Our European Sustainability Strategists Rachel Fletcher and
Arushi Agarwal discuss how fermentation presents a new
opportunity to tap into the alternative proteins market, offering
a solution to mounting food supply challenges.
Read more insights from Morgan Stanley.
----- Transcript -----
Rachel Fletcher: Welcome to Thoughts on the
Market. I'm Rachel Fletcher Morgan Stanley's, Head of EMEA
Sustainability Research.
Arushi Agarwal: And I'm Arushi Agarwal
European Sustainability Strategist, based in London.
Rachel Fletcher: From kombucha to kimchi,
probiotic rich fermented foods have long been staples at
health-focused grocers. On the show today, a deeper dive into the
future of fermentation technology. Does it hold the key to
meeting the world's growing nutrition needs as people live
longer, healthier lives?
It's Wednesday, 26th of March, at 3 pm in London.
Many of you listening may remember hearing about longevity. It's
one of our four long-term secular themes that we're following
closely at Morgan Stanley; and this year we are looking even more
closely at a sub-theme – affordable, healthy nutrition. Arushi,
in your recent report, you highlight that traditional agriculture
is facing many significant challenges. What are they and how
urgent is this situation?
Arushi Agarwal: There are four key
environmental and social issues that we highlight in the note.
Now, the first two, which are related to emissions intensity and
resource consumption are quite well known. So traditional
agriculture is responsible for almost a third of global
greenhouse gas emissions, and it also uses more than 50 percent
of the world's land and freshwater resources. What we believe are
issues that are less focused on – are related to current
agricultural practices and climate change that could affect our
ability to serve the rising demand for nutrition.
We highlight some studies in the note. One of them states that
the produce that we have today has on average 40 percent less
nutrition than it did over 80 years ago; and this is due to
elevated use of chemicals and decline in soil fertility. Another
study that we refer to estimates that average yields could
decline by 30 to 50 percent before the end of the century, and
this is even in the slowest of the warming scenarios.
Rachel Fletcher: I think everyone would
agree that there are four very serious issues. Are there
potential solutions to these challenges?
Arushi Agarwal: Yes, so when we've written
about the future of food previously, we've identified alternative
proteins, precision agriculture, and seeds technology as possible
solutions for improving food security and reducing emissions.
If I focus on alternative proteins, this category has so far been
dominated by plant-based food, which has seen a moderation in
growth due to challenges related to taste and price. However, we
still see significant need for alternative proteins, and
synthetic biology-led fermentation is a new way to tap into this
market.
In simple terms, this technology involves growing large amounts
of microorganisms in tanks, which can then be harvested and used
as a source of protein or other nutrients. We believe this
technology can support healthy longevity, provide access to
reliable and affordable food, and also fill many of the
nutritional gaps that are related to plant-based food.
Rachel Fletcher: So how big is the
fermentation market and why are we focusing on it right now?
Arushi Agarwal: So, we estimate a base case
of $30 billion by 2030. This represents a 5,000-kiloton market
for fermented proteins. We think the market will develop in two
phases. Phase one from 2025 to 2027 will be focused on whey
protein and animal nutrition. We are already seeing a few players
sell products at competitive prices in these markets. Moving on
to phase two from 2028 to 2030, we expect the market will expand
to the egg, meat and daily replacement industry.
There are a few reasons we think investors should start paying
attention now. 2024 was a pivotal year in validating the
technology's proof of concept. A lot of companies moved from labs
to pilot state. They achieved regulatory approvals to sell their
products in markets like U.S. and Singapore, and they also
conducted extensive market testing. As this technology scales, we
believe the next three years will be critical for
commercialization.
Rachel Fletcher: So, there's potentially
significant growth there, but what's the capital investment
needed for this scaling effort?
Arushi Agarwal: A lot of CapEx will be
required. Scaling of this technology will require large initial
CapEx, predominantly in setting up bioreactors or fermentation
tanks. Achieving our 2030 base case stamp will require 200
million liters in bioreactor capacity. This equals to an initial
investment opportunity of a hundred billion dollars. But once
these facilities are all set up, ongoing expenses will focus on
input costs for carbon, oxygen, water, nitrogen, and electricity.
PWC estimates that 40 to 60 percent of the ongoing costs with
this process are associated with electricity, which makes it a
key consideration for future commercial investments.
Rachel Fletcher: Now we've talked a lot
about the potential opportunity and the potential total
addressable market, but what about consumer preferences? Do you
think they'll be easy to shift?
Arushi Agarwal: So, we are already seeing
evidence of shifting consumer trends, which we think can be
supportive of demand for fermented proteins. An analysis of
Google Trends, data shows that since 2019, interest in terms like
high protein diet and gut health has increased the most. Some of
the products we looked at within the fermentation space not only
contain fiber as expected, but they also offer a high degree of
protein concentration, a lot of times ranging from 60 to 90
percent.
Additionally, food manufacturers are focusing on new format foods
that provide more than one use case. For example, free from all
types of allergens. Fermentation technology utilizes a very
diverse range of microbial species and can provide solutions
related to non-allergenic foods.
Rachel Fletcher: We've covered a lot today,
but I do want to ask a final question around policy support.
What's the government's role in developing the alternative
proteins market, and what's your outlook around policy in Europe,
the U.S., and other key regions, for example?
Arushi Agarwal: This is an important
question. Growth of fermentation technology hinges on adequate
policy support; not just to enable the technology, but also to
drive demand for its products. So, in the note, we highlight
various instances of ongoing policy support from across the
globe. For example, regulatory approvals in the U.S., a cellular
agriculture package in Netherlands, plant-based food fund in
Denmark, Singapore's 30 by 30 strategy.
We believe these will all be critical in boosting the supply side
of fermented products. We also mentioned Denmark's upcoming
legislation on carbon tax related to agriculture emissions. We
believe this could provide an indirect catalyst for demand for
fermented goods. Now, whilst these initiatives support the
direction of travel for this technology, it's important to
acknowledge that more policy support will be needed to create a
level playing field versus traditional agriculture, which as we
know currently benefits from various subsidies.
Rachel Fletcher: Arushi, this has been
really interesting. Thanks so much for taking the time to talk.
Arushi Agarwal: Thank you, Rachel. It was
great speaking with you,
Rachel Fletcher: And thanks for listening.
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