Preparing for the transformational changes

What you need to know about your opportunities and challenges?

3 min read

What you need to know about your opportunities and challenges?

With the global population expected to reach 9.8Bn by 2050¹, the demand for food and agricultural products is projected to grow significantly over the next few years. This, along with the increasing scarcity of arable land and water resources, is driving more investment into agricultural technologies, infrastructure, and real estate.

Private equity investors and agriculture focused funds can play a pivotal role in supporting the development of sustainable and efficient agricultural practices, whilst generating attractive returns on their investments.

A few European recent trends are noted below:

The price of agricultural land in Europe has been rising in recent years, driven by demand from investors and farmers. According to a recent study by the European Commission, the price of agricultural land in the EU has increased by 15 percent in the past five years²;
The number of farms in Europe is recording a declining trend, as smaller farms are absorbed by larger estates. This is driven by a number of factors, including the need for economies of scale and the increasing cost of land. A study commissioned by the European Commission states that the number of farms in the EU has decreased by 20 percent in the past decade ³;
Technology is playing an increasingly important role in agriculture, with farmers using drones, sensors, and other devices to improve efficiency and productivity. According to a recent study by the European Union, the use of precision agriculture technologies has increased by 25 percent in the past five years⁴.

There is continuous investment and momentum built by the EU deploying capital in the agricultural space through its Common Agricultural Policy (‘CAP’). The CAP is a set of policies that support farmers and rural communities, which accounts for a significant portion of EU’s budget. The new CAP period will provide €270billion in funding for the 2023-2027 period⁵. In 2021, top 5 countries which included France, Spain, Germany, Italy and Poland received €33 billion⁶ of CAP funding.

Another factor attracting investors is the rising focus on Environmental, Social and Governance (ESG) issues, with growing awareness of climate change, emergence of green funds and net zero targets all having caused significant investor interest in sustainable agriculture.

The sector has also attracted more focus from private equity investors, with recent notable transactions being: (i) EW Group’s €900m acquisition of Planasa (Spanish producer of red fruit varieties); (ii) Americold’s $1.7billion acquisition of Agro Merchants Group (owning and operating 235m cubic feet of refrigerated storage spaces across 10 European countries) and (iii) Partners Group’s $1.1billion acquisition of Rovensa (sustainable bio-nutrition, biocontrol and crop protection services, helping farmers produce safe, nutritious food).

The agricultural space is certainly gaining traction and we would expect to see more dry powder being deployed by private equity investors in this space, given their focus on green asset investments and portfolio diversification going forward.

What these recent trends may mean for your accounting?

As agribusiness players grapple with the recent sector trends and growth strategies, the accounting implications may be wide reaching. We have posed below some critical accounting considerations to help you identify likely challenges you may face.

Measurement of biological assets

Government support

Investment in agricultural technologies

Responding to climate change

IFRS Accounting Standards require biological assets to be measured at fair value less costs to sell, except in limited circumstances such as when fair value cannot be reliably measured in which case the cost model is used. Although there is a presumption that fair value can be measured reliably for a biological asset, that presumption can be rebutted only on initial recognition. Climate change, adverse weather patterns and recent trends in market conditions may impact the availability of active markets and it may therefore become necessary for companies to rebut the fair value presumption. However, companies will need to demonstrate that any fair value measurement (including alternative fair value estimation techniques in the absence of reliable market-determined prices) are clearly unreliable. It will be important to review and provide support for any changes to your measurement approach.

Governments are introducing policies to support the sector, including programs that finance the move to new agricultural technologies. Government assistance that meets the definition of a government grant are accounted for under the specific requirements of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (IAS 20), except for government grants received in relation to biological assets measured at fair value less costs to sell which are accounted for in accordance with IAS 41 Agriculture (IAS 41). Given the nature and extent of government support may vary, assessing whether government assistance is a government grant in the scope of IAS 20 requires careful consideration. Companies that have not received government grants previously may need to develop new accounting policies and procedures, which involves significant judgement.

Companies involved in the development of new technologies to support more efficient agricultural practices may incur significant expenditures. It may be challenging to assess whether such expenditures qualify for capitalisation under the applicable Accounting Standard, as certain aspects of the recognition criteria depend on management’s intent and is therefore subjective while other aspects can be judgemental. It will be imperative that all aspects of the capitalisation criteria are assessed before a decision to capitalise is taken.

As a sector dependent on the natural environment, the challenges facing the sector are compounded by climate change. Companies in the sector are tackling the climate challenge by implementing various policies and initiatives, such as recycling and creating new uses for residual waste or adapting processes to minimise the impact of climate change on reduced crop yields and lower livestock productivity. The impact of these initiatives and commitments on the financial statements—for example, in forecasts and assumptions used for impairment analysis—need to be assessed and disclosed accordingly in those financial statements. This is an area of increasing focus for regulatory bodies in the UK and Europe.

How can we help?

The agricultural sector is certainly a key focus on investors’ agenda to drive sustainable solutions in the ESG space. With significant experience, our sector specialists offer a broad spectrum of services, including support with developing the strategy for your investments in the sector and addressing the relevant accounting challenges.

If you would like to discuss, please contact us via email.