Food for thought

29 Apr 2021

Global warming and population growth could force radical changes to our diet. Mark Dunne looks at what could be on the menu.

Insects could one day be hailed as humanity’s savour. Yet crickets, grasshoppers, termites and beetles face competition from meat grown in labs, processed vegetable proteins or pills to provide the nutrition that will sustain us in the decades to come. Such a radical change to our diet appears inevitable and it could pay for long-term investors to understand the headwinds facing the food industry.

For starters, there will be many more mouths to feed. Indeed, our planet will have more than 11 billion citizens by the end of the century, the UN believes, up from almost 8 billion in 2019. More people mean a greater demand for freshwater, which you cannot grow crops without. Yet its supply is fixed and there are already shortages in some parts of the world. Global warming is another factor effecting food production.

“Climate change and the food chain are intricately linked,” says Yuko Takano, who manages the Sustainable Global Equity, Sustainable US Equity and Future Food strategies for Newton Investment Management. “The warmer it gets, the greater the impact on ecosystems and the less arable land there will be.” The food chain has been globalised so companies can offer consumers what they want to eat no matter the season.

Food chains have, therefore, become dependent on regions where rising temperatures and water stress are affecting production. “Changing temperatures are having an impact on yields, which is a critical issue for farmers,” says Agne Rackauskaite of Impax Asset Management and co-portfolio manager of the BNP Paribas SMaRT Food fund.

When it comes to climate change, food is caught between a rock and a hard place, says Yasmine Svan, a senior investment analyst in Legal & General Investment Management’s (LGIM) stewardship team. “Food is a significant contributor to the problem but is also feeling the physical impacts of climate change sooner than other sectors.

“While in the short term, countries that are already food insecure are likely to be more negatively impacted, an unmitigated temperature rise longer term would be catastrophic for global food supply chains,” she adds.

Yet climate change could have an upside in some areas. “The impact of temperature change is variable. It will be negative in some regions, but positive in others,” says Brian Kernohan, chief sustainability officer, private markets at Manulife Investment Management and its Hancock Natural Resource Group subsidiary. “Warming trends may create more sunshine and less fog, which will impact the production of nuts, for example,” he adds. “Cooler temperatures in other areas could limit the window for planting and harvesting row crops.”

Stéphane Soussan, who manages the CPR Invest – Food For Generations fund at CPR AM, a subsidiary of Amundi, agrees that rising temperatures could have a positive impact on crops in traditionally cooler areas. “In some parts of the world there is a negative impact on agriculture yields, but it is not a worldwide phenomenon,” he adds.

Kernohan’s colleague, Oliver Williams, who is head of agricultural investments at Hancock Natural Resource Group at Manulife Investment Management, says: “Agricultural producers have to deal with variable weather patterns and so must build management systems that are flexible and adaptable,” he adds.

The Covid diet

Another factor impacting what food we keep in our kitchen is Covid-19. Initially, the pandemic disrupted harvests and production lines. Supply was hit further by borders closing and some drivers refusing to deliver to Covid hotspots.

However, some food producers recovered faster than others. “We saw a lot of resilience in some parts of the value chain,” Rackauskaite says. “Vertically integrated larger brands which have full control over their supply chain adapted much better to the changing environment.”

Soussan adds that production was relatively good in 2020 and that Covid’s impact was felt most in the processing and delivery areas of the industry. “Meat processing in the US is where we have seen a relatively high number of Covid cases,” Soussan says.

This was mainly a result of working conditions, Svan says. “Some food companies failed to introduce adequate health and safety measures to protect their staff from Covid-19.” Investors specialising in food have faced a difficult period, but some are optimistic. “We were encouraged that while there were periods when shelves were empty, farms were not, so there was sufficient resilience to keep us ticking along,” Rackauskaite says.

Covid has changed some government food strategies as well as consumer demands. Rackauskaite says that the pandemic highlighted weaknesses in the supply chain, which has led to shifts in consumer behaviour. “People are a lot more focused on safety and testing, while countries which are big food importers have started prioritising food security,” she adds. Singapore, for example, relies on food imports but has speeded up its vertical farming strategy since the pandemic hit and has started regulating alternative meat products.

Meanwhile, some consumers have started shopping for fresh food online since the lockdowns began, which may have removed some of their concerns and could drive growth in online food shopping post Covid.

Then there are reports that obese people suffer more severely from Covid. This has led to vitamin and probiotic companies reporting rising demand for their products during the pandemic, Rackauskaite says. “It is not just the same consumers buying more, it is a new group who are taking an interest in immunity boosters,” she adds.

Funding the defence

“There are challenges across the food chain,” Rackauskaite says. Challenges that she seeks to tackle at the BNP Paribas Smart Food strategy through lowering the environmental impact of agriculture, provide nutritious food, improve safety and promote animal welfare standards.

“A solution to changing temperatures is agricultural machinery that helps farmers adapt to these factors by providing greater precision,” Rackauskaite adds.

