Podcast: How can we feed the world and meet climate goals?

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[00:00:07.930] - David Brett

Welcome to the investor download the podcast about the themes driving markets and the economy now and in the future. I'm your host, David Brett.

[00:00:25.130] - David Brett

With nearly 8 billion people to feed and climate change wreaking havoc across the globe the challenge of producing enough food sustainably while meeting climate targets has never been so acute.

[00:00:37.230] - Felix Odey

The food system is on track to use the world's entire 1.5 to 2 degree carbon budget.

[00:00:43.170] - David Brett

That's Felix Odey, a portfolio manager at Schroders. The 1.5 degrees Celsius Felix refers to is the threshold target established in the Paris Agreement in 2015, a treaty in which 195 nations pledged to tackle climate change. Historically, the United Nations Climate Change conferences, known as COP, have been almost entirely focused on the energy system and energy usage in transport and industry, which is strange given they knew the pressure food production and consumption places on those targets. Then, late last year, that changed.

[00:01:23.610] - News clip

Secretary of State Anthony Blinken is back in the United States after attending the COP 28 climate summit in Dubai. During his trip, he announced the US will participate in a declaration by the host country, the United Arab Emirates, to promote sustainable agriculture.

[00:01:39.270] - Felix Odey

At COP 28, 130 heads of state and governments signed a declaration recognising the grave threat climate change poses to our ability to produce sufficient amounts of food.

[00:01:50.710] - David Brett

The challenge of feeding the world sustainably and meeting climate targets has dawned on policymakers.

[00:01:57.130] - News clip

Global demand for food is likely to increase by an estimated 50% by the year 2050. An escalating climate crisis means that crop yields could drop by as much as 30% over that same period. So do the math.

[00:02:15.130] - Felix Odey

They recognise that any path to achieving the goals of the Paris agreement must include agriculture and food systems, and that this will require urgent adaptation.

[00:02:25.290] - David Brett

Meeting the challenge will require rethinking how we produce and consume our food and the pressure it places on other utilities, in particular water. In turn, it will redefine who and where we invest. In this show, we'll look at what needs to be done and how it's affecting investment decisions. But first we'll look at the challenges that need to be met.

[00:02:46.790] - Announcer

On Apple Podcasts, Spotify or wherever you get your podcasts, you're listening to the Investor Download.

[00:02:53.530] - David Brett

With rapidly growing populations and diminishing natural resources, sustainability has become more than a buzzword; it's a necessity. Much of it has focused on energy production and consumption, not enough on the way we produce and consume food, which has profound implications for our planet.

[00:03:12.250] - Felix Odey

If you look at the UN estimates, they suspect that we're going to reach around 11 billion people by 2050. Now, to put that into context. Assuming that the kind of protein and calorie consumption reaches globally, about the average for China today, that would involve a 50% increase in the amount of food we need to produce from today.

[00:03:33.520] - David Brett

Worldwide food production exceeds 2750 calories per person per day. That's according to a 2016 study by the US Food and Agricultural Organisation, or the FAO.

[00:03:48.710] - Felix Odey

And again to put that into context, because we deal with a lot of percentages in this industry that would involve producing more food in the next 30 years than we have over the entire course of human history. So it's a huge undertaking.

[00:04:01.150] - David Brett

Food production is already responsible for a quarter of the world's greenhouse gas emissions and is the largest driver of deforestation. It also accounts for 70% of global freshwater use.

[00:04:13.410] - Felix Odey

As economies tend to develop, the protein consumption per capita tends to go up, which means that there's even more pressure on the, on the environment and the world to produce that protein.

[00:04:25.230] - David Brett

As demand for food increases in the face of a rising population, so too will demand for water. According to the WWF, the annual economic value of water and freshwater ecosystems is estimated to be around $58 trillion, or the equivalent to 60% of global gdp. Yet the world's freshwater ecosystems are in a downward spiral due to climate change, posing an ever growing risk to these economic values. The interconnection between food and water is undeniable.

[00:04:56.750] - David Brett

The Danube river flows through ten countries in central and eastern Europe.

