Deutsche Bank – Responsibility

Agricultural investments for more productivity and sustainability

For food to become cheaper and more plentiful, agriculture must become more productive, more efficient and more sustainable. This calls for enormous investment volumes. Deutsche Bank supports this financial need with a wide offering that ranges from loans for farmers to the AATIF Special Fund for greater food security in Africa.

Addressing food security

  • Agricultural production must double.
    To combat world hunger successfully, it is important to address the diverse, long term causes of underfeeding and malnutrition. The central task in agriculture involves producing higher amounts of food staples and providing additional healthy and affordable foodstuffs. Prognoses by the Food and Agriculture Organization (FAO) indicate that grain production alone will need to double by 2050 if everyone is to have enough to eat in the future.
  • Agriculture must change.
    To achieve this, we must turn our environmentally damaging industrial landscape into a food production and distribution system that is more just, more environmentally friendly and more sustainable. That calls for innovative models and new, intelligent technologies to increase productivity and efficiency. These range from irrigation systems and precision technologies to a market for sustainably produced food that models itself on consumers’ needs. We must also use resources more efficiently and waste less food.

How Deutsche Bank supports growth and change in agriculture

  • Investment funds. Funds enable our customers to invest throughout the entire agricultural value chain, including innovation and technology. Shares or direct investments are one way of doing this. Another involves special funds like the AATIF – a public-private partnership that provides farmers and private-sector businesses with additional capital, either directly or through the local banking system.
  • Loans. We offer credit opportunities to agricultural businesses, trading companies and food producers all over the world.
  • Selective hedging. We offer farmers, food producers and traders opportunities to insure against price risks in soft commodities through forward trading. We also offer exchange-traded funds (ETFs).
  • Financial consulting. We advise corporations, financial institutes, finance sponsors, governments and states on how to counteract climate change and support them in adapting to it.

Jamshed Irani: Fighting Global Hunger by Throwing Away Less

Jamshed Irani
Dr. Irani is a former director of the Indian conglomerate Tata Sons Ltd, and is a member of the Deutsche Bank Climate Change Advisory Board

The need to double food production and reduce food waste creates the need for an integrated response. Jamshed Irani, Former Director, Tata Sons Limited (India) and Member of the Deutsche Bank Climate Change Advisory Board, on the determinants of food security in India and the challenges that are ahead.

Commodity speculation, food prices, investment opportunities and the role of global financial markets

For many people, commodity speculation with food is a controversial issue. Yet one of our global challenges involves doubling food production levels and fighting hunger. To achieve this, urgently needed capital has to flow into agricultural projects. Additionally, markets must become more transparent.

The first step in the wake of a flood of accusations was to review our own businesses that touch upon foodstuffs. Our conclusions (as set out in our 2011 CSR report) are in agreement with those of several international policy-makers: transparency in commodity derivative markets does need improving, but the agricultural derivatives markets remain a crucial tool in providing financing mechanisms across the agricultural value chain. Moreover, it is these markets that in fact catalyze investment in other critical areas of infrastructure development and that improve health and sanitation.

Deutsche Bank’s Climate Change Advisory Board concluded in May 2012 that the need to double food production and reduce food waste creates significant investment needs and business opportunities across financial institutions such as Deutsche Bank.

The determinants of food security

Global food security is most critical in the developing world, where the proportion of underweight children under 5 years of age declined only marginally from 31 percent to 26 percent between 1990 and 2008. The UN Millennium Development Goals have largely focused on the treatment of malnutrition, with an emphasis on the health sector. Other strategies such as improved productivity of staple grains and increasing local horticulture are important; however, the multi-sector approach that addresses the longer-term drivers of under-nutrition remain central to combating global hunger.

A multi-sectoral approach brings together a coherent range of strategies with the aim of enhancing food and nutrition security. These must include interventions in agriculture and business development, health care, clean water, hygiene and sanitation, basic infrastructure, gender equality, and education.

