Investment in global agriculture

January  2015  |  FEATURE  |  FINANCE & INVESTMENT

Financier Worldwide Magazine

In recent years, the world has been beset with myriad economic, financial and geopolitical problems. Financial crises, international terrorism and war are just a few of the issues humanity has been required to face since the start of the new century. Yet, in some respects these issues pale in comparison to an even bigger crisis, as humanity ‘sleepwalks’ into an impending, all-encompassing food shortage.

,the Earth’s population is set to exceed 9 billion. In order to meet the extraordinary demand, food production will need to at least double in the coming decades if we are to avoid mass shortages and disruption. Put simply, humanity is quickly running out of food. If we fail to meet the rising global demand for resources over the next 35 years, mass food shortages may become the norm, resulting in global political destabilisation, exceeding that produced by the oil industry over the last decade or so.

With global population growth approaching approximately 80 million people per year, the pressure on agricultural infrastructure is becoming untenable. Emerging markets such as India, Brazil and China are at the heart of the world’s rapidly expanding population, and it is in these states that we are likely to see the emergence of supersized populations in the coming years. The rapid expansion and urbanisation of emerging market populations is having a revolutionary effect on the countries themselves. As more people move out of the countryside and enter the urban middle classes, the world’s social and economic landscape will continue to change. According to projections from EY, by 2030 around one billion people in China could be deemed as middle class – as much as 70 percent of the country’s predicted population. The mass urbanisation of people in emerging markets is likely to have a transformative effect on global resources. Already, developing economies are demanding a more resource intensive and Western style standard of living. Westernised diets will ramp up the pressure exerted on an already struggling global agricultural sector in the years to come.

These trends will exacerbate the declining availability of productive land, which is already at a premium. At the current rate, tens of thousands of acres of land is being lost every year to soil degradation, urbanisation and shifting global climates. Accordingly, the productivity of the remaining arable land is a matter of serious concern. Agricultural productivity from viable land is already close to the limit of what is possible using existing technology, and agricultural yields are increasing at less than 1 percent per year.

For some commentators, the issue of food shortages may become significant even earlier than predicted. According to a recent report from the Global Harvest Initiative, if countries do not prioritise agricultural production and the growth of sustainable food sources immediately, it is conceivable that the world will be unable to feed the rising population as soon as 2030. The Global Harvest Initiative’s findings suggest that by 2030 the only region likely to be able to sufficiently feed its people, and provide a surplus of produce, would be Latin America. Food production in the region is likely to exceed local demand over the next 15 years, with remaining food stocks helping to meet the burgeoning demand from Asia’s urbanised and affluent middle class. Latin America’s major economies, including Brazil, Argentina, Chile, Paraguay and Uruguay, are expected to be at the forefront of the region’s increase in productivity going forward.

Clearly, the challenge of providing regular, affordable and sustainable food sources for such a vast population is enormous. Without drastic intervention, the situation is unlikely to improve. One of the best means of addressing this issue is via sustained and logical investment in the industry, and a wide spectrum of investors are already looking at the agriculture sector as an investment target. Given the economic instability persistent since the onset of the financial crisis, the agricultural sector encapsulates many characteristics sought by investors. It provides for preservation of capital, low volatility and an opportunity to generate significant levels of income, all of which appeal enormously to investors. Furthermore, the diminishing supply of productive assets is contributing to a rise in base value of agricultural land. Opportunities for investment are present across the agriculture supply chain in both developed and emerging economies.

Private sector investment

While government investment in global agriculture is crucial, it is imperative that the private sector is also engaged. However, attracting investment from private investors must be carried out in a sensible and sustainable way that does not restrict access to valuable land and resources. Increasingly, institutional investors are being urged to explore investment opportunities across a number of regions, including Central and Eastern Europe, Australia, Africa and the US. However, they are not merely considering investment in land. Infrastructure and technological development within and around the sector are also in desperate need of capital. For the right investor, the agriculture industry provides a host of opportunities to participate in the growth and potential income that can be derived from producing, processing, transporting, storing and selling food.

Other areas, including commodities investing and agricultural stocks, can also generate significant returns for investors. Although commodities in the sector have performed poorly in recent years, there is still a strong case for investors to consider investing in agriculture related assets. Issues of altruism aside, the burgeoning global population and inevitable rise in food consumption presents a compelling opportunity. The rise in the consumption of meat in recent years is a prime example of the potential profitability of agricultural commodities. Per capita, people are eating more meat today than at any other point in history. In 2014, the average person consumed around 40 kilograms of meat, double the 20 kilograms per year consumed in 1980. As the majority of livestock is fed on grain, grain consumption has also been rising – in fact significantly faster than population growth. For commodities investors, the Westernisation of diets in emerging markets, as well as the general consumption habits of the people in the West, may lay the foundation for impressive returns.

However, with the availability of arable land shrinking on a consistent basis, the amount of produce that can be generated in the future is likely to be limited, regardless of growing demand. Accordingly, farmers and the agricultural sector in general must find new methods and techniques to increase the productivity of their land. The private sector can help to facilitate productivity growth in areas such as fertiliser production and irrigation, which could offer solid investment opportunities.

Given the precarious state of global food production, it is clear that action is required to increase productivity. If the system is to produce necessary levels of affordable, sustainable food, investment from a variety of sources, including the private sector, must be solicited.

However, private sector involvement in the industry must be properly managed and regulated. In the past, investment in African agriculture, for example, has been criticised for the tactics adopted. The New Alliance for Food Security and Nutrition initiative, launched by Barack Obama at the G8 summit in 2012, was conceived to help accelerate agricultural production throughout the continent. Under the scheme, 10 African nations were required to make over 200 policy commitments, including changes to laws and regulations. But these changes were made at the expense of local farmers. Given that around a third of today’ s global population – approximately 2.3 billion people – are reliant on smaller famers for food supply, any steps taken to engage the private sector should also protect the interests of smaller scale producers.

Although the state of the world’s agricultural production is a cause for concern, there is a window of opportunity. Over the next 20 years or so, nearly half of all farmland is due to change hands in the US. Around 400 million acres will become available as the current generation of farm owners retires. With approximately $10bn worth of privately held capital already looking for access to US farmland, there will be myriad opportunities available to investors in the future. For private capital investors hoping to gain access to the agricultural sector, the availability of innumerable funding vehicles will help to address small farm undercapitalisation and inter-generational succession. Significant capital investment in smaller farms, both in developed and emerging markets, will help the agricultural sector to keep diminishing tracts of arable faming land in production, while boosting efficiency.

The emphasis is also on both the private and public sectors to ensure that adequate funding and investment is committed to infrastructure development to improve food production and distribution. Long-term underinvestment in key areas such as transport and irrigation should be addressed. Countries in the developing and emerging worlds would benefit from investment in both ‘hard’ and ‘soft’ infrastructure projects. Additionally, since the agriculture industry and international trade is reliant on roads and rail networks, as well as sea ports, capital should be committed to strengthen facilities where necessary. Investment in agriculture infrastructure is developing rapidly as investors identify the valuable opportunities available.

A wide spectrum of investors has earmarked the agricultural sector as an area of interest. Large scale financial institutions, hedge funds and real estate investment trusts, as well as private and public companies, have been pursuing farm ownership and management strategies. The sector’s income generation and capital appreciation prospects will continue to fuel activity. By entering the sector at various points in the value chain, investors can bestow a net positive effect. Good governance at the national and local level is critical if investors and small scale producers are to cooperate and meet the rising global demand for food.

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Richard Summerfield