How green is your salad? Can it be greener? It can and your investment portfolio can be too.
Agricultural Technology, commonly referred to as AgTech, is the use of modern technology, innovations, and data-driven solutions to enhance the efficiency and productivity of agricultural practices. Many of these practices are leading to more sustainable farming practices, which means greener greens on your plate. AgTech aims to address the challenges faced by the agriculture industry, such as increasing food demand, limited resources, climate change, and labor shortages.
By leveraging advancements in areas like biotechnology, automation, artificial intelligence, precision agriculture, and data analytics, Ag Tech seeks to transform traditional farming methods and improve overall agricultural processes
Various Sub Sectors of AgTech:
- Precision Agriculture: Precision agriculture involves the use of sensors, GPS technology, drones, and other devices to gather data on soil health, weather conditions, and crop growth. This data is then analyzed to optimize irrigation, fertilization, and pest management, ensuring that crops receive the right resources at the right time and in the right amounts.
- Vertical Farming: This area focuses on growing crops in stacked layers or vertically inclined surfaces, often in controlled indoor environments. Vertical farming allows for year-round cultivation in urban areas, reducing transportation costs and the need for large land areas.
- Farm Management Software: Farm management software helps farmers streamline their operations, optimize resource allocation, track crop performance, manage inventories, and make data-driven decisions to maximize efficiency and productivity.
- Agricultural Biotechnology: Agricultural biotechnology deals with the development and application of biological systems and organisms to improve agricultural processes, crop yield, and animal health.
AgTech is an ever-evolving field, and as technology continues to advance, new subsectors and innovations will continue to emerge, shaping the future of agriculture and food production.
Thematic Trends Supporting AgTech
Several macro trends in population growth, climate change and environmental impact reduction support the need for agricultural technology.
Firstly, with the global population projected to reach 9.7 billion by 2050, AgTech is essential in maximizing agricultural productivity to meet the increasing demand for food. Food production for a growing population is a resource limitation issue. AgTech solutions can also help meet this demand by streamlining agricultural processes, leading to improved efficiency and reduced operational costs. For instance, precision agriculture can optimize resource use, resulting in higher yields and reduced wastage, ultimately increasing profitability for farmers.
Secondly, the conventional agricultural practices have their own negative environmental impacts on the planet. These agricultural practices use a vast amount of soil, fertilizer and water, and land. Additionally, food and agriculture account for over a quarter of the world’s greenhouse gas emissions. By better allocating the limited resources we have available, AgTech can help reduce the overall impact that agriculture has on the environment.
Thirdly, climate change itself also poses significant challenges to agriculture. Extreme weather events, changing rainfall patterns, and rising temperatures all impact crop yields and productivity. AgTech solutions, such as drought-resistant crops and climate-smart practices, aid in building resilience and adapting to changing environmental conditions.
As a result of these underlying trends, the AgTech sector has significant growth potential, attracting investments from various industries.
Investment in this Space
According to data from various sources, including PitchBook, Crunchbase, and AgFunder, the total investment in AgTech was on an upward trajectory. In fact, Foley & Gartner LLP’s analysis on investment in the industry highlighted that “Crunchbase data showed 5 billion dollars over 440 funding deals to VC-backed startups in the AgTech space in 2021. That is compared to $3.3 billion over 422 deals in 2020.” The industry is attracting a mix of investments from venture capital firms, corporate venture arms, private equity, and government initiatives.
Funding came down slightly last year, but the overall investment momentum in the space remained, especially in comparison to other industries. Per McKinsey & Company, “AgTech funding may be down year-over-year, but it remains historically high and may be stabilizing. While second quarter 2022 saw a 36 percent drop from highs in third quarter 2021, it still represents more funding than in any quarter prior to fourth quarter 2020. In the third quarter of 2022, AgTech investment actually rose modestly relative to the second quarter, whereas overall VC investments, now down more than 50 percent from their peak, continued to fall.”
Some of the key areas within AgTech that are drawing significant investments included precision agriculture, vertical farming, farm management software, and biotechnology. Additionally, there is a growing interest in sustainable agriculture practices and technologies that could address climate change and environmental challenges.
