In many ways, 2023 was an extremely challenging year for agricultural companies raising capital. A spike in interest rates provided risk-free alternatives for investors who might normally allocate into the space, while banks and other lending institutions significantly tightened credit availability. Early stage companies struggled with runway and raising bridge rounds. Though economic headwinds remain, we’re optimistic that 2024 will see an uptick in funding for several areas.
Here are some of the trends we’re watching that could make an impact in the ag investing space next year:
A Resurgence in the CEA Industry
By all measures, 2023 was a bloodbath for controlled environment agriculture. Large, well-funded players, including AeroFarms and AppHarvest, filed for bankruptcy reorganization, while many other indoor farms, both large and small, closed their growing operations for good. Capital intensive hydroponic farms and greenhouses had major challenges raising money. As companies with unsustainable business models fall out, survivors will increasingly focus on unit economics and generating positive cash flow. Additionally, those indoor growers with strong distribution or off-take agreements in place will prosper compared to growers who are selling on a more ad hoc basis. Projected Federal Reserve interest rate cuts in 2024 will help jump start equipment and project financing in the CEA space.
Artificial Intelligence (AI) Becomes More Widespread in Ag
AI companies were one of the stand-outs in venture capital funding in 2023, and that trend will likely extend into ag-tech funding next year. AI can be used to analyze large amounts of data collected from farms and provide insights that can help farmers make data-driven decisions. AI-powered systems can predict weather patterns, soil moisture levels, and pest infestations, enabling farmers to take preventive measures and optimize crop yields. We’re witnessing both small and large ag companies embrace the efficiencies that bringing AI into supporting business functions, such as customer service and marketing can make. Others, like our portfolio company Precision Livestock Technologies, incorporate AI as a core part of their product.
Agricultural Biotechnology Momentum
Biotechnology and the use of so-called “biologicals” are used to develop crops that are resistant to pests and diseases, require less water, and have higher yields. Genetic engineering is also being used to create crops that are more nutritious and can withstand extreme weather conditions. Large corporations, such as Bayer and Syngenta, will continue to build their biologics portfolios via R&D, strategic investments, and acquisitions, while promising biological-focused start-ups will jockey for early stage funding rounds next year.
Functional Foods Continue to Gain Traction
Another hot consumer trend is functional foods with health benefits beyond nutrition, such as mushrooms, certain fruits and vegetables, and various seeds and nuts. According to Fortune Business Insights, the global functional food and beverage market is projected to grow from $281.14 billion in 2021 to $529.66 billion in 2028 at a CAGR of 9.5%. An increasing focus on gut health is helping reverse the downward trend in milk consumption with new demand for prebiotic and probiotic dairy products, along with generating demand for other fermented foods.
Regenerative Agriculture Embraced by Consumers
Though often overshadowed by a narrow focus on climate, regenerative agriculture involves farming practices that promote soil health, biodiversity, and ecosystem services. This approach focuses on building soil organic matter, reducing tillage, and using cover crops to improve soil health and reduce erosion. Regenerative agriculture also helps farmers reduce their use of fertilizers and pesticides, leading to cost savings and environmental benefits. On the livestock side, holistic, intensive, or “mob” grazing replicates the interaction between the land and native ruminant animals to build grasses deep roots that retain water and carbon.
Major brands embracing regenerative agriculture practices include General Mills, Patagonia, and Stonyfield Organic. Farmers, ranchers, and the agricultural investors who fund them will increasingly be called to respond to the public’s demand for production methods that enhance, rather than detract from the environment.