By Shawn Reynolds Portfolio Manager, Natural Resources & Ammar James Analyst, Natural Resources
With food prices at all-time highs and demand continuing to grow, the agriculture industry is embracing new technologies to achieve greater yields in a more environmentally sustainable way.
Food Security: Crisis of Epic Proportions
The global food crisis that is inundating countries around the world is becoming more glaring, possibly catastrophic and likely longer lasting. The fact that this is an indiscriminate phenomenon is writ large in the recent U.S. inflation figures. The U.S. headline Consumer Price Index (CPI) hit a four-decade-high rate of 8.6% year-over-year in May, partly driven by sharp increases in food and grocery prices, which were up 11.9% (the highest increase since 1979). While Russia’s invasion of Ukraine has greatly conflagrated the current situation, food prices worldwide have been moving up for a number of years. The United Nation’s Food and Agriculture Organization (U.N. FAO) Food Price Index increased 71% from January 2016 to May 2022, surpassing previous highs last seen in 2011.
Food Prices Are at All-Time Highs
Food Prices Are at All-Time Highs
Source: U.N. FAO. Data as of May 2022. Past performance is no guarantee of future results.
The humanitarian impact of this spike in prices is staggering. According to the U.N., the number of undernourished people, globally, currently stands at around 850 million, with the number of severely food-insecure people doubling in just the past two years and those experiencing famine conditions increasing some 500% since 2016. Pressure on the global food system will likely intensify with a worldwide population set to grow approximately 30% by 2050 and a concomitant demand for a greater and healthier food supply.
Global Hunger Remains a Persistent Issue
Global Hunger Remains a Persistent Issue
Source: U.N. FAO. Data as of May 2022.
Evaluating Root Causes of the Global Food Crisis
In our view, the untenable situation our global agriculture and food (“agri-food”) network finds itself in can be tied to three core causes: weather, COVID-19 and the Russian/Ukraine conflict.
Weather: The weather phenomenon known as La Niña, which generally leads to more severe drought conditions as well as more flooding, has been in place since 2020. Recent estimates from the U.N. suggest that there is a 70% chance La Niña conditions continue through this summer (in the northern hemisphere) and even into 2023. If this were to occur, it would be only the third time on record where this phenomenon has persisted for three consecutive years. This has led to severe drought in vital crop growing areas like South America (October and November 2020 were the driest months on record in 40 years for Brazil), while well-above-average rain fall and devastating floods have occurred in Australia and parts of Southeast Asia. Poor harvests followed. Some major grain provinces such as Argentina have produced lower output and yields of corn and soybeans on a year-over-year basis, while excessive rains affected major palm oil production in Malaysia. Accordingly, as per the FAO, 2021 cereal prices jumped 27% and vegetable oil increased over 65%.
COVID-19: The global pandemic has also played an undeniable role in all of this. Supply chain disruptions exacerbated the reduced ability to plant and harvest due to labor shortages. Everything from farm hands to truck drivers, ship crews and meat processors not only reduced output but also strangled distribution. Many lingering effects of the pandemic actually remain and are still restricting efficient and cost-effective delivery of many vital raw and finished food products.
Russia/Ukraine Conflict: To be sure, the seeds of the current food crisis were sown prior to Russia’s invasion of Ukraine. However, these actions have exorbitantly inflated the scale and scope of the current crisis.
Russia/Ukraine Conflict: Largest Disruption to Global Food Markets Since 2008
Russia/Ukraine Conflict: Largest Disruption to Global Food Markets Since 2008
Source: International Food Policy Research Institute. Data as of April 2022.
The magnitude of impact that Ukraine and Russia (and Belarus) have on agri-food markets cannot be overstated. Together, or separately, Russia and Ukraine have been responsible for approximately 30% of wheat, 15% of corn, 25% of barley and greater than 10% of sunflower and other edible oils exports over the last five years. Ukraine is also a major exporter of frozen chicken, while Russia and Belarus are leading producers of fertilizer.
We’re Talking Major Players in the Global Agri-food Markets
We're Talking Major Players in the Global Agri-food Markets
Source: World Bank. Data as of April 2022.
The war has severely disrupted the export of virtually all of Ukraine’s agricultural exports. Almost all of Ukraine’s grain exports passed through the Black Sea, which has been shut off by Russian forces since the invasion began. Approximately 10% of global wheat exports were expected to flow through Black Sea ports, but it is essentially impossible to estimate how much of that commodity can or has been transported via rail or road. No doubt that war-related disruptions will also have a huge impact on the current crop season. Labor shortages are obvious but so, too, are seed, fertilizer and other crop protection inputs as well as access to farm machinery. Ukraine’s crop output for the 2022/2023 growing season is estimated to decline from 25-50%.
Vital Input Market Concerns: Fertilizer Reduction
To us, one of the greatest concerns and one that likely has much more significant global consequences is the constrained supply and cost of fertilizer. Due to availability and/or price it is quite conceivable that fertilizer applications are meaningfully reduced this season. A 10% reduction across all major food stuffs and in all major geographies is an entirely reasonable response. The generous applications of fertilizer over recent decades is responsible for huge improvements in yields and total agricultural production. Needless to say, even a small reduction in fertilizer use and associated lower yields and output could be another major shock to global food markets.
