Food: a consumer led revolution

Food is probably the single most important need for human beings. The availability or lack of food has most profound implications at societal, political, economic and financial levels. Over the centuries, the shortage of food has led to the fall of political systems and to major humanitarian crises. The food chain has also been a unique source of wealth creation for those owning strategic assets along it.

Feeding the planet is the biggest opportunity for capital to do well over time in financial performance and to do good in creating a long-term sustainable economic model.

Over the last 50 years, our food system has evolved tremendously. The primary stage has seen the emergence of a few very productive species (crops and animals) easy to breed and fuelled by fossil resources (fertilisers and pesticides). It led to a trebling of the world's population and triggered the economic growth in Asia that we experienced over the last three decades. Globalisation of trade allowed the emergence of commodity traders connecting a large number of growers to the rest of the food system through a massive logistic network. Food and beverage processors created an ecosystem of global brands to transform commodities in higher-value products. Retailers developed real-estate empires to bring these branded products to consumers with ever bigger shops (the hyper-markets).

Across the entire system, an important consolidation happened over time, leaving only (at best) a handful of players active in a specific segment/geography with tremendous market power over the 1.5 billion farmers and 7.5 billion consumers.

We witness the early signs of a 4th revolution in the food system, led by the same consumer - better informed about what is in his/her plate, making a link between food and health and understanding the impact of the current food system on climate change. In a time of unparalleled developments in technology and life sciences, the opportunity is unheard of. It is about a multi-trillion dollar food & beverage industry going through an important change, but more importantly it is about a well-fed 9 billion people living in good intelligence with their planet.

Intelligent capital and corporate leaders will look at how to thrive in this context, creating long-term value using disruptive innovation.

The current food system

A handful super stars in our plates and cups...

Global production of crops has trebled over the last 50 years (+2.2% p.a. compounded over time), building on developments around plant and animal breeding, human intelligence in agronomy and extraction of natural fossil resources to feed and protect plants. While it took 1,000 years to increase wheat yields in the UK from 0.5 to 2.0 tons per hectares, this revolution (following the one earlier in the 20th century on farming equipment) led yields to top 7.0 tons per hectares by the turn of this century (read here).

However, this is the combination of this crop productivity increase with the breeding of new - more productive - animal species which created the food system of today. The number of animals quadrupled over the period (+2.7% p.a.)

This supported the extraordinary development of global population over the same period from 3.0 to 7.5 billions (+1.7% p.a. compounded over the period).

The period saw (a few) super stars emerge to shape the way we eat today. On one hand, the sweeteners: corn (which we mostly grow to feed animals, read here for a good essay on corn) and sugar cane (80% of current sugar production). On the other hand chicken, which global population is now close to 23 billion (representing 6 month of our global consumption of 50 billion broilers p.a., 8 billion p.a. in the US only).

...Provided by a selective club of companies

The concentration around a few crop and animal species has also led over time to a similar concentration in the Primary Stage of food production.

A group of CEOs, the size of a football team, can decide what 1.5 billion farmers will grow and 7.5 billion human beings end-up eating.

For crops, only three companies represent more than 60% of the seeds market and 70% of the pesticides market (Bayer, Dow and ChemChina). A similar three companies (Cobb-Vantress/Tyson Foods, Aviagen and Novogen/Grimaud) host more than 90% of the Chicken Pedigree stock parents to all chicken (one Pedigree Hen is the parent of 3 million broilers). Very much the same for the beef or pork species.

And of course, this concentration is not limited to the Primary Stage of the food system: it is also very high along the entire value chain. It means that it has become more and more difficult for a pub-owner to avoid ABInBev's pricing power. It also means that any cupboard includes some sort of cereals transported by Cargill. And tomorrow, Amazon, with its recent acquisition of Wholefoods, could become your reference distributor ahead of Walmart (the online grocery retail market is expected to grow 10 times to $100 billions in the coming 5 years).

While in the short to medium-term the different actors will continue to enjoy above average market returns, this creates in the long-run important issues of trust in the different actors of the food system. And of course issues around sustainability (imagine the speed at which Avian Influenza could spread if reaching a Chicken Pedigree Farm...). Fusarium (TR4) is an example of a disease rapidly threatening banana plantation around the planet – with low obstacle given the lack of diversity in banana species.

Such a trend of concentration is an early indicator that the current global food system is running out of steam

The 4th food revolution: eat local and balanced

This resulting food system calls for a number of changes - some of which have started to happen. They are led by consumers who are better informed about what they eat and the effect on their health and on our planet.

