How Does Agriculture Turn into an Asset?

Agriculture is an asset class that offers a diverse and appealing source of revenue.

Fremont, CA: Investors have been increasingly allocating to private markets as traditional asset yields have stayed at historic lows. While a considerable amount of investor money has flowed into private markets such as private equity, private finance, and infrastructure, very little has flowed into agriculture.

Agriculture as an asset class

In its most basic form, investing in agriculture entails the production of raw materials for sale farther down the supply chain. Farmland, which includes crops or livestock that wind up on supermarket shelves, and forestry, which includes the production of resources such as lumber that may be used for construction, are the two main ways to invest in agriculture.

Through public or private equity, agriculture investing has expanded to encompass agribusinesses. There is no clear definition of what constitutes an agribusiness, but roughly half of its revenue must be related to agriculture, either directly or indirectly. Companies involved in any of the phases required to get an agricultural product to markets, such as production, processing, and distribution, will be included.

Environmental, social, and governance (ESG) and sustainability factors

Environmental, social, and governance (ESG) concerns are vital to consider in any venture, and agriculture is no exception. Certain components of agriculture, mainly farmland, present significant environmental dangers, and potential. Deforestation has resulted in the usage of many lands for farming purposes, especially in rising countries. Food and crop production both use a lot of water, and animal-related production, in particular, produces a lot of carbon emissions.

There is a growing interest in agroforestry, which is a sort of sustainable agriculture that blends growing trees with crops instead of intensive cropping. This approach is more beneficial to the soil, habitats, biodiversity, and insect control. The preservation of the environment and responsible farming provide an opportunity to reduce the risk of climate change. If agricultural operations are sustainable, there is tremendous upside potential if carbon pricing or fines for excessive pollution or dangerous chemical use are implemented properly.

Additionally, an investment in agriculture could be utilized to mitigate the risk of portfolios with high carbon intensity. It's probable that regulatory requirements will be implemented, forcing corporations to meet particular ESG/carbon standards, resulting in an increase in forestry investment. A growing number of businesses are aiming for net-zero emissions by 2050, which means many of them may turn to forestry funds to offset their carbon footprints. This means that investors can get in early on this asset class and take advantage of the upside potential as well as the expectation that the asset class will become institutionalized and experience major inflows in the future years.

Aside from the environmental impact of agriculture, this form of investment has a distinct social benefit. With the world's population likely to continue to rise in the next years, increased agricultural productivity and efficiency will be critical.

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