From growing rice on Mars to developing new farming techniques here on Earth, the future of food is rapidly evolving. The global food system—spanning farms, factories, grocery stores and more—is a complex network that has far-reaching economic implications. It is also inefficient and increasingly unfit for purpose, encouraging innovation across the value chain that will give rise to attractive investment opportunities.

In the newest episode of PGIM’s The OUTThinking Investor, we take a deep dive into the world of food and its portfolio implications—whether seeking opportunities or mitigating hidden risks. Three experts provide unique perspectives on technological efforts to make food production more sustainable and efficient, the impact of inflation and recent shocks to the food system, China’s role in the supply chain, and how a growing population is driving demand. Joining us are agricultural and development economist Chris Barrett from Cornell University, Council on Foreign Relations fellow Zoe Zongyuan Liu, and PGIM Head of Thematic Research Shehriyar Antia.

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>> The Mojave Desert in the southwestern United States is a place of extremes. High temperatures in the summer are often above 100 degrees Fahrenheit. Total rainfall for the year averages just a few inches. It's the perfect place to start a farm if your end goal is to grow food on Mars.

>> Two, one, zero.

>> The possibility and benefits of building a permanent settlement on the Red Planet didn't spark much interest until Elon Musk declared and funded the Mission to Mars. The commute to Mars, however, could take six months each way, so the first colonists will need to start growing food right away. Mars not only looks quite a lot like the Mojave Desert with arid and mountainous terrain, but the ground is also quite similar, so much so that a group of research scientists from NASA and the Jet Propulsion Lab developed a soil composite called the Mojave Mars Simulant. Fifteen hundred miles from the Mojave Desert, a team of researchers from the University of Alabama recently conducted a study using the Mojave Mars Simulant. They showed that rice could grow successfully in this harsh environment. A bioengineered variety of rice may one day become the first Martian crop. Think it's too far out an idea that human beings will eventually be living on Mars? Maybe. But, just in case, we'd better start working on a meal plan. To understand today's investment landscape, it's important to know how we got here. This is the OUTThinking Investor, a podcast from PGIM that examines the past, the present-day opportunities, and the future possibilities across global capital markets. In this episode, three experts will help us understand the investment opportunities across a changing food system. Chris Barrett is an agricultural and development economist and professor at Cornell University. Zoe Zongyuan Liu is a Fellow for International Political Economy at the Council on Foreign Relations and author of Can BRICS De-dollarize the Global Financial System? Shehriyar Antia is Head of Thematic Research for PGIM. The future of food may indeed include rice farming on Mars, but we have more urgent issues to address. In fact, findings from the Martian rice research may also be used to improve farm production on Earth. As climate change makes growing conditions more challenging and the global population continues to increase, we'll need to cast a wider net for new solutions. Our global food system also has a massive macroeconomic impact. It accounts for nearly 40 percent of global employment. Farm subsidies are over $700 billion annually. So while the quantity and quality of our food is critically important for health and cultural reasons, it's also important from an investor perspective. But what exactly do we mean when we refer to the global food system? It's the entire food value chain, everything from agriculture inputs to food processing, from transportation and storage to grocery stores and Grubhub. Population growth has driven increases in food demand for decades. Chris Barrett explains the key underlying factors.

>> From roughly 1960 till the late 1990s, the world was enjoying historically unprecedented growth in food supply per capita. The consequence of that was food prices were steadily falling in inflation-adjusted terms, and more and more people were able to eat a healthy diet. Indeed, we were bringing out of food insecurity roughly 90 million people a year on average over that extended period of time. So this was really a remarkable accomplishment. But much of that was sparked by significant investment in the basic and applied science of improving agricultural production and the productivity of the agri-food value chain that takes farm gate products and turns them into the foods we Eat.

>> That additional productivity required investment, much of which started to fade in the early 1990s. Because of the lag effect of research dollars, the effects on food production weren't felt immediately.

>> The all-time low inflation adjusted global food price was December 1999. And, since then, we've seen a steady growth in real food prices punctuated by some pretty serious food price spikes, most notably in late 2007 to 2009 and then again in 2011 12 and then, most recently, in 2021, 2022.

>> These spikes in the global food price are a result of demand growth outpacing supply growth. Inventory falls, and eventually the global food system becomes vulnerable to shocks.

