Deeper Engagement with Sustainable Food and Ag: Pandemic Creates Multiple Opportunities for Food and Ag Investors

Last month, Temasek teamed up with the International Finance Corp. and food-focused venture capital firm Astanor Ventures to invest $30 million in Apeel, a startup whose plant-based technology extends the shelf life of fruits and vegetables from farmers who lack access to refrigerated supply chains.

The funding represented several intersecting trends, with investors, consumers and innovators all paying increased attention to sustainable food and agriculture today. While the attention isn’t new, it’s clearly been heightened by the coronavirus pandemic, which exposed multiple weak points in the global food industry and also emphasized agriculture’s interconnected ties to climate change and even to social and racial justice.

Even as the virus still rages, investors are taking steps to shore up that food system and make it more environmentally and socially friendly — and make some investment returns, too. They’re finding a range of opportunities in everything from innovative new food tech companies like Apeel, to back-to-basics farming methods that are intended to help rebuild soil and ecosystems.

Investors, particularly foundations, are showing a stronger desire to invest in sustainable agriculture, says Nicole Davis, partner and senior wealth manager at Veris Wealth Partners.

End-users are paying more attention to food systems too. “There’s this real hunger, if you will, among consumers to have a deeper connection to where their food is coming from,” says Cynthia Muller, director of mission-driven investment at the W.K. Kellogg Foundation, a leading investor in the sustainable food and agriculture space with $8 billion in assets. That desire for greater connectivity is leading to more investor dollars chasing an increased number of projects and companies in the space as well.

The coronavirus has been a big driver behind a lot of this increase. The pandemic “impacted the food/ag space in myriad ways, up and down the supply chain,” says Atish Babu, v.p. of capital development & investor relations at Agriculture Capital, a sustainability-focused agriculture and food investment firm. He points to items like labor shortages on farms, a sharpened focus on employee health and safety protocols, and efforts to keep store shelves stocked in spite of pressures all along the food supply chain.

Such factors are leading investors to pay more attention to sustainability issues. “At a high level, we have seen increased interest in the food production and farmland space as the asset class again showcased its resiliency compared to the broader market,” Babu says. That interest has led to “significantly more in-bound interest from those who are keen to learn more. Specifically, the topics of regenerative agriculture and resource efficiency are increasingly mentioned.”

More Attention for Regenerative Agriculture Investments

“Regenerative agriculture” is a broadly defined term that generally means farming practices that work to rebuild soil and mitigate climate change, though means such as improving topsoil, improving the water cycle, expanding biodiversity, and supporting carbon sequestration. Investors looking at regenerative agriculture include Veris, which just issued a report on sustainable agriculture that includes a lengthy discussion on the topic. (click here to view the report by Veris.)

As of last year, sustainable and regenerative agriculture had attracted some $370 billion in total investments, according to Croatan Institute numbers cited in the Veris report. That figure has surely increased, given the pandemic and the fact that there is plenty of room in the space for additional investment capital.

Veris notes a “convergence” of regenerative agriculture, forestry and climate change solutions, as investors recognize that these three areas are closely linked. Indeed, regenerative agriculture is increasingly necessary for many reasons — including that modern farming techniques often cause soil to be depleted of nutrients, such that we may one day run out of resources to feed the global population that is forecast to near 10 billion by 2050.

As the report notes, many methods that improve soil health also lead to higher profits because they reduce expensive inputs; they may also cause improved efficiencies and crop yields. That is making regenerative agriculture, and other forms of sustainable food and agriculture, increasingly appealing to investors.

Indeed, Veris is seeing a lot of interest for sustainable agriculture investments, particularly from family foundation clients, says Davis.

“There are a variety of new products that are trying to help the transition to regenerative agriculture,” she says, including debt funds that lend money to farmers to pay for regenerative agriculture practices.

With these kinds of investments, it’s important to understand that different investors may have vastly different goals. “One type of client wants to support sustainable agriculture by investing in a venture capital fund that is investing in companies that are largely focused on the distribution of sustainably farmed products,” Davis says. That is where you could potentially see higher returns in the sustainable food and ag sector, she says.

Other investors, she adds, may seek different, and very specific impact goals, such as “land access for farmers, encouraging certain regenerative practices, or paying for the storage of carbon through regenerative agriculture practices,” she says.

One thing Veris cautions its clients is that different types of sustainable agriculture investments will have different potential returns. “It’s much more difficult to get market rate returns without being extractive when investing directly in farms and farmers,” Davis says bluntly. “The more you are trying to ensure the economic viability of small regenerative farms, the harder it generally is on the return side,” she says.  “Ester Park from the No Regrets Initiative puts it best, market rate returns were generated with extractive agriculture. How can we expect these same returns when regenerating the depleted agriculture system (at least initially)?”

