Insights

Investment Opportunities in the World’s Largest Industry: Food

Significant growth potential exists for investors willing to play the long game and seize opportunities in Food & Agriculture

By David Gowenlock, ClearlySo Funds Advisory · April 21, 2020

Coronavirus Corrections

Investors have seen share prices tumble in recent weeks as major economies shift into lockdowns. The end to a long bull market made way to the fastest ever crash in history, repeatedly triggering stock market circuit breakers.

Valuations have also fallen sharply in the private equity and venture capital markets. In fact, these have probably fallen further and faster than those in public equity markets, possibly owing to more limited liquidity. ClearlySo’s Institutional Sales team recently reported on this in their April market update.

It’s clear that markets are full of uncertainty; Goldman Sachs’ chief equity strategist Peter Oppenheimer said on the 16th April that recent stock market rally “is probably too rapid given the near term prospects we see for economic and profit data“, BlackRock has reported an all-time record quarterly fall in assets and Emmanuel Macron warning of the unravelling of the EU.

At the same time some sectors, and some companies in particular are emerging as beneficiaries of the changes in circumstances we are all now confronting.

As much economic activity has shifted from the physical to the virtual space, business models based on cloud-based services have benefited significantly. Increased demand in Zoom’s video conferencing software has seen the firm’s valuation rise 124% in 2020 alone. Other such success stories can be found in cloud-based solutions in the health-tech and ed-tech sectors with examples including:

Bibliu – A digital learning platform that makes textbooks and reading materials more accessible than ever before, has secured $10 million in a Series A equity round with the help of ClearlySo. The investment was led by Nesta Impact Investments and included Guinness Asset Management, direct investment clients of Stonehage Fleming and ClearlySo.

Online digital health platforms are benefiting from the need for remote patient assessments. It is likely that changes will be permanent – both as a result of new enabling infrastructure and shifts in patients’ engagement with healthcare systems. One such firm is GPDQ who recently completed a £2m fundraise with the support of ClearlySo.*

ClearlySo’s Investment Banking team have being seeing such businesses enjoying strengthening fundamentals and valuations which are actually firming up amidst the broader chaos.

Emerging Opportunities in Food & Agriculture

Whilst such technologies and sectors are in plain sight and thus obvious areas of investor attention, may there be others being overlooked in this search for value in rapidly changing circumstances?

One such industry that ClearlySo believes investors should be focusing on is food. Food is considered the largest industry in the world (the World Bank estimates 10% of global GDP), is projected to grow at a strong 8.4% CAGR and importantly is non-cyclical, currently a key consideration given the imminent potential for a significant economic contraction. With uncertainty of how COVID-19 will play out, investors will find confidence in the fact that the quantity of food consumed will be far less impacted than other sectors and the fundamentals driving this industry’s growth are unchanged from pre-crisis levels.

Let’s start a brief exploration of this industry by considering three important facts:

  1. Future demand for food is very strong
    Population growth, urbanisation, and per-capita increases in income will result in a 50% increase in food demand by 2050 from 2012 levels. Meanwhile the natural resource base upon which agriculture depends will become increasingly stressed (globally, 33% of the world’s farmland is moderately to highly degraded).
  2. A more sustainable food system is urgently needed
    Around 35-40% of global greenhouse gas emissions can be attributed to the food system. These emissions result from crop and livestock production, transportation, changing land use (deforestation) and food loss and waste. In a business-as-usual scenario, these emissions are actually likely to increase by a further 30–40% by 2050 due to population growth and changing diets, making already challenging emission reduction targets even harder to achieve.
  3. Agriculture is ripe for disruption
    A recent McKinsey study found agriculture to be the least digitalised industry of all. There lies great opportunity in leveraging new technologies for efficient, sustainable food production to meet the challenges of 1) and 2) above.

These three factors present an attractive investment opportunity – one with both strong fundamentals as well as the potential for substantial impact on the environment and human health.

Not all Segments will Benefit Equally

Whilst the food industry presents many opportunities, not all food segments are impacted in the same way by recent events or longer term trends. The drastic reduction in eating out saw food-service suffer an initial 50-80% revenue loss in China. Despite many restaurants’ attempts to pivot to takeaway and other parallel business models this segment’s loss in revenue is projected to continue for some time and we can expect similar figures during extended lock-downs in Europe. A loss of jobs is not the only collateral damage, global food waste resulting from changes in supply chains is simply staggering – one US chicken processor alone is smashing 750,000 unhatched eggs every week.

Yet even before the outbreak, changes were underfoot. Several anecdotes are highly illustrative of core trends in consumer preferences related to the environmental and health impacts of dietary choices:

To help navigate this sector we suggest investors focus on two emerging opportunities which we anticipate will be unaffected by COVID-19, or potentially even positioned to benefit:

1) Novel Protein Production

Beyond Meat’s 2019 IPO can be considered a turning point at which many institutional investors started taking food-tech innovations more seriously. Raising nearly a quarter of a billion dollars at $25/share in May 2019, BYND was the best performing first-day IPO in nearly two decades. After initial volatility the stock has now settled at c.3x the listing price at $77, with a market cap of $4.8bn.

