investment viewpoints
Investing in the future of food
There is an urgent need to re-evaluate our wasteful and unsustainable food systems if we are to meet the challenge of feeding a growing global population amid geopolitical shocks, climate change and unprecedented biodiversity loss. How can investors align portfolios with this shift?
| Need to know:
|
|---|
The keys to unlocking new systems and profit pools
Moving to more sustainable food systems is dependent on investing in solutions that not only boost agriculture productivity and help improve nutrition for people worldwide, but also reduce negative impacts on the planet. Agriculture is a primary driver of planetary boundaries transgressions, and transitioning to models stands to potentially unlock annual revenue streams of USD 1.5 trillion by 20301, up from an estimated pool of about USD 727 bn in 2021.
At LOIM, we focus on several investment sub-themes that we believe are key to unlocking these new profit pools, including:
1. Sustainable food production: a USD 600 bn market in 2030
Growth opportunities exist for companies producing biological and synthetic inputs and food products. These include businesses focusing on:
- Aquaculture
- Animal feed and health
- Fertilisers
- Agricultural products
- Food additives and ingredients
The transition to new food systems will change the type of foods we consume and the way we produce them. This has implications for the growth of sustainable aquaculture, for example, which has numerous sustainability benefits over agriculture, including a modest emissions intensity compared to terrestrial livestock, in particular cattle. Reductions in wild fish supply by 2050 mean that the aquaculture market will need to grow from 115 m tonnes in 2018 to 150 m tonnes by 2050, according to the World Resources Institute.2
A greater focus on sustainable animal feed and health will enable us to maintain a much smaller but much cleaner animal-based food production.3 Inefficient livestock consumption of crop produce is currently a huge problem, as just 55% of the world’s crop calories are eaten directly by people, while 36% is used for animal feed, requiring a process whereby we ‘cut out the middle-cow’.
Clean and bio-based fertilisers will need to replace fossil fuel-based ones, while new food additives and ingredients must be substituted for old ones to manufacture plant-based foods in lockstep with improving technologies and shifts in consumer preferences.
2. Enabling solutions: a USD 100 bn market in 2030
We are interested in the potential for companies which provide specialised products and services that enable transformations along the value chain. These include companies focusing on:
- Farming and food equipment
- Enabling technologies
- Food packaging
- Life sciences
- Logistics and delivery
Enabling solutions will help build innovative cross-cutting business models. We expect to see the rise of new electrified farming equipment that is compatible with regenerative and precision agricultural practices, for instance. Enabling technologies will also help us make better production and consumption decisions. For example, satellite monitoring can track the health and abundance of crops and use this data to adjust watering and feeding cycles to maximise yields. The targeted application of fertilisers will reduce waste and help restore soil health, and resale apps can prevent unwanted but good food from being wasted.
New food-manufacturing equipment will emerge, notably to produce a range of alternative proteins at scale. Innovations in food packaging, logistics and delivery will both improve speed to prolong the life of produce and products, reducing wastage.
3. Sustainable food consumption: a USD 800 bn market in 2030
Consumer-facing companies which manufacture, retail and serve food are well-positioned to benefit from the transition, such as those engaged in:
- Food manufacturing
- Food retailers
- Restaurants and canteens
The food and drinks that we manufacture, distribute and consume will change profoundly in the coming years. We estimate that intake from some food groups, such as red meat and sugar, will drop by 50%, while demand for other food groups, such as legumes, vegetables, nuts and fruits, will increase by at least 100%. The meat and dairy aisles of supermarkets and options on restaurant menus are likely to shrink as plant-based foods transition from being alternatives to the norm.
This transition will be underpinned by the accelerating pace of innovation in plant-based, fermented, cultivated and insect-based proteins by 2030. In turn, this should change what food is provided to consumers as companies take advantage of expanding alternative-protein profit pools.
A non-linear transformation
In our view, the transition to new food systems will not be a linear process in which a primary focus on increased production is followed by sustainability concerns. In contrast, it will be a disruptive systems-change warranting a thematic investment approach.
Our focus on clear sub-themes guides us to key interactions within the value chain, and those between the value chain and the environment, that are driving the transition. We then assess whether they are generating investment opportunities and aim to generate alpha by capturing shifts in profit pools, with an emphasis on quality.
This approach includes the integration of forward-looking sustainability analysis and metrics, such as implied temperature rise and forest management, in addition to ESG scores.
