Life-giving, nutritious and blanketing vast swathes of the planet, food crops are our most essential commodity. While diets around the world are changing, the same grains of wheat, corn and rice have sustained humankind for millennia. Over recent decades, technological advances in production and crop science have enabled farmers to dramatically increase yields. Crop supplies have never been more abundant.

But with the global population growth, scarcer natural resources and the darkening shadow of climate change, how secure is this supply?

Here, J.P. Morgan Research examines the factors affecting the value of the world’s most important crops and the future of global food security.

Podcast: How lifestyle and diets are changing what we eat

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J.P. Morgan Global Research explores the trends that are leading to exciting new growth markets for farmers, manufacturers and retailers.

How Lifestyle and Diets Are Changing What We Eat

Noelle Granger: I'm Noelle Granger, Head of Global Equity Research at J.P. Morgan. And you're listening to At Any Rate, our Global Research podcast where we take a closer look at the story behind some of the biggest trends, themes and industries in markets today.

Today we're talking food, our most essential and perhaps emotive commodity and a huge growth market. The same grains of wheat, corn, rice have sustained humankind for millennia, but lifestyles and diets are changing.  Shares in vegan burger-maker Beyond Meat have soared by as much as 800% as the appetite for plant-based foods grows and more and more households switch to healthier diets.

At the same time, consumers want it all. Taste, convenience, low cost and, increasingly, the knowledge that their food is sustainable. These trends are leading to exciting new growth markets for farmers, manufacturers and retailers. But there are challenges and questions too. As global population grows, especially in developing countries, is food security at risk? In this episode, I sit down with Ken Goldman, J.P. Morgan's Lead Analyst for US food producers and retailers; who covers some of the largest manufacturers in the US including Kellogg, Kraft-Heinz and Hershey.

Also with me is Tracey Allen, J.P. Morgan's Global Strategist for Agricultural Commodities and a specialist in climate change economics.

 Tracey, Ken, thank you so much for joining me.

Tracey Allen: Thanks Noelle.

Ken Goldman: Thank you Noelle.

Noelle Granger: Before we talk about the future of food, which is really exciting, let's do a quick download on basic food crops. Wheat, corn, rice and soybeans. Tracey, would you mind kicking us off? I think it would be helpful to hear a bit about main trends that you're seeing and the appetite for these staples at the moment.

Tracey Allen: Not surprisingly, given the population growth that we are seeing. And despite the headwinds for global growth here and trade dislocations, the demand for those food staples, wheat, corn, soybeans, rice is at the highest level that we've ever seen. And on the one hand, you have, as you say, a consumer wanting everything, wanting more. Wanting the traceability, the sustainability. We have pressing environmental needs. Needing to reduce, water use, that water footprint, the intensity of the land use. And on the other side, of course, we want, rapid growth in production and productivity. And for a number of years, at least much of the last decade, farmers have done a fantastic job of producing more with less resources.

Interestingly, the last couple of years have actually had a number of marked climate-related impacts on productive capacity. And we've actually seen, for the first time in almost a decade the actual available stocks of these commodities start to dwindle. we're seeing weather-related shocks here in the US impact farmers' ability to plant the crops they, they wish to do. In parts of Europe, it's been incredibly dry. Parts of Australia have really reduced the available, water for, for yields of these crops. And so we're moving into a phase of farmers having to deal with tremendously low prices. Low investment in their sector. at the same time significant demand growth there, and a lot of challenges to meet.

Noelle Granger: Ken, how about on the meat side? Can you talk about production there a little bit and what are the shifts and the changes? 

Ken Goldman: Yeah. There's a lot going on. On the positive side, we're seeing productivity per animal go up. So, for example when I first started covering this industry 10-15 years ago, the average number of pigs per litter in the United States was closer to nine. Now it's closer to 11. So there are some ways that manufacturers of pigs, and yes, we call them manufacturers sometimes will be able to increase production by just working with genetics and better farming practices and so forth.

 By the same token, there are some pressures on them as well. So Sanderson Farms, a company that I cover, just talked earlier this year about how they've had a little bit of difficulty finding locations to build a new plant. People don't want, with more environmental concerns, don't want chicken and beef and pork plants necessarily in their backyards. Uh, it's harder to find labor than it used to be.

Tracey Allen: And probably more expensive, too, I imagine.

Ken Goldman: So much more expensive. And it's expensive to build a plant now, right? We're seeing the cost of steel, at least, fluctuating; sometimes going higher this year. That has been a disincentive to build new facilities as well. So tough labor, high-costs, difficult environment when you're trying to find a place to build a plant. Not easy to expand as some of these companies would like to do and to meet demand, frankly. So we may have to go overseas for some of the supply in the United States.

