THE RISE AND RISE OF AGRICULTURE AS AN ATTRACTIVE ASSET CLASS
Institutional investment in the agricultural sector experienced a surge following the 2008 financial crisis. Whilst many other asset classes were contracting the food and agriculture (“F&A”) sector showed distinct resilience. Institutional investors targeted ways to diversify their portfolios via allocation to assets that:
- Were not correlated with the financial markets;
- Enhanced wealth preservation; and
- Provided a hedge against inflation and local currency depreciation.
The investment activity in the agriculture sector has not slowed down post the financial crisis. If anything, it is speeding up. The continuing rise of investment activity in the sector is being driven by some compelling themes:
- Global population increase to 9.7 million by 2050 coupled with an increase in calorific consumption in developing countries;
- The inelasticity in demand for agricultural products through periods of global economic crises and therefore low volatility of returns;
- Additional opportunities for capital growth in farmland values as productivity is enhanced through the application of advancing technologies (e.g. biotech, IoT, AI, robotics, etc);
- Institutional investors seeking ways to achieve their sustainability and ESG targets.
A recent report published by High Quest Group LLC (“The Global Aginvesting Rankings and Trends Report 2019) really caught my attention. The purpose of the report was to develop a comprehensive view of the capital allocation to F&A – and has been based on 698 organisations surveyed. The result is a well-documented and informed overview of: the current capital deployed in the sector (assets under management or “AUM”), geographic apportionment and allocations by institutional investors. Although the authors suggest the report is by no means definitive it certainly provides a fresh insight into the global aginvesting landscape than previous attempts.
Key highlights from the report:
- AUM in global F&A sector exceeded $131 billion in 2019.
- The top 30 investors accounted for 68% ($88.6 billion) of the AUM in 2019. 15 of which are pursuing a farmland investment strategy.
- Investing in farmland (primary ag) accounts for the largest percentage of AUM at 39% ($51.5 billion) with debt/credit at 32%, private equity at 14%, impact investing at 9%, venture capital at 5% being the significant others.
- 30 farmland investors have over 19.5 million hectares under management – dedicated to row and permanent crops, specialty crops and animal protein.
- The overwhelming majority of the top 30 farmland investors having a geographic focus on North America, South America, Australia and New Zealand.
- Asset managers currently manage 469 funds dedicated to making investments in the F&A sector.
- Closed funds dedicated to F&A have had a 36% CAGR over the past 10 years, with the number of funds increasing by 79% in 2019 on 2018.
For anyone involved in developing ag investment opportunities in sub-Saharan Africa, the report is rather sobering as much as it is exciting.
Sobering because it highlights how absent sub-Saharan Africa features within the major ag investment portfolios. As of 2019, of the top 30 ag investors (by AUM), none are based in Africa. Of the top 30 only two have Africa within their geographic focus. Of the capital allocated into the regions F&A sector, by asset managers and institutions, very little is in primary agriculture. Surprising (or perhaps not depending on ones lens) considering the compelling themes of the regions population growth rate, climatic suitability, land availability, water resources, low relative cost of production, etc.
In spite of the apparent inertia from the major global ag investors, there is ever increasing farmland investment activity within numerous countries across SSA – particularly in permanent “high-value” crops. Mostly by regionally-based agribusinesses, entrepreneurs and a handful of local fund managers who understand the landscape, opportunities and risks. Coupled with support from many of the DFI’s and Impact funds, I envisage much more “catalytic” activity in the sector over the next decade – which will hopefully encourage more asset managers to include SSA in their investment strategies.
My prediction is that the “Global Aginvesting Rankings and Trends Report 2030” will show significantly more weighting of F&A investment activity in sub-Saharan Africa than today. The opportunities, for patient capital investors, will simply be far too compelling to ignore.
Craig McBain (14 December, 2020)
*The term “aginvesting” refers to investing across the “F&A” value chain from inputs used for production, crop and animal protein production to production of food, feed, renewable energy and other products derived from biomass.
(Watch this space for my next post where I dive into Peru’s agricultural renaissance – and possibly lessons applicable to Africa’s agricultural sector.)