Cover Story: Sowing Seeds For The Future

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 26, 2018 - April 01, 2018.
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The threat of climate change and degradation of natural resources have led to rising concern that the global food supply will run out as the world’s population continues to grow. The dim prospects, however, present an interesting investment case for the agricultural sector.

The agriculture technology (agritech) segment in particular has been heating up over the past year. Many start-ups are looking to tackle the pressing issues by providing exciting and innovative solutions across the supply chain and, as a result, are becoming targets for venture capital funds.

Investors can tap into these agritech start-ups, which utilise technologies such as drones and sensors to solve problems in agriculture, via venture capital funds. The solutions can range from sensors that help farmers apply precise amounts of nutrients in plantations to lighting devices that can improve the immune systems of farm animals.

“Agriculture has traditionally been underfunded. As far as venture capital investing goes, agritech is a world behind the other sectors. It really is a nascent sector as a destination for investment,” says Michael Dean, co-founder and chief investment officer of AgFunder, a US-based venture capital investment platform for food and agritech start-ups.

“A 2016 report by McKinsey lists agriculture as the least digitised industry, next to hunting at the very bottom of the list. But that has changed a lot. We are seeing more companies trying to solve problems in the sector and there are so many problems.”

Last month, AgFunder opened its co-investment fund to accredited investors from anywhere in the world so long as they meet the criteria set by the US Securities and Exchange Commission. Prior to this, its managed fund had been typically limited to large institutions and wealthy families. The minimum investment amount is US$100,000. However, there are six spots available for minimum investments of US$25,000 and six for US$50,000.

“It will be global in scope. Of the three investments we have made so far with our internal funds, one is Australian, one is Brazilian and the other is a UK/US company. We are open to investing in the best companies we find globally,” says Dean.

So far, there has not been any exits by the 16 companies it has funded internally since 2014.

Last year was a particularly good one for food and agritech exits, with two high-profile acquisitions of agritech start-ups highlighting the growing trend. Dean says now is a good time to invest in food and agritech due to the amount of activity in the space.

The first major deal last year was by chemical giant Dow DuPont, which acquired farm management software start-up Granular for US$300 million. Granular offers cloud-based software to handle the different aspects of the business, including agronomy, machinery, management and accounting.

This was followed by agriculture machinery manufacturer John Deere’s acquisition of agri-robotics start-up Blue River Technology for US$305 million. Blue River Technology uses computer vision and machine learning to power its award-winning See & Spray equipment, which allows intelligent weeding.

According to AgFunder’s AgriFood Tech

Investing Report, food and agritech start-ups raised US$10.1 billion last year, marking a 29% year-on-year increase in funding volume. This represents a recovery from the 9% dip in funding in 2016, which reflected the overall dip in venture capital funding that year.

Rabobank, a global bank with roots in the agricultural sector, focuses on food and agritech start-ups. Last May, it launched the Rabo Food & Agri Innovation Fund of its private equity arm that aims to invest in Western Europe and the US. The bank also supports a start-up accelerator and a competition for food and agritech start-ups.

Southeast Asia — the rice bowl of the world — is becoming a popular destination for food and agritech start-ups. Isabelle Decitre, founder and CEO of ID Capital, a start-up investment company that focuses on food and agritech start-ups in the region, says this sector addresses the pain points of agriculture by tackling issues such as pollution and lack of arable land.

“It is absolutely critical to remember that there are more people living in Asia-Pacific than the rest of the world. That is also the region where you have the least potential to expand arable land. You cannot keep having agriculture take a toll on the environment. There are countries that are already in the turmoil of polluting their soil and water. There are also countries that may eventually just fast forward and leapfrog to state-of-the-art technology,” she adds.

The innovations will have to be unique to each region as farming operations have different needs. “I see things moving very fast. There haven’t been many exits yet in Southeast Asia, and you certainly don’t have the same level of noise that you have in the US, but I see good start-ups. There will eventually be acquisitions and maybe a few listings,” says Decitre.

“A lot of American innovation caters for large-scale farming operations, but the average land size in India, for example, is a few acres. It is not huge, so you don’t have the same type of innovation as in a place where the land is very well distributed and ordered. Asia is about small farmers and that is one big difference from the rest of the world,” she adds.

“We see interesting signals of change. Private equity funds are usually big players in agriculture or food, but not in food technology or agritech. It is not the kind of investment they usually do. But for some reason, they would like to be part of this. The second interesting signal is we are having a number of solicitations from American investors willing to tap into the reservoir of Asia as they see great deals to be made there.”


