Emerging Markets / July 24, 2018

Financial Growth in International Agribusiness

Macroeconomics in the 21st century is defined by several demographic, technological, and social factors. Chief among these factors are the rapid demographic growth taking place in emerging regions and the lower fertility rate of developed regions as well as the ongoing urbanization of the world’s population and the increasing need for agricultural commodities. Over the past years, rising awareness of these forces has triggered massive interest and investment in the food and agriculture industry.

Financial Growth in International Agribusiness

As a consequence of growing populations, a growing middle class in developing regions, and an expanding urban class, demand for food and agricultural products is steadily rising. Simultaneously, urbanization, particularly in the developing world, is increasing the number of people who depend on others to grow and produce food for them. Thus, demand for goods coming from agribusiness is expected to increase globally by 2% yearly for years to come, with most of that growth coming from the developing world. Consumption is expected to rise across all key food segments as is the demand for biofuels, such as ethanol. Therefore, in order to meet demand growth, global food and agricultural production needs to rise. This reality has prompted research and development in biotech, farm mechanization, irrigation, and other agricultural yield enhancers. Likewise, these dynamics have generated a spike in investment as well as Mergers & Acquisitions (M&A) activity by strategic operators and financiers, leading to efficiency-driven consolidations and vertical integration across the agribusiness value chain.

Recent increases in food output have come primarily from improved productivity within crop yields, given that land under cultivation worldwide has not expanded significantly over the past decade. Increased productivity has been achieved through greater application of irrigation, advances in biotech seeds, and crop protection, steadily increasing farm mechanization, and more efficient agricultural supply chains. However, there are still challenges and opportunities within the agribusiness industry over the medium to long-term. For instance, agricultural logistics and infrastructure (storage, terminals, etc.) are still underdeveloped in many parts of the world. Similarly, significant investment is required in the coming decades to boost harvests and ensure that crops move more efficiently from where they are grown to where they are consumed, whether destined for food, animal feed, or fuel.

In the agricultural commodity markets, prices have become increasingly volatile in recent years given more unpredictable weather patterns and greater financial speculation in the commodities sector. This poses a potential risk not just to farmers, who bear the direct impact of lower crop prices, but also to farm input suppliers, as farmers are not willing or able to invest in mechanization and other discretionary farm inputs if crop prices do not support this type of high-price investment. Price volatility, however, may benefit others, such as companies supplying crop drying and storage equipment, because these systems allow growers flexibility in deciding when to sell their produce. Depending on the characteristics of each investor, different agribusiness areas should be pursued. Those interested in the growing and processing portions of the value chain are tending to pursue different strategies than those focused on farm inputs and automation.

(Read more about Agriculture and Macroeconomics in France)