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Agriculture in the low-carbon era: Why we can’t wait until the cows come home

Home / Perspectives / Agriculture in the low-carbon era: Why we can’t wait until the cows come home

Maxime Le Floch, CFA, Investment Analyst
04 September 2018
Impact

Agriculture had a ‘green revolution’ in the 1960s, resulting in greatly increased production. But it still isn’t green.

According to the US Environmental Protection Agency, agriculture – and the associated deforestation – contribute a combined 24% to global greenhouse-gas emissions, making it almost equal with power generation, at 25%, and well ahead of transport (14%) as a climate-change culprit1.

But agriculture is also a climate-change victim. Farmers will have to dramatically improve crop yields to feed the growing world population, with rising global temperatures making that task all the more difficult.

Surprisingly, the prospect that such a fundamental contributor to human existence appears caught up in a negative feedback loop rarely features in climate change debates – at least in investment circles. Perhaps the world is more willing to accept a high carbon dioxide-emitting agriculture sector (as opposed, say, to an oil-driven transport industry) precisely because it is essential to life: after all, we can live without long-haul flights, but not food.

Figure 1: Almost a quarter of our greenhouse gas emissions come from agriculture

0004375_Global emissions by sector_v2-01
Source: The US Environmental Protection Agency and the Intergovernmental Panel on Climate Change.

However, agriculture may be poised for another ground-up revolution that could truly earn it ‘green’ credentials. Farming has come a long way from its slash-and-burn origins in pre-history, but it remains a largely inefficient sector based on a number of practices that are well past their best-before dates. For example:

  • The vast majority of land is still irrigated by flooding techniques (applying water directly from above)
  • About 40% of fields are over-fertilised
  • Most farmland is used for animal feed and grazing2
  • One third of all food produced goes to waste

All of these facts suggest there is a big appetite for new solutions that will make agriculture more efficient and resilient to climate change without compromising its core function of feeding a hungry, growing population.

A much-needed new ‘green revolution’ for agriculture could also open up fertile ground for investors.

Future-proofing agriculture

Agriculture and tree-clearing are responsible for almost a quarter of annual global CO2 emissions, which likely returns the favour to earth via a number of climate-related effects, such as:

  • Water pressure: increased climate volatility will see extreme patterns of rainfall with both floods and droughts more common. At the same time, traditional underground water supplies could become overused and degraded. For example, the Chinese Water Resources Ministry  found in 2016 that 47% of groundwater were unfit for human consumption of any type3;
  • Soil degradation: rising temperatures are increasing the speed that microbes break down nutrients in soil. The world may already be seeing the impact of a warming earth on the amount of available farmland. In 2018, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services asserted that “by 2050, land degradation and climate change together are predicted to reduce crop yields by an average of 10% globally and up to 50% in certain regions"4;
  • Resistance: Some 250 species of weed are resistant to at least one key herbicide ingredient due to overuse in agriculture. There are a rising number of pesticide-resistant species meaning new effective chemicals are increasingly difficult to find and more expensive; and,
  • Social impacts: farming is still mostly a family affair. Even in the US about 90% of farms are small, family-run entities5. Large-scale farms are rare, representing only 2.9% of farms but 42% of production by value. In developing countries, the effect of climate change on traditional agriculture-based social structures could be even more devastating. Of the 75% of the world’s poor who live in rural areas, 80% directly or indirectly depend on agriculture as their main source of income and employment6.

Climate change adds a further unwanted challenge for the agricultural industry, which already faces a major production task over the next few decades. The world’s population is forecast to grow from its current level of 7.6bn to 8.6bn by 2030 and 9.8bn by 20507. Farmers will have to increase food production by 50% to meet the expected 2030 demand alone.8.

Agriculture does have an impressive historical record of boosting yields in concert with demand. But the conditions this time around appear much tougher than at the start of the ‘green revolution’ in the 1960s.

Indeed, the recent agricultural productivity evidence is hardly reassuring: yield gains have been consistently declining over the last few decades. Crop yields have only grown slightly more than 1% since the 2000s9.

The slowing productivity growth is compounded by the potential climate change-driven reduction in the area of arable land available to farm: agriculture is going to have to squeeze more out of less.

