Hostile Headwinds Hitting Ag Startups
Bah humbug! That’s the sentiment likely invoked by the USDA’s latest economic outlook. It certainly doesn’t sound like 2023 will end with a very merry Christmas, and 2024 isn’t shaping up to be a happy new year.
According to USDA’s Economic Research Service, projected U.S. net farm income plummeted by $42 billion this year—reaching $141 billion. This was a 23% income drop compared with just last year. If realized, then the decline will be the largest on record in nominal terms and the third largest of all time when adjusting for inflation.
Given the expectations for continued inflated production expenses coupled with weakening crop and livestock prices, farm incomes are likely to be pressured even lower in 2024. And don’t count on any Christmas miracle from Congress in the form of economic or regulatory relief — or even a new farm bill.
This situation is nothing new to those on the front lines of agriculture. Margins are constantly being squeezed, but this time it is negatively affecting a sector beyond the farm gate—and it could cast a long, dark shadow on the industry as a whole.
Investment in agrifood technology funding is down—way down. That’s not good as efficiency gained through the continued development and adoption of new technologies has been one of production agriculture’s few economic saviors in the past several decades.
AgFunder’s most recent Global AgriFoodTech Investment Report showed a 44% drop in the sector’s investments during 2022 compared with 2021. Mind you, that number must be taken with a grain of salt as 2021 was a record-breaking year. However, the downward trend has continued into 2023.
Things Are Starting to Crack
It is no secret what’s happening. The economic side effects from the pandemic showed up as out-of-control inflation and rapidly rising interest rates — a combination of circumstances we haven’t seen since the days of Jimmy Carter. We all know the ag economic train wreck that ensued and the subsequent farm crisis of the 1980s.
As access to “cheap money” has dried up within the investment community, so has confidence in ag tech investments. Add a war in Ukraine and now another in Israel to the mix, and the risks faced when betting on an agricultural startup have probably never been higher.
Certain areas have shown accelerated weakness as funding for overall tech has slowed. The vertical farming bubble is popping, and investors are taking dollars off the table when it comes to the “fake meat” crusade.
They’re finding that growing produce indoors and redefining the core ingredients in the American cheeseburger are really hard to do. For example, Fifth Season, a large vertical farming operation that provided salad kits to Whole Foods and Kroger, abruptly shut down operations in November of last year. Meanwhile, Beyond Meat lost more than 60% of its value during the past year. It’s now valued below its original IPO price.
ESG (environmental, social and governance) is one area that has bucked the decline in overall investments compared with other categories such as those mentioned earlier — not surprising given the number of carrots and sticks being thrown at agriculture when it comes to climate and the environment. Take the billions of dollars in USDA Partnership for Climate-Smart Commodities grants, or consider the implications of the enhanced ESG reporting requirements for publicly traded companies the U.S. Securities and Exchange Commission proposed. Those two items alone keep a lot of venture capital money on the table. And that’s just the tip of the iceberg as ESG has become entrenched throughout corporate and consumer cultures.
Save the Farm First
This does not mean every startup that touts cleaner air, fewer burping cows and more earthworms for your soil is going to be rolling in the venture capital dough. Even the quest for utopia has its limitations.
Consumers have had to withstand double-digit inflation when it comes to food costs the past couple of years. At some point, something has to give. Spending extra on a box of cereal that sequestered an extra ounce of carbon might not be the priority now that we have $5 eggs and 8% mortgages.
One positive nugget of information when it comes to ag tech investing is movement toward supporting tech that is closer to the producer rather than the consumer. Hopefully this means less “fake meat” and doing something that truly improves farming at its core. Right now, farmers need innovation to weather the coming economic storms. Successful innovation is defined at the farm level as whether it is profitable and practical.
Venture capitalists and their entourage need to stop focusing so much on saving the world and start with the basics of how to save the modern farm. We all must remember this: A black bottom line is the goal whether it comes to planting your money in the ground or the latest ag tech startup. Once we accomplish that, we might be able to start saving the world together.