>> So you get remarkably bad harvest in a key breadbasket area. You wind up having a pandemic that disrupts supply chains or wars that disrupt supply chains, and suddenly the system doesn't have enough shock absorption capacity. And so prices temporarily jump until farmers can begin to adapt to those higher prices and plant added acreage or adopt better technologies, more inputs to boost yields. And the delays in agricultural production mean that you go through a period of several months of a food price spike before the supply response begins to bring inventories back up and prices return. So we often say that commodity prices go up like a rocket and settle like a feather, and that's certainly true of food price spikes.

>> Going forward, the projections and implications are also stark. Here's Shehriyar Antia to explain.

>> Global population is forecast to grow 25 percent over the next 25 years or so. But food demand is set to grow 60 percent, more than twice the pace. Why is that? So when you look at drivers of food demand, there are really two primary drivers. There's population growth and income growth. The population effect is very straightforward. More people simply mean more mouths to feed. The income effect is a bit different. So because global populations are growing more affluent, diets are changing. What I mean by this is, as more people go from lower income to middle income, they demand different foods. They gravitate to what's known as a Western diet, one that's heavy in meat, in dairy, wheat, sugars. And as more people enter the global middle class, diets are converging towards this Western diet. Now, that people consume more calories as they grow more affluent is not a new phenomenon at all. This is a direct result of economic development and prosperity. What is different, though, is that, going forward, this income effect on food demand is going to be larger than the population effect. And that is why demand for food in calories will be growing at more than twice the pace of population growth. So bottom line here, this convergence of global diets creates a compelling need for greater productivity across the broad food system.

>> This increase in demand for food will be felt worldwide for decades. China, with the world's second largest population, illustrates many of the issues around food security. Zoe Liu provides important context.

>> Changing data patterns have actually driven China's food import dependencies, especially with regard to edible oil, sugar, meat, as well as processed refined food, in particular, you know, olive oils, grapeseed oil, and coconut oil. The reason I talk about oil is because people tend to think about China's crude oil import dependence and it is very high. China is the largest oil importer in the world. But actually China was also very much import dependent on edible oil.

>> China's edible oil import dependence ratio reached nearly 70 percent in 2021. That's actually as high as China's crude oil import dependence.

>> So, from that perspective, you know, rising income, expanding population of middle income with more disposable income for finer food drives up China's demand for a higher quality imported food and more diverse as well. And, you know, I lived through this period myself. Growing up in China, when I was young, my favorite date of the week was Friday. And that was not because Friday was the last day of school but because Friday was the day when my mom would cook me fish. But now, you know, the fish is no longer something that, you know, people can enjoy on special occasions. But, you know, just this -- specifically because China secured a lot of free trade agreement with many countries in the world and strengthened the diverse source of imported food. And that is good for Chinese consumers. But the flip side of it is import of China's increased food import dependence. It is certainly a notable aspect of human nature to aim for progress to make the world a better place for future generations. Ending malnutrition is a cornerstone of progress. But food security also contributes to peace, whereas food insecurity contributes to geopolitical risks. Chris Barrett cites two main ways in which food insecurity increases national security risks.

>> Food insecurity gives rise to unrest. So we see food riots. We see increasing contestation for land and water as food prices go up and those agricultural inputs become more valuable. This leads to civil unrest, government overthrow. During the 2007 to 2009 and again 2011, 2012 food price spikes, roughly 50 countries in the world suffered violent unrest, and several governments fell. The government of Madagascar fell after a large scale land deal with Daewoo, the Korean conglomerate. The government of Haiti fell. More recently, the government of Sri Lanka fell in 2022. The second way in which food insecurity is a problem in national security terms is that, as we've seen in the Russia, Ukraine war, contests between major exporters or major producers, the same would be true if you had a war with China, the world's largest consumer of food. Wars involving major producers and major consumers disrupt supply chains, that creates a lot of uncertainty in markets. It leads to food price spikes that hit all of us on the grocery shelf. And it also is prone to lead many governments to align themselves with one or another party, which can often run counter to American foreign policy goals.

