Agribusiness Key Themes For 2022

Fitch Solutions / Agribusiness / Global / Mon 29 Nov, 2021

fs disclaimer

As 2021 draws to a close, we take this opportunity to layout our global agricultural key themes for 2022. On the whole, we expect that agricultural prices will fall across the board in 2022 as favourable weather boosts supply and increase market surpluses. Lower prices, along with an increase in production costs, will weigh on farmer profitability and investment in agri-machinery. Meanwhile, we anticipate that governments will intensify their efforts and implement new policies to help reduce greenhouse gas emissions, speed up agtech adoption and improve domestic food security. 

Theme  Description Metrics  Winners Losers 
Agricultural Commodity Prices To Fall In 2022, Except Cocoa And Milk Stronger production will help increase market surpluses, adding to global stocks and weighing on prices. However, we think that cocoa and milk will be an exception as we expect growth in demand to outpace supply. Average price return and average total return. Cocoa and milk on a price returns basis. Livestock producers are likely to experience cheaper animal feed costs. Corn, coffee, cotton, palm oil, rice, soybean, sugar and wheat on a price returns basis.
Farmer Profit Margins To Decline In 2022, Weighing On Farm Investment Lower revenue from selling crops in conjunction with higher costs of production (especially fertiliser) will reduce farmer profitability in 2022. Farm profitability, profit margins, EBIT. na Lower profitability will likely weigh on agri-machinery investment and fertiliser application. Many governments may also have to subsidise domestic production even more to placate public opinion.
Increased Attention To Agriculture In Climate Policies Greater attention to the role of agriculture in global climate emissions, with actions by both governments and companies increasingly enacting climate change policies addressing the sector. In some cases, industries will themselves strive to reduce the negative environmental impacts of production as public scrutiny rises.  New policy initiatives by governments, companies and industries. This could include new or accelerated net zero GHG commitments, actions to halt deforestation following COP26 commitments and increased financing (both public and private) becoming available to incentivise producers to adopt more sustainable farming practices.  Producers of sustainably-produced products, for example soybean from the US if demand for Brazilian products declines. Industries that adopt climate-friendly practices, for example MLA targeting net zero emissions, will benefit as consumers make conscious decisions to purchase from suppliers with good ESG credentials. Farmers could benefit from increased available financing, for example the UK government's Sustainable Farming Incentive scheme, which is set to be rolled out in 2022. Potential for alternative revenue for farmers (carbon offsets).  Countries that export agricultural products with high deforestation rates or GHG emissions, for example Brazil and Indonesia. Producers of high-emitting agricultural products such as beef. 
Innovation Drive Within Sector Spurred by the recovery from the Covid-19 pandemic and increased awareness of the environmental impact of some commodities, innovation within the agricultural sector will accelerate in 2022 on multiple fronts, including in alternative proteins, lab-grown and cultured commodities, and agricultural technology Investment announcements/levels; deal volumes/size; Company spending on innovation.  Companies developing and investing in innovative products; Farmers if agtech helps to reduce farm costs and improve profit margins (for example precision agriculture reducing crop input requirements and increasing yields); Regions such as MENA where food security is a concern if lab-grown products can be grown domestically; Countries producing and exporting 'new commodities', such as Canada for yellow peas and India for chickpeas.  Livestock producers as the alternative protein sector continues to expand; Producers of 'traditional' commodities such as livestock, coffee and cotton once lab-grown alternatives gain ground.
Food Security To Remain Central To Agricultural Policy In 2022 Rising government intervention is a Megatrend across economics and industry, and some action has already been taken by governments in the agricultural sector amid decade-high global food prices.  Number of policy announcements to help farmers or introduce new trade restrictions. Farmers in emerging markets, such as India, where financial support is likely to rise.  Exporting countries, particularly in Latin America, are likely to experience trade impediments. 
na = not applicable. Source: Fitch Solutions.

Agricultural Commodity Prices To Fall In 2022, Except Cocoa And Milk

We forecast that the prices of all agricultural commodities, except cocoa and milk, will fall on a y-o-y annual average basis in 2022, although for the most part, prices will remain significantly above their 2016-2020 average. On the supply side, we expect global production to increase owing to high plantings and more favourable weather. Unseasonable weather depressed harvesting yields in the US, Brazil and other major producers in 2020/21, but the weather in all these locations has been much better so far in 2021/22. On the demand side, we expect steady growth in tandem with the recovery in real incomes but also because imports from Asia are likely to remain high amid the recovery in the hog herd from African Swine Fever (a hog-killing disease). Nevertheless, we note that the ongoing La Niña weather phenomenon could depress harvesting yields in some markets which is why the risks to most of our agricultural price forecasts lie to the upside.