But the world can dig itself out of this agricultural hole. There are a growing number of commercially available solutions that are already helping farmers prepare for a climate-altered environment – and many offer very promising fields of development.

Naturally, retooling agriculture for a low-carbon future will be a multi-disciplinary effort but there are four broad areas of particular interest, including:

  • micro irrigation systems;
  • ‘precision’ agriculture technologies;
  • agroecology practices; and,
  • a consumer shift to plant-based food.

Figure 2: There are four corporate impacts that are helping to ensure food security (click to enlarge image)

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Source: United Nations, Food and Agriculture Organisation, US Environmental Protection Agency as at March 2018.

A small, fresh noble idea: micro irrigation

Water is everywhere but it’s also in short supply. In fact, the scale of the global freshwater problem prompted former US president, John F Kennedy, to predict that anyone who can solve it would be nominated for two Nobel Prizes, “one for Peace and one for Science”.

So far, no-one has collected the double-Nobel for a global water solution but if there is a dual prize-winning idea out there it will surely come from the agricultural sector.

Agriculture uses about 70% of global freshwater;10 but not very well. At a macro energy level, agricultural water management is even a contributor to climate change. For instance, California, a major US farming state, uses 20% of its electricity for pumping water11.

Yet while the scale of irrigation has increased exponentially across the world, it remains grossly inefficient. Most farmers use surface or flood irrigation where water is simply poured onto the land – a process that can see up to half of the life-giving liquid evaporate before reaching any plant.

Wasteful, mass-scale irrigation can also have almost instant environmentally-disastrous flow-on consequences, which is already becoming apparent in many regions of the world. For example, images dated about the time of the country’s 1978 revolution show Iran’s Khaju Bridge – one of the finest examples of ancient Persian architecture – with impressive streams of water flowing underneath: a photo snapped at the same place today would reveal a dry, cracked riverbed drained by irrigation supplying the intensive pistachio agriculture upstream.

Micro irrigation, however, offers a powerful solution to the problem of supplying water to farmers in sufficient quantity with far less damaging downstream effects. Essentially, micro irrigation feeds water directly into the ground via tubing systems, which drastically cuts down evaporation loss: it can lead to reductions in water use of up to 95%12.

Furthermore, the lower cost and higher yields associated with micro irrigation can increase smallholder farmers’ earnings by up to 100% in some cases13.

Today, though, only 14% of global agricultural land is watered using micro irrigation. Clearly, there is a huge unmet need.

As Drawdown, a project to map climate change solutions, puts it, micro irrigation offers many advantages: “In addition to energy demands and associated carbon emissions decreasing, crop yields improve, the costs of cultivation drop, and soil erosion declines. A less humid field environment curtails pests. Surface and groundwater resources are better protected by lowering demand for water use. Conflicts among various stakeholders for water resources may ease. Moreover, drip irrigation can work across a wide range of landscapes.”14

The long-term gains are evident but successfully transitioning to micro irrigation systems requires a significant capital investment upfront for farmers. In developing economies especially, access to affordable loans will be essential in driving the shift to micro irrigation.

Figure 3: Water-smart farming: the advantages of micro irrigation (click to enlarge image)

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Source: Hermes Investment Management, World Bank, Jain Irrigation Systems, International Finance Corporation, Project Drawdown as at August 2018.

Just so: the promise of precision agriculture

Precision agriculture generally refers to farming practices that focus on managing individual plants rather than fields of crops.

But switching from a birds-eye view to the worm’s perspective requires farmers to adopt a tech-heavy approach that relies on a vast array of sensors and data management systems.

The investment in technology, though, could see farmers reaping huge increases in yields, lowering costs and improving sustainability.

According to a Goldman Sachs report, precision fertiliser application alone could increase crop yields by 18%. Better-targeted planting and spraying have the potential to bump up yields by 13% and 4%, respectively, the study says, while using a fleet of smaller tractors could also raise output by 13%.15

Using more, smaller tractors rather than fewer mega-machines might seem a counter-intuitive efficiency method for farmers. But larger tractors produce enormous ground compaction, which in turn leads to loss of soil life and erosion – both critical factors in long-term yields and resilience of agricultural systems.

