Currently, Context is focused on three key trends emerging in agribusiness – trends that have the potential to have significant influence on the way business is conducted.
In the near-term, we see a trend toward consolidation as firms reposition in a difficult market environment. At the same time, they are preparing for medium-term increased specialization, as consumers demand clear provenance for what they eat. Finally, in the long run, firms must support sustainable efficiency as a growing populations of increasingly prosperous people gobble up the slack in today’s agriculture.
Firms and investors who participate in these trends will, we believe, be rewarded.
1) Near-term Consolidation:
Five of the “Big Six” agriculture input companies are actively pursuing potential combinations: DuPont and Dow will merge, ChemChina plans to acquire Syngenta, and Bayer’s is pursuing Monsanto.
Large-scale consolidation creates an opportunity for emerging businesses to redefine their strategic focus and divest non-strategic assets. This results in investment opportunities as consolidating firms rationalize and refocus agribusiness assets into redefined platforms. Context helped clients navigate the last significant periods of consolidation in the seed and agrochemical industries, which occurred in the mid/late-90’s and early/mid 2000’s.
Concurrently, continued acquisition activity by the large equipment companies and other firms building technology platforms suggests investors in Agtech and Precisions Ag companies can still expect to exit through buyouts. Recent deals to note include: CNH’s 2014 acquisition of European spraying equipment manufacturer Miller-St. Nazianz, and Deere’s acquisition of high-clearance sprayer manufacturer Hagie Manufacturing. Deere continues to bundle technology with its equipment, as illustrated by its 2015 agreement to purchase Precision Planting from The Climate Corporation, and its 2016 purchase of Monosem, the European market leader in precision planters.
2) Mid-term Increased Specialization:
Consumer demand for organic, nut-free, “natural”, non-GMO, and sustainably-sourced products will promote increased specialization of the food products. Meanwhile, information technology progress allows tracking and separation of products on a scale never before plausible in the food value chain. We expect these trends to profoundly alter the food value chain over the next decade.
Strategic shifts among intermediaries, ADM, Bunge, Cargill and Dreyfus highlight the trend. ADM’s 2014 purchase of Wild Flavors and Cargill’s June 2016 acquisition of Five Star Custom Foods moved both firms toward specialty ingredients.
Beyond these headline deals, food companies are developing more robust direct sourcing models through emerging ag tech. Some are working with new specialty intermediaries to source organic, non-GMO, specialty grains, and crops with special attributes such as higher oil content. These changes to the agriculture and food supply chain create opportunities to invest in the development and growth of new products and business models. Context also recognizes how this trend converges with the need to identify strategies and pragmatic metrics geared toward measurable sustainability outcomes.
3) Long-term Sustainable Efficiency:
In the long run, growing populations and increased prosperity will drive the need for more food produced more sustainably and efficiently. In what we expect to be a continuing trend, Context clients from both private sector companies and non-governmental organizations (NGOs) are increasingly seeking our help to understand the potential impact of agriculture investments on metrics such as small-holder farmer income, carbon footprint, and other conservation based outcomes.
The focus on African development is increasing. Much of the two billion population increase anticipated by 2050 will be in sub-Saharan Africa and Southeast Asia, where opportunities to advance agriculture are extraordinary. Intermediaries are working to formalize markets and improved connectivity in Africa and Asia between farmers and consumers, underscoring long-term opportunities. With development needs for by so multi-faceted, public-private partnerships prevail as a preferred approach to create both successful financial returns and lasting positive social impact.
Agribusiness presents attractive investment opportunities for investors who understand and capitalize on underlying trends. Over the next three years, the consolidation of agriculture input companies is likely to create attractive opportunities. Over the next ten years, we believe companies, products and technologies supporting the increased specialization of the food value chain, driven by changing consumer demand, are well positioned. Investments in technologies and public/private partnerships which address key resource constraints, social impact, etc., provide investment opportunities aligned with powerful long-term demographic trends.
Over the next ten years, we believe companies, products, and technologies supporting the increased specialization of the food value chain, driven by changing consumer demand, are well positioned. Investments in technologies and public/private partnerships which address key resource constraints, social impact, etc., provide investment opportunities aligned with powerful long-term demographic trends.
Global perspective and intimate understanding of the key drivers influencing agriculture businesses is at our core. For additional support in advancing your company’s goals, partnering with those who can advise effectively can make the world of difference, Context’s proven track record of optimizing opportunities speaks volumes. Contact us today to help anticipate, develop and deploy confident actions to advance your company’s future.
Contact Paul Watson: paul.watson@contextnet.com.