In the business of protecting food

The growing demand from consumers for higher standards of food quality has spurred innovations in this segment. Dean says the majority of the food and agritech applications are currently for farmers in the developed markets. Most of these innovations emphasise supply chain security — tracking food from source to table — to ensure the quality of the food being consumed.

“There have been a lot of issues with milk powder in China, where substituted or tainted materials were used in products. So there is a big issue there,” he says.

“There are also a lot of issues around salinity and poor soil quality. Chemical fertilisers and herbicides have been vastly overused in many markets, so there is a real push for alternative bio-based chemicals and bio-based fertilisers to ameliorate the impact of all these.

“There is also animal welfare to ensure that the animals are treated humanely. All these technologies are focused on making farm production more efficient. We have been in a period of fairly low commodity prices, so new technologies that are able to help farmers either reduce 10% of their cost base or increase their yields by 10% are going to be a major benefit.

“There are a lot of issues in supply chain security, so we are seeing blockchain technology emerge in trading systems within agriculture. It is important to be able to monitor exactly where the product came from, how long it has been in the supply chain, how it was treated. All of these issues are becoming very important to the consumer, so we are seeing a lot of it being driven by consumers who want to know where their meat is produced.”

Other areas that Dean likes are consumer-facing technologies involved in food preparation. One example is the creation of lab-grown meat from stem cells. It was developed to replace red meat as a healthier option as it avoids the issues that come with antibiotic overuse, environmental pollution and unhygienic practices in some farms.

Companies that AgFunder has invested in include ImpactVision, which applies machine learning to measure freshness, quality and identify foreign objects in food processing, and The Yield — an artificial intelligence-powered, micro-climate sensor analytics platform for agriculture and aquaculture.

“The Yield uses small sensors to provide really granular detail, almost at the plant level, to what is happening on the farmer’s field so he is able to make decisions on whether to harvest at a particular time. If there is rain or frost coming, do they need to take action? Its first market was the oyster industry. Whenever there was a rainfall event upstream, the oyster farmers were told to stop harvesting,” says Dean.

He has observed food and agritech companies emerge in Southeast Asia. The problems tackled are similar to those in developed ecomomies. The only difference lies in the crop types and operating environment.

“In Southeast Asia, we are seeing some great technology for aquaculture and platforms for assisting the management of rice production and other technologies like that. The Japanese have been operating drones for many years and spraying in mountainous areas because they are very advanced,” says Dean.

“They are also advanced in indoor agriculture — the controlled-environment agriculture space. Singapore is really pushing forward in this space. We are definitely seeing more emerge from Asia-Pacific and emerging markets, but not so much from Africa,” he adds.

“For countries such as Singapore, where they import 95% of their food, controlled-environment agriculture will be a massive industry because it will provide the countries with the ability to feed their own citizens without having to rely so much on imports. As far as aquaculture goes, Southeast Asia is a huge centre. But there are a lot of problems in disease control and productivity improvements.”

The areas ID Capital is interested in are sustainable farming, precision agriculture, streamlining of the supply chain and enhancement of nutritional value. Critical innovations that Decitre has observed in this space include precision farming, where all the resources are applied at a precise level to prevent wastage. Another important concept is remote control.

“Food and agribusinesses are operating very complex supply chains. And for agriculture in rural environments, people have no way to connect with every farmer in a regular manner. There are a number of very smart innovations catering for how you can control your supply chain in a fairly granular manner. The concepts of precision farming and remote control comprise probably about 80% of what we are seeing in agritech,” she says.

Decitre’s ID Capital connects interested investors — mostly corporates and family offices — with start-ups. It also uses its own funds to invest in the start-ups it believes it can help grow.

ID Capital invests in mainly series A start-ups. Companies it has invested in include Switzerland-based ScanTrust, which addresses the problem of counterfeiting in the food chain. It has a successful pilot project that can trace and fight the counterfeiting of seeds. It is also doing projects on the authentication of food products such as infant food. Another company is Singaporean start-up Smart Animal Husbandry Care, which designs sensors to detect heat during breeding so that farmers can have a better conversion rate of artificial insemination.

Last year, ID Capital began organising the Future Food Asia Awards to connect start-ups with potential investors. The winning start-ups received prizes and grants while the other finalists had the opportunity to receive investments from either ID Capital or other investors. The 2018 Future Food Asia Awards was launched last month.



For investors with a bigger risk appetite who believe in the long-term trend of food demand, now is the time to put their money in agricultural commodities, say experts. This view is espoused by billionaire investor Jim Rogers, who predicted in January that an agricultural boom is forming and that product prices are expected to rebound.

He says the supply of agricultural products will not be able to keep up with the growing demand for food as the average age of farmers globally is rising and the younger generation do not want to work on farms. Thus, he plans to invest more in agriculture than in companies such as Inc.

