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Investing in Food Stocks

September 28, 2020 · 6 minute read

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Investing in Food Stocks

You may not know what the future holds, but you know there’ll be a meal involved. A good meal or grocery trip is not only a necessity for survival, it can also be part of an investment strategy.

While restaurants and retailers may come to mind, the world of food stocks is larger than one might think, encompassing everything from a grain of wheat to the latest on-demand app.

Food stocks and the industries surrounding them have long been a part of investors’ plate of holdings in the market. Americans dedicate close to 10% of their disposable income on food —a stat that’s been steady during the past 20 years.

But here’s where the broth thickens—some types of food stock can hold more risk than others. Read on to learn the history of food stocks in the market, the types of food stocks, and the overall risk profile of these tasty investments.

Risk Profile of Food Stocks

Looking at the market as a whole, food stocks are part of the “consumer staple” sector and are often considered less risky and more stable than other industries.

Food stocks are often considered to be recession-resistant. That means in the event of an economic downturn, food stocks may be less volatile than some other stocks.

However, no stock is recession-proof, but data has shown that this staple market fares better in the face of a weak economy.

When deciding whether to invest in a food stock, budding investors might want to research before chowing down.
Evaluate the stock and company, because while industries have trends, each company is unique.

Why Invest in Food Stocks?

If the stock market were a grocery store, food stocks would be the nonperishables on the shelf. They’re safer, less volatile, and can be a good base for a meal. Food stocks often keep their value since they’re considered essentials, and if a recession hits, you’re less likely to lose major value with these stocks.

That being said, no one wants to live on canned food alone. An investor might want to spice up their shopping cart with a variety of foods, creating a stock portfolio that’s diverse and exciting, with various levels of risk and safety. Food stocks have been consistent, but in general, they don’t experience the same growth as higher risk stocks.

Different Types of Food Stocks

Food stocks include more than just memorable brands like McDonald’s or Starbucks. It’s more encompassing than just consumer-facing brands or restaurants. Anything that helps food get to your plate can be considered part of the food supply chain.

Food stocks can be broken down a multitude of ways, but they generally fall under these seven sub-industries:

•  Farming (including machinery and chemicals)
•  Food processors
•  Food producers (diversified and specialized)
•  Distributors
•  Grocery stores
•  Restaurants
•  Delivery services

Farming

Food stock investing can start at the granular level—literally—by investing in raw agricultural commodities like soy, rice, wheat, and corn.

Farming stocks include raw goods, but also the ancillary companies that foster that growth. Take, for example, companies that create and distribute insecticide and herbicide or build the industrial-size farm equipment to help harvest goods.

While one might think investing in farming stock would be actual farms, the reality is the opposite. Ninety-seven percent of farms in the U.S. are family-owned and not publicly traded.

Instead, investing in farming stock primarily means the chemicals and machinery that help harvest the raw product.
Companies like Bayer and Monsanto produce seeds and chemicals to encourage more growth. Investing on the machinery side could mean purchasing stock from companies like Deere & Company, more commonly known as John Deere.

Farming is the first step in the food chain, but it’s not always the steady stock a potential investor might expect in U.S. markets.

Farming stocks can waver based on things like the weather and current events. It can be challenging to predict the next rainy season or drought, sometimes making it hard to track and predict value.

In addition, ongoing tariffs and foreign traders can influence the health of stocks. China’s ongoing tariffs on American agriculture, for example, have made the industry harder to predict.

Once purchasing up to 60% of American-produced crops, soybeans hit a 10-year low last summer in part due to the drop in interest from Chinese markets.

Processing

Whereas farming is the beginning of the supply chain for food, processing is the middle. Companies that work in food processing buy raw ingredients that are combined to make items in the grocery store aisles or on restaurant menus.
Everyone has to get their food from somewhere, making stocks in food processing a relatively stable venture. Over the past two decades , food processing stocks have consistently delivered high-single-digit annual returns.

Some names and brands in the food processing sector might not be familiar to the casual investor. More often than not, these companies are behind the scenes, operating at a large scale to provide the world oils and sweeteners.

Food processing stocks have their own quirks when it comes to investing. Unlike farming, they’re less influenced by the whims of weather or season, but they still have an associated set of risks.

