In the January edition of the MI magazine I’m going to be talking about food. Specifically: why global agribusiness is likely to step centre-stage in the next decade.
Basically there are two main reasons. Firstly, the world’s population is growing faster than crop yields are rising.
Secondly, we are running out of new agricultural land – unless we want to cut down more forest and thus accelerate climate change (which is already threatening agricultural output in countries such as Australia).
Last month I wrote about the forthcoming resurgence of economic nationalism across the world. Today, I cook up a case for gastronomic nationalism.
Britain, a country which imports 60 percent of the food it consumes should plan to boost its agricultural output both to ensure food security and to protect the environment. This could make canny investors money, too.
Of celebrity chefs…
It seems that you can’t switch on the TV these days in prime time in the UK without coming across a cooking programme. Celebrity chefs – Gordon, Jamie, Marco – seem to be bigger than most pop starts. (In fact Jamie’s book sales have only been surpassed by one living writer – a certain JK Rowling).
And then there is what I call the secondary market in TV food celebrity – MasterChef and Bake-Off. Who ever imagined that a programme about ordinary geezers and gals baking sponges in a tent for Mary and Paul would attract the biggest TV audience since the Morecombe & Wise Christmas Show, 1976?
Our pubs and restaurants have improved immeasurably over the last 15 years or so – no doubt, many would say, partly due to European influence. And the big supermarket chains offer more variety (and some would say) better quality than ever.
So there is no question that the British are more interested in food, and generally eat better than when I was young. (It was all school dinners then). Strange then, that the massive agro-industry that grows produces and packages our food is often seen by investors as uncool.
The amazing food value chain
This is something that I’m going to try to unpack in our January magazine. At the bottom of the chain you have seed providers, often huge multinational companies like Monsanto (NYSE:MON), which sell proprietary crops (they have a patent on them) to farmers. Then the farmers plant the seed to grow a commodity crop. The four major commodity crops worldwide are: rice, maize, wheat and soybean.
Now farming is globally a highly fragmented business, by its very nature, although big-ticket investors are increasingly interested in buying agricultural land – not least the Chinese in Africa. On the other hand, farmers almost everywhere enjoy state subsidies and preferential tax arrangements. (There is no VAT on basic foods in the UK and in many countries).
Farmers rely on fertilisers and pesticides to boost yields – unless they are “organic”, in which case they use much more land – which turns out to be even worse for the environment than using fertilisers.
The fertiliser industry, as I explain in the January magazine, is a classic mature commodity industry dominated by huge global players. I’ll just mention one name here: India’s largest fertiliser manufacturer is Liberty Phosphate (BOM:530273).
(Incredibly, all UK fertiliser manufacturers are foreign-owned. One of the last long-established UK fertiliser producers, Fisons, was acquired by Rhone-Poulenc in 1994 (now part of the French giant Sanofi (EPA:SAN))).
The farmers then sell their commodity crops to food companies, many of which are global mega-giants like Nestlé (VTX:NESN). With annual sales of US$92 billion last year Nestlé ranks 66 in the Fortune Global 500. What all the food companies do is to turn basic commodity ingredients into international food brands which are then sold to the next link in the chain: supermarkets.
Supermarkets, as we know from our own experience in the UK, exert huge oligopolistic buying power. The food companies can play tough with their brands – witness the recent spat between Tesco (LON:TSCO) and Unilever (LON:ULVR) over the price of Marmite. But when supermarkets buy (for example milk and meat) directly from farmers they drive a notoriously hard bargain.
Supermarkets have made some efforts to buy locally and improvements in labelling support this trend: one often sees a photo of a smiling farmer with the name of his or her farm on the label these days. That is progress; but the farmers are still dancing to the supermarkets’ tune. With an increased focus on food security, that could change.
The food value chain continues beyond supermarkets and wholesalers through restaurants, pubs, cafes, take-aways, and catering companies. There are numerous listed branded restaurant chains such as Mitchells and Butlers (LON:MAB) and catering companies such as Compass Group (LON:CPG).
France: a case study in gastronomic nationalism
One of the wonderful things that we Francophiles love about France is that its regional cuisine and produce are still celebrated and assiduously preserved. De Gaulle once mused that it was impossible to govern a nation that produced more than three hundred types of cheese.
Cheese is a case in point. Small provincial French towns like Pont l’Évêque, Cantal, Roquefort and Beaufort support their local cheeses with the same passion that provincial English towns support their local football teams. And note that these are local products, often produced in traditional ways (though of course with the help of modern technology) which are sold internationally, not least to the cheese-loving British.
