What are the opportunities in smart agriculture in Latin America?

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Nur: My name is Nur Cristiani, and I’m the Head of Latin America Investment Strategy at J.P. Morgan Private Bank. Today we invite you to join and discuss how investors can anticipate opportunities in the Agriculture-food-technology sector in Latin America. I’m joined today by Pratima Singh from the Economist Impact team.

Pratima: Thanks Nur, and it’s great to be here discussing this topic with you. I’m Pratima Singh and I’m a Principal with Economist Impact’s Policy and Insights team in New York, and I focus on issues around sustainability, the circular economy and natural resource management with a particular focus on the agriculture and food sector.

Nur: Thank you for joining us, Pratima. We have been working with Economist Impact for a couple of years now to produce long shelf-life and timely pieces on trends brewing in Latin America that could present interesting opportunities for our clients, both for their businesses and their portfolios. This time, we’re here to talk about the agricultural sector. We all know LatAm’s huge potential in this space, but what is needed to take us to that next level? As much as everywhere, “tech” is permeating into the sector, opening up new grounds for development. So Pratima, let’s talk about these new “AgTech” ventures in the region, what of the long-standing challenges are they addressing and what type of innovations can we look forward to.

Pratima: This quarter, we delve into the growing challenges the Latin America agricultural sector is facing, and analyse how agriculture and food (agrifood) technology innovations can help mitigate those challenges and position Latin America as a global breadbasket in the years ahead.

Our article, titled “Small-scale solutions in a large-scale transformation: Unearthing untapped opportunities in the agrifood sector in Latin America” invites investors to explore the shifting trends in the agrifood sector.

We believe that investors who are able to understand agrifood technology developments in the context of Latin American large, mid- and small-holder farms can stay ahead of the curve and strategically invest to leverage the region’s increasingly important role in supplying global agricultural demand.

I invite our audience to read the article at the JP Morgan Private Bank website.

Nur: In your view, what are the key insights from the article?

Pratima: In researching AgriFoodTech in the context of Latin America, our research highlighted four key upcoming trends:

1. Firstly, the growing global demand for agricultural products will position Latin America to become a global breadbasket, but the region will need to boost the productivity and sustainability of its agricultural practices to meet this demand.
2. Secondly, smallholder farms play an important role in Latin America’s agricultural development, and understanding the unique nature of the region’s agricultural supply market is key to making smart investments.
3. Thirdly, Agrifood technology projects and companies in the region at the pre-farm, on- farm and post-farm stages highlight the increasing innovation happening in the region.
4. And finally, we found that a major investment opportunity is being overlooked in Latin America. The region ranks last in agrifood technology investments with just $440m being invested in 152 deals over the last 5 years, which is a fraction of the $135.28 billion in global Agrifood technology financings.

Nur: Thank you for that summary, and I would love to dig into some of these themes a bit further. You mentioned that global demand for agricultural products is creating a unique position for Latin America. Can you explain what global trends are having the greatest impact on agricultural markets, and how will they shape the demand for food products around the world?

Pratima: The Food and Agriculture Organisation (FAO) predicts increased tightening of food markets in the year ahead, due to soaring input prices, weather concerns and increased market uncertainties stemming from the war in Ukraine.

In the longer term, global food demand is expected to increase anywhere between 59% to 98% by 2050, representing an astounding increase in food demand over the next three decades

Nur: And what role will Latin America play in helping to meet this demand?

Pratima: Latin American countries provide crucial agricultural goods to the global market, and the region is a global breadbasket.

To highlight global agricultural contributions on a country-by country basis; agricultural export data reveals that Brazil is the world’s third largest agricultural exporter (after the United States and the European Union), and produces most of the world’s sugar, coffee and orange juice, and is the largest exporter of beef, soybeans and poultry. Argentina is the largest exporter of soybean meal and soybean oil in the world, and third in bean exports. And Mexico is the third largest agricultural exporter in the region producing vegetables, fruits and other agricultural byproducts.

The Latin American region overall currently accounts for 16% of total global food and agriculture exports and has the highest share of net agricultural exports in the world.  The region is also one of the few parts of the world with significant unexploited agricultural land.

Latin America has more than 5 million square kilometres of arable land, 23 percent of the world’s forest areas, and between 60 and 70 percent of all life forms on Earth. It receives 29 percent of the world’s rainfall and contains about 30 percent of the world’s renewable water resources. Because of this natural resource advantage, the Latin American region is likely to continue to play a pivotal role in global food production and exports in the future.

However, the aggregate output of agricultural goods in Latin America is predicted to drop in the upcoming year. Latin America is particularly vulnerable to climate change and variable weather, and the el Niño phenomenon further exacerbates these conditions by creating water shortages and raising temperatures, straining crop production and agricultural capacities. Because of these conditions, there are likely to be poor producer margins in the year ahead. This emphasises the need for sustainable agricultural development, and new innovations to promote sustainable development.