She also uses non-genetically modified seeds that adapt better to regions that are prone to draught or higher temperatures. Newton’s Future Food fund also focuses on agricultural machinery and software, especially automation. Drones are used to monitor large farms and plantations, while sensors detect the height and colour of plants to decide how much fertiliser to administer. This is what Takano calls the “technification” of farming.

“This is not like big tech, which is super advanced,” she adds. “Technology in agriculture comes from a low base, so innovation has a huge impact.” Williams also sees the positives that tech can have here. “Automation is bringing greater efficiency by using less water, emit- ting fewer greenhouse gases and ultimately producing more nutritious food.”

But this could need huge investment. “Climatic shocks have doubled in the past 20 years,” Rackauskaite says, “which has an impact on smaller farms that cannot invest to adapt.” Soussan says that modern farming techniques are having a negative impact on the planet because they use too much freshwater and pesticides. “One of the big challenges of food production is to produce more for a growing population, with less input,” he adds.

It is not only about tech. Farming contributes to biodiversity loss, soil erosion and deforestation. During its engagement work with food companies, LGIM encourages a move to regenerative agriculture, which means farming using fewer chemical inputs, while leveraging interventions such as crop rotation, cover crops and agroforestry. Consumer goods companies are setting sourcing targets, such as buying X% of their corn from regenerative farms. “This is a result of investor pressure,” Svan says.

Yet, despite knowing what is needed to tackle the headwind approaching the industry, the lack of a roadmap could be a problem for some. “What makes this sector particularly challenging to engage with on a climate change basis is the lack of frameworks,” Svan says. “The sustainable development goals (SDG) provide a great starting point, but where we run into challenges is that there is no net-zero roadmap for food in the way that we have for oil and gas or utilities.”

There is also a lack of scenarios which outline what a net-zero system looks like for food. The IPCC tells us that the world’s crop land needs to shrink by the size of South Africa, according to the IPCC, but what does that mean for food producers. “The SDG are adequate as a sustainability roadmap to highlight the pressure points of, among others, food security,” Kernohan says. “Yet they are not designed to provide turn-by-turn instructions for getting from A to B.”

Alternative tastes

If it looks like a burger, feels like a burger and tastes like a burger, it does not necessarily mean that it is a burger. The range of meat and dairy substitutes is growing. In the US, for example, vegetarians and vegans account for 6% of the market, while people who do not rely on red meat for their protein intake, known as flexitarians, make up a quarter of the population, Takano says. “A lot of these plant-based meat companies are trying to cater for flexitarians. That implies a much bigger market size,” she adds.

Lab grown meat could ease concerns that there might not be enough protein to feed the world’s growing population, but it is not in the commercial phase yet. “Lab grown meat is meat, it is not beans,” Takano says. “When it commercialises, regulators will have to decide if it is a safe alternative to meat.”

Such alternatives are not just for vegetarians or vegans, but the mainstream consumer. They are more aware of the environ- mental and social impact of eating animals. Livestock contributes almost 15% of global harmful gas emissions through methane and the conversation of the land to feed them. “People are focused on their health but are also concerned about the climate impact that their food has,” Takano says. “They are more aware of where the food they consume comes from.”

Covid has accelerated this awareness. “The pandemic woke a lot of people up to sustainability,” Kernohan says. “Covid coming from an interaction between wild animals and humans has led to people questioning the sustainability of the food they eat, where it is grown and how.”

Soussan believes there is no need to recreate the look, texture and taste of beef. “Why try so hard to mimic meat? Working on a tasty plant-based protein could mean less processing and a lower investment.”

Yet some of the plant-based alternatives on the market are not the health fix that they appear to be. “It is heavily processed, so it is no panacea,” Soussan says. “For me, the positives outweigh the negatives for this new segment,” he adds, “so it should continue to grow.”

A new menu

To halt biodiversity loss, we will need to adopt a diet that is more varied. “Meat will always be part of our diet,” Svan says. “Human beings are omnivores. But just as we need to use less coal and oil to achieve the Paris Accord, we will have to eat less animal protein.”

Williams has a similar outlook. “There is a trend towards health and wellness,” he says. “The food consumed in the future will look more like the Mediterranean diet consisting of healthy oils, nuts and fewer unhealthy products.”

The alternative dairy and meat market could see reductions in the salt, sugar and fat content to fulfil consumer demand for healthier options. “Consumers are going to be given more sustainable options that are higher in quality,” Takano says. “Companies that create higher quality products with an environmental or health impact are going to be popular with consumers,” she adds.

While animal products are likely to remain part of our diet, consumption levels will fall. “In the future, meat will be viewed as a luxury that we reserve for the weekend. It will not be a ham sandwich that we eat at our desk for lunch,” Svan says. Kernohan believes there are huge challenges ahead, but they will be solved.

“Land is finite, but we have to increase scale to feed an expanding population and feed them with more nutritious food. I am optimistic that agriculture can respond to this challenge,” he adds.

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