Food investment: is there appetite for returns?

Much about what we eat is changing dramatically, a transformation that is creating opportunities for investors and leading to better environmental outcomes. Is there an 'appetite' for returns in the food investment space?

| 4 min read

What we eat has never been more important. At a global scale, conventional agricultural systems have been struggling to keep up with demand without adversely impacting the environment, which is why the food industry stands at the intersection of several important structural trends.

Digitalisation, artificial intelligence and automation are increasing productivity, a necessity to keep up with a world population expected to rise from 8 billion today to 9.8 billion by 2050. Not only are there more people on the planet but dietary needs are changing, with an increasing focus on health and wellbeing in the developed world alongside more calorific and higher quality diets in developing nations as they grow wealthier.

The ’net-zero’ imperative

There is also a pressing need to decarbonise. Although the focus of sustainability tends to be on green energy and transportation, the food industry is estimated to be responsible for as much as a third of global humancaused carbon emissions and must also play its part. Finally, food security and resilience is increasingly in focus.

Geopolitical tensions and climate change are affecting the productive capacity of many regions, with rising land and sea temperatures impacting capacity and the higher propensity of drought and flooding leading to supply shocks.

There is a danger food production takes an unsustainable path to meeting its challenges, overstepping planetary boundaries that lead to destruction of forestry to make way for more food production or devastating biodiversity loss. There are potential adverse health consequences too. With more people to feed, the focus could move further away from nutrition and towards the supply of as many calories as possible for as little cost, leading to excessive food processing, use of chemical fertilisers and unsustainable packaging practices.

Although daunting, human ingenuity and innovation stand ready to surmount these challenges. There is already a broad transition underway to meet our growing demand for healthy, affordable and nutritious food made using environmentally-friendly methods. It represents a positive force for some companies, but a potential headwind to others that are unable to innovate to keep up with market forces and consumer

All parts of the supply chain are potentially impacted – from ‘field to fork’ – but particular opportunities exist in areas such as precision agriculture, seed technology, alternative proteins, waste reduction solutions, sustainable packaging and more efficient logistics. There are also new techniques being developed such as vertical farming and smart agriculture, which involves the automation of vast greenhouses with highly controlled environments.

Food investment opportunities

A range of public and private companies are looking to provide the solutions for the challenges the food ecosystem faces, and for investors there could be many evolving opportunities.

Although some businesses in these areas are early in their development, and therefore represent a very high level of risk, there are lots of mature companies which also stand to benefit from embracing these trends.

  • For example, agricultural machinery supplier Deere & Co is helping farmers adopt more sustainable practices through the precision application of seeds, pesticides, and nutrients.
  • Meanwhile, Compass Group,the world’s largest outsourcer of catering services to offices, factories and hospitals, has set 2030 targets for halving food waste and ensuring 70% of output in its top five food categories is from regenerative agriculture.
  • There have also been more established manufacturers such as Nestle and Unilever entering the plant-based meat market as diet preferences evolve.

As well as targeting particular company shares that are involved in agriculture, food production and distribution, it is possible to access broad exposure to the theme through a specialist fund or ETF in order to spread the risk and provide a more balanced approach by sector and company type, although this still represents a narrow area and should only be considered as a modest component of a broader portfolio.

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