The funding environment for agriculture
Here’s a formula to consider for agricultural investments: income + capital appreciation = investor appetite
An investment in agriculture and forestry is a claim on two streams of returns: the financial return from crop and harvest income and the capital appreciation of land or timber. This combination of income along with the upside of an appreciating asset produces optionality. There are other benefits to this investment, including correlation to inflation (which reduces risk that changes in inflation will negatively affect returns) and diversification (which means that a wide variety of agricultural and forestry investments aren’t necessarily tied to the performance of more mainstream investments).
One institutional investor told Gro Intelligence that agricultural land was among a handful of liquid assets that could be sold to generate cash during the financial crisis. Another institutional investor cited agriculture’s independence from general economic conditions as a differentiating factor that invites investment.
Fundraising around agriculture and farmland has grown significantly since a decade ago. There were an average of 6.8 funds that closed per year in 2006-2010; this figure more than doubled in the next five-year period, 2011-2015, to 14 funds a year.
Correspondingly, the amount of aggregate capital raised over these two five-year periods has jumped by nearly 150 percent, from an average of $1.24 billion per year to an average of $3 billion per year. While insurance companies and commercial banks make up the majority of investment in the space, more and more funds have increased equity investments.
New funds on the block
Certain institutional investors have begun to create portfolios specifically dedicated to agriculture. In August 2015, TIAA, one of the largest US retirement services providers, set up its second global agriculture fund, named TCGA II. The fund’s initial fundraising target of $2.5 billion was exceeded, closing at $3 billion in committed capital. Even some of the largest private equity players, like KKR, are now investing in the space. In 2014, KKR made a $100-million investment in Sundrop Farms, an indoor agriculture company, and recently made another agricultural investment of $77 million in Kwality Ltd., India’s largest dairy company. In fact, the firm’s first ever Africa foray was a $200 million investment in Afriflora, an Ethiopian flower company.
A number of smaller ag-focused investment funds have formed in the past decade. Chess Ag Full Harvest Partners, Ceres Partners, Equilibrium Capital, and Homestead Capital are a few among the many examples. Blue Road Capital, which focuses on production and supply chain investments, recently established its first agriculture fund; it closed at $433 million after securing investments from university endowments, pension managers, family offices, and real asset investors. While direct equity investing continues to be a common angle, farmland investing has also emerged as a leading strategy.
How to approach farmland investment
Jim Rogers, who co-founded a hedge fund with George Soros, has declared to Fortune that: “I’m convinced farmland is going to be one of the best investments of our time.” Many other investors have voiced similar sentiments; Jeffrey Conrad, former president of Hancock Agricultural Investment Group and current president of AgIS Capital, has suggested that “Farmland is gold with a cash flow.” Beyond the usual macroeconomic drivers behind an agricultural investment thesis, agricultural investments benefit from a labor consideration—a third of US farmers are approaching retirement age, and investors believe that nearly 50 percent of US farmland will be under new management by 2022.
Gro Intelligence interviewed David Nicola, the founder and CEO of Blackdirt Capital, to understand how young funds are targeting farmland investments. Nicola has a unique investment thesis. He focuses more on mitigating downside risks than on finding the greatest upside potential. Volatility in external factors, such as rainfall and frost patterns, can and often do make the difference between making a return or suffering a loss. When Nicola approaches investments, he carefully examines whether the region receives stable rainfall and whether the land can be cultivated year round.
While many farmland investors have flocked to the West Coast of the United States, Blackdirt focuses on the East Coast, where there is comparatively less risk of drought. Nicola expects that areas with greater water availability will appreciate more quickly as US farming systems shift; organic foods are one example of a market that he expects will undergo production shifts, because there is unmet demand with limited domestic supply. As for whether additional farmland investment funds may open, Nicola does not anticipate a rush into the business, as farmland investment requires a great deal of capital upfront and significant product knowledge to generate a return.
