💚 Insurance costs as a carbon tax

The rise in insurance costs for the Ag sector is the carbon tax nobody is talking about. Can Agrifintech solve for this?

💚 Insurance costs as a carbon tax
How exposed would you be? Photo by Keagan Henman / Unsplash

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💭 Insurance costs as a carbon tax. Rising premiums for the Ag sector is the carbon tax nobody is talking about.

🎯 The Agrifintech newsflow has been fantastic in the past few weeks, including;

➔ AcreTrader 🇺🇸

➔ E-Farm 🇪🇺

➔ DeHaat 🇮🇳

Other content

💬 David Friedberg left some interesting snippets in his Agfunder chat; AND

🏜️ For FOAK sake - The "First Of A Kind" problem for hardware startups.

Insurance as a carbon tax

Lloyds of London recently warned that extreme weather would lead to a food and water shock with a potential $5tn economic impact over a 5 year period.

Agribusiness would bear the brunt.

"The initial impact is felt by agricultural entities, who see costs of in-demand fertilizers and pesticides rise sharply. Many farms are not able to access relief capital quickly enough to cope with the impacts. The global agricultural and food supply chain is disrupted, leading to panic buying and price shocks in developed markets and elsewhere"

⦿ It was a modelling exercise, but the expected loss, factoring in a range of probabilities is still a gigantic $711bn with a 2.29% chance of that scenario playing out.

What would you do if you had those odds in the lotto? I'd be all over it. 😅

⦿ We often think of the impact of climate on agriculture as something happening far, far out. But the immediate impact is already showing up in increasing insurance premiums in the Ag sector like a proxy carbon tax.

⦿ This shouldn't be surprising. According to a 2019 USDA report, the cost of insuring crops could increase between 3.5% and 22% by 2080 due to climate change, even if farmers adapted what and where they plant.

⦿ Other US research points to where the losses are stacking up. The EWG (Environmental Working Group), a lobby group, found that weather variability played a key role with Drought and Excess moisture by far the top causes of loss for crop insurance in that market.

⦿ Where losses increase, so do premiums. EWG use the data to highlight that indemnities for drought have increased from $325m to $1.65bn between 1995 and 2020, which they highlight as an alarmist total increase of 400%, but is actually a sober annual increase of 7%.

🏠 Into this mix, it is worth noting that property insurers in the U.S. are dropping new home cover and even abandoning markets in Florida, Louisiana and California because of exploding losses due to storms, flooding and fires. Might this happen in agriculture markets globally? (The U.S., for now, appears buttressed by government support).

💭 Despite some creative storytelling from the EWG above, the issue still feels real. The Lloyds study above is a genuine attempt but the key thing to learn is that the insurance sector sees risks rising and that means premiums will be rising too.

📊 There are numerous Agrifintech companies working in this space to highlight risks (Ceres Imaging), provide better valuation data, such as Acres below, or companies such as Hillridge - covered here - who are expanding distribution of these products, not only in Australia but the fast growing - and highly exposed - Southeast Asian market.

➔ In addition, some of the largest investment rounds related to Agrifintech have been into companies targeting insurance, specifically companies such as Descartes Underwriting who raised $120m in 2022.


🗺️ Acretrader

Acres, the data entity run by Acretrader, published their seminal Farmland Values report which has an exquisite analysis of farmland transactions and values from Q1 2020 to Q2 2023, covering 37,000 transactions valued at $30bn from across the U.S.

⦿ If you don't know Acres, I covered their operations here and noted:

The Acres offering allows easy access to farmland information. By finding a parcel anywhere in the US, you can find out key information on size, ownership, soil composition and quality, crop history, nearby land for sale, rent and yields or property taxes. And of course any nearby sales.

⦿ One key insight was their breakdown by Productivity Index and Land Class. Last year I attended an AcreTrader event and their vision was to begin capturing these subtle differences for investors, especially as they reflected an increasing awareness in the market around soil health and value.

⦿ I think this aspect of looking at land values by soil quality is critical for sustainable agriculture as the ultimate incentive. Carbon credits can offer short term transition related income and offtake markets appear a long way off paying a genuine premium for sustainable produce. What do you think?

⦿ So the benefit has to accrue in the useful economic life of land and this is the thesis behind several companies in the Agrifintech space.

⦿ The figure below from Savills Research in the U.K. depicts this perfectly.

Source: Savills Research, "Soil", June 2023

⦿ I queried with Savills if they might see a similar relationship in the U.K. market. Andrew Teanby from their Rural Research team provided some excellent context:

“In the U.K. farmland market we typically see 700-800 properties come to market each year. While we see the importance of soil quality for farmland as indicative of economic potential, in such a supply constrained market, the values we see are driven more by the supply and demand dynamics that’s anything else".

⦿ This comment from Andrew emphasised further the importance of the breadth of the Acres research across a major, commercial U.S. market. There will not be many markets who can link value with other factors.

🚜 E-Farm

E-Farm, announced the successful completion of their first online auction in September.

⦿ E-Farm are a German based managed-marketplace for used farm equipment. Unlike TractorZoom, for example, E-Farm originate the equipment, facilitate transactions, pricing and shipping across Europe.

⦿ The auction was small in value and the number of items, but what struck me about this was the geographic spread of registrations.

⦿ Italy, Spain and Greece were the countries most represented at 18%, 17% and 12% of registrations respectively, followed closely by Romania.

⦿ Europe, despite having a single market is still extremely fragmented and E-Farm are a rare demonstration of an Ag focused marketplace building a compelling proposition, not only in one country but matching buyers and sellers between countries.

Will there be other similar opportunities? I hope so. I think so.

🏪 DeHaat

DeHaat's gross revenue reaches $236.4m in India, but losses increased slightly.

⦿ The revenue is from its agri focused marketplace and represents GMV (Gross Merchant Value), which is mostly (98.5%) derived from agri products - both inputs and outputs.

⦿DeHaat provides agricultural inputs (seeds, pesticides, fertilizers), agricultural finance, warehousing, cold storage, and advisory services such as soil testing and yield prediction services. The fact most revenue is derived from inputs and market linkage, hints that the advisory and financing part of the business is quite small.

⦿ While GMV increased 54% yoy, expenses increased 60%, which meant losses widened by $25m, going from a net margin of 16% in FY22 to 21% FY23. For a venture backed business exposed to the Agriculture market in India, this is not bad and actually demonstrates resilience on part of the management who clearly wanted to aim for growth.

⦿ FYI - DeHaat last raised $60m in a Series E round in October 2022 and have raised a total of $254m according to Crunchbase, with prominent investors such as Temasek, Omnivore, Lightrock and Agfunder.

⦿ This report was picked up from Entrackr with their chart presented below and represented in rupees.

⦿ My question with DeHaat, and the other large Indian marketplaces, is what happens next?

These companies have done well to take advantage of regulatory change (Agricultural and Financial), technology change and political/ social change. Will we see an exit by way of IPO in India or Singapore for any of these players or what is the exit route? To borrow from the FOAK article below, they are FOAK's and have reached the other side of the valley of death.

💬 Agfunder - Have you delved into the Agfunder interview with David Friedberg?

About 30 mins in he makes a great point about the large incumbents and technology. He is referring to the alt protein space, but his point that incumbents will likely own the value chain and start ups will end up accruing much of the value of market transformation was a good one that could relate to many segments - including Agrifintech.

🏜️ FOAK off - The First of a Kind Death Valley. This is a great write up on the challenges of building hardware start ups.

And that is everything this week folks - did you enjoy? I'm always here for some feedback.

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