The main dimensions of any physical system are space and time. The first change is a massive reduction of time and distance between production and consumption. It comes with a production system which uses local resources and is wary of waste.

The second change has most profound consequences on the current food chain: it is a change in our diets from a meaty/greasy diet towards a healthier nutrition mix, better balanced between meat, fish, vegetables and fruits.

I. Bending time and distance

The flow of materials in agriculture is not sustainable: we grow crops in Brazil ($62 billion food trade surplus in 2015) from seeds (produced in the US) feeding them with synthetic/mined nutrients (we concentrate nitrogen from the air using energy from fossil-rich Russia, or mining resources such as potash from 350 million years old seabeds in Canada), protecting them with (US/Middle Eastern fossil derived) pesticides and then transporting them to mega urban areas (60% of world GDP, a city like Tokyo should host the equivalent of 50% of the UK population by 2020).

Very few of the resulting materials (food eaten or wasted) do come back to the original location. So the world of food resembles a sum of immense black holes (the London, New York, Beijing or Mexico city of this world) attracting natural resources from very far away and returning little.

There is a very strong trend to use local resources at all stages of the value chain as we understand that using local resources (and consuming locally) is the best way to make our food system sustainable.

At the Primary Stage, companies are working to get healthier soils (with a rich microbiome) to grow more self-sufficient crops (growing healthy fruits with fewer chemical control or synthetic nutrients). A number of initiatives in that field have drawn our attention as they contribute to redefine the way we grow crops. Take for instance Pivot Bio or Aphea.Bio: they are working on the identification of microbes/micro-organisms that can enrich the root ecosystem (mobilising nutrients available around the plant rather than importing it from the other side of the planet). They understand that nature didn't wait for chemical engineers to grow plants. What is wonderful about nature is that it is less expensive than any alternative: microbes don't cost much to multiply. In addition, growers can count on tech to allows for innovation to reach and inform them (see Farmer Business Network in the US).

Along the food chain, companies are reducing the number of actors separating growers from eaters. The local food market in the US is expected to reach $20 billion next year (according to Forager), growing at more than 10% p.a. (Berenberg). In China, Meicai connecting vegetable growers to small food processors (such as restaurants) is growing at extremely rapid pace (4 years of existence and 15,000 employees).

There are also movements to produce closer to urban areas, the main one being vertical farming. With its (large) support from Softbank, we can expect Plenty to support that trend and inspire an army of urban farmers/entrepreneurs while Aerofarms has been long in the making but sees a steady stream of farm constructions now.

Retailers – under the coming pressure of Amazon (and its acquisition last year of Wholefoods) – are working on their relevance (and reduce the market power of brands) by becoming the market place for local products providing a new appeal to private labels and answering the requirements for quality and seasonality from their customers. They can use their real estate to create a dialogue with clients (both informing and receiving data) - transforming their real estate in tomorrow's Agora, an active place for local communities.

II. Balancing our plates

While most animals on earth are able to find a balanced diet for themselves, 820 million human beings chronically suffer from under-nutrition while more than a billion are at risk of obesity (a fast spreading modern day disease, more than 5% of the UK population suffers from diabetes).

The global food and agriculture system has not been designed by nutritionists in the interest of human health. It has been driven by the single mantra of "economic growth" leading on one side to volume strategies along the value chain (from Mosaic to Tyson, Cargill or Walmart) and on the other side to price strategies (with Mars, Mondelez or Coca Cola using sugar as a super-marketer : between 1966 and 2016 the global production share of sugar cane grew from 21 to 25% reducing the share of fruits & vegetables from 31 down to 25%).

Of course, the onus is not solely on businesses. Public authorities (education) and consumers bear their share of responsibility to understand nutrition needs, finding the right balance between carbohydrates (the fast, the slows), proteins and fats.

The internet/information revolution accelerates a massive trend reshaping the food industry: the move away from livestock proteins (meat or dairy).

The primary alternative to meat is fish. While volumes of fish captured at sea and inland seem to have plateaued around 90 million tons p.a. since 1990, the growth in fish volumes comes from aquaculture production with more than 80 million tons produced in 2017 (China producing more than the rest of the world combined). Aquaculture is the fastest growing market in the food sector (estimated growth of 7% p.a. taking into account the price dynamics). This represents a dynamic market ($160 billions) with important challenges (opportunities), such as the production of food for the fishes (a $60 billion market itself) and the development of solutions to protect animal health.

