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What does the future of the ag food industry look like?

Updated: Aug 20, 2021




What is driving the competitive dynamic for conventional meat and dairy?


The disruption to the global economy caused by the COVID-19 pandemic has unveiled the fragilities and opportunities to a myriad of economic activities and systems. The closure of businesses, high unemployment, imposed lockdowns, significantly reduced travel, and social distancing has restricted nations' engagement in ‘normal’ economic activities. In particular, the closure of major meat processing plants around the world – following several confirmed cases of the virus – disordered the supply of meat in supermarkets as individuals were preparing for the long-haul and began the panic buying frenzy. The pandemic has shined a light on the working conditions of meat plants, which made it near impossible to maintain social distancing and the cold environment manifesting an ideal incubator for the virus. In Australia, we saw the indefinite closure of JBS’ Brooklyn (VIC) and temporary closure of JBS’ Dinmore (QLD) meat plants due to case clusters with the latter being the largest beef processing facility in Australia with a daily operating capacity of 3,400 head (Beef Central, 2020).


Relative to conventional meat, the production of plant-based alternatives is less reliant on labour and hence, less vulnerable to staffing shortages that witnessed significant year-on-year growth. This growth can be partially attributed to the temporary absence of conventional meat products but is primarily driven by increased consumer awareness that plant-based alternatives are ‘healthier’, more eco-friendly/efficient, and have a longer shelf life relative to conventional milk (Poinski, 2020). The closure of cafés around the world increased as economies battled to contain COVID-19, which resulted in an oversupply of milk with Dairy Farmers of America – the country’s largest dairy co-operative – estimating that farmers had to dump circa 14 million litres of milk every day, highlighting the short shelf life of conventional milk (New York Times, 2020).


Plant-based alternatives are here to stay and growing rapidly.

COVID-19 exposed the fragilities of the meat and dairy industries and has raised concerns particularly among Gen Z and millennials about stocking their grocery carts with meat (Datassential, 2020). This has enhanced the degree of competition and disruption of the global meat and dairy sector as consumers are more frequently reaching for plant-based alternatives across multiple categories. The market for plant-based milk and other milk alternatives in the U.S. are the most developed plant-based category that saw 20%, and 28% year-on-year growth respectively followed by plant-based meat and others, see figure 1 (Global Food Institute, 2020). A key driver to the success of plant-based alternatives is the innovation and development of successful biomimicry – the development of plant-based products that ‘mimic’ the taste and texture to traditional meat and dairy products.


Figure 1 U.S. plant-based food sales (Global Food Institute, 2020)


Growth in plant-based alternatives more broadly stems from changes in consumer tastes, environmental and ethical awareness, health benefits, and the enhanced scope of plant-based alternatives available on the market. Poore & Nemecek (2018) consolidated environmental data from 38,700 farms, 1600 processors, packaging types and retailers and measured the footprints of numerous commodities, detailed in table 1. Table 1 emphasizes the myriad of trade-offs between dairy and dairy alternatives with respect to the three environmental categories (CO2 emissions, water use, and land use). Conventional dairy has the largest environmental footprint relative to alternative dairy types while almond milk had the lowest carbon footprint but is the thirstiest of the plant-based alternatives. Oat milk is frequently discussed as the most sustainable and promising dairy alternative since it is often grown as a winter cereal and primarily derives its source of water from natural rainfall rather than irrigation. Companies are addressing the increased consumer demand to accommodate dietary shifts to a more ‘flexitarian’ product range. For example, plant-based brands from companies like Oatly and Beyond Meat have snapped up deals with Starbucks while major supermarkets are increasing their plant-based meat and dairy shelf-space with Califia Farms, Danone (Alpro), Oatly, Lavva, Impossible Foods, and Beyond Meat being among the most prevalent and up and coming brands.


Table 1 Environmental footprints of dairy and dairy alternatives (Poore & Nemecek, 2018)

However, the double-digit growth of the plant-based alternative industry relative to conventional counterparts can be deceptive. The plant-based meat category in the U.S. comprised approximately 1.5% of the total retail meat market in 2020 (Poinski, 2020). Additionally, the conventional meat and dairy sectors have pushed for legal action to restrict the labelling of plant-based products as alternatives to meat and dairy. The European parliament proposed Amendment 171, which will introduce new restrictions on the labelling of plant-based dairy products. Phrases such as “contains no dairy”, “creamy texture”, “suitable for persons suffering from lactose intolerance” or “plant-based alternative to yogurt” could also be banned under Amendment 171 (Politico, 2020). Despite these hurdles, plant-based alternatives appear to be here to stay as the industry is attracting capital from VC/PE funds, angel investors, and sovereign wealth funds that are supporting the new generation of food and address the consumer demands for healthy and environmentally sustainable food. High-profile celebrities are also joining the plant-based alternative movement like Robert Downey Jr. who invested $40m into a plant-based bacon start-up that primarily derives its bacon alternative from mycelium, a type of mushroom root (Bloomberg, 2021).


