Agriculture Investment
Focusing On Water Risk & Resilience
The World Economic Forum reports that water stress will be one of the top 10 global risks over the next decade, with environmental issues accounting for 5 of the top ten risks. From a lack of safe drinking water to insufficient water for food production, few sectors will be able to avoid the implications of increased water scarcity.
“The World Bank estimates that around US$114 billion per year is required globally to reach the Sustainable Development Goals related to water and sanitation.”
With only one-third of that amount being raised each year, a large gap exists between what’s needed and what’s currently being invested.
Not only that, but “water-related losses in agriculture, health, income, and property could result in a decline by as much as 6% of GDP by 2050 and lead to sustained negative growth in some regions of the world,” according to the OECD.
In short, water risk is business risk – and investors who take these developments into account will be better suited to navigate the financial challenges ahead.
Current Trends in Agriculture Investment
Increasing numbers of investors are turning to impact investing in order to finance water infrastructure, sanitation, resilient agriculture, and more. Here are three ways in which lenders and investors can play a role in developing a more water-resilient agricultural sector.
Investing in farmland
Farmland is one of the agriculture investment areas most vulnerable to water scarcity, with both environmental conditions and regulatory responses determining which crops can be grown on a piece of land and what kind of ROI can be expected.
Nuveen, a global investment manager, focuses on two key principles when investing in farmland:
- Pre-acquisition due diligence into land rights, harvesting practices, water rights, environmental risks, and more
- Post-acquisition management, or measuring farm activity each year based on the PRI Farmland Guidelines, in relation to legal compliance, infrastructure maintenance, and other issues
This process involves everything from adhering to the Brazilian Forest Code to learning about and adapting to regional regulations, such as California’s SGMA legislation. This allows them to make long-term decisions that benefit both farmers and investors, “with investments that often last 20 years or more.”
Investing in infrastructure
According to a report by the Value of Water Campaign (in partnership with the American Society of Civil Engineers) closing the gap in water infrastructure investment in the U.S. would add $220 billion in economic activity per year, and a total of 1.3 million jobs over the next decade. This is in part because the country’s water infrastructure is aging – including the dams and canals that prop up agricultural irrigation in the West.
Despite this reality, “Local, state, and federal funding is meeting a fraction of the current need. If this trend continues, the nation’s water systems will become less reliable [and] breaks and failures will become more common.” One solution is capital investment in “dams … along with other storage facilities, like tanks, and the pipes, pumps, and treatment plants in drinking water, stormwater, and wastewater systems.”
Investing in water
Investments don’t have to be linked to existing infrastructure to make an impact, though. The Oxford Business Review points out several forward-looking investments, including a $100 million “Water Innovation Impact Fund” by Switzerland’s Emerald Technology Ventures and a $300 million wastewater opportunity fund by Equilibrium Capital.
Other opportunities for investment in water resources include distribution, desalination, and sanitation technologies, particularly in developing countries.
The U.N. Principles of Responsible Investing Impact Investing Market Map reports that “water is considered a multi-impact investment because it affects the microclimate, food supply, industrial chain, health, productivity and the environment overall. A study by the World Health Organisation (WHO) found that the global economic return on sanitation spending is $5.5 per US dollar invested.”
Additionally, the World Bank’s Water Global Practice program accounts for 11% of its total lending, or $24.5 billion USD, focusing on Public-Private Partnerships and other initiatives with a global reach.
While not directly tied to agriculture, these investments will play a key role in ensuring equitable access to water in a water-scarce future.
What Agriculture Investment Trends Mean for 2021 and Beyond
Simply knowing what trends are on the horizon and what investment opportunities are available won’t be enough to shape a sustainable investment strategy or portfolio. As one mutual fund puts it on the Seeking Alpha blog, there isn’t merely an investment gap when it comes to water and agriculture – there’s also a gap in understanding:
“Unknown and undisclosed risks are likely to be mispriced and put assets at risk…. [C]ompanies and sectors lacking understanding of their water sources and footprints, lagging in disclosure of water risk, and/or postponing adjustments to the regulatory reforms… all present long-term risks to investors.”
