The food industry is at a crossroads. The United Nations projects the need for food supplies worldwide to increase by 50% in the coming years to accommodate population growth. At the same time, food industry players are trying to be carbon neutral, and climate change is jeopardizing large portions of the area used for crops and livestock.
“You can think about, ‘How do we make the food system lower carbon?’ Or you can think about, ‘How are we feeding an additional two billion people?’, “Said Jessica Alsford, head of global sustainability research at Morgan Stanley. “But you can’t really analyze them in isolation, because they have a real impact on each other.”
Morgan Stanley has recently produced several research reports on the future of food, identified ten key sectors for investors to monitor, which include alternative meats, precision agriculture, seeds and vertical farming.
Collectively, the sectors offer “potential revenue by 2030 in excess of US $ 1 trillion, a market size similar to that of the global pharmaceutical sector,” according to Morgan Stanley, and medium to high single-digit market growth.
The food industry is not using alternative technologies on the same scale as other industries such as renewable energy, Alsford said. “The agri-food system is responsible for at least a quarter of global CO2 emissions, but we don’t really have a scalable solution.”
However, there are some major developments that look promising for furthering industrial adoption of this technology.
In July, the United Nations hosts a Food Systems Summit, with a focus on reforming the food system and meeting sustainable development goals. The European Union has the details Farm to Fork Strategy on the spot, and China fourteenth five year plan includes a focus on more self-sufficient agriculture and improvements to seed technology.
Investing in the food industry poses challenges, including a lack of pure play in publicly listed markets. While offering investment opportunities for portfolio diversification, Alsford notes that sustainability in the industry is not always clear. For example, fertilizers can be essential to produce more food, but synthetic fertilizers contribute to greenhouse gas emissions.
“For investors, this type of valuation is very important and thinking about where you want to allocate your capital,” Alsford said.
Here are three areas that he thinks investors should pay attention to when investing in a food future.
Consumer Trends Drive Growth Categories
Since there is a fragmented early stage sector in this theme, customers play a big role in shaping the growth of the industry. “It’s much more dependent on all consumers changing habits, as opposed to the current top-down regulations,” Alsford said. In addition, monitoring trends will help identify sectors where investor growth and returns are increasing.
One particular trend he has noticed is meat consumption, which represents a large proportion of the emissions of the factory food sector.
Alsford notes that many of the developments in plant protein are driven not only by “vegetarians and vegans, but also meat eaters seeking low-carbon alternatives.” However, although plant-based meat production is less carbon intensive than meat, industrial growth can lead to additional environmental or sustainability problems.
Morgan Stanley predicts the combined market for meat and plant-based dairy will grow to more than US $ 80 billion by 2030.
Alsford also noted consumers are asking brands to think about sustainable packaging, such as using aluminum which is more recyclable than plastic. In addition, the origins of food, including its carbon footprint, fair trade status, or use of forced labor are becoming increasingly important to consumers.
Opportunities From Increased Technology Adoption
The food industry has not experienced the same technology investment as other industries, Alsford said. “But we’re starting to see it coming either in terms of farmed meat or vertical farming or precision farming.”
Precision agriculture, which Morgan Stanley identifies as a preferred sector, does this by using data – obtained by drones, satellites or sensors – to optimize yields. For example, identifying how plants in part of the same terrain might require different amounts of water. Precision agriculture can also reduce the use of products such as fertilizers. The Biden administration and the European Union have shown support for the concept, and in the next decade the market is anticipated to be worth some US $ 17 billion in revenue.
“That’s what hasn’t been there historically with agri-food,” says Alsford. “Data hasn’t been utilized in the same way as in other industries.”
While other innovations, such as vertical farming, offer possibilities, although they are limited to certain crops such as green vegetables or strawberries. The method, which can reduce space requirements by up to 99% while also using less water and requiring no pesticides, is expected to have a compound annual growth rate of around 25% through 2030.
Sustainable Supply Chain
“When we think about sustainability, we think about products, but then we also think about, ‘How can a company manage its own operations?’,” Says Alsford.
Morgan Stanley has identified a transition leader in the industry based on the “nutritional content of products being sold today and their carbon intensity” and “the transition to healthier, lower-carbon diets.”
Companies integrating regenerative agriculture are examples of supply chain greening, says Alsford and transition leaders like Danone and PepsiCo are using this technology.
“You can change agricultural practices, for example, by planting cover crops, and those cover crops can actually take carbon dioxide out of the air from absorption in the soil,” Alsford said. “So you are helping farmers to improve their farming practices, but also reduce the climate impact.”
But innovations like regenerative agriculture are not only good for the planet. There are financial benefits too. About a third of conventional farmers’ gross income is spent on fertilizers and seeds for conventional fields, but this drops to 12% when using regenerative farming methods according to a 2018 NIH study.