Farmers can also now plug into geospatial guidance systems to plot optimal routes for their light, possibly-automated, tractor fleets as they traverse the fields, resulting in lower fuel consumption and more effective use of resources.

For example, the Nasdaq-listed agri-tech firm, Trimble, estimates that its geospatial systems can lift yields by 30% while cutting both input costs and water use by 20%. Japanese companies Kubota, Iseka and Yanmar are racing to launch the first commercial driverless tractor in a move that could help farmers overcome labour shortages in some regions in addition to other efficiency gains.

Precision agriculture technology also produces a large amount of data that farmers can harvest to improve practices and output. OnFarm, a California-based connected farm platform, found that using ‘internet of things’ (IoT) technologies saw yields rise 2% along with a 35% reduction in energy costs and an 8% fall in irrigation water use.

Some companies are also trialling the use of drones in agriculture – chiefly as data-collection devices to help understand what’s happening in the fields. But, once battery life improves beyond the current typical half-hour limit per charge, drones might have another use as fertiliser application vehicles.

For all the excitement at the rapid pace of technological development, though, precision agriculture has a few fences to jump before it is more widely-accepted.

Firstly, the technology-reliant farming techniques depend on access to reliable mobile networks, which don’t always exist in rural areas. For instance, 30% of all US farms (and 18% of large holdings) still have no internet access compared to 14% in the UK.

And the precision agriculture technology also must overcome some of the understandable on-farm resistance to innovation. Farmers tend to be risk-averse due to the highly cyclical nature of the business: they usually earn most of their income in a single, annual post-harvest hit. If a new system fails, farmers risk bankruptcy, which is precisely why tried-and-tested methods have the psychological edge over experimental techniques.

Agroecology: holistic and organic goes titanic

The Food and Agriculture Organisation (FAO) – the UN body looking at agriculture and development issues – defines agroecology as a system “based on applying ecological concepts and principles to optimize interactions between plants, animals, humans and the environment while taking into consideration the social aspects that need to be addressed for a sustainable and fair food system”.16

In recognition of the topic’s growing importance, the FAO held a conference in April 2018 entitled Scaling up agroecology to achieve the SDGs (the UN’s sustainable development goals). The dividends for implementing agroecological practices could be significant with research indicating farming incomes could rise up to 30%, according to the FAO.

Agroecology could also help battle climate change on various fronts, including:

  • improving yields through better soil health;
  • producing healthier soil, which acts as a natural carbon sequestration system; and,
  • directly reducing supply chain carbon emissions by cutting the use of fossil fuel based fertilisers and pesticides.

As the FAO puts it, “agroecology represents a shift from ‘ready-to-use’ to ‘custom-made’ production systems. Farmers achieve a greater quality and quantity of production by transitioning from a reliance on chemical inputs to a holistic, integrated approach based on ecosystem management. This is done by re-introducing biological complexity, particularly by increasing plant diversity, perennial cover and the presence of trees.”17

Organic food production, which sits under the agroecology label, is one of the fastest-growing segments in the industry. Organic food sales grew at 5.4% in Western Europe during 2016. In France, entire organic supermarkets are opening in retail parks all over the country – over 2016 alone the sector grew by 20%.18 In total, the French organic retail and restaurant sectors grew at a compound annual growth rate (CAGR) of 36% since 2011.19

Figure 4: European organic retail sales have doubled since 2005

0004375 Impact Ops Chart 1 V2 01 01
Source: IFOAM EU Group as at March 2016.

Corporate food producers are taking note of the trend, though most of the larger firms are somewhat struggling to adapt their large, cumbersome portfolios for the organic market.

From 2013-2017 US supermarkets sourced almost 90% of new products from small- to medium-sized companies: European stores are following the same trend.20

Many of the more agile smaller producers are focusing on sustainable foods such as UK-based Snact, which puts the idea of a circular economy into practice. Snact produces a range of snack bars (wrapped, of course, in compostable packaging) made out of dump-destined fruit rejected by retail outlets merely for being mis-shapen or shelf-size inappropriate.

