Video: Sustainable food and water trends - Q2 2023

Yashica Reddy discusses the major trends in the sustainable food and water for the second quarter of 2023 and beyond.

02/08/2023

Authors

Yashica Reddy
Investment Director

What trends emerged across the food and water system in Q2 2023?

We saw mixed performance across the different subsectors in the  second quarter of 2023.  

Some of the more consumer facing sub sectors like food retail, food technology and staples were resilient as a result of higher consumer spending.

The agricultural and water equipment sectors have also performed well as supply chain constraints eased, allowing for backlogs and inventories built up in 2022 to be worked through.

However, some of the more commodity-linked subsectors struggled due to falling energy and agricultural commodity prices, along with fertiliser prices.

What are your expectations for the sector for the second half of 2023?

We do expect food inflation to fall for the rest of the year, but expect the agricultural commodity and fertiliser complex will likely tighten into the end of the year and into next year, especially if weather volatility and droughts persist in key markets.

Now, let’s take a closer look at some key subsectors:

  • Food retail  

The food retail names performed fairly well over Q2. The food price inflation wWe’ve witnessed has helped drive operational leverage and boost top-line growth for a number of the retail names. We still see some value in certain retail names, where the margin improvement story is not being credited in the current share price.

  • Conventional food production

Key global crops, like soybean and wheat, have rallied recently on lower crop yield expectations, mainly due to drought conditions in the US.

Geopolitical risks could also drive prices higher, given Russia is unwilling to extend the Black Sea grain deal under the current conditions.

We remain cautious on food inflation near-term, but we see the possibility of a return of agricultural commodity inflation at the end of 2023.

  • Agricultural inputs

Price declines in fertilisers and generic pesticides have been more aggressive than expected in Q2, given the agricultural commodity backdrop.

In particular, potash prices have fallen around 25% year-to-date, and ammonia prices are back to 2019 levels. Potash demand is expected to recover back to 2020 levels, and we do not believe this tightness is remotely being considered in the current potash producer valuations.

  • Food technology

The big names in this area have performed well year to date, that’s because they have been beneficiaries of the more resilient consumer spending we have seen. Other alternative protein-focused companies have been struggling as a result of margin compression, while the protein and crop processors have started to recover.

  • Water management

Lastly, in the water management space, the easing of supply chains and availability of parts has helped water equipment companies deliver on their backlog, and start to work through the inventories that built up in 2022.

However, we remain cautious on whether the rebound in construction spending can be sustained if interest rates remain at current levels next year.

Authors

Yashica Reddy
Investment Director

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