Equities
Equities

Unlocking opportunities in sustainable agriculture

April 25, 2023
Martin Frandsen
Portfolio manager, Equities

Investors should take note of a wave of innovation to address global food issues.

Food production and distribution is a fundamental part of our global economy. But around the world, growing food and moving it from farms to tables in efficient and sustainable ways faces a slew of challenges. Climate change is threatening the ability of farmers to dependably grow their crops. Demographic shifts, including population growth that is far outstripping food output, are pressuring growers and producers to make more food available. And more recently, the COVID- 19 pandemic has been upending global food workforces and supply chains.

“The last few years have shown that we can’t take for granted the systems this world is based on,” says Martin Slipsager Frandsen, a portfolio manager in equities with Principal Asset ManagementSM. “And the food system sits at the heart of this issue.”

Population to Cropland Ratio
Billions of people/billions of hectares, 1900-2016

Population to Cropland Ratio, 1990 to 2016

Source: “Our World in Data,” Principal Asset Management.

Overcoming these challenges will require innovative approaches to make food production and distribution more efficient and sustainable. For investors, these efforts will provide companies across a range of industries—from manufacturing to consumer staples—with sizable growth opportunities. “The companies that sell their solutions to farmers and into the food system will be in a very advantageous position from an investment perspective,” Frandsen says.

Next-generation farming

Some innovations in the agriculture industry are easy to spot. Take heavy equipment manufacturers, many of which are focused on making farmers’ jobs easier and more productive. These manufacturers are leveraging cutting-edge technology to create tractors that can till the soil, plant seeds and harvest food without a driver at the wheel. Seeders and fertilizer systems can be operated with pinpoint precision thanks to GPS, and farmers can use that technology to save fuel—and time—by plotting out the most efficient routes to plow and plant.

In fact, Frandsen notes a recent visit to a heavy equipment manufacturer with fellow Principal® portfolio manager Steven Larson yielded an interesting comment from company executives: They increasingly see the company as a technology and software firm as much as a manufacturer. From an investment perspective, that offers appeal because technology such as software can typically deliver stronger profit margins and faster growth to companies than manufacturing operations. “As companies transition from being old-school industrial manufacturers to include an element of technology, you start to see more traditional pure technology investors who are willing to pay for that,” Frandsen says. “And the company has the potential to have a value expansion as it evolves to become more of what it’s going to be in the future.”

It’s very apparent how important it is to anticipate the big increase in food demand in the future, and the extent to which all of this has real-world implications for investors.
Martin Slipsager Frandsen, Portfolio Manager, Equities

And as agriculture becomes more digitized, technology companies will play an even greater role in improving the global food system. One notable achievement is the development of a high- precision pesticide sprayer that relies on advanced cameras to identify plants that shouldn’t be sprayed and the weeds that should be targeted. “You can actually decrease the amount of pesticides being used by around 70%,” Frandsen says. “That has a positive environmental impact as well as a very positive economic impact for the farmer because these pesticides cost a lot of money.”

Other innovations may be less visible—but no less attractive—to investors. One company, Frandsen says, is focusing on developing enzymes that can lengthen the shelf life of foods such as yogurt and reduce food waste. In fact, the United Nations notes that the nearly 1 billion metric tons of annual food waste contributes as much as 10% of global greenhouse emissions.1 Additionally, companies involved in water and soil conservation will help fuel more scalable and sustainable food production, and food manufacturers targeting consumers’ changing tastes and preferences are creating new products that meet those needs in more sustainable ways.

A global approach

Much of the technological innovation in the agriculture industry occurs in developed markets, where farmers are more likely to be able to afford smart tractors that may cost several hundred thousand dollars. But Frandsen says that investors should take note of innovation happening in emerging markets, as well. He adds that larger emerging markets such as Brazil and India— both of which have robust agriculture markets—are already seeing a sharp uptick in adoption of more cost-effective, technology-based production processes. What’s more, these markets may provide investors with a longer-term growth story as developed markets become more mature.

Ultimately, addressing the need for sustainable agriculture and food security transcends geographical borders. Companies around the world stand to benefit from a collective move toward overcoming these challenges. “It’s very apparent how important it is to invest in agriculture,” Frandsen says, “and how important it is to anticipate the big increase in food demand in the future, and the extent to which all of this has real-world implications for investors.”

1 “Food Waste Index Report 2021,” United Nations Environment Programme, 2021.

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