Part of the answer to the climate crisis may lie on your plate. 

Changing tastes, improving efficiencies, and technology could help food production reduce its massive environmental footprint.

Today, agriculture accounts for a fourth of greenhouse gas emissions, 80% of deforestation, 70% of water use, and 78% of ocean and freshwater pollution, according to Sustainalytics, a Morningstar company. A warming globe also produces more erratic weather and hurts biodiversity, leading to the emergence of disease, which in turn produces lower crop yields. 

“The world's climate initiatives won't succeed without addressing agriculture in some material way,” says Ammar James, comanager of VanEck Future of Food ETF (YUMY).

“We're nearing an inflection point that will redefine how we define food.”

Increasingly, food innovations are catching the eye of investors. A raft of new funds, including James' own portfolio, are out to satisfy demand.

Food demand is surging

The world's population is projected to jump to nearly 10 billion in 2050 from 7.8 billion today. More people are entering the middle class today than at any time in history – which typically correlates with increases in meat eating. At the same time, soil erosion and contamination are curtailing the amount of arable land.

Meanwhile, geopolitical tensions are making food more scarce. Everyone knows Russia's invasion of Ukraine has dragged oil prices higher. But the prices of corn, wheat, vegetable oil, and fertiliser have also shot up. Russia and Ukraine account for a fourth of global wheat exports. The outlook for Ukraine's wheat harvest this summer is grim.

“We notice fuel the most, but food may be the most dangerous to global stability,” writes strategist Jeremy Grantham, co-founder of asset manager GMO. The long-term increase in food prices squeezes incomes and destabilises political systems.

The sustainable shift

Fortunately, people are becoming more thoughtful about food, and preferences are changing in favour of environmentally sustainable foods.

All that is giving rise to companies focussed on sustainable and organic agriculture, smart farming, or healthier and vegetarian products. There are roles for food retailers to bolster efficiency and to reduce food waste and their use of plastic packaging. 

In 2021, venture capitalists funded 1,358 food tech deals worth $39.3 billion, double the previous year, according to Morningstar company PitchBook. Much of it went to online grocers, whose popularity skyrocketed during the pandemic. But there were also alternative-protein investments, including $500 million in Impossible Foods, which is expected to go public this year.  

Companies invested in alternative proteins include Mars, Kraft Heinz (KHC), and Tyson Foods (TSN), which has its own plant-based brand, Raised & Rooted. The global bio-engineered foods market is expected to grow 7.6% a year to $45.9 billion in revenues in 2026, PitchBook says. Morningstar estimates plant-based meats alone could have sales of $29 billion by 2030. 

Then there are food suppliers, including grocery and e-commerce companies, which are improving inventory planning to reduce spoilage and waste. This will help forestall food shortages.

For its part, Amazon.com (AMZN) dominates online grocery shopping, but Kroger (KR), for example, has expanded into e-commerce by partnering with Instacart, developing automated fulfilment centres, and building a self-driving delivery fleet. The market is expected to grow 22.8% a year over the next five years to $677 billion in 2026, according to PitchBook’s analysts.

And don't forget technology, which improves cooking precision, reduces food waste, helps food suppliers track products, and improves food safety. This market for food tech is growing in the mid-single digits a year. It's expected to generate $85 billion in revenues by 2026. 

The future of food: Your role

Many food giants are also refashioning themselves, thanks in part to investors, who are pushing them to evaluate their business models.  

Investors are nudging companies to adopt sustainable food packaging, which can reduce carbon emissions. In addition, they're prodding companies to prevent deforestation and soil degradation, eliminate food waste, and supply alternative and sustainable proteins. 

Traditionally, food isn't a growth sector, but investors are looking for growth in innovation. Here are a few strategies that investors can consider, should they want to take part in the trend.

Our index explained

Morningstar’s Global Food Innovation Index contains companies that capitalise on consumer preferences for more sustainable and healthier food, with material revenue exposure to innovations that aim to improve nutrition, food production, food safety measures, and sustainable packaging.

The index has 40 stocks, including: Corteva (CTVA), one of the largest producers of genetically-modified seeds and natural crop chemicals; Neogen (NEOG), which does food and animal testing to help farmers make better breeding and herd management decisions; and Beyond Meat (BYND), the plant-based meat outfit.

Not all the stocks are winning this year. Both Neogen and Beyond Meat are down sharply in 2022, as the market savages growth stocks and questions whether strong demand for Beyond's goods will persist. Despite all that, the outlook is bright, says Andrew Lane, Morningstar’s director of equity research for index strategies. He notes that revenues at Neogen and Beyond are expected to grow more than 25% a year over the next five years. 

Alt proteins and plant-based foods: The outlook

While alternative proteins and other plant-based foods appear to have a bright future, the stocks have languished this year.

One reason: investors have grown concerned that Beyond Meat will struggle to maintain growth amid growing competition. In particular, one survey showed a muted reception for Beyond's McPlant burger at McDonald's (MCD).

“Investors seem to be extrapolating Beyond's struggles to the alternative-protein space in general," says VanEck's James, whose actively managed VanEck Future of Food ETF (launched in November 2021) is down sharply this year. That's hit other holdings like plant-based beverage specialist Oatly (OTLY).

James says he thinks those concerns are unfounded. “From my vantage point, after speaking with management teams, their message is they have no changes to their strong growth assumptions for plant-based protein,” he says. 

James now expects Oatly's revenue growth to approach 50% through the end of 2023 and then “transition to low-double-digit growth through 2025.”

Keep this in mind

To be sure, thematic funds can be thorny to use in an asset allocation.

Sheryl Rowling, a financial adviser who is also a columnist for Morningstar.com, eschews them.  

“How far are you going to segment your asset allocation?” Rowling asks. 

“If you focus on one sector, it doesn't make sense to me.”

It’s worth noting at this point that Morningstar's Lane notes the Morningstar Global Food Innovation Index currently sits in the mid-value section of the Morningstar Style Box, partly because the index contains a number of large, slow-growth companies that own small, faster-growing innovative businesses.

Another thing to note, though: for sustainability-minded investors, some of the holdings may have poor environmental, social, and governance ratings. (Read our latest on Beyond Meat and Tyson.) As a result, the Morningstar Sustainability Ratings for the funds range all over the place. 

Jeff Gitterman, an adviser with a substantial practice in sustainable accounts, currently invests in food through funds such as GMO Climate Change (GCCAX) and through venture capital. He is open to investing in thematic funds so long as they account for less than 5% of the portfolio.

“Food tech is a way to address a lot of these [climate] issues,” Gitterman says.