A Goldman Sachs report that was published last December forecast that agricultural commodity prices would decline for the fourth straight year in 2018. However, it noted that investors would benefit from being long on commodities — a sector that will outperform other asset classes against the backdrop of strong demand.

The trading of commodity futures contracts allows investors to benefit from the price movements of agricultural products. Commodity prices are currently low due to record levels of production for most agricultural commodities over the past few years. RaboResearch senior analyst Oscar Tjakra says there is a large stockpile of agricultural commodities, especially grains and oilseeds, that will limit the rate of price increases for soft commodities.

“I think prices at last year’s level, or even the beginning of this year, are low enough that there are more upside than downside risks than last year. I do think that demand will continue to grow, especially from Southeast Asia,” he adds.

“Africa is still behind the consumption curve. As the countries get richer, they will want to eat more meat and this will translate into more demand for soybean and corn as feed material. I do agree that in the long run, the story is there.

“It really depends on whether you are looking at short or long-term investment. If you believe in the story and that prices are low enough right now, you can actually invest. Obviously, if you look at the short term, the prices of agricultural commodities will be affected by many factors. But historically, the current prices are low. So, some may find it a good time to start investing in these commodities.”

In the short term, however, commodity prices could be affected by many factors. So, investors should be prepared for that.

“While investing in agricultural commodities seems like a good idea, investors should know how much risk they can take. Investing in the commodities futures market involves a high degree of risk and is not suitable for all investors. Investors should familiarise themselves with futures market concepts such as initial margins, maintenance margins, margin calls, contract sizes, settlement dates and so on to understand the risks of investing in these markets,” says Tjakra.

Investors who are interested in this area should look out for market-moving events such as weather patterns, trade wars and the rise of algorithmic trading. “We do expect to see more weather issues this year. It was El Niño last year and this year, it is La Niña. Look at what happened in Argentina. La Niña has pretty much caused a drought and it has affected soybean production and caused prices to increase 20%,” says Tjakra.

The last round of La Niña in 2012 drove soybean and corn prices up. If the phenomenon were to develop, it could cause volatility for commodities such as palm oil in Southeast Asia due to above-average rainfall and isolated flooding while row crops across the Americas could be affected by dry weather. For other crops, the three months of dry weather in the Black Sea region, Brazil and Argentina up to late October last year resulted in concerns of potential losses in the coffee business and delays in soybean plantings, according to Rabobank.

Trade wars are another issue investors should look out for. “We have seen the US impose a tariff on washing machines made in China. In retaliation, China is imposing a tariff on sorghum,” says Tjakra.

“Everybody is looking to see whether the next one will be soybean. China is the biggest soybean player in the world, so anything that happens around the US will be interesting. Also, the Trans-Pacific Partnership is interesting to watch as well as the Asean Economic Council.”

The prices of agricultural commodities that are used to produce biofuels will fluctuate due to the changing policies of various countries. Eliza Ong Yin Suen, CEO and managing director of RHB Asset Management Sdn Bhd, observes that rising oil prices will affect this demand.

“The demand growth for ethanol and biodiesel has weakened due to lower fossil fuel prices and fewer incentives from government policies. Although energy prices are projected to increase, the derived demand for biodiesel feedstock — especially maize and sugarcane for ethanol and vegetable oil for biodiesel — will grow slowly, except in key developing countries where the demand increase is driven by more proactive domestic policies,” she says, adding that the Indonesian government is considering incentives for the use of biodiesel in the railway and mining sectors.

More volatility in price movements may be expected in futures trading due to the popularity of algorithmic trading. A US Commodity Futures Trading Commission report last March found that between 2012 and 2014, automated trading systems accounted for 38% of the trades on the Chicago Mercantile Exchange while manual trading was 55.6%. Between 2014 and 2016, the numbers changed to 48.5% and 47.5% respectively.

“In terms of information flow, these algorithmic trading processes are so much faster. They can trade in and out of positions at a much higher speed than normal brokers or users,” says Tjakra.

“Humans, when they trade, sometimes involve feelings and need time to process. But algorithmic traders will read news from multiple sources and make trading decisions based on that. So, you can see huge price movements based on their decisions. Price movements could happen faster than in the past.”


Outlook for agricultural commodities

According to a Rabobank report, the prices of most agricultural products were down last year due to weakness in emerging-market currencies and the absence of adverse weather conditions in main agricultural areas. Prices may continue to remain low this year due to an oversupply of grains and oilseeds and it may take several years before stockpiles are reduced unless a supply shock occurs. Meanwhile, speculators are expected to continue being active in the agricultural commodity markets.

