By Chris Rawley
Each year, we spend some time researching the latest trends in agriculture and food production that we believe will gain the most attention and traction with investors. Despite some slow down in the economy, we anticipate that 2023 will be another strong year for investments in agriculture across all segments. Below are a few areas we see as attractive to investors wishing to diversify their portfolios in agriculture.
Agriculture Automation
Labor shortages and wage inflation are impacting the bottom line of nearly every industry, and agriculture is no exception. Despite continued automation in the industry, agriculture remains a labor-intensive business, with key tasks including planting, weeding, thinning, harvesting, and product transportation across the supply chain. Over the past few decades, the number of people working on farms has decreased by 70% across both family and hired farm workers, exacerbating the problem.
Farmers who want to automate their operations are increasingly turning to robotics. The International Federation of Robotics reports an all-time high of 517,385 new industrial robots installed in 2021 around the world. Installations of robots have grown 31% year-on-year. Today, there are a record 3.5 million robots in the farming industry. For a specific example, according to market research firm IDTechEx, the size of the market for weeding robots is expected to grow 11 times over the next five years, up from $22 million in 2021. Robotics are also growing in downstream segments of the supply chain, including packing and processing. Robots such as those in the above video will mitigate labor shortages in food processing.
Supply Chain Resilience
Between lingering COVID-19 impacts, massive disruptions to the grain and fertilizer markets due to Russian aggression in Ukraine, and continued high transportation costs from increased energy prices, 2022 presented major challenges to the agricultural supply chain.
Decentralization and localization of agricultural production will shorten supply chains to grow increasing amounts of food closer to where it is consumed to lessen supply chain impacts. Despite more than 2 million farms across the United States, farming of certain products is highly concentrated, especially in California, which produces over 68% of the foods and vegetables sold in the United States. Even more specifically, Monterey County California produces 61% of leaf lettuce, 57% of celery, 56% of head lettuce, 48% of broccoli, 38% of spinach, 30% of cauliflower, 28% of strawberries, and 3.6% of wine grapes sold across the rest of the country. Water, labor shortages, and other supply chain disruptions put some of these food chains at risk.
Consequently, production of these crops will continue to disburse across the country, as technologies such as Controlled Environment Agriculture (see more below) continue to gain traction with investors and consumers.
In addition to food production, further investments in processing facilities across the country will build more robust supply chains. Investments in small, localized processing facilities will provide capital to create a more resilient animal protein supply chain.
Regenerative Animal Protein
Despite significant investments from venture capitalists, plant-based protein products have failed to live up to all of the hype in terms of nutrition, environmental impact, and most importantly, consumer acceptance. VC favorite, Beyond Meat has seen declining sales since its initial public offering, and a falling stock price to match. Private competitors in the faux meat business are also facing challenges. The prospects for the economic success of so-called “cultured” meat seem even bleaker.
The contrarian view is that animal-based protein will continue to be a growing industry worthy of investor dollars. For people who care about the climate impact of their investments, regeneratively raised livestock tackles the dual problem of food security and carbon capture. Environmental lawyer and regenerative rancher Nicolette Hahn Niman makes a compelling case in her extensively researched book, Defending Beef. According to Niman, more carbon resides in the planet’s soil than in the atmosphere and all plant life combined. Raising livestock in a way that rebuilds healthy topsoil may be the best way to reduce atmospheric carbon.
Regenerative ranching techniques boost soil biodiversity and organic matter, reduce erosion and run-off and capture carbon in the soil. Grass-fed and grass-finished beef production converts sunlight into grass into highly nutritious protein and fats with a positive impact on the environment. All across the country, ranchers are working on starting or expanding their regenerative operations, requiring patient capital. Research firm Markets and Markets estimates that the CAGR of the regenerative agriculture market will hold steady at 14% between 2022 and 2027, making it an attractive sector for investors.
Water Smart Investments
Water is a worldwide currency and agriculture production is extremely dependent on it. Agriculture irrigation accounts for 70% of water use globally. Producers in many regions will face increasing competition from non-agricultural users due to rising urban population density and water demands from industrial use and energy production. For many agriculture producers, 2022 brought extreme weather conditions that drastically impacted their yields and profitability. According to the National Integrated Drought Information System, more than 44% of the U.S. remains in drought conditions.
Implementing responsible and sustainable water management becomes even more important, and investments that support smart water management will become increasingly attractive. Several areas we are watching in this space include:
Hydroponics
Hydroponic farming allows for irrigation water to be recycled, recirculated, and reused. Some vertical farming systems use 95% less water than conventional field farming to grow the same amount of produce. Furthermore, recirculating water systems prevent agricultural chemical run-off which has been responsible for deadly algae blooms that cause red tides and oxygen depletion in the ocean.
Pivot Irrigation
Though capital-intensive, pivot irrigation systems help reduce water runoff and soil erosion and their use is growing by about 14% annually. Other precision agriculture solutions that manage water are being developed at a rapid pace by early-stage companies. Technology that incorporates water sensing and predictive insights, like that made by our portfolio company Agrology, will help growers better navigate challenging water conditions.
Finally, land and agriculture investment in regions with water scarcity or that are drought-stricken may slow next year. Water-hungry crops, such as tree nuts, may become increasingly challenging to produce in some areas.