The Untapped Investment Potential of the South American AgTech Space
This article is a synopsis of the report ‘Fields of Promise: The Untapped Potential of the South American AgTech Space’, written collaboratively by Valoral Advisors and Quarterra. The full length report can be downloaded here.
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The Food & Agriculture Asset Class
As those familiar with the sector know, the food and agriculture industry worldwide is undergoing extraordinary change. Evolving supply and demand dynamics such as shifting demographics, sustainability pressures, and novel consumer concerns have led to the emergence of the food and agriculture asset class as a new and highly relevant investment space. Interest has been growing from both private and institutional investors. In fact, between 2005 and 2015 the number of investment funds specializing in food and agriculture assets jumped from about 30 to over 300, with current assets under management estimated in excess of $52 billion.
The AgTech Venture Capital Space
The early days of the agricultural commodity boom in the 2000s were led by investments in farmland, agricultural commodities, and listed companies. More recently the venture capital space has been gaining traction, with investments in AgTech growing substantially. According to AgFunder, despite the slump in farm income last year, AgTech investments doubled to a record $4.6 billion in 2015. However, the vast majority of investment is taking place in North America and Europe. These two regions account for over 80% of the total capital held by the 34 VC firms that manage the 42 funds analyzed in this study.
The AgTech venture capital space is enjoying unprecedented attention as farmers gradually embrace new technologies in their fields while hungry investors back start-ups in search for the next success story. AgTech is unique in the way that it cuts across the traditional areas of VC investments, and in many cases, allows stakeholders to apply technologies from other sectors to the agriculture space. At its core, the imperative of AgTech is to boost global agricultural productivity in a sustainable way. Achieving this objective will require collaboration between those who make up the ever expanding ecosystem, including but not limited to, entrepreneurs, corporations, funds, and academics. In particular, the role of VC will be elevated as global innovation funding shifts away from government backed research toward technological innovation funded by private venture capital.
Realizing the Investment Potential of the South American AgTech Space
As the AgTech market grows in developed regions, a clear path emerges for companies and investors to expand their scope to new markets. In our opinion, there is a compelling case that points to South America as the immediate opportunity, given the region’s agricultural diversity and significance, as well as natural resource wealth.
The pressure faced by South American farmers to optimize their inputs and outputs in a sustainable way is the same fundamental driver that has led to the adoption of AgTech innovations in North America and Europe. In fact, it could be argued that the need for AgTech in South America is even greater considering the region’s yield gaps and its unique social and environmental challenges. However, despite all its agricultural attributes, the region also has a distinct risk profile and it is critical for investors to understand the idiosyncrasies before moving forward with any projects.
AgTech is not a new concept for many South American farmers and other stakeholders in the agricultural value chain, but until recently, a variety of factors prevented the widespread adoption of these technologies. Today, South America is home to a large and established agribusiness market in which these developments can take root. Four key drivers have enabled South America to develop into a more AgTech friendly environment including:
· Professionalization and consolidation across the farming sector
· The adoption of precision agriculture as a core component of farm management
· The ability to address local agronomical challenges with biotech innovation
· Growing sustainability pressures
Furthermore, we believe that the new generation of farmers, young people in their 20s and 30s who take the lead on family owned farms and agribusinesses, will be particularly willing to experiment with new technologies and incorporate them in their fields and operations. In our view, this next generation will open the gates to increased AgTech adoption across the region.
The challenges faced by South American AgTech start-ups are largely the same as those faced by their counterparts in the developed markets of North America and Europe. This likeness can be a huge advantage for local AgTech entrepreneurs, who can learn from the past experiences of similar start-ups in other regions. These challenges include how to gain traction in the emerging space; how to build applications and platforms with the potential to make a meaningful difference to farmers’ profitability and sustainability; how to build a commercial distribution network for these AgTech innovations; and ultimately understanding where AgTech value creation will come from and where exits will materialize for VC investors.
In the ‘Fields of Promise’ report, we have mapped more than 60 companies in the regional AgTech space, concentrated in Argentina, Brazil, and Chile, that provide a wide array of technologies and services. Though it fell outside the scope of this report we have also noticed that Mexico is growing into a hub. These companies find themselves at wide range of developmental stages. While the key drivers of agricultural technology and food system innovations are common across the region, there seems to be particular interest in precision agriculture and biotechnology – two areas that target some of the sector’s greatest challenges and offer the largest opportunities for scalability.
