This report touches on the recent equity market context but its focus is to describe some of the often under-reported thematic investment opportunities in food and agriculture.
After suffering a sharper setback than the wider global equity market in the first quarter of 2020, the Sarasin Food and Agriculture Opportunities Fund portfolio has seen a steady recovery since the low point last March. This reflects the attraction of many fundamental growth opportunities in the food economy and has been both broad based and not so dependent on the rerating or exuberance seen for example in the US technology sector: Amazon, Apple, Facebook and Microsoft have now grown to make up 10% of the MSCI AC World Index. After rising by ten times since March, the market capitalisation of Tesla, at $600bn, is more than half the value of all other listed global car manufacturers combined; and lossmaking Snowflake’s share price has more than doubled since IPO in September, to give a market cap of $80bn on forecast sales in 2021 of only $1bn.
This monetary policy and speculation fuelled excess is not a rational benchmark against which to consider the steady year-on-year growth to be found in the food economy. As we’ll discuss, there are many fast-growing opportunities to be found in food, but the background drivers of the theme are the long-term, inexorable growth in the number of mouths to feed, the gradual improvement in standards of living for billions of people, the productivity to be gained from applying technology to a vast inefficient industry and the evolution of diets to be healthier, more accessible and more sustainable.
AFTER THE PANDEMIC
In 2022 the global economy will still bear the scars of Covid and after a period of recovery with significant regional variations, growth will settle back to a slow rate. China contained its epidemic by the end of March 2020 and has led the recovery. We can hope that a year later, the rapid roll-out of vaccinations is now set to reduce the rate of transmission and substantially lessen hospitalisation rates in most developed countries. This should allow governments to relax social distancing measures and release a wave of pent-up consumption demand. Developed market consumers have accumulated savings that will be spent in restaurants and bars, on transport, in hotels and on entertainment in 2021.
Without the benefit of Paycheck Protection Programs, government handouts and state healthcare, most developing economies will be slower to recover.
This pattern has been reflected in recent regional investment returns – we have seen a number of Chinese food companies leading the way: the fund’s holdings in China Mengniu Dairy and Meituan saw share prices rose 40% in H2 20. Developed market hospitality-linked share prices have also begun to recover, particularly since the announcement of the success of vaccine trials in November. Compass and Aramark (catering), Middleby (equipment for restaurants), DS Smith (cardboard packaging), and speciality food suppliers have all seen share prices pick-up.
Emerging market consumption will be last to recover but may have more enduring growth tailwinds as standards of living and spending on food have most scope to grow in the long-term. Attractive investment candidates in EM are relatively scarce but we do hold shares in two smaller Indian companies with exciting longer-term prospects.
HEALTHIER, MORE SUSTAINABLE, MORE NUTRITIOUS
But the longer-term opportunities are much more thematic than regional. Covid has accelerated many trends already underway. Wary of where the virus came from, and increasingly alarmed by climate change, consumers are more suspicious of animal protein and are more concerned about their health. Vegan, vegetarian and flexitarian diets are a rapidly growing trend, with supermarkets and food manufacturers responding with new meat-free and dairy-free products.
The fund has a small holding in US plant-based meat company Beyond Meat which is seeing strong take-up of its product range internationally – the plant based meat market is expected to grow at 15%-20% p.a. over the next few years. Another holding is Health & Happiness, a Hong Kong based company that sells infant formula and nutritional products for adults, mostly in China. Two other key holdings in this theme are Kerry Group and DSM. Kerry has a breadth of technical product process expertise to help global food manufacturers develop new products that respond to changing consumer demands for more sustainable, nutritious and tastier ingredients. DSM has a strong pipeline of innovation projects, in both human and animal nutrition, that help to shift food and health products towards more sustainable solutions. Its science base offers the prospect of long-term, steady mid-single digit revenue growth, with some margin expansion.
ONLINE FOOD DELIVERY
We’re all Zoomers now, and as Covid has forced many consumers to immerse themselves in the online world, the demand for home delivery of groceries has soared. In three months, the UK food retail market share for online sales jumped from 7% to 13%, limited only by hitting the maximum capacity for delivery slots. With its online software and automated warehouse technology Ocado is a clear winner from selling its capabilities to supermarket groups around the world looking to maintain market share in the shift from bricks to clicks. We have been long-term shareholders and took some large profits as the shares rose in 2020.
