Clément Maclou, Senior Thematic Portfolio Manager, ODDO BHF AM

The UN food commodities price index rose the most since 1961 in February 2022 after an already staggering +23.1% in 2021, putting the most vulnerable populations at risk. The gauge that track the price of meat, dairy, cereals, oils, and sugar is impacted by the war in Ukraine and sanctions on Russia on top of the existing Covid-related factors such as supply chain disruptions, logistic strains and pent-up demand. Food inflation is expected to remain elevated as Russia and Ukraine together represent 30% of world wheat exports, 50% of sunflower oils and 18% of corn.

Short and long-term impact of higher food prices

The food price shocks will have a negative impact worldwide and more particularly in emerging countries where food represents a higher share of expenses. In the US, food price counts for 7% of the CPI index and this figure goes up to 15% in Europe right to 40% in sub-Saharan Africa. What is on the menu also has a significant impact on the price. For example, European countries have a long history and culture of consuming bread; as a result, wheat accounts for a quarter of diets.

In Southern Asia, wheat only makes up 7% but rice, the most important crop, represents 42%. So far, rice price increases have been much more limited than for other crops, clearly good news for local consumers. Finally, countries highly dependent on Russia and Ukraine might suffer the most from supply chain disruptions. Eastern Europe, the Caucasus and Central Asia are among the most affected. We all remember that the Arabian spring in 2011 started because of the price of food and unfortunately Egypt is also especially reliant on Russian exports.

In the short term, one thing we know for sure is that we need to learn to live with inflation and volatility. In this context, all the segments depending on farmers dollar income should benefit, such as irrigation, machineries, fertilizers and to a lesser degree soft commodity trading. In contrast, segments that are net buyers of raw materials risk witnessing lower margins. Our analysis flagged categories such as packaged food, food ingredients, beer producers and biofuels.

Adopting a more long-term approach, we believe that the global geopolitical playbook will be revamped with a rising trend toward food autonomy and protectionism. As an illustration, Switzerland signed a deal with Qatar for the supply of natural gas and UK signed a deal with the USA to ensure supply of a variety of products including beverages. China and the USA may be called for help as the former holds more than half of the corn reserves and the latter uses 40% of its corn production for ethanol. USA appeared to be particularly well positioned as it is independent in terms of food, technology and energy. On the other side, European countries look more vulnerable. Another long-term impact will be an acceleration of the adoption of new technologies as they help to increase the yields while reducing the impact on the environment.

Lab-grown food: from fiction to reality

In order to give a definition of lab-grown food we will take the example of meat, keeping in mind that the technology is replicable for all kinds of animal-based products. Lab-grown meat (also called clean meat, cultured meat, cellular meat or cultivated meat) is a meat produced by in vitro cell culture of conventional animal cells. On paper the concept is pretty simple to understand but the technology behind it is much more complicated to apprehend.

While the first tasting of a burger is not yet 10 years old, the idea and science behind cellular agriculture is not new. In his 1931 essay Fifty Years Hence, Winston Churchill wrote: «We shall escape the absurdity of growing a whole chicken to eat the breast or wing, by growing these parts separately under a suitable medium». In 1991, a US scientist registered the first patent for the production of tissue-engineered meat for human consumption. In the early 2000s, many universities and even the Nasa started to work on the technology and in 2008 the PETA, an American animal rights organization, offered a $1 million prize to the first company to bring cultured chicken meat to consumers by 2012. Many searchers worked on it but the deadline eventually expired without a winner, however awareness was ignited.

Just one year after, professor Mark Post from the Maastricht University created the first cultured beef burger patty. It was made from over 20,000 thin strands of muscle tissue, cost over $300,000 and needed 2 years to produce. The burger was tested on live television in London on 5 August 2013, it was cooked by one the best chefs at that time and tasted by a food critic who said « there is quite some flavor with the browning… it’s close to meat, it’s not that juicy, but the consistency is perfect. This is meat to me...”.

Between 2013 and 2019, with the proof of concept, the industry focused on developing bench-scale prototypes and more than fifty startups were created mainly in the USA and Israel to target lab-grown meat, eggs, dairy, gelatin and other animals such as shrimps. The market entry really started in 2020 with the first sale of cultivated meat in Singapore after the country gave the approval to lab-grown chicken in December. 23 startups were created in just the year 2020 representing more than $350 million of investment, nearly doubling all the cumulative previous investments, according to a report assembled by the Good Food Institute.

Why is it the future of food?

A study conducted by Mark Post, who made people test the products, revealed that a vast majority of surveyors are ready to buy them even at a premium of 40% compared to traditional meat. However, the ultimate goal is to get taste and price parity. Regarding the taste part, we unfortunately have not been able to try the products so far. When it comes to pricing, the Israeli company Future Meat Technologies announced in December 2021 a cost for a chicken filet of $17 per kilo compared to an average price of $8 per kilo for farmed chicken. In order to reach price parity prices would need to go down by more 50% to include all the other relevant costs (packaging, transportation etc…).

The number one reason why people are ready to buy it at a premium and why the world needs lab-grown food is the environmental footprint of this new technology. According to Future Meat Tech, its production method leads to yields 10 times higher than the industry standard while generating 80% less greenhouse gas emissions, using 99% less land and 96% less freshwater all while delivering the same nutritional value as traditional meat. On the downside, lab-grown typically uses more electricity but its impact is rather limited, especially when using renewables sources. Another favorable argument for lab grown is the fact that is it much less exposed to contamination and the resulting diseases such as African swine flu.

The number two reason is obviously animal welfare. By removing animals from the food value chain, the need for intensive agricultural practices, battery farms and slaughterhouses disappears together with animal suffering. According to the FAO, it is estimated that more than 70 billion land animals are killed annually for human consumption and for marine animals giving an estimation is almost impossible but we consumed 150 million tons of seafood in 2016. By taking animals out of the food process, issues related to animal welfare like mistreatment, poor living conditions and disease outbreaks could be avoided.

In the future, lab-grown meat could become an accessible and cheap protein source, and could be used to address food security issues and food shortages that have been recently exacerbated by the COVID-19 pandemic and the war in Ukraine. We are still a long shot from seeing lab-grown food in our supermarkets. Governments would need to authorize the commercialization of such products and industry specialists anticipate that it could be for this year in the USA and Israel.

Looking at investment vehicles, there is only one pure player listed company and its share price reflects skepticism among investors as the current stock price is half compared to its IPO in March 2021. Another listed company, based in the UK, is highly involved in lab-grown food but also in plant-based and it performed well since the IPO on 2011 with share price having doubled since its debut. We can also name companies investing in startups such as ADM and Tyson’s investment in Future Meat Technologies. Other food giants are also starting greenfield projects, and we can highlight Thermo Fisher and 3M who publicly announced a focus on cultivated meat. Over the long term, the involvement of such large food and medical technology companies will be key in creating the necessary conditions for economically viable, scaled production of cultivated food.