Noelle Granger: Tricky to navigate for sure. a lot of changes going on with consumers as well. lifestyles are changing and it's playing a big part in what we eat and, and how we get our food. You know, we've got more people living in cities than ever before. In general, lives are getting busier, more hectic, there's less time to, to prepare food, to shop for food, to cook food. So let's talk a little bit about how these factors are effecting the food producers, the retailers. Obviously delivery services have really ballooned here in the last few years, whether it's delivery of ready-to eat, meals or meals ready for you to cook. there's a lot of different alternatives now. So Ken, can you talk a little bit about how these trends are effecting the companies that you cover?

Ken Goldman: I think it's funny because of all the trends that we've talked about taste, health and wellness. To me, the one that's probably changing the most is convenience. Consumers are demanding convenience in all factors of life, but I think in food it, it's really manifested in many ways.

So you think about Amazon spending all that money a couple of years ago to buy Whole Foods. Obviously Amazon, well, very well-respected, very fast-growing company see some changes there that they want, they want to take advantage of. When you think about Walmart, what they've done in terms of buying, becoming one of the biggest home delivery companies in the country and making it work really well for them. Clearly there's a trend there.

For me, the most interesting part, you have some consumers who are willing to give the pass codes to their apartments to home delivery people and then let those people go into their apartments, stock the fridge with whatever is being delivered, stock the pantries with it and consumers are saying, "That's fine. I'm willing to sacrifice some privacy and some security at home for the convenience factor." 

Noelle Granger: And soon they'll be cooking it for them, right?

Ken Goldman: Soon they'll be cooking it for them. That would be great. I would accept that as well.

Noelle Granger: It adds a lot of complexity for these companies, right?

Ken Goldman: A lot of complexity. Correct.

Noelle Granger: So another big trend especially in developed markets, is the move to healthier eating. Right? Healthier foods, plant based foods instead of meat, sweeteners instead of sugar. Tracey, how are these changing diets impacting the farmers on the agriculture side? in terms of what they're planting, what they're producing.

Tracey Allen: When we think about the sweetener and the sugar sector particularly, it's been quite interesting. it's really been the last year that we have seen a contraction in the output of sugar globally, and we've really started to see weakness in prices start to weigh on the production decisions of these producers. And in many cases, that's resulted in increasing use of cane and in some countries sugar beet to, to switch into the use of ethanol, a higher value use of that sucrose.

But perhaps the plant protein demand is a more interesting story here. you know, we're all more familiar with edamame and tofu these days. And there has been a real boom in, obviously not just the demand for animal proteins and meat-based proteins. Which of course are the primary and, and more traditional consumer of the likes of soybean meal and plant-based proteins. But now consumers want a piece of that pie, too.

Noelle Granger: Yeah. Speaking of the plant-base proteins, Ken you cover Beyond Meat, it's probably the best known meat alternative, product out there. talk a little bit about this market. It's really new, but seems to be growing fast. what are you seeing? What are your expectations? and more broadly what are the, the food producers, retailers doing to tap into the overall push towards healthier eating?

Ken Goldman: Well, clearly it's a phenomenon. it's really become part of our society now, in America anyway, where people are constantly being bombarded with news stories about alternative meats. And to me, that says that we're onto something here. it's not just us talking about this from our perches, it's really people out there who are consuming the product and trying them. And so far, so good. both of the leading companies, Beyond Meat and impossible Foods have come up with terrific products, very different products. The way they're, they're going to market, completely different. Impossible uses a soy-based product and they have more patents. Beyond M-, uses a pea protein-based product. They have fewer patents but in some ways perhaps they're off to an earlier start. So they arguably have a better brand.

We're seeing all sorts of other companies, whether it's Tyson Foods or Kellogg or Nestle, coming to the game. And I think what you're going to see is a market that, to me, can reach a hundred billion dollars, and that's probably conservative.

So the question for me is not how big can it be, it's when do we get there and which companies are the winners?

Noelle Granger: Sustainability is also something that's becoming more top of mind with consumers. we hear a lot about fair trade, palm oil, coffee, cocoa certainly involved in that discussion. people are also just more broadly really looking for more organic options. so how is this playing through the entire food ecosystem? Maybe Tracey, if we start with you and Ken we can talk about how that's playing out on the shelf as well.