Investors should also pay attention to the U.N. Sustainable Development Goals (SDGs) and the targets put in place for 2030, since “these will drive companies’ bottom lines, consumer and investor behavior, and the long-term viability of some industries.”
This guide delves into current trends in agricultural investment and how water stress is likely to impact investment decisions in 2021 and beyond.
Climate Change and Water – Impacts on Water And What Investors Can Do
It can be argued that the effects of climate change are some of the biggest threats to agriculture today, particularly around water. By 2030, half of the planet will be at risk of “severe water stress,” according to a U.N. panel, unless steps are taken to invest in sustainable infrastructure, re-allocate water more efficiently to key sectors, and assess the impact of global trade patterns. So, it is paramount for best practices to be highly utilized, even off the farm. Doing so derives financial value out of the land that is invested in and farmed on.
Investment value is another important point. Climate change puts immense pressure on agriculture and, therefore, investments. A report by the World Wildlife Fund calls on investors to “begin to recognize water risks for what they are: a material issue that needs to be accounted for in the decision making of any modern financial institution.”
A shift in agriculture investment decisions must happen, and it can. Collaboration over real water data and information is key. If there is a “silver bullet” to water resilience amidst a changing climate, having the correct data to aid investment decisions is the first step toward it.
This article looks at the link between water resilience and climate change, and the role that agricultural investors can play in building a more sustainable and profitable future.
Read our complete article about climate change’s impact on water and what investors can do about it.
How Sustainable Agriculture Investment Is Paramount To ROI
Sustainable agricultural investment has financial benefits, and part of making sound investment decisions is acknowledging and acting upon the importance of good water management.
Longevity is a huge factor in this. It can be unwise to invest money towards farms and businesses that are not water-secure and do not practice sustainable water management and agriculture. Investments will not be profitable in the long term, nor will there be resistance to external risks such as drought. All of this means that due to climate threats and water stress, sustainable agriculture investment is now the better option, financially.
Due diligence around water is necessary for ROI success around investment water, and it tends to be very intensive. This article explains some of the steps such as gathering comprehensive parcel and water-related information, assessing current properties, and more. It also describes some of the tools that are available to agriculture investors to assist them in making profitable decisions.
“We believe in the economics of land [and, therefore, investment] stewardship; if you do things the right way, you can get higher value out of your investments over time.” – Chris Peacock
Read more in this complete article about how investing in good water management practices improves ROI.
How To Value Water Rights In Agriculture Investing
Access to water is one of the key requirements for successful agricultural investment, and yet pricing water into land deals and infrastructure remains a challenge. One analysis from U.C. Berkeley puts it this way: “The value of water … remains difficult to estimate because water markets and market prices exist only in a few regions of the world.”
Owning a water right means having access to water to produce more crops when others don’t, giving a competitive advantage. In a scenario with drought or reduction in water allocation due to SGMA, the supply of a certain crop would be constrained. This would drive the price of that crop up. With a water right, a farm that produces that crop can keep producing while others don’t. Therein lies one of the values of a water right.
Water rights are particularly valuable when water can be stored in a water bank. An example of the benefits that derive from this is the ability to acquire water when it’s cheap and plentiful, store it, and sell it when the price of water goes back up in drier times. This can be done while simultaneously using water for a current crop. Having extra water to sell during high priced and dry times is another value of a water right.
In short, water has become a commodity, and one common saying that AQUAOSO hears from stakeholders is this:
“People don’t buy land anymore, they buy access to water.”
While the reality is slightly more complicated, the general idea is sound: without access to a water source, agricultural land doesn’t hold much value and, in fact, it may become a liability and impossible to sell.
Read more about how water rights affect land value in agriculture investment, as well as how GIS mapping tools and other data resources can help agriculture investors reduce their water risk.
Additionally, read about water rights systems in our explorable state by state guide.
