It's 2040: what does the agriculture system in which we're investing look like?

Investing for positive planetary health outcomes

I was challenged recently to put my thoughts together on the investment opportunity in agriculture. I’m on the short list to join the investment advisory board for a $5B planetary health fund.

To prepare for the interviews, I had to gather my thoughts. I focused on outlining critical components necessary to build an investment thesis for the regenerative agriculture systems of the future.

·?????? What is my vision for the future, the end goal?

·?????? Why must this future vision be realized for planetary health?

·?????? How would I describe the current state of play?

·?????? What are the headwinds and tailwinds of which investors should be aware?

·?????? What did I miss?

Thank you to my thought partners: my dedicated colleagues at The Nature Conservancy , and also Janette Barnard , Kerry Cebul , Adele Durfey , Kerryann Kocher , and Sarah Nolet . Also, thank you to Nicole Masters for her brilliant book, “For the Love of Soil,” which is a consistent inspiration, including the Co-Pilot-generated image that accompanies this article.

My vision for the Agriculture Industry in 2040

What is the vision for agriculture production in 2040? Where are we going with respect to agriculture’s role in planetary health? What does the agriculture system in which we're investing look like in 2040?

In 2040, farm and ranch operations are focused on continually building their biological systems, or soil microbiome (managing their micro-herd, Nicole Masters’ beautiful way to provide a visual for the future), as the most critical input for their profitable farm and ranch operations. They are building and managing regenerative agriculture systems. ?

In 2040, the businesses serving farm and ranch operations are building and delivering solutions focus on building healthy soil microbiomes and profitable businesses.

In 2040, those who buy farm grown food, feed, fuel, and fiber are exceeding their biodiversity, global greenhouse gas (GHG) emission, and revenue goals because their supply chains have made the transition to farming and ranching regenerative systems. This transition has continually reduced sourcing volatility, improved input quality, and facilitated the development of more diversified markets (the total revenue pie has grown).

Why must we see a shift in agriculture production to regenerative systems? ?

The current agriculture production methods have done an incredible job of producing food, fuel, feed, and fiber crops and also have a significant negative impact on planetary health.

Agriculture contributes to approximately 86% of global biodiversity loss, with 24,000 out of 28,000 species at risk of extinction. It accounts for around 70% of freshwater use and significantly degrades water systems. Additionally, agriculture is responsible for about 30% of GHG emissions, with farmgate crop and livestock activities contributing roughly 10%. Within this, livestock and rice paddies produce about 50% of methane emissions, while synthetic nitrogen fertilizer use generates around 50% of nitrous oxide emissions. Furthermore, ecosystem and land conversion for production, such as deforestation, contributes to about 10% of emissions, primarily CO2. The food supply chain also adds another 10% of CO2 emissions. (Sources: U.N. Environment Program. Food System…Biodiversity. 2021 and UN. Food Systems Account …GHG Emissions. 2021).

This impact, alongside a growing number of challenges (outlined below as tailwinds forcing change) affect the profitability of farms, ranches and the industry serving farm and ranches, making this moment an incredible one to invest in the solutions that will support the future state of agriculture production.

What does this vision require?

The Nature Conservancy completed a significant research study in 2016 to determine where in the ecosystem requires the most attention to deliver agriculture’s positive potential footprint for planetary health: it is rebuilding the soil microbiome. A healthy soil microbiome is required to halt and reverse biodiversity loss, improve freshwater systems: quality and quantity, build resilience and thereby profit for farm and ranch operations, and ensure a resilient supply chain and thereby profit for buyers of farm and ranch grown food, feed, fiber and fuel.

Examples of soil microbiome building regenerative practices include (but are not limited to, the research continues) producing crops with minimal or no tillage, cover cropping, agroforestry, precise nutrient management and irrigation, and adaptive grazing. Food companies, governments, and leading scientists recognize that regenerative agriculture practices can shift our food system from one that depletes our resources to one that delivers enduring net-positive benefits for people, climate, and nature. In 2022, for instance, the U.S. Department of Agriculture announced $3.1 billion in funding for climate-smart agriculture projects to spur the creation of new commodity markets that further incentivize the adoption of regenerative practices.

What is the current state of play?

The value chain is made up of a series of duopolies (approximately >60% global market share) in equipment: Deere, Case New Holland; seeds and inputs: Syngenta owned by Chem China, Monsanto now owned by Bayer; post-harvest aggregation and storage: Cargill and Archer Daniel Midland; meat processing and sales: JBS and Tyson. These are significant, profitable incumbents. A lack of competition disincentivizes innovation. And thus presents a textbook opportunity for disruption.

The companies are silo-ed in terms of the way they serve farm and ranch operations. There is little vertical integration. These silo-ed positions have resulted in a loss of customer-centric solution development. When those serving the customers are not obsessed with the customer’s whole farm and ranch business system, the products and solutions delivered fall short. And thus, a ripe opportunity for disruption.

