alternativeprotein

Alternative protein for human consumption (Newsletter #6)

The disruption potential of alternative proteins for human consumption

As we thoroughly discussed in our most recent newsletter, a separation between the demand and available supply of animal protein is expected to occur over the coming decades.

In fact, that separation proves so glaring that it is currently the driving force of the unprecedented innovation in the alternative protein space.  Entrepreneurs of all backgrounds, whether they be economists or engineers, have jumped at the opportunity to tap into the multibillion dollar animal protein industry.  We focused primarily on animal feed in our last newsletter, so it is important to reiterate why dozens of startups and millions of dollars are being invested into companies focused on providing an alternative protein source for human consumption.

According to industry experts, more food will have to be produced in the next 40 years than in the previous 10,000 years combined.  Couple that assertion with a 2014 research report that concluded just 50 crop commodities comprise upwards of 90% of the protein, fat, and caloric intake amongst global diets and there exists a food value-chain ripe for disruption in the face of inevitable imbalance – many of those 50 crops, such as soy, have been repeatedly shown to pose a long-term threat to stable ecosystems.  The concentration continues further – a vast majority of plants utilized as either protein sources or simply as a function of a regular diet are produced into a condensed group.  For example, 80% of the global soybean production occurs in the United States, Brazil, and Argentina.  Each of these three nations are home to a variety of biodiversity that has either been severely diminished or poses the risk of being compromised as a result of agriculture production.  What does all of this fundamentally mean, at the simplest level?  It means that, from an investment perspective, there is significant opportunity to fundamentally alter one of the most entrenched businesses that has existed since the advent of the Agricultural Revolution – livestock farming and the animal-derived protein business.


The bigger picture

Animal-derived proteins have, and will likely continue to be, among the most important resources for a properly nourished society.  No industry has persisted for so many centuries without fundamental disruption.  Over the last decade, however, disruption has occurred from the top-down, from massive shifts in consumer preferences to biologically-engineered products that take on the look, shape, and taste of animal-derived proteins.  Why, after so long, has there been such a sudden wave of what seems like unremitting transformation?  There are many answers, but the primary ones are the following: exponential population increase, worldwide poverty alleviation and growing individual incomes, and, quite simply, a limit has been reached on the available natural resources – land and water – available for animal-protein production.

Animal-derived protein should generally account for at least a third of daily protein intake, making it a substantial part of the human diet.  Empirical data abounds on the importance and overall positive impacts of a consistent protein intake, which is a primary reason why the burgeoning population poses such an immediate concern.


Different scenarios

Consider the following: from 1950 to 2000, the human population more than doubled, growing from approximately 2.7 billion people to 6 billion people.  In that same time span, meat production grew by a factor of five – from 45 billion kilograms per year to over 230 billion kilograms.  China alone experienced a 426% increase in per capita consumption of animal protein from 1980-2013.  These numbers are staggering.  But in the context of global poverty reduction and the relationship between income and protein consumption we discussed in our last newsletter, the numbers make a bit more sense.  What’s of chief concern to investors and innovators, now, however, is that these numbers are expected to continue (Table 1 & Figure 1). Research published in May of 2017 produced the following data that most succinctly capture the previous increases in protein consumption and the expected rise in the ensuing decades.

Screen Shot 2017-10-16 at 15.06.49

Table 1 provides a sensitivity analysis of sorts given an expected population in 2050 of 9.6 billion – a widely accepted figure.  As it demonstrates, even the most conservative estimates – Scenario 5 is written off as effectively infeasible – project a 30% rise in demand from current consumption levels and a population of over 7 billion.

Increasing demand for animal protein creates a domino effect of environmental degradation.  Firstly, the American Environmental Protection Agency released data that shows agriculture, livestock, and forestry as nearly the main contributor of greenhouse gas emissions (Figure 2).

