Reap big profits from the farming revolution

Technological advances are transforming our farms. Here’s the way to profit from them, says Matthew Partridge.

Ever since the Reverend Thomas Malthus warned in 1798 that the number of people on the planet was in danger of outstripping our ability to feed them, there have been fears we might one day face global famine.

The latest person to sound the alarm (though not for the first time) is Sir David Attenborough, who recently predicted food shortages unless population growth is reduced.

While such predictions have consistently been proved wrong over the past 200 years, concern over growing demand – from emerging markets in particular – remains.

The population isn’t getting any smaller, and evidence suggests that, as developing countries get richer, they will adopt Western-style consumption habits – in other words, they’ll eat more and they’ll probably waste more too.

The rise of the industrial and services sectors in these nations is also having an impact on agricultural production, as labour is drawn from the fields into the cities.

Last year, for example, China became a net importer of rice for the first time in at least 50 years. Overall, the United Nations estimates that food production will need to increase by 60% by 2050 to keep up.

The good news is that we don’t have to adopt draconian population controls to solve this potential problem. For one thing, increased wealth tends to go hand in hand with a falling fertility rate.

That doesn’t necessarily help if the mouths that are around to be fed are consuming a lot more. But on top of that, technological advances will help us to ensure that food production keeps up with population growth – and will do this sustainably.

Some experts even believe that changes to farming over the next decade could have as big an impact as the ‘agricultural revolution’ in the 19th century (when increased machinery usage boosted productivity massively), and the ‘green revolution’ in the post-war era (when the use of fertilisers and advanced farming techniques boosted yields again).

This new revolution isn’t about finding new fields to grow more crops on – it’s again about new technology helping us use the existing land and resources we have far more efficiently.

There are four key trends that are particularly interesting to investors: precision farming, robot farmworkers, the increasing use of agricultural enzymes, and indoor growing.

What is precision farming?

A farmer’s livelihood has always depended to some extent on an ability to judge how factors like the weather, soil fertility and location will affect crop yields. The problem is that, as Professor Richard Godwin of Harper Adams University puts it, “no one is tall enough to see the whole field”, and clearly this problem becomes more acute as farms become larger.

Farmers have traditionally dealt with this by simply assuming that what works in one part of the farm will work elsewhere, and just treating large swathes of land identically.

Yet even on small farms, differences in location and soil chemistry mean there can be a surprising amount of variability between, and even within, each small area. So the one-size-fits-all approach means that many parts of the farm aren’t being used to their full potential.

This is where ‘precision farming’ comes in. Advances in satellite technology and soil sampling mean it is possible to map these differences. Just as ever-increasing computing power has enabled retailers to monitor and analyse the buying habits of millions of customers and then use this ‘big data’ to adjust their operations, many farmers are using big-data techniques to plan their planting and harvesting down to the smallest detail.

The hope is that this extremely detailed approach will enable farmers to boost the productivity of underperforming areas, squeezing every inch of yield from their land.

For example, a case study from Britain’s Agriculture and Horticulture Development Board describes how one large wheat and oilseed farmer in Berkshire noticed that parts of his field were yielding far fewer crops than others. Since he couldn’t find an obvious reason for this, he decided to map his fields with satellite technology.

This helped him to identify where he needed to use extra fertiliser. Using a system developed by agricultural giant John Deere, he targeted the less fertile areas with additional chemicals. But he was also able to cut down on the amounts of fertiliser used on the rest of his land.

As a result, he drastically increased yields in the least productive parts of his fields, while keeping his fertiliser use stable.

Another increasingly popular technique – which demonstrates just how precise ‘precision farming’ can get – is ‘controlled traffic farming’. This analyses the best routes for farm machinery to take, with the aim of cutting down the amount of land that tractors actually drive over, which in turn reduces soil damage.

Computing capacity is also improving the ability of farmers to adapt and react to changing weather conditions. IBM has developed Deep Thunder – a forecasting technology that can provide accurate three-day forecasts of rain and temperature for areas as small as one square kilometre.

Originally prompted by a project for the 1996 Atlanta Olympics, using the latest generation of supercomputers, Deep Thunder can quickly incorporate changes, producing updates every ten minutes.

One version of the model, developed in conjunction with Rio de Janeiro’s local government and the University of Brunei Darussalam, is being used to predict the impact of flooding and involves calculations down to a distance of a metre.

And as the earlier example shows, precision farming can even have important environmental benefits. For example, more accurate use of pesticides (targeting specific areas, rather than dusting a whole crop) reduces the risk to the adjoining environment.

Similarly, more precise use of fertiliser also means less runoff from fields, and hence less potential for contamination of the water supply.

In an era where consumers are ever more concerned about the provenance of their food, the ability to demonstrate that crops are produced in as environmentally friendly a manner as possible will only become more of an advantage, making adapting this technology all the more attractive.

The rise of robot farmers

While precision farming has the potential to deliver large gains on its own, it still needs a certain amount of human input. This is a problem – because the agricultural workforce is in decline. The farmers themselves are getting older, with the average age of a farmer in the UK now 58 (their US counterparts are only a year younger). And the supply of labour faces an ongoing squeeze.