[00:05:01.170] - News clip

The most severe Danube drought in centuries has caused serious damage to countries whose economies are strongly tied with the big central European river.

[00:05:10.010] - David Brett

In the river's basin, 80% of the floodplain has been lost.

[00:05:13.980] - News clip

Severely low water levels have made the commercial navigation extremely difficult. At the beginning of August, the authorities prohibited using water from the Danube canal for irrigation. For two months, wheat, maize and sunflowers were at the mercy of the rain. And now even autumn crops seemed to be at risk.

[00:05:31.490] - David Brett

Seems like a perfect storm at the moment. If this all comes to fruition.

[00:05:35.850] - Felix Odey

I wouldn't want to use the word perfect to describe any of this, but I think the difficult thing to call here is over what time period, and a lot of that when you're dealing with agricultural markets, is going to depend on weather. What we do know is that we're seeing more and more extreme weather over the course of time. Last year, the drought in Argentina resulted in about a 50% reduction in the amount of wheat being produced. This is a key agricultural market. We've seen the like for California in the last couple of years as well. So this is really starting to have a very real impact on one the actual production, but also our ability to predict what our food production is going to be.

[00:06:12.040] - David Brett

With the population rising, natural resources literally drying up, and the weather becoming more unpredictable, action needs to be taken. That's coming up.

[00:06:20.680] - Announcer

Get in touch with us by email at schroderspodcasts@schroders.com or visit our website, schroders.com/theinvestordownload.

[00:06:29.790] - David Brett

The investor download so what can be done?

[00:06:33.460] - Felix Odey

The kind of three key changes that we see happening is the rapid and more rapid adoption of technologies that make the system more resource efficient. That kind of tweaking of global diets, maybe away from animal protein levels that we see today, and then also just this kind of awareness and focus on reducing the absolute food waste that we have.

[00:06:54.760] - David Brett

The amount of food produced each year should easily be enough to feed the world. However, one third of food produced for human consumption is lost or wasted globally, according to the World Food Programme data in 2020. On top of food wastage, you can add food used to feed livestock or convert it to biofuels, not to mention failed harvests.

[00:07:17.060] - Felix Odey

I think it's fair to say that if we see the world warming up, even in a 1.5 degrees scenario, things like corn and wheat yields are expected to decline by about twelve and 14%. So you have this natural pressure being put on our ability to even keep food production flat in a realistic scenario, let alone to kind of grow it, which really implies you will get more food inflation in the future.

[00:07:40.080] - David Brett

That's not even accounting for the cost of living crisis and conflicts in Ukraine and the Middle east, which are affecting prices. However, Odey says consumers are still better placed now, despite the price inflation, than they've been in recent history.

[00:07:55.190] - Felix Odey

If we go back and have a bit of a history lesson to the kind of 1960s and the postwar era, the percentage of disposable income that people were spending on food was multiples of what it is today. So whilst this is incredibly painful, we've still come a huge way in terms of reducing the cost of food. But the risk is that we've done that at the expense of our long term ability to actually produce it.

[00:08:17.840] - David Brett

Still, that's no consolation for consumers struggling to meet their food bills. And Odey says that even with the cost of living crisis, current food prices don't reflect the issues ranging from wastage, to environmental concerns, to transportation and consumption issues. Part of his solution...

[00:08:35.150] - Felix Odey

Regulation that allows price mechanisms to reflect these environmental costs more accurately, would drive yield enhancing and carbon efficient technology adoption. Shifts in global diets away from resource intensive animal meats and stimulate a reduction in waste and associated emissions from agriculture.

[00:08:53.490] - David Brett

And what does regulation look like?

[00:08:56.110] - Felix Odey

So I think subsidies is probably one of the levers. One of the things that probably isn't understood well enough is that already today there is a huge amount of subsidies on food and water. The last figure I've seen is from 2020, and that estimated around about $740 billion is spent each year by governments around the world subsidising that. That number will most likely have gone up significantly given what food prices have done since then. So this is already happening. But at the moment, a very small percentage of that has any sense of longevity. It's about maximising the yield this year, rather than maximising the yield over the next 10, 20, 30 years, so that we can actually sustain ourselves as a species. So I think you will probably see more of those subsidies beginning to target that longer term mentality. But likewise, even things like the free market carbon prices that we have in the energy market, if you started applying some of that to agriculture, that would create pricing mechanisms that would incentivise farmers to start caring about the carbon intensity of their produce, which again would have a kind of ripple, a positive ripple effect on the greenhouse gas emission intensity of the whole subsector.