The pandemic has enhanced consumer concerns about where their food comes from, its treatment, and its environmental impact. This is a major challenge for the conventional meat and dairy industry that are occasionally in the spotlight for animal abuse and their environmental impact. Currently, there is no definitive or totally credible way for conventional producers to inform consumers about their products quality and treatment of animals. Retailers such as Salling Group (Denmark’s largest retailer) have partnered with Dyrenes Beskyttelse, an animal welfare group who certify Salling’s animal products to be of ethical quality. This partnership helps Salling Group inform their consumers about the quality of their animal products and enhance trust in their conventional meat and dairy products. However, the absence of complete transparency calls for more disclosure from farmers, which emphasises the information asymmetry from the start of the supply chain to the end consumer. Addressing this information asymmetry credibly will enhance consumer trust in conventional producers.


What is being done to address this issue?


Technology platforms such as Aglive are digitising the food supply chain by leveraging blockchain to enhance transparency and traceability. The success of this technology will enhance consumer trust in conventional meat and dairy products since blockchain is immutable, meaning that the data stored cannot be subject to manipulation. Further, blockchain will enhance the quality of products that reach supermarket shelves and restaurants as well as prevent incidents such as the Tesco horsemeat scandal in 2013. The scandal was unveiled when researchers found that burger meat from Tesco comprised circa 29% horsemeat, which subsequently wiped approximately AU$600 million off Tesco’s market cap (The Guardian, 2013). However, in order to optimise the utility from blockchain technology, each point in the supply chain would need to buy into the system, which would include producers, freight-forwarders, ports and shipping firms, distributors, wholesalers, and merchants etc. otherwise blockchain’s usefulness is limited (Xiong, et al., 2020).


What is AgFood Opportunities Fund doing?


AgFood Opportunities Fund is engaging with companies (listed and unlisted) that are delivering and disrupting the agtech and plant-based alternative food markets. The fund has a small investment in Health Plant and Protein Group (HPP.ASX), which is one of the world’s largest processors, marketers, and distributers of macadamia-based products. HPP has also agreed to acquire up to a 24% interest in Lavva – a plant-based dairy alternative that makes substitutes for milk, yogurt, and desert-like yogurts from pili nuts. Pili nuts are considered to be a ‘superfood’ that are rich in monounsaturated fats and proteins, great source of amino acids, have anti-inflammatory properties, lowers LDL Cholesterol, Antioxidants, and has the highest amount of magnesium of all nuts. Lavva’s unique superfood product scope will drive demand with increased dietary shifts to vegan/vegetarianism and general health. The pili tree is highly water efficient relying primarily on rainfall and volcanic soil to develop, making it a highly environmentally efficient plant. Scalability is the major hurdle for their product with inefficient methods of commercially harvesting the pili nut that requires significant amounts of labour to process. Further, AgFood Opportunities Fund has avoided investing directly in red meat producers until there are clear signs of sustainability in the companies under evaluation. We favour companies exposed to aquaculture, dairy, poultry, and pork and/or broad exposure to agricultural supply chains.


Other investment opportunities under consideration are companies involved in the agtech space that are addressing data and credibility concerns up and down the food supply chain. The success of these companies will continue to improve quality of products that reach the end consumer via better utilisation and uptake of blockchain technology and enhance time efficiencies for farmers who are able to make quick and informed decisions across the entire enterprise and supply chain through efficient data analytic systems. AgFood Opportunities Fund continues to assess available and innovative technologies in both the listed and unlisted space to enhance partnering opportunities to address the sustainability demands of the ag food industry.


Reference

Beef Central, 2020. JBS to close Brooklyn and Dinmore processing plants. [Online] Available at: https://www.beefcentral.com/news/jbs-to-close-brooklyn-and-dinmore-processing-plants/ [Accessed 18 Apr 2021].

Bloomberg, 2021. Robert Downey Jr. Invests in Plant-Based Bacon Startup. [Online] Available at: https://www.bloomberg.com/news/articles/2021-04-15/bacon-minus-pigs-whets-investment-appetite-of-robert-downey-jr [Accessed 18 Apr 2021].

Datassential, 2020. COVID-19 Where's the Meat?. [Online] Available at: https://datassential.com/wp-content/uploads/2020/05/Datassential-Coronavirus-18-05-13-20.pdf [Accessed 18 Apr 2021].

Global Food Institute, 2020. U.S. retail market data for the plant-based industry. [Online] Available at: https://gfi.org/marketresearch/#categories [Accessed 18 Apr 2021].

New York Times, 2020. Dumped Milk, Smashed Eggs, Plowed Vegetables: Food Waste of the Pandemic. [Online] Available at: https://www.nytimes.com/2020/04/11/business/coronavirus-destroying-food.html [Accessed 18 Apr 2021].

Poinski, M., 2020. Is coronavirus accelerating the growth of plant-based meat?. [Online] Available at: https://www.fooddive.com/news/coronavirus-plant-based-meat-growth/585433/ [Accessed 18 Apr 2021].

Politico, 2020. What is Amendment 171 and how could it affect plant-based foods?. [Online] Available at: https://www.politico.eu/sponsored-content/what-is-amendment-171-and-how-could-it-affect-plant-based-foods/ [Accessed 19 Apr 2021].

The Guardian, 2013. Horse meat scandal wipes £300m off Tesco's market value. [Online] Available at: https://www.theguardian.com/business/marketforceslive/2013/jan/16/horse-meat-tesco-market-value-shares [Accessed 19 Apr 2021].

Xiong, H., Dalhaus, T., Wang, P. & Huang, J., 2020. Blockchain Technology for Agriculture: Applications and Rationale. Front. Blockchain, 3(7).


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