Food security: investing for the future

Investing in food sustainability

Inflation has put energy bills in the spotlight, but food prices are also contributing to the income squeeze.

Rising food prices made the largest upward contribution to the change in the CPI annual inflation rate between June and July, according to the Office for National Statistics.

As well as hitting consumers’ wallets, food inflation is having a wider impact on investors’ portfolios. High food inflation has supported the earnings of companies actively tackling food security, says Mayssa Al Midani, lead fund manager of Pictet-Nutrition.

“Technology that makes it possible to improve crop yields with fewer resources is seeing unprecedented levels of demand,” she says. “The inflationary commodity environment significantly enhances the value proposition of their highly efficient agricultural machinery, which enables farmers to use farming inputs, such as fertiliser, more efficiently.

“Food waste solutions, or companies that repurpose and recycle food waste into edible ingredients, also benefited from higher demand and prices of recycled food ingredients that serve as a substitute to grains."

She adds: “Food product companies with pricing power and the ability to reformulate food products to get around product supply constraints, or switch to natural ingredients that are less exposed to higher oil prices, have also proven to be resilient.”

Food is also a component of US CPI, which has likewise been rising – a reason why the US Federal Reserve raised its interest rate.

This in turn has been a factor behind value stocks having outperformed growth stocks this year, says Tom Atkinson, biodiversity portfolio manager at Axa Investment Managers.

Central banks have been raising interest rates as a result of inflation, but they have no influence over food or energy prices, reminds Frédérique Carrier, RBC Wealth Management’s head of investment strategy in the British Isles and Asia.

“The timing and level of the peak of food inflation, and the sustainability of the peak, will be largely determined by the weather, energy prices and geopolitics,” says Duncan Goodwin, manager of the Premier Miton Global Sustainable Growth Fund.

“By their very nature, these factors make definitive predictions difficult and so too the longer-term impact on markets.”

Rize ETF co-founder Rahul Bhushan expects a more prolonged period of volatility in food prices that will initiate a public conversation about food transition, comparable to the energy transition.

“We at Rize ETF have been talking about the need for a transition in food for several years. It’s now coming to a head due to the current food crisis,” says Bhushan.

Investing in the future of food

The world is at the early stages of shifting towards a sustainable food chain, says David Huggins, co-manager of BlackRock’s BGF Nutrition Fund.

“Over the next 20 to 30 years this will require tens of billions of dollars of investment into emerging technologies, such as cell cultured protein and controlled environment agriculture. 

“These are some of the most promising innovations in food and agriculture in the last century, and represent an exciting opportunity for investors focused on food and agricultural technology.”

Given inflation in input costs, Axa IM’s Atkinson says there is currently significant incentive to increase efficiency in food production.

“For example, fertiliser prices have risen significantly, mainly due to constrained supply due to the Russia/Ukraine crisis. This means farmers are incentivised to apply fertiliser more frugally, while maintaining yields.

“This is best achieved using precision fertiliser application machinery and software, which enables farmers to apply fertiliser at a variable rate, such that the most productive parts of a farm receive more fertiliser, in turn maximising the fertiliser’s boost to yields.”

Amy Clarke, chief impact officer at Tribe Impact Capital, likewise cites precision water technologies and precision weed control as further opportunities within agricultural technology, with the former reducing critical water waste and the latter reducing the need for chemical pesticides.

Carrier at RBC Wealth Management also sees opportunities in technological solutions that can increase crop yields, while reducing environmental stress and improving food security, such as:

• Gene technology: genetically modified crops that can be higher-yielding, more tolerant of drought and heavy rain, and more resilient to pests and diseases.

• Controlled environment farming: vertical farms growing produce by stacking trays of seeds and plants. Environmental factors such as light, humidity and temperature are controlled and pests are mostly eliminated.

• Supply chain technologies: for example, smart packaging that uses sensors to monitor product quality and storage conditions.

Another way to increase efficiency in food production is optimising what we already have, says Pictet’s Al Midani.

“Here, the priority is reducing waste, which currently swallows up a third of all food produced. Promising innovations include aseptic packaging, where high temperatures are used to sterilise food before packaging it, extending shelf-life without chemicals or refrigeration.