Although France has the reputation of being a highly centralised country, culturally and gastronomically, like Italy, it boasts proud regional traditions. The differing cuisines of Normandy and the Languedoc reflect the different climates and geographies of those two regions. Some French towns are associated with particular dishes; for example Castelnaudary is the home of cassoulet and Marseilles is the home of bouillabaisse; while Lyon is normally associated with coq au vin.
De Gaulle once mused that it was impossible to govern a nation that produced more than three hundred types of cheese.
(I’m going to be writing quite a lot about France next year in the run-up to the French presidential elections (23 April and 07 May 2017). I’ll also be looking at some of France’s top stock prospects – many of which are food-related).
Historically, the food of Britain and Ireland enjoyed wide regional variety. There are still a few tell-tale dishes with place names from Arbroath smokies to Bakewell tarts. But the regional diversity of our food has generally been lost. That is a pity. The British – if Sir Roy Strong is to be believed – derive their identity from their countryside.
If I were ever made Minister for Regional Development (unlikely, as Mrs May is still not taking my calls) I would encourage each and every municipality across this land to rediscover its local cheese, real ale, sausage, or pie. Melton Mowbray and Stilton: step forward and take your bow.
A wave of upcoming regional food producers
The UK’s food and drink sector value chain makes up the largest single manufacturing sector in the UK, with a turnover of around £100 billion. Whisky is its single biggest export but the sector has a hugely diverse number of niche enterprises.
While some UK food businesses are huge, 96% of all food businesses are micro or medium sized. Only 0.4 percent of UK food companies scale up to beyond 250 employees, according to the London Stock Exchange.
Many small producers are taking tentative steps towards a stock market listing. Chapel Down (ISDX:CDGP) blazed a trail in England’s wine-making and craft beer market when, in 2014, it raised a record £3.95 million in ten days through crowdfunding. That created 1,470 new shareholders, who are now brand advocates. In April this year it raised a further £1.5 million[i]. As a matter of fact, I’ll be drinking English fizz with my Christmas lunch this year.
Investment in land is for Old Money. Wrong!
In the magazine article I briefly survey the history of economic thinking about agriculture. François Quesnay (1694–1774) argued that there were only three economic classes: the “proprietary” class consisting of landowners; the “productive” class consisting of agricultural labourers; and the “sterile” class made up of artisans and merchants.
In the UK, farmland values have soared over the last decade. Knight Frank puts the gain at 187 percent over 2005-2015, and 15 percent in 2015 alone.
The flow of production and cash between the three classes originated with the proprietary class because they owned the land and bought from both of the other classes. Modern economists regard agricultural products as just another form of output; and they do not analyse economic activity in terms of social classes – except Marxists, of course.
Interestingly, modern developmental economists have returned with renewed interest to the question of land ownership in the economy. Land reform (also called agrarian reform) is a live issue in many countries, not least Scotland where land ownership is still highly concentrated.
Investing in UK agricultural land
In the UK, farmland values have soared over the last decade. Knight Frank puts the gain at 187 percent over 2005-2015, and 15 percent in 2015 alone. The main reason for this is obvious – demand is far outstripping supply.
It can be difficult for investors to find what they are looking for as high quality farmland will often be snapped up by existing landowners or neighbours. (If you are an Archers fan, there is a current plotline on this theme). Choices for farm owners looking to expand are limited, as many will look to buy available land from adjoining properties – this means neighbouring land often commands a premium over its market value.
The main trend for UK farmers is to increase the size of their farms in order to gain economies of scale. Smallholdings, popular in the 1970s-90s are effectively allotments for hobbyists. A viable family arable farm probably now needs at least 1,000 acres to remain competitive.
Within Europe, only Denmark and Spain have seen average farmland prices drop over the last year or two, with increases across the rest of the EU. Over the last decade however, prices have grown across Britain, France, Italy and Germany.
The Netherlands now boasts record EU farmland prices, which average €49,575 per hectare, compared to €18,962 in Britain, €19,400 in Italy, €22,267 in parts of Eastern Germany and just €5,420 in France[ii]. (For you imperialists, a hectare equals 2.47 acres).
[ii] Figures are from Eurostat, quoted by Simon Palmer, Consultant at Brachers, a firm of solicitors in Maidstone, Kent specialising in farmland. See: http://www.brachers.co.uk/knowledge-hub/articles/the-enduring-appeal-and-the-risk-of-investing-in-farmland