On an equal-weighted basis, we forecast that agricultural prices will fall by 11.8% y-o-y in 2022, after a stunning 26.3% rally that we currently project in 2021. We are mostly pessimistic in 2022 on the price of soybeans, corn, sugar and wheat primarily because higher global production should alleviate the near-term tightness in prices. In the case of soybeans and corn, we expect the global market to flip from their current deficits into a surplus in 2022/23. By contrast, we are positive on the prices of both milk and cocoa owing primarily to stronger demand associated with the global economic recovery.

Prices To Fall In 2022, But Remain Higher Than 2020

Global - Select Commodity Prices

Note: Right hand side columns: % change y-o-y; f = Fitch Solutions forecast. Source: Bloomberg, Fitch Solutions

Spread Of ASF Could Reduce Animal Feed Consumption

Global - Agricultural Commodity Consumption Growth (% y-o-y)

f = Fitch Solutions Forecast. Source: USDA, Fitch Solutions.

US Farmer Profitability Likely To Fall In 2022

US - Net Farm Income (2021USD, 000USD)

2021F = USDA Forecast. Source: USDA, Fitch Solutions.

Farmer Profit Margins To Decline In 2022, Weighing On Farm Investment

We think that farmer profitability, particularly in the US, will decline sharply in 2022 owing to a combination of higher production costs and lower revenue.

We highlight four key areas where production costs are likely to be higher in 2022 than 2021;

  1. Crude Oil – We forecast that the price of Brent crude oil will average around USD72/bbl in 2022, a touch higher than the USD71/bbl than we what project in 2021. All else being equal, this will increase the cost of refinery activity and ensure that the prices of refined products, including diesel fuel used within tractors and other plant operation equipment, remain high.
  2. Fertiliser – The prices of nitrogenous fertilisers (used to boost harvesting yields) are likely to remain elevated, particularly in the first few months of 2022, owing to elevated energy production costs and feedstock prices. Natural gas typically accounts for around 80-90% of the production cost for ammonia, the most common base substance behind nitrogenous fertilisers. While some governments are subsidising fertiliser application (in fact a number of countries have recently increased subsidies, including Thailand, a trend we see growing in 2022), we expect that most farmers – particularly in the developed world – will not benefit from that support.
  3. Labour – A combination of Covid-19 travel restrictions, a lack of opportunity for home working and a desire for greater work/life balance has already led to shortages in many manual, low wage jobs, particularly in agriculture. We expect that labour markets will continue to tighten in 2022 in tandem with the ongoing recovery in economic activity, which will put further upward pressure on labour costs.
  4. Seeds – Elevated agricultural prices earlier this year is likely to increase plantings and demand for seeds, pushing up seed prices.

US Farmer Costs Of Production To Rise In 2022, Particularly Corn

US - Costs Of Major Field Crop Production By Source (%)

Source: USDA, Fitch Solutions

As the price of fertiliser is likely to outperform the rises in crude oil, labour and seeds in 2022, we anticipate that the production costs of fertiliser-intensive crops, such as corn and rice, will increase disproportionately more than other crops. Some farmers will respond by reducing fertiliser application, although we expect that many will plant alternative less-fertiliser-intensive-crops, such as soybeans, instead.

At the same time, we expect that revenue generated from directly selling agricultural products will fall in tandem with the declines that we expect in the prices of all agriculturals aside from cocoa and milk (discussed above). We also think that more farmers will benefit financially from selling more of their agricultural ‘waste’ to make biomethane and from additional government financial support, but we doubt that this will be enough to offset the decline in revenue from selling their main agricultural products.

