Agritech: sowing the seeds of disruption
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.
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.
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 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.
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.
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.