Investment outlook for 2022 - Part 3 (Food)

Over the last few weeks, I’ve started to bring you the four key investment themes I’m watching for 2022. I discussed Climate before the Glasgow summit last week, if you missed it you can read the note here. The second theme and my focus in this note is on Food.

It comes at an amazing time as many countries, including China and the United Kingdom, are struggling with food shortages and disrupted supply chains. Food and Drink Federation (FDF) boss Ian Wright warned shortages might be around for longer than expected.

I suspect these measures will be temporary as the impact of the pandemic works its way through the global economy. I was invited onto the Wealthi podcast last week and I spoke about this very topic. I see it taking at least two years until we return back to pre-pandemic levels of global consumer supply for both perishable and non-perishable goods.

Food and Climate go hand in hand

Climate and the move towards a net zero economy will have a spillover impact on the way we consume Food, particularly in developed economies. One of the biggest post Glasgow themes has been the pressure for countries like Australia to sign up to methane gas reduction targets.

Methane is considered to be one of the most potent greenhouse gases and second-biggest contributor to global warming behind only carbon dioxide.

Last week, the US and the European Union announced more than 100 countries have joined their bid to cut methane emissions by 30 per cent by 2030. Both sides of Australian politics have said they won’t accept such targets.

Methane is emitted in coal and gas production, from livestock and other agricultural activity, and when organic waste breaks down in landfill. Almost half of Australia's annual methane emissions come from the agriculture sector.

Cows are a major source of methane emissions and so my belief is that the battlegrounds have been laid for new Food trends which will slowly shift in the coming years.

Grains are heavily reliant on a handful of countries

If we do see a shift away from traditional meat-heavy diets, there lies another problem in that around 60% of global grain supplies are farmed and distributed in a handful over countries — China, the United States, India, Brazil, and Argentina.

Even within these countries, food production is concentrated in a few regions, such as the Midwestern United States and the Brazilian state of Mato Grosso.

The world’s grains, in other words, are produced mainly in a few breadbaskets—which means that a few geographically concentrated extreme weather events in these regions could affect a large share of global production.

n the event of such a shock to production, grain commodity prices could more than double. Those most hurt by the attendant spike in global food prices would be people living in extreme poverty—the more than 700 million people worldwide who are currently living on less than $1.90 per day.

Food security will become a major investment theme

Between now and the middle of the century, food demand will grow by 50% and sustainable increases in crop yields will be crucial if we are to continue to feed the world. Advances in farming practices, farmer education and new seed varieties will all help to optimise yields in the future.

But as the quantity of production grows, so too does the amount of potassium removed by harvesting – and the sustainable, targeted use of potash fertilisers will be critical in replenishing our soils.

As an essential nutrient for plant growth, potash is a vital link in the global food supply chain. And the demands on that supply chain are intensifying; while cultivated land area will remain almost static, the global population will be close to 10 billion by 2050.

Not only will there be more mouths to feed but also rising calorific intake comprised of more varied diets, both of which increase the strains on finite land supply.

The finite supply of cultivated land area cannot keep up with that demand. In 2000, arable land per capita was 2,500 square metres – about half the size of a football field. Since then it has fallen to 2,100 square metres and is projected to shrink further to 1,900 square metres by 2030. As a result, the demands of food supply must be met through higher yields from existing arable land, putting more strain on our soils.

Bottom line — Food supply chain investment will be huge

All this points to steady long-term growth in global crop production and this growth will have to be achieved through the sustainable intensification of agriculture and the optimisation of crop yields. Potash is a key commodity I’m watching and investing in (through ASX listed BCI).

If you’re looking for larger companies, add Nutrien Ltd (NYSE listed) to your watchlist. The stock is up 64% this year, but up only 20% over a five year period, which means it has been clawing back recent losses.

Potash is one of many Commodities which I’m watching very closely. In my note next week, I’ll run through Commodities as an overall theme and pinpoint the areas which I believe will have the most significant movements next year.

As we transition our energy, food and overall consumption patterns for the global population, there will be a huge impact for commodities across the spectrum to facilitate this transition. Make sure you subscribe to get each week’s note in your inbox.