We are what we eat − Opportunities in the food transition 

The famous phrase “you are what you eat” serves as a thought experiment that prompts us to consider the disparity between our actual dietary choices and what we should be consuming for the sake of our health. It is not a good sign if we are primarily composed of pizza pockets and cherry cola, as delicious as these may be. We aim to expand on this idea by highlighting the gap between our current eating habits and what we should be consuming if we are concerned about the health of the environment and the fragility of our food system. We believe that to achieve a state where we align with these ideals, a food transition is needed, presenting numerous investable options across various areas of the economy. 

These opportunities encompass both the ancient and the new and are found throughout the food value chain: the revival of historical regenerative farming practices like crop rotation and agroforestry to reduce the use of pesticides and fertilizers, investments in infrastructure such as cold storage and port facilities, the adoption of innovative agricultural techniques like vertical / indoor farming, as well as the integration of technologies like robotics and AI to enhance picking efficiency and resource utilization. We emphasize that while investments in these areas are often seen as “low return”, our research suggests that agricultural investments may be profitable than many assume.

Plant, insect and animal species are being lost at a far higher rate than background levels of loss before human civilization, somewhere between 1,000 and 10,000 times higher according to scientists¹. Biodiversity loss is linked to climate change. Corals, for example, are struggling to cope with sudden – in evolutionary terms – rises in water temperature, and these losses are economically significant – the coral ecosystem supports the lives of more than half a billion people, and reefs contribute circa $350,000 per hectare in free services² (for example maintaining fisheries and preventing coastal erosion). 

However, biodiversity loss is a wider issue than climate change, and started much earlier^3,4. The rise of invasive species and soil erosion from unsustainable farming practices, as examples, are their own issues and have resulted in biodiversity loss. Such losses of biodiversity are generally due to failures in human stewardship of nature and human population expansion. 

Vertebrate animals have been hit hard, losing 73 genera of animals since the year 1500. The natural rate of loss over that time absent human activity is estimated at about two genera⁵. Severe declines in wild animal populations have been matched by rises in farmed animal populations, the result is that wild mammals make up only 4% of global mammalian biomass, with livestock making up 62%, and humans 34%⁶. With 75% of the land environment “severely altered” by human choices⁷, we must face the reality that our actions on this planet are significant and, once tipping points have been reached, very hard to reverse.

Agriculture is implicated. It is estimated that more than half of human damage to biodiversity is caused by the food value chain⁸. Of 28,000 species identified as at risk, agriculture is the sole threat to 24,000 of them⁹. Deforestation for agricultural purposes is a huge driver of biodiversity loss and while there are reforestation efforts underway in developed economies, it is more than offset by deforestation in emerging markets. The secondary forests resulting from reforestation efforts tend to have lower levels of carbon and species diversification than primary forests¹⁰, highlighting the importance of conservation. The commodities that pose the greatest deforestation risk are beef, soy for animal feed, palm oil, coffee, tea and chocolate, with around 80% of threatened bird and mammal species face extinction from the pursuit of these commodities¹¹. The depletion of this wondrous treasury of nature is not only heart-rending but also poses a significant financial burden. For instance, a declining pollinator base jeopardizes up to $577 billion worth of crops annually¹².

Most of the animals we eat are also fed from the same three crops mentioned above. In Europe, for example, 62% of cereal crops were used as animal feeds in 2021²¹. Of the crop calories fed to animals, on average only 10% become food calories that we ingest via animal products; the rate is particularly inefficient for beef, and higher for dairy, outlined in figure one.

Figure one: Calorie and protein conversion efficiency

Source: Environmental Research Letters²²

A deforestation-related crop, soy is deserving of special attention. A staggering 76% of global soy production is used to feed animals, around half of that is for chickens, and just over a quarter for hogs²³. Deforestation for cattle ranches and the expansion of soy plantations (predominantly for animal feed) are the first and second largest direct drivers of deforestation in the Amazon basin²⁴. Deforestation for soy may only increase if geopolitical tensions between the US and China rise. Brazilian soy becomes more attractive as tariffs are raised on US soybeans (currently at 25%).

The process of feeding animals to feed humans is incredibly inefficient. The willingness of consumers and food producers to tilt consumption habits away from the least efficient products in terms of water usage, land usage, and emissions, could potentially have a huge positive impact on public health and the environment. Attempts have been made to define what such diets would look like by organizations such as EAT Forum (Planetary Health Diet) and various national Dietetic associations.

We have been using the same techniques to feed more people with less land for quite a while now. However, crop yields will not be able to rise in line with the global population indefinitely, as extreme weather events increase in frequency, which could dampen yields by almost a quarter for some crops as soon as 2030²⁹. 

Non-linear risks are also emerging, such as aquifer depletion (over drafting of groundwater in the US and India for agriculture represent a major risk to food supply)³⁰. One response would be adaptation, for example a pivot from so-called C3 crops to C4 crops³¹, which do better in hotter and more drought-stressed environments. However, there are many other levers that we could and should be using.

We focus on private markets investment opportunities in the food value chain. While we outline opportunities that can be accessed on a standalone basis, most investors are likely to invest in broader funds focusing on areas such as agribusiness, natural real assets, food infrastructure, the future of food and food transition.

