Investing in agriculture

Farming isn’t usually a subject I find myself talking about. Yes, I’ve watched Clarkson’s Farm and laughed at Jeremy Clarkson’s attempts to get involved, but that’s about the extent of my knowledge (and his).

However, I found myself becoming intrigued recently by comments made by Chris Ford, manager of Sanlam Artificial Intelligence fund, about a fully autonomous John Deere tractor. I’m not alone if the 73,000 views on Youtube of said tractor at work are anything to go by.

And when I asked other managers about their exposure to the sector it was increasingly obvious there is far more to farming than cows, sheep and muddy boots. From feeding the 10 billion to machines that can differentiate between crops and weeds, here is what they had to say.

Agricultural mechanisation

“One of the biggest challenges that the world must address, is how to (sustainably) increase food production in order to meet the needs of a global population of 10 billion by 2050,” said Thomas Pratchett, investment specialist of the Baillie Gifford Japan Trust.

“India is at the forefront of that battle; despite already accounting for a quarter of the world’s hungry people, its ballooning population will shortly make it the most populace place on the planet,” he said. “Japanese manufacturer of agricultural equipment, Kubota, a holding in the trust, may offer one solution.

“Having operated in a country with little arable land, that is increasingly beset by the constraint of a declining workforce (the average age of farmworkers in Japan is around 67), Kubota developed the necessary technological tools for agricultural mechanisation required to modernise farming practises. Having already established a leading position in rice farming within the domestic market and profitable niches across South East Asia, Kubota has now set its sights on India.

“Having entered the market early and slowly built a strong brand and reputation, Kubota has recently turbo charged its presence in India through building up its stake in the third largest player ‘Escorts’. In time, Kubota also intends to use this as a base to expand into other Asian markets, and from which to launch its next technological campaign of smart farming, as part of the fourth agricultural revolution.”

Escorts Agri Machinery was a holding in Alquity Indian Subcontinent until very recently. Manager Mike Sell told us, “We originally identified Escorts as an attractive opportunity due to the long-term potential for increased mechanisation within the Indian agricultural sector. “This is currently just 45%, which is substantially lower than in Brazil (75%), China (57%) or the USA (95%). The strong brand and market share provide a long-term competitive advantage, augmented by the fruits of a restructuring programme in recent years, increasing government support for the rural economy, and a greater corporate focus on ESG issues. We initiated a position in July 2016 when the share price was 242 Indian rupees, and exited in February 2022 when it had reached 1835 Indian rupees – so almost 8x higher over 5.5 years,”

The fourth agricultural revolution

The fourth agricultural revolution refers to the impact that advanced technologies, particularly artificial intelligence, will have on planning and farming operations. “Kubota’s autonomously driven tractors and combine harvesters, for example, will work in concert with the ‘Kubota Smart Agri System’, a cloud based agricultural management service that visualises agricultural data, to provide ‘precision agriculture’, for the perfectly calibrated fertilisation and watering of crops allowing for healthier and more abundant production,” said Thomas. “Farms may effectively become more like factories, tightly controlled operations for turning out reliable products, immune as far as possible from the vagaries of nature.

“The new CEO, Yuichi Kitao, was formerly Head of the R&D Innovation Centre, so is keen on the area of autonomous harvesting and realises the need for collaboration with tech start-ups to succeed in this advancing area. As such, the company is collaborating with Nvidia to develop its AI capabilities for automated driving and farming optimisation based on analysis of imaging information from image sensors and drones. The company has also joined forces with Microsoft, Accenture and various start-ups such as ‘Advanced Farm Technologies’.”

Deere & Co is doing something similar, according to Chris Ford, manager of Sanlam Artificial Intelligence. “John Deere isn’t necessarily a name that one would associate automatically with AI, but it is transforming its world-famous farm equipment to mobile sensor suites – with computational capability – as part of its ‘smart industrial’ strategy.

“As well as developing fully autonomous tractors (including electric tractors) which do not require a human operator to be present within the vehicle, the firm is also utilising AI via its ‘See and Spray’ technology. This uses hi-resolution cameras and artificial intelligence to differentiate between cultivated plants and weeds, enabling each plant to be treated and dosed appropriately – an approach that boosts yields and reduces pesticide use significantly.”

Sustainable agriculture and decarbonisation

The point made initially by Thomas about food sustainability is one echoed by Deidre Cooper, manager of Ninety One Global Environment. “The global agri-food system needs to transform in order to produce 50% more food to feed the growing global population, and to urgently reduce the c. 20% of greenhouse gas emissions caused by livestock and their by-products,” she said.

“We own three stocks directly linked to this future of food and agriculture theme – Novozymes and Croda are active in agricultural and enzyme solutions, while Beyond Meat (along with Novozymes) is linked to meat alternative products.”

For those who still prefer the ‘real thing’ as opposed to meat alternatives, Alexandra Jackson, manager of Rathbone UK Opportunities, points to Cranswick, the pork and chicken processor.

“Farming is not a big sector for the UK market, thanks to the capital intensiveness plus vulnerabilities to weather and commodity prices,” she said. “And now there’s also always the chance that you find yourself the subject of an exposé around animal treatment.

“Cranswick see all these factors as superb barriers to entry and have a track record of investing proactively and generating a very steady return on capital from these investments. It’s enabled them to increase the dividend every year for the past 31 years. Cranswick pride themselves on the automation in their plants (meaning they are less reliant on expensive labour) and importantly on their animal welfare standards, so reducing the risks that have hurt their competitors.”

One of LF Montanaro Better World’s six impact themes is nutrition, which is inextricably linked to food production. “A company that we feel exemplifies this theme is Christian Hansen, a Danish producer of cultures, probiotics and enzymes for health and animal feed industries,” the team state. “The company’s product portfolio is promoting sustainable agriculture by replacing chemical pesticides in crop farming and helping to reduce the use of antibiotics in livestock production.

“In addition to selecting companies for investment that are aiding biosphere stewardship through sustainable farming practices, we are initiating an engagement project on the topic. Over the next year we intend to contact a number of companies on our approved list to discuss the integration of ecological considerations and the conservation of biodiversity as part of decision making.”

David Coombs, manager, of Rathbone Strategic Growth Portfolio, is also invested in Christian, as well as the iShares Agribusiness Index ETF. “We think the food industry could be the next sector ripe for disruption through greater embracing of scientific innovation, technology and environment efficiencies,” he said.

“Companies which can remove emissions from the food chain, increase yields through natural stimulants or provide foods that are less commoditised and more organic to shift pricing power to a more equal footing, could provide superior returns.

“Move over retail, it’s agriculture next in the crosshairs of innovation.”