Though animal proteins produce more greenhouse gasses than their plant counterparts, environmental consequences are compounded by the intensifying pressure on land to produce more animal feed and create space for livestock.  With 45% of land worldwide used for animal agriculture and another 33% used for feed products, there simply is a finite maximum that food producers have hit.  Taken together, it seems both practical and necessary to find an alternative protein source that emits low amounts of carbon, occupies relatively minor space on land, and can be produced without the necessity for massive quantities of feed.  That solution has been identified, with each of those boxes are checked.  Enter insect protein for human consumption.

Screen Shot 2017-10-16 at 15.07.30

Insects for Human Consumption As one researcher puts it quite well – there seems to be an incredible irony in the agriculture industry whereby billions of dollars are spent to kill insects and save crop yields when, in fact, those pests are more often of greater nutritional value in terms of protein content then the plants farmers so desperately try to save.  Over 1900 species of insects are capable of being eaten, and these critters so widely despised in Western society have actually been a staple in many diets for centuries – roughly 2 billion people enjoy insects on a regular, if not daily basis.  As a result, insects make for an intriguing replacement to animal-derived protein not only due to the immense market already established in Asia and other parts of the developing world, but also due to a variety of other factors.

From an investment perspective, edible insects represent the chance to enter a market expected to be worth over $350 million by 2020 – a market that, for the most part, remains relatively untapped.  As we have repeatedly stressed, many innovators and investors see the same glaring gaps in supply and demand that we have shown, giving rise to a prosperous alternative protein market.  Investing and funding, especially with a focus on human consumption, is highly concentrated on companies looking to create plant-based meat like Impossible Foods, Hampton Creek, and Beyond Meats, all of which have multimillion-dollar backing from some of the most reputable venture capital firms in Silicon Valley.  By contrast, no clear leader exists in the edible insects market.  There are a variety of well-funded startups in the insect-based protein space – Protix, AgriProtein, Ynsect, for example – but they primarily focus on animal and pet feed as well as aquaculture. Investors recognize the value in Novel Farming Systems, which produce alternative proteins like insect and algae – as capital raises grew by 560% year-over-year with $198 million in funding through the first half of 2017. The focus and the capital is growing; edible insect companies, however, have yet to seize momentum.

Part of the reason that funding has circumvented the edible insect sector is the presence of regulation in the EU that makes it illegal to sell insects for human consumption.  Those outdated policies, however, are slowly being turned over.  In fact, countries within Europe are creating their own mandates – Switzerland recently legalized the sale of edible insect and insect powders and already one of its leading grocery chains has begun to offer the product. New EU regulation is going into effect beginning January 1st, 2018 that does not explicitly make the sale legal, though it will include provisions that state once a product passes through the European Food and Safety Authority then it will be cleaned for sale amongst all member states as a generic product, meaning individual companies will not have to apply multiple times. This marks an encouraging step forward for what was once a complex legal landscape for edible insect producers.


What are the benefits of insect proteins?
With so much money and legal consideration going on, the question begs of what exactly the benefits to consuming insect-based proteins and powders are?  Insect-based proteins, often manufactured using crickets or grasshoppers, offer a nutritional benefit at least as favorable as beef consumption, but with significantly lower costs to the environment.  As Figure 3 illustrates using data from the Food and Agriculture Organization (FAO), insects are comparable with respect to protein content. In addition to have a high protein content, insects, and crickets in particular, are rich in minerals like iron, zinc, potassium, and calcium as well as omega fatty acids and vitamins B1, B2, and B3.  These nutritional advantages are enhanced when considering the land saved and emissions reductions as a result of cricket farming.  To put the land use into perspective, an insect-protein startup asserts that halving global consumption of animal products by eating insects or other alternative proteins would free up 1,680 million hectares of land – 70 times the size of the United Kingdom.  Much of that statistic boils down to feed conversion rates, which are significantly higher for insects versus beef.  It takes 10kgs to produce 1kg of beef, only half of which can actually be eaten.  On the other hand, 10kg of feed will produce 9kg of insects of which over 95% can be eaten.  Given the fluctuating costs of animal protein feed over the last five years, the ability to increase conversion rates proves to be an economic boon for entrepreneurs harvesting insects.  In addition, as Figure 4 shows, harvesting crickets saves significant amounts of water and increases land efficiency.

