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The sustainable investor for a changing world

What will be the consequences of the Covid-19 pandemic for the food and agriculture sector? How is the transition towards more sustainable food production and consumption affected? Agne Rackauskaite, co-portfolio manager of Impax Asset Management’s sustainable food strategy, gives investors her view on the post-pandemic outlook.

Listen to the podcast with Agne or read the article below:

Impact of Covid-19 on consumer behaviour

What we have seen so far is an acceleration of the trends that were already underway. Consumers have become much more aware of the link between food and their own health. In some cases, this greater awareness concerns the link between obesity and health issues related to Covid-19.

One of the most notable changes is a shift away from heavily processed foods to more natural foodstuffs. Whereas in the past consumers were more influenced by price and the power of brands their focus is now shifting to the food itself – the ingredients, how it’s produced and where it comes from.

Greater awareness of health issues related to food

That is to say, the pandemic has reinforced changes in consumer attitudes that lead to growth in demand for healthier food. The natural foods category – which includes better-for-you snacks such as fruit and nut bars and seaweed crisps – should continue to grow globally at high single-digit compounded annual rates as it gains market share from processed foods.

The pandemic has also raised awareness of the importance of our immune systems. This has given a significant boost to sales of nutritional products such as probiotic (bacteria and/or yeasts that occur naturally in the human body) supplements.

We see many investment opportunities, but speciality ingredient companies are currently in a real sweet spot. They are responding to strong demand for more functional food by working with manufacturers to reformulate products by, for example, reducing salt and sugar content while maintaining the taste profile. Specific investment prospects include companies involved in natural ingredients, dietary and nutritional additives, flavours, colours, emulsifiers, cultures and enzymes.

Over the longer term as we look beyond Covid-19 we expect these positive shifts to prove permanent and demand to settle at elevated levels particularly as this trend appeals to a broader set of consumers.

Digitalisation is empowering consumers of food

The surge in e-commerce of course has an impact on food consumption. So far, online shopping has been accompanied by an increase in basket size with reduced shopping frequency. Consumers have preferred shopping at stores closer to their homes.

Again, they are focusing less on price and brands and more on the food itself. They want to know where it is from and what has gone into it. Digitalisation has given them the tools to access analysis and assess the quality of different products as they shop. Food manufacturers have to respond accordingly.

Plant-based foods go mainstream

Another significant shift is the move to plant-based diets. Increasingly we see consumers making the choice to avoid environmentally harmful meat and dairy products and replacing them with plant-based alternatives.

The rise of flexitarian diets – which involve less meat and more plant-based foods – is driven by growing environmental, health and animal welfare concerns. Meat alternatives are growing rapidly, with sales of plant-based meats projected to expand significantly over the next decade. We expect the segment’s growth to significantly outpace that of traditional meats, analogous to the disruption of the liquid milk category by the emergence of plant-based drinks.

If we take, for example, plant-based meats, just a few years ago this was a tiny niche segment limited to only vegetarians and vegans. There was little innovation and the quality of the products was frankly poor.

Today, plant-based meats are moving mainstream for the following reasons; 

  • Increasing awareness among consumers of the environmental and health impacts of meat consumption
  • As the markets grows, product development increases. There is now a far greater range of tasty products with better nutritional profiles.
  • The launching of plant-based meats into the mainstream was assisted by a key breakthrough a couple of years back when a strategic change was made to in-store merchandising. Instead of displays in slow-moving isles for frozen and speciality products, plant-based meats were moved into the fresh meat isles. This made these products much more visible to consumers and raised their profile. 

More TV-dinners…

Finally, another change in consumer habits that we expect will prove to be permanent in the post-pandemic world is the greater tendency among consumers to cook and entertain at home. We expect this to be driven by the shift to flexible working.

Covid-19 – The impact on food supply chains

The pandemic highlighted real weakness in various parts of the supply chain. Early on, we saw significant disruption to supplies of crop inputs, partly because international borders were closed. In the future, the development of a range of technologies and practices should help reduce the inputs needed to produce food.

Another widely reported disruption we saw last April and May was the halt to supplies of meat during the pandemic as it became apparent that meatpacking plants were frequently Covid-19 hotspots. This was a global issue, but nowhere was this more apparent than in the US where consolidation left the industry vulnerable to this sort of disruption.

We were encouraged by the fact that other parts of the food supply chain were very resilient.  In order to ensure there was food on the shelves, food retailers reacted well early on by asking suppliers to reduce their product ranges and focus on deliveries of a few core products.  So instead of having 10 different sorts of orange juice they only had one or two. They standardised pack sizes and cut innovation to ensure there was food on the shelves.

Looking forward, we expect a few significant changes. Supply change resilience will be key. The pandemic has shown the benefits of investing in vertically integrated companies that have greater control over their supply chain.

Supply chains may become more localised. We may also see more investment in controlled environment agriculture, especially in countries relying heavily on food imports

Another priority will be to reduce food waste exist across all parts of the food value chain be it during transportation or storage. Extending the shelf life of perishable foods can have a dramatic impact on reducing food waste. Companies producing natural preservatives such as lactic acid should benefit here.

Near-term challenges for investors  

In the short term, inflationary pressures pose a significant challenge. Right across the food sector from farm to fork, we see reports of higher prices for raw materials, labour, freight and packaging. Multiple players along the value chain are flagging this issue.

While at the top of the value chain, higher food prices may be positive for producers there are questions as to whether companies further down the chain can maintain gross margins with these higher costs.

As investors we believe the best way to navigate this environment is to invest across the value chain and diversify risk. That means we are looking for very integrated business models and businesses that have the ability to maintain margins by passing on the burden of higher costs.

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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