Population, Pollution and Changing Preferences
According to the U.N., worldwide population is expected to reach 10 billion by 2050, roughly 30% higher from today. Astonishingly, it is also estimated that 70% more food will need to be produced to fully nourish this growth. Much of this increase in population is expected to occur in lower or middle income countries where accessible food is already limited. Greater expansion of urban populations is also expected, as is an increasing size of the middle class, which generally results in higher calorie, protein and overall nutritious diets.
Global Population Is Steadily Growing
Global Population Is Steadily Growing
Source: World Bank. Data as of April 2022.
As noted, the agri-food industry has a good track record of growing output along with increasing population. However, this success is rapidly running up against environmental limits. According to The Intergovernmental Panel on Climate Change (IPCC), the agricultural and land-use industry is responsible for approximately a quarter of global greenhouse emissions. This is roughly equal to the emissions levels generated by the power generation sector.
Agriculture’s Contribution to GHG Emissions Is Big
Agriculture's Contribution to GHG Emissions Is Big
Source: IPCC.
AgTech to the Rescue
The agri-food industry’s level of impact on the environment is dwarfed by other measures, such as the use of fresh water, deforestation levels and biodiversity. With environmental limits already straining the traditional agriculture supply chain, feeding an ever-growing population presents a unique challenge. Going forward, we expect increasing demand for cleaner, healthier, and more environmentally sustainable foods will continue to create growth opportunities.
The non-dairy milk sector and “organic” designations and labeling are some of the most obvious developments. However, demands for more sustainable, safe, traceable and transparent goods, services and production methods is also on the rise. Collectively referred to as “AgTech”, this nascent sector includes wide-ranging innovations across precision agriculture, improved irrigation technology, vertical farming, alternative proteins, farmland and timberland carbon credit programs, non-toxic and sustainable fertilizers and crop chemicals, and data analytics and intelligent software programs.
Encouragingly, both legacy and recently established entities are developing and advancing exciting solutions to many of the agri-food industry’s challenges. For example, Deere & Co. (7.6% and 4.3% of net assets in MOO and YUMY, respectively, as of 5/31/2022) is one of the world’s largest makers of farm equipment and a major producer of forestry, construction, commercial, and residential lawn care equipment. Deere has leaned into precision agriculture and has also seen 18% year-over-year growth in new products with a lower environmental impact. Established fertilizer company Nutrien (MOO: 6.5%) is well positioned to address fertilizer shortages, as it is poised to produce nearly a quarter of total global potash volumes in 2022. Meanwhile emerging companies like Benson Hill (YUMY: 1.2%) are using machine learning and cutting-edge breeding techniques to improve the protein content in crops, which should reduce the processing costs to convert those crops into ingredients for plant-based meat products. Other examples include Oatly (MOO: 0.2%; YUMY: 2.6%), a Swedish-domiciled company producing dairy alternative products derived from oats, and Kentucky-based AppHarvest (YUMY: 3.0%), which operates one of the world’s largest and most technologically advanced greenhouses.
Looking forward, we expect growth in the agriculture technology sector to increase meaningfully. There is a significant shortfall between the amount of food the world produces today and the amount that will be needed to feed the population in 2050. To achieve this in an environmentally sustainable way, the agriculture industry must embrace new technologies that generate higher yields using fewer resources.
Invest in the Future of Agriculture with VanEck
VanEck offers several solutions for investors to access the agribusiness space and companies that are embracing AgTech:
VanEck Future of Food ETF (YUMY)is an actively managed ETF investing in companies that are leading, enabling, supplying, disrupting and benefiting from new environmentally sustainable agriculture and food products and services.
VanEck Agribusiness ETF (MOO) offers investors diversified agriculture exposure, providing access to companies that operate in the agriculture sector, including farm equipment, seed and fertilizer, and animal health.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
United Nations’ Food and Agriculture Organization Food Price Index is a measure of the monthly change in international prices of a basket of food commodities.
Consumer Price Index (CPI) is a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.
An investment in the VanEck Future of Food ETF (YUMY) may be subject to risks which include, among others, risk of investing in agri-food technology and innovation food companies, equity securities, investing in small- and medium-capitalization companies, basic materials, industrials and consumer staples sectors, investing in European issuers, foreign securities, foreign currency, active management, market, operational, authorized participant concentration, no guarantee of active trading market, trading issues, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, initial public offerings, special purpose acquisition companies, and concentration risks, which may make these investments volatile in price or difficult to trade. Small- and medium capitalization companies may be subject to elevated risks.
An investment in the VanEck Agribusiness ETF (MOO) may be subject to risks which include, among others, investing in agriculture companies, foreign securities, foreign currency, depositary receipts, basic materials sector, consumer staples sector, health care sector, industrials sector, small- and medium-capitalization companies, cash transactions, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Funds carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