Nur: With such power at hand, why has LatAm not been able to capitalise on it in order to improve the productivity of the land and thus the level of livelihood of the people living off of it? What kind of transformations are required to enable Latin American farms to meet these new agricultural demands?

Pratima: To help the region match global agricultural needs requires four major transformations, according to the International Fund for Agricultural Development:

• The first is an increase in investment in agriculture and rural development across all aspects of the production cycle, including infrastructure, technical assistance and rural financial services.
• There needs to be a strengthening of capacities in each country, including the development of policy frameworks aimed at promoting effective government institutions and reducing poverty.
• Thirdly, agricultural research needs to be further promoted to better develop and share new and improved technologies
• And finally, there is a need for more private sector involvement in agricultural services, including in finance and marketing and the development of public-private partnerships.

However, we need to consider the unique nature of Latin American agriculture to understand these necessary transformations in context. Large farms account for much of the commercial agriculture that generates Brazilian and Argentinian exports, but it is estimated that more than 50% of the Latin American region´s food production comes from its 14 million smallholder farmers.

That means there is a huge amount of variation in terms of the scale and sophistication of agriculture and in terms of its contribution to the economy to consider when assessing the agrifood tech market.

Understanding the path forward for increasing agricultural output will rely on understanding the dynamics among farm types in the region.

Small family farms account for nearly 40 percent of agricultural outputs in Brazil and Mexico, and more than 60 percent in Central America. The role of smallholder agriculture is crucial to the story of agricultural development in the region.

However, these small-scale farmers tend to be among the poorest people in Latin America, and lack secure access to land, technologies, financial services and markets.

Ensuring broader, successful adoption of innovative agricultural technology solutions in Latin America will, in part, depend on uptake by the 14 million smallholder farmers. Only then can they be properly implemented and appropriately scaled.

This is in fact, the biggest challenge for Latin American startups: innovators need to promote consistent adoption of technology solutions across a number of actors, with limited resources.

Nur: What roles need to be played by both the public and the private sector to make sure that AgTech innovators actually drive productivity and social needs forward?

Pratima: On the public sector side, we see the need for greater policy action. Despite Agri-food systems going above and beyond their contribution to a country’s GDP, the region lacks strong policy frameworks and there’s a need for further public action to promote long term planning in the agricultural sector. Insufficient financing from both the public and private sector slows the pace of development. To enable agricultural productivity at scale, countries in the region need to develop policy frameworks that aim to strengthen agricultural value chains. An effective policy framework would set goals to increase access to technology, tools and training, thereby empowering farmers and producers along the value chain to be more efficient, productive and act as better custodians of the region's natural resources.

In addition to the need for a policy framework, there is a very real need for investments in Latin America to enable the development of agrifood technologies.  Policy makers need to focus on public sector investments in public goods such as rural infrastructure, agricultural research and development, strengthened standards, and enforcement of those standards.

Spending by the private sector could add significantly to the overall commitment to research and development and speed important gains in yield and drought tolerance, pest resistance, and help improve the nutrient value of crops, making food healthier and increasing efficiency of food production systems.

Global investors are starting to recognise the need to bring farming from the industrial age into the digital one. In 2021, they invested 51.7 billion dollars in agrifood technology financing.

However, a major investment opportunity is being overlooked in Latin America. Despite the clear need and the inflow of investment money, the region ranks last in agrifood technology investments with just $440m being invested in 152 deals over the last 5 years

Nur: It’s clear that additional public and private sector financing is a key driver to advance the future of agricultural production. Could you talk more about what increased financing ought to go towards?

Pratima Private sector investment can, for example, help further research for better irrigation systems, mechanisation for crop production and post-harvest processing and storage, as well as encourage innovation in animal health and nutrition. Many of these technologies current investments global investors are funding focus on increasing food yields, reducing the burden to the environment, maintaining farm viability and responding to consumer demand for quality foods.

There is also a considerable need for further investment in extension services that enable technology transfer and delivery to ensure the technical innovations and know-how are sufficiently distributed. This is an area that is particularly key for ensuring smallholder farmers can take advantage of budding technical innovations.

Poor transport systems, and underdeveloped infrastructure make the need for investments in transport and logistics increasingly essential. For example: In 2013, record harvests in Brazil resulted in lines of more than 20 kilometres on roads leading into port facilities and hundreds of ships waiting to load, with delays in some ports of more than a month.

Other improvements that are needed include better development of critical irrigation systems and electric utilities, which are both essential for scaling up farming operations.

Nur:  Let’s talk about what’s already going on in-situ. What are a few examples of agrifood tech projects or businesses in the region that this financing would go towards?

