Written by Cheryl Wilson, ESG Senior Manager at Capital Group
The main causes of food shortages include conflict, economic shocks, climate extremes and rising fertilizer prices. With the world population expected to grow to nearly 10 billion people by 2050, agriculture is under enormous pressure to meet rising food demands amid increasing resource scarcity.
To overcome these challenges, advances in agricultural technology, reducing food waste and changing dietary habits are crucial. For long-term investors, these structural changes present both opportunities and risks. Here we highlight the most important food trends and the investment opportunities associated with them.
Seed innovation
According to the UN, nearly 40% of the world’s land area is degraded by deforestation, water and soil overuse and rural infrastructure. As arable land is not expected to expand, innovations in the seed sector are likely to play a more important role. Innovations aim to improve the resilience and nutritional value of crops through germplasm (traditional cross-breeding of plants) and genetically modified (GM) or engineered (GE) seeds (using biotechnology to introduce new traits such as disease resistance or size increase).
If 10 to 15 percent of farms began using gene-edited seeds with multiple traits by 2030, yields could increase by as much as 400 million tons, according to a 2018 World Economic Forum analysis. Such use could, in turn, help alleviate iron, vitamin and other micronutrient deficiencies in up to 100 million people.
Concerns about long-term food security and growing scientific evidence that genetically modified organisms are not harmful to health have led the European Commission to propose deregulating certain genetically modified organisms. Looser regulations and yield-enhancing innovations could further increase sales of genetically modified seeds compared to conventional seeds over the next decade.
More environmentally friendly fertilizers
Chemical fertilizers and pesticides have significantly increased agricultural productivity over the last century. Unfortunately, this has also had a major downside: damage to the environment and, in some cases, to human health.
The production of nitrogen fertilizers is incredibly energy-intensive. And this type of fertilizer releases nitrous oxide, a greenhouse gas with a global warming potential more than 250 times that of CO2 – and which stays in the atmosphere for more than 100 years on average.
The development of fertilizers that reduce greenhouse gas emissions is still in its infancy, but we believe it could be one of the most important innovations in agriculture in the next decade. Genetically modified microbes, slow-release nitrogen and targeted application technologies are among the first breakthroughs. Technologies that help reduce overuse of fertilizers – for example through precise application or the use of carbon sequestration in fertilizer production – are also growing in popularity.
Precision agriculture
To increase crop yields and adapt to adverse climatic conditions, farmers need accurate information. Precision agriculture uses field data and weather patterns to enable better decisions in real time. Advances in artificial intelligence and data analytics can lead to even more efficient resource allocation and yield increases.
New advances in precision agriculture, such as the use of artificial intelligence, could lead to even more efficient resource allocation and increased yields. One company said such innovations could create tens of billions of dollars in additional value for customers and shareholders in the coming years through cost reductions and increased yields. Regenerative Agriculture
Regenerative agriculture, which includes cover crops, multi-cropping, and the elimination of inorganic pesticides and fertilizers, improves soil health, biodiversity, and the climate impact of farming. This approach integrates seed innovation, greener fertilizers, and precision agriculture. Analysis by Bernstein Research suggests that farmers who switch to regenerative practices could see a 15-25% return on investment due to higher crop yields and lower input costs.
Nestlé is one of the companies helping to bring regenerative agriculture into the mainstream. The Switzerland-based multinational food and beverage company has committed $1 billion to expand regenerative agriculture across its supply chain by 2025.
Alternative proteins
The rising popularity of plant-based diets and growing concerns about the impact of meat consumption on health, animals and the environment are changing consumer preferences. Since 2014, demand for meat substitutes has grown six times faster than conventional meat, and the growth rate of dairy substitutes is twice that of conventional dairy products. Research by Statista Market Insights estimates that the global meat substitutes market could exceed $16 billion by 2028.
While plant-based products are currently the most important alternative to conventional meat, we also appear to be at a turning point when it comes to cultured meat: this young segment could reach parity with conventional animal proteins in the 2030s.
Investors can find opportunities not only in companies that make alternative products, but also in those that supply ingredients and formulations. For example, Givaudan is working with manufacturers to develop new formulations and has increased its focus on biodegradable and plant-based ingredients.
Waste management and reduction
According to the World Wildlife Fund, 40% of the food grown is never eaten, resulting in an estimated 2.5 billion tons wasted each year. Reducing food waste, along with reuse and recycling, is a crucial aspect of managing available natural resources and minimizing future emissions.
In the future, food waste will be used much more frequently as a raw material for alternative proteins, animal feed, fertilizers, biofuels, bioplastics and even clothing. Regulation is providing additional tailwind.
Final thoughts
Governments, regulators, businesses and consumers are rethinking the way food is produced and consumed in a world of increasingly resource-constrained economies. Innovation and disruption are already taking place in response, and we believe this trend will accelerate in the years to come.
There is no doubt that all of the longer-term trends highlighted here will suffer setbacks at certain times. However, in our view, these developments are among those that are moving food production towards a more sustainable future while also offering attractive opportunities for selective investors with a long-term perspective.
