The Development Bank of Japan (DBJ) announced on November 19, 2020 that it will become the first Asian investor into US-based agricultural impact fund Equilibrium’s Controlled Environment Foods Fund II. This is Equilibrium’s second fund investing in large-scale controlled environment agriculture.
Meros has been fortunate to work alongside the DBJ team over the past year to help identify international agricultural impact investing trends and their impact on agricultural industries. We have also helped to outline the diverse challenges and investment and financing landscape facing Japanese agriculture that may potentially be addressed by agricultural impact funds in Japan. The last two years in particular have seen increased interest in the importance of impact and ESG investments in international farmland and agriculture supply chain investment, with ever-evolving discussion about how to measure and assess the impact of these investments.
Equilibrium Capital, the Pioneer of Agricultural Impact Fund Investing
Equilibrium is a US impact investment fund management company that creates investment opportunities with a focus on sustainability for institutional investors. The company is currently developing infrastructure investment funds for large-scale environmentally controlled agriculture and agricultural wastewater treatment projects. Founded by Dave Chen in 2008, the company is a pioneer in US impact investing.
In 2018, it launched the , the world’s first impact investment fund dedicated to large-scale, environmentally controlled agriculture, raising US$336 million and within one year, Equilibrium was operating over 100 hectares of greenhouse operations. CEFF II is now its second fund.
Equilibrium aims to create impact at every stage of the project. On the production side, the advantages of controlled environment farming are seen as efficient use of limited farmland, no soil runoff problems, less pesticide use, a better environment for workers compared to open field farming, and higher productivity, while reducing the need for irrigation. In terms of distribution and consumption, the peri-urban location of their greenhouses reduces logistics costs and carbon dioxide emissions in the distribution process, preserving freshness and providing nutritious food, reducing food waste, and improving food safety. The fund’s greenhouse operators are asked to align their businesses with Equilibrium’s goals, which include both growing efficiency and increased yields, as well as compliance with international food safety standards (GFSI) and working with retailers and freshness preservation technology companies to reduce packaging materials.
Development Bank of Japan (DBJ) and Sustainable Investment in Agriculture
By becoming an LP in Equilibrium’s fund, DBJ aims to obtain a deeper understanding of global trends in the agri-food sector, acquire advanced know-how, and contribute to the future growth of Japan’s domestic agricultural and food industries by sharing the knowledge gained from this investment with industries in Japan. Mr. Takuya Ogawa, Director of Corporate Finance Department 3, a core member of the DBJ team, commented: “We hope to achieve a more sustainable society through financial support to the food and agriculture sector and gain a deeper understanding of sustainable agriculture as advocated by Equilibrium and CEFF II.
As a government-funded financial institution, DBJ’s mission is to act in the public interest when selecting investments, and thus has a strong affinity with Equilibrium’s mission, sharing a philosophy of sustainable environmental, labor and social structures along the food chain, and impact investing in the food and agriculture sector.
Japanese Institutional Investors Already Moving into ESG Investing in Food, Agriculture and Farmland
While DBJ is the first to invest in an agricultural impact fund, Japanese institutional investors have already been moving into farmland investment. Nippon Life’s announcement in 2018 of an investment of approximately 10 billion yen in an overseas farmland investment fund managed by Hancock Natural Resources, a member of Manulife Life Group, is believed to be the first farmland fund deal by an Japanese institutional investor. According to their press release, Nippon Life Insurance expressed interest in how the fund can contribute to stable food supply through the environmentally friendly operations of farmland. The investment was positioned as an initiative within Nippon Life’s ESG-related investments and loans which total 200 billion yen. Hancock Natural Resource Group has a long history of investing in farmland, but in recent years, it has been focusing on more on sustainable practices in farmland operations, and in January of 2020, it announced the development of an ESG evaluation criteria for farmland operations, called Leading Harvest, together with several other large farmland investment funds.
As awareness of both ESG investing and impact investing grow in Japan, we look forward to Japan’s leading investors increasingly playing a role in global impact funds and bringing the lessons of sustainable farmland operations and impact investing to address Japan’s own agricultural challenges.
In honor of “CSA Day” today February 22, I thought I would share some observations from my recent exploration into the community supported agriculture movement in China. I am familiar with trends in Japanese agriculture related to ecological agriculture, organic farming, rural community development and alternative food movements, and have had the opportunity to do many deep dives into various aspects of the US organic industry.
