Why investors are pouring $20bn into Agtech

September 17, 2021 0 Comments

Here at The Money Cog, we write about various sectors ranging from oil & gas to banks to consumer retail businesses. However, every once in a while, we stumble across new and exciting sectors that investors pour billions of dollars into. One such industry that has become “hot” is Agricultural technology (Agtech). 

Today, most of the companies operating within the space are private. And that’s hardly surprising given the infancy of the industry. Many of these businesses have yet to establish a proven business model and are typically pre-revenue. But over time, this may soon change. 

According to the leading venture capital firm AgFunder, the sector raised over $20bn last year. So what is this technology? And are there any opportunities on the public markets to invest? Let’s take a look.

What is Agtech?

Agricultural technology – often abbreviated to ‘AgTech’ – covers a broad range of things. It is, in essence, any technology designed to improve the efficiency and standards of all farming and food production processes. A relatively new sector, AgTech has really taken off in the past few years and is now one of the fastest-growing and, in my opinion, most exciting industries around the world with a compounded annual growth rate of 29%!

Why am I writing about Agtech?

With a lot of money now going into the sector over the last 10 years, more opportunities have begun emerging for retail investors. These come in the form of already established businesses venturing into the space or recently minted stocks.

There is a company called Beyond Meat that I wrote about it a few months ago. It produces plant-based meat, an alternative solution to animal-based protein. A business that went from $66 to $234 in just a matter of months after its IPO. As Agtech is pretty new as a sector, there is going to be a lot more mispricing and a lot more opportunities for my portfolio!

How do I find opportunities?

Whenever exploring a new industry, I always like to take a top-down approach. What does that mean? Instead of focusing on specific companies, I’m looking at the market as a whole to see which firms are trying to solve the most lucrative problems. 

Agtech can be broken down into two segments, upstream and downstream. Sound familiar? It’s basically the same structure as the oil & gas sector. The upstream segment focuses on businesses closer to the farm and downstream that are closer to the consumer. 

Breakdown of the different areas within the Agtech sector

Source: 2021 AGRIFOODTECH INVESTMENT REPORT, Agfunder.com

There is a lot to take in from the above diagram. But it provides an informative snapshot of the different areas of Agtech. 

Opportunities in the Upstream

Upstream businesses tend to be very capital intensive. Meaning there is a lot of money required to get things up and running before any revenue is even generated. This certainly makes it challenging to succeed. However, for the firms that do, this barrier to entry significantly widens its economic moat – a fantastic trait for any business to have in my experience. So which firms are worth investigating?

A business that is already publicly traded that I’ve begun investigating is John Deere. The firm manufactures agricultural and construction heavy equipment. John Deere recently switched its focus on the future of farming with electrification, automation, and artificial intelligence

Another Agtech business that caught my attention is Archer-Daniels-Midland. The company focuses on procurement, transport, storing, processing, and merchandising of agricultural commodities, products, and ingredients in the US and internationally. In 2020 alone, its revenue came in at $64.4bn.

Opportunities in the Downstream

Now moving across to the downstream segment, there are some interesting businesses like Beyond Meat and Deliveroo that I’ve previously explored. In addition to those two, another one that comes to mind is Tyson Foods, a protein-focused food company that produces 20% of the beef, pork and chicken in the United States. Meanwhile, here in the UK, Ocado is transitioning from an online grocery business to a vertically integrated automated farming powerhouse.

In the future, I think there will be a large number of IPOs arriving onto the market for this industry. Impossible Foods, a competitor to Beyond Meat is rumoured to be going public within the next 12 months.

There is undoubtedly a lot of risks that need to be considered before investing anywhere. But this industry seems full of potentially explosive opportunities, especially since it looks like it’s only just gotten started.

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Imran Dean does not own shares in any of the companies mentioned. The Money Cog has published a premium report for Beyond Meat, Deliveroo, and Ocado. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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