Water Analytics Give Agriculture Investors A Competitive Edge
Water security and water risk are business security and business risk. What happens with water influences financials, business deals, and more. It is the once-hidden lever of agriculture investment success. It isn’t hidden anymore, nor should it be. Having good, centralized, transparent, and unified water data and the ability to analyze and put it into context is key to sustainability – both in terms of water resources and financials.
In the years ahead, by using water analytics to inform their decisions, investors and growers can work together to mitigate the risks of water scarcity. Being informed about water, particularly in agriculture, gives investors the advantage of seeing longevity in their returns by backing more water-sustainable parcels and businesses
Having access to water data and analytics gives investors the advantage of making timely, informed decisions. Intelligence is a driver of wise business decisions and analytics drive competitive advantage. Using data and trend analysis to understand long-term viability can keep agriculture investors out of the dark.
This article takes a look at what it means to have good water analytics, some of the tools available for water analysis, and how investors can use them to stay competitive in a changing agricultural landscape.
Read our full article about water analytics and the competitive advantage they give to agriculture investing.
Farm Investment – How Water Risk Plays A Key Role
If the parcels of land do not have water rights, access to water, the proper water utilities, and a practice of good water management, then the investment is at risk.
Farm investment will be key to ensuring a reliable food supply in the future, especially in developing countries, but also in water-scarce regions of the U.S. According to the FAO,
“Agricultural development depends on the simultaneous growth of farm-level production and productivity and the value chains to which it is linked.”
In other words, financial funding is what makes agriculture happen; investments help build stable supply chains and develop more efficient technologies for crop production. Growers are still limited by environmental constraints, though – specifically in terms of access to land and water – and if any of these resources are in question, all stakeholders in the deal are at risk. Therefore, understanding water risk is key to making sound, sustainable investments that will provide a consistent, long-tail ROI.
Read our complete article on the role water risk plays in farm investments, and where investors can find the data necessary to make sustainable investment decisions.
Impact Investing in Agriculture – Mutual Benefits & Acceleration with Data
Sustainable agriculture is projected to be an $872.7 billion industry and there is an increasingly relevant opportunity for investors to take part in positive economic recovery without sacrificing ROI. Impact investing in agriculture seems to be on the rise. An article in the Oxford Business Review claims:
“As groundwater, water systems, and water infrastructure face increased stress, impact investors look to the water sector as an opportunity to achieve outsized, uncorrelated returns while maintaining the integrity of their environmental, social, and governance (ESG) mandate.”
What will be needed to accelerate this trend and give investors a leg up in this area is access to the right tools and technologies. Investors will see a need for granular data, which can fuel their decisions to be mutually beneficial for an investment’s constituents.
Because of its key role in the Water-Energy-Food Nexus, agriculture can be either a major contributor to climate change, which is detrimental to agriculture, or a key solution to it.
Read our complete article on the importance and implementation of impact investing in agriculture.
How Tools like AQUAOSO Can Help
Fortunately, new technological advancements are streamlining the process and making it easier to understand what’s going on in a specific region or parcel of land. From smart water markets that help growers buy and sell water rights to more advanced methods of water conservation and data collection, ag professionals and beyond can get ahead of the trends and make more accurate predictions about agricultural investing in 2021.
AQUAOSO was developed for exactly this purpose. As a comprehensive resource for data on water risk, water rights, government regulations, and land rights, AQUAOSO helps its clients identify, understand, monitor, and mitigate water risk in their region.
As the Source puts it, “Water is not just an element; water is a medium of commerce, ecosystems, governance, and … climate change impacts. As such… the complexity of managing water across stakeholders, sectors, and political boundaries requires a higher level of awareness.”
The Bottom Line
AQUAOSO has made it its mission to better understand the connection between water risk and agriculture. As a result, the Water Security Platform helps investors make more informed and profitable investments toward organizations that practice good water management.
AQUAOSO has aggregated dozens of resources and data points in one place to aid due diligence before closing a land deal and continue to monitor water risk and other issues with real-time updates and analysis.
Visit our resources page to download free guides to water trends and water conservation, or contact us directly to request more information or a product demo.