Why Food Security May Be One Of The Best Investment Opportunities Of The Century: Post Four The Market Potential


This is part 4 in an ongoing series that’s investigating the food security sector and why it stands to be one of the best investment sectors for investors this century. If you missed any earlier segments in this series check out part one, part two and part three.

 

In this post, we’ll take a look at the growth of the various sectors within the umbrella of food security, what companies are getting investment and what factors investors consider before investing, and where we expect the industry and investments to grow in the next decade.

 

Industries Seeing Growth

Controlled Environment Agriculture

Controlled Environment Agriculture, or CEA, refers to any agriculture that is done in a setting where you have some level of manipulation over the environment. Essentially all non-field agriculture generally falls under this category with minor exceptions like open air rooftop gardens and farms. Everything from a greenhouse to a warehouse to a shipping container farm falls under this designation. It is one of the fastest growing sectors in the umbrella of food security. The ability to control or alter one’s environment means extended growing seasons, larger seasonal variety at the local level, increased harvest size and typically a significant reduction in resource inputs like water, pesticides, and fertilizers.

According to Manifest Mind, LLC, a sustainability research and consulting company based in Boulder, CO, the total domestic market for CEA grew from $2.6 billion in 2015 to$2.85 billion in 2016 , a compounded growth rate of greater than 9.5%. Using the same figure and extrapolating to 2023 results in an annual domestic market of over $5.5 billion. Industry and trade group estimates on growth rates for the North American industry are for a compounded growth rate of 9.0% for the period from 2015-2023. Agriculture is traditionally a conservative market sector, but the benefits of higher yields with lower inputs, improved soil and water quality, and food safety are compelling forces for change driving this sector’s growth.

.The World Market for CEA is forecasted to increase from from $21.4 billion to $36.9 billion US dollars from 2015 to 2023, that is an average CARG of 7.0%. Currently, North America held a minor 12% of the International CEA industry. This market share is forecasted to increase to 15% in 2023. Not only is there growth expected domestically but the market for CEA is growing just as strong globally.

In 2010, it is estimated that the Controlled Environment Agriculture had no commercial scale vertical farming operations. This grew to no more than fifty (50) businesses focused on commercial scale vertical farming, in the US by 2014, most with single farm locations and limited investment from institutional capital. Approximately fifteen (15) operations are at commercial scale, supporting a dedicated full time staff (Indoor Crop Production, 2015). Market Research for the CEA industry is unavailable for years prior to 2015 for this reason. As technology prices lower in areas like LED lighting the feasibility of commercial vertical indoor operations increases in more and more markets.

Industry experts, including Manifest Mind, a major industry consultant, indicate that the facing the U.S. producers and manufacturers of controlled environment agricultural products will result in a growth faster than other regional averages (9.80% CAGR). The reason for North America’s expected growth is due to a nurturing environment and:

  • Willingness of urban customers to pay significant price premiums
  • Advanced-technology adoption
  • Customer and retailer demand
  • High-tech skill sets
  • Export proximity

Facts about the CEA Industry:

  • In the United States, 50 million people are food-insecure (Feeding America, 2009). In Europe, there are 30 million undernourished people (FEBA, 2010)
  • According to the USDA, farmland declined by 40 million acres over the past 15 years due to urban growth, drought and poor soil management.
  • Another huge obstacle to the implementation of urban agriculture in and around highly industrialized areas is the soil contamination from heavy metals and other pollutants. Heavy metals are China’s most abundant pollutant, and 900 tons are emitted each year from processes such as metal purification in factories. This pollution has adverse effects on both human and environmental health. Furthermore, 10 million tons of food were lost from 20 percent of China’s already-dwindling farmland (Qian, 2010).

In short as our cities are growing our and our industrial growth continues around the globe, we are seeing less and less viable land on which to grow our food. As a result, producers have begun using soilless grow methods to bridge that loss of farmland and food production, especially in urban environments where demand for local is high but supply is extremely low.

The direct wholesale value of farm food production, in constant dollars, is projected to rise from less than $2 billion in 2007 to $6.5 billion in 2060

Indoor agriculture is quickly gaining momentum in the US. Indoor farms mostly use farming techniques and technologies which allow for improved control over the variables involved in growing the produce. In 2014 data shows there were only 15 commercial scale vertical farms and rooftop greenhouses in North America. That number tripled in 2015 and has continued to grow year over year.

With a total addressable market size of over $9bn, or 17x the current US market size, indoor agriculture is poised to be the next major enhancement to the American food supply chain. (Indoor Crop Production, 2015)

Investors also have a newfound interest in this sector, with about 12% of global agtech investment dollars going into indoor cultivation systems in 2014.