    Lower Farm Profitability Likely To Weigh On Machinery Investment

    North American - Total Tractor And Combines Sales (Thousand Vehicles)

    Source: Association Of Equipment Manufacturers (AEM), Fitch Solutions

    Lower farm profitability could have several knock-on implications, including;

    1. Less desire for farmers to invest in new machinery and agtech. Ag machinery sales boomed in 2020-2021 amid the pickup in farm revenue. In the US and Canada, sales are on track to record double-digit growth for the second consecutive year in 2021. Looking at 2022, we expect the sharp decrease in farm margins to lead to a stagnation if not a decrease in ag machinery sales. Farmers typically invest more in new technology when the rate of return is high and we therefore expect productivity-enhancing investment to slow in 2022, which will weigh on growth in harvesting yields and production.
    2. Greater farm subsidies and financial support mechanisms provided for farmers. Farmers are a huge percentage of the electorate in many markets, including the US, Brazil, France, India which all have important elections in 2022, and we suspect that governments will want to protect their incomes. Moreover, governments, including those that are not democratically elected, are also wary of the risks of being dependent on foreign imports for their food and we expect that many will implement measures to support their domestic agricultural sectors.

    Higher Agricultural Production In 2022 Likely To Weigh On Prices And Future Ag Investment

    Global - Agricultural Commodity Production Growth (% y-o-y)

    Note: 2023f refers to the 2022/23 marketing season, for which most of the harvest will take place in 2022. f = Fitch Solutions Forecast. Source: USDA, Fitch Solutions.

        2018 2019 2020e 2021f 2022f 2023f 2024f 2025f
    Pork Production 105,686,170 95,333,820 89,585,430 99,712,840 98,202,600 104,802,930 107,617,780 109,942,070
      % y-o-y 0.5 -9.8 -6.0 11.3 -1.5 6.7 2.7 2.2
      Consumption 106,773,790 96,736,880 91,058,720 101,040,520 100,392,960 105,361,500 107,495,480 109,629,130
      % y-o-y 0.7 -9.4 -5.9 11.0 -0.6 5.0 2.0 2.0
      Production Balance -1,087,620 -1,403,060 -1,473,290 -1,327,680 -2,190,360 -558,570 122,300 312,940
    Poultry Production 48,706,280 49,981,740 50,240,710 51,210,380 52,475,600 53,814,030 55,243,060 56,569,060
      % y-o-y 3.6 2.6 0.5 1.9 2.5 2.6 2.7 2.4
      Consumption 50,530,690 51,709,550 51,773,360 52,888,490 54,328,930 55,769,730 57,166,550 58,580,450
      % y-o-y 2.4 2.3 0.1 2.2 2.7 2.7 2.5 2.5
      Production Balance -1,824,410 -1,727,810 -1,532,650 -1,678,110 -1,853,330 -1,955,700 -1,923,490 -2,011,390
    Beef And Production 57,090,540 58,206,820 57,596,220 57,842,480 59,570,380 60,856,200 61,962,220 63,188,060
    Veal % y-o-y 2.4 2.0 -1.1 0.4 3.0 2.2 1.8 2.0
      Consumption 54,097,400 55,312,780 54,833,490 55,885,890 56,913,590 57,904,550 58,870,360 59,742,530
      % y-o-y 2.7 2.3 -0.9 1.9 1.8 1.7 1.7 1.5
      Production Balance 2,993,140 2,894,040 2,762,730 1,956,590 2,656,790 2,951,650 3,091,860 3,445,530
    Note: Aggregate of markets which we forecast. Production, consumption and production balance data in tonnes unless otherwise stated. e/f = Fitch Solutions estimate/forecast. Source: USDA, National Sources, Fitch Solutions.
      2018 2019 2020e 2021f 2022f 2023f 2024f 2025f
    Milk production 813,200,000 849,200,000 869,000,000 891,100,000 912,500,000 934,000,000 956,100,000 979,000,000
    % y-o-y 2.2 4.4 2.3 2.5 2.4 2.4 2.4 2.4
    Liquid milk consumption 265,100,000 263,900,000 267,100,000 274,500,000 281,400,000 288,500,000 295,800,000 303,500,000
    % y-o-y 1.6 -0.5 1.2 2.8 2.5 2.5 2.5 2.6
    Milk production balance 548,100,000 585,300,000 601,900,000 616,600,000 631,100,000 645,500,000 660,300,000 675,500,000
    Note: Aggregate of markets which we forecast. Production, consumption and production balance data in tonnes unless otherwise stated. e/f = Fitch Solutions estimate/forecast. Source: USDA, National Sources, Fitch Solutions.
      2018 2019 2020e 2021f 2022f 2023f 2024f 2025f
    Production 19,752,030 20,094,710 20,170,380 20,715,020 21,222,810 21,661,750 22,096,960 22,554,710
    % y-o-y 4.6 1.7 0.4 2.7 2.5 2.1 2.0 2.1
    Consumption 19,282,270 19,657,210 19,601,040 20,150,910 20,648,570 21,111,660 21,587,970 22,063,680
    % y-o-y 1.1 1.9 -0.3 2.8 2.5 2.2 2.3 2.2
    Production Balance 535,770 509,890 646,530 646,700 662,680 644,850 610,580 600,050
    Note: Aggregate of markets which we forecast. Production, consumption and production balance data in tonnes unless otherwise stated. e/f = Fitch Solutions estimate/forecast. Source: USDA, National Sources, Fitch Solutions.