Elsewhere, a number of small companies are ramping up plans to convert their offering one way or another towards organic. Wessanen, a Dutch food company, recently announced it would go 90% organic by 2025. And businesses from other sectors are also latching onto the organic food trend, including the US outdoor adventure clothing firm, Patagonia. Patagonia Provisions has a strong focus on sustainability with items like canned mussels, which it believes is one of the most sustainable animal protein sources.

But if it is the small-scale boutiques driving organic innovation, larger firms are beginning to hitch a ride. Typically, bigger companies tend to buy smaller organic food firms rather than develop products in-house. Amazon, for example, recently bought organic food retailer Whole Foods, while French giant Danone took over ‘dairy alternatives’ producer Whitewave.

The carnivore is over: plant-based foods grow up

According to US writer, Michael Pollan, a healthy diet boils down to three simple rules: “Eat foods. Not too much. Mostly plants.”21

Pollan’s advice, it turns out, could even help combat the rise of greenhouse gas emissions. Sticking to a simple, plant-based diet could be one of the most powerful ways for individuals to shrink their personal carbon footprints: considering that farming meat produces 15% of global carbon emissions.

Pound-for-pound, carnivores have double the carbon footprint of a vegan, according to some estimates.22 Other figures suggest that producing just one kilo of beef consumes about 15,000 litres of water, which, in a resource-constrained environment, may not be the best use of the world’s most precious liquid asset.23

Figure 5: Animal-based foods are more environmentally impactful to produce than plant-based foods

0004375_Impact_Ops_ Chart 2-01

Source: World Resources Institute as at April 2016.

A meat-centric diet could also trigger unwelcome health problems such as obesity while increasing the risk associated with non-communicable diseases.

And it seems like the anti-meat message is getting through, in some quarters at least. Meat consumption has already been reducing, especially among younger generations in developed nations. New products and businesses are springing up to service this vegetable-inspired trend. UK sandwich shop chain, Pret A Manger, for instance, has opened vegetarian-only outlets in London; Quorn, another British food group selling meat-free alternatives, saw a 16% rise in sales in 2017, with its US business growing 35%.24

The no-meat movement has also been a boon for vegetable producers such as French firm, Bonduelle, which is a global leader in the high-quality frozen and canned vegetable market.

Possibly, the current shift away from meat is merely a cyclical economic effect as consumers – stuck in a low-earnings growth market for a decade – trade-down to cheaper, plant-based foods. On the other hand – in good news for cows – the slowing meat consumption could signal a secular long-term generational shift in dietary habits.

A positive climate for farm reform

Agriculture has a significant role to play in mitigating climate change as the examples discussed above illustrate. The list is not exhaustive; many other climate change-focused agricultural innovations are under way – some are commercial, some still to be proven.

Currently, about one third of food goes to landfill.25 

Reducing such massive waste might seem to offer a simple solution to improving agricultural efficiency, and hence emissions, but the problem remains complex and perplexing. Other creative agricultural enterprises, such as aquaponics and vertical farms, could ease the soil degradation issues caused by traditional farming – although the economics of both these approaches is still challenging for now.

Changing agriculture and global food production systems will not be easy. The new agricultural ethos involves more than just ploughing money into new equipment; it means cultivating new mindsets around farming practices and training consumer preferences towards healthier, cleaner foods.

However, the powerful force reshaping supply chains from field to fork is already in motion. Investors may need to do some spadework to uncover some of the new agricultural potential lying below the surface but the opportunities are considerable and germinating now: Hamburg-headquartered investment bank, Berenberg, for example, estimates that the precision agriculture sector could grow at 8% each year until 2021.26

On the flipside, investors will also have to weed their portfolios of those firms on the losing side of the agricultural re-dig. According to a 2016 Goldman Sachs report, precision agriculture case studies found traditional farming techniques lead to significant amounts of fertiliser run-off and over-application in saturated fields.27 

If precision agricultural techniques are widely-adopted, Goldman Sachs estimates that global fertiliser demand could decline by up to 4%.

