As a sector, agriculture has increasingly been in the spotlight since the 2008 commodity price spikes[i]. There are many reasons for this increasing interest, not least because global populations are increasing[ii], the rise in urbanisation[iii], change in diets[iv], and limited supply of agricultural land[v]. Added to this, the production goal posts are changing due to, inter alia, climate change and biodiversity loss. The sector is also linked with many high-profile, emotive issues, such as land rights, gender, water, development, poverty, food security, nutrition, trade and resource commodification.
In this post, we aim to give a short, non-exhaustive overview of some of the interesting trends and business models that we are coming across, and in particular those that encourage ‘leapfrogging’ to more efficient land-resource utilisation.
The need for jumping the curve
Kuznets theory of development, the ‘Environmental Kuznets Curve’, suggests environmental degradation increases with average per capita incomes until an inflection point is reached, after which marginal environmental impacts start to diminish[vi]. While this growth paradigm was possible for economies that went through industrialisation first, it’s no longer an option for emerging economies, especially given the shrinking global natural environmental resource base. We need to start encouraging emerging economies to jump this curve, i.e. to ‘ encourage profitable investments that can reduce marginal environmental footprints that also promote socio-economic growth.
At Clarmondial, we believe that looking at agricultural investments through this lens is necessary for several reasons, such as: most of the world’s poor still rely on agriculture to meet their livelihood needs[vii], and many of the emerging economies with the highest growth rates are also still essentially agricultural. Concurrently there is an ever-increasing demand for agricultural products, in line with population growth and adoption of resource-intensive diets associated with economic development. This infers that more efficient production is required. Agriculture is also a major source of greenhouse gas emissions, which urgently need to be curbed to prevent further disruption to the global environment.
We believe that there are a number of trends that can promote leapfrogging within, or linked to, the agricultural sector, and that investors should consider, particularly in the context of emerging-market agricultural investments:
Interesting business models
In addition to these general trends, we observed some interesting business models that can help ‘jump the curve’. Those models are not necessarily new, but they do provide relevant examples in the context of leapfrogging.
(1) Aggregating Producers:
One of the big issues with doing business in rural areas is that of aggregation and reaching economies of scale: it’s often difficult and expensive to identify and coordinate rural suppliers, especially when they practice small-scale production and exist in areas of poor infrastructure. Agricultural producers that grow by establishing win-win relationships with smallholders can increase their production, and circumvent the debate around ‘land grabs’. When implemented properly this approach can help secure property rights of smallholders, and provide them with channels to valorise their products. This can also reduce risks to buyers and investors, who are faced with issues linked to adequate quality, quantities and timeliness of delivery when dealing with smallholders. These types of business models support leapfrogging as it can help overcome this ‘last mile’ hurdle by providing a production anchor to the smallholder, in the form of infrastructure, technical assistance, working capital and organisational support.
(2) Market and Supply Chain Infrastructure
The infrastructure required to link producers to markets is often missing in emerging countries. This includes infrastructure such as warehouses, roads, marketplaces, and factories for processing and packaging, as well as information and communications technology (ICT). Investments in this type of infrastructure and accompanying management may be profitable, while also providing significant development opportunities to rural communities. One example is warehouse receipt financing systems, where farmers can deliver and grade their produce to independent warehouses against a receipt. The farmer can use this receipt to get credit, which can help them smooth their seasonal production cycles. Grading can be performed under transparent pre-agreed standards. It also means that the produce can be stored in a safe place, allowing the farmer to sell out of season, when prices are usually higher, thereby getting more value for money.
(3) Energy-Agriculture Nexus
Access to reliable, affordable energy is a major impediment to growth in the agricultural sector in emerging markets, especially when related to irrigation, processing and storage. By approaching the problem holistically, it is possible to develop energy and agricultural industries in parallel, thereby advancing solutions for both areas. For example, the rice processing industry in Cambodia is not more competitive as a result of relatively high-energy prices and unreliable supply. Therefore, paddy rice is often exported to Thailand or Vietnam for processing. Agriculture can also be a major source of waste products, which can in certain circumstances be used to generate lower-cost energy (e.g. liquid waste that can be converted to gas in digesters, or solid waste that can be burned in a gasifier). In these circumstances, its often possible for investors who are not interested in agriculture per se to make profitable investments in conversion of agri-wastes to electricity and/or heat, sold to a captive user or the grid. This can significantly reduce production costs in rural areas, and increase profit margins to agricultural producers thereby supporting more resource-efficient economic growth[xii].
Figure 4: Basic schematic example of agriculture-energy nexus
How to invest in agriculture?
Investors can gain exposure to agriculture in a number of different ways. The most suitable form of exposure varies according to the investor, including the investors’ risk and return appetite, deal size, term and transaction cost, speed to act, interest in non-financial outcomes and geographical preferences, among other factors. Obviously, each investment requires a competent advisor and careful due diligence.
The general categories of agri-investments are summarised below:
At Clarmondial, we are working with project developers, entrepreneurs, investors and other parties (e.g. Governments) to encourage investments in the agri-sector that can promote ‘jumping the curve’. Let us know if you would like to explore this topic in more detail.
We recognise that this overview is rather basic, but hope that it has been helpful: we welcome feedback and comments!
[i] For a discussion of this, see “Why Another Food Commodity Price Spike?” by Ronald Trostle, published by the United States Department of Agriculture (USDA) Economic Research Service: http://www.ers.usda.gov/amber-waves/2011-september/commodity-price-spike.aspx#.Upyfk6VLcds
[ii] The United Nations suggests that world population will peak at 9.22 billion in 2075. See ‘World Population to 2300’, published by the United Nations, New York, 2004. Available from: http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf
[iii] Currently, ca. 50% of the world’s population live in cities, and this proportion is set to increase: Half the population of Asia are expected to live in urban areas by 2020, while African populations are expected to reach 50% urbanisation rate in 2035. See ‘World Urbanization Prospects: The 2011 Revision’, published by the United Nations, New York, 2012. Available from: http://esa.un.org/unup/pdf/WUP2011_Highlights.pdf
[iv] Average kilocalories consumed per person per day are increasing, and the proportion of meat in diets is increasing. For facts, see the CGIAR Climate Change Agriculture and Food Security (CCAFS) website: http://ccafs.cgiar.org/bigfacts/dietary-change/
[v] For a discussion on this, see ‘The Global Supply and Demand for Agricultural Land in 2050: A Perfect Storm in the Making?’, presented by Thomas W. Hertel (Purdue University) at the AAEA Presidential Address, 2011. Available from: http://ageconsearch.umn.edu/bitstream/100557/2/Hertel%20T.pdf
[vii] According to IFAD, at least 70% of the world’s very poor are rural; see IFAD’s Rural Poverty Report (2011). Available from: http://www.ifad.org/rpr2011/media/kit/factsheet_e.pdf
[viii] For example, the Everything But Arms (EBA) agreement, which provides duty and quota-free access to the European Community for all Least Developed Countries; In the US, the African Growth and Opportunity Act (AGOA).
[ix] For example, the EU General Food Law
[x] For example, the US Lacey Act, or the EU FLEGT
[xi] For example, US Dodd-Frank Section 1502 on Conflict Minerals
[xii] Obviously, this has to be properly managed so that biomass is not sourced from unsustainable sources