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By 2050, the population of the Earth will surpass nine billion people.
And the rise of the middle class in places like China, despite any short-term market turmoil, will continue. The numbers of the middle class globally is expected to grow from 1.5 billion currently to 4.5 billion in 2050.
That means a lot more food will have to be grown.
The “father” of the agricultural green revolution, Nobel laureate Norman Borlaug, said this last year: “In the next 40 years, farmers will have to grow as much food as they have in the last 10,000 years – combined!”
Problem: How to Feed a Hungry World
Finding food solutions will not be easy.
Just over the past 40 years, the UN’s Food and Agriculture Organization (FAO) says yields from crops rose by 77%. This was largely due to the increased use of fertilizers.
But now the FAO says we will need to increase crop yields by a similar percentage over the next 40 years. In sub-Saharan Africa, for instance, the World Bank says food production needs to grow by 60% to support the rapidly rising population.
The history of agriculture can be divided into three periods, according to Lance Donny. He is the founder of start-up OnFarm Systems, an agriculture data company.
Agriculture 1.0 describes the period from ancient times to about 1920 where farming was essentially a lot of manual labor. Then the period of industrial agriculture – agriculture 2.0, from 1920 to 2010 – is one in which machines, fertilizers and better seeds helped farmers.
The Dawn of Agriculture 3.0
Agriculture needs a “great leap forward,” technologically speaking. In other words, agriculture 3.0.
This is period in which high-tech sensors, robots, drones, cloud computing, specialized software and the internet of things comes to farmers’ rescue globally.
Data becomes crucial in this new age of agriculture. This data will be used to help farmers make more efficient use of their land, water and fertilizer. Of course, much of the data-gathering will be done by agricultural drones, satellites and “smart” farm equipment.
All of this has not been lost on Silicon Valley. Investing in agricultural technology start-ups has become red-hot.
According to AgFunder, an equity crowdfunding platform for ag start-ups, venture capital investment into the sector in the first half of 2016 was $1.75 billion in 307 deals. That followed a red-hot 2015, which saw a record $4.6 billion invested in 526 deals.
Of course, the field is not just dominated by start-ups. The venture capital arm of Alphabet (NASDAQ: GOOG) has invested into the sector. One investment was into Farmers Business Network, a social network that collects data on seeds and soil that farmers can use to review crop yields and seed performance.
Other big name firms investing into ag tech include: Agriculture giant Monsanto (NYSE: MON), which acquired weather data start-up Climate Corp. a few years ago for $1 billion. This company in turn bought a smaller farming data company called 640 Labs in December. And DuPont (NYSE: DD) says it will generate $500 million in revenues from data-related farming services over the next decade.
The Role of Drones
One key for investors to note is that the gathering of data is crucial to the whole agriculture 3.0 concept.
And that’s where drones come in. With the Federal Aviation Administration (FAA) opening the door for drone use, drones can now gather data on America’s farmlands over an entire growing season for the first time. Down the road, this type of data collection should help farmers with better crop rotation, water management and better use of pesticides.
A widely-cited study by the Association for Unmanned Vehicle Systems International forecasts that legalizing commercial drones will generate over $80 billion in economic impact over the next decade, with agricultural drones providing the most impetus.
The FAA relaxation of rules may open the door too for companies that already have drones that can be used in agriculture including AeroVironment (NASDAQ: AVAV) and Trimble Navigation (NASDAQ: TRMB). Firms like this have just been waiting for regulation to catch up with the technology.
Agriculture Stocks: The Japanese Drone Play
There is another player, from Japan, in the drone sector that would never occur to most investors. Japanese drone technology dates back to the 1980s, so it’s not surprising the Japanese are players in the field of agricultural drones.
But it is surprising that a company better known for motorcycles, Yamaha Motors (OTC: YAMHF) is heavily involved in the sector. Yamaha already sells agricultural drones in Japan, South Korea and Australia.
In fact, one in three bowls of rice in Japan has had the rice sprayed by a Yamaha drone.
Now Yamaha has plans for the United States. Yamaha was the first company to secure permission from the Federal Aviation Administration to fly a crop-spraying drone (the RMax) in the U.S. The drone is rather large, looks like a helicopter and can spray either fertilizer or pesticide and has a fabulous safety record.
Yamaha’s drone business though is a small part of the company. It accounts for only 5 billion out of a total 1.5 trillion yen in sales last year. But the company does plan to increase sales to 500 drones by 2020.
Agriculture 3.0 is an exciting sector with a mix of start-ups, established companies and agriculture stocks. And, thanks to rising populations, should be a very profitable one for years to come.