As food costs continue to soar, the call to improve agricultural practices has been growing more urgent.
Agriculture tech, or ag tech, will be key to feeding the growing global population under the duress of climate change, according to one strategist, and that makes it a strong theme for investors.
"We're going to have a population that'll reach 10 billion people," BlackRock U.S. Head of Thematic and Active Equity ETFs Jay Jacobs said on Yahoo Finance Live (video above). "We will have an emerging market consumer that will increase the middle class by hundreds of millions of people that are going to be demanding more complex proteins, meats, dairy, organic vegetables. That's going to put a lot of pressure on our food system, regardless of what happens in this inflationary environment today."
According to PwC's annual climate tech report, venture capital investment in food, agriculture, and land use hit $10.7 billion across 354 deals between the second half of 2020 and the first half of 2021, up 132% from a year prior. The report stated that estimates, which favor North American and European markets, may be conservative relative to overall investment levels.
Despite the pullback in tech stocks and slowing VC activity, Jacobs asserted that investors are "at the very beginning" of buying into ag tech.
"Looking forward, food is essential," he said. "We can see technology stocks sell off. We can see a rotation from growth to value. We can see maybe a hobbled economy going forward. People still have to buy food. ... So it gives us a certain amount of confidence and resilience in this theme that, despite the broader economic environment, we still have a lot of conviction that this will be growing going forward."
Challenges in the food system
The issue has been put into stark relief this year as food prices have exploded. The June consumer price index (CPI) showed food costs in the U.S. rose 9.1% year over year.
Inflation hasn't been limited to the U.S. with food chain bottlenecks creating rippling effects across the world, though. Between March and April 2022, the World Bank Food Commodity Price Index hit a record high, up 80% compared to two years ago.
A storm of factors including the Russian invasion of Ukraine, climate change, and disruptions from the coronavirus pandemic have led to an "unprecedented global hunger crisis," according to U.N. chief Antonio Guterres, which has included a series of famines in Somalia, Yemen, and South Sudan.
"If we project forward 20 years, a lot of these problems are not solved," Jacobs said. "In fact, they get worse. They're exacerbated by many of the challenges we see on increasing food demand. So the ag tech investment has to happen today. I think venture capital and the public markets both recognize that. And that's why we're seeing a lot of money coming into these strategies."
With stressors like drought and higher temperatures already affecting crop yields and agricultural workers, startups are looking to build resiliency into the food system while also emitting less and using fewer resources. A 2021 U.N.-backed report found that as of 2015, the food system accounted for over a third of global greenhouse gas emissions, indicating that the sector poses a serious risk — and opportunity — for the climate.
“Tomorrow's agricultural producers look very different though," Jacobs said. "These are bioengineered crops that can be more resilient to droughts. These are technology companies that are facilitating indoor farming, hydroponics, year-round vertical farming. It is robotics companies that are helping harvest our agriculture.”
The report found that plant-based meat alternatives offered the biggest bang for investors' buck when it came to cutting carbon emissions. According to the analysts, should meat alternatives remain on track to gain 11% market share of the protein category by 2035, it would be equivalent to decarbonizing 95% of the aviation industry.
"There's a lot of new age, disruptive companies that are coming into the ag tech space that we think are providing the solutions to the food shortages we're seeing today and, frankly, will address the ongoing issues we see as we have a growing population and a rising middle class, which is demanding more complex foods," Jacobs said.
Grace is an assistant editor for Yahoo Finance.