As you have come to realize, food is the main theme of this month’s newsletter. We have already discussed several megatrends in the past newsletters, and, to my surprise, we have not yet covered the long-term trends in the agricultural industry. Some past themes, such as decarbonization and water scarcity, are closely linked to agriculture but there are also other forces at play which will increase the demand for food in the next few decades.
Population Growth and Agricultural Challenges
The obvious long-term trend that the agriculture needs to deal with is the increasing population. We have already come a long way as the population has increased from 2.5 billion in 1950 to 8 billion in 2022. Despite some of the developed economies suffering from population decline, the United Nations estimates the Earth will need to feed nearly 2 billion people more in 2050. The current trend of urbanization and income growth are also expected to continue. The result is most likely a bigger population with a calorie-denser diet. This means that the agriculture industry needs to produce more while still having the same amount of land and fresh water at their disposal. The only way to attain these higher yields from farmland is to heavily invest in new technologies.
On top of the increasing demand, agriculture industry also needs to deal with climate change. It is indeed directly affected by changes in the climate and weather. As the environment changes, farmers and companies need to adapt to the potentially altered growing seasons. This might disrupt which crops can be grown where as well. At the same time, the agriculture sector itself belongs to the biggest carbon emitters. According to US Environmental Protection Agency, agriculture accounted for 10% of the carbon emission in the US in 2022 and this percentage is higher in developing economies, where agriculture is a bigger part of the overall economic output. Furthermore, the increasingly environmentally aware customer pays more attention to where the food is coming from and how it was produced.
Opportunities in the Food Supply Chain
The two long-term trends, population growth and climate change, are relatively predictable, and the agriculture industry is already looking for solutions. This means that the companies that can provide these solutions will benefit. But where in the food supply chain is there room for improvement and where are companies investing? Perhaps the most visible part of the supply chain is the production itself. Another one in our modern globalized world would be transportation and logistics.
Advanced machinery for farming, and food production in general, offers opportunities to enhance yields. Companies such as John Deere, CNH Industrial and AGCO produce agricultural machinery that cannot only make farming less labour-intense, but also improve yields due to reduced delays and more uniform planting, which leads to higher plant survival rates. On top of improving farming operations, better fertilizers and pesticides can also increase yields. However, their use has been controversial due to environmental concerns. The runoff from these products can cause water pollution and excessive use can lead to soil nutrient imbalances, which can make the soil unusable for future farming. Due to these short-comings of the current solutions, companies such as Nutrien and Bayer have been trying to develop more environmentally-friendly fertilizers as well as integrated pest management systems that reduce the harmful effects.
Globalized Food Supply Chains and Logistics
As the food supply chain has become more global, food needs to travel longer distances and spend more time in storage. This also means that the information about supply and demand needs to travel further. There are big agricultural traders such as Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus, also known as the ABCD, that have specialized in this. Despite being relatively unknown, they currently control 75-90% of the global grain trade and therefore play a central role in the global commodity trade, giving them insights about supply and demand. This information can also help farmers to produce what is needed, reducing waste and increasing profitability. ABCDs have also built their own infrastructure to store and move food, while Cargill and Louis Dreyfus have their own shipping subsidiaries. Transport being another contributor to the carbon emissions, Cargill and Maersk (one of the biggest pure shipping companies) are implementing biofueled ships to reduce their carbon footprints. Using biofuels does not fully remove the carbon emissions but, according to US Department of Energy, they can reduce the emission by up to 86% as they burn cleaner than gasoline.
Focus on Local and Sustainable Food
Some companies, and consumers for that matter, aim to decrease their carbon footprints by focusing on locally produced food where possible. kaisin., for example, gets its fruits and vegetables from Gebrüder Käppeli Gastro-Service, which is located close to Zürich in Merenschwand. Having shorter delivery distance of course reduces the emissions from transportation, and having a local producer also helps with quality control and overall transparency. But some foods are simply not produced close by. For those living in Switzerland, that is the case when it comes to tuna. kaisin. orders their tuna from Blue You. Blue You uses growing and harvesting systems that do not use pesticides nor toxic chemicals. Their harvesting systems also do not negatively affect biodiversity nor threaten endangered species. By conducting due diligence on its suppliers, kaisin. has been able to reduce its environmental impact. However, technological developments that will enable more carbon-efficient transportation and better storage to reduce the spoilage, are still needed going forward.
Agriculture: an Investment Opportunity?
Keeping all of this in mind, it is clear that the agriculture industry is going through a transformation. This means long-term growth opportunities for companies that are able to fulfil this need. We have been invested in an agribusiness ETF for years now in our ETF-strategies as we want to participate in these long-term trends.
As the community leader for the Bergos Next Investor, Jami helps to bring relevant investment themes to the attention of the Next Community. This includes explaining general finance concepts as well as informing about current market events.