The costs associated with this industry vertical are vast, and price competition across brands can lead to drops or jumps in the market.

Food Producers

Further up the supply chain comes food producers, where novice investors are more likely to know these brands and companies from daily life and dietary habits. Food producers take the raw ingredients provided by processors and create the items found on store shelves.

Break this vertical down further to find “diversified” and “specialized” producers.

As the name suggests, diversified food producers are companies that create a ton of different products under the same name umbrella, like Nestlé, which makes everything from baby food to ice cream.

Then there are specialized producers. They make consumer products as well, but these companies often cater to a narrower audience, producing only a few items, often within the same vertical. This includes brands like Post, which creates a variety of cereals.

In times of recession, luxury or expensive food processing stocks might take a dip. However, unlike other luxury brands or “nice to have items,” like new phones or clothing, food and grocery store items are often less volatile in economic recessions.

Additionally, consumer trends can influence the market. Take the alternative meat craze, for example. Investors in brands like the Impossible Burger and Beyond Meat saw larger-than-average returns for the industry due to such an interest in the trend.

Distribution

Distribution companies have little to do with consumption or production and focus more on logistics and transport. These companies, like Sysco or United Natural Foods, send products across the country and world.

Distribution companies range from very large, reaching national distribution, to fairly small, where they connect specialty retailers.

The distribution market might have its long-term players, but investing in it comes with its own risks. Amazon’s purchase of Whole Foods could lead to disruption in the distribution market, meaning change could be imminent in this steady stock.

Grocery Stores

Grocery stores have become big business in the investment game. The next link in the chain, grocery stores are where the products end up once a distributor drops them off.

The biggest name in the game is Walmart—which has cornered the grocery market. But there’s plenty of room for growth among competitors Target, Costco, and Amazon.

Grocery store investments are hardly recession-proof, but the necessity of groceries as a staple for consumers suggests these investments take a lesser hit in a market downturn.

Restaurants

Restaurants are an additional resting place for food distributors. Restaurant stocks include everything from the recognizable golden arches of McDonald’s to high-end hospitality holdings like The ONE Group.

In economic downturns, discretionary restaurant spending is usually the first to go, making this industry within food investing slightly less stable than the others. Additionally, this arena might be most susceptible to trends—take Chipotle’s meteoric rise and fall.

Delivery Services

The newest addition in food stocks is more about tech than good eats. Online delivery services like GrubHub, UberEats, and Postmates have burst onto the scene, and with a limited history of performance, are considered to be riskier than the traditional food stocks outlined above.

For example, GrubHub’s value has dramatically fluctuated , within a 12-month period. In addition to innovation, traditional grocery stores are getting into the game, offering delivery and pickup services for customers.

Right now, delivery service companies are still duking it out across the country, expanding to new cities and slashing the price of services to entice customers.

This vertical stands out against the other arms of food investing, and some might be considered “safer bets” in comparison.

Pros and Cons of Investing in Food Stocks

With all the ingredients in order, it’s time to highlight a few of the basic pros and cons of investing in food stocks.

•  Pro: Food stocks perform consistently. Food stocks can be a relatively safe, recession-resistant investment (but remember all stocks have inherent risk).

•  Con: Food stocks perform consistently. For an investor looking for a higher-risk investment, the steady year-over-year earnings might not be as enticing for someone trying to build a high-return portfolio.

•  Pro: Familiarity with brands. Many food stocks are also commonly found in investors’ pantries and refrigerators. For someone new to investing, buying stocks in the brands they trust and use could be a great way to dip their toes in the market.

•  Con: An investor might feel like they’re in it for the long haul. With consistent, steady returns, they shouldn’t expect to make a quick buck on food stocks. Instead, this might be best implemented as part of an investor’s long-term strategy.

How to Get Started

Looking to get a piece of the pie? Investing in food stocks is similar to investing in any other stock. Investors can buy traditional stock, mutual funds, exchange-traded funds (ETFs), or even fractional shares of stock.

If purchasing a whole share is too much of an investment, investors could use a service like SoFi Stock Bits to buy fractional shares of stocks—it’s a taste instead of the whole meal.

Get started with fractional share investing today.


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