GLOBAL AG INVESTING: How Institutional Ag Investors are Influencing Agtech Adoption
Institutional capital has been allocated to agriculture for decades. Investment in the sector surged following the 2008 financial crisis as institutional investors sought safer, real asset alternatives to the financial markets that also provided a hedge against inflation and currency protection. Capital continues to flow into the Food & Ag (F&A) sector in recognition that the growing global population also provides attractive investment opportunities for investors seeking to meet sustainability objectives and ESG goals.
According to a 2019 investment report by the HighQuest Group, global F&A fund managers have approximately $130 billion in assets under management (AUM). Why is this noteworthy for agtech start-ups? Because asset managers are data junkies but they have long struggled with lack of data in this asset class.
A recent AgFunder report illustrates the enthusiasm early stage investors have for the sector with farmtech startup investment growing 370 percent since 2013, reaching $4.7 billion in 2019. The maturing of farmtech during this time has created an opportunity for asset managers to influence adoption on the farm in order to address three key portfolio management objectives:
1). Asset managers need normalized, trusted data to measure and benchmark performance;
2). Many funds are committed to sustainability but need verification and reporting; and,
3). Investors are conditioned to believe in data-driven decision making, and with shifting climate and environmental patterns, uncertain trade conditions, and labor and natural resource pressures, the old way of depending on gut feel and intuition are no longer adequate to manage portfolio risk.
The Value of Farm Data is Coming Into Focus
As a result of my background in capital markets and investment banking, I have always thought about what the institutional ag investor of the future may look like. Following this year’s release of my 2020 FarmTech Landscape, which I use as a heatmap of activity, I believe the future is coming into focus. Technology is now giving fund managers an edge in analyzing ag land acquisitions, capex management, risk mitigation, and when to market or hedge crops, commodities, and inputs. I am particularly intrigued by the emergence of startups that are integrating fintech and agtech to enable financial product and business model innovation.
The emerging arsenal of tools is enabled by basic digitalization, growing data sets, and accessibility of AI/ML and vision system capabilities. In fact, it is estimated that an average-sized farm will produce more than one million data points a day. How will asset managers leverage an “unfair advantage” with that data?
Land acquisition intelligence platforms like CIBO Technologies and Granular’s Acre Value help buyers and sellers understand valuation and productivity characteristics.
New models for data-driven underwriting and the creation of financial products like FarmOp Capital, which is funded by Finance of America, a subsidiary of Blackstone.
– Faster adoption of Farm Management Information Systems like AgWorld and Conservis, as well as AgSquared for speciality crops, that can offer agronomic and financial benchmarking, planning and budgeting, better inventory tracking systems, and more precise overhead allocation leading to insights about the true cost of production per acre, field, or farm.
– Technologies to help analyze market data can have a significant impact on profit by improving buy/sell decision making like FarmLead for commodity row crops and AGTools for fresh produce.
– Water availability, quality, and reporting technologies like Aquaoso and SWIIM System are especially valuable in Western states where lenders and investors are constantly monitoring water risk in their portfolios.
– Sustainability reporting will only continue to be a driver of digitalization as data is shared downstream with buyers and brands who are responding to consumer demand. For investors, this can take the form of ecosystem services models and carbon credits which require data to verify regenerative practices that can then be reported through the value chain (and hopefully drive crop premiums).
– Capabilities to analyze capex vs. opex decisions as equipment and input providers explore new business models, including XaaS and outcome-based pricing models.
What it Takes to Be Great
I have already seen savvy fund managers and bankers use many of these technologies to improve their analysis of fund returns and manage portfolio risk. Yet we can’t forget that the key driver in asset performance is having a great farm operator.
In fact, in a recent article featured in AgDaily by Dan Manternach, president of Perfect Fit Presentations, aggressive precision ag users generally averaged 2.5 to 3 bu./acre more than non-users on land of similar quality based on rent value. Furthermore, those users generally had greater returns over variable costs ranging from $19 per acre among those in the 30th percentile, to $10 per acre among those at the median, and $6 per acre among those in the 70th percentile. The takeaway is that precision ag can make land more productive and profitable, translating into higher rent value and market value for farmland, and drive significant competitive advantage.
For startups, the takeaways for building a solution that becomes an integral part of the farmers tool kit are:
1). Develop a UX/UI design and clear ROI to drive adoption.
2). Develop a solid understanding of how your technology fits into a system of systems and how your data is combined with other datasets to enable operational or financial decisions. This requires a willingness to forge partnerships and collaborations.
3). Understand the totality of the farming operation and ecosystem of influencers. If your technology aims to make a key part of the farm support team redundant, the barriers to purchase are higher and probability of success can be diminished.
In my conversations with financiers over the years, one thing stands out: the great operators know how to make money in good times and bad times because they track and manage efficiency and productivity affording the time to work ON the business, not just IN the business.
Seana Day is a Partner at Culterra Capital and a Venture Partner at Better Food Ventures, with 20 years of finance, M&A and technology experience. Seana lives in Turlock, the heart of California’s Ag land.