>> Ukraine is a major producer of wheat. Prior to the Russian invasion, Ukraine provided more than half of the wheat supply distributed in emergency situations by the World Food Program. This humanitarian organization was awarded the Nobel Peace Prize in 2020 because of their commitment to preventing the use of hunger as a weapon of war. What better proof that food security is directly related to national security. Since Russia's invasion of Ukraine, the European Union has increased efforts to fill the gap of global food security, including increased food production and distribution. Food security clearly impacts national security. On the flip side, two significant drivers of the global food supply are climate and technology.

>> While it's clear climate change adversely impacts agriculture production, it reduces crop yields, it hampers livestock production, what is a little overlook is the two-way impact of climate and agriculture. That is, agriculture impacts the environment and climate as well. Agriculture accounts for 30 percent of greenhouse gas emissions and more than two-thirds of freshwater consumption globally. So there really is a circularity to it, and both agriculture and the environment impact each other. It's really important for investors to realize that this two-way impact between agriculture and the environment is really driving the need for greater sustainability in the food system. The second element of change that's really driving food production here is innovation. And this is essentially, the way the food system is responding. We could very well be at the dawn of a new Green Revolution because technology is really leaving its mark across the food value chain, from biological and organic farm inputs all the way to automation and robotics and cold storage facilities, all the way to cultivated meat. At all stages of the food value chain, innovation is really a key driver of change; and technology is a key element.

>> These are critical forces to making our food system more productive and more sustainable, which is essential given the risks along the value chain of the global food system.

>> Food production is becoming increasingly risky over the last generation. We see that in climate change and the increased risk of extreme weather events that really hurt production. So crop failures are more commonplace, which gives rise to a need for crop insurance and livestock insurance and other ways of helping to take some of the production risk out for the primary commodity producers. But there's also more price risk. We've seen the standard deviation of global food prices has roughly doubled over the last decade. It's up about three times relative to the 1990s. So price volatility means that, even if production risk is manageable for producers, they increasingly need to manage price volatility. They need mechanisms to hedge. So we're seeing around the world, including in low and lower middle-income countries the emergence of various sorts of commodity exchanges where you have the opportunity in futures and options markets for people to hedge. And, finally, there's the risk posed by technological change that can leave stranded assets. If we wind up seeing, for example, a really rapid improvement in the productivity of off farm production of alternative proteins, well, all of the investment in fixed capital on dairy farms or beef ranches, for example, they don't have many other good uses. So those largely become stranded assets. So there's always some risk in periods of rapid technological change that fixed assets that are very specific to one particular method of production might be relatively risky investments. There has been a fair amount of innovation in financial products, whether it's the rise of commodity exchanges in the developing world, the emergence of index insurance, which is essentially a put option on bad growing conditions or livestock herd loss, as well as insurance on assets that could be at risk of significant devaluation. So financial institutional development or financial product innovation is an essential part of accompanying technological and institutional change in our food system.

>> At the national level, risks related to a country's food supply play out in different ways, over time and across countries. That depends on where a country is in terms of its economic development, its trade relations, and a host of other factors. China has unique supply and demand factors that affect the country's food supply.

>> China is this country where, you know, it has less than 10 percent of the planet arable land; and, yet, the country China produces 1/4 of the world's total green and using that to successfully feed 1/5 of the global population. China today ranks number one globally in the producing of cereals, such as corn, wheat, and rice, as well as fruits and vegetables, meat, poultry, eggs, and fishery product. But, that being said, China also consumes a lot and has increasingly dependent on imported food. In particular since 2004, China has become a net importer of agricultural product. This is also why, despite China today has become a so-called world factory focused on food security and the issue of agricultural [inaudible] and farmers and all that, food security really has been emphasizing self-sufficiency, especially domestic supply.

>> Food is such an integral and complex part of the global economy. The investment implications seem endless. Whether investors are looking for firms that are high performers, or firms that are contributing to positive environmental, or social outcomes or both.

>> Cold storage and transport, especially in emerging and frontier markets, really stands out as a way for investors to not just do well but to do good. You know, with populations in Latin America, Africa, and Asia veering towards a Western diet, increasingly, there's rising demand for more Australian beef, for French cheese, for Chilean wine in new places. So there is a persistent source of demand for cold transport and storage to accommodate this. And, interestingly, cold storage also provides a way for investors to make impact. And what I mean by this is, according to the UN's Food and Agriculture Organization, as much as 40 percent of food grown or produced goes uneaten. In emerging and frontier markets, most food lost happens, you know, after the farm and before it gets to consumers. So investors supporting cold transport and storage infrastructure in these markets can make a measurable impact by reducing food loss and by enhancing food security in these places.

