Consistent, dependable access to sufficient quantities of nutritious food—a concept known as food security—has become a critical issue of our time.
Scarcity and inflation are spiking food prices, geopolitical tensions, and the pandemic are impacting the supply chain in both developed and developing countries, and food needs are growing, with 60% more needed by 2050, according to the World Economic Forum. Consequences of climate crises such as droughts and severe weather make meeting current and future needs more challenging than ever.
Darren Rabenou,
head of food and agriculture at UBS Asset Management in New York, says these issues have recently made food security a more pressing theme for investors to explore.
Today, a network of private-sector solutions is trying to alleviate food security challenges from farm to table, encompassing seed technology and irrigation, supply chain, and food storage solutions. These are creating investment opportunities in a market where primary agricultural production alone is estimated globally at over US$5 trillion by the Food and Agriculture Organization of the United Nations.
Rabenou believes investors need to consider the infrastructure underpinning global food security. “The biggest impact on food security is going to be the non-sexy parts of the business,” he says.
One element is farmland. As one of the United States’ largest institutional farmland property owners, UBS has over 280,000 acres of farms in 15 different states. These are diversified with 30 different major crops.
Rabenou thinks investors want not only farmland in their portfolios, but to invest in what he refers to as the food vertical—the different components that interact under the umbrella of food security.
For instance, last month, UBS Asset Management signed a US$700 million deal with Dutch cooperative pension fund manager PGGM and a group of family offices to develop cold storage facilities for perishable foods, an area which has seen little expansion in recent decades despite increased consumption. UBS had previously identified cold storage as a food waste reduction strategy to improve food security.
Solutions like this help achieve food security goals by getting it to market more effectively and efficiently, creating less waste while also reducing production costs.
In a recent interview with Penta, Rabenou offered some suggestions for investors interested in adding food security solutions to their portfolios.
ESG Is In the Eye of the Beholder
Some food security investments, such as irrigation solutions which reduce water use while maintaining or improving yield, are clearly sustainable. But investors looking to use the theme to satisfy environmental, social, and governance (ESG) investment strategies have to look closely, and in some cases make their own call.
“You’ve got to be careful when you say ESG,” Rabenou says. While some food security solution investments offer ESG and impact characteristics, others don’t qualify in the strictest definition. Consider cold storage, which can use lots of electricity.
“We made a decision that there’s a lot of sustainable characteristics to that investment thesis,” he says. In a 2021 white paper “Cold: the new warm?” UBS suggests that addressing this storage issue can reduce food waste, therefore indirectly reducing negative CO2 impacts and water waste. Also, they can offer “environmental benefits from new refrigeration systems that can be 15%-30% more energy-efficient and also have reduced or no ozone impact,” the report said.
Though some metrics are debatable, other impact metrics can be met more clearly with these investments. For instance, according to UBS, cold storage investments align with seven of the seventeen United Nations Sustainable Development goals.
Plant-Based Products Play a Role
Plant-based proteins are an important alternative to the grain- and land-intensive meat production industry and are also playing a role in future food security.
Though growth and venture equity have poured money in the consumer side of plant-based protein (think of Beyond Meat), Rabenou is betting on a secular change, not on individual brands.
“One key aspect of this growth market that they have missed is investing in the infrastructure side of the business,” he says. “In order for plant-based food to compete with traditional protein, the sector needs to bring down the cost of production.”
Last year, UBS forecasted the global plant-based meat market could reach US$51 billion by 2025. At 2.5% market penetration , it suggests an increase three times more than 2019 levels. Plant-based milk is already relatively mainstream, now making up about 15% of milk consumption, potentially rising to 30% by 2026. This has taken years, yet further development of plant-based meat substitutes could pay off with a similar result.
“If plant-based proteins are going to have the same impact on traditional proteins, that’s an enormous business opportunity,” he says.
A Special Need for Patience
There’s no simple path to expediting food security fixes, and investing in this theme requires patience—whether in tech, land, or consumer innovations.
“In farmland, changing prices in the underlying asset typically take much longer,” Rabenou says. “When you grow corn, you are realizing the value of the crop every year while pistachios take seven to nine years to get the first harvest.” Comparatively, investing in real estate development may offer results in one to five years, depending on the strategy.
Research and development to improve seed resiliency and yields is another long-term process; the FDA says bringing a GMO plant to the marketplace can take several years.
As a longer-term theme with long cycles Rabenou says investors can get frustrated, adding this makes food security a more popular theme for investors in private markets. But over time he thinks there’s an opportunity for food security to develop into its own sector.
“When this happens, I assume you may see more investment opportunities in the public sector, as companies go public,” he says. This includes areas typically dominated by private investments, such as agricultural technology and food infrastructure.