Many AgTech solutions also focus on sustainable practices, such as precision agriculture, which optimizes resource use, reduces chemical inputs, and minimizes waste. Sustainable agricultural practices are gaining importance as consumers and governments prioritize environmental conservation and food security, providing investors with options that align with ethical and ESG (Environmental, Social, and Governance) criteria, which can be helpful for investors with impact investing or sustainability mandates.
In fact, the Global AgTech Initiative highlighted that “food and sustainability remain high-priority areas for a number of investors, particularly those with environmental, social, and governance (ESG) agendas, as evidenced by a less severe decrease in global sustainable assets when compared with the broader market and the repurposing of funds toward ESG.5”
Government support on these initiatives offer additional tailwinds to investments in this industry. Several governmental authorities recognize the importance of modernizing agriculture and offer support and incentives for the adoption of AgTech solutions. These policies can create a conducive environment for AgTech companies, making them more attractive to investors.
For example, the Inflation Reduction Act, which was passed in 2022, expanded many incentives for environmentally friendly agricultural solutions. In fact, Agriculture Secretary Tom Vilsack noted that “the Inflation Reduction Act provided a once-in-a-generation investment in conservation on working lands, and we want to work with agricultural and forest landowners to invest in climate-smart practices that create value and economic opportunity for producers.”
These are just some of the many underlying long term themes that highlight the need and benefits of continued investment in this space. AgTech has a huge runway and has just started on its growth trajectory.
Risks associated with AgTech
Though AgTech has many underlying factors in its favor, there are some risks associated with the industry that should be taken into consideration, depending on an investor’s risk appetite.
The agriculture industry, in general, operates in a cyclical manner, which can lead to ebbs and flows in the structural improvement that farmers, growers and other stakeholders can invest in. In a Motley Fool podcast, Lou Whitemen, a contributor on the platform, echoes this very perspective: “ Again, from the USDA, net farm income was $134 billion in 2013. Four years later, that had dropped $80 billion. That's a 40% drop in four years… That means less money coming in. That means less money for farmers to invest in technology, chemicals, all of that.”
Moreover, agricultural technology is a relatively nascent industry, which in and of itself poses some risks. Many companies in the space still have to develop their commercial viability and illustrate to investors their ability to provide a return on the significant upfront investment. In fact, Global Ag Investing highlighted, “while the elevated return potential of investments in brand new start-ups aspiring to revolutionize agricultural productivity and sustainability can attract more speculative financiers, research by Bluefields Associates has found that only 2.4 percent of seed-stage AgTech companies survive to profitability.” However, it is important to note that that percentage rises significantly as the company matures. By the time the company reaches Series B funding, the number jumps up to 56%.
While there are risks associated with any investment, the AgTech industry is on a significant growth trajectory that might outweigh some of the risks. Furthermore, mature companies in the space could be appealing to investors, as they tend to further mitigate that risk.
Which private companies are operating in AgTech?
- Indigo Ag: A company focused on developing microbial and digital technologies to improve crop health and productivity, as well as facilitating carbon sequestration in soil.
- Plenty: Plenty is an agriculture technology company that aims to build vertical aeroponic farms. Plenty claims to use one percent of the water, less than one percent of the land, and none of the pesticides, synthetic fertilizers, or GMOs of conventional agriculture.
- CropX: CropX is an ag-analytics company that has developed the world’s most advanced adaptive irrigation service, which automatically optimizes irrigation, thereby delivering dramatic crop yield increase and water and energy cost savings to farms.
As the world's population continues to grow, the demand for food is steadily rising. At the same time, agricultural practices must adapt to changing environmental conditions, resource constraints, and the need for sustainable production. This is pivotal in revolutionizing agriculture and ensuring global food security.
By harnessing the potential of technology and innovation, AgTech is laying the groundwork for a more sustainable, resilient, and productive future for the agriculture industry and the world as a whole. Want to invest in a greener future? Take a look at some of the AgTech companies looking to change the world in our listings page.