ADM invests in plant-based meat substitutes likely to take market share from traditional meat - Crain's Chicago Business

It takes more soybeans to fatten a hog than a human.

That's the reality facing Chicago-based Archer Daniels Midland as it peers toward a future where the market for plant-based proteins is growing. The agribusiness giant has moved into this new arena with plant protein facilities in Brazil and North Dakota, plus a partnership with Brazil's Marfrig Global Foods to make a vegetable burger.

"ADM has a rich history as a leader in plant-based meat alternatives," CEO Juan Luciano said on an Oct. 31 earnings call. "Today our full pantry of great-tasting, innovative flavors, ingredients and solutions make us the provider of choice for customers looking to grow with this fast-moving market."

Still, a huge chunk of ADM's sales comes from customers who use soybeans and corn to fatten animals destined to become burgers or bacon. Livestock operations require greater quantities of these commodities than tofu producers. (This is why environmentalists say vegetarianism allows humans to live more lightly on the land.) For now, ADM's fortunes are tied to people eating more of the meat that comes from a slaughterhouse, not a pea patch.

While global meat consumption is expected to keep rising over the next decade, projected growth is slower than the previous 10 years. Meanwhile, market research shows the rising popularity of plant-based meat substitutes. ADM needs a big payoff on its plant-protein bets to offset the slow-burn risk to products linked to meat consumption, which generate an estimated 65 to 80 percent of the company's $64 billion in annual revenue.

"They have time, but it's not something that you can just brush off," says Bloomberg Intelligence analyst Alvin Tai. "It is a risk to the company."

ADM has struggled this year because of the trade war and poor weather for farmers. Net income fell 24 percent to $407 million in the third quarter, compared with the year-earlier period, as revenue rose about 6 percent to $16.7 billion. Plant-based proteins drove growth in the company's wild flavors and specialty ingredients business, which posted $102 million in third-quarter revenue and a 7 percent rise in organic sales, which excludes revenue from acquisitions.

ADM's results reflect consumers' appetite for meat substitutes. Supermarket sales of meat alternatives rose 19 percent to $878 million for the year ended Jan. 5, according to Nielsen data. Barclays estimates annual sales of "meat" made from plants or cultivated from laboratory cell cultures could equal $140 billion in a decade, carving out a 10 percent share of the $1.4 trillion global meat market. Swiss investment firm UBS more conservatively predicts the market for plant-based meat will grow from $4.5 billion annually in 2018 to $85 billion by 2030.

But ADM's business of buying and selling grains, along with its soybean crushing, corn processing and animal nutrition businesses, "all trace back to demand for protein," Tai wrote in a Nov. 19 note. If plant-based proteins and cell-based proteins reduce demand for traditional meat, that's a threat to the Chicago company's earnings.

MEAT-EATING SLOWS

Already, there are signs of slowing meat consumption. The Organisation for Economic Co-operation & Development predicts annual growth in worldwide pork consumption will slip to 0.9 percent between 2018 and 2027 from about 1.7 percent between 2008 and 2017. Growth in poultry consumption, meanwhile, is expected to drop to 1.3 percent annually over the 10 years ending in 2027, from 3 percent in the previous 10-year period.

Some analysts note that as more people in developing countries join the middle class, particularly in populous China, they eat more meat. That could offset potential losses in developed nations from consumers adopting a "flexitarian" diet where they eat less of it. But Tai points out that China's population is aging, likely leading to population decline, "so the demographics are not great for long-term protein outlook." Moreover, even a modest slowdown in meat consumption could trouble ADM because of the size of its exposure.

Still, any risk to ADM from plant- and lab-based proteins would be decades in the future, says David Katter, an analyst at Robert W. Baird. There's plenty of room for companies like Beyond Meat or Impossible Foods to grow before their products cut into ADM's territory.

ADM also can benefit from its own plant-based proteins, since the profit margins are both greater and more reliable than profits in its commodity business. The earnings before interest and taxes margin in the specialty ingredients business grew to 8.1 percent in the third quarter, up from 7.4 percent a year earlier. That's more than twice the 3.3 percent margin for ADM's ag services and oilseeds business.

"There's no reason to say that they're not going to be a major player in the (alternative) protein space," Katter says.

ADM is allocating more capital toward "downstream" businesses, including plant proteins, says Morningstar analyst Seth Goldstein. As the market for plant-based proteins grows, they can slowly ramp up production.

The key is backing the right protein. Tai says it's unclear which of the various meat alternatives coming to market will dominate.

"You can't be invested in every single one of these alternatives," he says. "So it's a risk you can't fully mitigate."

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ADM invests in plant-based meat substitutes likely to take market share from traditional meat - Crain's Chicago Business
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