Investment has been pouring into technology in the agriculture space. How to play it

Published Mon, Oct 24 202212:03 PM EDT

Even before the coronavirus pandemic hit in 2020, the agriculture industry was dealing with a number of headwinds, from hurricanes and poor planning disrupting crop growth cycles to the impact of retaliatory tariffs slashing exports. When Covid hit, it highlighted existing issues and brought new ones, including supply and demand shocks to the food system and a labor shortage. Then, the invasion of Ukraine dealt another blow, roiling global grain markets. These issues have highlighted an immense need for investment in agriculture and specifically technology to improve the efficiency of the industry. "There's a lot of attraction to this space and increasingly so since the beginning of the pandemic, you had a series of events that put a focus on food security," said Kristen Owen, executive director and senior analyst covering sustainable growth and resource optimization at Oppenheimer. For retail investors that want to broaden their portfolio, include some recession-safe investments and gain on an emerging trend, there are ways to play the agtech space, according to analysts. The best may be to focus on large, established companies that have invested in innovation themselves and have acquired smaller firms that are moving the industry forward. 'A massive opportunity' "It's a massive opportunity but the access to capital has gotten a lot harder, particularly this year," Owen said. Deals and venture capital investments in the space have ticked up since 2020. In that year, venture capital put $3.4 billion into 422 deals, double the $1.7 billion invested a year earlier, according to data from Crunchbase. In 2021, even more money went into funding agriculture tech startups, with 440 deals and $4.9 billion. This year, investment has slowed slightly. Through Oct. 17, there have been 321 deals and nearly $3.5 billion invested in agtech, according to Crunchbase. That's because the stock market has whipsawed all year but remained in a bear market – not a good time to invest in taking a company public. Last year was one of the busiest IPO markets in two decades , according to data from Renaissance Capital. That's dried up this year — the third quarter was one of the slowest in decades — putting 2022 on pace to raise the least amount of proceeds in more than 30 years, the firm said. Rising interest rates are also weighing on companies that need to borrow money to grow. Using M & A to evolve There are a few large players in the industry that have proven track records of investing in innovative technology and acquiring smaller firms. "Big traditional agriculture has been making investments into smaller startups and that's helping push the evolution of portfolios," said Steve Hansen, managing director and equity analyst at Raymond James. "There's a number of ways to play smaller, more nimble companies that are growing faster but this is a tougher environment for them right now." Ag is one of the few where we have conviction that they can sustain earnings power into 2023." Executive director and senior analyst, Oppenheimer Kristen Owen One example is Deere & Co , an agriculture manufacturing firm and one of Owen and Hansen's top picks. This year, the company finalized becoming a majority owner of Kriesel Electric, an Austrian company that manufactures batteries. Kriesel's advanced battery technology will help Deere develop off-highway vehicles— like tractors and other farm equipment — and move towards a future of zero emissions in such equipment. The deal was worth $249.2 million. "You're seeing a little bit more of these larger companies dip their toe into the venture space and give these new technologies a chance," Owen said. Last year, Deere also purchased Bear Flag Robotics, a Silicon Valley agriculture technology startup that develops autonomous farm equipment, for $250 million. "As our customers face the challenges of needing to feed a growing world with limited resources, it is imperative that we continue to deliver solutions that enable them to do more with less," said a spokesperson for Deere. "Automation and autonomy as well as innovation in sustainable land management are critical steps forward in doing that, creating opportunities for them to unlock a more sustainable and profitable operation. Investing in partners who can help us drive towards those solutions will continue to be a priority for us." Deere's stock is up more than 11% this year, but it's trading about 17% below its all-time high. AGCO , an agricultural machinery manufacturer, has also made several investments or acquisitions in the last few years in new technology in the space. In May, it acquired JCA Industries, a company that develops autonomous software for agricultural machines. That followed its agreement in December 2021 to acquire Appareo Systems, another software engineering, hardware development and electronic manufacturing company. In 2021, AGGO also bought Farm Robotics and Automation, a precision livestock farming company. AGCO shares are down less than 1% since the start of the year. One of Owen's top picks in the space is Trimble , a mid-cap software company that has a precision agriculture offering that uses technology like GPS-enabled tractors and satellite imagery to help farmers use their fields effectively. The company has also been part of the trend of funding new technology – it invested $61 million in Monarch Tractor, a developer of autonomous tractors, with CNH Industrial . Trimble shares are down about 36% since January. Corteva is a top pick for Hansen, and its shares have gained more than 33% since January. The agriculture company in September bought Symborg, a Spanish microbiological technologies firm that makes biostimulants and biofertilizers for many kinds of crops and agriculture systems that boost results. "They really are the forefront of innovation, either internally or through acquisition," he said. Incentive to invest Of course, high inflation has weighed on the U.S. economy and prompted aggressive rate hikes from the Federal Reserve, stoking fears of a recession in the next year. While that presents headwinds for many industries, agriculture is somewhat distanced from these pressures because of the importance of food and organic materials for use in other industries, such as corn and soybeans in ethanol. "The key drivers for the space tend to run almost on their own biorhythm," said Hansen. There is economic sensitivity to some inputs, such as fuel costs and commodity prices, but the actual supply and demand fundamentals that drive crop prices are independent of the actual economic cycle, he added. In addition, grain inventories are at or near decade lows, a problem that signals need for more growing. Because of this, his firm is very constructive on the health and potential of the agriculture sector going into next year. Certain pockets of the industry are also experiencing tailwinds that should benefit them in the coming years, according to Owen. "It is certainly the case that we have had about a decade of underinvestment in our agricultural economy and now that we're experiencing a confluence of events that is sustaining that economy and really incentivizing investment in this space, that should really benefit investors," she said. "Ag is one of the few where we have conviction that they can sustain earnings power into 2023." That includes sustainability initiatives in fertilizer and energy transitions to renewable diesel, which require corn and soybeans. "You've got these tailwinds that are continuing to support this industry that are different than the macroeconomic view," she said. Eyes peeled for the future Given the market for new technology in agriculture and the number of companies growing, it's possible that a slew of firms may go public in the coming years, giving retail investors a chance to invest directly. Part of the reason that public offerings in the space have dried up is because of the decline of the special acquisition market, a way of going public that became popular in recent years. Such companies, called SPACs, raise money through an initial public offering and then select a target to take pubic by merging. They were prevalent in 2020 and 2021 because it is often an easier way to become publicly listed than the traditional IPO process. That market dried up with stocks plunging and regulators looking into many of the deals made in 2020 and 2021. Now, issuances have come to a halt — no SPACs were issued in July , and liquidations of SPACs have topped $12 billion so far this year. Because of this market, many companies are staying private longer, pushing potential public offerings out a few years. "There are more and more companies that are part of this later tranche that may come public in 2024 and 2025," said Owen.