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By Alexander Roose,
CIO Fundamental Equity at DPAM
It has become increasingly clear that the agri-food value chain is at the very epicentre of sustainability issues. This should not scare off investors, however. Quite the opposite, as these challenges can lead to a vast array of investment opportunities: The agri-food value chain is clearly thriving on structural trends, such as the growing middle income class or the industrialisation of the protein industry in Asia. We also live in a world where we are starting to see inflation pick up. Fortunately, the agri-food chain has good inflation hedge characteristics, too. Let’s take a closer look at the dos and don’ts of in the agri-food investments, and find out how uncover the cream of the crop within this fascinating sector.
Although ‘agri-food’ might seem somewhat restrictive to allow for much diversification within the theme, it actually encompasses a surprisingly large range of different companies and sectors. Broadly speaking, the agri-food value chain can be separated into three distinct segments: upstream (i.e. plantation companies or farm technology), midstream (i.e. logistics/processing or packaging) and downstream (i.e. food technology, protein production or food downstream). Within these three segments of the value chain, one can then invest in different themes and subthemes. A top-down approach and a focus on fundamental and ESG KPIs should allow one to come up with several interesting companies in this theme.
It goes without saying that the savvy investor should also keep an eye out for drivers of growth and potential upcoming liabilities when selecting the best companies for their portfolio. One of the main challenges faced by the agri-food chain is the global push to deal with environmental and social challenges. The upstream part of the value chain particularly faces some key challenges related to the reduction of Green House Gas (GHG) emissions (land usage and livestock methane emissions), which is one of the key environmental issues in the agri-food value chain. Population is also growing and the middle income class is rising. Hence, feeding a growing and wealthier population is a monumental task if GHG emissions need be reduced. In addition, the move towards sustainability is no longer merely an ethical or moral obligation, but has received increasing legal support on a global level. This encourages more and more companies (and consumers) to make efforts to preserve biodiversity and robust ecosystems by offering solutions, such as precision agriculture, vegetable proteins, fermentation, methane reduction or local production and consumption. Companies that miss this green train will invariably fall behind. At the same time, companies that are able to find timely and innovative solutions to these challenges will outperform in the long term. Sustainability is the key differentiating factor for any company operating in the agri-food value chain. In the past decade, it has become abundantly clear that climate change and sustainability are a structural trend that is here to stay.
However, it is important to keep in mind that, apart from the immediate sustainable factors, there are a multitude of other trends that concurrently affect this sector as a whole. For example, we notice that the COVID pandemic clearly brought several key themes to the forefront as well (i.e. health, wellness, automation, packaging and circular economy). In addition, consumers are increasingly eager to buy dietary supplements. As a result, we will see an increasing conversion between healthcare and nutrition. At a different level of the value chain, we also observe how farmers are more concerned about safer labour and protection of the environment and they are increasingly adopting precision farming techniques.
While geography can be an aspect that’s worth considering, we would not necessarily look at a company’s location as a starting point in one’s investment process. We prefer to focus on growth themes instead. That being said, these individual themes do seem to display certain geographical tendencies. If we look at precision agriculture, for example, US companies are clearly at the top. Furthermore, US ammonia/nitrogen companies with their well-developed logistics networks should be able to better capitalise on the hydrogen economy, as ammonia is a better hydrogen carrier, leading safer and easier storage and transport capabilities. In contrast, within the health and wellness trend, Europe is the clear outperformer. This European know-how is perhaps best illustrated by its fermentation capabilities, which range from substituting synthetic ingredients, developing novel ingredients to find solutions in packaging. These, in turn, are quite limited in the US.
In conclusion, the agri-food value chain offers a plethora of opportunities to the well-informed investor. Since it’s at the very forefront of the current sustainable revolution, the sector as a whole manages to offer a remarkably unique convergence of sound financial returns, innovative opportunities and ethical investment possibilities. As a result, a diversified approach across the whole agri-value chain, a focus on sustainability and other key growth themes will form a great foundation upon which to build a well-diversified portfolio.