Successful strategies have focused primarily on the treatment of malnutrition and have found that the problems of hunger and malnutrition are deeply rooted within the health sector. Major strategies to tackle under-nutrition rely on the production of staple grains within the agriculture sector, although a comprehensive strategy to address under-nutrition will also require countries to increase the availability and reduce the cost of nutritious food beyond just staple crops and cereals.

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Agricultural production must double to meet future needs... but faces significant challenges

According to many estimates, the world’s agricultural production must increase by substantial amounts to meet demand for food, feed, fuel and fiber. Moreover, the world’s food systems suffer from gross complexity, which results in enormous inefficiencies.

Demand for increased food, feed, fuel and fiber is driven by increased population and an increase in the middle class in emerging economies. Coupled with a shift in dietary preferences from grains and staple carbohydrates to more protein-based diets including pork and beef (and perhaps fish), as well as biofuel production, more grains will be used to feed animals and fuel our automobiles.

As an energy-intensive sector, agriculture is closely linked to energy markets, with crop production and demand potentially adversely affected by higher oil prices, while crop inputs (such as fertiliser) may benefit from lower natural gas prices. These shifting dynamics will affect profit margins in different segments of the agricultural supply chain.

In addition to energy prices, likely constraints to increased productivity of agriculture include climate change, water resources, infrastructure, education and training of producers and social or governmental policies that distort agricultural markets.

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Investment opportunities

New technologies, product platforms and innovative business models in agriculture technology and food systems will drive the shift from a conventional, environmentally harmful and socially detrimental form of industrial agriculture to a more socially just and environmentally sustainable food production and distribution system.

The agricultural technology sector is large. In the US alone it comprises over 8,500 companies generating over $1.3 trillion of revenue per year. Moreover, the volume of transactions in the agricultural sector is greater than $15 billion per year, with an estimated peak of over $70 billion in 2007.

Agricultural supply is expected to fall far short of demand over the coming decades, particularly as developing and emerging economies develop further and consumption levels increase. McKinsey, for example, estimates that land supply would have to increase by 250% over the next two decades, compared with the rate at which supply expanded over the past two decades. There is, therefore, vast room for technological development in today’s agricultural sector to boost productivity and efficiency and we expect a transition to “smart” agricultural technologies over the next decade and beyond. Agriculture is a vast and growing sector; as such, it presents massive investment opportunities.

Going into the future, "smart" (and "climate smart") agriculture will include advanced irrigation and precision technologies, benign environmental residues from chemicals, an efficient distribution and marketing system for producers and a consumer-led demand market for sustainably grown foods.

Reducing waste in the food system presents an investment opportunity with resource productivity savings worth $340 billion globally, per year, by 2030. This opportunity spans from high-income economies where supply chains are more efficient to middle- and low-income economies with less advanced supply chains (such as modern cold storage systems). In high-income economies a majority of the waste is either at the farm - where products are discarded because they do not meet quality specifications or because of over production - or by the end user. In middle- and low-income economies, however, inadequate supply chain infrastructure means that waste is concentrated, from post-harvest to distribution.

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The role of a global universal bank...

... in investing in agriculture to mitigate climate change

The global agribusiness value chain is complex and represents significant opportunities for financial institutions. Each stage of the agriculture value chain has its own rewards as well as sector-specific environmental and social risks.

Good to know: Climate Change Advisory Board
Deutsche Bank set up the Climate Change Advisory Board in April 2008. It advises management on strategic questions related to all aspects of climate change.