Tracey Allen: it started a number of years ago being more of a niche segment of the market and particularly when we look at cocoa coffee production now this is very much mainstream and embedded throughout the entirety of the supply chain.  Certainly from origin we have everyone from the leading producers of these confectionary goods with their own programs locally ensuring the  sustainability of the farmer is maintained, the financial awareness of the community is maintained,  the environment and protection of the ecosystem is also maintained there. at the end of the day, that's what consumers are demanding. That's what we need and then that's what people are paying for.

It's interesting, though, that the farmer doesn't always necessarily see an increase in the price for that particular commodity. It's no longer a value add; it's a necessity. And it's something that's expected and is increasing their market share.

Noelle Granger: Ken, do you feel like organic has mainstreamed on the shelves at this point in time? 

Ken Goldman: It really has. it's extraordinary to see where we were 10 years ago, where most supermarkets had a little organic better-for-you section in a dark corner of the store; compared to where we are today where organic physically is integrated with most of the store. I think we're actually seeing a slight deceleration in the growth of organic lately and natural. Especially natural, which doesn't really mean a whole lot. Organic actually has a definition in the United States. But we're seeing very specific products, so gluten-free, dairy-free, made with x kind of protein or y kind of protein. These are the products that are doing better now.

 So the bifurcation of society, the fragmentation of society, is really spreading to food as well. This idea that consumers are all eating the same way, shopping the same way. it's really changing in food and so it's becoming more difficult for the producers, for the retailers to service consumers. But from that health and wellness side, absolutely we're seeing organic become very, very mainstream and consumers expect their products to be better for you.

Noelle Granger: So you just talked a little bit about this divergent, right, in tastes. And we're seeing that both here in the US but around the world. in terms of the trends in developed markets versus developing markets. Some consumers are moving to a more healthier eating habits, others are moving up the, the food chain to more animal protein. So how do your companies Ken try and manage all of this? And how do they prioritize what they're providing to the consumer?

Ken Goldman: The number one thing is always taste. I cover Hostess brands, and Hostess brands makes Twinkies.

Noelle Granger: [laughs].

Ken Goldman: Twinkies are doing well. Donettes are doing well. Right? We talk a lot about health and wellness. We talk a lot about alternative meat, things like that. But what the big brands or the big products are still selling is a decent amount of meat, decent amount of sugar and all taste. And so, you know, we've seen companies like General Mills, which makes Lucky Charms, go from a period a couple of years ago where they took artificial colors out of the Lucky Charms. Product didn't sell as well. Guess what, they put the artificial colors back in because it looks better for kids and kids want to buy it more.

Noelle Granger: One topic we haven't hit on yet is the interplay between the agriculture food industry and climate change and the environment. I think it's one worth talking about. So, agriculture sector is probably the most exposed to shifts in climate and changes in the environment. So Tracey, can you talk a little bit about how that has been effecting food production, how farmers are tackling those challenges?

Tracey Allen: Yeah. And I think farmers have prior experience here responding to shifts in climate, shifts in patterns. It's something that they've been dealing with in their sector, in their industry forever. Climate is never constant.

What has been interesting, the pronounced instability in climate and the, fresh records we keep seeing almost on a monthly basis. Record high temps. Record high rain. in the course of a month. In the course of day. The adoption of climate mitigating technologies has really been a massive boost for the agricultural sector to ensure that output can be maintained. We've seen for example in the US this year, unprecedented delays in plantings. a lot of stress on the crop from adverse conditions. Basically too much rain at the wrong time. and thus far despite our tremendous concerns for output, things might be actually okay. we've got a lot of plants and hybrids that can withstand heightened salinity pressures, drought-based stress, increasing moisture and temperature stress as well.

 Tracey Allen: I do think that there is a lot more technology that is available to be commercialized in the future. Prices are not yet high enough to be incentivizing the companies releasing the seed technology and traits to do so at this point, but I really do think that's the next phase.

 Noelle Granger: More to come on that. We've certainly covered a lot of territory. it's a fascinating topic. You know, from modern farming practices, the use of technology, home delivery, and more. there's clearly a lot to talk about when it comes to food and all the changes in consumer preferences. But that wraps up our discussion for today. Ken, Tracey, thanks so much for joining me.

Tracey Allen: Thanks for having me.

Ken Goldman: Thanks you Noelle.

Noelle Granger: Check out more episodes of At Any Rate, J.P. Morgan's Global Research podcast series coming soon.

This communication is provided for information purposes only. This episode was recorded on September 30th, 2019. Please read J.P. Morgan research reports related to its contents for more information including important disclosures.

How Lifestyle and Diets Are Changing What We Eat

The world’s most important crops (by metric tons produced per year)

Bar chart depicting the volume of corn, wheat, rice and soybean produced year, with corn being the most widely grown.