Across the South America AgTech space we have already seen some early successes which can strengthen the case for potential investors. These examples include the growth path of Bioceres, an Argentinian biotech company; the internationalization of S4, which operates at the intersection of AgTech and FinTech by leveraging big ag data for risk management; the launch of Frontec by large corporates recognizing the need for innovation; the arrival of Canadian firm FarmersEdge to Brazil; and the 2014 acquisition of Brazilian companies Arvus Technologia and iLab Sistemas by Sweden-based visualization technology provider, Hexagon.
Opportunities Ahead
Despite the many advancements made in South America’s AgTech space, it is clear that tremendous opportunity still lies ahead for the sector. One of the most active areas is the flow of inbound and outbound investments by AgTech companies themselves. This strategy can be employed both by those in the region who possess a technology that can be applied to other markets, as well as start-ups from abroad, typically backed by venture capital, who are interested in expanding their geographical reach.
Foreign AgTech companies may opt to develop partnerships with local players, which are critical to penetrate the regional market as they can provide specific, agronomical expertise and access to the local agricultural network. Though it may be early for foreign AgTech companies to break into the South American market through acquisitions, anecdotal evidence collected through our network points to this path becoming increasingly viable in the future.
Another way to take advantage of this rapidly growing segment is through the facilitation of capital. We believe that those venture capital investors and funds who find the region’s fundamentals compelling and are willing to invest in young AgTech companies will find themselves with a powerful early mover advantage. We also believe that soon a number of regional AgTech VC funds will emerge to facilitate private capital deployment in the region. Open innovation partnerships could also be launched in South America with support from local and international agribusiness companies. In addition, impact investors and Development Finance Institutions are also likely to become a relevant source of capital for local AgTech start-ups as there is a growing realization that funding AgTech innovations can provide benefits across multiple dimensions.
We would be remiss not to mention the role of traditional agribusinesses and farming companies around the world who are also joining the investment spree in AgTech. In South America we have noticed that these companies are increasingly willing to invest in AgTech start-ups in order to integrate new technologies into their operations as well as develop new revenue models. We anticipate that local, leading farm companies will participate in testing platforms to validate local and foreign technologies and accelerate their adoption by the local farming community.
Six AgTech Themes that Characterize the South America Opportunity
The analysis conducted during the production of ‘Fields of Promise’ has led us to identify six themes of the regional food and agricultural markets through which AgTech innovations will have a large impact over the next five to ten years:
· Sustainably Improving Crop Yields – through continued innovation in genomics, biologicals, and broader adoption of precision technologies combined with agronomic support.
· Leveraging Technology to Supply the Global Animal Protein Demand – by improving pasture and animal feed probiotics while leveraging precision technologies tailored to livestock farming.
· Developing Risk Management Solutions & Enabling Market Transparency – by using the data generated from the intersection of AgTech and FinTech to improve predictive models and support decision making by farmers, insurers, commercial lenders, and input suppliers, among others.
· Tracing Food & Tackling Food Waste – through a new wave of innovation designed to reduce food losses in the regional supply chain, as well as food waste at the consumer level, by making distribution and storage systems more efficient and improving the role of packaging in waste reduction.
· Producing & Delivering Better Food to More Conscious Consumers – by enabling consumers around the world to express their preference for healthy, nutritious, and convenient food, including functional foods and beverages.
· Pursuing Green Business Models & Rethinking Natural Capital – by reducing the net environmental footprint of crop and livestock production systems through biomass energy, regenerative agriculture, holistic production models, biotourism, and greenhouse gas offset credits.
Summary
Valoral and Quarterra are strong believers in the future of AgTech in South America. We believe that the fundamentals are clear and that those who make the first investments in the space will be rewarded for their vision. In addition to the financial benefits, we truly believe that the introduction of these technologies will bring positive social, economic, and environmental change to the region.
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Valoral and Quarterra look forward to partnering with shareholders across the agricultural supply chain to achieve these objectives together. If you are interested in learning more, don’t hesitate to reach out to us at roberto.viton@valoral.com or monica.ganley@quarterraglobal.com. We look forward to working with you.