Green eating

Environmental impacts, health awareness and growing intolerances are rapidly changing people’s appetites. Our head of multi-asset investments, David Coombs, has been gluten-free since before the kids started doing it, so he believes he has some wisdom to share.

A plate with lettuce

By David Coombs

Tracey and I were eating at our favourite local café Friday night, ordering the same main course. I tend to order first due to my coeliac need for gluten free which can complicate matters. (Better to strike while the service is fresh and sharp.) When Tracey ordered the waitress asked if she was normal. She quickly caught herself and said, “Perhaps I should rephrase that …”

I found this funny. Frankly, it happens all the time. It did make me think though: what is ‘normal’ in the food industry now? Aside from the rising tide of gluten-free people like me, you have the rapid take-up of vegan diets, carbon counters for each morsel, food miles and now labour shortages – both in restaurants and stores and in their supply chains … what a minefield.

We savoured our chicken burgers – gluten-free buns are no longer the dusty bricks of old! – while we still could, reminiscing over how we used to eat while growing up in the seventies when money was tight. Six types of vegetables on rotation, boiled to taste all the same. Arctic roll, Findus pancakes, meat well done (sorry, very well done) and fish paste. Our mothers did a fine job, but they were so limited in choice.

Now of course choice is phenomenal: vegetables flown from all corners of the globe, strawberries at Christmas and ready meals that taste amazing thanks to sugar and other stuff we’d rather not think about. We even have the 21st century equivalent of the Findus debacle, the Greggs vegan sausage roll that managed to be just as unhealthy as the meat version.

Fragmenting diets

From an investment point of view, there has been much excitement about the next big thing in food, alternative milk and meat, organically grown, plant-based, dairy-free, you name it. What do I take from all this? It’s clearly an industry ripe for disruption. From source through to manufacture and distribution. On top of that, more extreme and unpredictable weather patterns are a rising external risk factor to consider.

Disruption is generally polarising, as shown in sectors like retail. So, who will be the winners and losers in the food industry and how do we react as investors? I haven’t concluded yet, but I will share my musings.

I see this in two ways. I want to hedge our multi-asset funds against the risk of extreme weather, while also taking advantage of opportunities provided by the food manufacturing disruptors. Of course, we could get exposure to agricultural commodity prices, thereby benefiting if bad weather reduces harvests and sends prices higher. We do this already via our general commodity ETFs. But a specialised investment in agricultural commodities can be expensive, even if it does act as a hedge on food inflation. We could also buy food producers in the same way you can buy gold miners rather than bullion.

Let’s start with agriculture. It feels to me that the days of the small holding farmer are numbered. Clarkson’s Farm on Amazon is a great example of modern challenges, and his farm isn’t even that small. With ever more volatile weather, the need for more kit, technology and machinery is clear. Harvests need to be gathered more quickly and at short notice. You need access to capital to achieve scale and not every farmer can chair a quiz show on ITV.

Management of soil and livestock through carbon neutral and natural methods will be key to gaining the support of governments and consumers over the next decade. This means more scientific advances and falling prices. Sound familiar? So, companies that can provide pest protection without damaging ecosystems will be well rewarded. Meanwhile, agricultural machinery needs to electrify or find another alternative fuel system to the combustion engine. More technology will be needed, especially in automation and sensors that already help farmers achieve optimum yields. We are looking at all these areas and already own Trimble in our sustainable multi-asset funds.

Which is the greenest of them all?

Moving onto food production, the focus on healthier living, fewer food miles and alternative diets  all offer very exciting opportunities for disruptors. However, when you start digging it gets complicated real quick. Non-dairy milks that require huge amounts of water to make. Vegan foods that are highly processed and full of synthetic ingredients, so creating concerns around efficacy (and acceptance by customers) and even cloning. These are just a few of the many challenges to the new kids on the block whose environmental, social and governance (ESG) credentials aren’t as clear cut as their marketing would lead you to believe.

We want to invest in companies that provide food that is healthy, tasty, interesting and has a low carbon footprint. That’s a long and deeply challenging list, but I think companies that can crack it will dominate the industry over the coming couple of decades. Christian Hansen, a Danish food additive and enzymes supplier, is one company that we believe in. We own it in our multi-asset funds. We are looking for more like it.

Finally, there’s distribution. Food miles will, I believe, become a bigger issue as time goes on. Remainers need to get used to the Union Jack on food packaging. They can relax: it’s not about Brexit, but low miles. This shift to local supply creates huge opportunities for smaller companies in the UK as access to market improves. How will this land with supermarkets which are used to selling on volume and price? Are we at peak Lidl with German-made Glamorgan sausages? I just made that up, but the point is a serious one. We might see a change in the power imbalance between retailers and suppliers. It probably means higher prices, something that challenges our view that inflation will be a passing phase. We’re watching closely.

How will we buy food? Same-day delivery from Amazon Wholefoods, a chosen window from Ocado or the local butcher’s bike when he has the puff? Shopify is helping level the e-commerce playing field for smaller companies, which could also provide significant disruption to incumbent suppliers and retailers.

The last decade has seen technology upend retailers, energy markets, media, telecommunications and others. I think the food industry, from field all the way through to your doorstep, is in for a revolution, and that’s exciting. There will still be room for Arctic roll though.

Tune in to The Sharpe End — a multi-asset investing podcast from Rathbones. You can listen here or wherever you get your podcasts. New episodes monthly.