Members:

  • Lord Browne 

    Managing Director and Managing Partner (Europe), Riverstone Holdings LLC and former Chief Executive Officer of BP
  • John Coomber 

    Member of the Board of Directors, Swiss Re, Chief Executive Officer, Pension Corporation and Chairman, The Climate Group
  • Fabio Feldmann

    Chief Executive Officer, Fabio Feldmann Consultores and former Executive Secretary, Brazilian Forum on Climate Change
  • Dr. Jamshed Irani 

    (former Director), Tata Sons Limited
  • Amory B. Lovins 

    Chairman and Chief Scientist, Rocky Mountain Institute
  • Lord Oxburgh 

    Member of the Advisory Board, Climate Change Capital and Former Chairman of Shell
  • Professor Hans Joachim Schellnhuber 

    CBE, Founding Director of Potsdam Institute for Climate Impact Research
  • Professor Robert Socolow 

    Co-Director, The Carbon Mitigation Initiative and Professor, Princeton University
  • Professor Klaus Töpfer 

    Former Minister for the Environment, Germany
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Global Capital Markets

In providing debt and equity financing through origination, structuring and underwriting, capital markets businesses are integrating climate mitigation and adaptation strategies into their advisory services. While the structuring of these deals may be no different than “classic” transactions, an orientation is given to identify and originate much needed emissions education and adaptation opportunities. They include creative structures to finance advanced irrigation systems, tailored agricultural derivatives opportunities that emerge from unique production systems, and corporate treasury solutions for financing commodity movement, risk management and trade finance.
The growing grain and resources trade results in increasing storage, transportation, and logistics infrastructure. When evaluating deals pertaining to agricultural markets at large, keeping a diligent standard of reducing climate emissions is a needed core competence. While hedging products like swaps and options are routine for a large bank, tailoring solutions to account for the need to cut emissions is not. A transaction requires not only a sophisticated knowledge of direct agricultural commodity markets, but also experience with the carbon markets (both voluntary and mandated) as well as technical knowledge of the emissions abatement potential of a given project.
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Corporate Finance and Investment Banking

Advising major corporations, financial institutions, financial sponsors, governments and sovereigns on financing climate mitigation activities is another role of banks. Advising clients on M&A opportunities that seek to advance the climate mitigation and adaptation mission is also a key core competence of a modern climate-sensitive investment bank.
Institutions or investment banks can promote these types of investments by financing projects for firms and providing funds dedicated to climate change mitigation or adaptation (this includes determing standards and parameters to include climate change mitigation clauses). As resource productivity and climate change becomes an ever-increasing imperative for competitive businesses, corporations will need advice on mergers and acquisitions (M&A) and innovative financing structures that capture business opportunities.
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Equity Research

Building on the results of macroeconomic and trend research, food and agribusiness equity studies provide a research platform that can enhance the understanding of the sub-industries and help determine the financial value of resource efficiency and adaptation projects to corporate earnings. It is essential that sustainability and climate change risk factors are integrated into valuation models of global agribusinesses.

Asset Management

The Asset Management business is a key provider of capital and of exposure to all aspects of the agricultural value chain as well as across all asset classes.Funds focused on agribusiness can provide trading liquidity for these firms. Beyond this, asset managers, through their ownership of large blocks of shares, can engage companies and promote mitigation activities. Agricultural commodity funds provide exposure to the sector through futures contracts and are able to manage the optimum roll strategy.

Real asset funds can provide investors with several models of agricultural investing, including buy&lease or buy&operate. These funds exhibit a variety of diversification benefits as well as protection against inflation. Moreover, real asset funds focused on mitigation projects, such as carbon-efficient logistics, storage facilities and new transportation corridors, will provide benefits for these projects and provide financing for smaller projects with mitigation benefits. Sustainability-focused real asset funds that adhere to the UN principles for responsible investment (PRI) seek to finance mitigation activities or at least consider mitigation in the due diligence of the investments.

Private Equity funds offer thematic investments in young, up-and-coming agri-technology companies as well as expansion capital needed for companies providing mitigation solutions, whether they concern the improvement of farmland, farm management or vertically integrated production, processing and distribution. Technological advances at any point in the food supply chain (production, handling, logistics, processing or distribution) will require financing at various stages of development and across many countries.

Additional fund opportunities include public-private partnerships, which bring both the asset manager and the public entity (government agencies or international aid agencies) closer to their goal, providing much needed debt capital as well as equity capital.

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Public-private partnerships have a promising future. Here is an example of successful implementation: food security in Africa. Learn more

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