As rolling 10-year annualized returns of industrial commodity investments are producing the largest losses since the Great Depression, investors may want to turn to agricultural commodities and food products, where global demographic trends point to further sustained growth.
But although global trade in food products continues to expand rapidly, the structure and pattern of trade differs significantly by commodity and by region.
The Food and Agriculture Organization of the United Nations predicts that by 2050 the world’s population will reach 9.1 billion, an increase of 34 percent. Almost all of the population growth is confined to developing countries, where large segments of society are elevated from poverty to form growing middle classes.
To feed this larger, wealthier and increasingly urban population, food production will need to increase by 60 percent from a 2005-2007 baseline to 2050, according to an FAO report on the state of the agricultural commodity market.
“An estimated annual average of US$83 billion of net investment in developing country agriculture will be required to deliver this production increase,” the UN organization says.
Not only will a larger global population necessitate the production of more food but consumption habits will also change as incomes in developing and developed countries continue to converge.
Animal proteins and processed food
While the per capita consumption of animal protein and sugar in developed countries has plateaued, income increases and urbanization in developing countries have brought a change in lifestyle and diets.
This includes a shift from a traditional cereal-based diet to a more protein-rich and diversified nutrition, and greater demand for processed and prepared foods.
As a result, the consumption of meats, vegetable oils and sugar, which currently account for 35 percent of the average caloric intake in developing countries (up from 30.1 percent in 2002), will grow further.
The FAO report estimates that between now and 2024 more than 95 percent of consumption growth will be in the developing world.
Vikram Mansharamani, lecturer at Yale University, expects “meat demand to skyrocket, generating inordinate pressure on the entire value chain for animal protein and stressing an already precarious environment.”
In fact, meat production has tripled in the last four decades and is forecasted to double again by 2050.
But, relying on beef, pork and chicken to meet protein demand will come at a significant ecological cost, he wrote in a note in 2015.
Not only will it put a strain on the land that is available for agriculture as livestock production uses about 30 to 40 percent of the world’s arable land. But globally livestock also produces 7.1 gigatonnes of C02-equivalent per year. This represents about 14.5 percent of all anthropogenic greenhouse gas emissions.
According to the FAO, cattle raised for both beef and milk is the animal species responsible for most emissions, representing 65 percent of the livestock sector’s emissions. The figures combine emissions related to feed production and processing, enteric fermentation from ruminants and the use of fossil fuels in the processing and transportation of animal products.
Alternative protein sources
Mansharamani argues that to mitigate the environmental impact of animal protein production we will have to turn away from traditional livestock as a source of protein.
He suggests future alternative protein sources might include insects, lab grown meat, algae and peas.
Protein bars using flour from crickets as a protein base are already available from start-up firm Exo. The company touts crickets as the “gateway bug” and, due to their 65 percent protein content, a more logical protein choice than beef, chicken or salmon.
Meanwhile companies like Beyond Meat and Hampton Creek are producing meat and egg substitutes using pea and soy protein.
Google co-founder Sergey Brin is one of the financial backers of a project that produces animal protein in a different way: by growing burger meat in a lab. These burgers, developed by the University of Maastricht in the Netherlands, are made from bovine stem cells, which are incubated to multiply and take about six weeks to grow into muscle fiber.
Like other protein alternatives, lab-grown burgers have the potential to address concerns about food supply, the environment and animal welfare.
Yet, their true ecological impact will depend on how energy intensive mass-scale production methods are going to be.
Initially at least, the innovation in food production will be about greater choice rather than large-scale disruption of existing methods and dietary habits.
A 2014 report by Lux Research ‘WhooPea: Plant Sources Are Changing the Protein Landscape,’ for instance, concludes the dominance of meat and seafood will wane and alternative protein sources could take up to a third of the market by 2054.
More cultural diversity
The level of innovation in food production shows there is no shortage of potential investment opportunities.
Cayman-based fund manager Michael Kyne of Prairie Wind Advisors is launching a fund in April that will focus on investments in agriculture, food, health and the environment.
In addition to population growth and the growing middle classes in developing countries which change food consumption habits and demand, Kyne sees other food trends within developed markets, where his Harvest One Fund will seek to make investments.
Large scale immigration and accompanying cultural changes, such as a larger Hispanic population in the United States, are already reflected on the supermarket shelves. This has created a surge of new food companies in the last five years and has resulted in existing food producers embracing the trend in an effort to boost growth rates, says Kyne.
He cites the brand Goya from Puerto Rico and the now widely available Sriracha hot sauces as examples.
To make start-ups and smaller companies an interesting investment, Kyne says, he likes to see a business that is very entrepreneurial with little debt and that has a defining advantage over its peers in a new and growing market. In addition, the businesses have to show the ability to stay on top of developments within their industry and evolve with the market.
The cultural change in food preferences extends to restaurant chains. Ethnic food chains have seen the strongest growth in recent years with the most prominent examples in the U.S. being Chipotle, El Pollo Loco and Pollo Tropical. Kyne sees further growth potential in chains that cater to specific cultural offerings and demand for fresh, healthy food.
The market for organic foods in particular has exploded and brought about entire grocery chains like Whole Foods and Fresh Markets. Kyne believes the trend is closely aligned with the desire of an older population to live longer and better than previous generations. Supported by the demographics of an aging society, demand is likely to grow.