At ImpactAssets, we’ve identified global sustainable agriculture as an area of both tremendous need and opportunity for advisors and clients interested in impact investing.  

Over the next 30 years, the planet will add nearly two billion people. In order to feed this growing population, we will need to increase food production by 70 percent, according to the United Nations Food and Agriculture Organization. Global agriculture accounts for 70 percent of the world’s water usage and reliance on today’s industrial farming with its focus on monocrops and toxic fertilizers could further deplete water supplies and erode topsoil.  

Investing in sustainable agriculture can fuel both systemic change and meaningful impact. Supporting the world’s 450 million smallholder farmers is the right start. Smallholders represent 70 percent of the world’s poor and provide over 80 percent of the food consumed in many parts of the developing world, yet are among the poorest and most food-insecure people in the world.

The local knowledge and experience of smallholder famers is key to the practical solutions that can create a more sustainable and equitable global food system. Yet underinvestment and marginalization leaves smallholders vulnerable. Increasing support can help feed a growing population while promoting sustainable land and water use.

Globally, consumers are increasingly demanding organic and Fair Trade products including coffee, chocolate and quinoa. Consequently, corporations like Starbucks, Nestle, Green Mountain Coffee and Cargill are turning to smallholders for raw materials.

Confectionary giant Ferrero, for example, has pledged to sustainably source 100 percent of its palm oil by 2015 and all coffee by 2020. These types of corporate commitments motivate intermediaries and smallholders to meet demand for organic and Fair Trade products. These higher standards and better connections between buyers and growers lead to increased investment opportunities.

The need for smallholder investment is estimated at $450 billion. Formal debt financing from local lenders in the developing world is approximately $9 biller, meeting less than 3 percent of the total demand.

Yet despite growing demand, smallholders face weak market linkages and insufficient access to capital. They’re considered too small, too risky and too remote for local commercial banks. At the same time, smallholders that have formed organizations and grower cooperatives are too large for microcredit.

Fortunately, there’s proof that investing in smallholder farmer grower cooperatives can create growth and productivity for its members. Root Capital, Alterfin, Oikocredit and other pioneers show measurable evidence that direct investing in such organizations, combined with technical assistance, can increase smallholder productivity and help build local markets, linkages to developed economy buyers and associated fair trade premiums.

 

The Investable Market For Fund Managers
For advisors, fund managers like Alterfin, represent a seasoned source of smallholder investment opportunities. Fund managers typically invest through grower cooperatives and production enterprises because they can efficiently disburse capital to their smallholder members. Considered the “base of the global value food chain,” smallholders tend to produce and process high-value crops such as coffee and cocoa with a growing market in North America and Europe.

Calculations based on the 10 percent of smallholder farmers who are part of structured organizations such as cooperatives, estimate their short-term financing (typically working capital loans in the form of trade finance) needs at $1,000/farm, according to Dalberg Global Development Advisors.  This puts the investable short-term market at $22 billion. The market expands when factoring in the need for long-term financing.

Direct investment to smallholders in 2011 via impact investment fund managers was just $354M according to Dalberg Global Development Advisors. Clearly, there’s still both enormous need and tremendous opportunity for impact investors.

The Latin American Coffee Market -- An Impact Investing Example
Impact funds focus on certain geographies and products for specific reasons. Crops like coffee especially in Latin America have existing certification infrastructures, such as Fair Trade and organic. Because certification usually requires organization and a level of due diligence, these crops are attractive to investors. Additionally, certification attracts the most progressive food companies in the world that are seeing demand for sustainable products.

The investable coffee market is approximately $1.7 billion. Impact investment funds disbursed $170 million in 2011 – representing 10 percent of the investable market, according to Dalberg Global Development Advisors. While coffee is a more mature market, the demand for organic and Fair Trade is growing, as is consumer demand for other high-quality organic Fair Trade commodity crops such as cocoa and quinoa.  

How Can Everyday Investors Access Global Sustainable Agriculture?

As awareness of the gap between demand for and supply of capital grows, more investors are discovering that supporting the base of the global food chain is both crucial and impactful. Yet it’s not always easy to identify and access a strong avenue for investment.

Fund managers such as Alterfin, Incofin, Oikocredit, Rabobank, Rural Fund, responsAbility Social Investments, Root Capital and Shared Interest are among the most actively engaged in global sustainable agriculture investing today and provide strong points of access for investors.  A handful of these managers are represented on the ImpactAssets 50 impact investment firm list.

The emerging nature of global sustainable agriculture investing reminds us of the beginnings of microfinance, which took time to gain credibility with investors. In 2004, Microfinance Investment Vehicles (MIVs) represented $200-$300 million, per Microrate.  At the end of 2013, the MIV market represented $10 billion, per Symbiotics, drawing the majority of funding from institutional investors.

Pioneering investment in global sustainable agriculture, while more nascent than the current microfinance market, represents a viable and timely investment opportunity that also can create lasting, positive change for the planet and its most vulnerable citizens.

Fran Seegull is chief investment officer and managing director at ImpactAssets, a non-profit impact investment firm with more than $200 million in AUM. Seegull has a bachelor's in economics from Barnard/Columbia University and an MBA from Harvard University.