Investor Insight: Philippe de Lapérouse on Investing in Agriculture and AgTech

Editor’s Note: AgFunder recently sat down with Philippe de Lapérouse, the Director of HighQuest Partners’ Global Food and Agribusiness Practice. Philippe is the Chairman of the Global AgInvesting (GAI) conference series, and delivered the opening remarks at this year’s GAI conference in NYC.

AgFunder: How do you define agriculture investing, and do you consider AgTech separately?

Philippe: When we refer to agriculture as an emerging asset class, it presents a quandary to investors in terms of pinpointing what the industry is comprised of. Agriculture is a multi trillion-dollar market—the third largest market following the currency and energy markets. There are a lot of large publicly traded companies in the food and beverage sector and that is not the case in agriculture production, simply because the sector is so fragmented. Although, of course, there are the big publicly traded companies, such as Monsanto and DuPont.

What I think people are realizing now is that there has been a great deal of lost opportunity to invest in agriculture. Investors are beginning to have a better understanding about which segments of the value and supply chains to invest in, and the timing for doing so. In order to make large-scale production more efficient, address some of the demographical changes that are occurring and leverage new technologies, the agricultural production sector needs to gain better access to capital.

There is also an opportunity in transferring new technology into emerging markets, taking an existing technology in the U.S. and bringing it to a developing market in order to get a big kick in terms of productivity, which is what investors are looking for. At the same time, as we’ve seen, there can also be backflow in terms of new approaches. For example, in terms of integrating technology, one could argue that parts of Africa may be further along than the industry is here in the U.S.

AgFunder: How is technology changing the Ag industry?

Philippe: It’s creating new ways to work more efficiently. The whole value chain is trying to respond to consumer demand for sustainable, higher-quality products that have a lower environmental footprint—not only in how these products are made, but how they’re transported and shipped. That isn’t to say that local is better than imported, because each case is different. But there’s a big push towards consumer choice.

I think technology is enabling more opportunities and more options. Look at tractors for example —I think we’re probably going to see a revolution in equipment. It used to be that you’d own a tractor for forty years, but now with the rapid acceleration of technological change, it might not make sense to buy equipment designed to last that long. One could argue that tractors of the future will weigh less and will have a shorter shelf life because of this acceleration in technology to avoid allocating a lot of resources and capital to building and owning pieces of equipment that will quickly become obsolete.

Then you look at what’s going on with biologicals. While the jury is still out, there are a lot of opportunities to leverage endogenous bacteria in the soil. The main objective is to reduce the amount of inputs that have to be applied to crops. Then you have no-till agriculture. The irony is that due to the increase in biomass production per acre, a certain increased tillage may be necessary to recycle a certain portion of the increased biomass into the soil. While there has been a focus on no-till agriculture, we may be going back to tilling because there’s too much biomass produced. That’s why you have to keep constant vigilance to what’s going on [in the industry].

Not everything new development is going to be a winner, obviously. But technology can play a role, as you look at changing weather patterns for instance, in helping to decrease risk when it comes to reduced rainfall or access to ground water used for irrigation. So there’s a lot that can be done there. And the opportunity remains in emerging markets—in those markets there’s much more transparency. People in remote parts of the world are scouring everywhere for new technology. That’s where the technology can be leveraged much more quickly.

AgFunder: You’ve touched on the fragmented nature of Ag. If you were to invest your own money into the industry, are there certain players, subsectors, or technologies you’d be focusing on? Where and what are the biggest opportunities right now?

Philippe: I’m very keen on anything that has to do with logistics. The reason is that if you put yourself in the middle of a flow of product, you should be able to make money no matter what happens. I’m generalizing of course, but looking at the consumption level we’ve reached, I think logistics is one of the biggest opportunities out there right now. Improving the handling of crops and products derived from biomass is a major opportunity. I don’t know why investors haven’t focused more on it. It’s a very exciting area, and I think there are lots of ways to make money there.

I also think there are ways to invest in early-stage farmland and downstream activities in a very strategic way, which would enable you to arbitrage. In other words, if you know about new technologies that could have an impact on the ability to produce higher yields on marginal lands, that could give you an insight into where to invest in farmland that may not be particularly valuable right now because it does not have a history of generating attractive yields. Knowing that new technology is coming down the road that could open up new opportunities for investing in farmland.

In terms of new technology, there are a couple of different ways one could play this. As I said before, I think biologicals offer opportunities. In my own personal opinion, big data still has a long way to go. There needs to be a universally accepted platform that allows for better interoperability, because it’s a cacophony out there. If I were a producer, how would I know how to put my first foot forward when there are all these competing initiatives? There’s so much competition [for those initiatives.] And then there’s the question about data ownership. For that reason, I think big data is still an open book right now.

There are two other areas where I might pounce. One interesting opportunity is anything to do with water—at the end of the day, the Ag trade is the trade of virtual water. Aquaculture is the other. What’s both interesting and challenging about aquaculture is that it really involves a whole ecosystem. With aquaculture, you’re kind starting from scratch with things like selecting the right feed and species. Aquaculture production is typically very inefficient and environmentally unstable, and pursued in a very fragmented way. Something has to change and there’s a lot of new technology now that could improve the way the aquaculture industry operates which would help address the decrease in wild catch. Globally there’s great demand for seafood which is not slowing slow down—not only in Asia, but also in the developed world due to the shift in lifestyles and diets.

AgFunder: How do you think the big players—such as Monsanto and John Deere—are looking at agriculture technology?

Philippe: With Monsanto, they’re continuing to launch new seed varieties. Over the past ten years, they were assuming that most of the yield improvement was attributable to improved seed genetics. Yet, when you looked closer it became obvious that 50 percent of that yield increase was actually being derived from the application of improved agronomic practices in addition to the improved genetics. While we can expect Monsanto to continue launching new seed varieties, they’ve kind of taken the foot off of the accelerator on that to a certain extent and have been focusing on acquiring companies such as, Climate Corp., which they’re using as a platform for further investments and acquisitions. They’re creating a platform where they can provide a suite of improved agronomic services to growers with the idea that they can tie more clients more closely to the company. John Deere is doing the same thing. There’s are a lot of different strategies these big players are employing in order to position themselves in the market as central hubs—for instance, with open source technology. The big question is how many others will be willing to play the game their way.

AgFunder: What about family offices or institutions?

Philippe: Well, I think you have some family offices that have been bitten by the bug, so to speak, and are really pursuing opportunities to make allocations to this industry. As far as early-stage companies in AgTech, there are a number of family offices that are looking in that direction—not necessarily a large number, but many understand the opportunity. I think the big opportunity for family offices is that is still not that much competition out there. Family offices don’t have to compete with large institutions which are taking a long time to decide whether or not to jump in. Therefore, family offices can be a lot more nimble and should be out in the forefront leading the charge.

AgFunder: Is there any advice you would give to investors eyeing agriculture?

Philippe: For VCs looking to get involved, I don’t know that there’s anything specifically different about the process than would be the case with other industries. The only difference, maybe, is that agriculture is a more fragmented industry than many others. It also has exposure on the regulatory side—you have to understand that—and it can be very local. Even though it’s a global industry, issues in agriculture tend to be very locally based. You also have to get to understand the culture of the industry, which is unique to agriculture. I would say you have to be very careful when dealing with producers—these are family businesses in which they pass intelligence down from one generation to another. As producers are tied to the land, they want to avoid doing risky things for the most part. These family businesses have long institutional memories and they won’t forget if someone doesn’t deal with them properly.

Image credit: Lynda Newnam