    Increased Attention To Agriculture In Climate Policies

    In 2022, we expect greater attention to the role of agriculture in global climate emissions, with actions by both governments and companies increasingly enacting climate change policies addressing the sector. The agricultural sector accounts for around 20% of global greenhouse gas (GHG) emissions. However, the sector has until recently been largely side-lined in regulations, policies and other actions taken by governments to reduce GHG emissions. This is due to the difficulties in curbing emissions without reducing production volumes (which would conflict with food security agendas and the economic importance of agricultural exports for some countries). Not only is measuring and monitoring emissions from the sector extremely difficult, especially considering the large number of smallholders in rural locations and the sector being at an early stage of its digital transformation journey, but technologies required to reduce emissions from certain activities are often expensive and not yet widely available.

    Agricultural Emissions Need To Be Addressed To Meet Climate Targets

    Global - GHG Emissions By Sector, % of total in 2016 (LHS) And In Selected Markets, 2017 (RHS)

    Note: LUCF = Land use change and forestry. Source: Climate Watch Data, Our World In Data, Fitch Solutions

    We expect 2022 to see an accelerated number of government and corporate climate policies targeting the agribusiness sector in the aftermath of the COP26 summit. New pledges and commitments made at the conference – including pledges to reduce methane emissions by 30% by 2030 related to 2020 levels, and to halt and reverse deforestation by 2030 - will need to address the agricultural sector if targets are to be met. Although we hold the view that in many countries the agribusiness sector will continue to operate under lax environmental policies (for example, Brazil despite signing the COP26 deforestation pledge), and do not expect many countries to bring the sector under strict emissions reductions regulations, such as pricing agricultural GHG emissions, we do believe that government and corporate policies to support agricultural producers in making climate-friendly changes, as well as funding for research and innovation in emissions-reducing technologies, will accelerate over the coming year. In some countries where government policy targeting the sector lags, we could also see industries themselves adopt targets and strategies to reduce emissions. For example, industry association Meat & Livestock Australia has already set a goal of industry-wide carbon neutrality by 2030. This could be extended to other sectors and countries. 

    Agricultural Sector Critical To Combat Deforestation

    Global - Primary Forest Cover Loss (RHS) And By Country 2016-2020 Total (LHS), mn ha

    Source: Global Forest Watch, Fitch Solutions

    Climate-related developments for the agribusiness sector in 2022 could include:

    • Increased public financing to support agricultural producers in reducing climate impact: One of the first steps to work towards national and international climate commitments will be new support to agricultural producers to change farm practices and adopt new technologies to reduce emissions. In the US’s US Methane Emissions Reduction Action Plan, released in November 2021, sets out plans to provide financial incentives and technical assistance to producers through a range of programmes, launch a climate-smart partnership initiative within the Department for Agriculture, and more grants for research into reducing methane emissions from livestock. We expect these measures to be carried out in 2022. In 2022, the UK is set to roll out its Sustainable Farming Incentive scheme, to financially support the adoption of sustainable farming practices which reduce GHG emissions.
    • Increased government investment to research farm technologies to reduce emissions. Funding for new types of feed, as well as ‘precision feeding’ techniques to minimalise feed usage and feed waste, are already underway in most developed countries, including New Zealand, the US and the EU, and are outlined in emission reduction strategies for both the EU and US. 
    • Climate impact agricultural commodities incorporated into trade policy. Some major importing markets will take actions to minimise imports linked to deforestation and high GHG emissions, following on from announcements made in 2021. Both the EU and UK have in the past year proposed new rules regarding the regulation of agricultural imports, and 2022 will see these markets move towards making these policies a reality - for example guidelines on due diligence for imports - as well as the potential for similar policies being proposed elsewhere. 
    • New Company Initiatives: The vast majority of leading companies in the sector have already announced targets relating to GHG emissions and deforestation in their supply chains, and at the COP26 summit, 10 global companies with a major global market share in agricultural commodity production and trade, including BungeCargillADM and Marfig, announced a statement of intent to catalyse further progress on eliminating commodity-driven deforestation. These targets will require new policies and initiatives to be enacted by companies, and some may update their existing goals over the coming year as attention to the role of the agribusiness sector in climate change increases. Wilmar is scheduled to establish a GHG reduction target in 2022. Companies will also work to encourage producers to adopt more environmentally-friendly practices. Cargill has launched a carbon farming scheme for the US 2021/22 crop season, in which it will pay agricultural producers to adopt more climate-friendly production practices, and we will likely see similar moves elsewhere and by other companies.
    Company/Association Goal Announced Details
    Tyson Reach net-zero greenhouse gas emissions globally by 2050 Jun-21 The company’s original goal was to reduce GHG emissions 30% by 2030. With the urgency to combat climate change growing, Tyson has adjusted its target to net-zero by 2050. The company will plan for US operations to use 50% renewable energy by 2030 and extend a programme to verify sustainable production practices for cattle, among other steps.
    JBS Achieve net-zero GHG emissions by 2040 Mar-21 Achieve net-zero GHG emissions by 2040. Prior to 2040, reduce scope 1+2 GHG emission intensity by 30 percent by 2030, reach 60 percent renewable electricity by 2030 and invest $100 million by 2030 in R&D projects to assist producer efforts to strengthen and scale regenerative farming practices. Eliminate illegal Amazon deforestation from its supply chain by 2025 and zero deforestation across the JBS global supply chain by 2035. 100% renewable electricity in its facilities by 2040. Signed COP26 commitment to halt forest loss associated with agricultural commodity production and trade.
    Marfrig Reduce emissions 2020 By 2035 reduce Scope 1 and 2 emissions by 43%, and Scope 3 emissions by 35%. Have 100% of the production chain free from deforestation by 2030. Signed COP26 commitment to halt forest loss associated with agricultural commodity production and trade.
    Meat & Livestock Australia (industry association) Carbon neutral by 2030 (for Australian red meat industry) 2020 Help Australia's livestock sector to achieve carbon neutrality by 2030. 
    ADM Reduce emissions Mar-21 Reduce its absolute Scope 1 and 2 GHG emissions by 25% by 2035 from its 2019 baseline and reduce energy intensity by 15%. Prior to this, reduce GHG emissions by 1.5% by 2025. 100% deforestation-free by 2030. Signed COP26 commitment to halt forest loss associated with agricultural commodity production and trade.
    Bunge Reduce emissions na Be deforestation-free across all our supply chains by 2025. In 2016, set a 10-year goal to further reduce emissions, energy, water and waste by 10% per metric tonne of production, which they are reportedly on track to achieve. Signed COP26 commitment to halt forest loss associated with agricultural commodity production and trade.
    Cargill Reduce emissions; Deforestation-free supply chain by 2030.  na Reduce Scope 1 and 2 greenhouse emissions by 10% by 2025, measured against a 2017 baseline. Via pursuing emissions-reducing technology and investing in renewable energy to power its operations or offset its emissions. Cargill commits to reduce Scope 3 GHG emissions 30% per tonne of product sold by 2030 from a 2017 base year. Target for deforestation-free supply chain by 2030, and a signatory of COP26 Agricultural Commodity Companies Corporate Statement Of Purpose. Commitment to advance regenerative agriculture practices across 10 million acres of land in North America by 2030. Signed COP26 commitment to halt forest loss associated with agricultural commodity production and trade.
    Olam Reduce emissions 2019 Reduce absolute scope 1 and 2 GHG emissions 50% by 2030 and 100% by 2050 from a 2017 base year. Reduce scope 3 GHG emissions 50% per tonne of agricultural product by 2030 and absolute scope 3 GHG emissions 67% by 2050 from a 2017 base year. Signed COP26 commitment to halt forest loss associated with agricultural commodity production and trade.
    Wilmar Reduce emissions na Reduce GHG emission intensity by 15% for all palm oil mills by 2023 (against 2016 baseline). Build methane capture facilities to reduce emissions from palm oil. No Deforestation, No Peat, No Exploitation (NDPE) policy. Signed COP26 commitment to halt forest loss associated with agricultural commodity production and trade.
    Nutrien Reduce emissions 2020 Achieve at least a 30% reduction in GHG emissions (scope 1 and 2) per tonne of products produced by 2030, from a baseline year of 2018.
    Louis Dreyfus Company  Reduce emissions na  No set target, but working to reduce GHG emissions, energy and water consumption. Signed COP26 commitment to halt forest loss associated with agricultural commodity production and trade.
    na = not available. Source: Companies' websites; SBTi, Fitch Solutions

