Food For Thought: Exploring The Investment Angle Of Buying Groceries

Food stocks are part of the 'consumer staples' industry, which is considered to be a defensive sector in investing. Defensive sectors are less closely tied to the economy, so even if the economy is in a recession, consumer staples are seen as less risky and more stable than other industries. Food stocks include more than just memorable brands. They encompass anything that helps food get to your plate, from raw agricultural commodities to food-processing companies, food producers, food-distribution companies, grocery stores, and food-delivery services.

Food stocks have been performing well in recent years, outpacing the market averages. For example, Archer-Daniels-Midland, a giant food-processing company, surged 39.7% in 2022, and General Mills, whose brands include Pillsbury, Häagen-Dazs, and Progresso, returned 27.6%. The Invesco Dynamic Food & Beverage ETF (PBJ), the oldest dedicated food ETF, generated more than 8% gains in 2022.

However, it's important to note that not all food stocks are immune to economic ups and downs. Some companies, particularly restaurants or those producing higher-priced products, may be hurt if consumers reduce their discretionary spending. Additionally, food stocks can be influenced by various factors such as droughts, wars, and pandemics, which can impact supply and demand dynamics.

With the recent surge in inflation, rising energy prices, and disruptions in key resources, food costs have risen significantly since 2020, and there is no indication that these costs will stop increasing anytime soon. As a result, some people are starting to view food as an investment, similar to how they would approach their retirement plans.

In conclusion, while food stocks can provide a relatively safe and recession-resistant investment option, it's important to consider the various factors that can impact their performance and remember that all investments carry some level of risk.

Investing in raw agricultural commodities

There are several ways to invest in raw agricultural commodities:

• Mutual funds: These are companies that collect money from investors and put it into securities such as stocks, bonds, and short-term debt. You could invest in mutual funds that specialise in the agriculture industry.
• Exchange-Traded Funds (ETFs): ETFs are a basket of securities purchased or sold through a brokerage firm on a stock exchange. There are ETFs that specialise in the agriculture industry, known as agricultural commodity ETFs or Ag ETFs. These funds invest in companies that produce foods such as grains, dairy products, and livestock.
• Futures contracts: A futures contract is a legal agreement to buy or sell a commodity asset or security at a predetermined price and time in the future. Futures contracts are the most common way to trade commodities and they originated in the agricultural industry to balance market prices and reduce investors' risk.
• Directly into commodities: Through futures contracts, ETFs, and exchange-traded notes (ETNs), investors can take advantage of price changes in the marketplace. Depending on the type of fund, individuals can gain exposure to specific commodities, like corn and livestock, or a basket of commodities. For example, the Elements Linked to Rogers International Commodity Index-Agriculture Total Return (RJA) is an ETN that tracks the performance of an index representing the weighted value of a basket of 20 of the most liquid agricultural commodity futures contracts.
• Real Estate Investment Trusts (REITs): REITs are a way to invest in farm-focused real estate without actually owning a farm. The real estate is usually leased to farmers to create produce. REITs allow for diversification, as they enable a single investor to invest in multiple farms around the world, and they can also be sold on the stock exchange.

It's important to note that investing in raw agricultural commodities carries risks. Factors such as weather, current events, tariffs, and trade agreements can influence the performance of these stocks, making them more volatile. Additionally, investing in commodities is typically a short-term investment strategy, as commodities are based mainly on supply and demand rather than the long-term financial health of a business.

Investing in farming stocks

Agricultural Commodities

Investing in commodities like grains, livestock, and cotton can be a way to participate in the agriculture market without owning farmland. This can be done through exchange-traded funds (ETFs) or mutual funds. For example, the Elements Linked to Rogers International Commodity Index-Agriculture Total Return (RJA) is an ETF that tracks the performance of a well-known index representing the weighted value of a basket of 20 of the most liquid agricultural commodity futures contracts.

Farmland Real Estate Investment Trusts (REITs)

These are companies that own and operate farmland and lease it out to farmers. Investing in farmland REITs can provide exposure to the agriculture industry and potentially earn rental income. Examples include Farmland Partners Inc. (FPI) and Gladstone Land Corporation (LAND).

Agricultural Technology

Advances in technology are changing the way agriculture is done, and investing in companies that are developing innovative agricultural technology can be a good opportunity. This can be done by buying stocks of agricultural technology companies or investing in ETFs that focus on this sector.

Agricultural Stocks

Investing in individual agricultural companies can be a way to participate in the industry. Look for companies with a solid track record, a strong financial position, and a sustainable business model. Examples include Archer-Daniels-Midland Company (ADM), Deere & Company (John Deere), Agrium Inc, and Monsanto Company.

Supporting Industries

Investors can also consider buying shares in industries that support farming, such as fertilizer and seed companies, farm equipment manufacturers, and crop distributors and processors. Examples include Nutrien Limited (NTR), The Mosaic Co. (MOS), Deere & Co. (DE), AGCO Corp. (AGCO), Archer Daniels Midland Co. (ADM), and Bunge Limited (BG).