How might you develop an investment thesis around building a significant business that is vertically integrated and obsessed with serving the farms and ranches that are relentlessly focused on building their soil microbiome as their most important input? How would you not only invest to develop critical seed and supporting biological inputs but also the unique equipment required to deliver the inputs? How would you set the business up for success in terms of competing with the incumbent’s financing arms? How might you build in to your investment thesis the time required to build companies that will deliver the necessary systematic change (significant incumbent pressure and R&D times similar to pharma v. software)

The existing incumbents are extremely efficient. It is extraordinary how they have built businesses armed with hammer solutions that work well globally (e.g. glyphosate, limited number of crop varieties,? standard equipment solutions) for diverse biological systems. The future state of agriculture, however, requires the companies that serve and buy from farm and ranch operations to introduce solutions that are more responsive to the biological-focused system approach to producing food, feed, fuel and fiber. The solutions serving regenerative agriculture systems must be flexible and adaptive:

How would you build into your investment thesis the necessary financing flexibility (debt, equity, project financing) to support first of a kind (FOAK) businesses serving agriculture production systems of the future?

How would you support the development of solutions that leverage AI for faster solution testing and product introduction? How would you support the building of companies that have an ability to test and partner with an array of third parties to quickly deliver alternative solutions to farm operations?

How would you support a modular robotics company that leverages continual learning to adapt its platform for regional and/or unique farm system requirements? ?How might you build a business where the business success is tied to the profitable outcomes of your farm and ranch customers (outcome-based pricing)??

Farm and ranch operations- the lowest margin actor in the industry- must take the majority of the action to facilitate the transition towards farming and ranching for biological systems. Farm and ranch operators are ultimately responsible for the transition to regenerative systems. There are farm and ranch operations that have made this transition. These operations and their leadership remain outliers, swimming upstream against a powerful status quo.

How would you support the development of solutions that eliminate the green premium? How would you support the building of companies that make it the profitable choice for farm and ranch operations to produce their food, fuel, feed and fiber in a regenerative way (this is the underlying thinking behind the investment strategy we developed at The Nature Conservancy )? How might you support the development of financial tools that de-risk the adoption of regenerative practices for farm and ranch operations? How might you work to build for the food, feel, fuel and fiber buyers’ financial tools that derisk the shifting of their supply chain to regenerative production and thereby building the demand signal for the upstream agriculture companies in which you’ve invested? ?

What are the headwinds and tailwinds that are influencing the investing landscape and presenting opportunity?

Headwinds preventing accelerated progress towards the 2040 vision

Farm business dynamics (e.g., significant share of land that is leased on short term basis) that push farm operations to opt for short term risk management and over long-term building of soil microbiome and operation resilience.

The reality that farming to maximize your operations’ biological system does not necessarily deliver quick positive (or negative) feedback (versus an application of a hammer solution e.g. glyphosate). A longer feedback cycle insulates farm operations from the negatives and positives from their agronomic decisions.

In the U.S., government supported programs shield farm operations from responding according to market signals around supply and demand. They are operating in a distorted business environment.

Lending institutions that are not currently taking the quality of soil health into account for farmland equity or annual operating loans.

How might you build your companies to excel despite these headwinds and be primed for the potential (eventual?) market, industry changes that shift these from headwinds to tailwinds?

Tailwinds that support the 2040 vision for the shift towards regenerative farms and ranches

Growing corporate and financial market awareness of the need to expand focus beyond greenhouse gas emissions (one driver of climate change) to a broader focus on nature and biodiversity. There is a growing recognition that this shift is necessary for planetary health and business resilience, future proofing businesses.

Opportunity to solve for these identified challenges:

Labor availability is a challenge across the globe to support agriculture production systems. There are many challenges with labor shortages one of which is operating current human-driven equipment.

Existing synthetic chemicals are no longer working (the hammer solutions). As we have seen in healthcare with antibiotics, there is growing herbicide and insecticide resistance.

There is increasing food, feed, fuel and fiber production volatility driven by climate extremes. This volatility impacts not only the farm and ranch operations but also the buyers, off takers and ultimately consumers with higher prices (cocoa prices the last 5 years).?

Aquifers are being utilized at unsustainable rates for irrigation (among other uses).

Farm and ranch operations are under financial pressure forcing a review of existing business models and opportunity to change.

How might you build companies that take advantage of these tailwinds? Solutions that address the gaps left in the market and deliver solutions for the 2040 vision of large-scale regenerative farm and ranch systems?

The current agriculture production methods have done an incredible job of producing food, fuel, feed, and fiber crops and have a significant negative impact on planetary health. The time is ripe for investors with a lens on planetary health to build an investment thesis and take action to support the opportunity that is the necessary transition in agriculture towards large-scale regenerative systems.

If you've read this far, I welcome your thoughts. What resonated with what I’ve outlined? What did I miss? How are you investing for planetary health?

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