We have reached the ultimate demand-supply imbalance and it’s implicating tomorrow’s dinner.
The United Nations forecasts that the global population will reach a colossal 9.7 billion by the year 2050. Meanwhile, the Food and Agriculture Organization (FAO) has predicted that global agriculture production must increase by 70% in order to feed this 9.7 billion population. Moreover, the FAO predicts that in developing economies where population growth is increasing more rapidly, and poverty and malnourishment is most prevalent, global agriculture production must grow by 100%. Simultaneously, consumer preferences (particularly the millennial generation) have shifted to demand sustainably-sourced, chemical-free food, as well as transparent supply chains. In other words, more people are demanding “better” food.
Striving to increase crop yields, as opposed to clearing more land for agriculture, has been emphasized as the favored resolution. Yet, crop yield trends indicate an inability to grow at the pace required. The cause is cited in part due to climate change, such as droughts, floods, extreme temperature variations, and crop diseases. The increasing number of extreme climate events are serving to exacerbate the issue. The implications are tremendous.
On October 2nd, 2013, multinational agrochemical biotechnology firm, Monsanto, purchased weather insurance company, Climate Corp, for a hefty price tag of $930 million. The acquisition would forever change the way investors and farmers considered the intersection of technological innovation and agriculture. Monsanto stated its motivation for the purchase as the ability to leverage Climate Corp’s expertise in agronomy, data acquisition, and data analytics to provide value-added services to the farmers already purchasing Monsanto chemicals. One year later, in 2014, the AgTech sector grew 170% as it attracted a total investment of $2.36 billion across the entire agriculture value chain. In 2016, AgTech as a sector experienced total investment of $3.23 billion: 580 deals across 670 unique investors.
According to McKinsey & Company, the food and agribusiness market is $5 trillion and growing.
The agribusiness industry has generated significant negative environmental effects, such as ecosystem destruction, soil erosion, biodiversity loss, pollution, natural resources and water waste, in addition to social consequences, such as obesity, poverty, gender inequality, and labor injustice. Today’s agribusiness accounts for about thirty percent of global greenhouse gas emissions, a 75% increase from that of 1990. Yet, agribusiness need not be destructive. Sound agriculture practices can protect biodiversity, sequester carbon, increase soil health, and create jobs. In addition to the rapidly increasing population, five chief global developments have enthused investment in AgTech over the latter half of the past decade:
- Increasing demand for food and changing characteristics of this demand
- Increasing demand for supply chain transparency
- Growth of private funding for agriculture innovation
- Increasing effects of climate change and the urgency to mitigate said effects, and
- An advent of technologies applicable to agriculture efficiency
THE FUTURE OF FOOD:
The Internet of Things (IoT), or the ability to connect any device to the Internet, offers tremendous efficiency and profitability advantages for agribusiness. IoT has been most commonly applied to deploy connected sensors across a farm, or to measure and monitor on-farm conditions, such as soil moisture and grain quality. The risk, and resulting high interest rates, that still remains is that lenders are not granted any assurance of farm-level activity; rather, lenders can only analyze prior years’ numbers and make inferences. Therefore, vast potential exists in this space for sensors that are able to provide viewers real-time insights as to the conditions of soil, plant health, pest and disease presence, as well as algorithms that can predict yields and recommend best practices. Such advances in technology will likely decrease risks and enable cheaper financing.
Precision Agriculture includes drones, irrigation, satellite & imagery, hardware, sensors, and weather. Precision agriculture technologies have the potential to remove excess human labor and improve operating margins, but the space has room to mature. Farms and supply chains must become more comfortable with aggregating data and startups must articulate a compelling value proposition for the best uses of satellite feeds and drones. The problem that remains unsolved is that while much data and technology exists, entrepreneurs are still struggling as to how to articulate a value proposition that will resonate with farmers and solve a real problem. The vital question that must be asked is how farmers can use this plethora of technology in an integrated approach that effects the bottom line.
Aerial and Satellite Imagery has enabled greater supply chain transparency and risk assessment. Blockchain technology has the potential to transform agribusiness transactions, ultimately serving to decrease costs, time delays, and risks. The technology is immature, but anticipated benefits include: low transaction costs through digital payments, “smart contracts” for negotiating within production networks, peer trading to replace intermediaries, an increase in the amount of agricultural micro-commodity markets, and secure guarantees of sources of foods, including the ability to trace goods along the global agriculture supply chain. Deep learning (machine learning that uses neural networks to extract patterns from data) helps farmers make sense of images taken from satellites, e.g. to identify diseases and anomalies. Sharing economy and marketplace models have enabled farming practices in developing countries where farmers and growers don’t own tractors. Online marketplaces are enabling greater access to equipment.
- Interoperability: Although massive amounts of technology and data exist, solutions are highly specific in nature and the industry has not yet been able to connect data to data. In other words, there is a lack of interconnectivity between existing technology solutions. The desired future is a world in which data is aggregated from multiple sensors, analyzed by many algorithms, and compared across time and geographies. In this world, farmers use multiple technologies to drive a single decision.
- Funding Pipelines: Due to the consolidated nature of the industry, the small number of exit opportunities is still a valid concern among investors. While Climate Corp propelled the industry forward by $1 billion, few others have exited as successfully. The uncertainty around exit pathways is a potential advantage for investors with larger wallets able to fund longer-term investments (i.e. across multiple rounds of financing.) Optimistically, as the industry evolves, exit opportunities will increase.
- Farmer Hesitation: One major hurdle to achieving broad-scale data integration is a hesitation on behalf of farmers to share and aggregate data with each other. Some have cited a fear of large corporations exploiting their data for marketing or commodity futures traders leveraging data for investment. In response, twelve major AgTech providers and farm organizations have crafted ground rules for data: a voluntary “Privacy and Security Principles for Farm Data,” attracting big names such as John Deere, The Climate Corporation, and DuPont Pioneer.
- Timeframes: field trials or natural systems have a fundamentally different time frame than that of software, and thus achieving sufficient return on investments might take longer. This poises a problem for venture capital funds with LPs desiring short-term returns.
Progress is evident, yet slow. Funding has increased and technologies are advancing; however, as aforementioned, exits are few and far between. Businesses are continuously striving to offer an integrated data aggregation platform, farmers are increasingly becoming more comfortable and adept in using technology and data to drive bottom-line decisions, and investors are increasingly gaining comfort in the space as the financial opportunities are becoming evident. While there are certainly challenges, no challenge thus far presents a problem unable to be overcome. Moreover, farmers, technology providers, investors and companies in the space are actively working together to leap these hurdles. The future is bright.