The global population is expected to reach 10 billion by 2050, a 30% increase from today, meaning the demand for staple food and drink is growing exponentially. Moreover, the world’s rapidly growing middle class is demanding more agricultural variety and traceability, but basic food security remains an issue in many countries.
Agriculture plays a crucial role in the economy of developing countries, providing the main source of food, income and employment to their rural populations. According to the UN's Food and Agriculture Organization, more than 25% of GDP is derived from agriculture in many of the world's least developed countries.
Agribusiness FDI rankings
The food and beverage sector is the world's 11th largest source of greenfield foreign investment – out of 39 sectors measured by greenfield investment monitor fDi Markets – clocking 6729 projects since 2003.
The largest investor is the US, accounting for 1263 of these projects, followed by Switzerland with 599 and Germany with 565, according to fDi Markets data. The relatively small Switzerland excels in this sector and his home to numerous multinational corporations.
Eleven of the top 20 source countries of FDI into agribusiness are located in western Europe, according to fDi Markets. Indeed, the EU continued to top global agri-food trade in 2017, contributing €255bn, according to the European Commission. Excluding the US, the remainder of the top 20 source countries are mostly Asian – from Japan, China, Thailand, Singapore, South Korea and India, in descending order.
Conversely, the main destinations for this FDI are developing markets. Indeed, there are only five western European countries in the top 20 destinations locations for agribusiness FDI, but 11 emerging economies from Asia, Latin America and eastern Europe. Although the US has received the most projects, garnering 597, China and Russia follow closely behind.
The absence of a single African country in the top 20 FDI agribusiness destinations is notable considering the agricultural fertility and potential of the continent. African agricultural exports make up just over 10% of total exports from Africa, according to the Trade Law Centre. Generally, primary production is located in Africa, which is associated with low-level capital investment, while the more lucrative processing is completed outside the continent.
Dr David Laborde, senior research fellow at the International Food Policy Research Institute, says that Africa could play a similar role to Latin America in the past 30 to 40 years. Indeed, many investors are reaping the rewards of their strategic long-term investments in Latin America that began in the 1970s and 1980s.
“Other than sun and water, Africa still has [lots of] arable land and the availability of human resources for labour-intensive jobs. Improved governance, investor guarantees and infrastructure will play a key role. Africa’s production of soyabeans – a key crop for the future of the world – is very low, but growing,” says Mr Laborde.
Chinese investors may be poised to capitalise on this. In recent years, one-third of US soyabean production has been bought by China. However, in light of the ongoing tariff war between the two countries, the Chinese are already trying to find alternatives, according to Mr Laborde. Tariff fears led the price of the US soyabean to fall to a nine-year low in July.
“This global political uncertainty may reset some of the supply and value chains. Chinese investors might move to other parts of the world, potentially Africa, but also central Asia. Just a few years of crazy trade policies can shift investment and reshape global trade for 20 years,” says Mr Laborde.
Alternatively, China may try to produce more soyabeans at home by using land that is currently used to grow cereal crops, while outsourcing cereal crops to central Asia, according to Mr Laborde. Either way, The ongoing tariff war presents a threat to millions of farmers and exporters, globally.
The final frontier
Agriculture and aquaculture, when taken together, represent 8% to 10% of global GDP, depending on how both are defined, according to Thor Talseth, managing director at Amerra Capital, a private equity firm for agribusiness companies.
“However, if you look at global capital and private equity allocation to the same sector, it’s less than 1%. So there’s a mismatch between the size of the industry and its capital needs and potential,” he adds.
The reason for this, says Mr Talseth, is because agribusiness is such a fragmented, global and complex industry. Investments have all the typical risk factors of a more general business, plus biological and weather risks such as livestock disease and drought.
There are only a few giants in the agriculture industry, such as Cargill, while a large proportion of the sector consists of small, family-owned businesses, which is behind the industry's fragmentation. Indeed, 500 million smallholder farms support one-third of the world’s food intake, according to Elwyn Grainger-Jones, executive director at agricultural research body CGIAR.
Amerra Capital believes this situation will change rapidly as the sector consolidates its fragmentation to meet customer demand for food traceability, and also because institutional investors see agribusiness as the final frontier for deploying capital.
“The millions of small agribusinesses do not have the capital they require to grow, develop and improve and there are very few banks that specialise in this, and even fewer investors. Institutional investors such as pension funds and sovereign wealth fund, really want to invest in agriculture,” says Mr Talseth.
Institutional investor interest started about 10 years ago with the acquisition of farmland in Europe and the Americas, according to Mr Talseth. However, he adds, these investors are now looking at other segments of agribusinesses less familiar to them, such as in aquaculture.
Seas of opportunity
Within the agribusiness space, aquaculture is the fastest growing subsector. Oceans cover two-thirds of the world but provide only 2% of protein production, according to Mr Talseth. “With the world’s middle class burgeoning and evermore focused on health, seafood is the best protein and the demand is very strong. However the supply is more difficult,” he says.
Conventional ‘hook and bait’ fishing, known as wild-catch, is fully exploited within the world’s oceans, meaning global wild-catch supply has plateaued. Thus, demand will have to be met by aquaculture – fish farms – and there is a huge investment opportunity here, adds Mr Talseth.
The five global challenges
Mr Grainger-Jones says that there are five global agribusiness challenges that investors should be aware of due to ongoing and inevitable policy changes. First, food security. “In the next 35 years we need to produce more food than has been grown by humanity in the past 10,000 years. Increased productivity is essential since new land to produce on is decreasing,” he says.
Second is climate change. Food systems are responsible for about one-third of global emissions. However, the sector is investing less in emissions reduction than the energy sector, despite agribusiness being most at risk from global warming’s weather extremes, according to Mr Grainger-Jones.
Third, agriculture accounts for the most global water withdrawals, the most forest lost, and one-third of the world’s soil being classified as 'degraded'. Land is not limitless.
Fourth is growing ethical and health concerns linked to agribusiness, such as obesity, nutrition traceability and ethical sourcing, which Mr Grainger-Jones says need to be on investors’ agenda. Increased sugar or meat taxes are possible, he adds.
Job creation is the final global challenge. More than 85% of the world’s 1.2 billion youth population live in developing countries where agribusiness is still a major employer. Maintaining these jobs, especially in light of automation, is essential, according to Mr Grainger-Jones.
However, Mr Laborde highlights that the tech revolution in agribusiness is bringing a new wave of jobs and investment in tech services – for example, in agri-drone and robotics maintenance. Mr Grainger-Jones contends that tech innovations, improved knowledge and better policies will provide the solution to the aforementioned challenges.