Article / September 29, 2020

Impact Investing in Sustainable Agriculture

Rural areas are key to economic growth in developing countries. But across the developing world, the vast potential for economic productivity in rural areas is dramatically underutilized, leading to a litany of socioeconomic problems. One of the major challenges of the 21st century will be the revitalization of rural areas, and those who can accomplish this feat through impact investing stand to profit tremendously. 

There are many factors at play when it comes to rural underdevelopment in emerging economies – but the most important is employment. Jobs in rural areas are increasingly scarce, driving people to the city in droves in search of a better life. This creates a vicious cycle where a lack of labor depletes industry, which in turn damages the possibilities for rural employment. 

Ultimately, there is only one true solution – impact investing in rural areas in emerging economies on a massive scale. As the global population continues to rise, the productivity of rural areas, especially in the agricultural sector, will be a key factor not only for the economy, but for global geopolitical stability. It’s up to investors to drive the economic growth of these areas.

Changing Demographics

Over 4 billion people live in urban zones globally, and by 2050, over two thirds of the world’s population is expected to live in cities. In developing countries, many urban areas have already transformed into sprawling, overcrowded ‘megacities’ such as Dehli, São Paulo and Beijing. Although quality of life is supposedly higher in urban areas, these megacities often suffer from rampant crime, high pollution, and debilitating traffic levels.

The world’s megacities, now and in 2030 (projected). 

The scale of this phenomenon is staggering. In Japan, over 90% of people live in urban areas. In the US, that figure is over 80%. But both countries have been able to develop the infrastructure and supply chain capacity needed to sustain these levels of urban concentration – not everyone can say the same. 

In Brazil, for example, employment in agriculture has declined to 4.85 million, down from 6.2 million a decade ago, even as agricultural land use and production expand. Why hasn’t a country that has experienced such an agricultural boom been able to direct more employment to rural areas?

Brazil’s employment in agriculture continues to decline, even as the industry grows. 

For a couple of reasons. One, the focus of Brazil’s agriculture scale-up was mainly on land-intensive goods like soy, corn, and cattle. While these activities require significant chunks of land, they don’t generate much employment, forcing rural populations to journey to the cities to find jobs. 

So what are the characteristics of impact investing that can produce meaningful demographic and economic change? 

Job Creation

Many people seem to believe that in order for the agriculture sector to generate employment on an adequate scale, it needs to utilize more and more land. But the key to creating job stability in rural areas may lie in making better use of the land that’s already available. 

This means shifting the focus away from agricultural activities that require high amounts of land but create relatively few jobs. In Latin America especially, cattle is a major culprit. At this point, little about the cattle industry seems attractive – meat substitutes are on the rise, deforestation concerns are mounting, and COVID seems to have propelled a decline in demand. 

The growth of the meat substitute industry is a threat to cattle.

In many emerging markets, this means a necessary shift away from cattle and grains and towards higher-value products and value-added production. Permanent crops, despite their longer startup times, can mean more jobs and more stability in rural areas, as they provide year-round employment in a fixed location, unlike cattle and many row crops. 

Of course, we aren’t just talking about jobs working on farms. The development of agricultural supply chains creates jobs in a wide variety of sectors, from logistics services to technology and manufacturing. In many ways, agriculture can serve as a foundation for infrastructure investments, as the opportunity to facilitate profitable businesses can attract higher levels of capital. 

Infrastructure

Clearly, agriculture in emerging markets can be made more profitable through improvements to infrastructure. But infrastructure development can be significantly expedited if land is being profitably utilized. Agriculture investment can both motivate and benefit from large-scale infrastructure projects in emerging markets, making rural areas more accessible and literally paving the road for development. 

This relationship can produce a snowball effect with huge implications for investors and communities. Once a profitable business is established, infrastructure investment is incentivized, which in turn attracts more agricultural investment. 

No matter how productive an agricultural region may be, its viability may be severely limited by logistical access. But infrastructure development is unlikely to take place in areas where agricultural activity is unlikely to develop. In truth, infrastructure and agricultural investments go hand in hand, and each can increase the impact and mitigate the risk of the other. 

Economies of Scale

Globally, about half of all food is produced by farms that support a single family, or a small collective of families. But smallholder farms struggle to make any real dent in rural poverty, as they have no time outlays and can’t reinvest into their farms. Farmers who work in this way are often at the mercy of their own operating costs, and can little afford to take the risks of scaling up their businesses. 

Smallholder farms are essential to the global food supply. 

To bring lasting wealth into rural communities, impact investing must create economies of scale. This involves implementing agribusinesses that can support more than a few families at a time. In order to achieve the kind of wage growth needed to revitalize rural areas, capital must scale up agriculture in a sustainable way. This includes the use of advanced machinery, global best practices, and continual reinvestment. 

If the agriculture sector intends to create rural development at scale, it needs the capital to operate at scale as well. This means investment in the secondary sector, in ag tech, inputs, logistics, and the many other industries that go in tandem with agriculture. An agriculture sector that can operate at scale requires much more than farmland – it requires a dedicated effort on the part of investors to expand the capacities of the sector. 

In terms of impact investing, agriculture is a sector that can produce long-term wealth for rural communities, who are often highly exposed to economic volatility and climate change. With targeted and well-executed investment strategies, the conditions in the highly profitable but severely underutilized rural areas in emerging economies can be drastically improved.

Read more from Farmfolio. 

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