What market trends are shaping the Organic & Sustainable Agriculture sector in 2020?

Sustainable agriculture broadens its appeal

Twenty years ago, when the industry was approaching US$18 billion in sales, few people imagined a time when the organic food and drink market would surpass annual sales of US$100 billion. During the past two decades the market also became one of the cornerstones of the wider sustainability movement, which now impacts a wide range of industries — from food packaging to soil health and building large-scale food systems in emerging economies. The pace of change has driven firms to make investments, and M&A activity is moving ahead at a brisk pace.

The market is receiving substantial attention globally, buoyed by population growth and strong consumer preferences for sustainable food systems. Large-scale growth is on the horizon, especially in emerging markets such as Africa, and we expect to see inflows of capital to support innovative firms. DOUG KRAVET OAKLINS’ ORGANIC & SUSTAINABLE AGRICULTURE SPECIALIST

Market trends

The M&A deal environment continues to be healthy, with more than 600 M&A transactions completed between January 2014 and October 2019. Transaction volume increased through the first 10 months of 2019 as compared with the same period of 2018. Investors are pursuing deals across the agricultural supply chain, making acquisitions to build scale, broaden product lines, access markets, and enhance research and development capabilities. Financial investors are making platform investments to pursue attractive, risk-adjusted financial returns.

Acquisition strategies examples

Gladstone Land (organic farmland) is pursuing the strategy of purchasing and converting conventional farmland into certified organic land. The firm has completed 12 acquisitions over the past 12 months.

Taylor Farms (organic vegetables and branded products) purchased Earthbound Farm to build on its portfolio of organic brands, develop new organic products, and expand its growing and processing capacity.

Platinum Equity (sustainable seafood company) made a platform investment in Iberconsa, which is a vertically integrated seafood company headquartered in Spain. The company is expected to grow by making internal investments and via acquisitions.

Marrone Bio Innovations (sustainable nutrients and biostimulants) purchased Pro Farm Technologies to enhance its nutrient and biostimulant capabilities and add products for seed and foliar treatments to its portfolio.

Perfection Fresh Australia (fresh fruits and vegetables) acquired BerryYummy Marketing to increase its market share in Australia, and improve its genetics and research and development capabilities.

Olam (sustainable tree nut production, processing and distribution) purchased Hughson Nut to expand its almond processing and ingredient production capacity and presence in the US market.

The M&A market continues at its brisk pace, with many firms pursuing acquisitions to add capabilities and build scale

Of the 154 deals closed during the 12 months ending October 2019, 27.9% were cross-border. The most active countries included the US, Canada, Ukraine, Russia and China. The largest volume of M&A deals was completed in the US: 20 during this period. Institutional equity has become much more prevalent in the past decade, with more than 530 equity funds with agriculture-focused mandates currently pursuing deals.

Sustainability continues to be a key theme for US consumers, with Nielsen reporting that consumers will spend up to US$150 billion annually on products that are considered sustainable. More than 30% of households in the United States are willing to pay a premium for food products that have been certified as organic. As illustrated in the figure below, the definition of sustainably grown food has extended from food to include recycled/reused packaging and less packaging overall.

The sustainability movement is continuing to broaden its span, making an impact on a diverse range of other industries, from food packaging to soil health. The span of the industry is also widening as firms innovate to survive. The field of regenerative agriculture — which focuses on holistic agriculture practices that improve farmland and rebuild/ restore the biodiversity of the soil — is gaining traction. Well-known firms such as Danone, General Mills and Anheuser-Busch have made commitments to the industry. Regenerative agriculture is also attracting venture capital (VC), with VC firms such as AgFunder, Cultivian Sandbox and Stage 1 Ventures recently making investments.

While the organic and sustainable market is advancing, it is always prudent to consider the expansion in comparison to the overall agriculture markets. Even at US$150 billion globally, this market forms a small percentage of the overall US agribusiness sector (which generates in excess of US$1 trillion annually). The US agribusiness market is in a prolonged downturn, which began in 2013 and will likely continue to exhibit weakness for the foreseeable future. Major issues that are being encountered in the wider US market include slower global growth, increased trade friction and disputes, and changes in commodity prices. Continued weakness in overall agriculture markets could create headwinds for the organic and sustainable agriculture sector.