March 26, 2012 | Nicola Kerslake

Ejnar Knudsen is one of the better known hedge fund managers in the sustainable agriculture space; he was investing in the sector as far back as the late 1990s, when he led Rabobank’s investments into the early wave of food and agriculture internet sites such as farms.com, a collection of agriculture information sites, and eHarvest.com, a news provider.

Knudsen is a long way from the stereotype of a money-hungry MBA-grad hedge fund manager; he describes himself as a “flexitarian” and is absorbed with finding better ways of utilizing fish oil and nuts to provide health benefits after weaning himself off cholesterol drugs thanks to a nut-rich diet. Until recently, he was one of the portfolio managers at 12-year old San Francisco-based hedge fund Passport Capital. A few weeks back he spoke about his interest in alternative proteins at a recent agriculture investing conference.

Investment managers, such as Knudsen, frequently begin their search for investment ideas by looking at broad themes in the industries that they follow. Typically, they’re looking for the factors that drive the growth and profitability of companies in which they can invest.  Their research can be both lengthy and wide ranging, from visiting industry conferences to interviewing everyone from customers to government officials. In sustainable agriculture, one prominent theme over recent years has been the move towards alternative proteins.

It is no secret that higher salaries in emerging markets are translating into rising demand for meat. For instance, Chinese per capita meat consumption rose by 22% in the decade to 2010, and is forecast to rise a further 30% to 2020[1]. For those concerned with sustainable agriculture, the rising level and role of beef in this mix is worrying as it typically requires far larger quantities of grain feed per pound of meat than does China’s traditional preferences of pork and chicken. Already, more than half of US corn is used for animal feed, and many in sustainable agriculture worry that this trend is not a viable long term use of either water or soil resources.

As a consequence, alternative proteins are an intriguing investment theme for many sustainable agriculture investors. Pulses (annual leguminous crops such as dry beans and chickpea), for instance, have the benefits of being cheaper than meat and needing less water while at the same time offering high protein content. In some emerging markets, meat consumption is not currently a large portion of diets, so investors see an opportunity to develop further supply of pulses as protein sources. As Knudsen commented: “half of India is vegetarian, and that’s unlikely to change”.

Closer to home, Knudsen sees an increased focus on ‘selective proteins’ and more conscious decisions around food consumption, especially among US baby boomers. The popularity of “newer” grains, such as protein-rich quinoa, is one symptom of this trend. While Knudsen attributes the trend to health concerns, others cite environmental, animal cruelty, meat-borne disease and cost concerns. US meat consumption peaked in 2007 and has now fallen to the lowest level in over a decade, with no sign of the trend abating[2]. Having just returned from a packed Natural Products Expo, Knudsen was confident that the transition to healthier alternatives to animal proteins was as potent a force as ever.

As an investment manager, once you’ve established that your chosen theme is valid, you still have to figure out how to find investments that best capitalize on it. For animal protein alternatives, some have invested directly in crops, others in sustainable aquaculture operations. Knudsen’s particular bent is to find technologies that concentrate fish oil; “I’d have to take a crazy number of pills every day to get enough,” he says. Further, he is fascinated by the nut industry, noting that it is a palatable alternative to meat for many Americans. He attributes the revival of the nut industry to this trend; California’s almond production is up 75% in the past five years[3], for instance.  The industry is also seeing increased export demand, especially from China, the largest importer of Californian almonds.

Though there is no shortage of high-potential investment themes in sustainable agriculture, the major issue for investors will always be at the bottom of the chain; no matter how carefully crafted your investment thesis, its potential will be stymied if there’s a paucity of investment vehicles. In other industries, investors are used to choosing between an array of mutual, hedge, private equity and venture capital funds along with numerous credit, project finance and equity deals. If only we could be so fortunate in sustainable agriculture.

Nicola Kerslake is a real assets investor, entrepreneur & advocate and maintains the blog, Real Assets Junkie.