First grown for human consumption in Mexico about 10,000 years ago, corn is today the world’s most produced grain, used mainly as food for humans and livestock and in ethanol production. The U.S., China and Brazil are the leading producers and consumers.

Wheat has been a staple food source for more than 8,000 years, covers more of the planet than any other crop, and today remains the most important source of carbohydrate in most countries. China, the U.S., India and France are the biggest producers.

With most corn being used for animal feed, rice is the most important grain for human consumption and Asia’s staple food. More than 90% of the world’s rice is produced in Asia Pacific, with China and India being the main producers.

The world’s main source of animal food, production of soybeans has grown by 350% in the last 30 years. The U.S., Brazil and Argentina are the main producers while China is by far and away the world’s leading importer, consuming more than double the amount of the U.S., the second largest consumer.

The technology and science of farming

In 2016, German chemicals giant Bayer announced its takeover of U.S. seeds and pesticides company Monsanto in a $66 billion deal. It was the largest all-cash merger of all time, promising innovations to help farmers respond to one of the world biggest challenges: rapid population growth.

Within the next 30 years, the global population is expected to increase from 7.6 billion to 10 billion, resulting in an estimated 50% increase of the amount of food crops required and a 70% increase in the amount of meat, owing to rising middle-class incomes in emerging economies such as China and India.

Technology and a new age of precision farming are likely to hold the answer to growing demand.

Over the last decade, there have been huge advances in the way crops are produced, in seed technology and disease and pest management. From the use of the global positioning system (GPS) to map crop yields and optimize use of fuel, seeds and sprays to the masses of data now available to better manage weather patterns, nutrient levels and pests, farmers have never had more control over the land and what they grow.

Among the latest developments, manufacturers including John Deere, CNH Industrial and AGCO are competing to corner the multibillion dollar market in driverless tractors and agricultural robotics, ushering in the era of automated farming. Meanwhile scientists are exploring new ways to boost yields by enhancing the natural process of photosynthesis.

The primary long-term factor in agriculture in the last decade has been the technological shift we have seen in yield performance.

Record harvests, historically low prices

Crop yields have risen dramatically as a result. Since 2000, yields of corn have surged by 35%; wheat is up 25% and soybeans have gained 23%.

“Investments in technology have enabled crops to withstand more intense periods of heat and moisture stress, so despite the growth in consumption, we’ve basically seen supply outstripping demand in recent years,” explained Tracey Allen, agricultural commodities strategist at J.P. Morgan.

Global crop yields indexed from 2000 - (2018 yields for each crop)

Line chart depicting yields of corn, wheat, soybean and rice, which have risen between 2000 and 2018. 

The knock-on effect on prices has been equally dramatic. With declining supply-side risks, agricultural prices have been at historically low levels for many years. In 2012, corn, the world’s most produced grain, cost $330 per metric ton; today, the price has more than halved to $160. Over the same period, the price of wheat, which covers more of the planet than any other crop, has dropped from a high of $350 per metric ton to $200 today.

More recently, there has been some relief, said Allen. Crop prices are now rising off the lows and further hikes are expected in the months ahead after heavy rains across key growing areas of the U.S. caused unprecedented planting delays for farmers. In May, U.S. corn futures rose to their highest levels in two years.

The J.P. Morgan agriculture and livestock index

Line chart depicting agricultural prices, which have declined between 2016 and 2019. 

The effect of trade wars on crop prices

Escalating trade tensions between the U.S. and China, the two largest market players in agriculture, have until recently had an overwhelmingly bearish impact on agricultural markets. In May this year, Bloomberg’s index for grain futures slumped to its lowest level since 1977 after tweets by Donald Trump threatened to further intensify the conflict.

China is the world's biggest importer of soybeans, relying heavily on the crop for its poultry and pork trade while the U.S. is the world’s largest producer. In 2018 when the trade war began, China bought $9.3 billion in agricultural products from American farmers, down from $14 billion the year before.

"China has effectively stopped buying U.S. agricultural products, so that has put a lot of pressure on prices,” commented Allen. “U.S. soybean exports, the largest agricultural commodity by import volume to China, have been the worst affected, followed by tree nuts, pork products and ethanol.

”The U.S. Department of Agriculture has since intervened to provide farmers with $28 billion in compensation for the lower prices and lost sales stemming from the disputes. The immediate future, however, does not offer much hope for an end to tensions, nor a return to normal trade flows between the agricultural juggernauts. “There has been a gradual deterioration in confidence within the agricultural sector during the intensifying US-China trade war. A trade agreement would be material for U.S. agricultural demand, however in the absence of confidence and certainty, the market is trading the fundamentals at hand.”

