The following is an excerpt from the Institute’s recent paper, “Food innovation: Investing to feed our future.”
In recent months, my family has been buying delicious fresh from-the-vine tomatoes. Given the harsh climate and arid conditions surrounding Dubai, most fruits and vegetables consumed in the region are imported. Anything comparable grown locally is likely the product of hydroponic farming, as was the case with the delectable tomatoes we had been enjoying. As fate would have it, a few weeks later, an accomplished entrepreneur with a background in technology walks into our offices pitching an opportunity to participate in an equity raise for a venture he was pursuing. He and his partners, using controlled environment agriculture (CEA) technology, successfully recreated a Mediterranean climate in the middle of the desert in Abu Dhabi. They built sophisticated greenhouses that could yield more produce per square meter than the best farms in the Netherlands, doing so with a fraction of the water other processes require.
Before we get to the story of tomatoes and what they mean for future investing opportunities in the Gulf Cooperation Council (GCC),1 let’s talk about the evolution underway in the region, and aspects of change that may not be fully appreciated by the world. I have often observed that investors have a fundamental misunderstanding of the risks in the GCC region. They tend to associate GCC bonds with volatile oil prices, or worse, volatile geopolitics. Thus, GCC states are thought to be behind the curve in terms of applying environmental, social and governance (ESG) best practices. In our view, this is a misconception, particularly as it pertains to the “E” in ESG. GCC states are in fact pushing the policymaking envelope with programs to address sustainability challenges, in areas such as carbon emissions and food security.
In recent years, countries in the GCC have established ambitious food sustainability and security programs aimed at improving food production in the region. Member countries have been sponsoring and funding research and development of new and innovative farming technologies, such as drip irrigation, vertical farming, hydroponics, aeroponics and aquaponics. In addition, initiatives like seawater harvesting, soil improvement techniques, microalgae production and groundwater conservation have all played a part in improving food production. These programs are critical to food production in the region due to the arid and inhospitable climate in the GCC, as well as the lack of fertile land.
Although the food and agriculture sector in the GCC is transforming due to innovation and state-sponsored policies, the change is slow and many challenges remain. Of note, despite the bold and ambitious policymaking and programming, the GCC is still on average only 31% food secure.2 In addition, production, storage and transportation of locally cultivated produce is still very inefficient.
While there are clearly tremendous challenges facing the Gulf region as it seeks to achieve food security, there are also significant opportunities for investment. According to ADQ,3 it is estimated that US$200 billion of investment is required annually until 2050 to meet the GCC food supply and demand gap.4 Which brings us back to the delicious tomatoes my family and I enjoy over dinner, and the investment opportunity we see in technologies such as CEA.
As we have observed, demand for produce is high in the region and growing. Furthermore, given the increase in lifestyle diseases and obesity, there is heightened awareness of the need for healthy eating habits. Awareness has increased interest in locally sourced and organically grown fruits and vegetables. CEA is ideally suited to meet this demand. Through technology, regulated environments can yield resource-efficient food anywhere in the Gulf, year-round. These farming methods are more sustainable as well, and we believe they offer the most competitive solution for products with short shelf lives and low value-to-weight ratios in terms of transportation logistics. The bottom line is that CEA is a uniquely suitable industry for profitable, large-scale impact—truly doing good and doing well.
In summary, we saw an opportunity to invest in a company that could disrupt the business model of trading imported food to the GCC into a technologically advanced industrial production model. This coincides with recently articulated policies around food security, sustainable practices and water conservation. To take advantage of these opportunities, investors would do well to consider credit in emerging markets, particularly those with a commercial environment and macro policy framework that support investments in similar growth opportunities.
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1. The Gulf Cooperation Council (GCC) is a political and economic union of Arab states bordering the Persian Gulf. Established in 1981, its six members are the United Arab Emirates, Saudi Arabia, Qatar, Oman, Kuwait and Bahrain.
2. Sources: FCSA of UAE, NCSI of Oman, CIO of Bahrain, MDPS Qatar, GAS of Saudi Arabia, FAO.
3. ADQ is one of the UAE’s largest holding companies, with a broad portfolio of major enterprises spanning key sectors of Abu Dhabi’s diversified economy. It is both an asset owner and investor in target sectors, locally and internationally, which align with the Abu Dhabi leadership’s economic vision. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
4. Source: ADQ, Cultivating the Future of Food, Bolstering Food Resilience, September 7, 2021.