In 2014 at least 32 million in venture capital like funds was invested in indoor agriculture which was more than 60% of the total raised from 2011 onwards (Indoor Crop Production, 2015). In 2017, that number is well over $250million to date, with more investments happening every week. We’ve also seen investments in amounts never seen before in the industry. Plenty, a San Francisco based startup focussing on vertical growing in urban outskirts, raised $200million in 2017. Not only is investment happening on a larger percentage, the amount of money being invested is surging as well.

Investments of this scale are necessary for two reasons. One goes back to the question, can we scale this within 10 years to serve a billion people. That will take a significant number of new farms and a many quick iterations that advance thecnologies from where they are today. Investments like the Plenty deal, show that investors are willing to put up the capital that these startups don’t have to accellerate their pace of growth exponentially to help meet the demands of the coming decade. Remember, within ten years we will already have a billion more mouths to feed and 70% of them are going to be living in urban settings.

Like many young industries, the indoor agriculture sector looks to a variety of stakeholders to aid its expansion. It takes buying in beyond investment expand this industry quickly and to its fullest potential. Local governments have to play a role in making regulations and zoning more favorable for indoor farming. We’ve seen that trend taking hold all over our country. Cities like Detroit, Boulder, Cincinnatti, Denver, St. Paul and NYC are just a few we’ve covered in the past few weeks.

While indoor farming likely won’t ever replace conventional outdoor farming methods, it can augment the food chain to create a diverse, distributed system more resilient to supply shocks and better prepared to meet the demands of a growing and more urbanized global population.

.It is an industry that is showing no signs of slowing down growth and it now has a track record of year over year growth for multiple years. Any time an industry shows signs of strength to the extent we are seeing in the CEA industry, investors will follow. 2017’s been a lnadmark year for investment, and we expect it is just the tip of the iceberg in terms of what we’ll see over the next decade.

Local Food

One of the main factors we’ll need to consider with the expansion of CEA and producers in general is will there be the demand for all these new local providers. Is the demand for local food growing as strong as the CEA industry or is there a ceiling to how much we can expect demand for locally produced foods to draw?

Turns out the demand is surging just as much if not more than the growth of the producers trying to meet that demand. Another great sign of strength for investors.

Strong growth in local food demand, the market for which has surpassed an estimated $1bn in 2005 to nearly $7bn in 2014, has meant a unique market entry point for indoor farms’ higher price-point products. While seasonality, soil conditions, and access to land have traditionally made year-round local produce sourcing impossible, indoor agriculture is well positioned to satisfy the largely unmet need for local produce by growing year-round in any climate. (Indoor Crop Production, 2015)

Local food sales in the U.S. grew from $5 billion to $12 billion between 2008 and 2014, according to food industry research firm Packaged Facts. The same study predicted local food sales would jump to $20 billion in 2019, outpacing the growth of the country’s total food and beverage sales (biz insider). Local food sales is among the strongest growing areas of food retail. As consumers become more conscious about food production and methods they are seeking out local varieties for greater nutritional value, perceived safety and economic impact with their purchasing dollars.

Meanwhile, the 2013-14 school year saw nearly $790 million worth of local foods purchased by primary and secondary schools, and by 2015, nearly 8,500 farmers markets had sprung up across the nation, an increase of more than 380 percent in 20 years (business insider).

Access to healthy food has dwindled in both rural and urban communities. Today’s food entrepreneurs have the passion and the commitment to fill these gaps. What they need is financing and strategic assistance to help them accelerate their growth, scale their businesses, and achieve long-term success.

Let’s take a look at an example of how investment in local food production can have great returns for an investor.

One organization, the Fair Food Fund,  provides financing and mentorship to food entrepreneurs. They have committed more than $2 million to enterprises across the Northeast since 2013. Not an overwhelming amount of money but it is having tremendous impact!

Recently, it invested in Five Acre Farms, a company that brings great-tasting local milk, egg and apple products to more than 150 grocery stores and 75 restaurants and coffee shops in New York, New Jersey and Connecticut.

The approach: find outstanding sustainable farmers—within a 275-mile radius—pay them fairly and make their products accessible to average Americans.

Over the past few years, Five Acre Farms has grown its network of partner farms from two to 25. Five Acre Farms is now the official milk of Kellogg’s NYC cereal café in Times Square, and its products are featured on more than 50 Delta Air Lines flights.

Each product is fully traceable to the land and people that produced it. Since 2014, Five Acre Farms has paid a total premium of more than $700,000 above market price back to the farmers that produce its milk, eggs and apples. And in the process, its business has helped strengthen local economies while preserving farmland, protecting the environment and ensuring that animals are treated humanely.

It’s precisely these kinds of diverse returns that deserve the attention of investors.

Investing in food has multiple leverage points: sustainable agriculture practices and boosted farmer income; increased access to healthy food; economic development and job creation all along the value chain; and revitalization of previously struggling rural and urban communities.

Warren Buffett famously cautioned, “Never invest in a business you cannot understand.”

