Food Security Worries, Not Climate, Driving Money into Ag-Tech

Venture capital investments into agriculture technology companies have slowed this year, just as they have into startups overall. But the outlook for ag-tech remains positive, and as inflows start to accelerate again, the primary driver won’t be net-zero or other climate-change centric concerns, experts say.

Instead, the key force behind ag-tech investments for at least the near-term is likely to be food security – and the need for individual nations to ensure that global events can’t disrupt their food supplies.

“Food security, and providing food, is maybe more important than sustainability” in terms of driving investor interest these days, said Nitza Kardish, CEO of Trendlines Agrifood, on a panel at Rethink Events’ Asia-Pacific Agri-Food Innovation Summit, held recently in Singapore. Her comment was reflective of the general attitude among her fellow panelists

That interest in ag-tech – vertical farms, alternative proteins, precision farming and the like – has been strong in recent years. Companies in the sector raised $12.2 billion last year, CropLife reports, citing Crunchbase data – more than double the amount raised in 2020.

Indeed, “The last few years we’ve just seen a tremendous amount of capital go into these industries,” said Adam Bergman, global head of ag-tech investment banking at Citi, at the Rethink conference.

But, according to a new McKinsey report, “Ag-tech investment saw a precipitous decline toward the end of 2021.” Through the first three quarters of this year, ag-tech companies raised $8.9 billion and are on pace for $10 billion to $11 billion for the year, CropLife says – slightly off from last year’s total.

In just the third quarter, those companies raised $2.6 billion – down 5% from Q2, though still better than the broader VC industry, which saw a 33% quarter-on-quarter drop in investments.

Such declines in VC funding “raise a number of questions for ag-tech start-ups and investors,” McKinsey says in its report, “particularly given broader market uncertainty.”

Still, the report also outlines several reasons for optimism, including indications that ag-tech fundraising looks to be “stabilizing” after the recent decline and the fact that VC funds in general have a lot of dry powder that they’ll be looking to deploy.

Also, “Food and sustainability remain high-priority areas for a number of investors, particularly those with environmental, social, and governance (ESG) agendas,” McKinsey says.

There was little pessimism on display at the Rethink conference, though panelists agreed that the overall fundraising environment interest may be evolving.

Much of what Bergman called the “tremendous amount of investor interest” in ag-tech in recent years stemmed from the belief that the sector was poised to deliver massive carbon savings, as well as solid returns.

But recent headlines – supply chain disruptions and Russia invading Ukraine in particular – have made many nations, and investors, focus more on food security than carbon emissions.

“I think we had a sea change in the past six or nine months because all of a sudden, this view of a climate-positive future fell up against what was a new trend which none of us were really focusing on, which is food security,” Bergman said.

To some degree, the split runs along the line between developed and developing nations

“A lot of the developed world, which is much wealthier, is more focused on sustainability and sustainable food systems,” Berman says. “In the developing world, where you have a growing percentage of people who are facing food insecurity, they are starting to think, ‘Wait a second, let’s not talk about sustainability, let’s talk about food. Let’s talk about my ability to eat food. How do we stop hunger? How do we go up and really solve these problems?’”

That doesn’t necessarily mean less money will flow into sustainable agriculture projects and technologies – but the precise direction may be tweaked. Projects related to food waste are likely to be hot.

“Nowadays, we put a lot of emphasis on food waste, looking for technologies that will contribute to reducing food waste,” Kardish said. That, of course, can help with food security while also reducing the sector’s carbon emissions.

There are already signals that a sharper focus on food waste may be underway. Food waste companies raised nearly $400 million more in Q3 than they did in Q2, according to Crunchbase data – even amid the overall slowdown in VC and ag-tech funding.

Ag-tech investors can definitely play a major role in reducing food waste, notedIan Sikora, executive director of Openspace Ventures. “Applying very simple technology to solve a very basic problem can lead to massive improvements in efficiency,” he said at the conference. “That can reduce a lot of food waste.”

Bergman agreed that food waste will be a large focus going forward. It has to be, as the global population continues to grow. “We can’t have 30% of what we grow not get consumed,” he said. “I think you’re going to see more and more focus on food waste since, like energy efficiency, it’s the lowest-hanging fruit.”

Indoor and urban farming also look poised to continue to rake in investor dollars, experts say.

“I still expect a tremendous amount of capital going into indoor farming,” Bergman said. Food security will be a big driver of this. “I think the lessons everyone’s going to learn from what we’re seeing with the Russia-Ukraine war, as well as climate issues, is that you better produce as much as you can domestically, because you can’t really count on your neighbors.”

Kardish said she agrees that urban farming will be a key area of interest, as it “saves so many resources,” including energy and transportation. However, a fair critique of urban farming is the limited variety of crops that most such farms grow currently. “We do have to increase the crop variety,” she said, adding that this will likely mean the use of genetics.

She also thinks cellular agriculture will see increased attention from investors. In fact, her company just announced an investment in Celleste Bio, a startup that is developing cell culture methods to produce cocoa ingredients. “We think [cellular agriculture] will be much more sustainable than growing In the traditional manner,” she said. “This is one of the trends that I think is here to stay.”

Food security is likely to fade as the primary driver behind ag-tech investing, eventually, with climate concerns returning to the forefront. But for now, securing food production will be the focus for ag-tech investors, companies and governments.

“We’re at a really interesting time where we’re talking about a climate-positive food system,” Bergman said. “But I think that’s going to be interrupted for at least the next 12 to 24 months as we deal with food security.” He added: “No political leader is going to focus on sustainability if they’re citizens don’t have enough food to eat. That’s typically how governments get overthrown.”

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