“They shorted a couple of agricultural commodities last year. Obviously, they have covered some of those positions. But in many commodities, they are still short and if they decide they want to cover their short positions or take profit from their short positions, they should buy to cover and this could increase the commodities’ prices in the short term,” says RaboResearch senior analyst Oscar Tjakra.

In terms of demand, it will be important to note the growth of countries with huge populations. In the last decade, it was China — with its rising demand for meat and fish — that led feed consumption to grow almost 6% a year, according to a 2016 OECD-FAO agricultural outlook report.

Rabobank forecasts that China’s economy will grow 6.2% this year while India is expected to see a growth of 8%. Chinese growth will contribute to rising soybean imports and domestic cotton demand while Indian growth is anticipated to support vegetable oil import demand. Meanwhile, Brazil’s gross domestic product growth forecast of 1.9% may translate into higher local demand for coffee and strengthening Brent crude oil prices will affect the commodities related to biofuels.

“If you look at the demand for animal protein, we forecast that it will increase although at a slower rate than a few years ago. That will translate into higher demand for feed grains such as corn and soybean,” says Tjakra.

“Coffee is interesting as well because people are drinking more coffee. I think cocoa will also be an interesting commodity.”


Bearish on CPO

In Malaysia, the commodities futures that are actively traded on Bursa Malaysia Derivatives are the ringgit-denominated crude palm oil futures (FCPO) and crude palm kernel oil futures (FPKO).

Tjakra says Rabobank is currently bearish on crude palm oil (CPO). “It is still the cheapest vegetable oil out there and in terms of productivity, it is still the highest per hectare. Demand will still be there, but we think global demand is kind of stagnant, especially in Europe and China. In India, it will still grow about 4% to 5%. However, we should see an oversupply in most palm oil producers, especially from Indonesia and Malaysia, this year.”

Similarly, Eliza Ong Yin Suen, CEO and managing director of RHB Asset Management Sdn Bhd, says investors should take a cautious approach to the agricultural sector. “Within Southeast Asia, the demand for CPO has peaked. In our view, the overall tone of agricultural demand, driven by CPO, is at best marginally positive in the longer term. We have seen some of the strongest growth in recent years, driven by strong demand growth in China. However, the growth phase has shifted to a moderating outlook as inventories have been sufficiently built up in China,” she adds.

“In the near term, there may be a short-term supply disruption, which is positive for the outlook of CPO. We are expecting slowing production this year to support CPO prices. Oil World is forecasting production to rise 5.6% to 20.6 million tonnes in Malaysia this year. This is a significant slowdown compared with the estimated growth of 12.6% last year. The main reason is the maturing trees over the years as most of the replanting has been concentrated in Indonesia.”

Ong says CPO is likely to trade between RM2,400 and RM2,800 per tonne in the short term. In her view, the demand for the commodity from China and India is expected to decline this year. The lower demand from India is due to a hike in import duty for palm oil products.

“Off-take of palm oil from the biodiesel segment in Indonesia is not expected to be exciting this year. There is little incentive for biodiesel consumption as petrol prices are low and subsidies are insufficient. The Indonesia Palm Oil Association estimates that biodiesel consumption was 2.6 million tonnes last year, compared with 2.9 million tonnes in 2016,” says Ong.

There are a few unit trust and exchange-traded funds in Malaysia that focus solely on agriculture and agribusinesses. Among them are AmGlobal Agribusiness, Pacific Global Agriculture, Infrastructure and Resources (AIR) and MyETF Thomson Reuters Asia Pacific ex-Japan Islamic Agribusiness ETF.

Apart from Pacific Global Agriculture, the other two funds are invested across the agricultural supply chain. The target fund of AmGlobal Agribusiness is the Luxembourg-based DWS Global Agribusiness. According to its fund fact sheet in February, it has allocated 25.6% to fertilisers and agricultural chemicals and 16.8% to packaged foods and meat. The fund saw a return of 8.67% last year, compared with its benchmark’s 10.08%.

DWS Global Agribusiness has reduced its exposure to materials and increased its investment in consumer staples in view of the weak overall grains markets and high stock levels. It is also looking at opportunities in the more remote sectors of food delivery, precision farming, higher-value animal feed ingredients and aquaculture — areas that should be less affected by commodity prices.

Pacific Global AIR is less focused on agriculture as most of its investments lie in telecommunications services, transport and materials. The ETF, which tracks an index of 30 stocks in a variety of areas, mainly has holdings in fishing and farming (50.05%) and food processing (28.51%), according to its fund fact sheet as at Feb 28. Its net asset value fell 0.95% in the past year compared with the index, which rose 1.39%. On March 20, it was trading at RM1.06 per share.