A New Frontier for Institutional Investors
February 25, 2014
Rising GDP in developing markets throughout Asia, the Middle East and sub-Saharan Africa is resulting in the emergence of highly urbanized middle classes, which are transitioning from primarily grain-based diets to increasing consumption of animal proteins. The strong correlation between animal protein consumption and per capita GDP, referred to as Bennett’s law (which posits that as individuals become wealthier, they switch from simple starchy plant-dominated diets to a more varied food input that includes a range of vegetables, fruit, dairy products, and especially meat) is illustrated in Table 1.
While protein derived from livestock and poultry (meat, milk and eggs) has historically represented a major portion of the animal protein consumed globally in human diets, fish protein, both wild and farm-raised, represents a very healthy and efficient source of animal protein for consumers. With expected population growth in developing markets, demand for seafood is expected to grow dramatically over the next 35 years. At the same time, health consciousness in developed markets in North America and Europe is driving increased demand for high value seafood products in developed markets.
Aquaculture to Meet Future Increases in Demand for Seafood
Due to these developments, per capita consumption of seafood on a global basis has increased by approximately 60% over the past 30 years (1980-2010) with total seafood production doubling during the same period in order to meet this growing demand (see Table 2). With the depletion of wild fish stocks due to overfishing and climate change pressures (and offtake limits imposed globally on wild catch fisheries in order to address these concerns), the volume of seafood derived from wild catch landings remains relatively flat. Therefore, in order to meet growing demand for seafood, aquaculture production will have to double or triple within the next 35 years. In fact, farm-raised seafood production already exceeded wild catch production for the first time in 2013 and is predicted to increase at a much faster rate than wild catch through 2050 (see Table 3).
While China accounts for over 60% of total global aquaculture production (see Table 4), much of it is comprised of low value fish protein produced in land-based systems as opposed to open water. With growing demand for seafood, China, historically a net exporter of seafood production, has recently become a large net importer of products to meet growing demand for higher value products, as it lacks the necessary land and water resources required to expand land-based aquaculture production.
In addition, feed conversion rates for producing a unit of farm-raised fish protein is far more efficient than those required to produce a unit of beef, pork or chicken protein (see Table 5). It is therefore no surprise that during the 1980-2009 period global aquaculture production grew at a substantially higher rate (8.2% CAGR over the period) than other sources of animal protein (see Table 6). This comparative efficiency also explains why aquaculture is expected to play significant role in addressing food security concerns and why it is benefiting from strong support from both multilateral lending institutions as well as governments as an efficient and sustainable means of providing animal protein for growing populations.
Challenges and Investment Opportunities for Increasing Production
While poised for long-term growth, aquaculture production faces a number of challenges for increasing output, which represent intriguing opportunities for investors who have a long-term focus, a thematic mindset, seek inflation protection and subscribe to the “efficient protein” story of aquaculture.
Compared to land-based animal protein production, aquaculture is a relatively nascent industry. Large-scale pond production was first developed in the 1930s and the first commercial salmon farms began operations in Norway as recently as the 1960s (see Table 7). In order to meet the rapidly growing demand for seafood, substantial amounts of capital will be required to support the development and commercialization of improved genetics of farmed species and new technologies for sustainable and efficient production systems both in land-based and blue water aquaculture. For example, with the decline in availability of fish meals sourced from depleted wild fish stocks, new sources of feed ingredients addressing the nutritional needs of a wide range of fish species need to be developed. The technological ecosystem required by aquaculture provides investors with a wide range of interesting opportunities to invest in “technology solutions” for the industry as well as in production systems and distribution channels (see Table 8).
As the adoption of new technologies will enable aquaculture production to scale up, the seafood industry, which is highly fragmented compared to the global meat industry (see Table 9), will begin to consolidate. This consolidation, which will be led by both aquaculture producers as well as wild capture fisheries seeking additional volumes of seafood protein to distribute through their supply chain, will also provide investment opportunities.
While targeting the most attractive sectors within aquaculture for investing is challenging, there is no question that this industry is posed for tremendous growth over the next three decades and that those who invest wisely early in the industry’s expansion cycle should do well.
Philippe de Lapérouse has more than 30 years of senior level experience working with leading global companies in the agro-industrial and value-added food chain, including Ralston Purina and Bunge, as well as working as an investment banker at the beginning of his career. As Managing Director of HighQuest Partners, he has led over 60 engagements advising strategic and financial investors operating and investing globally across the food, biotech and bioenergy value chains on making informed decisions regarding resource allocation and new business opportunities and developing strategies that address the challenges facing the global food and agriculture sector.
Mr. de Lapérouse chairs the Global AgInvestingSM conference series, the world’s leading resource for events, research, and insight into the global agricultural investment sector and serves on the Advisory Committee of the Ag Innovation Showcase held annually at the Danforth Plant Science Center in St. Louis, MO.
He received his B.A. degree from Trinity College and an M.B.A. degree from The Darden School of Business at The University of Virginia.