The topic of food security goes well beyond the topic of food inflation. To illustrate this point, consider the following question: do we need low or high food prices to feed a global population of 10 billion? ‘Low’ is the answer if you think about those who currently struggle to pay for their food and those who may suffer from malnutrition as a result. ‘High’ is the answer if you think about those who are supposed to produce the food – the farmers – and the investments that they need to make to ensure sufficient supplies. While financial affordability comes to mind first when thinking about food security, the topic is also related to physical availability – especially in developing countries.
The financial point of view
Data from the US Department of Agriculture shows that people in developed countries spend a rather low share of their total expenses on food. In the year 2021, which is the most recent data, spending on food ranged from almost 7% in the United States to around 17% in Japan.Looking more closely at the United States, we find that the median household income has risen faster since 1975 than overall consumer prices, which have in turn risen faster than food prices. Breaking down the spending of US citizens, housing is the biggest item (34%). This is followed by transportation (16%), personal insurance and pensions (12%), healthcare (9%), food (7%), and entertainment (5%). Hence, it is not primarily food prices that are constraining the spending power of US households but rather elements such as rent and healthcare, which have risen at a faster rate than food prices, as well as our overall propensity to consume.
The picture is very different in developing countries, where food claims a much higher share of people’s total expenses. This ranges from around 16% in Brazil to around 60% in Nigeria, making the citizens of those countries much more vulnerable not only to food inflation but also to food insecurity. While for most parts of the population this is a consequence of lower income levels, the factors that push spending on food so high go well beyond financial affordability and often are much more associated with physical availability. There are many factors that impact the availability of food and that thus contribute to the threat of food insecurity. This is why we believe that the world will not be able to solve the food security issue simply by producing more food.
Threats to food security
Theoretically, the world produces more than enough food to feed every person on the planet – around 4.2 billion tonnes in 2020, according to the United Nations. This is equivalent to almost 3,000 kilocalories (kcal) per capita a day and compares to around 2,200 kcal in 1960 or 2,600 kcal in 1990. While the ideal daily intake of calories varies depending on age, activity, and metabolism, the recommendation is around 2,000 calories for women and 2,500 for men. Looking ahead, we constructed two primarily theoretical cases for future food production:
- The first case assumes that the available kilocalories remain at today’s level. Food production would rise around 17% from today’s level, mirroring global population growth and reaching 4.9 billion tonnes in 2040.
- The second case assumes that the past decade’s trend growth in global food production continues. The total volume would rise to 5.85 billion tonnes or 3,250 kcal per capita a day, which is 40% higher than today.
Even in the very conservative first case, it becomes clear that food security will remain a top priority in the years to come.
Seven important factors that constrain the availability of food and that are thus threats to food security include:
How to harvest the benefits?
Precision agriculture holds the promise to produce this food more responsibly, i.e to produce more with less. We believe agricultural machinery companies are the main long-term beneficiaries of precision agriculture, as more sophisticated products provide a new selling opportunity. Agricultural traders should also profit from structurally globally growing volumes, even though they seem to have missed the opportunity to turn last year’s turmoil into bumper profits. Seed, fertiliser, and pesticide producers should face some more short-term headwinds as agricultural prices continue to come down. In the longer term, these companies should still benefit from rising volumes and their strong market position. Last but not least, agricultural producers are unlikely to offer strong structural growth potential, as on average this segment should grow in line with the overall economy, reflecting population and prosperity growth.