Investing in ag: Dramatic increase in ‘agrifood tech’

CHICAGO — The food industry is a dynamic system that is currently impacted by several factors, including research and development investments.

“One of the factors is agricultural commodities, where the margins remain low for the farmers and for food processors,” said Jayson Lusk, distinguished professor and head of the Department of Agricultural Economics at Purdue University. “So, people are looking for alternative ways to make more money.”

Another issue is agricultural innovation, which traditionally has been a story about public investments in research and development.

“For decades the U.S. led the world in investments in research, but for the last decade we haven’t been investing as much in that space,” Lusk said in a presentation during the annual Agriculture Conference hosted by the Federal Reserve Bank of Chicago — Midwest Agriculture and Shifting Consumer Preferences.

“At the same time, other countries have been investing more,” he said during the virtual meeting. “And private investments have been increasing.”

New investments are coming from outside of the agricultural industry.

“Over the past decade, there has been a dramatic increase in investments for agrifood tech, around $21 billion,” Lusk said.

Some of this money is flowing into alternative protein companies, which have the potential to be disruptive to traditional agriculture, Lusk said.

“Retail scanner data from late March into April and May for meat alternatives showed sales were up 250% during the peak panic buying,” he said. “But even after that we still see sales growth of 100% compared to the same time last year.”

However, Lusk said, these are really small markets.

“Some of the really large percentages for sales growth are due to the fact we’re starting at a very small base, but the data suggests it’s a market that is growing,” he said. “Meat alternatives are about 0.3% of the total meat sales, but investment dollars give us reason to think there could be more here in the future.”

According to the U.S. Department of Agriculture, total revenues across the farm sector are $374 billion.

“Roughly half of that were animal products, 15% were feed grains and another 10% were soybeans, which about 85% go to animals either here or abroad,” Lusk said.

“So, about two-thirds of the value of our farm production is tied up in animal protein production,” he said. “Any factor that reduces demand for animal protein has the potential to have big impacts on the ag economy and rural America as a result.”

Food system realignments are occurring with new, outside investments in the agricultural space, Lusk said, which includes companies such as Beyond Meat, Indigo Ag, which is an input company, and Farmers Business Network, a data company.

“Walmart is now integrating to develop partnerships for packing capacity to secure a supply of beef, and Costco just opened a chicken processing plant,” he said. “Perdue Farms has announced an effort to sell directly to consumers.”

Lusk highlighted some of the drivers for change in the food and agricultural sector.

“Evidence suggests a lot of efforts focused on sustainability are driven by investment pressures,” he said. “We’re starting to see companies trying to figure out ways to interact with the supply chain to make improvements on sustainability goals.”

Another driver is new information from consumers that is available through digital agriculture.

“Blockchain enables the transmission of information across the supply chain in ways we haven’t seen before,” Lusk said. “So, there is an attempt to try to be more responsive to consumer demands by providing products to them.”

High-income consumers spend a smaller share of their income on food and also spend roughly equal shares on food at home and away from home, Lusk said, while lower income consumers spend more on food and they spend more on food at home.

“As a country grows wealthier, we spend smaller shares of income on food, which means we can ask more out of our food system than we did before,” he said.

According to surveys, the four most important factors consumers want from their food system is taste, safety, nutrition and price.

“Then there is a big drop off to natural, animal welfare, environment, origin and novelty,” Lusk said. “As income grows, what becomes more important to people is natural, nutrition, origin and novelty.”

With the COVID-19 pandemic, income fell backwards for consumers and price became more important, Lusk said.

“We will have to wait to see if that’s a short- or long-term phenomenon,” he said.

Some of the changes that occur with food products are not due to consumer decisions, but are rather a result of a policy decision or retailer pledge. For example, large restaurants and grocery store chains have made pledges to go to cage-free egg production by 2025.

“To meet all these commitments, a dramatic change needs to happen within five years if those pledges are going to be upheld,” Lusk said. “Most consumers indicate they’ll pay a little for cage-free eggs, but not as much as the extra costs involved.”

In California, laws have been in place since 2015 that include a space requirement for hens.

“Our estimates suggest that increased egg prices by 30%, and there has been a new law passed that makes the entire state cage free in a few years,” Lusk said.

In mid-March, the pandemic triggered two big demand shocks in opposite directions.

“We had a near destruction of demand for food away from home and at the same time a spike in demand at grocery,” Lusk said. “For most consumers, it got back to normal within a few weeks and then the next big shock was when meatpacking plants shut down because workers contracted COVID.”

When the packing plants shut down, Lusk said, there was a significant amount of volatility in the wholesale prices.

“Beef wholesale prices reached a level we haven’t seen previously and pork got to near record levels,” he said. “But chicken never got above last year’s price levels.”

Supply chains have an hour-glass shape, Lusk said.

“There are a lot of farms and a lot of consumer-buying locations, but the processing and packer sector is more concentrated,” he said. “As a result, if something happens to the middle sector that can cause a lot of disruptions.”

Eggs are a really good example.

“There was a big run-up on retail eggs prices — a three-times increase in retail egg prices, and part of the reason was there were not enough packing materials to ship eggs to grocery stores,” Lusk said.

In addition, about 30% of all eggs are shipped in liquid or powder form, Lusk said.

“Those eggs are regulated in a different way because they are pasteurized,” he said. “There are laws preventing eggs that go into liquid form from going into grocery stores.”

Since many consumers have lost jobs or income the United States is now in a recession, Lusk said.

“If consumer incomes fall by 10%, that might increase purchases of something like eggs, and the product categories that take the biggest hits are alcohol and food away from home,” he said. “Even if we didn’t have the pandemic, consumers would stop spending as much away from home because of income concerns.”

Retail food prices have started coming down somewhat from the last few months, Lusk said.

“We are not out of the woods yet, but overall I suspect this time next year to be back down to normal rates of food price inflation,” he said.