The Coming Agriculture Sector Investment Landscape

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Due to the challenges of feeding a rapidly growing world with shrinking arable land and water sources, the agriculture and financial sectors will need to work hand in hand to create new, sustainable food solutions. The drive to meet food supply needs will have a large impact on agriculture sector capital requirements and investment.

We believe the following developments will significantly affect the agriculture sector investment landscape in the coming years. 

Mid-Market Cross-Border Agriculture Sector Investment Activity will Sharply Rise

A large amount of food in the world is produced by small and mid-sized farmers.  These farmers often face many operating difficulties, including inefficient farming practices, lack of capital and limited or no access to markets that can pay the best prices for they food that they produce.

Cross-border investment will allow smaller and mid-sized agricultural businesses to supplement traditional debt finance with more flexible equity capital that will permit them to better withstand financial and production downturns and more quickly reach their agriculture production potential.  This will provide the financial sector with essentially a new class of investment opportunities.

The Agriculture Sector Investment Vertical Will Become More Stratified

The agriculture sector currently represents a collision of large agriculture sector and financial sector factors.  On the agriculture side, the traditional up-stream, mid-stream and down-stream components of the agriculture value chain are being rapidly broken into smaller parts to create production, processing and transportation innovations, efficiencies and risk diversification.

On the financing side, traditional commercial bank debt financing is being rapidly supplemented by capital from new classes of investors who are relatively new to the agriculture sector, such as family offices, private equity funds and pension funds, and who have different investment horizons, objectives and risk thresholds. These investors are bringing not only additional funds but also non-agricultural short and long-term value creation investment strategies to the sector.  This will provide new financial flexibility as well as discipline.

The result of this collision will be that investment strategies and products will become increasingly calibrated with agriculture sector value chain stratification, more efficiently matching capital with vertical-specific needed agriculture sector finance.  This will lead to a broad range of investments that will accelerate agriculture sector value chain stratification further, from development of new types of food, to new processing robotics to the efficient delivery of food to consumers.

Tech/Land/Sales Tie-Ups Will Become More Common

The global agriculture value chain suffers from large input, throughput and output inefficiencies which cause a great loss of potential sector value.  Examples of this are:

–  Often developing countries with large agriculture land holdings lack technology and sales channels to maximize production potential;

–  Companies with developed agriculture technology lack land or sales channels to maximize technological potential; and

– Sellers who have strong sales channels lack appropriate or sufficient product to maximize sales potential.

Because of increasing market transparency, it has become easier to identify and eliminate these  inefficiencies, which should lead to new joint venture models which harness horizontal and vertical synergies. The realization of these synergies will create real financial gains that can be either passed through to consumers or recycled back down the agriculture value chain in the form of new investments.

The Agriculture Sector Value Chain Will Increasingly Resemble a Circle Rather Than a Line

While the global international trade network has allowed the agriculture sector value chain to be significantly extended, there is often a significant gap between production strategy and actual food consumption, resulting in significant agriculture production missteps and financial inefficiency.

Going forward the distance between the production and consumption ends of the agriculture sector value chain will increasingly form a circle rather than a highly elongated line, allowing producers to better understand consumer preferences and allowing consumers to better understand more about the food that they consume.  This reformation of the agriculture sector value chain will create many investment opportunities, particularly in processes and entities that can shorten production and consumption gaps.

Combined Energy/Agriculture Projects Will Become More Common

The combination of renewable energy and agriculture is still in its infancy and there are many ways that renewable energy can be used to maximize the value of rather than replace agricultural land, such as through mini-renewable power and bio-mass projects that power specific agriculture activities or provide energy for whole farming operations.

For some agricultural projects, complimentary solar or hydro projects may be used to generate independent revenue streams which can provide additional property financial strength and smooth out production-related revenue volatility.  This will not only open up agriculture projects to a wider investor base but will also increase confidence in yields which should attract further institutional investment capital.

Land Value Monetization Strategies Will Become More Widely Used

A significant obstacle to obtaining equity financing in the agriculture sector, particularly in the mid-market segment, is often that land values are very high but cash flows are low, resulting in the common M&A deal dynamic where investors want to value an agriculture business based on a multiple of cash flows but farmers do not want to sell their businesses at a fraction of what the fixed assets are worth.

There are several ways to overcome this impasse, but one way is to replace traditional buy-sell deal approaches with more flexible transaction structures which better share property operating risk and rewards going forward.  One example of this is the sale-leaseback where a farmer sells land to an investor and subsequently operates the land and makes guaranteed lease payments.  This allows cash-constrained farmers to monetize land values, remain incentivized to manage the property well over a long period of time and gives investors a long term attractive yield.

Agriculture Capital Markets Will Become More Diversified

Many agriculture companies, particularly in the mid-market segment, are not publicly listed, which limits their access to capital. However, individual consumers have increasingly shown an interest in a greater connection with the food that they buy, and this will likely naturally lead to small lot investments in agriculture projects.  Building capital markets products from a food consumption demand rather than a strictly financial perspective would also create wider agriculture market capital channels.

Article written by Darin Bifani, Partner of ONEtoONE Corporate Finance.

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