With attention piqued, investors have started to consider where future similar opportunities could lie and how to pursue them – via direct, fund or co-investments. Other examples of new technologies being used to produce food ingredients in novel ways include:

 

MosaMeat – A leader in cellular agriculture having created the world’s first slaughter-free hamburger in 2015. This technology promises to provide ‘real meat’, identical at a cellular level to an actual steak, with 1/5th the water use, 1/5th the GHG emissions and 1/10th the land use. This is a longshot as we are still to see commercially viability at scale – investors may be well-advised to keep an eye on firms with advanced scaffolding technologies.

 

BlueNalu – Whilst the easiest meat item to replicate with cellular agriculture is the uniform, “round burger patty”, other firms are exploring how to use this technology across a wide variety of food types. BlueNalu is a leader in cellular aquaculture, providing consumers with what they claim to be great tasting, healthy, safe and trusted cell-based seafood products that support the sustainability and diversity of our oceans.

 

Geltor – Whilst some firms grab headlines by growing beef in space, others are working behind the scenes to find novel ways to produce fundamental building blocks used by the food and cosmetics industries. Geltor is one such example, producing mass-scale proteins such as collagen and elastin via microbial fermentation. This presents a huge opportunity, the markets for collagen and gelatine are worth a combined $9 billion dollars alone.

 

Natures Fynd – Manufacturing sustainable protein using microbes originally discovered in the geothermal springs of Yellowstone’s ancient volcano. Natures Fynd has patented a novel, scalable bio-reactor design and fermentation process. The yielded product can be considered special as it contains all 9 essential amino acids, making it one of the rare non-animal sources of complete protein.

 

 


Source: Solar Foods – A bioreactor producing proteins from thin air

2) Ag-tech Innovations

Agriculture’s state of low digitalisation presents opportunities spanning the value chain, ranging from in-field IoT sensors, cold store technologies and distribution.

To date, much of the increases in food supply have come from yield improvement and cropping intensity, and much progress can still be made in this area by narrowing the gap between average and optimum farm yields. Given the changes outlined in 1), we advise aligning with the mega trends of resource scarcity and need for productivity improvements in the production of inputs used by emerging novel food products.

Examples of companies ClearlySo is aware of in these areas include:

PES Technologies – Current agricultural data is limited in the fact that it does not probe the surface of our soil. This company’s ultra-portable device provides a solution capable of measuring microbial activity in soil enabling more accurate soil management decisions: from which fertiliser to use to whether farmers ought to employ “no till” strategies.

Fungi Alert – An innovative new detection system in Fungi Alert’s SporSenZ sampling devices enables the prevailing, actively growing rhizosphere microbiome to be rapidly characterised. This provides growers with key information necessary to make informed disease management decisions, helping reduce chemical use.

 Metronome – Most industrial cold stores use simple thermostats. Metronome’s advanced thermal modelling and machine learning uses live weather, spot and forward electricity pricing data to shift electricity demand away from fossil fuels to renewable sources – reducing energy consumption, cost and GHG emissions.

LettUs Grow – A manufacturer of aeroponic-based vertical farm hardware and software technologies used by commercial growers of hyper-local produce. Technologies allow optimisation of growing performance, minimising resource consumption and food miles (this company has been a ClearlySo client).

The Pressing Need for Change

All indicators suggest massive challenges animal agriculture in the coming years. In the coming years consumers are expected to see plant-based and novel foods’ price points fall below animal-based foods due to further process improvements and scale economics. Innovations such as cellular agriculture promise to reduce health risks through antibiotic resistance and the contamination of various pathogens (in a 2015 study by Consumer Reports, out of c.500 pounds of beef purchased randomly throughout 26 U.S. cities, 100% of it contained bacteria that signified faecal contamination!).

RethinkX, a think tank co-founded by Stanford University’s Professor of Disruption Tony Seba, projects we are about to undertake a massive change in food production:

“By 2030, demand for cow products will have fallen by 70%. Before we reach this point, the U.S. cattle industry will be effectively bankrupt. By 2035, demand for cow products will have shrunk by 80% to 90%. Other livestock markets such as chicken, pig, and fish will follow a similar trajectory. There will be enormous destruction of value for those involved in rearing animals and processing them, and for all the industries that support and supply the sector (fertilizers, machinery, veterinary services, and more). We estimate this will total more than $100bn. At the same time, there will be huge opportunities for the producers of modern foods and materials.”

Although the point of view above is not universally accepted, there is growing support for this position.  Also, the recent bankruptcies highlighted above indicate these projections may not be as wild as they seem. Given current worldwide events related to COVID-19, these changes will likely be welcomed by the epidemiologists around the world.

Animal consumption, farming and trade are major vectors of diseases – the human animal interface was the source of Ebola, The Asian Flu, MERS, SARS, the Spanish Flu and now COVID-19.

Source: Blue Horizon Ventures

Professor Andrew Cunningham, deputy director of science at the Zoological Society of London reflects:

“Covid-19 is a warning shot. We really ought to use this warning to get our act together and start funding the work that needs to be done in order to stop the next pandemic.”

As we all witness in real time the huge impact of this pandemic, one of the best ways for investors to be part of these funding efforts is by backing food-tech innovations which promise only an impressive commercial opportunity, but also immense environmental and health benefits too.

 

*This version of the blog post has been updated regarding a recent press release announcement. It previously referred to a undisclosed digital health platform.