Everyone understands food and the importance of food. It is essential to life. And now, investors increasingly understand the power of local food entrepreneurship to deliver meaningful returns in a world of food shortages and growing populations.

Not only has there been huge growth in the number of farm-to-table restaurants and farmers’ markets, but grocery chains and big box retailers, including Wal-Mart, are aggressively expanding and marketing their locally grown offerings for sale.

Wal-Mart sells $749.6 million of “locally grown” produce annually, while Supervalu, owner of the Jewel-Osco, Albertsons, and Lucky chains, buys between 25 and 40% of its produce locally, according to AtKearney, a consulting firm.

In fact, the Packaged Facts report notes, nearly half of people surveyed said they are willing to pay up to 10% more for locally grown or produced foods, and almost one in three said they are willing to pay up to 25% more. (fortune)

That’s music to the ears of both producers and investors. Those that can provide an equal or superior product to the local market can expect to receive more than the large-scale counterparts that get shipped hundreds or thousands of miles. This will allow them to not have to compete on prices with producers whose scale affords them the ability to undercharge a local producer. It seems consumers are increasingly more concerned with the where of production and the how than they are with the price tag on there apple.

Organic Food

In addition to the local food movement, organic food demand is also surging.

Organic sales in the U.S. totaled around $47 billion in 2016, reflecting new sales of almost $3.7 billion from the previous year. The number of organic food sales marked the first time the American organic food market has broken through the $40-billion mark. Organic food now accounts for more than five percent — 5.3 percent to be exact — of total food sales in this country, another significant first for organic (Organic Trade Association).

Organic food sales increased by 8.4 percent, or $3.3 billion, from the previous year, blowing past the stagnant 0.6 percent growth rate in the overall food market. Sales of organic non-food products were up 8.8% in 2016, also handily surpassing the overall non-food growth rate of 0.8 percent. Consumers are getting more conscious and they are using their dollars to shop with their conscious. As we learn more and more about industrialized production in all industries we are seeing the trend towards spending on products that are produced in a more sustainable and healthy way for ourselves and our planet.

The survey also showed that organic is creating jobs. More than 60 percent of all organic businesses with more than 5 employees reported an increase of full-time employment during 2016, and said they planned to continue boosting their full-time work staff in 2017 (Organic Trade Association).

“The organic industry continues to be a real bright spot in the food and ag economy both at the farm-gate and check-out counter,” said OTA’s CEO and Executive Director Laura Batcha.

“Organic farmers are not just staying in business, they’re often expanding. Organic handling, manufacturing and processing facilities are being opened, enlarged and retooled. Organic farms, suppliers, and handlers are creating jobs across the country, and the organic sector is growing and creating the kinds of healthy, environmentally friendly products that consumers are increasingly demanding.” (Organic Trade Association)

 

Organic products of all sorts are now found in the majority of kitchens and households across our country,” said Batcha. “But the organic sector is facing challenges to continue its growth. We need more organic farmers in this country to meet our growing organic demand, and the organic sector needs to have the necessary tools to grow and compete on a level playing field. That means federal, state and local programs that help support organic research, and provide the organic farmer with a fully equipped tool kit to be successful.” (Organic Trade Association)

Looking at the growth in the CEA industry, the local food industry and the Organic Industry two things are very clear. Demand is surging for food thats produced more sustainably, closer to the consumer and available locally year round. In addition, while the CEA industry is growing at a staggering pace, it is still not keeping up with demand for the local and organic food markets.

The demand is such that producers are still getting a premium for locally sourced and organically produced products and there is plenty of room for more producers to meet the demand gap we are currently seeing. That means investors can still expect a good return from the producers they invest in and as we know with our population surging, that demand isn’t going anywhere for a long time.

 

Investment, especially in proven and strong small scale producers, will allow them to scale their operations and farms much more quickly than they could through revenues alone, helping us meet the demand gap between producers and consumers and creating a more food secure future. It will also help us lesson on reliance on industrialized agriculture, especially in areas where indoor production is more efficient than field production. While we don’t expect indoor farms to take over orange groves any time soon, it is a much more efficient way to get specialty crops such as greens, herbs and small fruiting plants like strawberries. In the case of greenhouse production tomatoes and peppers are outperforming their field counterparts as well.

As technology improves, and as investment speeds those improvements along we will see more and more variety make economic sense in a Controlled Environment Agriculture setting. The more variety in our production methods, the more resource efficient our production methods can get and the more producers we can incentivize to expand or start growing, the brighter our future looks. Investment will be a significant component of all this, but investors are looking at the opportunity of a lifetime and stand to benefit greatly while having a huge impact on food security.

Next week, we’ll conclude our series by identifying what qualities investors should look for when considering investment in this sector and what type of impact we are seeing from those early stage investors of the past few years.


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