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Sustainable Investing

Is a new food supply chain poised to take off?

Apr 11, 2023

Consider this potential global megatrend—a potential opportunity for attractive returns and to address a top planetary threat

Did you know that one of the gravest environmental threats is also one of today’s most exciting investment themes? We’re talking about the current food supply chain.

How produce is grown and harvested, how livestock are raised, the use of agricultural chemicals and plastic food packaging—in short, the food system—ends up polluting soils and waterways. Agricultural land is also expanding worldwide at the expense of natural habitats. Scientists consider the current food system one of the most serious planetary threats.

But that’s only part of the story.

Innovative companies throughout the food supply chain are providing a range of strategies that we believe are investment opportunities potentially offering attractive returns.

Here’s why.

Reengineering the food system for biodiversity will likely attract capital

Scientists agree that biodiversity—the variety of animals, plants, insects (and microbes such as bacteria and fungi) and their habitats—is essential to the viability of human life. Biodiverse habitats provide us with the raw materials and clean water we need to live.

We think the innovative companies reengineering how the food system will work in the future present potential opportunities for investors to help promote and protect essential biodiversity while potentially earning attractive returns.

In our view, food system innovators are more likely to succeed than competitor companies that aren’t making the transition to producing with less of an influence on biodiversity—for economic reasons. Take a company selling organic, friendly microbes that make seeds sprout faster and are less expensive than fertilizer. We think that firm’s chances of success look better over the long run than the maker of a more expensive, conventional agricultural chemical that does the same thing.

Or take companies using precision agriculture (more on what that means below). Some precision technologies can improve input efficiency by 20 percent, reducing the overuse of fertilizers, herbicides, and other agrochemicals.1,2That’s a win-win situation—economic and environmental.

Companies are also looking to reinvent the world’s food supply chain because in its current state, our food ecosystem is helping drive unprecedented global biodiversity loss.3 Pastureland is expanding at an unprecedented rate to meet growing demand for meat, crowding out plants, animals and their habitats. Agriculture uses 70% of the planet’s fresh water and food systems are responsible for over one-third of global greenhouse gas emissions (GHGs).4,5 Intensive agriculture depletes the soil, and the runoff from synthetic chemical fertilizer damages habitats.

We see the following types of companies in the food value chain making positive contributions to biodiversity and potentially outperforming traditional indexes.

Alternative plant-based proteins

Companies making new, plant-based foods have the potential to achieve four goals at once:

  • Supply food for the world’s growing population
  • Use far less land than animals would for an equivalent output
  • Supply humans with needed protein (typically from legumes, such as lentils, peas, chickpeas and beans)
  • Boost soil fertility (because many legumes put nitrogen into the soil, which helps other plants to grow)

When it comes to the planet, a broad rise in plant-based proteins’ popularity would drastically reduce agricultural water use.6 Legumes could eliminate vast amounts of fertilizer use, and greatly increase yields if they were planted simply as soil helpers, in rotation with cereal crops that deplete the quality of the soil.

What about the bottom line?

Consumers are already shifting away from foods whose production creates the highest GHG emissions. We think more people are likely to join the trend, making alternative proteins an interesting investment opportunity. Some specialists believe that the plant-based meat market has the potential to increase by $17.8 billion by 2030 - a 14.74% CAGR.7

Replacing chemical inputs with cutting-edge science

Biochemicals occur naturally in plants, animals and microorganisms, and act like fertilizers. Companies are commercializing them for agricultural use because they make crops more resilient, helping farmers reduce their use of more dangerous (and expensive) synthetic fertilizers whose polluting runoff damages biodiversity.

Biochemicals are especially appealing at a time when human-made fertilizer’s prices have exploded, one of the factors pushing food prices beyond the reach of many.

So-called “bio-science” innovator companies are producing natural enzymes and bacteria that speed seed germination and plant growth while enriching crops’ nutritional quality. They also require less energy than conventional farming techniques.

The bottom line? The market for beneficial insects and biochemicals, and other forms of crop protection, some specialists anticipate may have an 8%–10% compound annual growth rate, and could expand to a billion industry globally by 2035.8

Making agriculture less water-intensive and less polluting

Companies are tackling the water issues in two ways: first, they’re reducing water as an input, especially in drought-prone areas, with technologies such as micro-irrigation, “digital water” (using sensors to, for example, monitor and measure soil and plants’ status to determine their precise water needs for conservation and efficiency), and closed-loop water recycling (as in vertical farming, which can recirculate most of the water that would be lost to evaporation out in the field).

Companies are also working on the wastewater side of the equation— aiming to prevent chemically tainted water as an output. They’re looking at treatment prior to release, for example, making infrastructure investments to stop the release of raw sewage into rivers and oceans.

Right now, the deployment of water recycling and micro-irrigation is limited. But important growing regions of the United States are already experiencing a profound water shortage, so we expect a strong demand for these companies and their technologies.

Sustainable food packaging

The images may be familiar: sea turtles strangled by plastic rings, birds and fish with stomachs full of plastics. A mere 9% of plastic waste is recycled while 50% ends up in landfill. By 2060, plastic waste is on track to almost triple compared to 2019 levels.9

To address these issues, some packaging manufacturers in the food supply chain are using less of it—or using more recyclable materials such as cardboard. Some also are switching their processes. One packaging industry executive estimated plastic substitution to be a 12.5 billion annual global opportunity.10

Another potential benefit: switching from plastics to alternative packaging can also enhance food preservation.11

We can help

There are a number of investment opportunities that go hand-in-hand with helping the world preserve biodiversity. If you're interested in discussing whether food supply chain innovations make sense with your financial goals, reach out to your J.P. Morgan team.

 

1USDA, “Benefits and Evolution of Precision Agriculture”, July 12, 2023, https://www.ars.usda.gov/oc/utm/benefits-and-evolution-of-precision-agriculture/

2Annual Review of Resource Economics, “Precision Farming at the Nexus of Agricultural Production and the Environment”, https://www.annualreviews.org/doi/pdf/10.1146/annurev-resource-100518-093929

3Humanity has caused the loss of 83% of all wild mammals and half of all plants, and biodiversity loss and ecosystem collapse is one of the top five risks, according to the World Economic Forum, “2020 Global Risks Report,” January 15, 2020.

4OECD, Managing water sustainably is key to the future of food and agriculture, https://www.oecd.org/agriculture/topics/water-and-agriculture/, EAT Lancet Commission on Healthy Diets from Sustainable Food Systems, June 30, 2021.

5Nature Food, “ Food systems are responsible for a third of global anthropogenic GHG emissions”, https://www.nature.com/articles/s43016-021-00225-9, 2021

6The International Journal of Life Cycle Assessment, Ex-ante life cycle assessment of commercial-scale cultivated meat production in 2030, January 12, 2023.

7Data Bridge Market Research, Global Plan-Based Meat Market – Industry Trends and Forecast to 2030, December 2023.

8Tennant, Fraser, “Corteva Acquires Stoller Group in $1.2bn Transaction,” Financier Worldwide, December 6, 2022, https://www.financierworldwide.com/fw-news/2022/12/6/corteva-acquires-stoller-group-in-12bn-transaction.

9OECD, “Global Plastics Outlook: Policy Scenarios to 2060”, June 21, 2022.

10“Investor presentation,” Graphic Packaging International, November 2022.

11“‘Smart’ Packaging Preserves Food and Enhances Safety without Plastic Waste,” Harvard School of Public Health, April 12, 2022, https://www.hsph.harvard.edu/news/features/smart-packaging-food-safety-plastic/.

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