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Investment Trends in Large Scale Farming - Mila Kletsky

25 August 2018 - Talking about investments in agriculture, one must differentiate between large scale land deals by means of land appropriation and investments into modernization of the existing agriculture that bring about new technologies, innovative solutions and approaches. Since agriculture tends to be very risky due to unpredictable weather conditions and volatile agricultural commodity prices, investors are reluctant to invest in agriculture. Mila Kletsky, President and Academic Director of Picking Alpha, an international investment consultancy, told about the trends and developments in agri-food investments with a particular focus on large scale farms.

Where does the capital for investments into agriculture come from?

There are different sources: investment companies; asset management companies; more than one thousand of various funds with a  total of about $10 billion of assets; wealthy individuals; public money; venture capital; foreign direct investments; crowdfunding etc. Investment or asset management companies invest the pooled funds on behalf of their clients according to the defined investment objectives. In return, the clients share their profits (and losses) or pay a fee to the company. Venture capital enterprises are investing in small, early-stage, emerging firms, usually based on an innovative technology, that are deemed to have high growth potential. They provide the funds and finance risky start-ups in exchange for equity or an ownership stake at those companies. The capital for the top five biggest farms of the world comes from either private companies operating as a venture enterprise or from the governments (state funds) which back up the largest farms representing their countries. The state acts sometimes as the safeguard for lent capital by backing the farms and by providing the loan guarantee. In some cases the state owns the shares of the company or provides loans from the state budgets or state funds at a discounted rate to the farms. So there are many different forms of backing the farms by the state.

What are the main goals of investors in the agri-food sector?

The investors in agriculture are like all other investors: they want to earn money by lending their money. First of all, because no one knows whether we will live in 10 or 15 years, the investors prefer fast return of capital – within oneto three years. The next criterion is the sustainability of earnings – usually 20-30% on the annual basis. Of course, the investment target should provide liquidity at all times. Long-term investors look for the 10 to 50-fold growth of their capital within 3 to 20 years. Small fraction of investors just invests as sponsors (to get higher visibility, taxes write-offs etc.). For the capital holders it is very important that the managing teams of the company in which they invest are credible and dedicated. Of course, they trust them their money and want to be sure that both the risk of losing it is as low as possible and their returns will consistently grow as much as it happens in the other industries. Agriculture per se is known to be one of the riskiest and unstable industries. So private investors invest in agriculture reluctantly. It is difficult for large farms to get loans from banks because with the globalization the agricultural commodities prices became very volatile. US large farms experience now big difficulties to sell their crops due to the growing competition from China, Russia  and other countries – from here are rooted their difficulties to get loans from banks. For investors their output became illiquid. The same holds for Russian wheat (cheaper than that from the US). The larger the farm, the more unpredictable its sales could be in today’s world.

What do you think are the main problems in the area of the agri-food investments?

One of the problematic issues is the fact that the developers of agricultural innovations (inventors, scientists etc.) are little connected to the agriculture and are not very well familiar with the real demand of farmers for innovations. In fact, in the field of agricultural technology, a technology bubble has developed that completely bypasses the needs of farmers. There are too many companies involved in the digitalization of agriculture who know too little or nothing about the needs of farmers and agriculture. If the innovative developers continue to work off the needs of farmers, the technology bubble will burst.  A look at the financing in the field of agricultural innovations shows that the air has long gone. Already last year, the donors radically shifted away from the agricultural sector to the food sector. The focus is no longer on digital agriculture but on the digitalization of the food sector. Almost two-thirds of all investments in 2017 went to start-ups developing innovative solutions for digital food marketplaces, e-restaurants and digital food retailing.

Another point is that farmers themselves are more interested in cutting their costs than investing into agricultural innovations like robotics or digitalization, especially in the US. The hype surrounding digitalization of agriculture is over. Surveys in the US have shown that for farmers the number one issue right now is reducing production costs. There is a unanimous opinion among US farmers that it is difficult to make any profits at all. The bad economic situation has a decisive effect on the purchasing decisions of farmers. Some investment companies in the US have, therefore, already stopped further investment in agricultural technology. Nobody obviously asks the farmers themselves. Though there is a strong trend in Silicon Valley – inventors work hand in hand with some farmers – inventing AgTech innovations together. Also it sounds very promising that more and more food related companies become major sponsors of AgTech innovations. In Europe the situation is slightly different. I heard of several investment projects based on cooperation of private farms which invested together into the development of new technology for which they had a demand.

So what would be the main nearest future tendencies in investments in agriculture?

The key technologies, which can support the productivity increases in agriculture include precision monitoring(which enables smart decision making), automation (which frees the human operators from the routine tasks), biogenetics, selective breeding, advances in crop and animal nutrition – anything that drives productivity and allows cutting the expenses, thus driving up the profits. But, unfortunately, I have to disappoint you. In spite of all the importance of innovations in agriculture, soil quality management, better water management and so on, the venture capital is leaving this market.80% of the deals are investments in sectors other than agriculture; only about 7% of the funds are going in agri-food. The main tendency is that investors are investing their money less in the primary agriculture, but more in the digitalization of the food supply chain.

The next trend is that large agricultural companies invest only in such things which have the potential for demand growth. For example, the case with antibiotics and hormones free chicken meat. In the USA in 2016 demand for organic chicken meat grew by 8.6% compared to 2.15% for conventional chicken meat. Tyson Foods followed the trend and contracted 1,000 small organic chicken farms. In 2018, it became the largest organic chicken producer in the US by acquiring organic poultry producer Tecumseh Poultry LLC. If the companies do not follow the demand, they lose their profits. Therefore, they monitor such consumption developments and trends and invest in the potential innovations. Big food producers deliver about 20% of all funds in agricultural innovations. Really conservative investors are not interested now in the agricultural inventions, food innovations, etc. They like to eat, but they do not want to invest their money in food.

Where the investment money will flow geographically?

Europe. 500 million people living in Europe are very well educated. 300 million of them are middle class population. These people, in fact, have enough money to buy quality products and to invest in special technical innovations. So here in Europe you have a very good combination: educated community, big demand, and you do not kill your middle class and that is also very important for the quality. Why is it so important to take into account the middle class? Because middle class is the basis for a steady demand. The demand is in its turn the basis for the companies' profits. So investing into the agri-food sector can only be reasonable in the market in which the consumers are well off and ready to spend their money on the end product.