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 grocery stores 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’ portfolios. The most recent figures show that Americans dedicate close to 10% of their disposable income on food, a level that’s been consistent for about two decades. Roughly half that is spent for food at home, and the other half is on dining out.
But some types of food stocks 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 investments.
Are Food Companies Consumer Staples or Discretionary Stocks?
Looking at the market as a whole, food stocks are part of the “consumer staples” industry, which is considered to be a “defensive” sector in investing. Defensive sectors are those less closely tied to the economy. That means even if the economy is in a recession, consumer staples are seen as less risky and more stable than other industries.
However, no stock is recession-proof. And not all food stocks are actually consumer staples. For instance, restaurant companies typically fall into the consumer discretionary category, which consist of “cyclical stocks,” or those tied to how well the economy is doing. That’s because of how people tend to dine out when they have more income to spend in their pockets.
Recommended: Investing With the Business Cycle
When deciding whether to invest in a food stock, beginner investors might want to research which industry the company falls under: consumer staples or consumer discretionary.
Different Types of Food Stocks
Food stocks include more than just memorable brands. 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 generally fall under these seven sub-industries:
Farming
Food stock investing can start at the granular level–investing in raw agricultural commodities like soy, rice, wheat, and corn. Farming stocks can also include the ancillary companies that foster that growth–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. About 98% of farms in the U.S. are family-owned and therefore, not publicly traded. So investing in farming stock primarily means the chemicals and machinery that help harvest the raw product.
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, tariffs and trade agreements can influence the performance of these stocks, making them more volatile.
Recommended: How to Invest in Agriculture and Farming
Food-Processing Stocks
Companies that work in food processing buy raw ingredients that are combined to make items in the grocery store aisles or on restaurant menus.
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.
Stocks of 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.
In times of recession, luxury or expensive food processing stocks might take a dip. Additionally, consumer trends can influence the market. Take the alternative meat craze–a popular investment trend in recent years. Investors saw larger-than-average returns for the industry due to interest in the trend.
Food-Distribution Stocks
Distribution companies have little to do with consumption or production and focus more on logistics and transport. These companies 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.
Grocery-Store Stocks
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.
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.
Recommended: Investing During a Recession
Restaurant Stocks
Restaurants are an additional resting place for food distributors. 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.
Food-Delivery Service Stocks
The newest addition in food stocks is more about tech than good eats. Online delivery services have burst onto the scene, and with a limited history of performance, are considered to be riskier than the traditional food stocks outlined above.
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.
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, particularly those that are consumer staples, can 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: Not all food stocks are immune to ups and downs in the economy. Some companies, particularly restaurant groups or those that produce higher-priced products, may be hurt if discretionary spending by consumers pulls back.
The Takeaway
Investing in food companies can actually lead to investing in a wide range of different companies–those that are defensive and more immune to economic shifts, those that are cyclical and rise when the economy is hot.
It can also involve wagering on stocks that have long been a part of the food supply chain, as well as startup unicorn companies that are using innovative mobile technology to deliver meals to consumers.
For individuals who want to try their hand at picking food stocks, SoFi’s Active Investing platform may be a good option. Investors can buy traditional stocks, exchange-traded funds (ETFs), or even fractional shares of some companies. For those who need help, the Automated Investing service builds portfolios for SoFi Members and Certified Financial Planners can answer questions on investing.
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