But other alternatives to meat are coming to market, providing a way for fruit & vegetables to regain some share of production. While at the top of consumers' "want to eat more" list, these alternatives have long suffered from less appealing flavors and textures. Recent technology developments now allow for exciting products to emerge in the market. As an example, Impossible Foods or Beyond Meat try to create plant-based products that mimic the benefits of meat for the consumers (with fascinating research on the satisfaction provided to our brain when eating haemoglobin).

New delivery formats, such as the ones developed by Soylent, playing on convenience and short time-to-meal should accelerate the delivery of these new products.

Changes in the dairy sector are also worth noting. Whereas almond milk has been far ahead so far (although its water footprint creates some debate), alternatives have most impressive growth such as Oatly (oat milk) or Ripple milk (pea based milk). Another one noticing is Halo Top - providing a healthier diet for ice cream lovers (using organic stevia as a sweetener instead of sugar cane or corn derived sugar).

The risk: reaching the planet boundaries

While the food system is changing, there is a major question on the speed of change. In particular in a context of population growth, while demand for food is expected to increase by 70% over the coming 3 decades as population and nutrition need change. In 2018, for the third year in a row, there has been a rise in world hunger (FAO report).

Food production represents 32% of global energy consumption (6.6% primary / 14.1% processing and distribution / 11.6% retail, preparation and cooking). The current food system is one of the largest greenhouse gas emitters, ranking third after China & the US. It is also fairly inefficient, with a third of the food produced lost or wasted (FAO).

Agricultural activities account for almost 70% of global water withdrawals (OECD) yet only 40% of this water reaches plants (EEA). By 2050 about half a billion people are likely to be subject to water-stress, increasing the pressure to intervene in water systems.

Fertiliser run-off from the agricultural system lead to nutrients accumulating in rivers, lakes and oceans and eventually to dense growth of plants and algae creating zones with no oxygen left for (sea life essential) plankton to grow (ocean dead zones now affect 240,000 square kilometre, an area approximately the size of the UK) (Diaz, Rosenberg).

Urbanisation (gaining on farmland) and pollution are reducing the availability of land with close to 5 million hectares of China’s farmland (roughly 15%) - an area the size of the Netherlands deemed too polluted to grow crops.

One of the most severe consequences of the current food system (intensively focused on few crops and animals) is the fact that it has severely reduced biodiversity on the planet. Every day, scientists estimate between one and 100 species go extinct.

All these issues call for a drastic change.

However the most immediate concern is the effect that climate change already has on the food system.

There has been important lack of water precipitation this year in many different geographies across Europe, Argentina, Russia, Ukraine and Australia. Forecasters assess that grain stocks around the world, excluding China, are going to be down to roughly 16% of annual demand by the end of the 2018-19 crop year.

The opportunity

Farmers, traders, wholesalers, food manufacturing companies, and retailers together make up the world’s largest sector, generating an approximate global value of around $12.5 trillion revenue, or 17% of world gross domestic product in 2013 (Natural Capital Coalition).

With increased global focus on health and natural eating, smaller food companies have grown in recent years, Consumer Packaged Good companies with less than $5 billion in sales gained 2.7 points of market share since 2011 - representing $18.1 billions in aggregate sales growth (BCG). Performance wise, products with direct sales to consumer command a 3-1 market valuation (equivalent sales) compared to products sold in supermarkets.

There are different ways to be involved in the industry and its transforming scene. Anyone looking at long-term and responsible wealth creation should understand the entire value chain in order to perform with the required risk management.

On the listed side, there are a number of good strategies out there but very few go much away from being an index to the food & beverage industry. There is an opportunity to better read the industry change in the construction of a portfolio of listed equities.

On the private side, there are many opportunities in all private equity classes, from the early seeding of ventures to growth capital or late buy-out. The best opportunities lie probably in identifying incumbent players that have a market position and the capacity to integrate change. On the private side, there are other interesting angles such as lending to credit-worthy actors in the sector (requiring capital to integrate change) and of course, intelligent land / infrastructure investment to capture the changes.

About the author

Jean Baptiste Oldenhove is one of the leading figures in sustainable investing. He is a Principal at EstariGroup.

He has been instrumental in the creation of ManorGroup over the last decade, one of the largest sustainability investment group active in over 15 geographies and 3 major industries. Among other projects he chaired the Board of Directors of Agrinos, the leading platform in microbial applications for soil & plants over its strategic transformation.