These funds will often use a diversified set of opportunities including some of the ones we mention below. Many of these opportunities incorporate circular economics, focusing on lowering emissions and inputs, more efficient nutrient recirculation and sustainable design and distribution. 

The reasons for focusing on private markets are as follows:

There are diverse opportunities in the food transition. Many can be accessed in single sleeves, and then used to construct portfolios. These opportunities often span venture capital, private equity and infrastructure. Food supply chain, agribusiness and food transition funds also exist in the private markets and periodically raise capital. Below, we provide a classification of the opportunities and focus on some that we expect to be attractive going forwards.

Figure seven: Classification of opportunities

Regenerative agricultural techniques are numerous and varied. In general, they focus on restoring soil and ecosystem health while providing better working conditions, using fewer inputs (such as pesticides), keeping soil covered (to minimize erosion) and dialing down negative externalities such as fertilizer runoff. 

An example of this is agroforestry. Agroforestry is an agricultural technique that was applied much more frequently in the past and involves using trees in fields with annual crops. To increase the yields in the short-term field trees were cut down, making crops easier to access. The birds that lived in these trees were great natural pest control and have had to be substituted with insecticide.

In developing countries, the link between deforestation and topsoil loss is stark and clear for all to see³⁷. Soil erosion can lead to a 50% reduction in crop yields³⁸. However, when farmers incorporate trees on their farms, they can improve ecosystem resilience and the resilience of their own livelihoods. For example, when Acacia trees are added to a field, they control erosion and fix nitrogen, leading to improved maize yields. Another example of an innovative approach is to combine mahogany plantations with crops such as chillis or potatoes. This way there is income available from the land much more quickly than if the farmer had to wait for the mahogany to grow to a sufficient size to be harvested. 

One promising area where agroforestry is employed is in coffee plantations. As coffee tends to still be picked by hand, the shade offered by trees makes working in the fields more bearable and will enable local pollinators to return. Coffee itself has a negligible impact on human nutrition, being valued for its stimulating effect; however, as a premium crop, it does support many small hold farmers in the developing world. 

There are a huge variety of potential crop combinations, from growing raspberries, chestnuts and asparagus all together in an alley cropping system to silvopasture techniques where animals graze in orchards. Silvopasture allows for animals to benefit from shade and some weather protection whilst the animals control weeds and provide manure. The tree crop can be harvested or used as tree fodder, providing the animals with a more diverse diet. We see the most ambitious transformative funds in regenerative agriculture area targeting gross Internal Rate of Returns (IRR) of up to 20% per annum, reliant on a variety of added value approaches including end-market integration, economies of scale, and regenerative farming techniques.

Cold storage and logistics are real assets opportunities that are core to the food transition (and the transition to net zero). According to the UN Food and Agriculture Organization, half of food-related emissions are related to wastage³⁹. Furthermore, the tilt in the global diet towards fruit and vegetables that is required both for sustainability and health purposes brings with it a greater need for cold storage, and regardless of this imperative, consumer preferences are moving to quicker, fresher and less-processed food. Returns can be generated by using economies of scale to create new facilities and consolidate existing operations. Technology can be leveraged to largely automate procedures and improve logistics, and you can improve refrigeration processes to lower ongoing costs.

Although cold storage can be associated with increased energy usage a variety of strategies can be employed to reduce energy usage within cold storage, for example by using phase-change materials in refrigeration⁴⁰.

Lowering costs related to cold storage is a key opportunity that a number of General Partners are actively looking at. Some strategies incorporate Artificial Intelligence and machine learning to optimize food freezing as well as efficiently maintaining temperatures to reduce energy consumption. Others incorporate onsite battery storage backups to protect against power outages and the associated food wastage. The bottom line is that companies and investors are recognizing financial, environmental, and social impacts from investing into cold storage. We see the most ambitious logistics funds in this area, partly investing in cold storage, targeting gross IRRs of up to 20% per annum.

Vertical farms are typically warehouse-like areas where plants or mushrooms are grown indoors under highly controlled conditions. These farms are typically employed to grow leafy greens, such as salads and high-value herbs. Early-stage investment in rice hydroponics is also underway, for example in Singapore, where vertical rice farming is receiving investment as part of the national food security strategy⁴¹.

When growing short leafy greens, many layers of growing space can be stacked on top of each other, making it possible to grow multiple hectares of crop per hectare of land. As the day-night cycle is simulated by LEDs, it’s possible to fit many cycles into one day, creating the potential for extra growth. It is possible to accelerate from 1-2 harvests a year in a field to 10-12 harvests indoors. While a head of lettuce in outdoor farming typically requires over 10 liters of water, a vertical farm in Japan is designed to use less than a hundredth of that amount of water⁴². 

The UN expects that agricultural production will need to grow by 50% to meet demand in 2050, requiring water withdrawals that are 30% higher than today. At the same time, 2.4 billion people live in countries suffering from water stress, and we already face water scarcity in global croplands⁴³. There are many avenues to reducing water shortages (reducing reliance on livestock, drip irrigation rather than spray watering, AI powered irrigation etc.), with vertical farming one of the most powerful. The need to conserve water is one of the reasons why the world’s largest vertical farm has been constructed in Dubai.

