The future of food is technology

Experts in environmental, social and governance (ESG) specialists can write in detail about the impacts of climate change on our food system and which government policies are required to address or decrease impacts.

I am looking at the future of food and the innovation and technology that will be needed to safely produce and distribute the food we need from the perspective of an investor. 

That said, it is clear the food system – which makes up 10% of the global economy – is increasingly a major driver of climate change, and at the same time is disrupted by climate change. This disruption will impact global investors across asset classes – in equities alone, food makes up US$4.9 trillion or approximately 4% of global market capitalization. 

So it’s critical that we think about how investors respond – whether they focus on ESG or not – to identify opportunities in the market and potentially avoid risk that could materially impact their portfolios. 

I have some history in agriculture being from a fourth-generation ranching family in Montana. Anyone associated with a ranching family gains a lifelong education on the food supply chain, commodity prices, and the challenges ranchers and farmers face every day to get their product – whether it’s a cow or a bushel of wheat – to market. 

Despite this experience, I am somewhat surprised by the level of sophistication in today’s food business. Food is no longer a story just about land, water and weather; it is a story about technology, innovation and the future. It’s clear to me that food innovation, and the future of food production, will play a major role in markets over the coming decades.

Food’s environmental impact At the recent COP267 conference, members of the Glasgow Financial Alliance for Net Zero (GFANZ), of which Franklin Templeton is a member, signed a commitment to deploy over US$100 trillion in financing over the next three decades to move the global economy toward net zero carbon emissions by 2050. The capital will be deployed over 24 major initiatives, one of the largest and most important being the transformation of the global food system – which will need to feed our future 9.3 billion people and produce 70% more food by 2050 than we do today, while simultaneously reducing its significant negative impact on the environment. 

While today’s global food system makes up nearly 10% of the global economy – the food system is valued at over US$8 trillion a year – it also generates over US$12 trillion a year in negative externalities ranging from water and air pollution to food-borne diseases and health impacts from unhealthy food and exposure to toxic pesticides and fertilizers.

In stark terms, the globe is taking on a US$4 trillion loss each year to finance a food system that is unsustainable, unhealthy, inequitable, unstable and one of the biggest contributors to climate change. It is estimated that over a third of greenhouse gas (GHG) emissions – one of the leading contributors to climate change – come from food systems. This estimate accounts for the full cycle of food production – including supply chain, packaging and retail – whereas previous calculations often accounted for GHG emissions only on the farm or pasture.

Food system GHG emissions are also creating a negative feedback loop. As emissions continue to grow, global temperatures continue to rise – additionally, higher CO2 levels in the atmosphere reduce nutrient levels in foods. As global temperatures continue to rise, farm yields continue to fall. Decreased productivity depresses supply and leads to increases in food prices. Combining falling yields, lower nutritional value and higher prices creates higher prevalence of food insecurity. Mitigation of these trends will require a broad range of solutions, including addressing issues around policy, land use, diet, waste, subsidies and trade agreements. These changes are where financial markets and investors will also play an important role – particularly in the deployment of some of the US$100 trillion in capital that GFANZ has pledged over the next few decades. 

Three reasons food matters for investors

Food industry innovation will require innovation in financing

What does this mean for investors? In my view, there are three main points. First, innovation in the food industry must be financed. Whether it be funding for improving traditional farmers’ production, the move to high-efficiency indoor agriculture, startups developing alternative proteins, or helping companies build supply-chain resilience, all will require large capital inputs from equity, fixed income, and private markets. And, if we’re expecting the food industry to innovate, the asset management industry must also innovate to create investment vehicles to address these large-scale changes. This may require rethinking traditional funding models, including the duration and types of loans, direct impactful investing and aligning investments to long-term sustainability goals, such as the UN Sustainable Development Goals (SDGs). And, due to the significant impact agriculture has on GHG emissions, it is critical that carbon trading and carbon markets develop as soon as possible. 

Investors should consider unintended consequences

Secondly, the food system is highly complex and interconnected, and deployments of capital must consider unintended consequences (read: negative externalities). Changes in the system create ripple effects that have long-term impacts and can lead to severe disruptions. We’ve seen these disruptions during the COVID-19 pandemic. 

One ripple effect I have seen firsthand is how the change in diet in China has affected the health of Chinese people and the environment globally. When I first started traveling to China in the early 1980s, most of the diet was plant based with just a small amount of meat – usually pork. In the early 1980s, the average per capita consumption of meat was just over 13 kg per year. Obesity, diabetes and other diet-related diseases were rarely reported during the 1980s in China. With the opening of China’s economy and subsequent rise in average incomes and a growing middle class over the last few decades, meat consumption now hovers over 60 kg per year. The significant increase in meat in the Chinese diet corresponds to a nearly 7x increase in beef consumption since 1990. 

Increasing appetite for beef in China is linked to accelerating deforestation of the world’s greatest carbon sink, the Amazon rainforest, where many cattle are now being raised. The change in diet is not limited to meat – we’re seeing increased consumption of sugar and fat, resulting in significant increases in type 2 diabetes in China’s populace. Less than 1% of China’s population suffered from type 2 diabetes in 1980; that number is now close to 12% in 2022 – in raw numbers, roughly a jump from fewer than 10 million to over 170 million people. 