>> Food waste happens in different places along the food chain in different regions. Emerging market countries see more waste during production and distribution. In developed market countries, more waste occurs once food is in the hands of consumers. But 40 percent is certainly a staggering amount and a good place to start for investors looking for opportunities.

>> There are lots of investment opportunities that we uncovered in our research. I can highlight a couple. First, there are new areas of crop science that feel like we might be ushering in a new Green Revolution. There are new crop varieties that are drought and climate resilient, for example. There are biological and organic fertilizers being developed that are far less damaging to the environment. You know, in livestock production also, there are feed additives that can not only boost beef production in cattle, they can also reduce the enteric methane emissions by almost 90 percent. Another angle of technology and innovation here is really around ag tech, which can really improve productivity on small-scale farms. What I mean by this is using sensors embedded in fields and trees to sense moisture and nutrients and apps on mobile devices that provide this data in real time to farmers via their phones, this is a way to enhance productivity, for example, on the more than 80 percent of farms in India that are smaller than 10 acres and that rely on manual labor.

>> With many innovations on the horizon, investors will need to be discerning. Some new concepts may not end up being viable options. Others may function well but still not have good investment prospects.

>> Let me highlight two areas of innovation within food production that are not great investments. We're not especially sanguine on vertical farming. The costs for heating, cooling, and providing light can really soar when energy prices go up. And these indoor operations can be difficult to scale. By comparison, we're more bullish on greenhouses that use sunlight for free. This model we think is more viable even if energy prices go up and certainly more easily scalable. And the second area of innovation that we're not optimistic about as an investment is cultivated meat. And this is essentially a small cluster of meat cells that is grown at high speed and density in a biotech lab. And we're not sanguine on this as an investment opportunity for several reasons. First, cultivated meat have a long way to go to be comparable on taste, texture, and price. And plant-based meats and consumers' foray into plant-based meats showed us that consumers are not likely to compromise much on those three fronts. Second, the landscape is highly fragmented right now. There are literally hundreds of startups doing this. It's very unclear who will emerge as a winner and gain scale and efficiencies. So innovation is key to making the food system both more productive and sustainable, and there really is a big role here for investors to play in achieving this.

>> What is clear is that opportunities exist, and investors should be intentional about meeting their investment needs, whether they're seeking performance simply in risk-adjusted returns or they also want positive impact.

>> First, we think investors need to engage with all sectors within the food system. To put it simply, you can't make impact if you're not engaged. And the inconvenient truth here is there are no perfect solutions out there right now when it comes to the food system. Instead, there are lots of imperfect options and alternatives. Second, investors really need to work on two fronts here. They need to acknowledge the current needs and limitations today, and they also need to work to find more perfect solutions for the future. So this may -- may mean finding global fertilizer manufacturers who are forward leaning and taking relevant measures to reduce their carbon footprint today, some producers who maybe do this better than their peers, for example. And it also means investing in startups working on organic or biological fertilizers that may someday replace nitrogen-based fertilizers altogether. And, third, investors need to work to narrow the data gap that really exists today. They need to push their portfolio companies to disclose more information; to disclose more data; to measure it, first of all, so that all investors can make more informed decisions in this investment space. So bottom line here, the food system really is the new frontier for sustainability and impact-minded investors. And investors can really borrow from the successful parts of the playbook in dealing with fossil fuel firms over the last decade and put that to use here.

>> Whatever the future holds, the global food system will continue to be an important industry for investors to understand and carefully select their exposure. Thanks to our experts, Chris Barrett, Zoe Zongyuan Liu, and Shehriyar Antia. To learn more about investment opportunities across the global food system, click the link in this episode's show notes. Join us for the next episode of The OUTThinking Investor when we'll explore the microchip industry, including the impact on technology solutions, supply chain management, and the global economy overall. The OUTThinking Investor is a podcast from PGIM. Follow, subscribe, and if you like what you hear, go ahead and give us a review.

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