Vertical farming uses far less land, while water and nutrients are recycled within this controlled environment. It also allows the re-purposing of older buildings and warehouses in urban areas that may otherwise have stood vacant or been demolished. The enclosure allows for reduced or even no pesticide usage, and total protection from adverse weather events such as hail, which can destroy a crop in a few minutes. Because it’s a sealed and controlled environment, the consumer isn’t going to be wiping chemicals off the produce, and if you do it on site in a retail store, there’s no need for preservatives at all with shelf life for leafy greens and herbs up to 14 days longer. 

Early adopters of vertical farming have tended to be driven by necessity. For example, 75% of vertical farms are located in Japan given the shortage of land, as there are many mountains, and the plains are filled with converging cities. Innovation in the UK has partly been driven by the lack of labor availability, resulting in fully automated harvesting

Vertical farms have been a high-risk industry, with failures attributed to the following factors:

1. Naïve energy strategy. Firms with no expertise in the area of energy have often contracted with suppliers under variable price contracts during a period of swinging energy price rises and struggled to stay solvent. Real assets managers with expertise in running both energy assets and farming assets may be best positioned to capitalize on vertical farming opportunities.
   
   
2. Lack of experienced agronomists on staff. It’s important to have holistic food systems experts on staff and not overspend on research and development. Whilst research and development is important, a stable business model emphasizes evolution over revolution.
   
   
3. Capital hungry projects failing in rising rate environment. AeroFarms has been the most prominent firm in the vertical farming space but had to go through a Chapter 11 bankruptcy and a subsequent restructuring as funding for vertical farming dried up in venture capital markets between 2022 and 2023⁴⁴. 

Due diligence when selecting investments in this area should involve making sure that projects are not overextending or falling into these common pitfalls outlined. There is a spectrum of targets in the vertical farming industry. The most ambitious funds in this area may target gross IRRs of up to 15% per annum, with 8% being more typical. There was around $10.4 billion invested in the private markets indoor farming space as of July 2024⁴⁵, however, there are few vertical farming funds of large target investment size, and so this opportunity may more typically be accessed in broader funds.

Brewing is usually associated with products like beer and soy, but brewing is surprisingly versatile. For example, it has been used to produce insulin for the last forty years⁴⁶. It can also be incredibly efficient, up to 100x more land efficient at producing protein than the next best method, which is field-grown soy⁴⁷. This technology has been referred to by environmentalist George Monbiot as “maybe the most important green technology ever”⁴⁸.

It is important to point out here that producing proteins and carbohydrates to specification will often rely on transgenic techniques to genetically modify yeast or other micro-organisms. This is not science fiction – in fact it’s already up and running in a number of places around the world.

A criticism of precision fermentation is that it is used to create ultra-processed food. This is accurate, however it is a much more sustainable way of doing so, and it is a compromise many will find worth making. It may even be possible to get rid of plant-based feedstock (think the barley used to make beer). You can create methanol using carbon dioxide and water (this is carbon sequestration), and culture the micro-organisms⁴⁹ with methanol and a nitrogen feedstock to produce proteins. These processes do not require the use of arable land at all, and because the brewing chambers are self-contained, waste emissions and runoff can be kept to a minimum. It has the potential to replace dairy farming entirely, by producing lactose, fats and milk proteins in a more land efficient way.

The global precision fermentation market is projected to grow by c. 13% a year from 2024 to 2040, starting at $3.4 billion on a trajectory to $7.1 billion⁵⁰. 

Precision fermentation is generally seen in venture capital investments where target IRRs are very high, for example 20-30%, with a commensurate increase in risk. Despite a scientific track record dating back to the last century, we still categorize this as an early-stage investment idea, more likely to be found within diversified funds as opposed to having standalone availability.

While food has often been seen as a low return area; however, we believe the return potential for private markets approaches is more significant than many presume and can be accessed across multiple asset classes. The impact opportunity is outsized given the environmental footprint of the food industry and the need for transformation. We believe you can generate impact across the value chain. We encourage investors to start with their current exposures. Globally diversified investors are highly likely to already have exposure to the food transition – and it is worth exploring whether the companies you provide capital to are part of the future of food or contributing to a failed food system.

Investors may have to rethink traditional portfolio bucketing and integrate either structural trend or illiquid diversifier allocations. This is due to a trend we are seeing a trend in private markets where lines are being blurred between venture capital, private equity, and real assets. The underlying investments that we have highlighted as needed for the food transition exemplify this. 

For example, vertical farming involves elements of both infrastructure and venture capital; the venture portion can be particularly pronounced in more experimental projects (for example where trials are being run to grow soft fruit as opposed to the leafy greens more commonly used now). Another example is that vacant real estate can be purchased and transitioned into vertical farms. Investors may have to think outside of asset class silos when investing in the food transition. 

We hope we have provided some insight into the challenges and opportunities within the global food system and look forward to working with those investors who would like to be part of the future of food.