The food industry is at a crossroads. The United Nations projects worldwide food supply needs to increase by 50% in coming years to accommodate population growth. At the same time, food industry players are trying to become carbon neutral, and climate change is putting vast swaths of terrain used for crops and livestock at risk.
“You can think about, ‘How do we make the food system lower carbon?’ Or you can think about, ‘How do we feed an extra two billion people?’,” says Jessica Alsford, Morgan Stanley’s head of global sustainability research. “But you can’t really analyze them in silos, because the two have a real impact on each other.”
Recently Morgan Stanley has produced several research reports on the future of food, identifying ten key sectors for investors to watch, which include alternative meat, precision agriculture, seeds, and vertical farming.
Collectively the sectors offer “2030 revenue potential in excess of US$1 trillion, a market size similar to that of the global pharmaceutical sector,” according to Morgan Stanley, and mid-to-high single digit market growth.
The food industry isn’t using alternative technologies at a similar scale to other industries like renewable energy, Alsford says. “The agri-food system is responsible for at least a quarter of global CO2 emissions, and yet we don’t really have scalable solutions.”
But there are some major developments that look promising for advancing the industry’s adoption of these technologies.
In July, the United Nations is hosting a Food Systems Summit, with a focus on reforming food systems and meeting sustainable development goals. The European Union has a detailed Farm to Fork strategy in place, and China’s fourteenth five-year plan includes a focus on more self-sufficient agriculture as well as improving seed technology.
Investing in the food industry poses challenges, including a lack of pure plays in publicly-listed markets. Although it offers investment opportunities for portfolio diversification, Alsford notes that sustainability in this industry isn’t always clear cut. For instance, fertilizers can be critical for producing more food, but synthetic ones contribute to greenhouse gas emissions.
“For investors these types of assessments are really important and thinking about where you want to allocate your capital,” Alsford says.
Here are three areas she says investors should watch when investing in the future of food.
Consumer Trends Driving Growth Categories
Because there are early stage, fragmented sectors in this theme, customers play a huge role in shaping industry growth. “It’s a lot more dependent on all consumers changing habits, as opposed to top-down regulation at this point in time,” Alsford says. Furthermore, monitoring trends will help identify sectors with increased growth and investor returns.
One particular trend she’s watching is meat consumption, which represents the majority of factory food sector emissions.
Alsford notes the many developments in plant based proteins are driven not only by “vegetarians and vegans, but also meat eaters looking for lower carbon alternatives.” However, while plant-based meat production is less carbon intensive than that of meat, the industry’s growth may cause additional environmental or sustainability concerns.
Morgan Stanley estimates the combined market for plant-based meat and milk will grow to more than US$80 billion U.S. by 2030.
Alsford also notes consumers are asking brands to think about sustainable packaging, like using more easily recycled aluminum instead of plastic. As well, the provenance of food, including its carbon footprint, fair trade status, or use of slave labor is of increasing importance to consumers.
Opportunities From Increased Technological Adoption
The food industry hasn’t experienced the same technological investment as other industries, Alsford says. “But we’re starting to see it coming through whether it is in terms of cultured meat or vertical farming or precision agriculture.”
Precision agriculture, which Morgan Stanley identifies as a preferred sector, does this by using data—acquired by drone, satellite, or sensor—to optimize yields. For instance, identifying how crops in parts of the same terrain may require different amounts of water. Precision agriculture can also reduce the use of products like fertilizers. The Biden administration and European Union have shown support for the concept, and in the next decade the market is anticipated to be worth about US$17 billion in revenues.
“That’s what’s historically not been there with agri-food,” Alsford says. “Data hasn’t been harnessed in the same way that it has in other industries.”
Meanwhile other innovations, like vertical farming offer possibilities, albeit limited to certain crops like leafy greens or strawberries. The method, which can reduce space requirements by up to 99% while also using less water and requiring no pesticides, is expected to have about a 25% compound annual growth rate through 2030.
Sustainable Supply Chains
“When we think about sustainability, we think about the product, but then we also think about, ‘How is the company managing its own operations?’,” Alsford says.
Morgan Stanley has identified transition leaders in the industry based on the “current nutritional content of products sold and their carbon intensity” and the “transition towards healthier, lower-carbon foods.”
Companies integrating regenerative agriculture is an example of greening the supply chain, Alsford says and transition leaders like Danone and PepsiCo use this technology.
“You can change agriculture practices, for example, by planting cover crops, and those cover crops can actually take carbon dioxide out of the air from sequestering in the ground,” Alsford says. “So you’re helping the farmer to improve their agriculture practices, but also reducing the climate impact as well.”
But an innovation like regenerative agriculture isn’t simply good for the planet. There’s a financial benefit as well. About a third of conventional farmers’ gross income is spent on fertilizer and seeds for conventional fields, but this drops to 12% when using regenerative agriculture methods according to a 2018 NIH study.