INVESTING IN SUSTAINABLE AGRICULTURE
What You Should Know
We face increasing challenges in global agriculture and food systems. These challenges push private and public investors to look at investing in sustainable agriculture, infrastructure development, new practices and better technologies. Due to food waste, infrastructure inefficiencies, nutrition related diseases and climate changes, among others, sustainable agriculture is becoming one of the leading topics in impact investing.
From Farms to Agricultural Factories
Over 200 years ago, 90% of the U.S. population lived on farms and produced their own food to eat. When we tell our children what a farm is today, those are the farms we share: a picturesque place home to many different animals and land that nurtures a diverse set of crops. In other words, we talk about what’s possible with sustainable agriculture practices.
The reality is quite different. Changes and advances in the agricultural system have made it possible for farmers to increase output withing raising total input use. Thanks to one of the most efficient food production systems, the U.S. produces almost as much as China, with a far smaller population.
-But these changes have come at a price. We’ve moved from the family farms of yesteryear to agricultural factories with practices that are focused on mass production rather than sustainable production.
This is the challenge we now face: how do we maintain the level of agricultural production necessary to feed the world and retain the sustainable practices of the small family farms? This question is why so many impact investors are now looking at investing in sustainable agriculture. To find the answer, ensure the feeding of billions, create food practices that make a lasting difference, and make a profit along the way.
Invested Industries
What is Sustainable Agriculture?
Sustainable agriculture, or sustainable farming, is exactly what it sounds like: farming in sustainable ways. But what does that mean?
The idea of sustainability in general is that we meet the needs of today without compromising tomorrow. For sustainable agriculture, it is the response to questions like:
- How do we manage crops in a way that the world has enough food and textiles without destroying the resources we have?
- How can we deal fairly with those who work the farms and production areas?
- How do we create a mutually beneficial relationship with the surrounding community?
Sustainable Agriculture Examples
There are many examples of sustainable farming, ranging from small changes to major production and process overhauls. No matter what the example is, however, it’s important to remember that any sustainable practice takes forethought to succeed. Deciding which crops to plant and rotate, moving to aquaponics or hydroponics, choosing how to nourish and water the crops: all of these take understanding, thought, and planning. A few examples of sustainable agriculture include:
Crop Rotation
Crop rotation is an important technique to keep the soil healthy and avoid depleting it entirely of nutrients. Different crops are planted in different locations over several years in such a way that the succeeding crops helps replenish the nutrients the previous one has taken out of the soil, or vice versa.
Planting cover crops
Cover crops are planted during off-season times when soils might otherwise be left bare. These crops protect and build soil health by preventing erosion, replenishing soil nutrients and keeping weeds in check.
Integrating livestock and crops
Industrial agriculture mostly keeps plants and animal production separate from each other. Research shows that an integration of crop and animal production can actually make for a more efficient and profitable way of farming.
Does “Sustainable” Also Mean it’s Organic?
“Organic” and “Sustainable” can’t be used as synonyms. There are still some standards in organic farming that are not sustainable, and not all farmers who use sustainable practices qualify for USDA certification or choose to pursue it.
Regenerative agriculture takes sustainability to the next level by not only preserving the land in which food crops are grown but employing farming practices that rebuild soil quality and restore biodiversity on the farm.
Corporate Farms vs. Family Farms
While urban commercial real estate prices have skyrocketed in the past years in cities like New York, San Francisco and Washington, D.C. so has also the price of farmlands. When it comes to farming, a small number of large farm operations “produces the vast majority of the nation’s food” according to U.S. Secretary of Agriculture, Tom Vilsack.
Large farms with over $1 million in sales account for only 4 percent of all farms, but 66 percent of all sales. That’s up considerably from 1 percent of all farms and 50 percent of all sales a decade ago. However, three quarters of all U.S. farms gross only $50,000 a year and currently account for only 4 percent of product sales.
