In my article about the St. Joe Company JOE, “Two Tales Of One City,” I presented a cautionary case of how climate change can (and will) negatively affect asset values. While it is important for investors to understand the risks of climate change, I also believe it is also crucial to understand what opportunities will arise as humans learn to adapt to a warming world.
You might say that thinking about the investment opportunities available due to climate change trivializes the problem. I do not agree.
The essential function of the capital markets is to channel needed investment capital into companies and projects solving difficult problems. If the problems a company is solving are important — for example, the problem of feeding a global population totaling 7.5 billion people and growing — the demand for company’s goods and services should be high. Channeling investment capital to such a company helps solve the problem while financially helping the owner of the business.
Over the last year, I have been getting excited about a new industry, hot in the venture capital community, that applies modern computer technology to farming – AgTech – and have done a bit of research on how the market is evolving. As you read the brief research not below, see if you do not find yourself getting excited about the possibilities too!
What is AgTech?
AgTech represents the application of technology – especially software and hardware technology – to the field (pun intended) of farming. AgTech is an industry that encompasses diverse solutions to almost every step in the food production process. I think of AgTech innovation in terms of three classes that I “Tech Assisted Farming,” “New Farming,” and “Revolutionary Farming.”
Tech Assisted Farming is the application of current technology to aid current farming techniques. Examples are:
- Water Management: Systems designed to maximize plant yield through efficient watering (e.g., Hortau)
- Plant / Soil Analytics: Services to analyze soil quality and plant health (e.g., Trace Genomics — see Forbes’ coverage on this company)
- Sensors: IoT devices to measure the health and growth of plants (e.g., Phytech)
- Advanced Machinery: Drones to monitor crops, robots to pick them (e.g., FarmBot)
- Predictive Analytics: Weather forecasting and other big data tasks applied to agricultural settings (e.g., aWhere)
- Grocery Supply Chain Management: Food quality / safety tracking (e.g., Park City Group)
New Farming is the application of current technology to develop new agricultural techniques. An excellent example is Indoor and Vertical farming (e.g., Mirai), which uses LED lighting, sensors, and automation to effectively stack farming plots on top of one another indoors.
Revolutionary Farming is the development of new technology to develop new agricultural products such as Sustainable Proteins (e.g., Memphis Meats, a private company owned in part by Bill Gates and Sir Richard Branson), which cultures meat products in a laboratory.
Mechanical tractors in the 1920s and the Post-War Green Revolution allowed humans to increase farm productivity and to significantly increase crop yields. However, over the past generation, increases in crop yields have slowed and are now roughly only half of what is necessary to meet projected 2050 consumption demand. In addition, the effects of climate change on soil moisture levels may create stress on yields, to say nothing of as projections for the increased severity of droughts and more numerous incidents of crop-damaging floods.
In the face of almost unavoidable unmet demand for products that satisfy the lowest level of Maslow’s hierarchy of needs, entrepreneurs, technologists, and investors have realized that Information Age solutions can profitably be applied to Bronze Age problems. The AgTech gold rush began in 2013, when Monsanto’s purchase of agricultural data company The Climate Corporation for $930 million drew attention to potential in the space. In 2017, two AgTech investments (Indigo Agriculture, a microbial crop technology start-up and Plenty, a vertical farming company) raised $200 million each – double the entire AgTech investment spend in 2012.
AgTech Risk and the Power of Government
Different areas of AgTech have specific drivers and risks associated with them; the dynamics behind the production of cultured meat, for instance, is very different from the dynamics behind drone-based crop inspection. However, we believe there is one macro factor in particular you might not consider immediately when thinking of food production, that nonetheless have the potential to affect many corners of AgTech – government policy.
U.S. government policy initiated in the Nixon Administration subsidized farmers’ economic losses when they overproduced rather than subsidizing farmers to cut supply by leaving fields fallow. For 50 years, the result of this policy has been a surplus of certain grains that ripple through the entire food value chain.
With food prices low, farmers whose capital costs are relatively high – such as many engaged in AgTech methods – need concomitant increases in efficiency just to keep on par with farmers whose capital costs are low – such as traditional farmers. To the extent that AgTech innovations create a higher capital cost hurdle to clear for farmers, it will be difficult for AgTech innovations to come into the mainstream and we would expect the most capital-intensive AgTech areas to be the most disadvantaged.
If agricultural subsidies are restructured to encourage AgTech innovations such as was done to encourage electric vehicles and renewable energy in years past, we believe the boom in AgTech will strengthen significantly. However, if subsidy structures remain trapped in the Vietnam Era, capital-intensive areas of AgTech will face a headwind.
How Does AgTech Protect Against Climate Change?
Research published in 2012 suggests that an average of around a quarter of the production of greenhouse gasses are generated by global agriculture. A more recent study published in the scientific journal Nature, suggests that the effects from current agricultural technologies have the potential by themselves to push the Earth past critical tipping points. Read the quote below and see if you don’t get a shiver down your spine:
…[B]etween 2010 and 2050… the environmental effects of the food system could increase by 50–90% in the absence of technological changes and dedicated mitigation measures, reaching levels that are beyond the planetary boundaries that define a safe operating space for humanity.
In other words, “Fix farming or run the risk of making the planet an unpleasant place for humans to live.”
The “technological changes and dedicated mitigation measures” mentioned in the Nature quote above refers precisely to the solutions now being built at the AgTech companies featured in this article and many more like them. These business represent great opportunities — both for their owners as well as for the entire human race.