything from water efficiency technologies to drought-resistant crop seeds creates attractive investment opportunities.
However, the complexity of the food supply chain - with players ranging from vast global agri-businesses to smallholder farmers - also holds risks for investors. Commodity price increases, for example, can be offset by everything from the increasing cost of inputs, feed stocks and energy, to exchange-rate appreciation.
When it comes to agricultural land, investors must also tread carefully. Given the widening gap between the demand and the supply for agricultural products, and increasing constraints on the land available for agriculture, farmland is being seen as an increasingly attractive investment asset.
However, it can be a risky investment in countries where tenure is uncertain, governance is poor and companies need to put in large sums of money to rehabilitate land to make it productive, says Michael Landymore, investment manager of the recently launched food and agriculture fund at Impax Asset Management. "And in the meantime, if it's nationalised or expropriated, you're scuppered."
Land ownership is also an increasingly sensitive issue, with investors at risk of being accused of "land grabbing". In research published in February, Oxfam accused investors of targeting the most poorly governed countries to buy land.
The Oxfam research - which cross referenced information from a database of reported agricultural land deals with World Bank governance indicators - found that more than three quarters of the 56 countries where land deals were agreed, between 2000 and 2011, scored below average on four key governance indicators.
"The land-grab question is getting more and more attention in the discourse," says Ben Caldecott, head of policy at Climate Change Capital, an investment management and advisory group specialising in low-carbon economy opportunities. "Investment has to be made transparently and in a way that helps build support for local communities."
Mr Caldecott is currently working with the Smith School at Oxford University on a new research programme looking at investments in assets that risk becoming "stranded" - devalued or written off - as a result of changes in technology and regulation.
Climate risk and the clean energy and green growth agendas have increased the risks for environmentally unsustainable assets. The programme's first project is focusing on global agricultural supply chains, looking at methods of transportation and production.
Yet despite the risks, plenty of options exist for investors to put money into the agricultural supply chain in a way that generates returns, shores up long-term global food security and supports environmentally sustainable farm productivity. "This is a massive theme for investors that is also integral to solving environmental challenges," says Mr Caldecott.
Water conservation technologies are one area in which capital is needed. Agriculture accounts for more than 70 per cent of global water consumption, a figure that rises to more than 90 per cent in developing countries, according to the World Economic Forum.
Meat is a particularly thirsty agricultural product; a single beef steak takes an astonishing 7,000 litres of water to produce, according to the United Nations Food and Agriculture Organization (FAO). Countries that export beef are, therefore, effectively exporting their water supply, as is the case with many agricultural products.
Moreover, agriculture is not only responsible for consuming large amounts of water. When the chemicals in fertilisers and pesticides used in industrial cultivation run off into the surrounding soil, they pollute groundwater, lakes and rivers.
"Sustainable use of water resources is going to be important as we see demand rising dramatically," says Mr Caldecott. "So investment opportunities exist in that space to drive efficient water use."
Measures to address climate change - both mitigation and adaptation - are also areas where private-sector capital will be required, particularly as temperatures start to rise.
"The investments needed to cope with climate change through 2050 seem possible to accomplish, at least under conditions of relatively free international trade," according to a 2010 report by the International Food Policy Research Institute. "After 2050, however, the challenge of ever-increasing temperatures becomes potentially much greater."
Constraints on agricultural land, combined with climate change and pressures on water supplies, mean the development of new drought and flood-resistant crops will play a critical role in increasing farm productivity.
"If you accept that we're short of land and we need an increase in yield through more efficient seeds or seeds that are more efficient in their use of water and fertiliser, there's a whole range of big companies through which investors can get involved," says Mr Landymore, who points to the work of companies such as BASF, Syngenta and Monsanto in both genetic modification and traditional crop-development methods.
Plenty of room for efficiency gains also exists in the livestock sector. Mr Landymore cites companies, such as the UK's Genus, which is applying biotechnology to developing new animal breeds that have improved meat-to-fat ratios and can process feed or convert water more efficiently.
As well as producing more with less, funding is needed to cut agricultural waste through investments in infrastructure, such as grain storage facilities, cool-chain technologies, roads, railways and port facilities. In Brazil, for example, América Latina Logistica is building railways connecting the interior to the country's ports.
"Post-harvest losses, particularly in the developing world, are a huge issue," says Mark Driscoll, head of corporate stewardship, food and water, at WWF. "So there's a real opportunity to add value to the supply chain."
Of course, as well as the activities of large companies, the global food supply chain relies heavily on smallholder farmers, with an estimated 500 million farms of less than two hectares feeding one third of the world's population, according to Oxfam.
With this in mind, investors could even consider putting their money into information, communications and technology companies. This is because, armed with cell phones and other mobile communications devices, smallholder farmers are accessing everything from real-time commodities prices to mobile banking, and advice on more efficient and sustainable methods of crop cultivation.
These technologies could contribute substantially to both smallholder productivity and farm incomes. In India, for example, companies such as Tata Consultancy Services and Reuters Market Light, part of Thomson Reuters, the financial information company, deliver information on farmers markets, crops and weather forecasts via mobile phones.
Large telecoms companies are also involved. Vodafone has established information services for farmers in several local markets, paid for through special tariffs. In Turkey, more than 600,000 farmers subscribe to the Vodafone Farmers' Club service.
The focus on mobile communications in agriculture reflects the diversity of the food supply chain. While investments in large agri-businesses, biotechnology innovations and infrastructure projects are critical, global food security will also depend on investments that advance sustainability and efficiency for the smallest players in the supply chain.
This article was originally featured in Raconteur's special report on 'Sustainable Agriculture' which published in The Times newspaper on March 25, 2013.
To read related articles, view the full special report here