The following editorial piece was published on the Financial Times website, FT.com, in December 2013. For the original article please follow this link.
Recently, Tesco publicly acknowledged that 28,500 tonnes of food went to waste in its stores and distribution centres in the first six months of 2013. It was a revealing but welcome statement highlighting the fact that the food supply chain is broken.
Tesco’s troubles are part of a bigger story. The food supply chain is riddled with inefficiencies: between production and consumption 40 per cent of food ends up in the bin, according to a recent study by the Food and Agriculture Organisation. At the same time, demand for commodities is projected to rise by 70 per cent between 2005 and 2050.
This demand cannot be satisfied simply by an increase in production: the world is running out of fertile land, water and nutrients, and average rates of improvement in global crop yield are steadily declining.
But Tesco’s frankness on waste points to a dramatic shift in attitude in the food and agriculture industry, from a focus on production to targeting efficiency.
Traditionally, the sector has been all about farming more land and adding more chemicals to improve crop yields. This led to an abundance of cheap food and indifference to waste.
But now the sector is starting to realise that increasing efficiency is the only way forward in the face of unsustainable fundamentals. However, to achieve the necessary gains in efficiency, the sector will need to introduce a host of new technologies.
Some of these will need to be developed from scratch, while many others already exist but are not yet being applied to the food and agriculture value chain. Nevertheless, the opening up of the food market to new products and services will create significant investment opportunities for a variety of asset managers.
So why are more investors not entering this emerging asset class? The truth is that, although the potential financial returns are substantial, there are a number of aspects that make food and agriculture a challenging sector to invest in confidently. For example, many of the key players are rather conservative and thus slow to embrace innovation, while unpredictable weather or regulation can bring unpleasant surprises.
Still, with a bit of patience and careful navigation, few sectors will offer better opportunities.
We have identified three key themes that we think are important for successful investing in food and agriculture.
Stay in the comfort zone of key technology buyers:
The average company in food and agriculture exists in a tough environment: razor-thin margins, regulatory regimes in flux and the ever-present threat of hostile weather or disease wiping out entire crops or livestock. Unsurprisingly key players, such as farmers, input providers, food processors and food retailers, are reluctant to take on additional risk.
Investors should bear this conservative outlook in mind. Do not invest in a hot start-up with a disruptive efficiency solution if you are in a hurry. Key players in the sector typically like to take it slow and gravitate towards proven technologies they understand.
An alternative approach is to look at the food and agriculture industry as a substantial new market for existing technologies and products from other sectors, like human health, life sciences or even software, that have a proven record in situations similar to those food and agricultural companies are now facing.
For example, the advanced product track-and-trace software solutions used in the pharmaceutical value chain can be applied to the fresh food chain.
Don’t do it alone:
It is not difficult to enter the food and agriculture market and gain a few clients. But as the thousands of small and largely stagnant companies in the sector show, it is much harder to achieve scale.
Many factors conspire to hamper the growth of new entrants: buyers are powerful and conservative; tastes, customs and regulations are often very local and can make it hard to repeat success across borders.
In our view, successful investment in food and agriculture requires knowledge of the sector, a focus on simple, easy to communicate value propositions and strong partners to help with international expansion. So investors should surround themselves with dedicated food and agriculture experts and innovative companies should engage with end customers early and consider partnerships as they grow.
Go forth and diversify:
As a food and agriculture investor you may not know when, where or how hard a natural disaster or food scandal will hit one of your portfolio companies, but you can rest assured that it will happen at some point.
So diversify your exposure across regions, customers, commodities and suppliers, or invest in a service that will remain in use throughout any cycle. The Tesco story suggests the rollout of new waste-reduction technology would be such a service. Investors who skip diversification do so at their peril.