How Lifestyle and Diets Are Changing What We Eat

Noelle Granger: I'm Noelle Granger, head of Global Equity Research at JP 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, JP 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, JP 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 jet.com, 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, JP 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 JP Morgan research reports related to its contents for more information including important disclosures.