How to Profit from the Coming Food Crisis
Someone once said the most appealing message for retail investors is an idea that combines a crisis with a way to become wealthy that only a select few are privy to. You’ll often see this in respect to gold. The U.S. dollar is on the verge of collapsing so act now and buy gold. For some reason, people really like the idea of a crisis befalling their fellow man while they rise to the top. We’re not sure if becoming wealthy while watching others experience misfortune is the ultimate rush, but it’s a good way to get clicks. Unfortunately, the title of this article is anything but clickbait.
The Coming Food Crisis
There’s trouble brewing, and it’s not just the domain of conspiracy theorists. Put together the pieces and there’s every reason to be alarmed. Sri Lanka is simply a remarkable country to visit, or at least it used to be. Months ago, the country defaulted on its debt amid massive protests. Inflation surpassed 50% in June while nine out of ten Sri Lankan families are skipping meals. The straw that broke the camel’s back was when the president decided last year to (checks notes again) ban fertilizer, a move that decimated crop production. When the country started subsidizing fertilizer in the 1960s, they saw rice production triple. Now, the reverse is happening. A recent piece by Bloomberg talks about how “rice production in the last harvest season had already plunged 40% to 50%,” while “seed and fertilizer scarcities could shrink crop yields by as much as 50% this year.”
Across the pond in the Netherlands, farmers are blockading food distribution centers and roads because the government is planning to impose a one-third reduction in the numbers of pigs, cows, and chickens in the country. Europe’s largest exporter of meat is being threatened in the name of protecting the country’s nature reserves. The world’s second-largest exporter of agricultural products is the Netherlands (second only to the United States), so maybe we should stop pissing off the 2% of Dutch citizens who till the land. Also in Europe, the world’s largest and third-largest wheat producers are producing less grain because of supply chain problems brought on by The Rona and the fact that both countries are trying to kill each other.
Guess who the world’s largest exporter of fertilizer is? Russia.
Food protests are taking place across the globe – Albania, Kenya, Indonesia, Peru, Ecuador, Panama, Argentina, Tunisia, and Lebanon are all seeing people protesting in the streets over the rising costs of food. War, famine, and pestilence are the perfect storm for a brewing food crisis that’s not being covered sufficiently by the media. That’s great Jennifer Lopez wore three different Ralph Lauren dresses for her wedding to a guy who makes his living pretending to be someone he’s not, but maybe there are more important things to focus on right now?
We firmly believe that plant-based meat substitutes will never scale unless they can compete on cost with real meat products. Beyond Meat is a long way off, so perhaps soaring beef prices can help Beyond Meat achieve price parity sooner. That depends on how the price of peas – a key input for Beyond Meat – will react to the soaring costs of food across the board. With more than half of Americans living paycheck to paycheck, we can be certain that consumers will exhibit more price sensitivity.
The plant-based meat boom is withering because the demand just isn’t there. Taco Bell is now developing their own meat substitute and the McDonald’s plant burger didn’t go over well with consumers. Who would have thought the typical McDonald’s consumer doesn’t care much about healthier eating options? The only hope for Beyond Meat is that meat prices are soaring across the board and will likely continue to. The cheapest meat protein – chicken – is now predicted to increase between 14.5 and 15.5 percent in 2022. “Beef prices are poised for a surge that could last years,” says the New York Post, pointing to a severe drought that’s leading to massive cattle slaughtering. While the situation at Beyond Meat seems dire, perhaps they’ll be able to compete on cost sooner than anticipated as the demand for alternative proteins increases. That’s what our next company is hoping for as well.
We’ve been long-time shareholders of ADM as part of our dividend growth investing strategy, and its recent stock price appreciation makes it our second-largest stock holding. It’s a company that’s been enjoying tremendous revenue growth even before the price of commodities soared.
Financial discipline is what enables a firm like ADM to not only pay, but increase their dividend for 47 years running. With a payout ratio of 30 to 40 percent, ADM has plenty of dry powder to continue growing through acquisitions as well, including a push to enter the alternative protein market. An article by Food Dive talks about how ADM saw earnings soar in Q2-2022 with their Ag Services and Oilseeds division more than doubling profit to $1.85 billion compared to the same quarter last year. That windfall was “fueled by higher prices for grains like wheat and soy.” The recent earnings call saw ADM’s CEO talk about the need for Ukraine and Russia to allow food supplies to continue without disruption to avoid a potential “availability issues for food.” Seems like every company dabbling in food is aware of the potential problems and seeking to address them – like Agronomics.
Several years ago we wrote about A Clean Food Stock That’s Not Beyond Meat noting that if it wasn’t for their small size, we might be interested in making an investment in this publicly traded venture capital (VC) firm that invests in food technology. An investment in Agronomics at that time would have appreciated +159% vs a Nasdaq return of +44% over the same time frame. Unlike most publicly traded VC firms, Agronomics trades at a premium to its net asset value (NAV) which means investors see a bright future for the firm’s investments which constitute two-thirds of the fund’s value. The rest is in cash which can be used to make further investments like the Series A round they led last quarter in faux leather maker VitroLabs.
The company’s recent Q2-2022 update addresses the brewing food crisis and proposes that cellular agriculture is the solution. The Agronomics portfolio consists of 22 companies covering major categories within cellular agriculture including beef, chicken, pork, and fish. With a market cap of $202 million, it’s still too small to be on our radar and, for that reason, we’ll be removing it from our tech stock report in the coming August update (it will stay in our catalog as a like). For investors with more tolerance for risk, Agronomics might make for a compelling way to get exposure to food technology.
ANIC’s performance since inception in 2019 has been positive, with an NAV total return of 80% over this period. And we share the company’s view that there is significant potential for further NAV uplifts over time, as and when the company’s greater focus on nearer-term income pays off, and its longer-standing portfolio holdings make further progress towards financial viability.Credit: Edison
As long-term investors, our methodology avoids trying to profit on short-term trends. Sure, you might try to invest in fertilizer companies, but demand for fertilizer will likely fall if fewer people are farming. Food processors may enjoy a temporary benefit from increasing food prices, so they better be investments you’ll still want to hold when things go back to normal. At any rate, there are probably much bigger problems to worry about unless the world collectively takes action to resolve them. Putting farmers’ interests above all else might be the best way forward.
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