However, when I learned that the number of CSAs has been exploding in China, amid increasing discussions of environmental issues and food safety concerns, I was interested in understanding how community supported agriculture was developing in China, in a country with strong state-directed agriculture policy and weak tradition of civil society and community engagement in urban areas. My chance came at the 10th China Community Supported Agriculture Conference held in Chengdu, Sichuan Province in December 2018.
The conference attracted over 1,000 attendees including CSA farms, academics, politician and government staff, farm tourism and education business operators, agritech & food tech companies, certification agencies, architects as well as international guests from France, Netherlands, Canada, the US and Japan.
In China, where farmland is still collectively owned and the majority of farmers are smallholders, China’s CSA movement tends toward developing commercial-oriented agricultural business opportunities through the establishment of environmental-friendly agricultural practices as well as trustworthy distribution channels to consumers. To be honest, I felt that the current Chinese CSA approach is quite different from the original CSA concept of ‘maintaining and developing small-scale organic family farming and of achieving local food sovereignty,’ and there is less sense of ‘community.’
However, with CSA developing in this direction and seemingly embraced by the State government as one tool for improving food safety and building confidence among consumers. CSA could have a large social and political impact in China’s future agricultural scene. It makes Chinese CSA an important movement to watch. Here are some main observations.
1.CSA Projects are Rapidly Expanding but In a Different Trajectory than the US or Japan
CSA, as defined by the International Network for Community Supported Agriculture (URGENCI) is the concept of partnerships between producers and consumers to maintain small-scale organic family farming and of achieving local food sovereignty for communities, as a solution to the problems associated with global intensive agricultural production and distribution. These partnerships of course will take different forms around the world, depending on social, political, economic or agricultural realities.
The CSA movement was born in the US on two farms during late 1980’s in response to an increasingly industrialized food system, marked by large private farms, retail supermarkets and top-down food safety laws and standards. CSA in the US has expanded to 5,000-6,000 programs and more than 12,000 farms are involved in CSA now. Today, you can see various styles of CSA, and the farms working with CSA programs are not only organic but also conventional.
CSA was originally an economic risk-sharing system whereby (mostly urban) consumers signed an annual subscription contract with local small-scale organic farmers before the planting season. The system often includes labor sharing and educational meetups to strengthen the ties between member farmers and consumers. A concept similar to CSA was also seen in Japan and other countries, from the early 1970’s. In Japan, this system is known as teikei (literally ‘partnership’), and it emerged from an awareness of increasing health problems caused by agrochemical usage, during the course of rapid economic development in Japan. Teikei aimed to create relationships between small-scale organic farmers and urban consumer communities.
The concept of Community Supported Agriculture (CSA) was introduced in China almost 10 years ago. In China, one challenge was already that the word used for “community” (shequ) is a word adopted by the Chinese government in 1980s to describe administrative units that took on the welfare and community services role that had previously been carried out by the work unit (danwei) under the communist planned economy system. This word did not necessarily include the broader concepts the word “community” as used in other countries. Together with the lack of a tradition of participatory self-governance in urban cities and the rapid expansion of massive population influx to urban areas, it has been difficult for a broader concept of community to take root in Chinese cities.
The pioneer CSA in China was a farm called Little Donkey Farm in Beijing, which was set up in 2008 as a Renmin University project by PhD student Shi Yan, who had learned about the concept from a small CSA farm in Minnesota. In 2009, a year later, Professor Wen Tiejun, one of the most influential agriculture economists in China, organized the Chinese federation of CSAs with 9 CSA farms, and started to lead the CSA initiative in China. Since then, the little seed sown by the Little Donkey Farm in Beijing has now sprouted to over 1,000 CSA projects all over China and over 100 ,000 farmers and consumers are involved in these projects. The CSA farm concept is attracting highly-educated young Chinese people to start their own farming businesses.
2. The Concept had evolved from ‘Community Supported Agriculture’ to ‘Ecological and Social Agriculture’
Throughout my discussions, it became clear that the CSA movement in China is trying to position itself as much broader concept, encompassing all business opportunities that can strengthen ties between farmers and consumers while ensuring eco-friendly agriculture and food safety.
Concern about food safety, as well as concerns about the environmental impact of farming, are drivers of many Chinese agriculture policies and movements. The idea of organic agriculture (youji nongye), in China, is strongly associated with certification systems and is commercially driven by more by consumer’s food safety concerns than by an underlying political or social philosophy. There is already a growing market for organic labelled foods, with well-recognized corporate players and government support. Shentai Nongye (Ecological Agriculture) is the farming concept promoted in government policies China since late 1980s, meaning eco-friendly sustainable farming model integrating crop and livestock operations.