This increase has economic ramifications. In 2015, it was estimated that type 2 diabetes generated US$1.32 trillion of negative impact on the global economy, and, by 2030, it is estimated to have a negative impact of US$2.25 trillion–US$2.5 trillion. With the world’s largest population, China leads the globe in financial loss from type 2 diabetes. That loss is projected to grow to consume 3%–5% of China’s forecasted 2030 GDP. As China becomes a larger segment of the emerging market index – and it really should be considered a developed market, in my opinion – this could have a significant impact on investors’ assets going forward. 

We need better financial incentives and environmental impact measurements

Third, as we invest in innovation to help reduce negative externalities, a market-based approach where we more effectively measure and price environmental impact will be necessary. More directly: the economic value of natural systems and the risks to these systems’ further degradation must be accounted for in asset pricing. To give context, the World Economic Forum (WEF) and PricewaterhouseCoopers (PwC) have estimated that more than half of global GDP is moderately to highly dependent on natural systems under threat – essentially, half of global GDP has significant risk exposure to changes in nature.

I expect that number may make you gasp. However, for investors, there is opportunity on the other side of this equation. The opportunity to help fund the global economy’s transition to a nature-positive economy – which the WEF has defined as “enhancing the reliance of our planet and societies to halt and reverse nature loss.” It is estimated this transition will generate US$10 trillion in additional business revenue and cost savings and over 395 million jobs by 2030 – of which US$3.6 trillion and 191 million jobs are directly related to changing the food system. 

The growing role of private markets 

Though public markets play a critical role in our food system, I see private markets playing a growing and significant role in food innovation going forward. 

Venture capital investing in foodtech and agritech start-ups is rising steadily. From 2015–2019, over US$45.6 billion was invested in foodtech startups in 3,200 deals. This space will continue to grow as start-up companies explore lab-grown meat, 3D-printed food and other innovations. 

Private equity investing is playing a major role in mergers and acquisitions of food giants. The deal landscape slowed a bit during COVID-19 but has picked up again, with North American transitions in the third quarter of 2021 exceeding US$13.6 billion, 76% of which was by private strategic buyers and private equity firms.

Real estate will play a major role in the expansion of controlled environment agriculture (CEA) and vertical farming. Much of this growth will happen closer to urban areas through in-fill or suburb/exurbs in order to guarantee fresh produce is delivered short distances to consumers. The global CEA market is expected to reach US$172 billion by 2025, and the vertical farming market is expected to exceed US$31 billion by 2030.

Private debt will play a key role in the coming years in providing funding to farmers making the transition from traditional to regenerative agriculture. In 2019, US$3.6 billion in private loans was issued in the United States through private debt managers, with US$2.8 billion having loan criteria tied to regenerative agriculture.

¹ van Nieuwkoop, M. “Do the costs of the global food system outweigh its monetary value?” World Bank Blogs, June 17, 2019.
² FactSet, as of February 21, 2022. Calculation contains a market cap of 2,114 companies in these categories: food distributors, food retail, hypermarkets and supercenters, agriculture products, packaged foods and meats, and the soft drinks industry. Total market cap of US$117.1 trillion calculated on 48,325 companies.
³ The 2021 United Nations Climate Change Conference, commonly referred to as COP26.
⁴ Food and Agriculture Organization of the United Nations (FAO). 2009. High-Level Expert Forum–How to Feed the World in 2050. Rome: FAO.
⁵ van Nieuwkoop, M. “Do the costs of the global food system outweigh its monetary value?,” World Bank Blogs, June 17, 2019.
⁶ Crippa, M., Solazzo, E., Guizzardi, D. et al. 2021. Food systems are responsible for a third of global anthropogenic GHG emissions. Nat Food 2, 198–209. 
⁷ UN FAO. Data excludes fish and other seafood sources. As of February 2022.
⁸ Organisation for Economic Co-operation and Development (OECD), Meat consumption indicator. As of February 2022.
⁹ Trase, China’s exposure to environmental risks from Brazilian beef imports, Trase Issue Brief 3, June 2020.
¹⁰ Yuan, H. et. al. 2017. Type 2 diabetes epidemic in East Asia: a 35-year systematic trend analysis. Oncotarget, vol. 9(6), 6718–6727.
¹¹ Bommer, C. et. al. 2018. Global Economic Burden of Diabetes in Adults: Projections From 2015 to 2030. Diabetes Care, vol. 41(5):963–970.
¹² WEF in collaboration with PwC. 2020. Nature Risk Rising, Geneva: WEF.
¹³ Tran, T. “The State of the Food Industry, and How FoodTech Startups Are Creating a New Normal for All,” Applico Blog, May 20, 2020. 
¹⁴ Tran, T. “The State of the Food Industry, and How FoodTech Startups Are Creating a New Normal for All,” Applico Blog, May 20, 2020.
¹⁵ KD Market Insights, Controlled Environment Agriculture Market–By Crop, By Growing Method, By Component & Global Region–Market Size, Trends, Share & Forecast 2020–2025, February 2021.
¹⁶ Precedence Research, Vertical Farming Market: Global Market Size, Trends Analysis, Segment Forecasts, Regional Position, 2021–2030, January 12, 2022.
¹⁷ Electris, C. et. al. Soil Wealth: Investing in Regenerative Agriculture across Asset Classes, Croatan Institute, July 2019.