Lots of agricultural work is low-skilled, exhausting, seasonal and poorly paid. In most developed countries, that means immigrants have been left to take jobs that the indigenous, largely urban workforce has no desire to do.

However, the supply of willing immigrant workers is being restricted by two main issues. Firstly, governments around the world are cracking down on immigration, or encouraging ‘high-value’ immigrants rather than those who might be willing to get to work in the fields.

Farming and agriculture groups, such as the British Growers Association, have warned that recent restrictions could hit food output and push up prices. Secondly, as the countries that traditionally produced these workers become richer, their own populations no longer have any need or desire to go and break their backs in foreign fields.

For example, farmers in Mexico – once a fruitful source of immigrant agricultural workers for the US – are now having to ship in their own immigrant workforce from Guatemala.

As a result some companies and farms are starting to take precision farming a step further, and are looking to do away with human workers as much as possible by replacing them with specialised robots. The attractions of such machines are obvious.

As well as cutting labour costs, they can work day and night if needs be, reducing the time taken to do any given job. At harvest time, for example, delays can result in large amounts of food going to waste. And in some cases, increasingly advanced machines are even performing the job better, with less crop damage and wastage than their human counterparts.

The area that has seen the greatest amount of automation is dairy farming – and milking specifically. Although milking machines have been around in some form or other for well over a century, it still takes human beings to connect the machines to the cows manually and disconnect them after milking.

Apart from being a repetitive, boring task for a human (it typically needs to be carried out twice a day), there is also the risk that contaminated cups can spread infection between cows. It’s also very easy even for experienced farmers to upset the cows in the process, which reduces their milk yields in the long run.

Milking robots do away with many of these problems. They automatically milk the cows and sterilise the cups after each use. While the machines were once limited to use on big farms, the latest models are cheap enough even for smaller farms to use.

The most advanced models also allow the cow to choose for itself when it is ready to be milked (they use a gate system that monitors the cow’s movements).

As well as being less stressful for the cow, this also enables the farmer to collect data on the behaviour of the herd, which helps with herd management by providing early warning of any problems.

But it’s not just dairy farms that are reaping the benefits of this technology. Privately owned Blue River Technology has already trialled LettuceBot, a machine that can thin lettuces, removing unwanted leaves to improve growth.

The trials, carried out in California, show that one machine can do the job of around 24 workers. Carnegie Mellon University has also made substantial progress in automating the production of apples and oranges, which are a major commodity, accounting for $5bn of output in the US alone.

The Royal Agricultural Society in England thinks the use of robots will become “ubiquitous” within five years.

The uses of agricultural enzymes

It’s not just robotics and computing advances that can make farms more efficient. Biotechnology is helping too – specifically enzymes. These play a vital role in many biological and industrial processes by reducing the amount of energy needed to start a chemical reaction.

Some enzymes, such as rennet in cheese-making, have been known about for hundreds of years. They are also widely used in the industry.

Yet up until very recently their use in agriculture has been limited. However, that is now changing, with companies and universities both pouring money into research on ways in which enzymes can make both agriculture and food processing more effective. One area in which enzymes can help food production, for example, is chicken farming.

Danish firm Novozymes and Dutch group DSM have shown in tests that one enzyme – RONOZYME ProAct – helps broiler chickens (those bred for meat production) to digest their food more efficiently, releasing more nutrients into their bloodsteam.

This means they either gain more weight with the same amount of feed, which boosts the selling price of their meat, or they need less feed, reducing farmers’ bills. Either way, this is good for a farmer’s bottom line.

Another example comes from crop farming. Traditionally, farmers have used phosphate-based fertilisers to improve crop fertility. With global fertiliser consumption rising, and reserves declining, some fear we might experience ‘peak phosphate’, where prices soar as easily recovered reserves are used up.

But there’s a lot of room for improvement here – a large proportion of the nutrients in fertilisers ends up being wasted. So Novozymes has developed an enzyme (called JumpStart) that increases plant uptake of these minerals.

Results from farms that have used JumpStart suggest it can boost yields by as much as 7%. As with precision farming, this is good for both the farmer and the environment – better use of fertiliser means less run off.

Enzymes can also help further down the food production chain, improving both the quality and the shelf life of food, which cuts down on food waste. Research has found that enzymes from cod, salmon and other fish could play an important role in preventing the oxidisation and the growth of bacteria.

Norwegian experts think that herring has huge potential in this field, and are working with fisheries firm Nergård AS to bring some of the enzymes to market.

The firms pioneering controlled indoor harvests

We’ve talked about ways to make farming more efficient – but another big problem is the fact that urbanisation is reducing the amount of land available for agriculture. Chinese state-owned companies are even resorting to buying up large tracts of agricultural land in other countries.

Until recently these purchases have mainly been in African countries, leading the Brookings Institute to talk about a “new scramble for Africa”. However, China is now starting to buy land in Eastern Europe too. Last month, the country formally agreed to lease three million acres in Ukraine, 5% of the country’s total area.