Capturing inflection points
Our research suggests that 10 out of 13 sectors underpinning the new food systems will have reached inflection points by 2030, setting innovations on a course towards mass-market adoption. For example, technologies supporting the transition in aquaculture have already reached the mass-market phase, while the transition in fertilisers, employing green ammonia and circular bio-fertilisers, is at an earlier stage, with the potential to scale up significantly. We define inflection points as moments when markets find a new equilibrium as sustainable products and services progress from niche to mass market.
MARKET INFLECTION POINTS: AN ASSESSMENT COVERING 13 FOOD SYSTEM SUB-THEMES, WITH A HORIZON OF 2030
SUSTAINABLE FOOD PRODUCTION
| SUB-THEME | KEY TRANSITION SOLUTIONS | MATURITY | BARRIERS TO SCALE | RISK/ RETURN PROFILE | DEMAND OUTLOOK | INFLECTION POINT REACHED BY 2030? |
|---|---|---|---|---|---|---|
| Aquaculture | Non-fed aquaculture, sustainable feed1 | Mature | Medium | Medium | Good | Likely |
| Agricultural products | Regenerative agriculture, alternative proteins2 | Emerging | Medium | Medium | Good | Likely |
| Food additives & ingredients | Alternative protein ingredients3 | Emerging | Low | Low | Good | Likely |
| Animal feed & health | Sustainable feed, preventative animal welfare4 | Mature | Low to medium | Low | ST Good, LT Poor | Feed: likely (for some products) Health: uncertain |
| Fertilisers | Low-carbon and bio-fertilisers, green ammonia | Emerging | High | High | Good | Unlikely |
ENABLING SOLUTIONS
| SUB-THEME | KEY TRANSITION SOLUTIONS | MATURITY | BARRIERS TO SCALE | RISK/RETURN PROFILE | DEMAND OUTLOOK | INFLECTION POINT REACHED BY 2030? |
|---|---|---|---|---|---|---|
| Food & farming equipment | Electrified and smart equipment,5 alternative protein infrastructure | Mature | Medium | Medium | Good | Likely |
| Life sciences | Synthetic biology | Mature | Medium | Medium | Good | Likely (for some products) |
| Enabling technologies | AI & predictive analytics, track & trace solutions5 | Growth | Low | High | Good | Likely (for some products) |
| Food packaging | Bio-based packaging6 | Emerging | Low | Medium | Good | Likely (for some products) |
| Logistics & delivery | Electrified transport, smart distribution, food | Growth | Low | Medium | Good | Likely (for some products) chain improvements7 |
SUSTAINABLE FOOD CONSUMPTION
| SUB-THEME | KEY TRANSITION SOLUTIONS | MATURITY | BARRIERS TO SCALE | RISK/RETURN PROFILE | DEMAND OUTLOOK | INFLECTION POINT REACHED BY 2030? |
|---|---|---|---|---|---|---|
| Food manufacturing | Alternative proteins, increased fruit & veg | Emerging | Medium | Medium | Good | Likely |
| Retailers | Alternative proteins, local sourcing, increased fruit & veg, food resale8 | Emerging | Low | Medium | Good | Likely |
| Restaurants & canteens | Alternative proteins, local sourcing, increased fruit & veg, food resale | Emerging | Low | Medium | Good | Likely |
Source: LOIM amd SystemIQ. Notes: 1 Aquaculture companies must work with animal feed manufacturers to source sustainable feed. 2 Including insects, fermented, cultivated and plant-based proteins. 3 Including enzymes and nutrients. 4 Including health planning and vaccines. 5 Including precision ag, robotics and indoor farming (e.g. CEA). Incl. blockchain & RFID. 6 Incl. bio-coatings. 7 Including cold chain management. 8 including food waste resale apps.
These paradigmatic shifts will disrupt profit pools, either by altering the opportunity set in existing markets or by creating new sources of demand, thus causing an abrupt materialisation of risks as well as unlocking potential upside for financial-market investors.
In listed equity markets, opportunities can be captured by investing in companies transitioning their business models in anticipation of shifting profit pools, as well as by investing in new enterprises targeting new profit pools.
At LOIM, we aim to invest in innovative, proven products and solutions with the potential to transform food systems. To discover more on how LOIM is investing in the future of food, click here.
Sources
important information.
For professional investor use only
This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited which is authorized and regulated by the FCA. ©2022 Lombard Odier IM. All rights reserved.