Watch: The Future of Food
Many people underestimate agriculture’s contribution to the climate crisis and its harmful long-term effects. According to studies by the UN and other organizations, agriculture contributes around 15 to 20 percent of the world’s greenhouse gas emissions.
International food giants dominate virtually every step in the cycle of the global food industry and try to maximize profits. Large farms are growing the same crops year after year, using enormous amounts of pesticides and fertilizers that damage soils, water, air and climate.
It is time for us to find a way to reconnect and raise awareness for our food system and support sustainable agriculture practices that are sufficient enough to meet the demand of our growing population.
Investing in Sustainable Agriculture in 2020 and Beyond
Only a few years ago, impacting investing was mostly a PR play for financial companies and other institutions to appear sensitive to issues like climate change, social welfare, and inclusivity. However, as we watch the rise of impact investing and an increased availability of better measurement tools, investing in sustainable agriculture is set to dominate.
Why Sustainable Agriculture is on the Rise
It’s becoming widely understood that the impact investing market is rising to well above $14 trillion by 2023. Affordable housing, community development, sustainable energy and health have been the dominating sectors of impact investments. However, investments made specifically in agricultural sustainability have remained relatively low compared to other impact investment categories. This is primarily due to the lack of regulation of what is considered “sustainable agriculture,” confusion around sustainable versus organic farming, and other challenges that have prevented accurate benchmarking.
With that said, the sustainable agriculture is now on the rise for other reasons, and should see a growth trend in the next year. A combination of the aging-out of farmers, growth of sustainable agriculture projects, and reported allocations from investors to projects in sustainable agriculture is allowing for this rise.
Population Demands
As the world population grows at an alarming rate (10 billion by 2050), and as we raise more people out of poverty, there is not only a higher demand for food, but higher priced foods like meat and dairy products. But as the average age of farmers rise to 58 years old, and output gains of the “green revolution” have reached their maximum, we are forced to seek smarter solutions to safely and sustainably produce more agricultural output to feed the world.
In the report Impact Investing in Sustainable Food and Agriculture Across Asset Classes led by the Croatan Institute, authors note:
“Food and agriculture ultimately remain bounded by natural resource limits on a finite planet facing rapid population growth and urbanization, long-term soil degradation and land scarcity, and widening inequality in access to resources.”
Transformation, LLC outlines these issues in our 2018 report on Global Agriculture. Although Transformation was only formed in 2017, the firm plans to launch a global investment syndicate to address global agricultural issues. The plans for the fund will be formally announced on June 12, 2019 at the AIM Summit in Geneva.
Global Investment Capital Allocations
Transformation is not alone in our efforts. During the first week of March 2019, one of Europe’s largest private equity firms announced the launch of its own impact investing fund with Nordea Asset Management. The fund is planning to invest in companies with business models that contribute to the UN Sustainable Development Goals, of which includes five goals that directly relate to agriculture such as “Zero Hunger” and “Clean Water and Sanitation.”
The most recent survey (reported in the 2017 Croatan Report) by the Global Impact Investing Network of leading impact investors show that 63% of respondents reported allocating funds to food and agriculture. They write that “Investors across all asset classes are consequently making critical decisions to invest, divest, and engage based on deeper analysis of the social and environmental impacts of agricultural commodities and their extended supply chains.”
The various areas of investment can help the different sub-sectors of sustainable agriculture:
- Fixed-income investment managers can finance food and agriculture value chains as their preferences include corporate, municipal or government agency bonds.
- Equity investors can finance agriculture technology (AgTech) companies.
- Private equity and venture capital investors can provide early capital to private companies in AgTech and agriculture, food, and water companies with a measurable positive social and environmental impact.
- Real asset investors can finance farms, ranchland, and forests whose crops are sustainably managed.
Of course, there are many more ways investors can take part in investing in sustainable agriculture, which we believe will be realized in the next few years as more investment opportunities in the space come to fruition.