We’re all Zoomers now, and as Covid has forced many consumers to immerse themselves in the online world, the demand for home delivery of groceries has soared
Takeaway food is not new (there is evidence of takeaway food outlets in the ancient Roman ruins of Pompei) but, like home delivery of groceries, the already growing trend in delivery of restaurant meals has been accelerated by online and smartphone shopping adoption. Like other retailers, for many restaurants their online business has become a mainstay. Competition among platforms can be intense and the successful business models are those that have built network effects and offer the most utility to consumers – most users have a primary marketplace app. The fund invests in Just Eat Takeaway, Delivery Hero and Meituan, providing wide geographic exposure to the leading marketplaces, and also holds shares in Hello Fresh. The latter is a different model, delivering meal kits for customers to cook themselves. It is based in Germany but operates in 12 countries and now has over 2 million consumers in the US. WFH means more cooking at home and even when commuting returns, the habit of cooking easy recipes with all the ingredients supplied and no waste is likely to remain very popular.
AUTOMATION AND FARM TECHNOLOGY
On the subject of waste, the food chain has many inefficiencies, with over a third of all food going to waste and high labour inputs in often unpleasant and low-paid tasks. Technologies already commonplace in other industries are being modified for the food chain. For example, face recognition technology used in mobile phones is being adapted to provide ‘leaf recognition’, which means that farmers can target individual plants when spraying, rather than entire fields. This technology is being introduced by John Deere in their ‘technology stack’ of innovations to help farmers cut costs and improve productivity (crop sprays are one of farmers’ highest input costs and John Deere’s ‘See & Spray’ technology could potentially save them over 75% of the cost).
The opportunities to use automation technology to improve productivity extend right across the food chain. Returning to Ocado, they are among the leaders in developing the artificial intelligence, vision systems and ‘haptic’ technology for robots to pack groceries. This technology could be used in multiple applications, for example to pick soft fruit berries without damaging them. Another holding, Middleby, the largest global manufacturer of commercial cooking equipment, is similarly applying technologies in kitchens to improve labour efficiency, reduce energy use and cut waste. This is the early stages of a revolution that will transform the way that food is grown, harvested, delivered and prepared over the next decade.
SUSTAINABILITY AND CLIMATE CHANGE
As well as changes downstream, radical changes are likely to occur upstream in the production of food. Agriculture will need to be more sustainable and less intensive, which means reduced waste, healthier soils, reforestation and reduced chemical use. Subsidies encouraging intensive production and over-supply will be replaced with ‘public money for public good’ policies to restore wildlife and tackle climate change.
The International Panel on Climate Change (IPCC) calculate that agriculture, forestry and the change of land-use account for as much as 25% of human induced GHG emissions. Agriculture is one of the main sources of emitted methane and nitrous oxide and it takes more than a calorie of fossil fuel energy to produce a calorie of food. Climate change will also continue to be one of the biggest risks to the agricultural sector. Recent changes in the climatic pattern, particularly water irregularity are having increasingly large impacts on crop health.
These adverse impacts are a real challenge to consider in the fund strategy. Whilst the fund has invested in a manufacturer of irrigation systems in India, our main activity has been in selling-down exposure to fertiliser producers and other agricultural chemical manufacturers. Despite their important role in growing crops, in most cases we see the costs to natural capital outweighing the financial capital potential.
There is no question that a very significant change in land use and farming practices is coming and we are exploring many of the ways in which food can be produced more sustainably, from vertical farms to lab-grown meat, insect protein to edible algae.
Scientific advances on a very large scale are needed to solve the problems of climate change and biodiversity loss and similarly, very large amounts of capital will need to be deployed across the food chain (from field to fork). In addition to the automation and farm technology advances described above, we expect to see huge strides in understanding the workings of our gut biome, for example ‘nutrigenetics’ with diets tailored to both your individual microbiome and DNA, and ‘neurogastronomy’ which combines neurology and food science to change behaviour (did you know that crisps feel softer if we can’t hear them crunching and desserts taste creamier if served in a round bowl rather than on a square plate?).
Looking beyond the pandemic investors must assume a gradual reduction in extreme central bank policy support, and a greater influence of longer-term fundamentals to drive equity investment returns. The re-rating of share prices needs to be replaced by underlying sales and earnings growth. After a short period of recovery, demographics, debt and disruption from technology will all continue to subdue global economic growth rates compared with recent decades. Many companies and industries, from oil companies to banks and retailers to taxis, face challenges that have impaired their ability to make the profits they did in the past.
For equity investors the best opportunities lie not in seeking broad-based leverage to a rising economy but in anticipating and participating in the positive secular changes within economies.
Food is the world’s largest industry yet often ignored by investors. The food economy is set to continue growing inexorably as both volume and value increase. We continue to explore with fascination the evolving changes and breadth and depth of opportunities that make this such a diverse, enduring and growing theme. Our experienced and dynamic thematic team are ideally placed to explore all aspects of the interconnected world of food and to discover the investments where long-term value will be created.