Published On: Wed, May 18th, 2016

Why Do Some Investors See Farming As The Next Big Thing?

If you’d asked investors twenty years ago what they thought would be the biggest market in the following decades, they would have said “IT.” And by and large, they were right. Most of the growth we have seen over the last two decades has come from new information technologies. They have trickled down from a few, bespoke applications to being part of practically every industry.

agricultural machinery

But what if you’d asked those same investors whether they thought farming might boom? Well, you might have gotten a chuckle. After all, farming is the oldest human industry. And from the perspective of the late twentieth-century, most, if not all, of the gains had been made. Heck, employment in the farming sector was down to about 2 percent of the workforce. How could it go any lower? Machines had replaced almost all workers in agriculture. And there seemed little scope for any new developments taking place, especially in America.

Demographics

But then, investors don’t tend to have very long-term time horizons. They don’t see, for instance, the fact that over the following decades, the demographics are going to change wildly. The World Bank has predicted that the human population will grow to somewhere between 9 and 10 billion by mid century. And that means that there will be a lot more mouths to feed.

A new wave of humans will rise in India and China (now the one child policy has been relaxed). And these people will have to be fed. What’s more, they’ll be a lot richer than their parents and grandparents. China’s per capita GDP is set to more-than-double over the next twenty-five years. They won’t be eating boiled brown rice and vegetables. They’ll start moving over to a more Western style diet, just like practically every culture does. They will start demanding more meat and more processed foods as their tastes change. Traditional diets will end in these countries, just as they have in the West. And what emerges will likely only be a vestige of former habits.

So what does this mean for investors? Is it enough that the population is increasing? Well, one would expect that if everything else was held constant, that an increase in population would bump up the price. More people clamoring for the same resources always pushes up the price paid. If you remember back to the Arab Spring in Egypt, food prices there rocketed and produced riots. And many saw this as the result of rising food demand but steady supply.

But of course, the rise in food prices there was mainly for political reasons. It didn’t have all that much to do with the underlying supply. And that, incidentally, has managed to keep track with the demand so far. No, the reason investors are looking at farming once again is that this is a new potential growth area.

This massive potential demand for food overseas is driving expectations. There is going to be a basic demand that undergirds the agricultural sector for years to come. And this is what ought to be driving interest among investors. The very fact that people must eat should drive interest in a sector that must expand alongside the population. The auto, semiconductor, and financial industries don’t, and yet they secure significant investments.

Technology

Some investors, however, do see farming as the next big thing. And there are a couple of important reasons for that. The first is that emerging markets will start to industrialize. In other words, farming in those countries will become more capital intensive. They’ll start using tractors and combine harvesters to take labor out of the equation. And their economies will go through the same process as economies have in the West. By the middle of the century, billions more people will have moved into cities, their labor replaced by machines. Investors will provide the capital for farm machinery finance. And this investment will see modernisation of farming around the globe.

But, of course, in the real world, things aren’t static. It’s not just going to be the case that farming elsewhere catches up to the Western model today. Technology is also going to be changing all the time, providing new profit opportunities. Over the last couple of years, a Japanese company has begun producing food made in its indoor farm. It’s what’s been dubbed a “vertical farm” and promises to revolutionize food production.

These installations will start out small (although some greenhouses are already acres in size). But the goal is to make a farm that soars into the sky. Each floor will house a crop, and machines will harvest that crop. And they’ll have several distinct advantages over regular farms.

The first is that they will take up a lot less space. Good news when you consider that many climate scientists believe less land will be available for food production in the future. The second is that crops won’t be exposed to the vicissitudes of outdoor living. Their environment will be perfectly controlled, increasing yields. This is rather like mushroom factories today, where the ideal environment can be calibrated correctly. The third significant advantage is that these farms will require far fewer resources. There won’t be a need for heavy farm equipment to burn fuel collecting and processing food. Rather, that will all be done either by human pickers (less likely) or by robots (more likely). And there won’t be a need for pesticides or herbicides since the farms will be sealed from the outside.

Putting it all together, it seems as if investors have an opportunity here. Legendary investors, like Jim Rogers, have spoken at length about why now is the time to invest in agriculture. As billions of people in Asia move out of poverty, their disposable income will rise. And their demand for new types of food will grow. The bottom line seems to be that there are still massive productivity gains to be made using today’s technology. And that in the future, technology will usher in even lower marginal costs. This is what investors should be intested in because this is where their return will lie.