28/08/2019 - Investment Themes: Food


Soya and soldier fly

The world population is growing and with it the need for food. With overfished seas and because of  environmental and climatic aspects and as animal breeding cannot be increased unlimited without restricting animal welfare the food industry is looking for new ecological solutions - an investment focus of the DJE - Agrar & Ernährung.

By Jörg Dehning, Analyst for the Food & Beverage Sector at DJE Kapital AG and Fund Manager of DJE - Agrar & Ernährung

According to first estimates China's pork consumption dropped between 10 and 15 percent year-on-year in the first half of 2019. This may come as a surprise as China in particular has been considered insatiable in terms of meat demand in recent years. The decisive factor for the decline, however, was not the lack of appetite for meat. Instead, "African swine fever" scared off many consumers in the Middle Kingdom. According to market observers about 40 percent of breeding pigs were culled nationwide to contain the disease. Nevertheless, it has not been possible to prevent the disease from spreading to a greater or lesser extent in neighboring Asian countries. Therefore, it is not surprising that a large part of the additional protein requirement was covered by the consumption of poultry and farmed fish.

Fish farming expands, but must become more sustainable

While the world's oceans have already been largely overfished the aquaculture industry in particular has continuously expanded its range in recent years. In Indonesia alone, the production volume in fish farming has increased almost sevenfold since 2009 to 31.9 million tons. However, the ecological balance is rightly criticized here as well since many aquaculture companies also use fish meal and fish oil in their fish feed. The problem of overfishing has hardly been reduced in recent years. Thanks to the relatively low price level many fish farmers are now switching to soybean meal. However, their fatty acid profile is insufficient. That is why completely new approaches are needed.

Alternative solutions improve life cycle assessment

The replacement of fish meal with insect meal and the use of algae instead of fish oil seem to be the most interesting options in this context. Since mid-2017 a total of seven insect species have been approved for use in fish feed in the European Union. Several large-scale plants for the production of insect meal based on the "black soldier fly" will go into operation this year. The "black soldier fly" from Florida is particularly interesting because of its resistance to viruses. In this way it fulfils important food safety requirements. In addition insects are virtually unbeatable in terms of greenhouse gas emissions and land and water consumption.

The same applies to the production of proteins and fatty acids from algae. In addition to sunlight and CO2, microalgae only require inorganic nutrients such as phosphate and nitrogen for cultivation. Compared to land plants they also consume less water and do not need any agricultural land. Using the residual biomass as fertilizer or as a further source of energy helps to reduce production costs even further.

Innovative fish farming on land saves long transport distances

In addition innovative water circulation systems (RAS systems) now enable professional shrimp and fish farming on land. Whereas previously salmon had to be transported from Chile or Norway to the USA or China land-based fish farms could in future make long transport routes to customers superfluous. Although the necessary investment volumes are considerable, the US projects that are currently being launched can cost up to 400 million US dollars each. However, in view of the freight cost savings of around two US dollars per kilogram and the possible premium price in trade, the capital investment should pay off in the long term. A part of the US salmon has already been sold to a large retail group. After all, regionally and sustainably produced food is increasingly in demand among consumers.

Plant-based meat replacement as part of the new lifestyle

The current discussion about progressive global warming and various animal welfare initiatives will encourage more and more consumers to attach importance to a conscious and sustainable diet. This trend therefore also requires a rethink on the part of listed food companies. According to the market research company Mintel, 53 percent of US consumers now accept plant-based foods as having a better ecobalance than comparable animal-based foods. Not only vegans are making the new lifestyle suitable for the masses. There is no other explanation for the hype surrounding the new plant-based burgers in the USA. Meat substitutes produced on the basis of pea or soy protein are not only finding their way into supermarkets there. Even leading fast food burger chains have recently added the meat-free alternative to their range. Other "Foodtech" companies are already working on the development of plant-based tuna and shrimp substitutes. If these also meet the taste of consumers, the criticised tuna catch could possibly be restricted more strongly in the future.

Organic cultivation under artificial light is sustainable, but not yet efficient enough

However, even the ecobalance of some organic products is increasingly being questioned. It should be clear to everyone that, for example, organic potatoes from Egypt should be less in demand with regard to the ecobalance. Urban greenhouses with artificial light are therefore often presented as the solution of the future. The absence of pesticides and the reduced use of fertilisers and water make the concept very attractive. Unfortunately, the high energy costs are currently still leading to a cost disadvantage of 200 to 300 percent - which so far can only be profitably offset by higher sales prices in cities such as Tokyo or New York. It is also possible, however, that intelligent closed-loop systems will improve efficiency in this area in the medium term.

Conclusion: Investors should focus on innovations with a positive eco-balance

One thing is certain: limited resources, a growing world population, environmental problems, climate change, overfishing - all these factors have an impact on food production. Under the heading "Foodtech", more than ever new ways in food production are being searched for. This offers corresponding opportunities for investors. In the future, those companies in the food and agricultural sectors that offer innovative solutions in production or in the manufacture of animal feed will be of particular interest. Increasing social awareness of sustainability and health should be at the forefront of every new product launch. The consideration of the so-called ESG criteria (Environment/Social/Governance) will certainly also determine the development - and should therefore be included in the selection of stocks.


Funds Profile: DJE – Agrar & Ernährung

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