Given the distances between inputs and outputs in the food and agriculture industry, as well as the predominant fragmentation in the distribution channels, there is strong value to be gained from further improvements in the transportation sector. Whether pushing more product categories and brands through existing channels or bolting together strong local and regional distributors to achieve greater scale economies, investors should seize the opportunity to benefit from consolidation and up-scaling distribution in the agribusiness sector. Economies of scale within the value chain can optimize agribusiness performance by boosting access to inputs, improving integrated processing capabilities, and supervising larger segments of the supply chain. Investments in integration are attractive as they allow operators to achieve a strategic market position in their specific portion of the value chain, while helping shelter processors from commodity price volatility.
Investment Opportunities in Agribusiness
Expansion into new geographic markets or into specific crop segments is a strategy being pursued to secure access to feedstocks and drive yield improvements. Global agribusiness processors and traders seek to expand their operation in order to increase their reach and share of commodity production. Similarly, investments in land bank or plantation assets yield returns on crop production as well as potential long-term land value appreciation. However, it is increasingly challenging to find and acquire large land banks given the scarcity of available arable land as well as political sensitivity to large-scale foreign direct investment in land banks.
Similarly, many investors have been placing bets on farm automation, precision-farming solutions, crop protection systems, and other emerging technologies to help boost yields, optimize water usage, and advance fertilizer efficiency. There are numerous opportunities for such technologies to be adopted around the world. Furthermore, over the medium and long-term these technologies will need to be simpler and more affordable to be accessible to growers in developing markets. Likewise, crop and cattle land have been major receptors of institutional capital within agribusiness, particularly across North America and Oceania. Investors are now discovering the attributes of permanent crops, as recent years have seen major investments into this diverse sector. For example, fruits and nuts growing on trees and vines that can deliver higher returns than row crops and can provide a longer time horizon. Permanent crops and technology investment are attractive components to a diversified agricultural portfolio for a variety of reasons.
By comparing forestry and agriculture, investors can better understand and facilitate the allocation process. The two assets have many similarities; both are intrinsically linked to land and depend on biological growth for the larger part of the yield. However, one basic difference is that forestry is less vulnerable to price volatility as the trees can simply be kept planted if prices are unattractive, while most agricultural products must be marketed soon after harvest. A further significant difference is that returns on forestry investments are driven almost entirely by biological growth, with a minor portion driven by changes in land value. That is different from farmland, where the returns come from both biological yield and capital appreciation. Moreover, forestry assets usually enjoy a larger scale as the sector is more concentrated, compared to the highly atomized agricultural business. These characteristics explain why institutional capital was quicker to enter the forestry space. Nevertheless, the past reluctance to invest in agriculture is giving way to gradual allocation into the sector, as institutional players understand the attributes of the sector and develop suitable investment models.