    Innovation Drive Within Sector

    Innovation within the agricultural sector will accelerate in 2022 on multiple fronts, including in alternative proteins, lab-grown and cultured commodities, and agricultural technology. Both the Covid-19 pandemic and new pledges made at the COP26 summit (discussed above) have added impetus to trends such as consumers seeking healthier and more environmentally-friendly alternatives to some agricultural products, such as red meat, and investment in agtech as countries strive for improved food security. With 2021 having been a year of recovery from the Covid-19 pandemic, our Country Risk team believes that 2022 will bring almost full economic normalisation, and another year of above-trend economic growth. This will be reflected by increased levels of investment in innovative sectors. 


    Company  Country Plant-Based Protein Used 
    Algama France  Algae
    Dutch Weed Burger Netherlands  Seaweed
    Fazenda Futuro Brazil  Soy, pea, chickpea
    Gardein Canada Soy, pea
    Has Algae Australia  Algae
    Impossible Foods  US  Soy
    It's Jerky Yall US Soy
    Lightlife US Pea
    Like Meat Germany Soy, pea
    Linda McCartney UK Soy 
    Meatless Meat Co  UK Pea (some products still soy)
    Moving Mountains UK Soy, pea
    NEXT MEATS Japan Soy, pea
    No Bull Burger US Soy
    Ozo US Pea, rice
    Raised & Roosted  US  Pea
    Starfield China  Seaweed
    Triton Algae Innovations US Algae
    V2Food Australia  Soy
    Vegini Austria  Pea
    Vivera Netherlands  Soy, wheat
    Zhenmeat China  Pea
    Note: Correct as of November 2021. Source: Companies' websites, Fitch Solutions

    In particular, we highlight the following areas where we expect innovation, research and innovation to increase in 2022: 

    1. Alternative Proteins: Interest in alternative proteins has been rising in recent years, with both new companies emerging in the market, as well as major agribusiness companies expanding product lines outside of 'traditional' commodities. In 2022, this trend will continue, with increasing levels of investment in developing products to appeal to consumer health and environmental demands. We have previously identified pea protein as set to outperform over the coming years, though we also expect to see growing interest in other protein sources such as chickpeas and other pulses. Companies will also expand into new markets. Furthermore, multiple large meat companies, including JBS and Marfrig have announced investments in, and acquisitions of, plant-based alternative meat companies over the past year, and will likely continue to expand their product offerings in the area in 2022. 
    2. Lab-Grown And Cultured Commodities: New developments will emerge in lab-grown and cultured commodities, widening the focus from alternative meat production to other commodities. 2021 saw VTT Technical Research Centre of Finland announce the development of a lab-grown coffee, while a lab-grown form of cotton has also been developed in recent years. Other companies developing lab-grown agricultural commodities include Compound Foods (coffee), Atomo ('Coffee' produced by converting 'upcycled' ingredients [no coffee beans] into the same compound as coffee beans), Galy (cotton) and TurtleTree (milk). In 2022, we expect more developments to emerge in the production of lab-grown commodities, while government regulations surrounding the products may also begin to shift (currently most lab-grown agricultural products have not been approved for human consumption). Meanwhile, in November 2021, it was announced that JBS is to acquire cultivated meat company BioTech Foods, while Brazilian meat company BRF invested in cell-cultured meat start-up Aleph Farms in July 2021, indicating growing interest by large meat companies in the cultured meat industry. 
    3. Agricultural Technology (AgTech): Investment in AgTech will continue to accelerate, especially in the context of COP26 and food security concerns as Covid-19 highlighted the vulnerability of global agricultural supply chains. Rising costs of production (e.g. elevated fertiliser costs) could also spur farm adoption of agtech as producers seek to reduce costs in other areas and maximise yields. Reflecting these driving factors, areas of agtech where investment appears to be growing rapidly include agricultural biotechnology and novel farming systems (such as vertical farming). We have previously highlighted rising investment in MENA agtech to address food security concerns. Recent investments demonstrate growing interest in the agtech industry by leading agricultural trading firms also. In November 2021, CHS launched a USD50mn VC fund with Growmark to invest in new technologies for crop production, supply chain and sustainability in the sector. Meanwhile, ADM purchased a stake in agtech company Farmers Business Network the same month. Farm-level technologies are also central to many nations' efforts to meet climate goals. Both EU and US national plans to tackle agricultural methane emissions cite innovation and technology as central to reducing emissions, which we expect to be reflected by greater investments in supporting the development of these technologies. 