In any case, the interest is strong, managers say. Agriculture Capital Management, for instance, is also seeing a “trend of investor interest in regenerative agriculture as an opportunity for ESG investments,” Babu says. “With the severe fires across the Western U.S. this year, climate change is top of mind. Regenerative agriculture, with a focus on soil health, and permanent crops in particular, can offer a range of benefits — from carbon sequestration to efficient water resource management for long-term impact.”

The markets have developed a number of methods for investors to access regenerative agriculture and related areas. A popular one is the purchase of carbon credits, which can help companies offset their own carbon emissions and even, in some cases, assist farmers in using soil to sequester carbon.

Companies like Indigo Ag are among those benefiting from this interest. The Boston firm helps farmers improve their soil health and crop practices, and has attracted several hundred million dollars from investors, the Veris report notes. And rePlant Capital, an impact investing firm focused on climate change solutions, is working with food giant Danone to make tens of millions of dollars available as loans to support conservation and regenerative farming practices.

Invesco Asset Management is also getting into the space: the manager is working to create a type of green bond focused on soil health and carbon sequestration. Invesco expects to find buyers for such bonds from foundations and state and corporate investors, according to the Veris report.

Kellogg’s Approach to Sustainable Agriculture

Kellogg’s Muller says today, with the world looking to reset in the wake of the virus, is a great time for investors to take advantage of this renewed focus on sustainable agriculture and related issues. Kellogg is looking at a number of such ventures, including some dealing with urban and even suburban farming as a way to shorten and strengthen food supply lines

The foundation is also looking at investments that can help solve issues like food waste, food security, access to food, and increasing the participation of minorities and indigenous communities in the food system.

Kellogg has also sharpened its focus on investing with managers who are “working on streamlining the plant based food access,” Muller says. One goal is to “create more efficiency for plant-based products, and drive the costs down,” she says. Kellogg is doing this in part through Better Ventures, a venture capital manager that invests in startups like Emergy Foods, which produces the alternative meat brand Meati Foods; cellular agriculture firm Mission Barns; and plant cell agriculture startup Chi Botanic.

The foundation also backs efforts aimed at supporting minorities in the food and agriculture system. For instance, Kellogg invests in the Native American Agriculture Fund, which offers grants and other assistance to support Native farmers and ranchers. It’s also supporting an initiative aimed at creating more opportunities for Black food farmers in upstate New York, Muller says.

Another social justice effort is the foundation’s investment in Everytable, a Los Angeles healthy fast-food company that adjusts its prices based on the restaurant’s location — essentially, higher-income neighborhoods subsidize diners in lower-income areas.

Investment Opportunities Across the Food/Ag Space

Other inventors are finding new opportunities among larger trends that existed pre-pandmeic, Agriculture Capital’s Babu says. Those include “ecommerce for produce and groceries, more transparent supply chains, and increased consumer emphasis on food quality. Many new investment opportunities can stem from these trends,” he says. “Broadly speaking, investments in produce packaging suited for ecommerce that also reduces single-use plastics, safety protocols up and down the supply chain, and quality control are all sure to benefit from the pandemic.”

And the sector’s recent performance is certain to attract more attention. “Increased LP interest seems largely driven by the broader asset class’s resilience in times of turmoil such as a pandemic or recession,” Babu says. “In addition to that, the number of offerings available to LPs is growing. Where historically, LPs may have found it difficult to get exposure to the asset class, today there are a variety of firms with nuanced mandates ready to steward institutional capital.”

Kellogg is also “looking at ways we can work with cities, either through muni bond financing or other actions, to support urban farming,” Muller says. “We’re seeing a lot of that coming up, because it’s better if food is closer to us.”

These trends are all but certain to continue as the world tries to shake off the coronavirus, as the global population keeps growing, and as the agriculture and forestry industries work to reduce their greenhouse gas emissions, which currently comprise almost a quarter of global emissions. And that will lead to more investors looking to put their money to work in companies like Apeel, or in farming-focused bonds, or in funds supporting minority farmers.

And while the coronavirus and its impacts was a major shock, this increased focus on sustainable food and ag is not really new. In many ways, it’s just a more intense way of embracing trends that were already in existence, but have simply become more obvious and more urgent.

“In a world of near-zero interest rates, every investor seems to be seeking stable, yield-producing, and non-correlated assets,” Babu says. “Those have been the primary long-term features of real asset investing in the farmland/agriculture space, and this period has reinforced those investment characteristics.”

Or, as Muller puts it: “The lens hasn’t shifted. It’s just deepened.”

 

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