Screen Shot 2017-10-16 at 15.08.04

Insects for Human Consumption As one researcher puts it quite well – there seems to be an incredible irony in the agriculture industry whereby billions of dollars are spent to kill insects and save crop yields when, in fact, those pests are more often of greater nutritional value in terms of protein content then the plants farmers so desperately try to save.  Over 1900 species of insects are capable of being eaten, and these critters so widely despised in Western society have actually been a staple in many diets for centuries – roughly 2 billion people enjoy insects on a regular, if not daily basis.  As a result, insects make for an intriguing replacement to animal-derived protein not only due to the immense market already established in Asia and other parts of the developing world, but also due to a variety of other factors.

From an investment perspective, edible insects represent the chance to enter a market expected to be worth over $350 million by 2020 – a market that, for the most part, remains relatively untapped.  As we have repeatedly stressed, many innovators and investors see the same glaring gaps in supply and demand that we have shown, giving rise to a prosperous alternative protein market.  Investing and funding, especially with a focus on human consumption, is highly concentrated on companies looking to create plant-based meat like Impossible Foods, Hampton Creek, and Beyond Meats, all of which have multimillion-dollar backing from some of the most reputable venture capital firms in Silicon Valley.  By contrast, no clear leader exists in the edible insects market.  There are a variety of well-funded startups in the insect-based protein space – Protix, AgriProtein, Ynsect, for example – but they primarily focus on animal and pet feed as well as aquaculture. Investors recognize the value in Novel Farming Systems, which produce alternative proteins like insect and algae – as capital raises grew by 560% year-over-year with $198 million in funding through the first half of 2017. The focus and the capital is growing; edible insect companies, however, have yet to seize momentum.

Part of the reason that funding has circumvented the edible insect sector is the presence of regulation in the EU that makes it illegal to sell insects for human consumption.  Those outdated policies, however, are slowly being turned over.  In fact, countries within Europe are creating their own mandates – Switzerland recently legalized the sale of edible insect and insect powders and already one of its leading grocery chains has begun to offer the product. New EU regulation is going into effect beginning January 1st, 2018 that does not explicitly make the sale legal, though it will include provisions that state once a product passes through the European Food and Safety Authority then it will be cleaned for sale amongst all member states as a generic product, meaning individual companies will not have to apply multiple times. This marks an encouraging step forward for what was once a complex legal landscape for edible insect producers.


What are the benefits of insect proteins?
With so much money and legal consideration going on, the question begs of what exactly the benefits to consuming insect-based proteins and powders are?  Insect-based proteins, often manufactured using crickets or grasshoppers, offer a nutritional benefit at least as favorable as beef consumption, but with significantly lower costs to the environment.  As Figure 3 illustrates using data from the Food and Agriculture Organization (FAO), insects are comparable with respect to protein content. In addition to have a high protein content, insects, and crickets in particular, are rich in minerals like iron, zinc, potassium, and calcium as well as omega fatty acids and vitamins B1, B2, and B3.  These nutritional advantages are enhanced when considering the land saved and emissions reductions as a result of cricket farming.  To put the land use into perspective, an insect-protein startup asserts that halving global consumption of animal products by eating insects or other alternative proteins would free up 1,680 million hectares of land – 70 times the size of the United Kingdom.  Much of that statistic boils down to feed conversion rates, which are significantly higher for insects versus beef.  It takes 10kgs to produce 1kg of beef, only half of which can actually be eaten.  On the other hand, 10kg of feed will produce 9kg of insects of which over 95% can be eaten.  Given the fluctuating costs of animal protein feed over the last five years, the ability to increase conversion rates proves to be an economic boon for entrepreneurs harvesting insects.  In addition, as Figure 4 shows, harvesting crickets saves significant amounts of water and increases land efficiency.

Screen Shot 2017-10-16 at 15.09.10


If you want to be signed up to our F&A-Tech newsletter please do so here or contact me directly: fabian@pendulumadvisors.com

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