    Producers Of Alternative Protein Sources Benefit From Rising Demand

    Selected Countries - Dry Pea Production (tonnes)

    Note: Includes dry garden peas and dry field peas (yellow peas for pea protein are a type of dry field pea). Source: FAO, Fitch Solutions

    These developments will have numerous implications for the sector. Rising demand for certain high-protein commodities, such as pea, will benefit producers of these products, and countries that are able to increase exports. For example, Canada is a large producer and exporter of yellow dried peas, with producers already benefitting from elevated prices in H221, driven by the alternative protein sector. India could significantly increase its chickpea exports. Meanwhile, both lab-grown commodities and agtech developments could help to address food security concerns where production of many agricultural commodities is currently inhibited by unfavourable climates, such as in the MENA region.

    Food Security To Remain Central To Agricultural Policy In 2022

    Rising government intervention is a Megatrend across economics and industry, and some action has already been taken by governments in the agricultural sector amid decade-high global food prices. In particular, Russia has been very proactive in seeking to limit the rise in consumer food prices as it has introduced a new, higher floating export tax in June 2021 on the grains as well as a new cap on the export of fertiliser to limit domestic exports in an attempt to lower domestic prices. Other governments, including China, have also introduced other policies to support domestic agricultural production.

    We think that protectionism will continue in 2022 under the guise of food security, and we highlight four key areas in particular where we think that governments around the world will implement changes;

    1. Higher subsidies or minimum prices for farmers. Greater financial support is more likely to occur in emerging markets where farmers form a large proportion of the electorate and where the potential to increase yields is the greatest, such as India. China will also probably increase the level of financial support that it gives to farmers as part of its efforts to reduce agricultural imports, as laid out during its Fourteenth Five-Year Plan. Meanwhile, the MENA region is a huge net importer and currently has limited ability to increase production, so we suspect that governments here will seek to increase the subsidy for importing food products instead.
    2. Tighter trade measures. Higher export taxes and, potentially even export bans, would encourage more agricultural goods to be sold domestically. This has already happened in Russia and a few other markets with regards to fertiliser and grains, but we anticipate that other emerging markets will implement similar policies, particularly if the current La Niña weather event depresses crop production, as food generally accounts for a large percentage of gross income and governments are keen to limit any further increase in prices. Meanwhile, the EU has proposed tighter rules on the imports of agricultural products associated with deforestation, which could soon lead to lower imports of soy oil and palm oil into the bloc and support its domestic rapeseed oil industry.
    3. Looser migrant labour restrictions. Agriculture is a labour-intensive industry and Covid-19-related travel restrictions have led to a shortage of workers and a sharp rise in agricultural worker costs as well as logistical shortages. The UK has already increased the number of temporary agricultural visas for the livestock and fruit-picking sectors in an effort to limit the rise in labour costs and we suspect the US and other markets to implement similar policies in 2022 for similar reasons.
    4. Increase investment in agtech. While all governments will seek to increase investment, we think that most of it will occur in developed markets due to the availability of private finance and existing technological infrastructure. Nevertheless, we note that large net importers in emerging markets, including in the MENA region, will also likely see an increase in government-led investment. We also note that fruits and vegetables (‘ponics’) could see largescale investment in the near future due to greater levels of investor awareness amid a desire to mitigate against changing climatic conditions.

    All of these measures would support agricultural production and could distort global trade flows, with top agricultural producers, such as Brazil and Argentina, potentially losing out on market share. 

    Government Financial Support To Rise In Coming Years

    Select Countries - OECD-FAO Agricultural Producer Support Estimate, as a % of gross farm receipts

    Note: The Producer Support Estimate (PSE) represents policy transfers to agricultural producers, measured at the farm gate and expressed as a share of gross farm receipts; calculated by the OECD and FAO. Source: OECD, FAO, Fitch Solutions

    This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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