Pratima: Generally agrifood technology solutions are considered to be in either “pre-farm” “on-farm” or “post-farm” category, and in Latin America, post-farm technologies are most prevalent, closely followed by on-farm solutions.

The goal of pre-farm activities is to improve yields and incomes, prevent further land from being converted for cultivation and ensure farmers can thrive in the face of climate change and unpredictable conditions. Pre-farm activities can range from crop genetic research and development to easing the administrative processes required to begin agricultural operations.

A start up based in Brazil called Bart Digital found that the most bureaucratic and complex operations happen during the negotiation between rural producers and input companies. The startup aims to digitise this process that occurs at the pre-farm stage, helping small shareholders better manage the bureaucratic processes to level the playing field.

On-farm activities focus on the actual growing and harvesting, and combating challenges such as damage to crops due to pests, disease, severe and unpredictable weather, and the question of how to manage food loss, ensuring quality control, high productivity and yields, and sustainable practices.

For example, the Space AG company, which was previously a drone company, evolved to develop and supply a range of tools to increase crop productivity and make better use of satellite images and drone photos. These tools detect irrigation deficiency and other anomalies, identify and quantify dead plants, project crop yields, and determine and pinpoint productive or non-productive areas, and these are all visible to the farmer in a smartphone or computer app.

Post-farm opportunities target activities in the marketplace, matching supply and demand, reducing waste and integrating byproducts into the market.

Agree, an Argentinian agrifood technology startup founded in 2017 focuses on buying, trading, and selling grains and their by-products, all on a blockchain.

Climate-focused projects are also increasingly prevalent in Latin America.

For example, In Ecuador, a climate-smart livestock project on 800 farms allowed roughly 1,000 small farmers to increase their milk production, augment their income by 40%, improve the quality of the soils in 40 thousand hectares, and reduce their greenhouse gas emissions by 20%, avoiding more than 24 thousand tons of greenhouse gas..

Sustainable, productivity-enhancing agrifood technology projects and companies in the region at the pre-farm, on- farm and post-farm stages highlight the increasing innovation happening in the region.

Nur:  This last part about climate-focused projects is interesting. Here at the PB we’ve been flagging the clean energy transition as a major long-term theme for our clients, and beyond that, more than 60% of our client base is worried and interested in an ESG overlay to their portfolios. However, farming is not usually very ESG friendly. How can agrifood tech investments help address a sustainable development of the region’s available resources?

Pratima: Although the region accounts for just 13 percent of global greenhouse gas emissions, Latin America is the second-largest producer of agricultural emissions globally, surpassed only by Asia.

Agriculture uses over one-third of the region’s land area, consumes nearly three-quarters of the region’s freshwater resources, and generates almost one-half of the region’s greenhouse gas emissions.

The current rate of resource use poses a significant threat to the region’s global public goods contribution.

Though there have been some farmers making strides to adopt green technology, many Latin American food systems are dominated by production models based on unsustainable practices. These production models threaten the viability of Latin America’s food production capacity, generate greenhouse gas emissions, and pose a risk to the long term viability of the agricultural market.

There is a clear need to replace these unsustainable farming practices with better models that ensure the sustainability of the region’s natural resources. More green-friendly practices not only are ecologically beneficial, but improved environmental management is key for solidifying Latin America’s dominant position in global food markets.

If ecosystems cannot deliver key services such as water regulation, micro- and global climate stabilisation, nutrient cycling, pollination, soil retention, and sedimentation control, agricultural productivity dramatically declines and the region will not be able to hold its global position.

Encouragingly, there is a clear trend in Latin America and the Caribbean towards addressing pressing environmental issues.

Nur: Thank you for sharing these findings and insights with us. I’m Mexican, a country that boasts impressive natural resources but also, shamefully, one of the highest levels of inequality in the region. This, unfortunately, should resonate with many of my fellow Latin Americans. However, the solutions that we just discussed today give me hope that there is a way out. LatAm is already and should take, going forward, an even greater role as the world’s breadbasket, but ensuring agricultural production in the region is both sustainable and maximally productive and will require new innovations in the space.

The Agrifood tech developments you discussed are one such way to address these challenges, but these technologies need to be developed to ensure both large-scale production and smallholder farms can adopt at scale.

A key point discussed is that further investment in agrifood tech is essential. The region has been overlooked, and there is missed opportunity for financing these technological developments. Additional financing flows can help address the unique challenges of the region and lead to a scaling up of innovation, and subsequently of agricultural supply, to match the increasing demand, creating economic gains for both investors and the region. And finally, political willingness needs to be there with the proper regulations put in place to foster greater participation in the space.

Pratima: Precisely. Thank you, Nur for hosting me today and for facilitating this conversation.

Nur: Thank you Pratima for joining us today, and thank you to all those who joined us in today’s conversation.

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