[00:10:06.600] - David Brett

But that's for the future. Right now, those businesses connected with food and water sustainability have been experiencing a rough time. How will those investments respond to this renewed focus? That's coming up in the final part of the show.

[00:10:26.150] - David Brett

It's been a tough period for businesses linked to food and water sustainability.

[00:10:30.610] - Felix Odey

I think that demand has kind of definitely slowed a bit, and we saw that really from probably October, which was really the lows. And yeah, I think, I mean, really, you'd had such strong adoption of a lot of these technologies that you were kind of due a bit of a slowdown, especially as kind of costs of capital went up.

[00:10:48.080] - David Brett

Over the past two years, businesses and consumers have been battling the effects of rising interest rates to combat spiralling inflation. The aim being to make borrowing more expensive, so to dampen demand and cool the economy. It seems to be working with inflation in the western world dipping below 4% in some countries. But it's come at a cost.

[00:11:08.650] - Felix Odey

Not surprising, but it's always surprising how brutal the adjustments can be. But if you look back to the .com bubble, you saw the exact same thing. The technologies are still going to get adopted, but you can have these kind of annual blips.

[00:11:21.890] - David Brett

The problem remains the uncertainty surrounding the direction of interest rates, with some believing they've peaked and should begin to fall, while others are not so sure as inflation remains well above policymakers 2% target.

[00:11:35.090] - Felix Odey

Today we see again waning confidence in the consumer and pessimism in the agricultural cycle.

[00:11:41.330] - David Brett

Odey says, the difference now is that we've already seen six months of weaker underlying demand and weaker prices across crop and agricultural chemicals.

[00:11:49.880] - Felix Odey

Likewise, we have seen destocking across the agricultural inputs, food and beverage packaging, food technology ingredients and vitamin space, potentially setting up for some restocking volume recovery in 2024. Valuations and earnings expectations have also reset for much of the food and water system. Everything except the water management, aquaculture and agricultural equipment subsectors have been trading at or near their five year lows in terms of forward valuation. This contrasts with the backdrop of the MSCI ACWI, which rallied an impressive 20% in 2023, meaning the food and water universe is now experiencing its biggest discount in over ten years.

[00:12:31.430] - David Brett

And where should investors be focusing their energies?

[00:12:34.470] - Speaker 3

I think technology is going to have to be a huge part of this. I think that we talk about regenerative farming and sustainable farming, and I think that completely needs its place as well, because we are beginning to see ecosystems collapse because of essentially monocultures that have developed around the world. But realistically, if you look at the yield collapse that you get when you stop using fertilisers and stop basically applying at optimal levels, it's around 40% for nitrogen in the first year. Realistically, we need to lower the carbon intensity of those fertilisers and make sure they're being applied most appropriately through technologies like precision agriculture and equipment, rather than trying to actually just get rid of all this overnight. Because realistically, if we're going to bridge that calorie gap that we see emerging out to 2050, we're going to need those technologies.

[00:13:41.540] - David Brett

Well, that was a show. We very much hope you enjoyed it. If you want to find out more, please head to schroders.com/insights and we're endeavouring to record as many of these shows in the studio on video. And if you want to watch them in their full, unabridged version, then go to Schroder's YouTube channel. If you want to get in touch with us, it's schroderpodcasts@schroders.com and remember, you can listen, subscribe and review the investor download wherever you get your podcasts. New shows drop every Thursday at 05:00 p.m. UK time, but above all, keep safe and go well. Cheers.

[00:14:17.840] - Announcer

The value of investments and the income from them may go down as well as up. Investors may not get back the amounts originally invested. Past performance is not a guide to future performance. Information is not an offer, solicitation, or recommendation of any funds, services, or products or to adopt any investment strategy.