These findings mark an important point of difference with the last agricultural revolution, which was largely fuelled by mass application of the-then new fertilisers; almost 60 years later agriculture may have to rely on a little less chemical manure as it moves to newer, greener pastures.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested.

The above information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

It should be noted that any investments overseas may be affected by currency exchange rates.

Past performance is not a reliable indicator of future results and targets are not guaranteed.

  1. 1 “Global Greenhouse Gas Emissions Data,” published by the US Environment Protection Agency on 21 March 2018.
  2. 2 “Livestock and Landscapes”, published by the Food and Agriculture Organisation in November 2017. It cites that 26% of farmland is used for livestock grazing and 33% is used for livestock feed production.
  3. 3 “Four-fifths of China’s water from wells ‘unsafe because of pollution’,” published by The Guardian in April 2016.
  4. 4 “The assessment report on land degradation and restoration,” published by IPBES in March 2018.
  5. 5 “Large family farms continue to dominate US agricultural production”, published by the US Department for Agriculture in March 2017
  6. 6 “Access to finance for smallholder farmers” published by the International Finance Corporation in 2014.
  7. 7 “World population projected to reach 9.8bn in 2050, and 11.2bn in 2100”, published by the United Nations Department of Economic and Social Affairs in June 2017.
  8. 8 “The Future of food and agriculture”, published by the Food and Agriculture Organisation in 2017.
  9. 9 “The future of food and agriculture: trends and challenges,” published by The Food and Agriculture Organisation of the United Nations in 2016.
  10. 10 “Globally, 70% of freshwater is used for agriculture,” published by The World Bank in March 2017.
  11. 11 “Is using less water the secret to cutting our greenhouse gas emissions?” published by The Guardian in October 2016.
  12. 12 “Jain Irrigation Systems Sustainability Report 2016,” published by Jain Irrigation Systems in 2016.
  13. 13 “Impact of efficient irrigation technology on small farmers,” published by the International Finance Corporation in November 2017
  14. 14 “Food: Farmland irrigation”, published by Project Drawdown in April 2018.
  15. 15 “Profiles in innovation: precision farming”, published by Goldman Sachs in July 2016.
  16. 16 “Agroecology Knowledge Hub,” published by the Food and Agriculture Organisation in April 2018.
  17. 17 “The Future of food and agriculture”, published by the Food and Agriculture Organisation in 2017.
  18. 18 “Large distribution: the bio business is booming,” published by L’Humanite in March 2017.
  19. 19 “The organic market in France,” published by the Agence Francaise pour le Developpement et la Promotion de l’Agriculture Biologique in April 2018.
  20. 20 “Supermarket sweep: the new food and drink upstarts”, published by Courier in April 2018.
  21. 21 “In defence of food”, by Michael Pollan published in 2009.
  22. 22 “Dietary greenhouse gas emissions of meat-eaters, fish-eaters, vegetarians and vegans in the UK”, by Peter Scarborough et al published in Climatic Change in June 2014.
  23. 23 “Water footprint of crop and animal products: a comparison”, published by the Water Footprint Network in March 2018.
  24. 24 “Quorn boss: meat breaches ‘good for vegan category’,” published by Food Manufacture in February 2018.
  25. 25 “Save food: global initiative on food loss and waste reduction,” published by the Food and Agriculture Organisation of the United Nations in 2018.
  26. 26 “Agricultural technology: harvesting returns”, published by Berenberg in October 2017.
  27. 27 “Profiles in innovation: precision farming”, published by Goldman Sachs in July 2016.
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Maxime Le Floch, CFA Investment Analyst Maxime Le Floch joined Hermes in 2016 as a Responsible Investment Analyst, with the aim of enhancing the integration of ESG factors across investment strategies, through the production of ESG research and incorporation of engagement insights. Prior to joining Hermes, Maxime worked at AXA Investment Managers from July 2010 as a Responsible Investment Analyst, producing research on companies in the energy and materials sectors, as well as thematic reports on long-term sustainability trends. Maxime holds an MA in Economics and an MA in Politics both from the Institute of Political Sciences (Sciences Po) Bordeaux. He is a CFA charterholder. A native French speaker, he also speaks Spanish and Turkish.
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