One potential solution is indoor farming. At its simplest, this involves growing crops in greenhouses. However, a more recent innovation is to use warehouses, sometimes in an urban environment. Of course, there are lots of problems.

Greenhouses cost money to build, urban land can be expensive, and both lack natural light and rain. However, by moving food production to a closed environment it is also far easier to control every single variable and therefore maximise growth.

It is also easier to prevent disease and isolate the plants from pests. And because you don’t need good weather, you can grow year round, increasing the number of crops per year.

Indoor farming also allows the production of crops that are not suited to the local environment. For instance, Japanese strawberries are very popular in the United Arab Emirates. The trouble is, it’s almost impossible to grow them in the harsh desert climate, and their tendency to spoil makes them hard to transport.

However, Japanese electronics giant Sharp, in conjunction with Osaka Prefecture University, is developing an indoor food factory in Dubai where they can be grown.

The company is using its LED technology to provide light, and it has developed a special filter to purify the air.

The use of artificial, instead of natural, light also allows the creation of ‘vertical farms’ – growing plants in boxes stacked up on top of each other. This greatly increases the amount of crops that can be grown in a fixed amount of space. Of course, the principle can also be applied to outdoor farms and greenhouses.

Indeed, several architects have come up with plans for hanging gardens and ‘green walls’ that grow down along the side of office buildings. Japanese recruitment agency Pasona has even dedicated 20% of its headquarters to food production, creating the country’s largest urban farm.

While Pasona’s gesture is largely a publicity stunt, Singapore – where space is clearly at a premium – is taking the concept very seriously, in an attempt to cut the proportion of food it imports from the current 93%.

Along with local entrepreneur Jack Ng, the government has invested in the production of 120 vertical towers, each the size of a small bathroom, which rotates plants on a vertical conveyer belt inside a greenhouse, exposing each to an equal amount of light.

The scheme is already so successful that there are plans to expand the number to 300, with an eventual target of 2,000.

The six stocks to buy now

If you’re looking for a wide-ranging play on the development of agricultural technology, then Deere & Co (NYSE: DE) is a good option, being one of the leading global producers of farming and forestry equipment.

The company is developing several autonomous farming systems, including driverless tractors. Other projects include drones to spray crops and robots that can till soil.

As proof that it can bring such technology to market, it launched a robotic lawnmower last year, and a recently released improved model has been praised by the press. The stock trades on a price/earnings (p/e) ratio of 9.7 and has a solid dividend yield of 2.4%.

AGCO share price chartAGCO (NYSE: AGCO), one of Deere’s major rivals, is even more invested in the rise of precision farming. It has launched a major scheme, called Fuse Systems, to make its equipment interoperable with the main precision farming systems. This will encourage those experimenting with the approach to choose AGCO’s equipment, rather than those of its competitors.

JP Morgan also expects it to be one of the major winners from government programmes to boost output in both Brazil and China. It has a p/e of 11.8.

Most precision farming systems require high-quality sensors, which are supplied by firms such as MTS Systems Corporation (Nasdaq: MTSC). MTS, which currently provides sensors for industrial and hydraulic systems, has recently launched a new range specifically targeted at farmers.

These sensors are designed to give extremely precise readings, to be easy to use and able to handle dusty and wet environments.

It currently trades at over 20 times earnings, with a dividend of 1.85%. But thanks to rapid growth, this is set to fall to 14.9 times next year and 12.2 in 2015.

Trimble Navigation (Nasdaq: TRMB) provides GPS systems and lasers for precision farming. It also provides ‘dashboard’ displays for farmers that enable them to see all relevant data at a glance.

To further expand its agricultural unit, Trimble Field Solutions, it has recently taken over IQ Irrigation, which uses GPS technology to guide irrigation systems. Demand from outside the US is particularly strong.

Strong growth from its engineering and construction and mobile-solution segments (which are growing by 42% year on year) should also help boost the bottom line. Overall, it trades on 14.8 times 2015 expected earnings.

On the indoor farming side of things, Village Farms International (TORONTO: VFF) specialises in growing fruit and vegetables in indoor greenhouses in America, Mexico and Canada, in climates that would not normally support such crops.

Unlike conventional greenhouse farmers, the farms aim to control every aspect of the environment, using hydroponics to eliminate the need for soil. The farms also use supplementary lighting to ensure uniform plant growth through the year.

The produce is then sold throughout North America under the Village Farms brand. The company currently trades at 9.3 times current earnings.

The largest developer of agricultural enzymes is Danish biotech conglomerate Novozymes (Copenhagen: NZYMB). As well as enzymes to enable chickens to gain more weight and to improve uptake of nutrients, it is using enzymes to help control pests without using conventional pesticides.

At the same time its industrial enzymes and biofuels divisions are also doing very well. It trades on a very high current price/earnings ratio of above 30, but revenue is expected to rise by 43% in the next four years, with earnings per share set to go up by 86%.