July 2, 2014

Chris Paterson Saskatchewan farm-raised and proud of it, Paterson has a degree in agronomy as well as agribusiness experience across Canada, the U.S. and overseas. Paterson has traveled through more than 25 countries and continues to visit as many farms, corporate offices and agribusiness conferences as his busy schedule will allow. His goal: staying current on the emerging trends transforming agriculture. He can be reached at cpaterson@agri-data.net. (Click here to see the article as it originally appeared on www.agadvance.com.)

In May, I attended the Global Ag Investing Conference in New York, which was aimed at educating large investors about opportunities in the agriculture industry.

My goal was two-fold: I wanted to be able to report on investor interest in agriculture as inadequate capitalization is one of the biggest issues facing farms and agribusinesses. Second, I wanted to check out the companies that were seeking investment. I was expecting to see some interesting new business models and a lot of start-up technology companies pitching themselves to investors, in typical Dragon’s Den fashion.

Last year, the investors I interviewed all seemed to be looking for something quite unique; they sought different time frames, risk levels, deal sizes and complexity. There was no ‘ideal opportunity.’ I also noticed last year that few of these investors really understood agriculture. This is the second oldest profession, yet many described it as a new and emerging asset class. As a result, the opportunities around investing into farmland tended to dominate the discussions, presumably because this is essentially just a real estate transaction that most investors could relate to. Plus, the capital appreciation and cash-flow returns had been trending very positively for a number of years, especially compared to most other asset classes. Investing into upstream and downstream agribusiness infrastructure and technology companies was discussed, but only on the periphery.

That was not the case at this year’s conference. Although the food commodity super-cycle is still believed by most to be in a bullish trend, it is true what they say about “the cure for high prices is high prices.” There has been a pullback in ag commodity indexes and an apparent plateau in land prices, as the land buying frenzy has calmed to more strategic acquisitions. This year, discussions about investing in farmland had largely been replaced by discussions about agribusiness infrastructure and technology companies.

So, what’s driving this intense interest in ag tech and ag infrastructure investing? There are three key factors:
 

• Monsanto’s acquisition of Climate Corporation for US$930M. This deal came on the heels of Monsanto’s acquisition of Precision Planting for US$250M, followed by the purchase of the soil science division of Solum Inc for an undisclosed amount.

  When funds of that scale are deployed to acquire relatively small unknown tech companies in the ag space, everyone takes notice and begins investing resources into understanding how these seemingly unrelated businesses fit together — and what other opportunities might still exist that could have a similar fit. Very few conversations at this conference took place without some reference to Monsanto’s new multifaceted data acquisition strategy.

   

• Water shortage in many of the world’s key ag markets, especially California. When more than 10% of the nation’s food supply is jeopardized, and the mainstream media picks up on it, that spells opportunity for those companies that can position themselves in the right spot.

  So, technologies that could lead to more efficient water use were of great interest. These technologies could come from biotech research, soil moisture measurement and modelling, variable rate irrigation, farm equipment or soil additives. Companies with water-conservation technology were in hot demand.

   

• Finally, there have been a number of agribusiness infrastructure acquisitions, resulting in higher company valuations, which has attracted some new investors to agriculture.

  Historically, agriculture has been very privately owned, and the valuations of the companies that were available to buy were too small to attract large investors. A similar amount of time and due diligence is needed to buy a $50 million company as a $500 million company, so these larger investors prefer fewer, and larger, deals.

The take-home from this year’s conference: Institutional investors interested in the ag play are no longer just considering farmland. It goes way beyond that; primarily into ag tech and infrastructure innovations and investments.

This might seem very distant from your individual farm operation — but keep in mind, there’s value to keeping abreast of these macro ag-investing trends. In the end, they can drive the very forces that impact the decisions you make on your farm every day.

The opinions expressed in this editorial are the author's own and do not reflect the view of Global AgInvesting.