In order to emphasize that CSA also includes the concept of “society”, the Chinese CSA federation decided to change the Chinese translation of CSA several years ago from “Shequ Zhichi Nongye (literally, Community Supported Agriculture)” to “Shehui Shentai Nongye (Socio-Ecological Agriculture)”. By adding the aspect of Society (Shehui), the CSA Federation emphasizes the importance of ties between farmers and consumers and builds on the already familiar concept of “ecological agriculture”.
3. China’s CSA initiative has strong political and academic support
Academics have played an important role in the CSA initiative in China, from the very first CSA farm. Furthermore, academic-led initiatives are seeking more policy and government involvement in order to broaden the concept and their practices.
For example, the opening event of the conference was a joint signing ceremony for various large-scale government agricultural investment projects in the region, and in the first panel session, several Chinese agricultural economic professors discussed the need for political support for CSAs.
This is strikingly different from the US and Japan, where originally the CSA movement started as voluntary networks of farmers and consumers who shared a philosophy of seeking alternative ways of farming as a counter-movement against intensive, commercial large-scale farming.
5. Technology is being introduced especially in food distribution, payment, traceability and certification.
Technology was extensively covered in the conference, especially various technologies related to food distribution, traceability and certification. With the development of agri-tech and food-tech in China, CSA is also trying to utilize technology to find the optimal way to reach consumers and to ensure an efficient route from farm to consumers. For example, sessions in the conference introduced various cutting-edge blockchain test-cases in agriculture and food chains in developing countries, as well as a fish resource conservation program utilizing tech solutions.
4. The Chinese CSA concept is diverse and includes farmers markets, farm stays, local food branding, rural development and local seed conservation.
The wide diversity of topics covered in the conference was impressive. For example, organic farm managers discussed technology in an organic farming panel: a local corn seed conservation program presented on its collaboration with a university and local villages; rural development was discussed from the viewpoint of international architects; the Sichuan government explained its local food branding initiative and its marketing and export strategy.
Professor Kazumi Kondoh from Chuo University in Japan, who presented on the Japanese teikei system at the conference, raised her concern that the Chinese CSA movement is more focused on profitable business models and is not putting enough effort into encouraging the philosophy of organic agriculture and the ultimate objective of achieving local food sovereignty. Her concern is understandable.
But, if CSA is to be influential in China, it must work with the government under the current Chinese political system and be aligned with current government policies. With growing demand for safe food and escalating concerns about environmental issues, people see clear business opportunities in developing reliable food chains as well as in agri-tourism and agri-education. The CSA movement in China will inevitably be shaped by China’s own characteristics and it remains an interesting area to watch in order to understand the bigger picture of China’s agricultural development and food systems.
At the recent Nikkei Ag/Sum Agritech Summit, Tokyo welcomed agtech and food tech start-ups from around the world to exhibit and present. However, some of the highlights were Japan’s own homegrown start-ups, who may have gotten less attention because less information was available in English.
In the global agtech universe, if you mention Japan, the immediate association is usually hydroponic vertical farming technology (called “plant factories” in Japanese) and robotics/drones. This is not surprising. Japan is a country where nearly 50% of the country lives in one of three densely packed metro areas (Tokyo-Yokahama, Osaka-Kobe-Kyoto and Nagoya). In rural areas, the number of farmers is dropping dramatically, farm land increasingly lies uncultivated and the average age of a Japanese farmer is 66. Japan’s food self-sufficiency rate is now less than 40%.
Japan’s tech, engineering, machinery and robotics industries have been increasingly active in agtech R&D, aiming for potential solutions to the hot button Japanese issues of decreasing farm production, aging farmers and food security. Hydroponic farming, led by names such as Spread and Mirai, and robotics and drones being developed by universities and research institutes as well as companies like Yamaha, Fujitsu or Panasonic, have received significant media attention.
But indoor farming and drones are far from the only agtech innovation in Japan. Below are three interesting Japanese start-ups that recently exhibited at Nikkei’s Ag/Sum Agritech Summit.
ad-dice Co., Ltd.’s Bee Sensing
Bee Sensing offers an IoT sensor device that allows bee keepers to remotely monitor bee health and activity. Through a smartphone app, beekeepers can check temperature, humidly and how active bees are as well as receive alerts and record memos. Bee hives are often placed in distant or remote areas, making it difficult for farmers to visit them every day. This IoT sensor system is expected to increase beekeeper productivity by freeing them from constant patrolling of distant beehives. It will also allow timely reactions to changes in bee health and decrease beekeeper worry about the health of their remote apiaries. It also creates honey production data records to share with customers who are increasingly interested in the differences in local honeys and their different tastes and colors.
