Impact investing in agriculture: A new source of capital
There is a new trend that is changing the way we grow our food: impact investing in agriculture. Impact investing allows farmers to access diverse sources of private capital funding to raise money for sustainable projects.
A growing number of investment companies are interested in funding food and agricultural projects running sustainable or transformative business models. For example, in America, Bonterra Partners and SLM Partners invested in ranches to encourage a switch to 100 percent grass-fed beef production.[1] In Australia, Rural Funds Management Limited, which owns a portfolio of 687 million Australian dollars in agricultural assets, invested in cattle properties that provide climatic diversification.[2]And now the major banks in Australia are joining in with National Australia Bank offering Green Bonds for sustainable projects.
Farming and agriculture have long been the domain of chemical companies, conventional capital and government incentive programs. However, this system has been changing slowly over the last decade to make room for smaller, sustainable projects with farms that are trying to do things a little differently. Whilst impact investments in agriculture do care about profits they also look to make sure investments generate social and environmental benefits.[3]
This trend is likely to continue with the success of some of the early impact investments. Croatan Institute recently published a comprehensive report about impact investing called the “Impact Investing in Sustainable Food and Agriculture Across Asset Classes.”[4] The guidelines for responsible investing in food commodities, include implementing investments that acknowledge social and environmental impacts, disclose ESG impact of trading in food commodities, advocate for improved regulation and support appropriate investments that reduce the risk of famine and build sustainable communities.
So why is the investment community suddenly interested in sustainable approaches to food production?
Social Conscious of High Net Worth Investors
There is a growing class of high net worth individuals who are looking for sustainable investment opportunities. These investors are not restricted by the traditional timeframes and investment parameters placed on publicly listed entities. The entrance of longer term capital into the agriculture market can only be viewed as positive as the cycles in broadacre agriculture means that 80% of profits are usually generated in 3 years out of 10, meaning that short term capital is often caught out by cycles in weather patterns and markets.
A looming global food crisis
Investors are investing their money into changing the game, because there is a global food crisis looming. Current farming methods will not be able to sustain world food production beyond 30 years into the future. By 2050, food production will need to rise by 70% to support the 200,000 new people added per day to the world food demand.[5]
The current food production system is fragile, with challenges faced by climate change mitigation and adaptation, water scarcity, the decline of petroleum-based energy, biodiversity loss and persistent food insecurity. In addition, the degradation caused by deforestation and inappropriate agricultural practices, has already resulted in losses of 2 billion hectares of the world’s agricultural land[6] and continues to account for net losses in cropland productivity at an average rate of 0.2% per year. It is estimated that 20,000 to 50,000 square kilometres of land are lost annually through land degradation.[7]
New approaches to agricultural production are required if the planet is to produce enough food for an expanding population. Current farming methods use far too much water, chemicals and energy to remain sustainable in the medium to long term. Radical new approaches are needed. This is where impact investing in agriculture has found its niche.
Making impact investments in agriculture
Impact investing in agriculture has disrupted traditional capital markets; currently agricultural electronically traded funds such as MOO, PAGG and CROP are on the rise. These funds are mostly populated by the agricultural and chemical giants such as Monsanto, Syngenta, Cargill and Deere. However, they are also swelling with the growing investments through impact investing.
New impact investing entities are forming. GIIN’s Terragua working group includes IFC, OPIC, WK Kellogg Foundaiton, Omidyar Network, the Tony Emelelu Foundation, Calvert, Accion, IGNIA and many other impact players.[8] With a portfolio of USD 3.2 billion, Responsibility is investing in 500 companies in 100 emerging and developing countries, provided the projects can demonstrate that they improve well-being, and create decent employment, better access to markets and healthy ecosystems.[9]
While impact investing in agriculture is still relatively new, farmers are beginning to respond and become active players in this new economy. With new opportunities for financing, the possibilities for sustainable farming are widening. It is a welcome development for people that work on the land every day, because they know firsthand that it makes more sense to farm sustainably. Impact investing in agriculture has the potential to change the way we grow our food.
For more information on projects that impact investors can get involved in please contact southern ag management
[1] http://civileats.com/2017/06/07/despite-many-challenges-grassfed-beef-could-go-mainstream/
[2] https://ruralfunds.com.au/about-rfm/rfm-history/
[3] http://www.fao.org/support-to-investment/news/detail/en/c/1061863/
[4] http://www.trilliuminvest.com/wp-content/uploads/2017/05/Investing-in-Sustainable-Food-and-Agriculture.pdf
[5] FAO
[6] Pinstrup-Andersen and Pandya-Lorch, 1998
[7] Ben Biggelaar et al. (2004)
[8] http://maximpactblog.com/cultivating-change-why-agriculture-needs-impact-investing/
[9] http://www.fao.org/support-to-investment/news/detail/en/c/1061863/
