Innovation in sustainable food production could help feed a growing global population and protect the planet. Why companies and investors also stand to gain.
“Given that agri-food systems are responsible for up to one-thirdi of emissions today, 15% of emissions reductions may need to come from this sector,” says Stephen C. Byrd, Morgan Stanley’s Global Head of Sustainability Research. “As the world transitions to net-zero greenhouse gas emissions, and a growing population further squeezes land available to produce food, food production will need to evolve to feed more people—while using less land and consuming less energy.”
The current threats to the industry—and, by extension, the world’s food supply—are increasingly evident. Climate related disasters can destroy a significant portion of country’s annual domestic crop production, hampering exports and increasing food insecurity.
Almost 10% of the global population is currently undernourished; of that group, more than half live in Asia and more than one-third in Africa, areas particularly vulnerable to climate change.
And it’s only expected to get worse.
According to data from the Intergovernmental Panel on Climate Change, the earth has already experienced a temperature rise of 1.1°C, with projections suggesting a potentially catastrophic 3.2°C of warming by 2100 if climate policies are not changed. Indeed, to keep average temperatures from exceeding the 1.5°C limit, emissions must be cut by at least 43% by 2030, compared with 2019 levels. The agri-food sector may need to account for 15% of that global reduction to keep the Earth from warming to catastrophic levels.
Getting there, says Byrd, will require the industry to focus on three areas of innovation:
transitioning from traditional meat products to alternative, plant-based proteins
producing and using higher-quality and higher-yielding seeds
increasing “precision farming” methods
“These solutions offer the potential for high growth, compelling risk-reward profiles, significant customer benefits, and are supported by favorable policy initiatives,” Byrd says.
Alternative proteins: Protein food products created from plants, animal cell cultures or through fermentation of microbes are at the top of the food chain in terms of their ability to reduce emissions while serving up more food for the masses. Interest in these products have seen significant growth in recent years amid shifting consumer preferences. A study of Chinese consumers, for example, found that about 40% have reduced meat consumption due to taste, ethics and/or climate consciousness. In addition, about one-fifth of the world’s population has adopted a plant-based or vegan diet. Reflecting these trends, the alternative proteins market could grow roughly 20% annually to reach $150 billion by 2030.
“Ingredient manufacturers focused on improving the taste and texture of these foods are a good way to play this theme, which is set to benefit from increased support from government policies,” says Byrd.
New seed products: Global demand is also strong for seeds that require less fertilizer or are designed to protect crops while increasing yields, thus reducing land use. This category is expected to grow about 8% per year to reach $117 billion by 2030; however, margins vary by crop and region.
Precision agriculture: This approach uses data and technology to increase the efficiency of food production. Technologies like variable-rate seeding can boost yields by up to 15% while cutting costs by 8% and has earned strong policy support around the world. It could also help net additional gains. “The benefits of this technology go beyond simply increasing food production,” says Byrd. “It can support sustainable agricultural practices, enable other ag-tech solutions and provide important data for climate transition.”
While alternative proteins, new seed products and precision agriculture are the most promising options for reforming the agri-food industry, other possibilities are gaining traction as well:
The production and consumption of organic and naturally healthy food, such as fruit, vegetables and grains, is on the rise, with the European Union alone expected to increase its allotment for these crops to 30% of agricultural land by 2030, up from 9% in 2020.
Animal health efforts aim to improve the productivity of the livestock industry through initiatives that include vaccines, diagnostics and parasiticides.
Vertical farming uses 95% less water and 99% less land space, though it requires a lot of electricity and is limited as to the kinds of food produced
Aquaculture explores breeding and growing aquatic organisms in controlled environments.
As newer technologies develop and achieve scale, investors should note that more mature segments of the industry, such as fertilizers, pesticides or other crop-protection products, will see a decline in demand. They are also likely to face more regulatory pressures because of their associated emissions and environmental impacts, such as soil and drinking-water contamination. For instance, the EU is targeting a 20% reduction in fertilizers and a 50% cut in pesticide by 2030.
“On the whole, several factors will be most important in determining which companies could have the biggest impact in helping evolve sustainable food production,” says Byrd. “These include scalability, their contribution to halting climate change and loss of biodiversity, their ability to provide healthy food for masses of people and their growth and return rates.”
For more detailed insights on food production and sustainability, ask your Morgan Stanley representative or Financial Advisor for “Future of Food: Three Years on” (April 3, 2023).