The agricultural sector undoubtedly has its challenges; the impact of drought, waste, plastics, energy sourcing, labour, over-processing and methane emissions just to name a few. Equally, however, there are also many opportunities. So, what are some of the exciting trends we are seeing in agriculture today? Below I highlight six trends that we have identified, providing interesting insights into the rapid change underway in the sector and the potential investment opportunities that could result.

Trends in agriculture

1. African Swine Fever (ASF):

One of the biggest events over 2019 was ASF, which wiped out 30-40% of the pig herd in China, creating record high pork prices and the need for protein replacement. This resulted in a surge in the share price of US protein-focused food producer, Tyson Foods. It now appears the worst may be over, with pig herds slowly recovering, which should be a tailwind for DSM, a large supplier of animal feed in China.

2. Overcoming the restriction of limited landmass:

Limited landmass in places like the Netherlands and Singapore has previously been a limiting factor in agricultural production. However, through innovative agricultural developments, the Netherlands is now the world’s second largest food exporter. Growing crops in glass houses that are self-sufficient in energy and even fertiliser has resulted in high volumes of production at efficient costs, with reduced impacts from seasonality.

Meanwhile, Singapore, which currently needs to import 90% of its food, is turning to vertical and urban farming practices to reduce some of its reliance on offshore sources.

By being aware of this developing theme, we are better placed to understand the opportunities that innovations of this nature are bringing and what sort of companies will benefit. For example, how does this theme affect specialised manufacturers of horticultural equipment, such as hydroponics?

3. Engineered meat and sustainable protein:

Expect to hear about more and more meat substitute companies such as Impossible Foods (private) and Beyond Meat, which listed in the US in 2019. Given the pressure on land and the amount of resources required to produce cattle, we are likely to see a lot of companies providing meat substitutes over the next 5-10 years.

This is creating opportunities in protein-based foods and the need for flavours and textures. We have seen International Flavors & Fragrances (IFF) take over the DowDuPont bio-sciences business for US$26bn to create a US$45bn merged company. Investing in this theme, we hold companies such as Archer Daniels Midland and DSM that are looking to expand into the plant protein sector.

4. The Internet of Things:

More precision farming will mean better use of resources, including fertiliser. We continue to invest in equipment providers, Deere & Co, and Nutrien for potash fertiliser and retail exposure. We expect fertiliser companies, Nutrien and Mosaic, to recover strongly through 2020 after unusually wet conditions restricted US fertiliser applications over 2019.

In an interesting technological advance in agriculture, companies are now producing sensors at the farm level to help predict micro weather patterns, improve the timing of planting and harvesting and monitor specific crop areas’ fertiliser and water requirements. The benefits here include enhanced production efficiency and reductions in water and chemical applications to crops.

Provenance of fresh produce is growing in importance for consumers and the agriculture sector is responding to demand. Internet-connected devices and processes can now be used to track food’s journey from ‘paddock to plate’, providing consumers with comfort about the quality of their purchases. While we see investment opportunities in this area, the main companies are unlisted and therefore outside our current scope. Nonetheless, we need to be alert to the new opportunities that technology is bringing to agriculture.

5. Environmental and sustainable innovations in food production:

DSM has developed a feed additive called Clean Cow which can lower greenhouse gas emissions from cows by up to 30%. This is currently undergoing certification in Europe, to be closely followed by New Zealand.

As consumers become more and more particular about their food’s ‘green credentials’, companies like Synlait are making rapid gains in demonstrating ESG* leadership. Further, ocean farming is growing in importance given the reduced environmental pressure it has compared to land-based production of beef, pork and chicken. We see opportunities for companies like Mowi, as consumer demand for omega-3 oils and a reduced environmental footprint gain prominence. Global demand for seafood is expected to grow from 15 kg per capita (1980) to 21 kg per capita by 2027, with the difference being provided from fish farming as the wild catch is not changing.

Related to this trend, almost 20% of the global fish catch is processed into fish oil and fishmeal to feed farmed fish. As demand increases for oily fish, such as salmon, supply could be outstripped without alternative sources of omega-3 oils for fish feed. To counter this issue, Veramaris, a joint venture with DSM and Evonik, has developed a process to produce omega-3 long chain natural oils from algae as a sustainable alternative for feed at fish farms.

6. Packaging is another major theme as the plastics controversy continues to build:

Smurfit Kappa provides us an opportunity to participate in the move to cardboard recycling and bespoke production of cardboard boxes to replace plastics in the food supply chain.

In our view, forestry and wood products are also likely to receive increased attention as markets focus on more sustainable building materials and the importance of forests as a carbon sink. To take advantage of these trends, we are invested in UPM and Stora Enzo.

In the meantime the world needs to be fed right now

The global population is 7.7 billion people, growing to 9-10 billion by 2050. To support this, more food, trade and better logistics are required. The yield of existing land holdings needs to lift, meaning more nitrogen, potash and phosphate applications will be required, but better directed. Resilient crops are required to provide reliable harvests to ensure food security. New seed traits will need to be developed to adapt to changing climates and provide resistance to pests and diseases. With Corteva (a seed technology company) spun out of DowDuPont last year as a key example, we are seeing more specialist operators like this rise to cater to the demands of feeding the global population.

Our ability to invest in the agriculture sector as part of our global natural resources portfolio is something the sets us apart from a lot of resources fund managers. For us, agriculture provides us with a source of returns that is uncorrelated to mining and energy due to the very different factors driving its opportunity and outlook.

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