Agritech: sowing the seeds of disruption

Technology has been a positive, yet disruptive influence across many industries and these innovations have often been accepted without question. One area that is late to this disruption parade is agriculture. Some would argue that the industry’s structure of complex supply chains and high levels of regulation make it harder for true disruption to be achieved. However, dig a little under the surface and it’s easy to see that new technological innovations are driving change in lots of different areas of agriculture, but so far these disruptions are on a relatively small scale. That said, there are a number of trends beyond agriculture itself that may force profound change on the industry and sooner, rather than later.

The world has endured a period of great instability in recent years, culminating in the pandemic, which has resulted in short-term changes across a number of industries, with agriculture being no exception. Yet, there are also forces set to underpin a much longer-term transformation of the sector.

Global warming is already changing farming patterns worldwide. Farmers in southern Europe are now growing tropical fruits, such as avocados, while locations in Northern Europe are being sourced as the preferred terroirs for cultivating vineyards. But it’s not just the warmer climate that is sparking change. Agricultural is one of the biggest carbon emitting industries and therefore food production needs to be transformed if the world is to achieve net zero targets.

Agriculture is also a major exploiter of the earth’s natural capital. Many current practices harm biodiversity through deforestation, soil erosion, pollution – via the misuse of chemicals and fertilisers – as well as the overuse of water. While concerns across these areas are not new, the pandemic highlighted the vulnerability of our food supply chains, which often encompass vast distances and were quick to breakdown amid lockdowns restrictions.

Importantly, more conscious consumers are no longer prepared to tolerate these practices and are already open-minded about trying food-based innovations. Their desire to be better informed about the journey from farm to fork could be the final factor that forces a major transformation of the agricultural industry.

It is easy to forget that farming has traditionally been an early adopter of technology, after all it was one of the pioneering industries in the industrial revolution. Farming has actually maintained this forward-thinking mindset, but it is often applied on a much smaller scale.

Technologies currently exist that offer innovative, environmentally-sound solutions to both what we eat and how it reaches our plates. But a widespread adoption of such innovations has yet to reshape the way farmers operate at scale and questions remain regarding whether such changes can be implemented in time to prevent irreversible climate and environmental damage – especially in poorer countries.

Vertical farming has the potential to fix many of agriculture’s problems. Conceived in 1999 by Columbia University professor Dickson Despommier¹, its practice of growing crops in vertically stacked layers seeks to optimise plant growth while minimising land use. Practitioners often repurpose large, multi-storey buildings in urban areas where otherwise land would be too scarce and expensive to be used for agricultural purposes. By controlling the environment, which is indoors and therefore not weather dependent, vertical farming can produce a wide range of crops all year round.

Critics have often highlighted the high initial set up costs and energy usage. While the former is largely unavoidable, improvements in LED technology and the application of renewable energy sources are reducing the costs of the latter. Additionally, the associated carbon emissions of transporting products are reduced, given products are often used by local communities, and vertical farming systems have been found to use 95% less water than traditional farming². They also have far less need for herbicides and pesticides as the produce is grown indoors³.

While many vertical farms operate worldwide, there aren’t any dominant players and their true commercial potential has yet to be harnessed. That said, the market size exceeded $4.5 billion in 2020 and is expected to grow at an annual growth rate of 23% between 2021 and 2027⁴.

The use of chemicals and fertilisers in agriculture has raised concerns about their impact on the environment, therefore biologists are seeking out new solutions to advance environmental safety, improve yields and increase plants’ resistance to disease and pests.

The cross breeding and creation of crop hybrids are nothing new, but scientists are now applying our advanced understanding of genetic engineering and micro-organisms, etc, to improve crop production. For example, a company is currently utilising natural organisms, such as bacteria and fungi, to coat the seeds of grains to assist growth, improve yields and protect them against stresses such as droughts⁵.

Beyond biotech, robots, drones and nano-sensors are also being used to provide better data for day-to-day farming, making it less labour intensive and helping reduce the use of fertilisers. Even so, these technologies are only being used on a very small scale, are often expensive and will need to prove their value before adoption gains full traction.

Amid so much innovation and development, communication in the farming community needs to be transformed to keep everyone up to date. Online social hubs have been established to not only support day-to-day farming, but also share ideas on important topics such as making farming less labour intensive and the effectiveness of new technologies and crop developments.

This sharing of ideas, feedback and data is especially significant for an industry that has often been run in small silos – where lone farmers can have little access to comparable data and the pricing of materials can be opaque. Such a forum provides much needed clarity on the efficacy of different crops and their yield potential in specific soil types or regions. Such sharing of farming knowhow is critical to improve the overall efficiency of farming.

The transformation of agriculture may currently be below the radar for many, but it hasn’t escaped the notice of canny investors – used to identifying technological innovations with disruptive potential. This interest saw agritech investments reach $22.3 billion in 2020⁶ providing much needed funding for the development and wider implementation of these new technologies, but could also inflate valuations and make it harder to find genuine opportunities.

At BNP Paribas Asset Management, we take an investigative mindset when looking at the abundance of agritech opportunities to separate the wheat from the chaff and identify which will be market-leading companies of the future. We believe the world is on the cusp of a new digitally-driven agricultural revolution. A transformation in the way we farm, transport and consume food is set to take place over the next 20 years, providing attractive opportunities for investors. Not only that, but these opportunities are aligned with the transition towards a more sustainable global economy.