March 14, 2016

By Garrett Baldwin

Long before the gluten-free trend, and the Ketto and Paleo diets were a craze in the United States, the United States Department of Agriculture explained that the global food marketplace had shifted from production-based agriculture to consumer-driven agriculture. The last 16 years has seen a dramatic change in demographics, consumer taste, technological capacity, and the emphasis of ethical accountability.

According to data from the Economic Research Service at the USDA, three primary trends are shaping the future of American agriculture: the maturation of consumers, an increase in customer diversity, and the boost in population that must be fed. These have fueled a much-needed boost in agricultural investment to meet changing taste and consumer demands.

Among the top trends, the U.S. Hispanic population continues to swell across the country. This has placed a broader emphasis on fresh and “from scratch” stove-top preparation habits that dominate the dining traditions.

Next, the Millennial generation actually surpassed the Baby Boom population last year as the nation’s largest by size. Millennials have a greater appreciation for less-processed foods, and are far more likely to visit fast-casual restaurants where fresh ingredients are more commonly used. Millennials are also far more demanding of greater ethical treatment of livestock and environmental standards.

Finally, American households are getting smaller. According to U.S. Census data, roughly 27% of all U.S. households have just one person under the roof. This has serious ramifications for food and beverage companies, particularly when related to product size, packaging, and design.

But no greater consumer driven preference is more important than food ingredients themselves.

When it comes to food, what exactly do buyers want?

For that information look no further than claims from the U.S. Grocery Shopper Trends 2014-2015 Report. When asked what health claims that individuals sought on a package, whole-grain and low-sodium remain long-lasting marketing messages. But recent years have seen a bigger push from non-GMO, a lack of trans fats, and high fiber.

Source: Food Marketing Institute, U.S. Grocery Shopping Trends 2015

Almost every major health-conscious, consumer-driven marketing message experienced an increase of customer awareness and demand.

This piece explores a number of these categories, the ongoing shift in consumer knowledge, and how investment capital is pouring into these consumer-driven products and commodities.

Gluten-Free: Fad or Grow

According to research from Packaged Foods, the gluten-free industry will see a surge in sales by 19.2% annually through 2019, representing a 140% increase from figures in 2014. The primary growth factor for companies engaged in this space is offering the quality as “a unique selling proposition or value-added component.” Meanwhile, Jeff Harmening, COO of U.S. Retail for General Mills, says that retail gluten-free foods hit roughly $9 billion in 2014. Harming puts the boost in sales at 60% through 2017.

According to that same report by Packaged Foods, “one-quarter of shoppers who respondents [to their survey] said they make a point of shopping in stores with good selections of gluten-free products.”Whether it is medically relevant or the result of a placebo effect, gluten-free demand is poised to remain a vital part of consumer demand.

Major food producers like General Mills and grocers like Kroger and Whole Foods Market have boosted their offerings in gluten-free products. But the money is really taking off at the private-investor level. Last year’s market saw private investors close a $3.8 million financing round with Smart Flour Foods. The company is engaged in the production of ancient grains.

But while gluten-free may be a trend right now, there is one group that could eliminate the entire market overnight through innovative medicine. Pharmaceutical companies are jumping into the game as well. Investors of AbbVie and their drug partner Alvine Pharmaceuticals are working on two enzymes that can break down gluten, as they aim to eliminate gluten allergies once and for all. AbbVie currently has an early-stage pipeline for drugs to address celiac disease, making them the first company to make this leap.

Humane Agriculture

When it comes to investment in sustainable agriculture and animal welfare, the Humane Society of the United States has said that “greed is good.”

Upton Sinclair’s The Jungle remains the definitive tale of unethical and unsafe conditions in the agricultural supply chains of the early 20^th century. It’s clear how far the United States and other nations have come in 100 years, but how much further will consumers want them to go in the years ahead?

According to Hartman-Group, roughly 47% of consumers say “they support companies that avoid inhumane treatment of animals (up 6 points from 2013).” That also includes a 44% response rate from individuals who want to know how the company treats animals used in its products.

The push in ethical agriculture today is primarily driven by Millennial consumers who are pushing for greater transparency in the sources of their food production. Radical changes taken by companies to both boost transparency and change practices indicate industry intends to conform to these consumer demands.

This may be most evident in the recent transition to cage-free eggs. Kraft Heinz and the world’s largest restaurant chain, Subway, both announced plans to eliminate battery eggs from its North American supply chain by 2025. The Schwan Food Company will only source cage-free eggs by the end of the 2020s and the world’s largest bakery company – Grupo Bimbo – will adopt a global cage-free egg policy. This trend has grown immensely popular with hotel chains, supermarkets, restaurants, and even Google Mexico.

Meanwhile, JBS, the second largest pork producer in Brazil, announced plans to eliminate gestation crates from its production policies later this year.

Moving Forward

Consumer demand will continue to drive food sales and agricultural investment in the years ahead. As demographics change and consumers continue to seek specific qualities in the the products they buy, investors should continue to invest in technology and firms aiming to capitalize on these trends.