Changing tastes

Affluent countries have long been tempering their sugar consumption, and switching to alternate sweeteners. In emerging market regions, however, sugar consumption is still on the rise, chiefly due to population growth and because it is a cheap source of carbohydrates. Another significant food trend is being seen in countries like China and India where rising middle-class incomes are increasing the appetite for protein. That is also having implications for the demand for vegetable proteins such as soybean and rapeseed meals to feed the livestock and aquaculture industries.

One difference between agriculture and other commodities is that, while you are dealing with biological systems, there is a human being involved in the production – there is more of a tangible, emotional, physical attachment to it.

Why algorithmic trading is hurting farmers

Among the less widely reported factors affecting crop prices are the structural changes that have transformed how agricultural commodities are traded. The rise of algorithmic trading and price-following strategies have changed trading patterns across agricultural markets, at times reducing the relevance of fundamental supply and demand forces, according to Allen.

Probably the most significant change has been in the market participants. Today, there are four main categories of participants in the agricultural futures market: commercial types like farmers, grain traders and food producers; the swaps dealers from financial institutions who manage large commodity positions for clients; long-term investors who hold commodities as an index-type of investment; and speculative investors like hedge funds where the money flow is fast and the horizons typically short term.

One major player is absent from this mix. Seven years ago European pension funds still held large stakes in the agriculture sector. In 2013, they withdrew their investments because of concerns that they may have been inflating food prices.

“In my view, this has accentuated the impact of price-trend followers in the market,” argued Allen. “These days there are very few long-term investors holding positions based on a specific view on the commodities.”

“With many of the dollars once invested with a long-term view on agricultural markets getting reallocated to systematic funds, prices have been pushed lower, ignoring basic production economics.”

This dislocation has become even more pronounced in the last twelve months. “When you have incidents like the U.S.-China trade war, there’s no confidence from the major market participants and prices can go into large selling spirals. It has taken Mother Nature to drag agricultural markets out of their historic slump.

”Now that crop supplies are threatened by the wet weather, fundamentals are returning as a primary driver of prices and traditional market participants have returned to express their views.

More broadly, the implications of having lower prices for the long term are difficult to gauge. While lower food prices are good news for consumers and alone do little to imperil global food security, if prices fall back again more farmers are likely to question the financial viability of their operations.

Farming incomes are already at their lowest levels for years. In the U.S., net farm income has fallen by more than half since 2013, according to the Department of Agriculture. For every dollar that consumers spend on food, the farmer receives just 14.8 cents, it said.

Climate change and food security

For farmers’ incomes at least, more positive news could be on the horizon. For two main reasons, according to Allen.

The first is that while technology will enable farmers to answer the population-fueled growth in demand for food crops, the pace of productivity gains are set to slow – the yield gains from science and technology will ultimately reach a tipping point.

Probably the most important factor in the future of global food security, however, is climate change, as a recent J.P. Morgan research report highlighted. “The decade-long bear market on technology-driven gains in yields is not fully over, but over time it will be reversed by worsening water scarcity. Food security will still be fine, but there will be more climate-related shifts and they will become more noticeable,” commented Allen.

More extreme weather events like heatwaves, hurricanes or floods will create a supply-side shock, leading to crop shortfalls and putting upward pressure on food prices.

As the planet heats up, there is likely to be a geographical shift in the main centers of crop production with regions closer to the North and South Pole likely to see increased activity and improved agricultural yields. In the Northern hemisphere, countries and regions like Russia, Scandinavia, and Canada could benefit while in the South, Australia, New Zealand, Southern Chile, Argentina and South Africa all have great locations for crop production but remain vulnerable to droughts and flooding in low-lying areas.

Allen said that investors have not currently factored in the long-term impact of climate change on agricultural commodities.

We fear that the world is making precious little effort to keep global warming below +3°C by 2100 and thus think it worthwhile adding some hedges against temperatures rising to over +4°C by 2100.

“With agriculture prices already trading at the bottom of their 10-year range reduced arable land supplies and worsening water scarcity are probably not fully priced in.“We fear that the world is making precious little effort to keep global warming below +3°C by 2100, and thus think it worthwhile adding some hedges against temperatures rising to over +4°C by 2100.“For that reason, the advice for investors is to hold a broad long in agricultural commodities, and in particular wheat, the crop most vulnerable to water scarcity, as a hedge to the worsening impacts of climate change.”

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