How new technology can help lift agri returns

Mar 25, 2019

NZ Super says more pensions funds are looking at the asset class just as technology is providing new ways to address labour challenges, climate risks and other challenges.

How new technology can help lift agri returns

Asset owners are increasingly looking at the potential for new technology to bring about a step-change in farm productivity and, in so doing, lift the investment return on their agricultural assets.

In particular, they hope to use new technology in traditional farming to overcome labour shortages and improve operational efficiencies in agriculturally resource-rich countries.

“I think there are challenges in there but [there is] certainly a lot more talk [about investing in agricultural assets]," said Neil Woods, a portfolio manager for New Zealand Superannuation Fund (NZ Super) overseeing the sovereign wealth fund’s rural and forestry investments.

"I think [there is] a lot more awareness of the sector than it was when we started eight years ago,” he added. “I think a lot more pension funds like ourselves are getting into the sector or [becoming] more comfortable with the sector.”

Nevertheless, it remains a difficult sector to access, he noted.

Neil Woods, NZ Super

The NZ$40 billion ($27.5 billion) fund currently holds a portfolio of vineyards, beef and dairy farms in Australia and New Zealand. But overall, agricultural investments account for just 1.5% of the fund’s portfolio.

One of the factors holding back investment in traditional farming is labour shortages.

“What's emerging ... as a risk in the primary sector is the availability of labour and people willing to work and harvest the crop," Woods said. "[For] things like vegetables and fruit where it’s still a very manual function, we are really struggling to find the required labour to do those sorts of operations.”

But the landscape could be changing.

The use of technology is “definitely becoming more prevalent” with agricultural businesses starting to use robots to work in glasshouses to harvest crops such as fruits and tomatoes, he said.

Another challenge for agriculturally inclined investors is natural disasters.

But here too new technology can help, say some industry experts.

“We use technology to give us protection against frosts,” said Alistair Nicholson, who is a director of Valic, an avocado producer in New Zealand, and also a representative of several family offices globally through Singapore-based Vulpes Investment Management.

He added that in areas with extreme weather conditions, such as parts of Australia, there are watering systems that protect crops from frost in winter and act as a coolant during times when day temperatures soar to 40 degrees Celsius.

BOOSTING YIELDS

Using new technology – from autonomous vehicles and systems to biotechnology, sensors and satellite systems – will all help to boost agricultural yields, a Moody’s report in May 2018 said.

With the world population currently at more than 7.5 billion and still growing, that's just as well, giving the implications for food demand.

Sensors and robots, for instance, could be used to report on weather conditions, crop data and suggest the optimal time to harvest crops. Data thus collected could be used for further analysis and to detect patterns and guide decision making in the future.

Even countries such as China are getting in on the act: after being hit by African swine flu fever in the past couple of months, it has been widely reported that Chinese companies have pushed for facial and voice recognition and other technologies to protect their pigs.

Overall, yields from agricultural investments can vary by geography, noted NZ Super's Woods. "But our target return is high single-digit post local-tax. Total returns are cash plus capital growth plus productivity improvements," he added, but did not offer any specific figures.

The growth of technology aimed at agriculture will be driven by the need to meet surging global demand for food, not just from population growth but also from rising incomes as diets improve and become more varied, particularly in emerging countries. The UN Food and Agriculture Organisation estimates that agricultural production will have to rise by 70% by 2050 to meet demand.

Technology is key because most land suitable for farming is already farmed and future growth will need to come from higher yields.

It could, for example, account for as much as 90% of the growth in total corn production in the coming decade, with land expansion accounting for the remainder, the Moody’s report said, citing research produced by the Organisation for Economic Co-operation and Development.