Market Thoughts: Food & Ag in a Recession

Everyone is talking about what is going to happen when we enter an inflationary recession (as if we are not already there)…and while many of the headlines focus on the impact of higher food prices consumers are seeing in grocery stores, it is also important to think through how this recession will impact the rest of the food supply chain. Food is one of the most recessionary-resistant sectors, but the industry will still have some serious economic dynamics to deal with over the next few years. We are bullish on the role that technology stands to play in managing costs and driving efficiencies for the food & agriculture industry.

• Rising food prices mean that food companies pay see nominal increases in top line revenue, but rising input costs will force food producers and manufacturers to pay closer attention to their margins and operational efficiency.
• Farmers may not realize the benefits of higher food prices on the grocery shelves, yet they will battle higher input costs, which may push them to adopt technologies that incorporate “precision ag” practices and/or increased automation to manage their costs and operations. (Link to ag report from Purdue University here.)
• Higher labor costs may make expensive robotic and automation solutions more attractive to food manufacturers and producers. Automation can help businesses improve their operations, which can help them maintain or improve profitability given recessionary pressures. This may, however, come at a tradeoff with high upfront costs for installation and maintenance in the short-term.
• Indoor farming has its eye on profitability, but higher energy prices & labor shortages will put added pressures on their unit economics (which has been a major critique of the industry). (See article from AgFunder from 2019 here that walks through the economics of greenhouse & indoor growing operations.)
• An inflationary environment will put pressure on the consumer-facing food tech companies, especially those (like grocery delivery, meal kits, quick delivery platforms, or premium CPG brands) that have achieved rapid growth by pricing their services or products below cost for the last few years to attract customers. Indeed, many of the major quick commerce grocery delivery companies are already scaling back operations. (See article here about the slow demise of quick grocery commerce.)
• Sustainability may move beyond a “nice to have” as food & ag businesses think about ways to maintain profitability. This could come in the form of technologies that help manage inventories more efficiently, that monitor costs & margins more closely, or that look at adding additional revenue streams from unused assets or by transforming waste streams.

At REMUS Capital, we are interested in funding companies that are tackling these increasingly complicated economic dynamics. We believe that:

• Automation & robotics will offer interesting solutions to solve increasing labor costs and a shifting workforce
• Businessses will require solutions that analyze operational efficiencies to needed to help customers maintain profitability
• New marketplaces could be interesting solutions for industries that have traditionally lacked transparency (such as food distribution, ag finance & insurance, and more)
• Platforms that collect and share data will be necessary in an increasingly digitalized food & ag ecosystem

Please reach out if you are working on any of these problems in the food & agriculture sector. You can get in touch with me on LinkedIn or at ifantini@remuscap.com.