Getting food from farm to fork has always been a societal imperative. But big challenges loom due to expanding populations, less arable land and freshwater supply constraints. Overcoming those is the problem facing the nutrition and agriculture industries. For investors, that means an opportunity for solid and likely enduring, if not spectacular, gains from new sources of protein: plants.
“A growing global population needs to be fed, and there are less resources to do so,” says Gillian Diesen, a senior client portfolio manager for thematic equities at Pictet Asset Management, in an interview. Hunger affected 828 million people worldwide as of 2022, the World Health Organization stated. At the same time, among well-fed populations, Diesen adds, poor diet (think fast food) and obesity are hazards.
The world’s population is expected to increase to 10 billion from 8 billion over the next 30 years, the United Nations calculates. Arable land has decreased by one-third since 1961 to 5.3 million square miles, owing to climate change and deforestation for real estate development, per the World Population Review. While the amount of freshwater has stayed constant over time, the burgeoning population means less is available to go around.
“We need more healthy products that people are willing to consume,” says Kevin Dreyer, co-CIO at Gabelli Funds and co-manager of its Gabelli Health & Wellness Fund, which is up 5.6% annually over the past five years, as compared with 14.3% for the Standard & Poor’s 500. In addition to medical companies, his fund includes health-minded food providers like Danone (yogurt) and Treehouse Foods (organic and gluten-free snacks)
Alternative Proteins
The quest for expanding beyond traditional sources—such as protein from livestock like cattle—is drawing investor interest, with an emphasis on “alternative proteins” that come from plants. A big plus is that this shift would bring a reduction in carbon emissions, as the need for livestock (which infamously emit their own gas) would drop. Raising livestock also entails a lot of water use.
The Boston Consulting Group estimated that the market for alternative proteins will reach $290 billion in sales by 2035, up from around $8 billion now. In a report, the firm noted, “This will represent 11% of global protein consumption, and the impact on climate change would be equivalent to decarbonizing 95% of the aviation industry.”
In the alternative protein realm, much of investors’ capital is directed at small, non-public companies. For instance, the Ontario Teachers’ Pension Plan Board in 2021 led a $226 million capital raise for food company Motif FoodWorks, which makes plant-based food meant to resemble meat.
Motif produces beef, chicken and pork substitutes that, in promotional material, it touts as “the same meaty, umami flavor and juicy texture as the real thing” (“umami” means a taste found in cooked meats). A bonus: Medical research has found that plant-based protein is lower in cholesterol than animal protein.
Food Investing
Family-owned farms continue to dominate the U.S. agricultural landscape, controlling more than 95% of total acreage, which makes investing in this asset class hard. Nonetheless, food companies, farm equipment makers and other nutrition businesses provide ample places to invest as food tilts more toward plants.
Among the biggest agriculture owners are very wealthy people: the Bill & Melinda Gates Foundation Trust, media magnate John Malone and real estate developer Stan Kroenke. The Gates Foundation owns 241,000 farm acres spread across 19 states, from California to North Carolina. Although he is a well-known cheeseburger fan, Bill Gates is an enthusiastic proponent of synthetic meat.
The Gates organization last year joined forces with the Novo Nordisk Foundation, the pharma firm’s philanthropic arm, to invest $29 million in an effort to convert CO2 gas into acetate that would in turn yield proteins. Bill Gates was an early investor in alternative meat companies, including Impossible Foods, Beyond Meat and Upside Foods.
Supplementing standard, animal-derived food is increasingly popular among investors. Take BellRing Brands, a small ($6.7 billion market cap) food business that Dreyer’s fund invests in. The company’s stock has tripled in value over the past five years as its revenue and earnings have climbed.
BellRing has a line of plant-based products, including its Premier Protein Plant powder (often mixed with water or milk) that is made from peanut and rice protein. “They are doing well,” said fund manager Dreyer. “Two-thirds of their sales are at Wal-Mart and Costco,” and they have “room for further expansion.”
Institutional investors have taken notice of sustainable farm and nutrition investing. Canada’s Public Sector Pension Investment Board, the retirement fund for public employees, as of May was the biggest investor in Australia’s agricultural sector, totaling $4.9 billion. PSP’s holdings down under are not strong on livestock, with concentration on egg producer Ellerslie Free Range Farms and grain grower Timberscombe.
Meat Risk
Farming itself can be made more sustainable. The largest maker of farming equipment globally is Deere & Co., also known as John Deere, with one-quarter of the market by sales. A large part of its product offerings is made up of tractors, harvesting combines, field sprayers and the like. One innovation it has pioneered is “precision spraying” to counter pests and fungus by chemicals sprayed directly on the plants, a much more efficient method, according to Pictet’s Diesen. “Farmers don’t have to spray an entire field,” she said.
The stock has doubled over the past five years, with revenue up 18% over the past fiscal year (ending in October) and earnings ahead 42%. More than half its stock is owned by institutions, mainly large asset managers such as the Vanguard Group.
Meat-based food enterprises may even be riskier investments than plant-based. Among the leading food-producing companies is Tyson Foods, a major pork, chicken and beef provider. Its stock has dipped 25% over five years, amid flat revenue for the last couple of years and red ink.
General Mills, on the other hand, has performed decently in the market, with shares ahead 24% over the past five years, and sales and earnings down slightly for the year ending in May. The company is not as dependent on meat, with its focus on pet food and snacks—Cheerios cereal, Haagen-Dazs ice cream and Pillsbury baking goods. Analysts are optimistic. As Morningstar strategist Kristoffer Inton wrote, “In many categories, General Mills has not only the top brand but also several leading brands that together create a dominant companywide share.”
For investors, it is cheering that such companies have long track records and good financials. “They are well-established,” pointed out Pictet’s Diesen.
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The Alpha Opportunities of Declining Biodiversity
Tags: alternative protein, BellRing Brands, Bill & Melinda Gates Foundation Trust, Boston Consulting Group, General Mills, John Deere, Motif FoodWorks, Ontario Teachers’ Pension Plan Board, Pictet Asset Management, protein, PSP, Tyson Foods
