GEOS Thematic Update: Agricultural Productivity
The Essex Global Environmental Opportunities Strategy (GEOS) invests in solutions to increase agricultural productivity and reduce the environmental impact of farming through our Agricultural Productivity and Clean Fuels theme. The GEOS Agricultural Productivity and Clean Fuels theme invests in clean technologies farmers need to increase yields and reduce the use of inputs such as energy, chemicals, and water. We previously published a white paper in December 2021 (linked here) describing the challenges facing global agriculture and how GEOS invests in food solutions. To meet growing global food demand driven by population growth and rising per capita income, farmers must deliver yield increases greater than 50% by 2050. This is a difficult task alone, but farmers must also reduce their environmental impact and manage the increasing physical impacts of climate change such as drought, heatwaves, and water scarcity. Agriculture is among the leading contributors to global emissions and is responsible for 70% of global water withdrawals, making it imperative that farmers transition to more sustainable farming practices. GEOS recognizes the challenges ahead for the global food system and the growth opportunities for companies providing solutions to enable more sustainable and productive agriculture.
Since publishing our initial white paper on agriculture in 2021, the GEOS team has done additional research on sustainable agriculture and agtech. We provide our updated view of the key agtech segments below along with a brief description of each segment.
- Precision agriculture: using satellites, sensors, and drones to collect data on key factors such as pH, soil health, moisture, and pest concentration to determine optimal timing, location, and volume for planting, spraying, and irrigation activities. Action is then carried out using variable rate technology, automation, pivot irrigation, and precision sprayers or planters to increase crop yields and farming efficiency while reducing the use of inputs like energy, water, fertilizer, and pesticides.
- Crop biologicals: bio-based crop protection (bioinsecticides, biofungicides, and bioherbicides) and crop nutrition (biofertilizers and biostimulants) products made from natural materials that are used to enhance plant growth, improve nutrient uptake, and manage pests and diseases by displacing farm chemicals like synthetic fertilizers and pesticides.
- Biotechnology: genetic modification (GM) or gene editing of seeds and other crop inputs to boost yields, select for desired crop traits like drought resistance, and improve input performance.
- Alternative protein: alternative dairy and meat (plant based, precision fermentation, and cellular meat) products with lower environmental impacts and improved health profiles versus traditional animal products.
- Controlled environment agriculture (CEA): growing fruits and vegetables indoors (vertical farm, greenhouse, hybrid facility) to maximize yield, eliminate crop stressors, and reduce water use and land requirements.
The GEOS team identified these five investable segments based on our analysis of technology viability across the agtech space and our view of the solutions needed to address farming and food challenges. Among the five segments, the GEOS team sees the most attractive listed equity investment opportunities in precision agriculture, crop biologicals, and biotechnology. The alternative protein and CEA segments are areas to watch for the future, but we believe there are several near-term hurdles for each to overcome before they become scalable solutions. We expect to see many disruptive agtech companies come public over the next few years, especially in the precision agriculture and crop biologicals segments, assuming market conditions improve.
The GEOS team believes precision agriculture, crop biologicals, and biotechnology can be deployed at scale today to increase productivity and reduce the environmental impacts of agriculture. Precision agriculture technology facilitates smarter growing decisions, such as planting more seeds in areas of the field with better growing conditions, based on insights gained from collecting weather, soil, pH, moisture, and other types of farm data. Farmer adoption of precision agriculture technology is high for some legacy technologies, but we expect penetration for newer planters and sprayers will meaningfully accelerate with the rollout of autonomous tractors. Labor shortages are particularly problematic in agriculture where farmers must navigate “weather windows”, or optimal planting and harvesting times. To help address persistent labor shortages, agriculture OEMs are preparing to offer fully autonomous tractors within the next few years that leverage onboard sensors, advanced computers, cameras, and software to fully automate driving, seeding, spraying, and harvesting activities. Full autonomy will help farmers reduce operating costs, increase yield per acre, and improve the quality of input application by avoiding direct human intervention. Autonomy will also support OEM pricing power and drive higher gross margins and profit margins since autonomous tractors and retrofit packages for existing tractors are higher margin sales than their legacy business. We expect OEMs will pair the next generation of precision planters and sprayers, which leverage AI and machine learning technology, with new tractor or retrofit sales as well, providing an additional boost to their margin profile.
Crop biologicals, made of natural substances or organisms like microbes, plant extracts, and macrobials, are bio-based products used to promote crop health, increase nutrient uptake, and control pests and diseases. Biological crop nutrition products replace, or significantly reduce the need for, synthetic fertilizers. Biological crop protection products replace, or reduce the need for, chemical pesticides and have roughly 10% global share in the crop protection market today. The GEOS team believes biological crop protection and nutrition products are at an inflection point and expect strong annual growth of 12-15% over the next 3-5 years. The growth catalysts include the increasing efficacy of next-generation biologicals, improved application methods, greater farmer awareness, and increasing focus on sustainable farming. Biologicals can be brought to market faster and at lower cost than traditional farm chemicals, improving company ROI and decreasing the development payback period. Pests and crop diseases do not develop resistance to biologicals, unlike with pesticides, and incorporating biologicals into an integrated pest management system can prolong the useful life of existing pesticides. Companies can also formulate biologicals to only affect the targeted crop pest, avoiding the common issue of chemical pesticides killing non-target plants and organisms. We are monitoring several innovative companies that leverage RNA interference (RNAi) or other novel pathways to produce biopesticides that interfere with pest protein expression. These products degrade quickly in the environment, pose significantly fewer health risks to humans through ingestion or exposure, and do not affect non-target organisms. Several other companies we identified are using synthetic biology to engineer nitrogen-fixing microbes, with the potential to disrupt the crop nutrition market. We expect biologicals to experience significant adoption globally, but especially in the European Union (EU). The EU Farm to Fork strategy plans to reduce the environmental impact of food production in the EU, with specific goals to reduce fertilizer use by 20% and pesticide use by 50% by 2030, and we believe biologicals are well positioned to help meet these goals.
Crop biologicals leverage biotechnology in certain instances, but the GEOS team views seed innovation as the key focus in the biotechnology segment for agriculture. Crop yields would not have risen fast enough to meet food demand over the past 50 years without the increased yields made possible by genetically modified (GM) crops, which have received significant scrutiny. However, GM crops, which include transgenic material, create significant environmental and social benefits such as higher yields, reduced chemical use, lessened environmental degradation, and enhanced food security. We believe responsible genetic modification and gene editing of seeds will play a key role in boosting future yields and safeguarding food production from the impacts of climate change. As drought and water scarce conditions increase, yields can be preserved by planting seeds with desired traits such as drought resistance. The GEOS team is tracking one company that has achieved drought resistant wheat and soy varieties leveraging their proprietary IP, preserving yields in drought conditions, but not adversely impacting yields in normal growing conditions. Drought resistant crops are urgently needed to ensure food security in a warmer and drier world, and we believe companies innovating to produce these seeds have attractive growth opportunities. Key agricultural producers like the US, Brazil, and Argentina have largely accepted biotech seeds and we expect other areas like China, and potentially even the EU, will relax some restrictions on GM or gene-edited seeds to safeguard food security in the future.
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