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Mission possible

Securing the future of food
Harry Sevier
Investment Director
Peter Lunt
Responsible Investment Manager

This year, the global population surpassed eight billion people.

The extraordinary population growth over the past century has relied upon, and been enabled by, the birth of vast industrial farming systems. Food, on aggregate, is plentiful.

Yet today, the dual issues of food security and sustainability loom as large as they have done in the post-industrial era. These megatrends present sources of both investment risk and opportunity.

Finding fodder

Modern agriculture, in terms of both practice and scale, has put unprecedented stress on the planet’s natural capital; fresh water, arable land and the nutrient cycle. Yield optimisation, a surging demand for meat and an acceleration of per capita consumption has had a notable impact on farmland across the globe. Climate change is likely to exacerbate these problems further, so too will geopolitical tension, through disruptions to the supply of soft commodities or natural gas.

With the UN forecasting a 23% increase in population size by 2050, significant innovation is required to increase the quantity and quality of food, through more efficient or alternative production methods.

In a 2017 paper published in Global Food Security, the authors suggest livestock consume a third of global cereal production and use about 40% of global arable land. This implies around a billion tonnes of cereal is diverted to animal feed. The livestock industry is also responsible for 14.5% of all anthropogenic GHG emissions. It is unsurprising then, that investor and government scrutiny on the traditional agricultural sector and farming practices is increasing. Together, this makes current agricultural systems ripe for disruption.

The mother of invention

Is society ready to consume laboratory ‘grown’ food?

Or, as the think tank RethinkX refers to it, the product of precision fermentation (they define this as “a process that allows us to program micro-organisms to produce almost any complex organic molecule”). Imagine a genetically engineered yeast cell, or collection of cells, which under the right conditions of temperature and pressure, create an alternative (animal-free) T-bone ‘steak’. RethinkX argue this disruption to agricultural systems, in particular beef, will be up to 100 times more land efficient, 10-25 times more feedstock efficient, 20 times more time efficient, and ten times more water efficient.

Demand for alternative meat and dairy products will continue to accelerate. The industry has captured the attention of investors and incumbent food manufacturers alike. Opportunities are many and varied, but so too, are the risks. We have watched innovative companies like Oatly Group AB (oat-based alternative to dairy products) and Beyond Meat Inc (plant-based meat substitute) list via initial public offering to great fanfare and stretched valuations. Oatly has fallen by 85% since its listing and Beyond Meat has suffered a 45% decline. Our caution, if not scepticism, has been thus far justified.

Food waste alone is thought to be responsible for between 6-8% of all global greenhouse gas emissions worldwide

At the same time, highly cash generative incumbents in the food manufacturing sector trade on lower valuations. They have the deepest pockets to invest, an established route to market and arguably the most at stake in the face of innovation. This is where we have identified the most attractive opportunities.

One example is Ruffer’s investment in Danone, the global consumer goods company best known for its dairy products under brand names such as Activia and Alpro. The business is amid a pivotal transformation and has become the first listed company in France to adopt the Entreprise à Mission status. This initiative requires companies to pursue a purpose and objectives which explicitly benefit society and the environment.

Entreprise à Mission status involves a variety of initiatives, ranging from regenerative agriculture (supporting ecosystems and biodiversity), investing in, and promoting the circular economy through advanced recycling, as well as developing a more sustainable product offering. Danone has invested heavily in dairy alternatives and is now the world leader in plant-based product sales. In the realm of food manufacturing, there’s no doubting the ‘alternatives’ garner the most intrigue amongst investors – and their innovation is to be applauded. But for value sensitive investors, avoiding getting caught up in the excitement surrounding a particular product or stock is crucial to investing responsibly.

Looking up

The effects of climate change on food production are becoming clear. Take California’s $6 billion almond industry. Changing rainfall patterns and decades of unsustainable groundwater extraction have had a deleterious impact on the water supply. Combined with so-called ocean ‘dead zones’ (hypoxic areas which affect the lifecycle of fish and other aquatic species), it has become imperative to rethink farming practices in the region to establish non-damaging and sustainable almond production.

One solution being explored around the world is to move farming indoors. Farming in a closed system, making use of fast-developing vertical farming technologies, could be essential to feeding the human population in the coming decades. Although still in its infancy, the prospects for vertical farming are promising; it uses 99% less land and 97% less water than traditional farming, with up to 300x the yield.

In recent years, we have invested in several food retailers for whom food sustainability is incorporated into their business model. Ocado, for example, gave us exposure to a best-in-class advanced robotic warehouse solution as well as a number of ambitious vertical farming initiatives.

Marks & Spencer, another of our portfolio companies, has taken this one step further and begun to dedicate in-store floor space to vertical salad farms. They have also committed to increase the number of products sold without plastic packaging and are heavily promoting their own Plant Kitchen range of alternative proteins.

Tackling waste

Arguably the most important factor in shaping the future of food has little to do with innovation in production or manufacturing. Rather, it is simply reducing the amount of food which goes to waste. It is estimated that a third of all food produced is wasted, either never leaving the farm, spoiled or thrown away. As this food waste breaks down it produces large quantities of methane. Food waste alone is thought to be responsible for between 6-8% of all global greenhouse gas emissions worldwide: more than any country in the world outside of the US and China. This is all the more significant given methane has a global warming potential that is up to 86 times greater than carbon dioxide.

As investors in the UK’s largest supermarket chain, Tesco, we are encouraged by their commitment to addressing the issue – with a goal to halve food waste by 2030. The company’s approach is multi-faceted; they are investing in developing technologies to reduce waste from stock keeping, for example, as well as expanding existing schemes which ensure edible food is distributed to those in need before being sent to landfill.

A secure and sustainable future

The war on Ukraine has dealt a blow to the quest for food sustainability. The humanitarian crisis has been accompanied by an enormous supply shock to two of the world’s leading grain producers. This has catalysed already rising food price inflation with the effect of pushing many households to (or over) the verge of food poverty. The security and sustainability of food has never felt so pressing. As responsible investors, our focus is on encouraging the companies in which we invest to move in the right direction. We will continue to engage with them, to champion innovation and to ensure the sustainability of food production, retail and consumption is given the credence it requires.

2022 Q2 report
In this quarter’s thought piece, Responsible Investment Manager Peter Lunt and Investment Director Harry Sevier explore the challenges involved with feeding a growing global population. They look at the risks and opportunities in the future of food security, and how these are reflected in Ruffer portfolios. We also include the usual update on our stewardship activities throughout the quarter.
Read
Villains to heroes
Banks are rarely the first port of call in a responsible investor’s portfolio. The preference has been to allocate capital to companies directly involved in climate risk mitigation – electric vehicle manufacturers or renewable technology businesses. But financial services have a pivotal part to play in the transition to Net Zero and investor engagement is critical in determining how banks stand up to the climate challenge.
Read
2020 Stewardship report
Our 2021 report highlights the depth and breadth of our stewardship activities. Our focus on engaging directly with company management has afforded us a deeper understanding of the companies in which our clients are invested.
Read

Past performance is not a guide to future performance. The value of investments and the income derived therefrom can decrease as well as increase and you may not get back the full amount originally invested. Ruffer performance is shown after deduction of all fees and management charges, and on the basis of income being reinvested. The value of overseas investments will be influenced by the rate of exchange.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.

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OUR THINKING
London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France