Venturing into agtech
Agriculture technologies have seen a great deal of investment and innovation. While early agtech primarily consisted of seed genetic and biofuel companies, the landscape has evolved to offer a variety of sub-sectors, including soil and crop technology, drones and robotics, alternative proteins, and others.
Agtech investment in 2015 was one for the record books. The $4.6 billion that was raised nearly doubled the $2.36 billion raised in 2014, and this 95 percent growth rate was more than twice the year-over-year growth of global venture capital in 2015 (44 percent). Still, agtech funding in the scope of agriculture’s economic significance remains small. Agriculture makes up nearly 7 percent of global GDP, but agtech investment made up less than 3.5 percent of total venture funding in 2015. Other sectors, such as healthcare, had investment proportions that were more in-line to their representation in GDP.
While both 2014 and 2015 showed growth, 2016 is off to a slower start. The number of deals in the first half of 2016 (1H2016) has gained 7 percent on that of 2015, but the $1.8 billion raised during this period represents a 20 percent decline from 2015 levels. The decline in investment is roughly in line with a 14 percent decline across global venture capital markets compared with the 1H15, and the uptick in deal activity bucks the trend, as most sectors experienced a cooling in deal volume.
A greater number of venture capital funds are getting involved. Traditional mega-venture funds, like Kleiner Perkins, Sequoia Capital and Bessemer Venture Partners have invested in agtech, and a number of corporate venture arms have become increasingly active in the space. Both Monsanto and Syngenta operate venture arms, and some say Monsanto’s near-$1 billion acquisition of The Climate Corporation in 2013 ignited the spark for a flurry of corporate agtech investments. Even non-ag corporates, such as Verizon Ventures, have invested in multiple agtech deals.
Another interesting theme of 2016 agtech investment is the distribution of funding among the various subsectors of agtech. Since 2013, food ecommerce has taken the lion’s share of venture dollars, making up nearly a third of agtech investment in the 1H2016. However, food ecommerce investment in 1H16 lost substantial ground compared to 1H15, declining 22 percent—second to only drones and robotics which fell 32 percent in the same period. Existing food ecommerce companies have also taken a hit; in July 2016, Farmigo, a farm-to-consumer delivery platform closed its delivery business after five years of operations, citing logistics costs as a reason for the decision. Soil and crop technology, on the other hand, have enjoyed an increase in relative market share among subsectors.
Gro Intelligence spoke with Annie Hazlehurst, the founder of a venture capital fund Faridan, to gain more insight on the current funding landscape. (Full disclosure: Hazlehurst sits on Gro’s Board of Directors.) She noted that after the financial crisis, venture capitalists became primarily interested in consumer, enterprise, or data companies, and many of the recently funded agtech ventures have been data companies.
Hazlehurst has seen a shift in interest from primary innovation (such as biofuels and water purification) to secondary innovations (such as drones and robotics) that rely on non-sector specific technology. Innovations in hardware and software that improve data collection and interpretation will continue to play a central role. Computational technology has already achieved this in robotics and drone technology and is expected to do so with satellite and sensor technology.
On future potential large acquisitions in agtech, such as Monsanto’s acquisition of The Climate Corporation, Hazlehurst warned that the venture arena is far less established for agtech than for other sectors. Biotechnology and pharmaceuticals have been acquiring start-ups for years and have set sector precedence for the acquisition and integration process; on the other hand, agtech is still quite young, and so there is limited knowledge on acquisition patterns.
Ag sector investments have traditionally been limited because of inherent risks, such as weather and pathogens, that aren’t a factor in sectors like construction, energy, and pharmaceuticals. But two things have changed: Better data tools have become available to limit these inherent risks; and low returns in other sectors have pushed investors to look at agriculture.
Neither of these factors have gone away, and therefore we should expect that investments in agriculture still have room to grow. Certainly the sector faces challenges, which include lack of venture capital familiarity with the agriculture market, and the ever present weather and climate risks. There are nonetheless improvements possible along every step of the agricultural value chain, from optimizing soil conditions for growth and using drones on cropland, and improving data collection so that farmers and traders better understand risks.