Agri investment - I

Agribusiness has long been ignored as an asset class by institutional investors around the world. The risks associated with farming, the skillset required to understand agriculture, and the volatility of crop prices have kept investors away. Most investors have portfolio exposure to things like equities, debt, currencies and deposits, and "alternative assets" - a broad category which includes real estate, private equity, hedge funds, art and commodities (including agricultural commodities). Agribusiness is usually lost somewhere in between.
The truth is, agribusiness is one of the most exciting investment opportunities in the world today, and investors are finally taking note. In Pakistan, we are positioned to capitalise on growing interest in this sector, and have a unique opportunity to make the most of it. This won't last forever, and the time to act is now.
Most institutional investors still consider agribusiness a real estate play. Land is acquired for onwards lease to farmers who pay rent, earning the investor a fixed yield. The farmer takes the crop risk, while the investor collects rent, regardless of how the crop turns out. Dozens of "farmland funds" have recently emerged to fill this investor demand. Some investors go a step further and purchase shares in listed seed, food and fertiliser companies. Others like to trade commodities such as wheat and rice. While all these are legitimate ways of investing in agriculture, investors should now start looking beyond the usual.
The big opportunity is in building and financing high-growth agribusiness companies, who can be industry game changers. Such companies with huge growth potential exist in Pakistan, and need the attention of investors. They also need the support of lenders. At the moment, debt providers in Pakistan hesitate in accepting agricultural land as collateral, preferring residential or commercial property in big cities. This is understandable, as agricultural land records remain vague and contentious, and the land itself is exposed to factors such as floods, drought, pests and crop disease. But in reality, our agricultural lands are more important of an asset than our urban real estate, and banks must do more to develop the capability to assess these as such.
There are obvious, and wide-ranging, social benefits to investing in agriculture - but institutional investors aren't necessary social impact investors. On a purely commercial basis, agribusiness represents a compelling investment story.
What drives this are the basic laws of supply and demand. Pakistan has a huge population, and a lot of mouths to feed. It is also surrounded by a region whose food imports exceed US $93 billion, and these will only continue to grow. The Indus Basin used to be one of the world's most important breadbaskets. But crop yields today across many of our key crops are lower than they ought to be, our farm mechanisation is dated, and we have large tracts of unproductive land with potential for development. Each of these challenges represents an immediate opportunity for investors.
To complement our natural soil and climate advantages, Pakistan has some of the world's most dynamic agribusiness entrepreneurs. These entrepreneurs need access to risk capital, and fortunately, small amounts of risk capital go a long way in Pakistan. If local investors were to increase their exposures to agribusiness risk capital from zero to 5%, many agribusiness entrepreneurs could get the funding they need from sources right here at home.
We are also fortunate to have several centres of agribusiness R&D excellence, including the Pakistan Agricultural Research Council, and very good universities in Faisalabad and Peshawar. These are staffed with innovative researchers working on important projects. There is little attention given to commercialising local research, and in this, another opportunity exists. Value is locked in our own R&D centres, waiting to be realised, and just needs the attention it deserves.
Farmers are the backbone of successful agribusiness investing. Our farmers are hugely capable, have been in the business for generations, and are receptive to all kinds of advice. Perhaps, they are the most innovative of Pakistan's domestic workforce. They happily experiment with new seeds, listen to best practices, and do their best to improve productivity. They just need businesses to engage with them. Where this has happened in Pakistan, for example in the introduction of better seeds in potatoes and maize, the increases in productivity are case studies for how businesses can work with farmers in a win-win situation.
Agribusiness is an exciting investment opportunity, not the boring land tending we imagine it to be. In fact, it may be one the most important investment themes in our lifetimes. Let's not miss the chance to make the most of it.
(To be continued)
(The writer is founder of Indus Basin Holding (www.indusbasin.com), a developer of agribusiness projects)