Exchange-Traded Funds (ETFs)

ETFs provide a diversified way to invest in the agriculture sector. For example, the VanEck Agribusiness ETF (MOO) invests in companies that derive at least 50% of their revenues from agriculture. Other ETFs focus on specific agricultural commodities, such as the Teucrium Soybean ETF (SOYB) and the Invesco DB Agriculture ETF (DBA).

Mutual Funds

Mutual funds that invest in farming and agriculture industries are also an option. For example, the Fidelity Global Commodity Stock Fund (FFGCX) has exposure to agricultural firms or commodities.

Commodities

More speculative investors may consider directly investing in agricultural commodities through futures contracts, ETFs, or exchange-traded notes (ETNs). Some options include the Teucrium Corn Fund (CORN), iPath Livestock Subindex (COW), iPath Bloomberg Agriculture Subindex ETN (JJA), and Rogers International Commodity Agriculture ETN (RJA).

Investing in food-processing stocks

Food stocks have long been a part of investors' portfolios. Food-processing stocks are one of the seven sub-industries that food stocks fall under. Food-processing companies buy raw ingredients and combine them to make items for grocery stores or restaurants.

Food-processing stocks have their own unique characteristics when it comes to investing. They are less influenced by seasonal changes and weather conditions compared to farming stocks. However, they are subject to a different set of risks, including vast costs and price competition, which can lead to market volatility.

Some food-processing companies may not be well-known to casual investors, as they often operate behind the scenes to provide oils and sweeteners on a large scale.

When considering investing in food-processing stocks, it is essential to research the companies and their financial performance, as well as understanding the broader trends and risks within the industry.

Investing in stocks of food producers

Food stocks have long been a part of investors' portfolios. Food stocks are part of the "consumer staples" industry, which is considered a "defensive" sector in investing. This means they are less closely tied to the economy and are therefore seen as less risky and more stable than other industries.

Food stocks generally fall under seven sub-industries:

• Agricultural commodities: Soy, rice, wheat, and corn.
• Farming stocks: Companies that create and distribute insecticides and herbicides, as well as those that build industrial-size farm equipment.
• Food-processing stocks: Companies that buy raw ingredients to make items for grocery stores or restaurants.
• Stocks of food producers: Diversified and specialized producers. Diversified food producers create a wide range of products, while specialized producers cater to a narrower audience.
• Food-distribution stocks: Companies that focus on the logistics and transport of food products.
• Grocery-store stocks: Where food products end up once distributed.
• Food-delivery service stocks: Online delivery services that are considered riskier than traditional food stocks due to their limited history of performance.

• General Mills (GIS): Owns a wide variety of well-known brands, including Pillsbury, Cheerios, Häagen-Dazs, Progresso, Green Giant, and Yoplait. General Mills has been able to pass on higher costs to consumers without losing sales.
• Tyson Foods (TSN): A leader in the meat industry, Tyson Foods' results are dictated by supply and demand for beef, pork, and chicken. While its profits are taking a hit due to cost inflation, pricing and volumes are still on the rise.
• Mondelez International (MDLZ): Boasts a long list of well-known snack brands, including Cadbury, Chips Ahoy!, Oreo, Philadelphia, Ritz, and Wheat Thins, which are sold in over 150 countries.
• PepsiCo (PEP): A packaged food company with a large portfolio of leading brands, including Pepsi, Mountain Dew, Gatorade, Lay's, Doritos, Quaker Oats, and Cheetos. PepsiCo has significant pricing power, with a 16% increase in effective net pricing in the first quarter of 2023.

Investing in food-delivery service stocks

Food delivery services have seen explosive growth in demand during the COVID-19 pandemic. With restaurants relying on third-party delivery services to stay afloat, investors have been keen to get involved. However, despite the surge in demand, turning a profit has proven difficult for some companies.

• DoorDash (DASH): The leading third-party food delivery service in the US, with a market share of around 50%. DoorDash makes money by charging fees to both restaurants and consumers. It is not yet profitable, as it is prioritising expansion over making money.
• Uber Eats (UBER): This service has contributed increasingly to Uber's earnings, highlighting growth despite the overall segment's unprofitability. Uber stock offers exposure to both food delivery and passenger transportation.
• Domino's (DPZ): Domino's has its own well-established food delivery infrastructure, which saves the company money in third-party fees and gives it complete control over the delivery process and customer experience. It is already a profitable company, making it a safer investment.
• Grubhub (GRUB): Grubhub is in the process of being taken over by Netherlands-based Just Eat Takeaway.com, so there is only a limited time to invest. However, shares have been performing well, recently hitting their highest point since 2019.
• Papa John's International (PZZA): This pizza delivery company struggled after the departure of its founder but has since bounced back, with system-wide comparable store sales in North America soaring 28% in the second quarter.
• Blue Apron Holdings (APRN): A potential bargain for hunters, this meal kit stock has seen significant new business fuelled by the pandemic. Blue Apron is growing revenue substantially and isn't going anywhere soon.
• HelloFresh (HLFFF): HelloFresh is another Germany-based meal kit company that has seen substantial growth. It recently increased its full-year revenue growth guidance to the 95% to 105% range.
• Delivery Hero (DLVHF): Operating in approximately 70 countries, Delivery Hero offers online food ordering and delivery services.

Food delivery stocks are subject to market and industry fluctuations, so carefully vet your picks before investing.

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