Bee Sensing’s patented technology was a collaboration between Japanese IT company, ad-dice, founded by Daisuke Ito and featured as one of Toyo Keizai Magazine’s Top 100 Ventures That Will Change Japan in Feb 2017, and innovative beekeeper Hideki Matsubara from Hiroshima.
Bee sensing technology may be a niche industry within agtech but these emerging technologies can serve an extremely important industry. According to FAO statistics, honey production is around 1.2 million metric tons globally, mainly concentrated in China, North Eastern Europe and the US. It is a high value industry. For example, the US retail price of natural honey is around 5-7 US$/pound and bee by-products, like propolis, are even more expensive. In addition to those products, the bee industry itself is also creating extremely important economic value – pollination.
There are now number of bee hive remote monitoring technologies being developed around the world, from the UK, US and Bulgaria among others as interest in this high value agricultural industry increases.
Kisvin Science’s Sap Flow Sensor
Kisvin Science’s sap flow sensor was developed to support the grape-growing and wine making industry. Japan may be better known for its beer or sake, but Japan actually also has a significant wine industry, centered in Yamanashi prefecture. The sap flow sensors monitor grape stem heat and soil moisture.
Co-founder Kazuhiro Nishioka originally established a small sap flow sensor manufacturing company, Nissy Instruments, as a side-business when he was a PhD student. He then created Team Kisvin, an initiative with two wine grape farmers (Hitoshi Ikegawa of i-vines and Yasuhiro Ogihara founder of the Kisvin winery) to study and improve viticulture in Yamanashi. They have been using the with sap sensors to produce premium wine grapes now for 10 years ago.
With the increasing number of cooperative farms, they have released their own branded Kisvin wines. In 2015, Team Kisvin decided to found Kisvin Science in order to support other wine grape farmers and wineries around the world. Their first new market target is California.
There are several sap flow sensors in the market, but Kisvin Science feels its strength is its low cost achieved with cutting-edge printing technology, Nishioka and his team’s aggregate knowledge of plant physiology and its relationship to wine grape farming. His team is aiming to raise its next round of funding soon, and is considering whether to target Japanese or US funds.
Rice Technology Kawachi’s Rice Gel
Some of the best inventions are accidents. Dr. Junichi Sugiyama unintentionally developed a new food ingredient – a type of rice gel – when he was a senior researcher under the Ministry of Agriculture, Forestry and Fisheries. He found an innovative way to convert cooked rice into a gel-like paste which retains moisture well. Since retiring from the institute, Dr Sugiyama has dedicated his energy to commercializing this product, with the strong support from the local rice-growing community in Kawachi, Ibaraki, and leading agriculture machinery manufacturer Yanmar.
Dr Sugiyama’s rice gel is a smooth white paste, which can be produced in any level of solidity or density, depending on customer needs. The product is made only from rice and water, so it is free from major allergens.
This rice gel food technology addresses two major problems the food industry in Japan and overseas has found when using rice flour. First, rice flour has low absorption capacity for water, meaning most rice flour breads and cakes also have add wheat in order to improve moisture absorption. Second, rice flour usually is also more expensive than wheat or other flours, as rice production costs are high.
However the rice gel retains moisture, meaning bakers can eliminate wheat, which can be an allergen for some consumers. It has been particularly attractive to cake and confectionery bakers who aim for moist, fluffy creations.
In addition, Kawachi is able to produce for a competitive price, because they use rice which is high in amylose (a type of starch component that forms a solid gel at room temperature) which is a high yield type of rice. High amylose rice production for non-table rice can currently receive subsidies under the rice acreage reduction policy of the Japanese government which is helping Kawachi Rice Technology maintain lower costs than rice flour producers.
Full disclosure, Nikkei Ag/Sum event was not the first time Meros has encountered Kawachi rice gel. Last year Team Meros’ Lucia Vancura discussed the product as a panelist on NHK World’s Biz Buzz Japan when the gel was still in its R&D stage. This is why we were even more pleased to get an update from Dr Sugiyama and see his progress in commercializing this product. There is hope that this ingredient will have opportunities in the global baking industry, especially in the gluten free baking market, where rice flour is usually too expensive to use as the main substitute for wheat flour.