“Another approach, natural bio protection, draws on traditional fermentation principles and uses specially developed food cultures to better preserve yoghurt and cheese.”

Estimates of global food waste by sector

Junwei Hafner-Cai, a senior analyst in Polar Capital’s Sustainable Thematic Equity team, says the most viable solution to improve food security is to reduce the food system’s dependence on fossil fuels, and transition towards clean energy solutions.

“Processing and distribution account for more than 40 per cent of energy used across the food value chain, and these activities are strongly dependent on oil and natural gas. 

“Therefore using energy-efficient technologies, replacing natural gas boilers with electric boilers and heat pumps, decarbonising the transport sector via electric vehicles, powering heavy-duty trucks with green hydrogen, and using green hydrogen-based synthetic fuels for shipping and aviation will be attractive solutions.”

Besides technological solutions, a shift away from farmed meat is “low-hanging fruit”, according to Conor Walsh, lead portfolio manager of Lombard Odier’s New Food Systems strategy.

“Livestock not only consume more than a third of global crop calories, but they also occupy around 80 per cent of agricultural land, while producing only 20 per cent of global calories.

“Cultivated meats may be part of the solution to help manage the shift. Although we are in the early innings, some countries have made inroads to adoption.

"For example, Singapore [has] approved the first lab-grown meat by Californian start-up Eat Just.”

Premier Miton’s Goodwin likewise highlights the development of more intensive, laboratory-based food manufacturing as an area of potential investment.

“Albeit at the more nascent and higher risk end of the investment spectrum, in our opinion,” he adds.

How secure are we for food in the UK?

The UK imported 46 per cent of the food it consumed in 2020, with no single country providing more than 11 per cent of those imports, according to the government’s latest food security report.

“Having a diverse range of international sources makes food supply more resilient, as if the production or output of one source is disrupted, other sources can meet demand,” it reads.

Rize ETF’s Bhushan highlights how the production of various food items has ended up with the nations that are most adept at producing them, with consumers as the ultimate beneficiaries through reduced cost, variety and availability all year round.

“As a world, we have built a very interconnected and interdependent import/export economy for food. But what today’s food crisis is showing us is that interconnected systems are not necessarily the most robust. An import/export economy for food is fraught with risk,” Bhushan says.

Globalisation has been a boon to the energy and agriculture sector, says Martijn Kleinbussink, senior portfolio manager, sustainable equity at Kempen Capital Management.

“However, in some instances we are seeing its slow reversal. For instance, we have already seen examples of protectionist measures being implemented by nations like Indonesia, which temporarily limited the export of palm oil.”

Goodwin sees wholesale changes to food security policies longer term, with the prospect of food independence and de-globalisation as relevant for food as it has become for energy.

Indeed, high gas prices and the war in Ukraine have shown the ever stronger link between energy independence and food security, says Hafner-Cai at Polar Capital.

“The current crisis is disrupting fertiliser plant operations particularly in the UK and EU, therefore affecting food supply and exacerbating inflationary pressures,” she says.

“In June, [US fertiliser group] CF Industries announced it would permanently close its fertiliser plant in Cheshire due to soaring natural gas prices. This would increase the UK’s reliance on fertiliser imports and have a knock-on effect on carbon dioxide supply, a by-product of fertiliser production.”

Carbon dioxide is also important to the food supply chain, with it being used to extend the shelf life of perishables, carbonate beverages and in the processing of livestock.

With rising bills amid an energy crisis, Tribe Impact Capital’s Clarke says impact investors are accepting the themes of de-centralisation and security.

“One of the most significant vulnerabilities the UK has in terms of its food is in the quickening pace of the climate crisis and the catastrophic impact this has on crops,” she adds.

“As we [navigated the] heatwave it’s becoming clear to many that, even in the UK, we cannot rely on our environment to support us the way it has historically. There is extremely little resilience in UK food production and consumption and that is something investors must first be concerned about and second, act to address.”

Chloe Cheung is a senior features writer at FTAdviser