Cultivating sustainable solutions to food inflation

Food prices in 2021 hit their highest level in six years. According to the Food and Agriculture Organization of the United Nations (FAO), which publishes the Food Price Index each month, food prices in January marked the largest increase from month to month. each other and from year to year for a decade. Since then, prices have continued to rise sharply and the April numbers pushed the index to its highest level since May 2014. For those who closely watch food prices, this was not much of a surprise. ; April’s results came after ten consecutive monthly increases, which has also not been the case for about a decade. In total, world food prices increased by more than 30% between the low of May 2020 and April 2021. These trends indicate what could be the start of food inflation, or so-called “agflation”. As in other sectors, technological innovation is a means of countering rising prices. At VanEck, we believe that now is the time to invest and promote emerging agtech companies. These companies are spearheading the modernization of agriculture, leading to higher yields, safer chemicals for crops, and other breakthrough innovations in food production that can provide healthy diets to the world’s population. growing.

What causes agflation?

The most important factors behind the global rise in food prices came from China, which began to experience localized food inflation in 2019. During that year, African swine fever wiped out the herd of Chinese pigs, which is the world’s largest, causing 11 million tons of pork deficit. Then, in 2020, the country’s poor harvest – caused by severe flooding in the southern region and droughts in the west – compounded the already dire situation for the country’s roughly 26 million pig farmers who depend on it. the country’s agricultural production for affordable animal feed. Domestic prices for corn, soybeans and meat have skyrocketed, with parts of the country rising by more than 50%.

With the support of government subsidies, Chinese pig farmers have acted aggressively to rebuild their herds. Last year, China’s pig population rebounded 31%, suggesting the country may need several more years to return to pre-2019 pig population levels.1 In addition, its pig farmers are restocking their herds differently this time around to better meet global health and safety standards, which include higher feed rations. This means that feed demand could be higher than pre-2019 levels, even with the same number of pigs. To meet this demand, China has launched an aggressive agricultural import program with the aim of reducing food prices in the domestic market and replenishing its strategic reserves.

U.S. agricultural exports

Source: USDA External Agricultural Service

China’s huge crop demand has tightened grain supplies around the world and paved the way for a prolonged recovery in food prices. According to the United States Department of Agriculture (USDA), U.S. agricultural exports to China in 2020 increased by more than 80 percent to $ 29 billion from the previous year. Soybean exports accounted for a significant share of these exports, increasing from $ 8 billion to $ 14 billion. Corn exports soared to $ 1.2 billion from $ 56 million the previous year, translating into a staggering 2,081% increase. For the 2021-2022 crop year, the USDA predicts that Chinese soybean imports will remain strong, at around 103 million tonnes, while corn imports could increase to 26 million tonnes, an increase of about 240%. compared to 2019 levels.

As a result, agricultural commodity futures listed on the Chicago Board of Trade have risen significantly. As of April 30, 2021, the prices of corn, soybeans and lean pork the month before had increased by 50% to 80% since the start of 2020.

Corn and soybean prices

Corn and soybean prices

Source: Bloomberg

AgTech is the future of agriculture

In general, higher crop prices improve the margins of companies higher in the supply chain, such as fertilizer producers, and hurt the margins of companies lower in the chain, such as food companies. consumers, due to higher input costs. Protein companies (i.e. poultry, beef and pork producers) are caught in the middle, with higher feed costs on the one hand, but potentially higher meat prices. high on the other hand. Ultimately, however, cost increases are passed on to end consumers, and when agflation is high, a higher percentage of household income leans toward food.

The nascent agtech sector is tackling food inflation with innovations that aim to reduce unit costs on a financial and environmental basis. These far-reaching innovations include precision farming, improved irrigation technology, vertical farming, alternative proteins, carbon credit programs for farmland and woodlands, non-toxic and sustainable fertilizers, and plant chemicals, as well as data analysis and intelligent software programs. For example, Benson hill, a stake of the VanEck Global Resources Fund (0.7% as of 05/13/2021), uses machine learning and advanced breeding techniques to improve protein content in crops, which should reduce processing costs to convert these cultures into ingredients for plant-based meat products. Many other solutions are being developed by private companies and VanEck has gained exposure to companies such as AgNext (a food quality and traceability platform), TartanSense (a manufacturer of crop protection robotics) and Fasal (on agricultural sensors).

Global Sales of Alternative Protein Industry

Global Sales of Alternative Protein Industry

Source: UBS

Doing nothing is not an option

Planting more acres of corn and soybeans over the next several years could prevent rampant agflation in the medium term, but it’s not a sustainable solution for the future. Indeed, societal problems will only exacerbate if nothing else is done. People in developing countries tend to spend a higher share of their income on food. That, combined with the loss of income from business closures linked to Covid, could have dire consequences. Social unrest in developing countries, such as the hunger riots in Haiti in 2008 and the “Arab Spring” in the early 2010s, coincided and were in part sparked by rising food prices.

The United Nations expects that by 2050, the world’s population will reach around 10 billion, which is 28% more than the 7.8 billion people on the planet today.2 Almost all of this growth will occur in developing countries. Urbanization will continue at an accelerating pace, causing around 70% of the world’s population to live in urban areas by 2050, an increase from around 54% today. More people will enter the middle class than at any time in history, impacting the global agricultural ecosystem3. Entering the middle class is generally correlated with a higher consumption of foods of animal origin, the production of which is more resource intensive. In order to feed this larger, richer and more urban population, food production must increase by 70%. Meeting this demand while reducing greenhouse gas emissions requires deeper integration of data and technology on the farm and into the global supply chain.

World population

World population

Source: United Nations Department of Economic and Social Affairs

Going forward, we anticipate significant growth in the agricultural technology sector. There is a significant gap between the amount of food the world produces today and the amount that will be needed to feed people in 2050. To achieve this in an environmentally sustainable manner, the agricultural industry must adopt new technologies. which generate higher returns using less Resources. By embracing smarter ways of doing business, the industry has the capacity to thwart a worsening food insecurity crisis.

Originally posted by VanEck, 5/17/21


Disclosures

1 Source: Reuters, February 3, 2021

2 Source: United Nations, June 17, 2019

3 Source: United Nations, June 17, 2019

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